Economist's View

This is one of the big controversies in happiness economics.

I wonder if this effect (which directly contradicts Easterlin's findings that money has no effect on happiness past a certain point; here, they contend that there is no saturation point and that happiness evolves with the logarithm of income) could be somewhat due to the way they framed the question: "assume you are on a ladder of happiness with 10 steps, which one would you say you are on; then tell us how much you earn". It is widely known in behavioral economics that framing effects can have a huge effect on the way people respond ([1] [2], and so on), so I wouldn't be surprised than the way you ask people to evaluate their own happiness could explain at least part of the difference.

One of the conclusions of the Easterlin Paradox is that people care more about how much they earn compared to their neighbors than the actual amount. I feel like asking the question this way (imagining their happiness as a ladder with 10 steps, then thinking about their income) would directly lead to people implicitly internalizing this comparison in some kind of mental model where higher wealth = more happiness because they're trying to imagine what the best life possible could be: "ah I'm pretty happy right now, but if I had a twice as much money I think I would be happier though, so surely I can't be at the last step at the ladder. Actually, people who have twice as much than that should be even happier, so I'll add some steps…

It always amazes me to see how, no matter what the crisis is, conservatives will find some way to blame the poor. Ah, let's see: just five minutes of research turns up this: http://www.ourfuture.org/blog-entry/mythbusting-rights-subprime-excuses and http://economistsview.typepad.com/economistsview/2008/04/did-liberals-ca.html and http://www.prospect.org/csnc/blogs/ezraklein_archive?month=04&year=2008&base_name=liberals_and_the_shtpile . Unlike Arrington's ridiculously stupid and uninformed ranting these articles have real numbers that show that at best just 20% of the all those "bad loans" out there originated outside of CRA-regulated banks. At this point most economists have conceded that the CRA had little, if any, contribution to the current crisis but this won't stop conservatives and their faithful wingnuts from lying and trying to blame everything on a 30 year old law.

This has scared me for quite some time:
http://i.imgur.com/ZxBWh.png

and:
http://i.imgur.com/u6aU2.gif

With a plausible explanation:
http://economistsview.typepad.com/economistsview/2012/04/the-wedge-between-productivity-and-wages.html

The only explanation I can come up with is that this happened because it could. Because money is self-reinforcing, and breeds power, which allows control.

But I don't think it's sustainable, and I think it's one of the largest, if not the largest problems with our society today.

1. I am not an economist. Is this view in any way valid? Am I seeing the right things?

2. What are the other causes? Surely the economy is complex and there are multiple driving factors.

3. What can we do?

Help us all if this can't be resolved. Because that graph is very, very scary and I see this going downhill fast if something doesn't change.

"That increasing tendency to embrace methods and models for their own sake rather than because they can help us answer substantively important questions is, I believe, a misstep for the field. This trend is in part the result of the otherwise normal and productive workings of science, but it is also reinforced by less legitimate motives, particularly organizational self-interest and the particularities of our intellectual culture."

Perhaps they are becoming another tribe of the Econ, as described by Dr. Leijonhufvud is his 1973 essay 'Life among the Econ' - https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1465-7295.1973.tb01065.x

edit - here's the full text, unpaywalled - https://economistsview.typepad.com/economistsview/2007/05/axel_leijonhufv.html

You are applying a model with fixed r

No, this is not true. The whole point is that R=R(r). Its just that the relationship is ~chaotic, not linear. And it gets messy as either r or R --> 0. The fact that preferences are recursive on (r) should not be a surpirse, but I don't think mainstream Economists generally go there.

On the topic of "temporary" vs Uncertain changes in (r), they are not the same. One is risk, the other is uncertainty. In general risk is priced a certain way (reasonably efficient), uncertainty is something you have preferences for (ie, you dont "price" it in the normal sense) and can only model indirectly in the first instance.[1]

[1] eg, http://economistsview.typepad.com/economistsview/2010/06/risk-versus-uncertainty.html

I'm not an economist.. I imagine there are papers with better data, but I would have to spend some time trying to find them.

I did come by this article which deals with the same question:
http://gregmankiw.blogspot.com/2006/09/measuring-poverty-income-vs-spending.html
http://economistsview.typepad.com/economistsview/2007/06/family-income-v.html

If income volatility has increased, it could explain why the spending-income gap is so wide, and why they (poor) spend more on education (retraining to re-enter the workforce).

Maybe try asking EconTalk (podcast of economics topics).. Sounds like something he would find interesting, and he often takes questions and makes episodes out of them.
http://www.econlib.org/library/contact.html