"With Happiness for All?, Carol Graham takes the study of the new inequality one step deeper. She tells what it means from the perspective of those who suffer from it, as she explores, from many different angles, how it affects Americans' sense of well-being, and their place within the American dream. This is a very important book, on the deepest social problem facing the United States today."--George Akerlof, Nobel Laureate in Economics

"Compelling. Happiness for All? is a significant work of scholarship by one of today's leading scholars in the field. Graham's book will inform our debates on inequality, and is extremely timely and important."--Martin Binder, Bard College Berlin

"Carol Graham uses well-being measures to bring new insights to the divisions that are threatening America. Far from dreaming of a better tomorrow, many Americans, especially white Americans, are deeply pessimistic about their future and the futures of their children. This book brings much to think and to worry about."--Angus Deaton, Nobel Laureate in Economics

"In a world where people are turning against governments from across the political spectrum, the search is on to discover the source of this collective angst. Why are the leaders of extremist political parties gaining so much support and why did the UK vote to leave the EU? In this timely and invaluable book, Carol Graham investigates whether inequalities in well-being can explain this profound sense of alienation. We know globalization created many losers but, until now, these effects were measured in terms of income not individuals' well-being. The well-being lens casts a powerful light on the fundamental causes: lack of opportunity caused by poor education and failure to invest in the skills needed in the future."--(Lord) Gus O'Donnell, chairman of Frontier Economics and president of the Institute for Fiscal Studies

"Graham writes with clarity and passion."--Andrew Oswald, University of Warwick

Happiness for All?

Unequal Hopes and Lives in Pursuit of the American Dream

PRINCETON UNIVERSITY PRESS

Contents

Introduction

Happiness for All: Living the Dream?

Life should be better and richer and fuller for everyone, with opportunity for each according to ability and achievement regardless of social class or circumstances at birth.

— James Thurlow Adams, The Epic of America

Sukhov went off to sleep, and he was completely content. Fate had been kind in many ways that day; he hadn't been put in the cells, the gang had not been sent to the Socialist Community Center, he'd fiddled himself an extra bowl of porridge for dinner.... The day had gone by without a single cloud — almost a happy day. There were three thousand six hundred and fifty-three days like that in his sentence, from reveille to lights out. The three extra days were because of the leap years.

— David Malouf, quoting Aleksandr Solzhenitsyn in One Day in the Life of Ivan Denisovich

The U.S. Pledge of Allegiance promises liberty and justice for all. The U.S. Declaration of Independence guarantees the rights to life, liberty, and the pursuit of happiness to all citizens. These promises are not about guaranteed outcomes, but about opportunities to seek fulfilling lives. They have a long grounding in history and philosophy, beginning with Aristotle's concept of happiness. This concept — eudemonia — is not about contentment, but about having sufficient means to be able to seek purpose or meaning in life. When Jefferson conceived of the pursuit of happiness, he was grounded in the works of Plato and Aristotle, as well as in the kind of liberalism articulated by John Stuart Mill, which combines notions of individual freedom and societal fairness (Malouf, 2011; Reeves, 2007). These promises are the basis of the American Dream, with its strong focus on individual freedom, opportunity, and faith in future mobility.

Yet there is increasing debate — both academic and political — about the extent to which the American Dream — and the right to the pursuit of happiness — is equally available to all citizens today. U.S. trends in opportunity and in distributional outcomes are becoming more unequal by any number of measures. Is the ability to pursue happiness as unequally shared as income in the United States? While U.S. attitudes about inequality and opportunity have historically been exceptional, are they still? Do these attitudes, which are closely linked to happiness and to optimism about the future, affect individual choices about investments in the future and therefore life chances and outcomes?

This book answers these questions, using metrics and tools from the novel science of well-being measurement. It is conceptually distinct from the extensive literature on inequality and growth and from the smaller literature on measured inequality and well-being, although it clearly builds and benefits from both. The focus is the related but less studied link between well-being and attitudes about the future, and the implications of that link for the behaviors and future outcomes of different socioeconomic and demographic cohorts.

A modest body of research (including some of my own) has shown that people with more positive attitudes and/or more positive attitudes about their future mobility have higher levels of well-being, with causality running in both directions. As a result, they are more willing to invest in those futures. People with limited future opportunities have higher discount rates — meaning that they are present-biased and place less value than the average on future income, health, and other outcomes. This tends to be because they have less capacity to set aside their limited means to make such investments, and because they have less confidence that those investments will pay off (De Neve et al., 2013; De Neve and Oswald, 2012; Oswald, Proto, and Sgroi, 2009; Graham and Pettinato, 2002a, 2002b; Graham, Eggers, and Sukhtankar, 2004). The patterns across individuals and socioeconomic cohorts in these beliefs tend to be self-perpetuating, meanwhile (Lerner, 1982; Butler, 2014).

