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Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys

De Neve, J. E. & Norton, M. (2014) “Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys“, VoxEU Organisation, 08 October.

 

Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic ‘booms’ that risk even short ‘busts’ is unlikely to improve social wellbeing in the long run.

How do macroeconomic fluctuations affect individual welfare? Nobel laureate Robert Lucas famously suggested that the cost of business cycles in terms of consumption is insignificant (Lucas 1987, 2003). Such findings paved the way for a straightforward growth policy that tends to be evaluated on the basis of how much the economy has grown rather than how the economy has grown. Yet, the psychological impact of the growth trajectory – whether volatile or smooth – is understudied even though it is felt strongly by ordinary citizens and results in markedly different reports of life satisfaction.

The analyses reported in our new paper (De Neve et al. 2014) reveal this important asymmetry in the way that individuals experience positive and negative macroeconomic fluctuations.

We find evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative growth as compared to positive economic growth. People do not psychologically benefit from expansions nearly as much as they suffer from recessions.

These results suggest that policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms. Our results also offer an explanation for why increases in GDP do not always pay off in increases in happiness – the modest happiness gains accrued over years of growth can be wiped out by just a single year of contraction.

 

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