The Decline in American Optimism—Posner

I don’t put much weight on public opinion polls that show a drop in Americans’ optimism about the economic future of the country. Optimism and pessimism are personality traits that condition people’s reaction to uncertainty, but they are also influenced by uncertainty. This was one of Keynes’s insights. When a sharp economic downturn creates the kind of uncertainty about economic prospects that we’re now observing, people’s “animal spirits” (his term for optimism) droop; hoarding increases and entrepreneurship flags. These are rational responses to uncertainty, but they do not predict a nation’s future economic performance.

 

There are, however, objective reasons to worry that the nation’s economic growth may be stunted for years to come. One reason is the high level of international political instability threatening to U.S. interests (think of Pakistan, Iran, Afghanistan, Iraq, Lebanon, Yemen, and North Korea, and of potentially tense relations between the United States on the one hand and Russian and especially China, on the other hand), which will require the United States to continue to spend disproportionately on national security. A second reason for concern is looming fiscal crisis in the United States, as a result of a diminished tax receipts, huge and growing federal public debt, uncontrolled entitlement spending, and deterioration in state and local government finances. And third is our government’s inability to address in a serious fashion, let alone solve, a host of serious structural problems. We badly need tax reform, education reform, health reform, immigration reform, environmental reform (with emphasis on climate control and preserving biodiversity), repeal of the drug laws, a reduction in economic inequality (with particular emphasis on improving the lot of the black underclass), a better transportation network, and a slimmed-down public sector. Our political system seems incapable of achieving improvements in any of these areas. So we need reform of the political system, but that is blocked by a combination of incumbent self-interest and a constitutional structure optimized for eighteenth-century conditions.

 

In assessing the likely impact of these factors on our economic future, we need to distinguish between per capita income and a more inclusive measure of social welfare—call it happiness or utility (though, depending on how “happiness” is defined, it might better be regarded as a component of utility; see Becker’s comment on a well-known paper by Stevenson and Wolfers, which together with the paper can be found at http://bpp.wharton.upenn.edu/jwolfers/Papers/EasterlinParadox.pdf, analyzing the correlation across countries of happiness with income). Per capita income is a proxy for and input into happiness, but it is not a synonym for it. If there is diminishing marginal utility from increased income, then an increase in income inequality, which we have been experiencing of late and which may continue, may offset the effect of an increase in average income on utility. So also an increase in the average age of retirement as a result of increasing the age of eligibility for full social security benefits (one reform that is at least conceivable), or other increase in hours worked, are offsets to increased per capita income. But against this is the seemingly continuous increase in the quality and variety of most products and services. (Not all: airline service has deteriorated markedly since the 1990s and traffic congestion has increased.) Increased longevity, and the greater youthfulness of most middle-aged and elderly people, are only the most dramatic signs of impovements in welfare that are related to but not adequately proxied by increases in average personal income.

 

Innovation is costly, so if the rate at which per capita income rises declines, the rate of improvement in the quality and variety of goods and services will slow. Nevertheless that improvement will continue even if per capital incomes stagnate.

 

While, as Becker points out, per capita income has been growing in the United States for a long time at an average annual rate of about 2 percent, happiness has been growing at a much lower rate, if at all. People in 1810 were not sad at the thought of how much better people would be living in 2010; and people in 2010 take for granted improvements in product quality before they were born. One has to be a certain age to appreciate these improvements; the first car I drove was a 1953 Pontiac.

 

The issue of increased per capita income over time is often discussed in terms of parental preferences: parents want their children to be better off than they. Here I think the distinction between income and welfare is critical. I believe that most parents want their children to be happy, though some want them to be successful even at some (modest) cost in happiness, rather than to be financially better off than they (than the parents). The farther down one goes in the income distribution, however, the closer the correlation between income and happiness; this is an implication of diminishing marginal utility of income. So poor people, or people who are not poor but are beset by anxieties, do want their children to be better off financially than themselves; but I do not think people who are well off do, or at least should, want their children to have higher incomes than they. Parental altruism implies concern for children’s welfare, rather than for children’s incomes per se; and the higher a family’s standard of living, the less likely an increase in that standard in the next generation is to increase happiness.

Comments

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[Mark]

"So we need reform of the political system, but that is blocked by a combination of incumbent self-interest and a constitutional structure optimized for eighteenth-century conditions."

