Yes, money does buy happiness* *terms and conditions apply

 Years ago, when our kids were young, we used to stay at a guesthouse in the mountains in the same week of January every year, as did various other families. When we met up with people we knew quite well, but hadn’t seen for 12 months, the greeting was always the same: D’ya have a good year?

So, has 2022 been a good year for you? Something similar is asked by the Australian Unity Wellbeing Index. Each year since 2001, researchers from Deakin University ask 2000 people how they’re doing. Are they satisfied with their standard of living, their relationships, purpose in life, community connectedness, safety, health and future security?

The index combines the answers to those questions into a single rating of our “subjective wellbeing”, somewhere between zero and 100. It’s too soon to have results for this year, of course, but the researchers do have them for the first two years of the pandemic – “the worst economic crisis in a generation, and the worst health crisis in a century”.

Guess what? The index actually rose from a low of 74.4 in 2019 to a high of 76.4 in 2020, before falling back a bit to 75.7 in 2021.

But don’t take those tiny changes literally. Allow for sampling error and the best conclusion is: no change. Indeed, in the survey’s 20 years, there’s been only minor variance around an average of about 75.4.

So I can tell you now that our wellbeing in 2022 will have been much the same as it always is, just as almost everyone at the guesthouse gave the same answer every year: “Not bad, not bad”.

The index’s stability from year to year – which is true of similar indexes in other rich countries – confirms a point its founder, Professor Bob Cummins, has been trying to convince me of since I first took an interest in the study of happiness.

Measures of satisfaction with life reflect both biological factors and situational factors. At the biological level, it seems humans have evolved to maintain a relatively optimistic and happy mood. This is controlled by “homeostatic” mechanisms similar to the one that keeps our body temperature stable – unless some situation (such as getting COVID) causes it to go off range.

The researchers say the situational factors most likely to adversely affect a person’s wellbeing equilibrium are insufficient levels of three key resources: money, connection with others, and sense of purpose.

A nationwide average bundles together those people whose wellbeing is reduced by such deficits with a greater number of people who are doing well.

So nothing in this finding denies that many people did it tough during the pandemic, whether monetarily or in their physical or mental health. It’s just that more of us stayed happy enough.

Remember, too, that the media almost always tells us about people with problems, not those doing OK. Similarly, medicos rightly focus on the unwell, not the well. But if you’re not careful, you can get an exaggerated impression of the world’s problems.

And when you look further than the average, you do see the pandemic making its presence felt. The index always shows people living alone, those in share houses and single parents having the least satisfaction with their lot.

But get this: those living alone and single parents enjoyed a big increase in perceived wellbeing. Why? Keep reading.

When the survey divides people according to their work status – unemployed, home duties, study, employed or retired – it always finds the unemployed far less satisfied than everyone else.

In the first year of the pandemic, however, the satisfaction of the unemployed leapt by 9 percentage points. Why? Maybe because the composition of the unemployed had changed a lot. Or maybe because, with many more people becoming unemployed, the stigma of being without a job was reduced.

But a much more obvious explanation is that, early in the pandemic, the rate of the JobSeeker unemployment benefit was temporarily doubled. Suddenly, it went from being below the poverty line to well above it. And wellbeing went up.

Trouble is, when the payment was cut back heavily in the second year, the satisfaction of the unemployed fell below what it was in the first place.

This supports a finding of “behavioural” economics: people suffer from “loss aversion” – we feel losses more deeply than we enjoy gains of the same size.

And it’s borne out by the survey’s finding that the satisfaction of all those people whose household income had fallen was more than 3 percentage points lower than that of those whose income was unchanged.

But. The satisfaction of those people whose income had risen was no higher than that of those whose income didn’t change.

The survey shows that people on the lowest incomes were much less satisfied than those on the next rung up. But it also confirms economists’ belief in “diminishing marginal returns”. The higher incomes rise, the smaller the increase in people’s satisfaction with their lives.

So, unless you’re really poor, don’t kid yourself that more money will make you a lot happier.

