In pursuit of happiness

In pursuit of happiness

GDP is the universal yardstick of economic activity and standards of living. Invaluable though GDP is, it is not a measure of the quality of life or human welfare. In recent decades economists and statisticians have sought to fill this gap, developing measures of happiness, life satisfaction and quality of life. With the summer holiday season underway, this week’s Monday Briefing examines what these surveys can tell us about where to live and the determinants of happiness.

• For some, happiness is a vague, subjective concept that does not allow meaningful comparisons across countries, groups or over time. But as Lord Richard Layard, dubbed the ‘happiness’ economist, observes, if policymakers are trying to raise welfare, we need to measure happiness. In response to the claim that self-assessed happiness is unreliable, Lord Layard notes that an individual’s responses correlate with levels of the stress hormone cortisol and, indeed, life expectancy.

• The annual World Happiness Report, co-authored by Lord Layard, ranks 156 countries by their happiness levels based on the results from Gallup World Poll surveys. Finland ranks as the world’s happiest country, followed by Denmark, Iceland and Sweden. Along with the Netherlands, Norway and Switzerland, these countries have featured in the top rank of the happiness league table since its inception in 2012. Afghanistan is at the bottom of the table, in 143rd place, with Lebanon just above. Low-income countries, especially those facing political instability or conflict, tend to register the lowest levels of happiness.

• What explains the position of the highest rated countries?

• It helps that all are rich, advanced economies with high GDP per capita. This is one of the six factors that the UN has found to support well-being. The top-rated countries also score highly on the other five factors: healthy life expectancy, social support, freedom, trust and generosity.

• These influences are themselves a product of income, politics, culture, history and individual behaviour, and can substantially offset the effects of lower income levels. Thus Costa Rica and New Zealand rank above Germany and the US in the happiness league, despite having lower levels of GDP per capita. Conversely, some relatively rich nations, including Japan, South Korea and Singapore, rank well down the happiness league. 

• This is a consistent theme across surveys. Relatively low-income Romania scores significantly higher levels of life satisfaction on the EU’s measure than Germany. We see the same picture within countries. The UK’s official measure of welfare shows that levels of happiness and life satisfaction are consistently higher in Northern Ireland than in London.

• In the UK, research shows that health and marriage/being in a civil partnership are significant influences on happiness. Having a secure job is also important, and not solely because of the income. Work provides structure, self-esteem and social connections. Across EU member states, people with higher levels of education report higher levels of life satisfaction.

• Measures of happiness and life satisfaction, such as the World Happiness Report and those produced by the EU and the UK Office for National Statistics, rely on self-reported welfare. An alternative approach is to assess the ‘liveability’ of cities or countries using third-party data.

• Multinational businesses regularly compare cities to understand the cost of living and quality of life for local staff. One tool created to help them with these decisions is the Economist Intelligence Unit’s (EIU’s) Global Liveability Index, which rates the standard of living in 173 cities worldwide. It is an annual survey assessing cities across five categories – economic and social stability, quality of health care, culture and environment, education and infrastructure – to produce an overall ranking.

• Western Europe is home to four of the EIU’s top five most liveable cities in the world – Vienna, Copenhagen, Zurich and Geneva – and is the best-performing region in the index. Though assessed in a completely different way, these findings broadly accord with the results of the World Happiness Survey. The EIU’s liveability exemplars enjoy relatively high levels of public spending on housing, health, education, transport and social services. Because residents tend to have lower levels of spending on these services, they have more free income for leisure and cultural activities.

• Access to and affordability of housing remains a big determinant of quality of life. Vienna, which was rated the most liveable city in the world for the third year, does particularly well on this. Austria's active social housing policies mean that its housing market is among the least commercialised in Europe. About 60% of Vienna’s population lives in social housing where rents are kept artificially low. This makes rentals affordable, with a recent Deloitte study showing that Vienna's renters pay roughly a third of what their counterparts in London, Paris or Dublin do. (For a critical assessment of the Viennese social housing system, see this week’s Economist magazine.)

• Elsewhere, housing shortages have hit the EIU’s liveability ratings. They have pushed Toronto down to 12th position this year, leaving Calgary and Vancouver as the only North American cities among the top ten most liveable. Sydney and Melbourne have also seen their ratings slide for similar reasons but still feature among the top ten.

• Another driver of liveability seems to be population size. Cities with relatively small populations, such as Copenhagen, Zurich, Geneva or Vancouver, tend to see lower crime rates and more manageable demands on public services. Many of the largest western cities are not top performers on the EIU index. London is ranked the 45th most liveable city, while Los Angeles and New York are ranked 58th and 70th, respectively. In the UK and the US, other cities performed better, with Manchester ranking two spots ahead of London and Honolulu rated as the best city to live in the US.

• As with measures of happiness, conflict and political instability have a predictable effect on the quality of urban life. This is evident towards the bottom of the EIU ranking which is dominated by cities in Africa and the Middle East. War-ravaged Damascus is rated as the least liveable city in the world, its position constant since 2013. Tripoli, Algiers and Lagos follow Damascus, with political instability as their primary affliction. The war in Ukraine has kept Kyiv in the bottom ten for the second year running, while Tel Aviv has seen its position slide sharply this year.