I would love to see this sentence expanded upon in a future post. In what ways is the constitutional structure of our government ill-fitted for today's conditions? Is there a viable route towards political reform, and what would that route look like?

[Alvin]

Mark, I was thinking exactly the same about Judge Posner's statement about the constitution. I hope he expands further in a separate post.

Judge Posner - I thought you guys would address the Mosque controvery this week.

Good post though. Very thought-provoking. In addition to the constitution being a relic, can you discuss specific tax and educational reforms you have in mind? I like that you favor repeal of the drug laws.

[TwoPlusTwo]

“…environmental reform (with emphasis on climate control…”

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EVEN(*) if we experience in the next 100 years as much growth as we experienced in the past 100, our descendants, four generations from now, will be 7 times richer (assume very modest 2% growth)(**) than we are today, AND have a life expectancy perhaps twice as high as we do today (simply project lifespan increases from the last century into the next).

Yet Mr. Posner advocates that we feel sorry that our descendants, who will be lucky enough to live twice as long and be 7 times richer than we are, will be unable to adapt to a 2C temperature increase and thus suffer.

In other words, we the poor and short lived must go to great lengths to accommodate the rich and long-lived generations of the future. Am I the only one surprised that such a regressive intergenerational transfer is being proposed?

The argument also assumes that our descendants will even face the problem. It thus assumes that in the next 100 years humans will be unable to engineer an economically viable solution away from fossil fuels.

I suspect that our descendants a century from now will be laughing at us the same way we would laugh learning that someone in 1900 advocated that people stop using woodstoves in their freezing houses, lest the world run out of wooden telegraph poles and thus condemn their descendants to live in a world without telecommunications.

I’d exchange in a heartbeat my life today for a life that is twice as long and 7 times wealthier, but 2C warmer, in the future.

On the other hand, if abandoning obsession with climate issues results in even a 0.5% boost in growth (from, say 2% to 2.5%) then our descendants will be 12 times richer rather than 7 (a 70% difference).

So I truly do not understand the obsession with climate. If we want to worry about the future, lets worry about nuclear weapons. I am willing to bet 30 to 1 that if humanity faces an existential challenge in the next 100 years it will be from nuclear weapons, not global warming.

----------------------
(*) I say EVEN because all indications are that the pace of human progress is actually accelerating. So we are likely to see more progress in the next century than we saw in the past one.

(**) I say 2% growth is very modest because the more recent worldwide average has been 4% (which BTW would make our descendants 30 times richer in 100 years).

[Landauer]

TwoPlusTwo,
Your analysis is based on a 2% growth. That is very modest indeed. Perhaps Europe (and now America which recently seems poised to follow the European example) is growing at 2%, but the world as a whole has been growing at 4% for some time now. That means that our descendants in 100 years will be 50 times richer than we are (1.04^100=50).

Having immigrated to America from Europe, I would dare speculate that an additional reason for American (and European) pessimism is that Americans, like Europeans, see their relative prosperity levels compared to the rest of the world decline.

Today Americans are by far wealthier than 90% of the planet. But, as they adopt European style policies, they seem condemned to a 2% annual growth trendline, while the rest of the world grows at 4%, thus losing ground by 2% every year.

Also, drawing on my European experiences, I dare speculate that like the Europeans, Americans too will react to economic distress by shooting themselves in the foot. That is, by moving even further away from the philosophy that brought them to their current level of enviable prosperity: Individualism.

[Pandora Bracelet]

So poor people, or people who are not poor but are beset by anxieties, do want their children to be better off financially than themselves; but I do not think people who are well off do, or at least should, want their children to have higher incomes than they. Parental altruism implies concern for children’s welfare, rather than for children’s incomes per se; and the higher a family’s standard of living, the less likely an increase in that standard in the next generation is to increase happiness.

[A. Kazal]

Competent people already face decreasing marginal happiness with increasing income. So, progressive taxation makes it all the more difficult for society to tap their full higher potential. Hence, slower growth.

[blake]

" In what ways is the constitutional structure of our government ill-fitted for today's conditions? Is there a viable route towards political reform, and what would that route look like?"

Range voting, campaign finance reform, greater transparency, less gerrymandering, enforcement of anti-corruption laws to start. Realistic paths to reform are as follows, either we get our act together and our current system reforms itself (in every ones interest but lol) or someone effectively takes over and centralizes power (perhaps like Hoover, perhaps like a Chavez). That person would have the power to reform, although probably not the motivation. IIRC the roman republic would occasionally appoint a dictator to set things straight, and it worked a couple times...

