Policy

Rethinking the role of happiness in public policy

From: Blog

Life, liberty, and the pursuit of happiness are described in the US Declaration of Independence as "inalienable rights." But while life and liberty are accounted for and spiritedly debated in public policy (think abortion, incarceration), the pursuit of happiness is not as explicitly incorporated into the law. 
 
Now, thanks to a study of health and wealth, we know that there is a way to factor in happiness in quantitative analyses of public issues. The paper, coauthored by Chicago Booth's Matthew J. Notowidigdo, MIT's Amy Finkelstein, and Dartmouth's Erzo F.P. Luttmer, was just awarded the Hicks-Tinbergen Medal, given biannually by the European Economic Association to honor an outstanding article in the Journal of European Economics Association

In "What Good is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption," the coauthors investigate the impact of health on the marginal utility of consumption. What they found is that people get more utility (enjoyment) out of consumption (spending money) when they're young and healthy than when they're old and sick.

"Across a wide range of alternative specifications and assumptions, we find that the marginal utility of consumption declines as health deteriorates, and we are able to clearly reject the null of no state dependence."  

If we get more out of spending money when we're young and healthy, where does that leave us when it comes to saving for retirement? (Read more about that in a graphic short story from the Summer 2014 magazine featuring Notowidigdo and Chicago Booth's Daniel Bartels, Are we saving too much for retirement?)

The research will certainly bring a new perspective to long-standing policy questions on the value of health insurance, and what a lifetime savings plan should look like, among others. 

—Chelsea Vail
Cat:Policy,Sub:Economics,