Does the increasingly unequal distribution of opportunity in the United States thus imply that disadvantaged cohorts of society are more likely to focus on the short term, at the expense of investments in their own and their children's futures? Are increasing sectors of U.S. society simply living in the moment, not as badly as Sukhov perhaps, but without the opportunities to seek better and more fulfilling lives, as James Thurlow Adams posits? How does the United States compare with other countries on this score?

Well-being metrics give us a novel tool to measure the linkages between mobility attitudes and well-being in its various dimensions. So-called hedonic metrics capture daily experience and respondents' mental states — such as happiness at the moment, stress, and anxiety — as they experience their daily lives. Evaluative metrics capture respondents' attitudes about their lives as a whole, including how they change over the life course and the ability to lead meaningful and purposeful lives. Respondents with different attitudes about the future may emphasize one or the other well-being dimension more. If capabilities and opportunities are limited, individuals focus more on the daily experience aspects of their lives and well-being, as they live from day to day without the capacity to plan for the future (Graham and Lora, 2009; Graham and Nikolova, 2013; Haushofer and Fehr, 2014). Those with more capabilities and opportunities often focus more on the longer term dimensions of their lives and well-being — such as purpose and fulfillment — even at the expense of daily quality of life, at least in the short term.

This book builds on my research on well-being and on mobility and opportunity in countries around the world. I explore the linkages between the distribution of income, attitudes about inequality and future mobility, and well-being in the United States, and also provide some comparisons with other countries and regions. This scholarship is distinct from existing work on inequality in its focus on the well-being–beliefs channel and its implications for individual choices about the future. The "Gatsby curve" in economics posits that children from different backgrounds will have even larger gaps in outcomes than their parents did, since better-off parents have more resources to invest in their children (Krueger, 2012). In this instance, we are exploring the role of beliefs, which are also passed on from parents to children, with the gap growing ever larger between children from different socioeconomic backgrounds as the differences in the opportunities and life experiences of the rich and the poor grow.

If we are an increasingly divided society now — from the perspective of both available opportunities and attitudes about what the future holds — will we be even more divided in the future? The Declaration of Independence promises the opportunity to seek life fulfillment and happiness — in its fullest sense, for all U.S. citizens. Is happiness for all an increasingly elusive dream?

Inequality: A Complex Topic

Inequality is a controversial topic. After years of being off the table, it is now front and center in political and polemical debates. It is complex to measure, and the standard metrics that are used, such as the Gini coefficient or the 90/10 ratio, while useful for economists, are difficult for the average layman or laywoman to understand. In addition, these measures provide snapshots of distributions at one point in time, and do not change much in time periods that are relevant to political or policy cycles. The measures also mask very different trends in mobility and opportunity across societies and cohorts within them. Meanwhile, the data that are necessary to measure mobility and opportunity are rare, as they entail following the same individuals or cohorts over time.

There is a vast literature on the linkages between inequality and growth, with some of the linkages being positive, and many others negative (see Salverda, Nolan, and Smeeding, 2009, and the many essays therein for a comprehensive review). Some inequality is constructive and rewards productivity and innovation; some is destructive and creates disincentives for disadvantaged cohorts to invest in their futures and in those of their children (Birdsall and Graham, 1999). These vary across and within societies, and are also affected by structural trends in the world economy, such as technology and skill-driven growth. The standard inequality measures tell us very little about these more complex phenomena.

Because it is relatively easy to measure them, most of the debate, at least among economists, has been about trends in income inequality and, less frequently, about trends in mobility over time. Yet regardless of trends in the data, the channel by which inequality has the most direct effects on individual welfare and resulting behaviors may be what it signals in different societies and among different cohorts. In other words, if inequality — and particularly the gains of those who are being successful — is a sign of hope and potential future progress to others in society, then it has positive signaling effects. Alternatively, if it is a marker of persistent advantage for some and disadvantage for others, it has negative effects. What inequality signals is, in turn, linked to behavioral outcomes, such as effort in the labor market and investments in health and education.

Studies of inequality and individual well-being — in the United States, the European Union, and Latin America — have yielded mixed results, precisely because inequality has different implications in different contexts. Albert Hirschman's well-known "tunnel hypothesis" provides a good conceptual frame for interpreting these mixed results. In a seminal article published in 1973, Hirschman described two kinds of signals and their potential effects. He compared inequality in the development process to a traffic jam in a tunnel. When one lane of traffic begins to move, initially it gives those in the other lanes reason for hope, a signal that they may also soon move forward. Yet if only that lane continues to move and the others stay stalled, then the drivers in the stalled lanes become frustrated and engage in dangerous behaviors such as jumping the median (Hirschman and Rothschild, 1973).