[Jim]

As one gets older, regardless of net worth, one realizes that a big house or houses, a plane, boat, art collection, etc are all hindrances to happiness and that lasting happiness and peace of mind have to do with basic necessities and doing for others. Teaching that to the young is difficult. The best way to convince them is to poibnt out the negative consequences of greed ( the lust for power is also a form of greed ). As that great philosopher, Michael J. Fox, said, “Your happiness grows in direct proportion to your acceptance, and in inverse proportion to your expectations."

By the way the answer to your title question is NO.

[Tom Meadowcroft]

Parents worry about their children, often more than they should. They are overly sensitive to most of the risks that their children will face. When they try to answer a question like "will my children be better off than myself", they assess many things, but a big one is risk. As productivity grows at 2% a year, we all get richer, but that slow change is hard to perceive in human time scales. The fact that the world has grown more peaceful, and that today's children are less likely to be involved in a war, is hard for parents to appreciate who don't know their history well (most of them). What is appreciated is that in a society with so many options (for career paths, mates, where to live, what to do), there is a clear and daily risk of choosing bad options. The fact that there are so many bad choices out there for younsters is ever-present to parents. The fact that there are also many more good choices is easier to ignore. The proliferation of choice which our liberal ethos and variegated economy have brought about is terrifying to parents. Throughout history parents have always tried to limit (bad) choices for their children, have always wanted to choose their children's careers, have always wanted to pick their mates. As we enter the 21st century, a parent's power over their children entering adulthood is little more than the power to make easily-ignored suggestions. Parents always fear the worst.

So, in addition to the average individual's very poor knowledge of history, and thus of the state of previous generations, the frightening uncertainty and lack of control over their children's destiny make parents overly pessimistic. As for their children's view, I calmly dismiss it. Anyone under 30 lacks the perspective to answer the question.

[Jordan 1]

Each of the simple life is desired! Sometimes people can not simply live! Often feel tired! Really frustrating! So people should maintain a childlike innocence

[Ivo]

As a parent of three children, my most important endeavour was to give each of them the best education possible (each one did what he/she could). The result I wished for is that they find their place in society be it better off or less better off than our (their parents) in society. The rest will be settled when we disapear, they will get what rests of our life savings.

Of course I hope they do better, but in the times we live in it is not easy even with a "good" education.

Good education is what matters!

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[stone crusher]

Each of the simple life is desired! it's good.

[David]

As globalization turns America into a more services-oriented country, our education system is not adapting to changing times by updating its curriculum to one that trains graduates for the services sector. The average high school curriculum is still guided by policy crafted in the early 20th century to fill factory and agricultural jobs. Poor families' children, who are less likely to attain a college degree, are left in the unenviable position of having fewer labor-oriented jobs available while not adequately trained for available service sector jobs. Unless something is done, per capita income for this poor population is likely to decline as a result. Along with it , happiness.

[Google Ankara]

Each of the simple life is desired! it's good.

[Joshua Norman]

I agree where David Says "As globalization turns America into a more services-oriented country, our education system is not adapting to changing times by updating its curriculum to one that trains graduates for the services sector. The average high school curriculum is still guided by policy crafted in the early 20th century to fill factory and agricultural jobs. Poor families' children, who are less likely to attain a college degree, are left in the unenviable position of having fewer labor-oriented jobs available while not adequately trained for available service sector jobs. Unless something is done, per capita income for this poor population is likely to decline as a result. Along with it , happiness."
America's government run education system does not prepare kids for today's economic realities. I would like to get the government out of the schools & have parents pay lower local taxes but assume responsibility for financing and doing due diligence for their children's education. Plus government run schools preach the agitprop of special interest gangsters like the NAACP, La Raza, NOW, CAIR, the tree hugger groups & other leftist-statist collectivists.

[Joshua Norman]

We badly need tax reform, education reform, health reform, immigration reform, environmental reform (with emphasis on climate control and preserving biodiversity), repeal of the drug laws, a reduction in economic inequality (with particular emphasis on improving the lot of the black underclass), a better transportation network, and a slimmed-down public sector.

