Education: Sharing the Wealth

In my past entries I have discussed an array of economic factors affecting people’s happiness. This week I had an opportunity to investigate into “This I Believe,” a national project that was launched as a radio program in the 1950s and recently revived by Jay Allison and Dan Gediman. It is a platform on which millions can share and discuss “the core values and beliefs that guide their daily lives” and come to “developing respect for beliefs different from their own.” Inspired by this project, I would like to share with readers a personal experience that led me to choose economics and happiness as the emphases of my blog.

When I decided to take an economics class in high school, my only motive was to fulfill a social science requirement. On the first day my teacher asked the class to explain in a short paragraph why it was important to study economics. I struggled to answer that question and for a long time could not formulate an intelligent response for I had no prior knowledge in the subject. Yet as the school year passed I fell deeply in love with that which some label as “the dismal science.” I found that because economics explains people’s behavior with so much logic and rationality, learning about the models made my own life more meaningful. Indifference curves, production functions, and utility theories quickly grew to be integral parts of my philosophy. And after almost five years of exploring the field, I can now proudly declare that I know precisely why I study economics and why it is important for others to do so too.

Steven Landsburg, author of The Armchair Economist, once said that businessmen want people to die rich and economists want people to die happy. Economics is the search for the best way to allocate limited resources in order to satisfy unlimited wants, for the paths people should take to arrive at the maximum level of utility under a certain budget constraint. When an individual has a given level of income, he must choose among numerous goods he wishes to consume. Since higher income allows one to purchase bigger bundles of goods, it is then perhaps natural to subscribe to the common belief of “more is better” and thus seek after the ways to increase material wealth. Yet Anke Zimmermann in time-series survey data analysis observes, “on average, an individual’s well-being does not improve despite increases in income.” This result appears puzzling if one is unaware that consumer products’ price and impact on happiness are
not always proportional; in fact goods can be divided into categories, some of which bring lasting increase in wellbeing and other do not. Understanding the difference among these types of goods helps consumers to make wise purchase decisions.

Many assume that they can derive the most satisfaction from purchasing materialistic goods such as luxurious cars and large mansions. I had believed that too, until I enrolled in a course titled “The Economics of Happiness” last semester. In that class I learned to examine time series data and identify how life circumstances such as getting married, having children, surviving accidents, and winning the lottery affect wellbeing. Through reading scholarly journals and participating in class surveys, I discovered that as welfare economist Tibor Scitovsky (pictured to the right) has stated, luxury or “comfort” goods like iPods and cell phones merely increase happiness temporarily, and only cultural or “stimuli” goods such as books, concerts, and theatrical productions have lasting positive effects on one’s welfare. Moreover, people tend to compare their collection of “positional” or material possessions, to those of others. When one discovers that his peers drive better cars or live in bigger houses than he does, he feels miserable under the influence of social comparison. And according to economics professor Richard Easterlin, assets that improve welfare the most are non-pecuniary
and non-positional and thus cannot be used as standards to compare oneself to other people. Good health, time spent with family, and personal hobbies fall under this category.

After studying economics and its connection to happiness I realized that my lifestyle had been too materialistically oriented. And I learned that from enjoying pastimes, developing artistic interests, and investing in interpersonal relationships I will find more lasting joy than from buying jewelry and clothes. Yet because our American culture places an emphasis on consumerism and the pursuit of wealth, many are still unaware of the fact that a more extravagant lifestyle does not necessarily lead to a happier life. It is then the responsibility of those who are well informed in the subject to share this knowledge with others, as I hope to do through this blog. I believe that education plays an important role in showing people the ways in which they can improve their wellbeing without laboring for additional income.

Too Much On the Plate: Adding Nutritional Information On Menus

Recently there have been heated debates about whether restaurant chains should be required to provide nutritional information on their menus. The total number of calories, as well as the fat and cholesterol content, in certain food items served in restaurants such as the Colossal Burger from Ruby Tuesday are becoming serious concerns to nutritionists. According to the Los Angeles Times, health advocates led by Margo Wootan labeled them “hybrid horribles” because “eating just one of those items would swamp the eater's daily calorie requirement, 2000 for women and 2500 for men.” And Michael Jacobson, the executive director of the Center for Science in the Public Interest (CSPI), declares even more frankly that they “are seemingly designed to promote obesity, heart disease, and stroke.” The issue has been brought to the attention of state legislatures. In California, for instance, “hearings are scheduled for next month on two bills that would require greater nutrition labeling on restaurant menus,” one by Senator Carole Migden from San Francisco and the other by Senator Alex Padilla from Los Angeles.

