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Effects of inflation

The econometric analysis of happiness data allows us to go beyond the a priori notions of theoretical economics, based on the distinction between anticipated and unanticipated inflation. Adjustment is the more costly, the higher is the variability in aggregate inflation and in relative prices caused by an increase in inflation. People must invest a lot of effort to inform themselves about, and insulate themselves from, the expected price increases. They may make many different errors, for instance underestimating the extent of future inflation, or how a particular price changes in comparison with other prices.

The welfare costs of rising prices have previously been measured by computing the appropriate area under the money demand curve. Based on this method, the cost of 10% annual inflation has been calculated to be between 0.3% and 0.45% of national income (Fischer, 1981; Lucas, 1981). This is very little and suggests that an anti-inflationary policy is rarely worth the cost it entails in terms of additional unemployment and real income loss. In contrast, happiness research finds that inflation systematically and sizeably lowers reported individual well-being.

Effects of democracy

The consequences of democratic rules have mainly been analysed in economics with regard to their effects on economic growth. Data on subjective well-being allow us to look at the interaction between democracy and happiness. The extent to which a constitution is democratic and allows its citizens to make decisions according to their own preferences can be captured by various measures. It is found that increased possibilities to directly participate in public decision-making via popular referenda and a decentralised state significantly contribute to happiness.

The insights gained about happiness are in many respects useful for economic policy undertaken by governments. Two examples suffice to illustrate the point:

• Welfare policy is faced with the question of to what extent people with low incomes can be helped by financial support. If low income is due to unemployment, the research results suggest that not much is achieved by providing the person with a higher income. Rather, the policy should be directed towards providing the person with appropriate job opportunities.

• Tax policy must consider to what extent various income groups are affected. Is it possible to achieve social goals by redistributing income, or are the negative effects on subjective well-being prohibitive?

The discussion in this paper intends to show that the happiness research in which economists have recently become engaged constitutes an important advance over previous economics. This research is only in its initial stages, and much still awaits analysis. For instance, most happiness studies consider developed economies. Additional empirical studies devoted to developing economies could broaden the picture and qualify previous findings. It has sometimes been claimed that comparisons of happiness between countries make little sense because of cultural differences. While differences between cultures are important, they are often exaggerated. Culture may, to some extent, affect what factors influence happiness but, as shown in various studies, there are universal factors determining subjective well-being, and it may also be argued—as Ng (2001b) does—that happiness as an ultimate goal in life is independent of culture.



 

 


Date: 2014-12-21; view: 1103


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