Paper of the Day: Economic Policy and the Level of Self-Perceived Well-Being

Economic Policy and the Level of Self-Perceived Well-Being: An International Comparison by Tomi Ovaska and Ryo Takashima, the Journal of Socio-Economics 35 (2006) 308-325. An excellent econometric paper. Best part:

Contrary to the findings on political freedom, economic freedom was found to be statistically significant in nearly all estimations, and of the positive sign. Furthermore, the relationship between SWB and economic freedom depicted in Fig. 2 largely held, unlike that for income, after controlling for alternative explanations of well-being. For instance, when the economic freedom index average in the sample rises from 5.76 to 6.34, the happiness levels rise from 3.01 to 3.07. The effect on life satisfaction is identical. The results suggest that people unmistakably care about the degree to which the society where they live provides them opportunities and the freedom to undertake new projects, and make choices based on one’s personal preferences. Compared to the GDP per capita measure, the index of economic freedom – personal choice, freedom to compete and the security of privately owned property as its core components – turned out to be about four times as important, as measured by elasticities. This indicates that the newly found interest of economics and of policymakers in measures of institutional quality is well placed. Based on the regression results, economic freedom holds some promise in serving as one of the policy tools that could be potentially used to increase the SWB of a nation’s population.

The explanation of why political rights (i.e., voting rights) had a negative influence was interesting:

It turned out that though insignificant, political rights had negative sign while civil liberties had a positive sign. This may be a reflection that democracy is not ideal as a collective decision making mechanism. As one can see from the median voter model of public choice theory, only the median voter obtains satisfaction from political rights. In addition, unlike market exchanges, every majority voting decision can potentially create a relatively large number of losers, all those who were in minority. However, the positive sign of civil liberty indicates that regardless of political structure, civil liberties are essential for human beings across society.

They also note that general freedom is likely prone to adaptation. We take it for granted. Sound's right to me.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center