On the other hand, restaurant owners led by Jot Condie, the president of the California Restaurant Association (CRA), accuse nutrition advocate groups of making “misleading, inaccurate” generalizations based on just a few items from a few restaurants. Condie suggests that the public should have the freedom to choose their food without interference from the government or organizations like the CSPI. “Consumers are capable of making decisions about what to order and are tired of the ‘food police’ telling them what to eat,” says the National Restaurant Association. This argument, although seemingly noble in promoting freedom and consumer sovereignty, is no more than a defense of business interest, an exploitation of the public’s lack of knowledge for the purpose of maintaining high levels of profit.

The CRA’s claim has neither theoretical nor empirical support. While analyzing public welfare, economists assume that the consumer faces perfect information; in other words, he is given every detail about his options before making a rational choice. In the context of ordering in a restaurant, the eater would have the freedom to choose the food he desires from the menu after finding out exactly to what the choice leads, including the number of calories. Without knowing the nutritional information, the customer could not necessarily be making the decision in his best interest. Such unawareness is especially dangerous because food consumption decisions entail long term consequences. People live through multiple periods of time, which economists call the “present” and the “future” in an intertemporal consumer choice model. The model assumes that a person is aware of the impact of the choices he makes today on his wellbeing tomorrow. For instance, when he chooses to eat the Cheesecake Factory's Chris’s outrageous Chocolate Cake, he is ready to deal with the impact of its 1,380 calories on his health in the future, possibly including physical pain and extra medical expenses. “Poor health,” suggests economist Ruut Veenhoven, “lowers appreciation of life indirectly by hampering economic activity and social contacts.” While Veenhoven provides reasons behind the negative effect of poor health on life satisfaction, economics professor Richard Easterlin goes one step further to conclude that people never fully adapt to illness. After examining time series data from the General Social Survey, Easterlin states, “There is, on average, a lasting negative effect on happiness of an adverse change in health.” When restaurants do not publish nutrition facts, diners who act in ignorance risk not only deterioration of physical health in the future, but also permanent decline in happiness as a result.

In reality perfect information is impossible to obtain, yet more information leads to better decision-making. Though Condie and the CRA seem supportive of consumer sovereignty, in reality they are merely trying to avoid having to reveal the fact that some of their products have detrimental effects on health and life satisfaction. The Cheesecake Factory currently does not have nutritional information on its menu; Ruby Tuesday does, but only for the items in its “Smart-Eating Choices”category. By selling high-calorie treats without labeling them, these prominent restaurant chains are taking advantage of the public. Contrary to the claims of the CRA, laws requiring more nutrition labeling on menus will not rob customers of the freedom to choose what to ea t. In fact, such new legislation will help consumers make wiser dining decisions.

Too Busy Not to Play: How Children Affect People’s Happiness

Last week I commented on the recent Unicef report regarding the well-being of children in 21 rich countries. As I did more research on the topic of children’s well-being I found two Blogs that provide insight on the effect of having children and of child-like behavior on adults’ well-being. In her Blog titled the Happiness Project, Gretchen Rubin discusses the impact of having children on people’s happiness. She insists that having children increases happiness although studies done by psychologist Daniel Gilbert prove otherwise. Alexander Kjerulf presents in his Blog the Chief Happiness Officer an interview with Bernie DeKoven, the author of the Well-Played Game. DeKoven suggests that adopting a playful, child-like attitude in the workplace makes people happier. My comments on these entries can be found below.

Surveys of subjective well-being ask people to rate their happiness on a scale. Thus happiness is usually measured only by the first two elements in Ms. Rubin’s formula--“feeling good” and “feeling bad”-- as ongoing states of general well-being. Ms. Rubin, however, treats the two as transient emotions and suggests that there is a third component—“feeling right”—which influences people’s happiness. As an example she states, “You might choose to have a bad commute in order to live in a neighborhood with good schools […] but it’s worth it, because you feel right about your trade-off.” Feeling right seems to improve the parent’s well-being. But if one analyzes the parent’s behavior using utility theory, the effect of “feeling right” on happiness is no longer a unique force; instead it is included in the effect of “feeling good” about the decision. When the parent must choose between the good school and the good commute, he evaluates, though perhaps unconsciously, the amount of satisfaction he will derive from each option. His decision implies that the chosen option offers more utility or happiness. So Ms. Rubin’s conclusions differ from those of earlier studies only because she uses different definitions of “feeling good” and “feeling bad.”