I agree that we need education reform, let's start the reform process by getting government out of it. If something is being run well, its probably not being run by the government.
I agree that we need immigration reform, let's start by removing all the illegal aliens and limiting the number of legal immigrants. Do we really need 1 million new landscapers, maids, nannies & day laborers each year?
I agree we need to reduce income inequality, my ideas if implemented will do that. They will also help the black underclass because they won't have to worry about being undercut by illegals from Mexico.
I agree that we need a reduced public sector so much, I've personally offered areas to cut spending.
I agree we need to improve transportation, my ideas if implemented will do that by reducing the potential number of drivers in the country, resulting in less wear & tear on our highways, byways & bridges.
I agree that the environmentalist wackos are out of control. Man made climate change has been disproven. Phil used Mike's Nature Trick to Hide The Decline in Global Temperatures. Plus uncertainty over the tree huggers' agenda is helping to contribute to economic paralysis.
I agree we need health care reform. However we do not need government taking over health care. Health care costs are out of control due to third parties (government & health insurers) assuming the majority of direct spending.
I agree we need tax reform. Taxes are too high in this country. Other countries are lowering their taxes, America needs to lower taxes in order to remain competitive.
I wonder if legalizing, taxing & regulating narcotics would undercut the power of the cartels. The current Prohibition model doesn't seem to be working out well for America.

[EuropeanImmigrant]

In summary, the answer depends on whether we look at the question in absolute or relative terms:

A) Will the next American generation be better of than their parents in absolute terms:

Yes, most likely

…since the general trendline worldwide during the past 200 years has been for every generation to be better off than their parents – notice I used the term trendline implying that there have been some notable exceptions).

B) Will the next American generation maintain its unique position of enviable prosperity compared to the rest of the world:

Most likely not

…because the recent adoption of collectivism on behalf of the American public indicates that Americans have been, or are now becoming, unaware of what really differentiated them from the rest of the world and what has been exclusively responsible for making them a great nation in the first place – see proposals to revise an already trampled upon but unique in the world constitution.

[Economist]

TwoPlusTwo,

Have you been exposed to the field of happiness economics? Although we are richer and live longer than people from 200 years ago, we are NOT happier than people were 200 years ago. You seem to think that if you lived in the future, many times richer than you are now and with an even longer life, that you would be happier - well actually, that is not the case; future societies will not be happier than we are, in the same way that we are no happier than past societies were, despite our more advanced technology, medicine, etc. Please do some research on happiness economics.

Also, please understand that "two degrees warmer" is more than just a temperature change. Climate change has real impacts for the people of the world, including those who are already very impoverished, and it is usually the poor who have the most to lose from the current and future effects of a warming planet. Indeed, it is not an exaggeration to say that climate change has the potential to send human development into reverse if it is not alleviated. Clearly you have not grasped the day to day realities of what "two degrees warmer" means for our future. Please do some research on this topic before posting comments about it, else you run the risk of sounding incredibly ignorant, as you have here.

[Nike Shox Turbo]

I want to bring out the secrets of nature and apply them for the happiness of man. I don't know of any better service to offer for the short time we are in the world. (Thomas Edison, American inventor)

[Nike Shox Turbo]

I want to bring out the secrets of nature and apply them for the happiness of man. I don't know of any better service to offer for the short time we are in the world. (Thomas Edison, American inventor)

[rock crusher]

I don’t put much weight on public opinion polls that show a drop in Americans’ optimism about the economic future of the country.

[M Hoffman]

Once again, an absurdly simplistic thesis. Would the author of this blog explain why he believes he is an expert on everything? It seems he just peruses the internet and picks and chooses "facts" which purport to support his opinions? Certainly happiness is a state of mind related primarily to environment, health and genetics
At present, this blog makes me extremely unhappy.

[Mr. Econotarian]

"airline service has deteriorated markedly since the 1990s and traffic congestion has increased"

I think you should describe your metrics on this. In 1990, no passenger aircraft has on-board TV or WiFi Internet, today many airlines have this. In particular, flying coach today on Virgin American is more enjoyable for me than flying on coach on any other airliner during my lifetime.

Air travel analyst Terry Trippler did a study comparing 1982 and 2007 ticket prices and flights, finding that most routes have had significant reduction in real ticket prices and increases in number of flights.

Even if you look at 1990 until today, airfare cost per passenger mile has dropped, although of course this is offset somewhat by loss of free meals, luggage costs, etc.:

http://cavehicdragones.files.wordpress.com/2008/04/picture-1.png