Investigating Macroeconomic Determinants of Happiness in

Transition Countries: How Important is Government Expenditure?by L. M. Perovic and S. Golem

Discussant: K. Zigic CERGE-EI Prague, Czech Republic

The Fifteenth DubrovnikEconomic Conference

Organized by the Croatian National Bank

Summary of the Paper• Objective: – Analysis of the role of macro factors and especially

government expenditures for happiness• Methodology:– Based on survey data– Ordered logit econometric analysis of dataset

constructed from survey respondent-level data on happiness and social characteristics and macroeconomic variables

• Conclusions– “Government expenditure significantly and non-linearly

influences happiness in transition countries”

Main Variables UsedVariable Source Description

HappinessWorld Values SurveyWaves 3, 4 and 5

Taking all thing together, would you say you are: 1: not at all happy, 2: not very happy; 3: quite happy and 4: very happy.

Government expenditure

World Development Indicators, World Bank (2008)

General government final consumption expenditure as a percentage of GDP (annual %)

Measuring the Quality of Life: Overview• GDP – very bad measure of the quality of life (but often the only one readily

available)• Measures derived from GDP – e.g. GDP adjusted for leisure and pollution

– Hicks, Kaldor, and others (Measure of Economic Welfare, Net Economic Welfare)• Non-economic indicators – social, health indicators

– Infant mortality, life expectancy• Happiness

– J. Bentham – utility in terms of psychological states– “Feeling good – enjoying life and feeling it is wonderful.” Layard (2003)– Can we measure it by GDP?

• In spite of economic growth people in USA, Japan, UK do not seem to be happier than 50 years ago. Hedonic adaptation?

• But Deaton (2007) finds relationship between life satisfaction and per capita GDP– Can we measure it by surveys?

• D. Kahneman, A. Kruger: Day Reconstruction Method– Or borrow methods from neuro-science? – D. Prelec: positive feelings correspond to

brain activity in the left side of the pre-frontal cortex, somewhat above and in front of the ear.

– Not only tangible wealth matters, but also our ability to appreciate and enjoy life.• We should also have teachers that will teach us the ways to happiness – R. Layard (2007)

Easterlin (2003)• Analysis of happiness that attempts to bridge the gap

between psychology (set theory) and economics (revealed preferences)– Focuses on aspirations/social comparison and hedonic adaptation– Differentiates between nonpecuniary factors (marriage, divorce,

health) with lasting effects and pecuniary factors with possibly only temporary effects (due to hedonic adaptation and social comparison)

• Traces happiness of identical individuals in time• Two of Easterlin’s conclusions relevant to the discussed

paper:– “Policies to improve health or facilitate more time with one’s

family are consistent with greater happiness”– “Increase in income … does not bring with it a lasting increase in

happiness…”

“Happiness” Variable In the Discussed Paper• Data from World Value Survey used– Not too many details about the data provided in the paper

• Methodology and quality of the data on happiness (World Value Survey) should be analyzed in more detail in the paper as it is crucial for the whole analysis

• Possible problems with the data– E.g. Croatia seems to have been included in two waves (1996,

1999). Is this representative enough?– While the data on happiness are on “respondent level”, from the

description on WVS web it seems that the same set of respondents is not tracked during different waves of the survey (i.e. random sampling in each wave is used). Is this true?

– If yes, then this could be a problem• As e.g. Easterlin (2003) discusses, life-cycle and “hedonic adaptation” do

matter a lot in analysis of happiness• The data are rather a sequence of cross-sections than a real panel• Description of equation 1 (indexes) can be misleading

Sampling used in Croatia (1999 Survey)• Source: WVS website• Use was made of two-stage probability sampling. – At the first stage 63 locations were selected from a list of all

towns/villages in Croatia that was sorted by administrative districts and degree of urbanisation. • In each location 16 interviews (systematic selection) were conducted.

Some minor corrections were made to adjust for urban representation of each country. More than one sampling point were made in larger cities (e.g. Zagreb had 10 sampling points).

– At the second stage respondents were selected randomly within the household (using the Throdal and Carter method - balancing gender and age) from a list of addresses in each location.

• According to description, the same methodology used in 1996. But how about the stability of the sample and ability to track the original individuals?

