Sunday, June 5, 2011

Economic Freedom and Happiness

I was recently looking at the economic freedom numbers for countries around the world and I wanted to know what the connection to actual outcomes was; in particular, the happiness of the people in those countries. All the rest are surrogates. Political and economic debates sometimes lose focus on this fact.

I looked at the following data, for all countries that had them (evident in the datasets); for each, it was always a clear majority of countries on the planet.

- The Heritage Foundation's Economic Freedom Index for 2011

- White's Life Satisfaction Index

- GDP per capita (IMF data, supplemented by CIA for small countries, non-reporting countries, or inaccurately reporting countries)

- Gini index (from the U.N., or for some countries in the midst of conflict the Global Peace Index statistic)

- Economic growth for countries 1990-2007 (data from United Nations Statistics Division)

As I've done previously, rather than show a bunch of scatter-plots, I'll give you the statistical highlights. I'm happy to share the spreadsheet if anyone is interested, although this is not quite graduate-study-level QC'd data.

Map of White's life satisfaction index in 2006. This is what counts.


1. Interestingly, economic freedom correlates more closely with life satisfaction than with economic growth (R^2=0.239 vs 0.1075). This suggests that economic freedom adds to utility other than through direct material gain. Freedom does correlate better with per capita GDP than with growth (more below).

2. Economic freedom is associated (albeit weakly) with a decrease in Gini, that is with a more equitable income distribution.

3. There were a number of outliers in the plot of economic growth vs. life satisfaction. Most of these were very high Gini countries.

4. In the "unsurprising" cateogry: there were two R^2 that rose above 0.3 were the correlation between per capita GDP and life satisfaction (0.3106, stronger without outliers). The correlation between economic freedom and per capita GDP was even stronger at 0.3873. The curve appears to flatten at the high end of per capita GDP (removing three outliers raised the R^2 to 0.4665) reinforcing the conclusion that once basic needs are met there is a diminishing return. It bears emphasizing that this is a correlation, not a cause; economic growth may CAUSE economic freedom, or they may both be caused in parallel by the same thing.

CorrelationR^2Relationship Means?
Econ free & PCI0.3873Every point increase in econ freedom (range 0-100), raise PCI US$70
PCI & life sat.0.3106Raise PCI US$1,000, increase life sat. 1.14 pts (range 100-250)
Econ free & life sat.0.239Add a point in econ freedom (range 1-100), increase happiness 1.67 points (range 100-250)
Econ free & growth0.1075Add a point in econ freedom (range 1-100), increase growth 0.001%
Econ free & Gini0.0837Add a point in econ freedom (range 1-100), decrease Gini 0.2685
Growth & life sat.0.0544Every 10% increase in growth, get 25 points happier (range 100-250)
Gini & life sat.0.0258Increase Gini by 1, life sat. drops by 0.5 (range 100-250)

Unsurprising, but interesting to see in this form. Adopt policies that expand economic freedom in order to make people happier, partly by increasing growth. The best way to produce happiness is to reach a target high per capita income, but there is a diminishing return. Economic freedom has a weak beneficial effect on Gini, but Gini can offset the happiness effects of high PCI and good growth.

Future questions:
- There are a number of countries that, looking merely at per capita GDP, aren't as life-satisfied as they should be. These countries usually have large Gini; a surface in a 3D scatterplot would show this distortion. It might be informative to see which countries are "off the surface" in terms of how much we expect their Gini to distort their happiness:PCI ratio, and then ask how this effect is transmitted - a first guess to investigate would be degree of media saturation. Prediction: countries with more media and a high Gini will tend to be less happy that those with less media but the same Gini. Seeing how the other half lives forces everyone into the same status game.

- Are certain regions of the world off these curves in predictable ways because of cultural commitments? (See the World Values Survey.) E.g., are Confucianist countries less happy per dollar of PCI? Or are cultures with more family-oriented, traditional values differentially susceptible to the effects of Gini distortion?

- (Added later: personal economic freedom in the 50 U.S. States can be found by category here.)

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