Partly as a result of these multiple possible meanings, there is no consistent pattern in the results of studies of inequality and life satisfaction and other measures of well-being (Alesina, Di Tella, and MacCulloch, 2004; Graham and Felton, 2006; Oishi, Kesebir, and Diener, 2011; Van Praag and Ferrer-i-Carbonell, 2009). Of the many studies that I review in Chapter 3, some find a negative correlation between inequality and life satisfaction, others a positive one, and some none at all. This is likely because there can be negative comparison effects — e.g., if those in your reference group have higher incomes you feel less well-off — or positive signaling effects, or they may both operate at the same time, depending on the context. In more stable economies, such as the United States and Europe, comparison effects seem to dominate, while in contexts of economic transition or change, inequality seems to provide a sign of positive progress (at least initially), as in the tunnel example.

The reference or peer group that individuals are comparing themselves to plays a role, as well as their belief structures. Positive signaling effects are more likely in smaller areas, such as neighborhoods and small towns, perhaps because public goods such as schools and parks are shared at this level. In contrast, in larger reference groups, such as large cities, comparison effects are more likely. In the latter instance, the large differences in wealth are quite visible, and at the same time the lives of those at the top and the bottom are much further apart from each other. Thus the "success" of the very wealthy seems much more out of reach for those at the bottom.

Belief structures about what determines "success" also matter. In contexts where the majority believes that connections or unfair advantage determine success, inequality typically has a negative relationship with life satisfaction. In those where high income gains are seen as a just reward for hard work, skills, productivity, and innovation (as used to be the case in the United States), inequality usually has a positive or at least neutral association with well-being. And, as described in subsequent chapters, individual experiences along these lines, such as being rewarded fairly or unfairly at school or in the workplace, can result in persistent belief structures about the ability to get ahead in the future.

An important question in the debates today is whether the United States' long-held reputation as a land of opportunity is still backed by exceptional rates of mobility. High levels of inequality were traditionally seen as rewards in a dynamic and fluid labor market and as a positive signal to individuals of where they might end up in the future. Material success was seen as a just reward for hard work and innovation. Yet there is now significant evidence that U.S. mobility rates — both inter- and intragenerational — are actually lower than those in many other countries in the OECD (Brunori, Ferreira, and Peragine, 2013). We know less about public perceptions of inequality in the context of these changes, and belief structures tend to lag behind objective changes. Yet the new data that I present throughout the book suggest that they have indeed changed a great deal.

Attitudes about Future Mobility

For decades U.S. citizens accepted and even supported exceptionally high rates of inequality and relatively low rates of redistributive taxation because of a widely held belief in the inequality-opportunity link (Bénabou and Ok, 2001). Bénabou and Tirole (2006), based on World Values Survey data, found that only 29 percent of Americans believed that the poor are trapped in poverty, while only 30 percent believed that luck rather than effort or education determines income. In contrast, the figures for Europeans were nearly double that — 60 and 54 percent, respectively. Conversely, Americans were twice as likely as Europeans (on average) to believe that the poor "are lazy or lack willpower" (60 percent vs. 26 percent) and that "in the long run, hard work usually brings a better life" (59 percent vs. 34–43 percent).

These beliefs tend to correlate with actual levels of redistribution across countries, even though they are often out of touch with reality — as in the case of U.S. mobility rates. Bénabou and Tirole cite various studies that show that such beliefs are chosen and held on to despite what the data show about actual trends in inequality and mobility; the average individual believes that there is more mobility than there actually is. This phenomenon was described by Lerner (1982) as the "belief in a just world"— such as the nearly universal human tendency to want to believe that people generally get what they deserve.

Yet these studies were based on data for the 1990s, and objective trends in inequality — and more recently awareness of them — have changed a great deal. The explosive amount of public attention given to Thomas Piketty's (2014) excellent but highly technical book on inequality in capital was an indication that attitudes might be changing, at least in some circles. The 2016 electoral debate and the remarkable support for antisystem candidates such as Bernie Sanders, promising to address the plight of those who have fallen behind, also revealed significant levels of public concern about the issue.

In addition to the high levels of concern, there is evidence that attitudes about inequality are increasingly divided across ideological lines. A recent Pew poll, for example, found that 57 percent of Republicans believed that people who became rich did so because they worked harder than others, while only 27 percent of Democrats thought the same. In contrast, only 32 percent of Republicans felt that people were poor because of circumstances beyond their control, compared to 63 percent of Democrats (Blow, 2014). Kuziemko et al. (2015), meanwhile, find that the difference between liberals and conservatives is the most important explanatory variable in the determinants of attitudes about inequality.

The latest Gallup data (Jones, 2015) show that a reasonably high percentage of Americans — 56 percent — say that the amount of income tax they pay is fair (down from a recent high of 64 percent in 2003). Yet there are differences across groups, with lower and upper income groups displaying less support than those in the middle. And, among lower income groups, it is those who identify as Republicans who have become less likely to view their taxes as fair, while lower income Democrats have not changed their opinions. This again reflects a deep ideological divide and the fact that antigovernment sentiment is increasing in the United States (Jones, 2015).