By Angus Deaton
National Bureau of Economic Research, March 2018
I respond to Atkinson’s plea to revive welfare economics, and to considering alternative ethical frameworks when making policy recommendations. I examine a measure of self-reported evaluative wellbeing, the Cantril Ladder (a tool for self-assessment of wellbeing with ladder steps numbered 0 to 10), and use data from Gallup to examine wellbeing over the life-cycle. I assess the validity of the measure, and show that it is hard to reconcile with familiar theories of intertemporal choice. I find a worldwide optimism about the future; in spite of repeated evidence to the contrary, people consistently but irrationally predict they will be better off five years from now. The gap between future and current wellbeing diminishes with age, and in rich countries, is negative among the elderly. I also use the measure to think about income transfers by age and sex. Policies that give priority those with low incomes favor the young and the old, while utilitarian policies favor the middle aged, and men over women.
This paper takes up Atkinson’s challenge to bring back welfare into economics, and to do so in a way that does not have to deny the findings of modern behavioral economics. It also thinks about how policy varies with different ethical assumptions. It uses Gallup’s data on the Cantril Ladder measure of life evaluation as a measure of (period) utility, and examines the implications for welfare variations by age. I find a midlife dip in wellbeing in rich countries, but less or no evidence of it elsewhere.
Overall, only some features of the ladder are consistent with life cycle theory if it is interpreted as a period, or age-specific wellbeing measure; it is much harder to interpret it as a lifetime measure. People’s expectations of the ladder five years ahead are grossly inconsistent with those reports being the mathematical expectations of future period utility; throughout the world, people are generally over-optimistic about the future, except for the elderly in rich countries, who are generally over-pessimistic about the future. These findings are of considerable interest, but cast doubt on the idea that people arrange their consumption and labor supply to maximize the expected integral of age-specific utilities, at least if utilities are well measured by the Cantril Ladder as recorded in Gallup’s surveys. This does not, by itself, invalidate the ladder itself as a measure of period age-specific wellbeing.
Finally, I illustrate what the ladder measure would imply for distributing income by age, and how the choice of the ladder versus income interacts with different ethical frameworks. In the United States, income prioritarians will tend to favor redistribution towards elderly or young adults, whose incomes or per capita incomes are lowest. By contrast, utilitarians will favor those for whom marginal utility is highest, which turns out to be those in midlife, and especially men over women, a prescription that would be enhanced by giving additional priority to those whose wellbeing is lowest, also those in midlife. Both approaches would favor men over women. I make no prescriptions here, but am concerned only to show the possibilities that arise from having a direct measure of wellbeing. I also am responding to Atkinson’s challenge by emphasizing and illustrating that policy prescriptions depend, not just on measurement, but on ethics, a point that is not always given the weight that it should be when economists discuss policy.
As in the happiness literature in general, my findings are mixed; the Cantril Ladder is clearly useful, is not obviously inconsistent with standard notions of period utility, and allows us to say things about welfare and distribution that we could not say using standard revealed preference methods. It does not assume that people do not make mistakes. Reported expectations of future wellbeing are consistent with the widespread finding of optimism bias in psychology, but inconsistent with the rational expectations formulation that is standard in much of economics. Whether this is an advantage or a disadvantage will surely differ according to preference and disciplinary background.
By Don McCanne, M.D.
Although this NBER working paper by Nobel laureate Angus Deaton is quite wonkish it is an interesting analysis of self-assessment of current and anticipated future well-being under variables of age, sex, wealth, and nationality. For a blog on single payer reform, this paper does have some application since perception of well-being might be an important attribute related to a nation’s health care system.
But that is not why this paper was selected for a Quote of the Day, rather one sentence extracted from the paper expresses a truth that is too often neglected in the policy community:
“I also am responding to Atkinson’s challenge by emphasizing and illustrating that policy prescriptions depend, not just on measurement, but on ethics, a point that is not always given the weight that it should be when economists discuss policy.”
We hear a lot of policy recommendations, but all too often it is difficult if not impossible to identify the ethical imperative. In contrast, the ethical imperative permeates the single payer model of reform.
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