• Conspicuous by their absence so far are cities in the two largest and fastest-growing emerging markets – China and India.  China's higher income economy enables it to spend more on its cities than India. As a result, they fare comparatively better. Ranking 81st, Beijing is the most liveable city, with good standards of education and healthcare. Given lower levels of per-capita GDP and high population densities, Indian cities feature closer to the bottom of the rankings, with Delhi and Mumbai tied at 141st rank.

• There is, of course, no complete measure of human welfare. The EIU measure provides a useful measure of the quality of life for expatriates and, as such, excludes elements, such as political conditions, which matter for nationals. Hong Kong, for instance, ranks above New York or Los Angeles in the EIU index, despite the absence of political freedoms that are taken for granted in North America and western Europe. 

• Much of what contributes to happiness lies beyond the control of individuals. Where and when you are born and your family environment matters. Yet individuals, especially those in richer, freer countries, have significant agency. The more an individual identifies with family, friends and colleagues the happier they tend to be. Education enriches life. Prosaic changes really make a difference. Exercise and reducing time spent on social media contribute to happiness. Reduced commuting times are associated with higher levels of welfare.  Researchers at the OECD have suggested that for those with the wherewithal paying others to do your chores reduces stress.

• There is, in short, much we can do to assist ourselves in what the US Declaration memorably dubbed the “pursuit of happiness”.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.3% at 8,175 as global equity markets sold off due to weak economic data and continued pressure on semiconductor shares.

Economics

• The Bank of England cut interest rates for the first time since 2020.  The Monetary Policy Committee voted five to four to lower the key rate from 5.25% to 5.0%
• BoE governor Andrew Bailey said that policymakers “need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much,”
• UK manufacturing activity expanded for the third consecutive month in July, with increases in output, new orders and employment, according to PMI data
• UK house prices rose 2.1% year on year in July, the fastest increase since 2022, according to Nationwide’s index
• The US economy added 114,000 jobs in July, fewer than expected, and the unemployment rate rose, in a further sign the labour market is weakening
• US manufacturing activity contracted for the fourth consecutive month in July. The Institute for Supply Management’s index tracking activity came in below expectations as demand remained subdued and companies were unwilling to invest due to high interest rates 
• The US Federal Reserve left its key interest rate unchanged prior to these soft data releases, but Fed chair Jerome Powell said, “the economy is moving closer to the point where it will be appropriate to reduce our policy rate”, reinforcing investors’ view that the Fed will cut rates in September
• The Bank of Japan (BoJ) increased its benchmark interest rate from 0.1% to 0.25%, following an increase from -0.1% to 0.1% in March. It also announced that it will slow the pace of asset purchases
• Japanese equities suffered the largest one-day decline since 2016 after the BoJ unexpectedly raised interest rates as investors weighed the negative impact of a stronger yen on the country’s large exporters
• Euro area inflation accelerated slightly to 2.6% in July, from 2.5% in June. Service prices again rose at a faster pace, increasing by 4.0%
• Euro area GDP expanded by 0.3% in the second quarter. Spain continued to outperform while the German economy contracted by 0.1%. The German economy has now contracted in two of the last three quarters
• Euro area manufacturing contracted again in July, led by particularly weak readings in Germany and France, according to PMI data
• Foreign direct investment into China fell 29% in the first six months of 2024 compared with the same period a year earlier. Investment has likely been hit by disappointing economic growth and concerns about an escalation of trade/ investment restrictions with the US

 

Business

• US chipmaker Intel is to cut 15,000 jobs and reduce capital spending to shore up its finances. The Intel stock price fell 25% on the announcement
• Multinational drinks maker Diageo reported sales fell in the 12 months to July on a year earlier, the first drop since 2020, and warned persistent inflation is weighing on consumers
• Fast food firm McDonald’s also reported a drop in global sales, with chief executive Chris Kempczinski warning consumers were feeling the effects of higher prices
• Delta Air Lines says that the IT outage caused by CrowdStrike in July will cost the company $500m
• German carmaker BMW’s chief executive Oliver Zipse said he expected “countermeasures” following the EU’s introduction of tariffs on Chinese electric vehicles and warned Europe’s net zero transition relied heavily on raw materials from China
• The regional government of Valencia, Spain, is cracking down on back-market Airbnb-style rentals after a rising backlash from locals against mass tourism. The move follows more radical steps taken by authorities in Barcelona

Global and political developments

• Iran accused Israel of killing Hamas political leader Ismail Haniyeh in Tehran. Iran's leader Ayatollah Khamenei vowed "harsh punishment" against Israel
• Israel admitted carrying out an airstrike in the Lebanese capital Beirut that killed senior Hezbollah commander Fuad Shukr
• The US and Russia engaged in a major prisoner exchange, involving the Wall Street Journal reporter Evan Gershkovich who was released from a Russian prison
• The EU issued the UK with a list of requirements, including fully implementing existing agreements on Northern Ireland and the rights of EU citizens living in the UK if the new UK government wants an improved relationship with the bloc, the FT reports
• Germany blamed China for a 2021 cyber-attack on its precision mapping department that may have exposed sensitive information about its critical infrastructure

And finally… Australian hockey player Matt Dawson chose to have his broken finger amputated so he could take part in the Paris Olympics. The 30-year-old suffered a bad break to one of his digits when it was struck by a hockey stick in a training session a few weeks ago, and was told he would have to miss the games. Instead, a surgeon took an inch off the end of his ring finger on his right hand, just below the top knuckle, and he was able to compete in Paris – extremity committed