Feeling of Happiness: Croatia in 1996

Source: World Value Survey

Feeling of Happiness: Croatia in 1999

Source: World Value Survey

Other Comments on Variables Used• There seem to be substantial (extreme) variability in some of

the variables (Table 2), especially in inflation– It seems that there may be some outliers– Did you test robustness of your results with respect to the role of

the outliers• E.g. – if it is the case – by omitting observations for a country (countries?)

that acts as an outlier with respect to inflation?• On the other hand, variability in happiness variable is fairly

low – as expected, most respondents were between 2 and 3 on the 4 grade scale

• This is not unusual, but may lead to question concerning quality of relationship between very variable macroeconomic variables and the happiness variable– No additional information about the properties of the resulting

estimates (i.e. no other than t-tests) were given– Do you have more details on fit/predictive powers of the model or

some specification tests?

Table 2: Summary StatisticsVariable Obs Mean Std. Dev. Min Max

Happiness 30057 2.72 0.71 1 4

Sex 30820 1.52 0.49 1 2

Age 30803 44.87 16.85 17 101

Education 30649 4.64 2.16 1 9Marital status

30689 2.48 2.08 1 6

Employment status

30543 3.14 2.17 1 8

Income scale

26468 4.52 2.50 1 10

Gen. govt. exp.

3082817.72 5.87 5.69 27.78

Inflation 30828 47.81 192.27 0.54 1058.37Unemployment 30828 12.79 6.66 5.8 34.5GDP per capita 30828 10520.81 4422.48 3631.99 23010

Who is Happy? Average Happiness 1995-2005How much people enjoy their life-as-a-whole on scale 0 to 10

Top> 7,7

Middle range± 6,0

Bottom<4

Denmark 8,2 Phillipines 6,4 Armenia 3,7

Switzerland 8,1 India 6,2 Ukraine 3,6

Austria 8,0 Iran 6,0 Moldova 3,5

Iceland 7,8 Poland 5,9 Zimbabwe 3,3

Finland 7,7 South Korea 5,8 Tanzania 3,2

Source: World Database of Happiness, Ruut Veenhoven, Erasmus Univ. Rotterdam

USA – 17th place, Czech R. 40-43rd place out of 95 countriesResults based on surveys

Life Satisfaction and GDP p. Capita

Source: Deaton (2008)

Interesting Unaswered Question• Authors assume inverted u-shaped relationship

between government expenditures and happiness– E.g. „we hypothesize that there is a “useful” amount

of government expenditures that positively influences happiness…”

– Find that marginal effects correspond with expectations (Table 4 and 5) and are significant

• Logical question: – have you tried to derive the “optimal” levels of

government spending for the analyzed countries?

Conclusion: Final Comment• Interesting paper based on a fairly wide dataset. However, consistency and

properties of the dataset needs better description and clarification• Approach standard in analysis based on probit/logit regressions with similar

types of survey data and macroeconomic characteristics but adds share of government expenditures to the set of variables – Compare e.g. Di Tella, MacCulloch, Oswald (2003) that represent the standard

form of similar studies• Survey could focus more on literature from the frontier segment between

psychology and economics – such as e.g. Easterlin (2003)• More attention should be paid to the variables describing happiness, it has

to be made clear whether the same individuals were or were not tracked in different waves

• Econometrics: more details on the results and tests of the results should be provided

• Analysis of results: results can be “dangerous” for fiscal stability if interpreted literally– It may be useful to try to experiment with searching “optimal” level of

government spending – after taking care about interactions between spending and other variables in the model

References• A. Deaton: Income, Health, and Well-Being Around the World: Evidence

From the Gallup World Poll. Journal of Economic Perspectives — Volume 22, Number 2 — Spring 2008

• B.S. Frey, A. Stutzer: Happiness Research: State and Prospects. Review of Social Economy, June 2005

• R. Layard: Happiness: Has Social Science Have a Clue? Lionel Robbins Memorial Lecture, LSE, March 2003

• Easterlin R.A. (2003): Explaining happiness. Proceedings of the National Academy of Sciences of the United States of America, September 16, 2003

• Di Tella R., MacCulloch R.J., Oswald A.J. (2003): The Macroeconomics of happiness. The Review of Economics and Statistics, November 2003, 85 (4): 809-827

• World Database of Happiness: http://worlddatabaseofhappiness.eur.nl/• World Values Survey

http://www.worldvaluessurvey.org/