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One small step for the wellbeing budget, giant leap yet to come

Hey, wasn’t this budget supposed to be Australia’s first “wellbeing” budget? Whatever happened to that? Well, it happened – sort of – but it turned out to be ... underwhelming. Didn’t arouse much interest from the media.

It met the expectations of neither the sceptics nor the true believers. Treasurer Jim Chalmers began talking it up long before he got the job. The treasurer at the time, Josh Frydenberg, thought it was a great joke.

He pictured Chalmers “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, wellbeing budget in the other”.

No robes on budget night. But nor did we see Chalmers make a ringing denunciation of the great god GDP.

No quoting of Bobby Kennedy’s famous words that such measures count “air pollution and cigarette advertising, and ambulances to clear our highways of carnage ... special locks for our doors and the jails for the people who break them [and] the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.

In short, Kennedy said, “It measures everything except that which makes life worthwhile.”

No, none of that. Nor any condemnation of economic growth or attack on the materialism of our age.

What we got was what Chalmers promised on the day he became treasurer: “It is really important that we measure what matters in our economy in addition to all of the traditional measures. Not instead of, but in addition to. I do want to have better ways to measure progress, and to measure the intergenerational consequences of our policies.”

What we got on budget night was a start to just that. Not a wellbeing budget, but a normal budget with a chapter headed Measuring What Matters.

It kicked off with some stirring rhetoric about how traditional macroeconomic indicators don’t provide a “complete or holistic view of the community’s wellbeing. A broader range of social and environmental factors need to be considered to broaden the conversation about quality of life.”

Then followed a lot of earnest discussion of “frameworks” and other high-level stuff that’s deeply meaningful to bureaucrats, but not the rest of us. It’s not a long chapter, but I had trouble keeping awake – though I may just have been tired at the time.

But don’t get me wrong. Though none of this stuff gets the blood racing, Chalmers is on the right track. It’s just that he’s got a lot further to go before we see anything likely to make much difference.

Let’s start with GDP – gross domestic product. Everything Kennedy said about it is true. Those who say it’s a bad measure of progress or prosperity or wellbeing are right.

But, as every economist will tell you, it was never intended to be. It’s a measure of the value of all the goods and services produced and consumed in Australia over a period, which means it’s also a measure of the total income Australians earn from producing those goods and services.

It counts the cost of the ambulances and tow trucks that attend road accidents, not because accidents are a good thing, but because all the workers involved earn their income by turning up and helping.

If you’d like everyone who wants a job to be able to get one – meaning unemployment is kept low – the managers of the economy need to know what’s happening to GDP to help them achieve that goal.

GDP doesn’t count “the health of our children or the joy of their play” because, apart from the doctors and nurses, the income we earn from that is “psychic”, not something you can bank or spend.

What economists are more reluctant to admit is that their obsession with the ups and downs of GDP – with the purely material aspect of our lives; with getting and spending – has led them to revere GDP as though it measured our wellbeing.

The rest of us have caught the bug from them. This suits the rich and powerful, whose main objective is to get richer and more powerful. They are focused on the purely material, and it makes it easier for them if the rest of us are too.

It doesn’t suit them to have us asking awkward questions about what economic activity is doing to the natural environment – or the climate – why it’s better for so many jobs to be insecure and badly paid, and whether the pace of economic life is extracting an (unmeasured) price from us in stress, anxiety and depression.

So, Chalmers is right. There’s much more to life – to our wellbeing - than just working and spending. If that’s all governments are doing for us, they’re not doing nearly enough.

We put much effort into measuring and thinking about GDP, but need to put a lot more effort into measuring all the other things that affect our lives and how much joy we’re getting.

Business people say that what gets measured gets managed. True – provided politicians take account of those numbers in the decisions they make. Chalmers’ wellbeing budget is still a long way off.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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We've got more than we've ever had, but are we better off?

It probably won’t surprise you that the Productivity Commission is always writing reports about … productivity. Its latest is a glittering advertisement for the manifold benefits of capitalism which, we’re told, holds The Key to Prosperity.