Throughout the interview Mr. DeKoven stresses that “play” and “fun” are important in the workplace. He establishes a positive relationship between playing and happiness in stating that playing “makes us happier because it allows us to have fun together” and “because we are most thoroughly ourselves when we are playing, because we experience our health, emotionally, physically, socially.” These explanations seem logical, but Mr. DeKoven does not provide any statistical evidence in his interview to support his theory. Regression results showing the relationship between the amounts of time spent playing in the workplace and the workers’ job satisfaction, for instance, would perhaps make his argument clearer and more convincing. In addition, Mr. DeKoven only presents the advantages of playing and having fun at work from the employees’ point of view. It is not clear if the workers’ job satisfaction and their productivity are positively-related. Are happy workers indeed better workers? If there is empirical evidence showing that they are, then employers have an incentive to support “play” and “fun.”

Beyond the Number of Toys: Measuring Children's Welfare

In the past few decades the American youth have been setting the trends in the world, and young people in other countries try to imitate their American counterparts in every way. They listen to American music, wear American clothing, and eat American fast food. It is widely accepted that the American way of life is “cool.” But behind the glamorous billboards, are Americans actually happier than everyone else? Not really, according to a report published by Unicef last week. An article in the Economist titled “Suffer the Children” states that the report compares the well-being of young people in 21 rich countries, and concluded that British and American youths endure the worst quality of life of any. In contrast, North European children, especially the Nordics, apparently have a lovely time.” Such information is shocking and deserves attention from the government and the American people. However the measures used as indicators of the children’s welfare should be examined in depth to ensure that the conclusions of the report are well-founded.

The chart on the right shows that the Unicef report uses both objective and subjective measures as indicators of children’s wellbeing. These cross-sectional results are determined by life circumstances, such as education and family income, and the children’s self-reported levels of happiness. Some doubt the validity of the report and argue that the subjective measures are prone to cultural bias and the objective measures present an incomplete picture of the children’s quality of life. Further study of empirical data is needed in order to test the merit of these measures.

The effect of the objective measures can be determined by studying the change in children’s subjective wellbeing by allowing only one factor to vary at a time while holding all other circumstances constant. The measures that do not make statistically significant differences in children’s happiness should be eliminated. And as time progresses, relevant new measures should be added to reflect changes in children’s lives.

The validity and consistency of subjective measures can also be tested in different ways. Psychologist Ed Diener concludes from his studies that “self-reports of subjective well-being have substantial validity, as demonstrated by their convergence with other types of measures such as informant reports and biological measures of well-being.” For instance, by measuring a child’s brain waves, one can compare his neural activity to those corresponding to positive and negative emotions; and by asking the child’s parents, teachers, and friends to rate his happiness, one can observe if the child’s appeared well-being is consistent with his self-reported results. Regarding the consistency of the survey results with respect to time change, Diener states, “although certain response artifacts such as a respondent’s current mood can bias the reports, we have found that these usually pose little threat to validity.” To test this claim, the same survey should be given to a child multiple times to see whether his answers depend on transient emotions. If Unicef includes a section that presents the empirical evidence which reflect the validity of the measurements used to evaluate happiness in the report, the conclusions would be more clear and convincing.

The Economist suggests that “the report could cast more light […] on how child welfare is changing over time.” Collecting and analyzing time series data is very important in the study of well-being because it is hard to compare the survey results gathered at one point in time from different countries. Self-reported level of happiness can be affected by social and cultural expectations. In some countries, for example, the people are encouraged to be modest, and their welfare may contain a downward bias as a result. Making accurate generalized conclusions from cross-sectional data thus becomes especially difficult. On the other hand, a panel study that follows the same group of survey participants or at least a synthetic panel study featuring the same birth cohort in a country would demonstrate how subjective wellbeing changes as the group ages. This causes some objective circumstances such as cultural background to be controlled, which isolates the effect of time-variant variables, such as employment rate and family income. As the Unicef report indicates, the children’s wellbeing and government spending are positively related. Perhaps the American government should offer more funding to support the study of children’s welfare over an extended period of time and the search for ways to improve their wellbeing.

Seeking the True Promise: the Difficulty of Forming Cartels

My last two posts were inspired by recent news articles in the field of economics. While newspapers and magazines are important sources of reports on current events, blogs also provide interesting and valuable information that enhances our understanding of the world around us. For the general public who are uninterested in studying data and figures, reading economic news can be boring or overwhelming. Some authorities in the field, however, make enlightening, witty, and engaging comments in their blogs, which encourage people to examine some of the major issues. In my time of research this week I explored blogs written by university professors and economists and found two posts to be especially informative and humorous. One of the posts discusses the difficulties of establishing collusion in the classroom; the other mentions that the reluctance to cooperate in the international community hinders efforts to prevent global warming. The permanent links to the posts as well as my own comments can be found below.

