There’s a puzzle that’s plagued psychologists, economists, and policy makers for decades. Governments strive to promote economic growth with the assumption that doing so will enhance their constituents’ well-being (and, hey, maybe get them reelected). Interestingly, though, the data are mixed as to whether citizens get any happier as their country gets richer. One intriguing trend emerges from the data, however: economic growth appears to do more for the happiness of the average citizen in some countries (like Denmark, the Netherlands, and Italy) than in others (like the United States and China). Alan Krueger, tapped by President Obama to be chairman of the White House Council of Economic Advisers, suggests that this variation poses a pressing new puzzle: “Why do some countries do a much better job translating income gains into happiness than others?”
If the amount of happiness your money buys depends on how you spend it, might the same idea hold true at the level of countries? The variability in how governments choose to spend money, and encourage their citizens to spend their own money, may explain why some countries are so skilled at turning cash into happiness. Below, we briefly outline each of the five principles from our book, Happy Money: The Science of Smarter Spending, then discuss ways in which governments can – and in some cases, already are – putting those principles into action.
Experiential purchases provide more happiness than material purchases.
Should governments institute policies to encourage the pursuit of experiences? Evidence from the city of Somerville, Massachusetts suggests yes. The city asked more than six thousand residents to rate their satisfaction with various aspects of life in Somerville, from traffic to schools to snow removal (a big deal, given Massachusetts winters). The goal? The city wanted to determine what aspects of life in Somerville exerted the greatest influence on inhabitants’ happiness. As it turned out, residents’ ratings of “the appearance and maintenance of parks” and “the beauty or physical setting of the city” were important predictors of their overall happiness with Somerville. It’s easier for people to seek out experiences, from picnics in the park to nights on the town, when the local environment provides appropriate settings.
Governments often provide support for museums, national parks, and other cultural institutions, thereby making experiential purchases accessible and affordable for their citizens. To experience those experiences, of course, people need to have the time to pursue them. And countries vary not just in providing more kinds of experiences, but in the amount of “free time” their inhabitants have, particularly in the form of government-mandated vacation days. In Denmark, ranked among the world’s happiest countries, the Danish Holiday Act requires that workers get five paid weeks off each year, leaving the Danes with more time for experiences than people have in countries such as the United States, which lacks a mandatory vacation requirement.
Make It a Treat
Giving up the things we love makes us enjoy them more when we consume them again.
Governments are in the business of making sure people have the opportunity to get what they most want, whereas “making it a treat” is all about limiting the supply of our favorite things. Should governments ration how much of our favorite things we consume? It sounds crazy, except that governments implicitly ration all kinds of products we consume, via taxation.
Consider cigarette taxes: In 2011, Missouri had the lowest state cigarette excise tax in the United States—just $0.17 per pack—while New York’s was more than twenty-five times higher, at $4.35 per pack. And as you might expect, taxes are related to consumption. New York has lower rates of smoking than Missouri, and in general, states with higher taxes tend to have fewer smokers.
Or take sugary sodas, the latest bad boys of the beverage world. Policies banning the vending machines that dispense them are spreading in American schools. The first was passed in Arkansas in 2003. The evidence is mixed on the effect of such bans on childhood obesity and on children’s health more broadly. But banning soda for a large chunk of the day may have an additional benefit, restoring children’s enjoyment of drinks best regarded as treats. These examples show that governments can encourage people both to limit and break up consumption with simple policy changes.
Considering how purchases will affect our time increases our likelihood of making wise decisions.
Commuting times show enormous variability between countries, ranging from a low of around 25 minutes each way in Ireland and Denmark (oh that Denmark!) to more than 50 minutes each way in Korea and South Africa. Governments are quite adept at altering how much time and money people spend commuting.
Consider an innovative program launched by Washington, D.C.’s Office of Planning called Live Near Your Work. The program offers up to $12,000 in incentives for people who move within two miles of work, half a mile of the subway, or a quarter mile to a bus stop. And in Sweden (another pretty happy country), Stockholm City Bikes allows residents to buy bike cards that provide access to bikes stashed at any one of dozens of bike stands around the capital city, making biking as convenient and affordable as sitting on a bus or taking a subway. But would encouraging biking increase happiness? Within American cities, the percentage of commuters who cycle to work is positively correlated with average happiness in those cities (though cities with lots of bikers also have a higher standard of living in general, which may account for at least some of the effect).
Time spent driving is a bust for happiness, whereas time spent exercising is a boon. Taking a bike to work (even once a week) can transform our happiness-wasting commuting time into happiness-inducing physical activity time. Governments can help make this happen.
Pay Now, Consume Later
Paying up front and then waiting to consume decreases the pain of paying and increases anticipation – and happiness.
In the United States, the income tax system is structured such that many people overpay during the year and then receive a tax refund when April rolls around. Doug Shulman, the commissioner of the Internal Revenue Service, notes that “80 percent of Americans get an average of a $3,000 refund.” Overpaying can have real costs, depriving people of the interest they could have earned on that money if they invested it during the year. In the United Kingdom, in contrast, the tax collection system is designed to minimize error, such that relatively few people end up receiving tax refunds (or owing money) at the end of the year.
At first glance, the British system sounds great. But consider the consequences if the British system were skewed toward overcollecting taxes during the year so that people very rarely have to make a repayment at the end of the year. What would happen instead? Many people receive a rebate, more similar to standard operating procedure in countries like the United States. How would this policy help taxpayers follow our principle to pay now and consume later? Overcollection helps ensure that people pay up front rather than devoting all their dough to immediate consumption and then being left short-handed when the tax bill is due.
Invest in Others
Spending on others produces more happiness than spending on the self.
How much do Americans care about investing in others? The United States has lower income taxes than many similar countries. Top earners paid a tax rate of 35 percent in 2011, compared to 50 percent in the United Kingdom and 52 percent in the Netherlands. On the other hand, the United States is consistently in the top ten countries in the world in terms of percentage of citizens donating to charity. An impressive 65 percent of Americans reported donating money to charity in 2011.
The high rate of giving among Americans is due in part to a government decision that changes the frequency with which people invest in others: tax incentives for giving. Countries vary on whether charitable contributions can be deducted from income taxes, estate taxes, or both, and on the ceiling they set for total deductions. These policies are linked to the frequency with which people give. Stronger incentives for giving have the potential to encourage greater investment in others.
Teach a Man to Fish…
We close by mentioning another powerful tool that governments have at their disposal: raising awareness. Our book reveals the very best ways to spend money to reap the most happiness from every dollar, but governments can provide such “happiness education” on a much broader scale.
David Halpern, director of the Behavioural Insights Team in the British government, offers this goal as his core job description: “Deshroud for citizens what it is that impacts their well-being, including their consumption choices.” For libertarian-minded readers horrified at some of the government interventions we outlined in the previous sections, raising awareness offers a middle ground. Governments can provide accurate information on the determinants of well-being and then leave it up to citizens to decide how best to implement that knowledge in their own choices. Halpern wondered: “Would people choose to live in a different area because reams of data show that people are happier there?” In the longer term, we can imagine that people would use their knowledge about the determinants of well-being to pressure governments to enact policies that maximize their own well-being.
Excerpted from Happy Money: The Science of Smarter Spending (Simon & Schuster).
Disclosure: Michael Norton is a member of The Psych Report’s Advisory Board
This article was updated.