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

[China digital thermometer]

Thank you for this. Please don't worry about making people sad. Trying to get at the truth is the important thing.

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[Sharon J.]

It doesn't even matter how our economical situation changes- for better or worse- because you're never going to please everyone and in most situations, what helps one group, hurts another, so that's life.