Which is? Glad you asked. Among all the ways to co-ordinate a nation’s economic activity, capitalism – which the commission prefers to call the “market” economy – is by far the best at raising our material standard of living by continuously improving our … productivity.

Productivity is capitalist magic. It means producing more outputs of goods and services with the same or fewer inputs of raw materials, labour and physical capital. This involves not working harder or longer, but working smarter – using new ideas to reduce the cost of the goods and services we produce, to improve their quality and even to invent new goods and services.

Find that hard to believe? Keep watching the ad.

We’re told that sustained productivity improvement has happened only over about the past 200 years, since the Industrial Revolution. Then, 90 per cent of the world’s population lived in extreme poverty, compared with less than 10 per cent today.

Technological developments and inventions – including vaccines, antibiotics and statins – have driven huge increases in the length of our lives and years of good health.

In Australia, output of goods and services per person – a simple measure of prosperity – is about seven times higher than it was 120 years ago at Federation. This means people today have access to an array of goods and services that were unimaginable in the past.

For every 10,000 newborn babies in 1901, more than 1000 died before their first birthday; today it’s just three. For those who survived childbirth, life expectancy was about 60 years, compared with more than 80 today.

During their 60 years, the average Australian worked much longer hours than today, with little paid leave. The 48-hour week wasn’t introduced until 1916 and paid annual leave didn’t become the norm until 1935. Workplaces were far more dangerous.

Most people died before becoming eligible for the age pension (introduced in 1909) and the average wage bought far fewer goods and services, with a steak costing 5 per cent of the weekly wage.

Homes were more crowded – about five people per home, which were much smaller. We had outside toilets until the 1950s and washing machines and dishwashers didn’t become common until at least the 1970s.

By making goods and services cheaper and better, productivity improvement has increased the typical worker’s purchasing power. That is, it has reduced the number of hours of work required to achieve any particular level of material living standards.

For instance, the cost of a double bed, mattress, blanket and pillows has fallen from 185 hours of work in 1901 to 18 hours today. The cost of a loaf of bread has fallen from 18 minutes to four minutes.

More recently, the cost of a new car has fallen from 17 months in 1990 to five. The cost of a smartphone has fallen from 60 hours in 2010 to 16.

End of advertisement.

When you think about it, this is amazing. Objectively, there’s no doubt we’re hugely more prosperous than our forebears. Our lives are longer and healthier, with less pain, less physical exertion, less work per week, bigger and better homes, more education, more comfort, more convenience, more entertainment, more holidays and travel, more ready contact with family and friends, and greater access to the rest of the world.

We’re not just better off than our great-grandparents, we’re clearly better off than we were 20 years ago. Oldies like me can’t begin to tell our offspring how much clunkier the world was before computers and the internet.

And yet … the trouble with the higher material living standard we strive for – and economists devote their careers to helping us achieve – is that we so quickly take it for granted. It’s always the next step on the prosperity ladder that will finally make us happy.

We’re undoubtedly better off in 100 ways, but do we feel much better about it?

I suspect our lives are like a Top 40 chart – when one tune falls back, another always takes its place. There’s always one tune that sold most copies this week – even if this week’s winner sold far fewer than last week’s.

Whether they’re life-threatening or just annoying, there’s always a set of worries that mar our sense of wellbeing. Makes you wonder whether there might be more to life than prosperity. Human relationships, for instance.

Then there’s the possibility – beyond the purview of most economists – that prosperity comes at a price. Maybe the world we’ve created in our pursuit of prosperity comes at the price of more stress, anxiety, depression and loneliness.

And maybe the natural world is about to present us with a belated bill for all our prosperity: more droughts, bushfires, cyclones, flooding and higher sea levels. All of it in a despoiled environment.

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You'd be surprised what's propping up our living standard

It’s the last lazy long weekend before the year really gets started, making it a good time to ponder a question that’s trickier than it seems: where has our wealth come from?

The question comes from a reader.

“Australia has been without a recession for 25 or more years, the economy seems booming to me, just by looking around: employment, housing prices, explosive building in major capitals, etc. Where is the wealth coming from? Mining? Other exports? Because the resources have to come from somewhere,” he writes.