As a student of economics I have witnessed many attempts made by my classmates to collectively cut back studying. Unfortunately all of the collusion efforts, as predicted by Professor Caplan, ended in failure. When my high school economics teacher encouraged the class to organize a boycott against his final, no one believed that he was serious, for we all thought forming a cartel would be easy—at least easier than studying for a cumulative exam. Had we understood the four big reasons, we would not haven been so optimistic. I must admit that I am a “hold-out,” always reluctant to participate in the collusion because I love studying economics. I act as a consumer deriving satisfaction from my education rather than as a firm trying to maintain high price, or high grade in this case. My level of utility does not depend solely on my grade in a positive and linear relationship; instead I have indifference curves mapped on two axes—“economic wisdom accumulated” and “points received on the exam.” I would enjoy the same level of utility if I learn the material but fail the exam or if I learn nothing but receive an A. If I study and earn an A as a result, however, my indifference curve and thus my level of happiness would be much higher than under the two previous conditions. Of course not all of my classmates share my interest. So I agree that heterogeneity is an important cause of the failure of collusion in the classroom.

Permanent Link: EconLog

Dr. Roberts’s argument treats China and the U.S. as two firms in a cartel trying to maintain low level of pollution. If both countries honor the Kyoto treaty, they benefit from the slowing down of global warming. Because reducing greenhouse gas emission leads to a decrease of output, however, if one country keeps its promise while the other continues to pollute, the GDP of the latter would increase at the cost of that of the former. Dr. Roberts predicts that China will not reduce gas emission and suggests that the U.S. should not do so either. But according to Qin Dahe, who co-chairs the Chinese intergovernmental panel on climate change (IPCC) working group, China has set “the goal of cutting its energy consumption by 20 percent per unit of GDP in the period from 2006 to 2010” and has already “reduced emissions by some 800 million tons of coal equivalent from 1991 to 2005.” Qin also states that China’s “forests, grasslands and natural reserves have helped absorb another 3.06 billion tons.” If these data are accurate, the U.S. should, perhaps, make an effort to cut back emission as well. After all, assuming the worst from the partner firm is not the best attitude with which to start collusion.

Permanent Link: Cafe Hayek

More Is Not Always Better: Examining Materialism Among the Young

Over the past few decades the United States has enjoyed an annual national income growth rate of more than two percent. As a result young people today generally enjoy a much more comfortable lifestyle than their parents did twenty years ago. Televisions, cell phones, personal computers, iPods (pictured below)—products that were once luxurious or even nonexistent—have become easily accessible. And with the blessing of affluence came confusion, anxiety, even frustration. Responses to the Roper surveys show that cohorts born later consider more goods to be “necessary parts of a good life” than those born earlier. This explains why high school and college students have become more and more materialistic, setting financial security as their primary goal in life. According to CNN news, “UCLA's annual survey of college freshman […] found that nearly three-quarters of those surveyed in 2006 thought it was essential or very important to be ‘very well-off financially.’” The number, “compare[d] with 62.5 percent who said the same in 1980 and 42 percent in 1966, the first year the survey was done,” is astonishing. This obsession with wealth leads to the expectation and the pressure to earn high income, as well as the burden of more college loans. “No wonder we hear so many 20somethings talking about the ‘quarter-life crisis,’” says psychologist Jean Twenge.

It is natural to assume that accumulating more possessions will lead to a better, happier life; but the results of studies done by economists prove otherwise. Robert Frank, a professor of economics at Cornell University , argues, “We need ways to evaluate how we’re doing and make judgments about how best to adapt to changing environments. Such judgments almost always depend heavily on how we’re doing relative to others in the same local environment” (1). Therefore satisfaction with life is influenced by social comparison, a process in which the person compares his or her own situation to that of other people. For example, a student who does not own an iPod may not feel any desire to buy one until all his friends own an iPod; then he suddenly feels miserable because compared to his friends he is “worse-off.” On the other hand, Anke Zimmermann (pictured to the right) concludes after examining time series data from the Roper surveys, “On average, an individual’s wellbeing does not improve despite increases in income, because rising goods aspirations offset the effect of rising.” Thus hedonic adaptation, or getting used to one’s experience, is yet another force affecting people’s happiness. For instance, the excitement of having a new cell phone or a new car wears off after a while, leaving the once- proud owner bored and in search of a better product.

