Consider the good fortune of a country far richer than the UK. Its economy is more than £300bn bigger and its workers are almost a quarter more productive than Britain’s, enjoying wages that are typically £7,000 higher. Households are flush enough to spend thousands more on consumption, just as public services are far better resourced. This economy still faces deep challenges — including entrenched inequality, regional imbalances and climate change — but prosperity generally makes life just that bit easier.
If this imaginary nation sounds both foreign and familiar, well, it should. It’s a sketch of the economy the UK might have today if it hadn’t just lost a decade of economic progress following the financial crisis.
As a dismal decade draws to a close, it’s worth conjuring up this counterfactual — not to torment ourselves with what might have been, nor to re-litigate the rights and wrongs of economic austerity. Rather, it is a timely moment to ponder how we would feel if things had turned out differently: would richer have meant happier?
This may sound like a fatuous question to many. Walk across any town or city in the UK and the human cost of economic stagnation is clear. Yet the link between national prosperity and personal wellbeing is complex. One of the most cited — and contested — findings in modern social science, the so-called Easterlin paradox, holds that as nations get richer they tend not to get happier, despite the fact that within a given society those with more money tend to be more satisfied.
One reason for this may be that the pain of bad times greatly outweighs the gain from good ones. Just as studies show strong loss-aversion when it comes to individual incomes, the same applies to macroeconomic performance. Across advanced economies, estimates suggest it takes between 2 per cent and 6 per cent of economic growth to compensate for the harm to personal wellbeing arising from a 1 per cent fall in gross domestic product. The result? Over an economic cycle, nations may struggle to make much headway.
When it comes to human happiness, however, national averages may conceal as much as they reveal. If our primary concern is the avoidance of misery then changes in the distribution of happiness, as much as its overall level, should concern us. Here we can see light and shade. According to research by Andrew Clark, Sarah Flèche and Claudia Senik, a striking feature of capitalist democracies is that “happiness-inequality” falls as nations get richer — the ranks of both the utterly miserable and seriously satisfied decline (with the US being a notable exception).
This narrowing gap, however, tends to go into reverse during economic downturns. In the UK, where overall levels of wellbeing proved resilient during the crisis and rose in its aftermath, the position of exposed groups — the unemployed, disabled and least-qualified — deteriorated. Even in better times, falling happiness-inequality depends on the quality of a society’s public goods and institutions: policy choices matter.
As the 2010s draw to a close, how might the decade’s explosion of interest in the link between wellbeing and economics help guide us through the 2020s? One implication is that downturns may be even more damaging than we previously thought, while sustained expansions, when employment finally reaches the most vulnerable groups, are even more beneficial.
Full employment is a social as much as an economic prize. Once attained it must be fiercely guarded. In Europe, a rise of 1 percentage point in unemployment is estimated to generate a decline in wellbeing five times larger than that arising from a 1 percentage point increase in inflation: this “misery ratio” should weigh on policymakers when balancing the risks of policy choices.
The harm done by negative income-shocks to wellbeing should motivate us to think afresh about decent systems of income-insurance — especially in a country like the UK, given its unusually high levels of household income volatility and the severity of recent welfare cuts. Above all, the evidence highlights that a new generation of services, focused on mental health, public health and employment support, should be flooded with resources rather than political rhetoric.
Looking to the decade ahead, are there grounds for a smidgen of seasonal optimism? Perhaps. The risk, of course, is that we have learnt to have diminished expectations: the 2010s downgraded our conception of what is normal. The silver lining, however, might be that the 2020s wouldn’t have to offer all that much to give us a surprise boost.
If, despite the headwinds, something resembling better times emerged we might, for a while, appreciate them a bit more. If so, let’s hope any optimism is deployed to tackle the challenges, old and new, of the decade ahead.
The writer is chair of the Resolution Foundation