That’s the first thing he’s got right: it’s not money that matters (the central bank can create as much of that stuff as it sees fit) it’s what money is used to buy: access to “real resources” – which economists summarise as land (including minerals and other raw materials), labour and (physical) capital.

But here’s the first surprise: of those three, when you trace it right back, probably the most important resource is labour – all the work we do.

The first complication, however, is the word “wealth”, which can mean different things. It’s best used to refer to the value of the community’s assets: its housing, other land and works of art, the equipment, structures and intellectual property owned by businesses (part of which is represented by capitalised value of shares on the stock exchange), plus publicly owned infrastructure (railways, roads, bridges and so forth) and structures.

To get net wealth you subtract any debts or other liabilities acquired in the process of amassing the wealth. In the case of a national economy, the debts we owe each other cancel out, leaving what we owe to foreigners. (According to our national balance sheet, as calculated by the Australian Bureau of Statistics, at June last year our assets totalled $15.4 trillion, less net liabilities to the rest of the world of $3.5 trillion.)

But often the word wealth is used to refer to our annual income, the total value of goods and services produced in the market during a year, as measured by gross domestic product (which in the year to June was $1.8 trillion).

The people in an economy generate income by applying their labour to land and physical capital, to produce myriad goods and services. Most of these they sell to each other, but some of which they sell to foreigners. Why? So they can buy other countries’ exports of goods and services.

Only about 20 per cent of our income comes from selling stuff to foreigners and only 20 per cent or so of the stuff we buy comes from foreigners. This exchange leaves us better off when we sell the stuff we’re better at producing than they are, and buy the stuff they’re better at than we are.

Much of what we sell to foreigners is minerals and energy we pull from the ground and food and fibres we grow in the ground. So it’s true that a fair bit of our wealth is explained by what economists call our “natural endowment”, though it’s also true that we’re much more skilled at doing the mining and farming than most other countries are.

Speaking of skills, the more skilled our workers are – the better educated and trained – the greater our income and wealth. Economists call this “human capital” – and it’s worth big bucks to us.

How do the people in an economy add a bit more to their wealth each year? Mainly by saving some of their income rather than consuming it all. We save not just through bank accounts, but by slowly paying off our mortgages and putting 9.5 per cent of our wages into superannuation.

It’s the role of the financial sector to lend our savings to people wanting to invest in the assets we count as wealth: homes, business structures and equipment and public infrastructure. So if most of our annual income comes from wages, most of our savings come from wage income and our savings finance much of the investment in additional assets.

But because our natural endowment and human capital give us more investment opportunities that can be financed from our savings, we long have called on the savings of foreigners to allow us to invest more in new productive assets each year than we could without their participation.

Some of the foreigners’ savings come as “equity investment” – their ownership of Australian businesses and a bit of our real estate – but much of it is just borrowed. These days, however, our companies’ (and super funds’) ownership of businesses or shares in businesses in other countries is worth roughly as much as foreigners’ equity investments in Oz, meaning all our net liability to the rest of the world is debt.

Naturally, the foreigners have to be rewarded for the savings they’ve sunk into our economy. We pay them about $60 billion a year in interest and dividends, on top of the interest and dividends they pay us.

The main thing we get in return for this foreign investment in our economy is more jobs (and thus wage income) than we’d otherwise have, plus the taxes the foreigners pay.

People worry we can’t go on forever getting wealthy by digging up our minerals and flogging them off to foreigners. It’s true we may one day run out of stuff to sell, but our reserves – proved and yet to be proved – are so huge that day is maybe a century away (and the world will have stopped buying our coal long before we run out).

A bigger worry is the damage we’re doing to our natural environment in the meantime, which should be counted as reducing our wealth, but isn’t.

But mining activity accounts for a smaller part of our high standard of living than most people imagine – only about 8 per cent of our annual income.

Most of our prosperity – our wealth, if you like – derives from the skill, enterprise and technology-enhanced hard work of our people.

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