Materialism among the youth is especially alarming and deserving of public attention because attitude toward wealth affects decisions regarding education, career, and family life. The American Freshman National Norms for Fall 2006 how that students attending their second choice institutions listed “being offered financial aid” and “the cost of the college” as two of the top five important reasons influencing their college choice (8). Even before entering the work force, many students are already concerned about or even burdened by the cost of their education. The importance of financial concern in the process of decision-making is also likely to be reflected in the students’ choice of jobs after college. Since earning high income and buying luxury goods do not guarantee long-term high life satisfaction, selecting a job solely based on the amount written on the paycheck would be unwise. Instead one should consider the intrinsic elements of the job, such as the freedom to use creativity and to work independently. While the media are presenting wealth as the key to happiness, educators have the responsibility to inform young people of the limited effects of income on life satisfaction. Happiness and its sources should be introduced in high school or even in middle school, before students start making decisions about higher education or work. Like civics and economics, subjective wellbeing deserves to be a required course. Outside the classroom the spread of information can be promoted through providing welfare study data and results in school career planning centers and academic advisors’ offices. Even basic understanding of the topic can shape our youth into more responsible consumers and better policy makers in the future.

Woe is the Amphibian: Reflections on Tesco’s Turtle Trouble

Last Friday Beijing saw the grand opening of the first Hymall Tesco store in China. According to the Independent, “Tesco,” based in London, “is Europe’s top retailer and the third largest retailer in the world.” The expansion of its brand name to China, a market with more than one billion consumers, completes the first step in increasing, or even multiplying, profits in Asia. Yet amidst the excitement of opening the new frontier, Tesco is already facing severe criticism from animal rights activists for selling live turtles and frogs in the new store as pictured on the left. Led by Barbara Maas, the chief executive of Care for the Wild International (CWI), they accuse Tesco of “damaging wild population" and practicing “cruelty to amphibians” by supplying them as food and ingredients for traditional Chinese medicine.

The criticism that Tesco faces has profound implications about the troubles and blessings of globalization. Although the conflict seems to be a simple one between business and activist groups over animal rights, the matter is complicated by clashes between Chinese and Western cultures reflected in consumerism.

Over hundreds of years turtles have been available in China for consumption to those who can afford them. According to the Independent, “about 20 million turtles are consumed in China each year.” Their role as a luxurious ingredient in Chinese cuisine and medicine is no different from that of other sea creatures such as eels and sea horses. Prior to the establishment of Western supermarkets, turtles were sold in open markets in bundles (shown below), by individual suppliers who harvest them from farms or catch them from the wild. And environmentalists have voiced the concern that consumption of amphibians can disrupt wild populations. Asian governments, as a response, drafted legislations to regulate the market and set up special agencies to enforce them. The Asian Turtle Conservation Network estimates that of the "90 species that are native to the region, more than 50% are listed as 'Critically Endangered' or 'Endangered' on the IUCN Red List of threatened species." The CWI’s call to maintain the environmental equilibrium by protecting the amphibians is not new in China. And it is unlikely that by targeting Tesco the CWI will more effectively discourage overall turtle consumption.

As a grocery retailer, Tesco is not setting the precedent to supply live amphibians but merely providing an intermediary market between the farmer (or the hunter) and the consumer. Its decision to sell live amphibians is a response to consumer demand and the price, which has already been established by years of trading in live animal markets. Since open markets still exist as competition to supermarkets like Tesco, Chinese consumers reserve the right to choose whether to purchase live turtles and from where to do so.

Tesco argues that selling live amphibians is justified because consuming turtles is a part of Asian culture. Maas, however, dismisses this claim and asks, “why not sell live kittens or dogs in that case?” The issue she fails to address is the fact that in some live animal markets, there are indeed kittens and dogs sold for the same purposes—as food and medicine. Instead of focusing their attack on large corporations like Tesco, animal rights activists should, perhaps, concentrate on eliminating cruelty by organizing more effective campaigns to educate the Asian public and to bring conservation issues to government attention. Maas argues against cruelty to amphibians, which is practiced by a very large Asian population. Yet Tesco stands to take the blame because it is a large Western grocery retailer. This implies that Western companies are still judged by Western cultural standards despite their need to meet the demand of people in other parts of the world. Tesco, a British company seeking to succeed in the Asian market, experiences an extraordinary amount of pressure exerted by both the Eastern and the Western world, in the form of consumer demand by the former and in the form of ethic standards by the latter. Perhaps Tesco , the commercial amphibian, deserves some sympathy as do the turtles.