13 July 2017

Happiness For All?

Unequal Hopes and Lives In Pursuit of the American Dream

Carol Graham
2017, Princeton University Press, 208 pages,
ISBN 978-0691169460

Reviewer: Sunil Krishnan, Santander Asset Management


The American Dream: A review of two books addressing the living conditions for America’s working classes

This review is to be read in conjunction with 
The Financial Diaries:
How American Families Cope in a World of Uncertainty


These two new studies improve our understanding of living conditions for America’s working classes.

How did US citizens become so desperate that they placed their hope in a reality TV star and intermittently successful property mogul to lead them to better times?  Answers are in plentiful supply, from linguistic studies of @realdonaldtrump, through lists of the flaws in fact-checking, to international conspiracy theories.  Most economists, though, would attach at least some weight to evidence that America’s economic growth, dating back before the financial crisis, has not been evenly shared among its citizens.

With median real household incomes declining in the 16 years to 2015, and a Gini coefficient which some observers place at 1930s levels, complaints of an unfair deal seem all too plausible.  When it comes to immediate solutions, though, focusing on the macro level issue seems to lead straight into ideological quicksand, at least as far as Washington is concerned.  It can also supplant analysis of the precise challenges faced by struggling families, and how to target assistance.  New micro-level research is emerging, though.  Two new studies take research techniques more commonly applied in Bangladesh or Brazil, and bring them to America’s towns and cities.

The Financial Diaries is an important addition to our understanding of US society in the 21st Century.  It challenges perceptions of poverty, social mobility, financial behaviour and even the statistics on which we often base our analysis of consumption and the labour market.

Written by a financial inclusion researcher, Rachel Schneider, and Jonathan Morduch, a professor at NYU, the book adapts Morduch’s earlier work overseas to study the lives of American families through detailed diaries of their income and spending constructed from interviews with 235 families over a 12-month period in 2012-13.  What emerges is a compelling picture of ‘temporary poverty’ – the tendency of households with average incomes well above the official poverty line to spend periods of time below the line, or stay above it only precariously, as a result of enormous volatility in both incomes and spending.  In the year of the diaries, the average interviewed household saw a month where income was 46% below its full-year average.  The results were consistent across every income cohort in the sample – even the highest cohort, who earned over twice the official poverty threshold, saw an average dip of 44% in at least one month.  The authors see this insecurity primarily as a problem of illiquidity rather than insolvency.  But the strains can often be compounded by a lack of assistance, and sub-optimal decision-making under pressure, to do lasting damage both to immediate solvency and long-term aspirations.

Viewed this way, perhaps the deep  pessimism about the current system becomes easier to understand, as insecurity can stretch far beyond official poverty measures.  But the implications extend even into our understanding of the business cycle.  As bond investors scrutinise changes in seasonally-adjusted monthly series for incomes and spending, it should be clear that this approach was much better suited to the era of steady salaries and defined benefit pension plans.  The delayed disbursement of $40 billion in tax rebates during the first quarter of 2017, for example, becomes more than a simple case of shifting consumption by a quarter; for many households the rebate cheque is a critical fixed point of financial planning, worth perhaps 30% of annual income.

The style of the book forces the points home.  Case studies of specific families, some of whom endured deep reversals of fortune during or even shortly after the study period, humanise the statistics and sharpen the call to action.  The book ends with impact, too, indicating specific micro-level policy areas which could make a real difference to the present-day situation and long-term futures of thousands of households across the income distribution.

For sheer impact, Happiness For All? suffers in comparison: literature surveys and regression specifications are the enemy of the marketing man’s ‘call to action’.  But Happiness For All acts as a careful companion piece to Financial Diaries, evidencing the links between income, inequality, perceptions of well-being, life choices and life outcomes across US society.  The author, Carol Graham, is a fellow at the Brookings Institute and a specialist in the economics of happiness, having published comparative studies ranging from her native Peru to Afghanistan.

Where Happiness succeeds is in placing well-being in the causal chain between life circumstances and outcomes.  The first half of the book carefully gathers existing research to demonstrate that perceptions of well-being correlate with forward-looking life choices such as education, saving and crime.  Tucked away in the final third of the book is revealing, original research where data are extracted from Gallup surveys to map life circumstances to more subjective well-being questions such as stress, life satisfaction and optimism for the future.  It may not surprise readers to learn that income levels and regional income equality are positively correlated with well-being – though interestingly, inequality does not emerge as a theme in Financial Diaries.  What may be more eye-opening is that when we control for these and a range of other known well-being determinants, there is still a role for ethnicity.  It turns out that poor white people are notably less satisfied, less optimistic and more stressed than poor black people or poor Hispanics.  (The rich, we learn, are similarly happy across all ethnicities.)

Graham is too careful a researcher to speculate idly on the reasons for this divergence – though she highlights a few possible candidates from the existing research: stronger social support networks (including religious ones) in ethnic communities, along with the shrinking of the material advantages of poor whites over poor minorities in recent decades. 

Such a prudent approach to explanation naturally limits Graham’s scope for policy prescriptions to interventions in schools and the structure of welfare transfers – proposals which are both familiar and surprisingly hard to progress in Washington.  At heart, Happiness For All is rather an appeal that we should measure the right things.

But it seems impossible to come away from the two books feeling that nothing can be done to assist those who are losing faith in the American Dream.  Support for dire poverty, education and health are surely valuable interventions for these families.  Providing them additionally with greater financial stability could be the step that allows them to make investments of their own in the future.

References:

Collins, D., Morduch, J., Rutherford, S. and Ruthven, O., Portfolios of the Poor – How the World’s Poor live on $2 a Day (Princeton, 2009)

An important recent work of the impact of scarce resources on decision-making, cited by the authors, is Mullainathan, S., and Shafir, E., Scarcity: The New Science of Having Less and How It Defines Our Lives (Picador, 2014)