Usually, I don’t care about the general population’s happiness. It’s their business, not mine.

Though Gross Domestic Product is a lousy measure of economic output—so bad that it’s been nicknamed “Grossly Deceptive Product—” I still wouldn’t use Bhutan’s measure of Gross National Happiness in its place.

But seeing the US fall out of the top 20 happiest countries felt like a gut punch. Really, if you can’t feel happy in America, where can you feel happy?

How can the Land of the Free and the Home of the Brave not be one of the happiest countries on earth?

Well, there are plenty of reasons.

In this Rude, I want to discuss the exciting connections between happiness, confidence, and economic output.

What Happened?

I just read in The Wall Street Journal that the “US No Longer Ranks Among World’s 20 Happiest Countries.”

The article starts with this:

The U.S. has fallen out of the top 20 happiest countries for the first time since a global ranking began in 2012, due in large part to a drop in happiness among younger adults. 

Americans fell to 23rd place in happiness, down from 15th a year ago, according to data collected in the Gallup World Poll for the World Happiness Report 2024. Costa Rica and Lithuania were among the countries that reported being happier than Americans, according to the annual survey, which asks respondents to rate their current lives on a scale of 0 to 10, with 10 being the best possible life for them.

Nordic countries dominate the top 10, with Finland at the top.

Unfortunately, the study didn’t give reasons for the unhappiness. But scientists suspect some of the reasons include worries about money, loneliness, anxiety about their futures, and what is happening around them. 

Why is this worrisome on a national level? Let me explain.

What is Happiness Economics?

Often seen as a subjective state, happiness plays a crucial role in the broader spectrum of economics. 

Beyond the mere accumulation of wealth and the pursuit of growth, the significance of happiness within an economic framework offers profound insights into societal well-being, productivity, and sustainable development.

The Foundation of Happiness Economics

The study of happiness economics emerges from the intersection of psychology and economics, challenging traditional metrics of economic success, such as GDP.

Nobel Laureate Richard Easterlin’s Easterlin Paradox highlighted the complex relationship between income levels and happiness. It posits that beyond a certain point, increases in a country's wealth do not lead to greater happiness among its citizens.

This insight propels the argument that economic policies should not solely focus on material wealth but also consider the happiness and well-being of the population.

Happiness and Productivity

A significant body of research underscores the link between happiness and productivity.

Happy employees tend to be more engaged, creative, and resilient in facing challenges. They exhibit lower absenteeism and turnover rates, contributing positively to their organizations' bottom line.

A seminal study by Oswald, Proto, and Sgroi (2015) at the University of Warwick found that happiness led to a 12% spike in productivity, while unhappy workers were 10% less productive.

This suggests that investments in employee well-being can yield substantial returns in productivity, a critical component of economic growth.

Consumer Behavior and Economic Stability

Happiness influences not only how much individuals consume but also what they consume. Happier people are more likely to make long-term investments in their health and education, which are pivotal for economic stability and growth.

Furthermore, a content populace is less prone to erratic spending patterns, contributing to a more stable and predictable economic environment. This stability is crucial for long-term planning and investment at the individual and governmental levels.

Public Policy and Happiness Indexes

The understanding that happiness is a valuable economic indicator has led several countries to integrate well-being measures into their policy-making processes.

Bhutan famously prioritizes Gross National Happiness (GNH) over GDP to measure its development.

Similarly, the World Happiness Report, an annual publication by the United Nations, ranks countries based on their citizens' self-reported well-being, considering factors such as income, social support, and freedom to make life choices.

These initiatives underscore the shifting paradigm towards policies that foster economic environments conducive to happiness.

The Broader Impacts on Society

The emphasis on happiness within an economic context extends beyond the immediate benefits of increased productivity and stable consumer behavior. It fosters a society where mental health is prioritized, social bonds are strengthened, and inequalities are addressed more holistically.

By valuing happiness, economies can create a virtuous cycle where well-being and economic prosperity reinforce each other, leading to a more resilient and cohesive society.

How does happiness interact with confidence?

Happiness Translates Into Consumer Confidence

Economics has increasingly recognized the importance of psychological factors such as happiness and confidence in shaping economic outcomes.

The interaction between happiness and confidence is multifaceted and influential, affecting individual behavior, market dynamics, and overall economic health. Here’s how economics handles this interaction:

Consumer Confidence and Spending

Consumer confidence, often measured by indices that reflect optimism or pessimism about future economic conditions, directly influences spending and saving behaviors.

When consumers are happy and confident about their financial future, they are more likely to spend, driving demand for goods and services. This increased demand can stimulate economic growth. 

Conversely, low confidence can lead to decreased spending and slowing economic activity.

Economists and policymakers closely monitor consumer confidence as an indicator of economic health and potential shifts in the business cycle.

Investment Decisions and Risk Tolerance

Happiness and confidence play a critical role in investment decisions, impacting individual and institutional investors. Confidence in the economy, markets, or specific investments can increase investment activities, driving capital formation and economic growth.

Happy and confident investors, like Paradigm’s own Alan Knuckman, may exhibit higher risk tolerance and seek growth opportunities that can yield higher returns.

Conversely, a lack of confidence can lead to risk aversion, potentially slowing economic growth as investment in new ventures and projects diminishes.

Labor Market Dynamics

The interaction between happiness and confidence in the labor market influences job satisfaction, productivity, and career decisions.

Confident and happy individuals are more likely to pursue career advancements, switch jobs for better opportunities, or start new businesses.

This dynamism contributes to economic flexibility and innovation. Furthermore, happier employees tend to be more productive, as mentioned earlier, which can enhance a firm's performance and, by extension, the economy's efficiency.

Macroeconomic Policy and Stability

From a macroeconomic perspective, happiness and confidence intersect in the realm of policy-making. 

Economic policies that foster stability, growth, and employment boost confidence and happiness across the population.

For instance, effective monetary and fiscal policies that curb inflation, ensure low unemployment, and promote equitable growth can enhance overall economic confidence and happiness, creating a positive feedback loop that supports sustainable economic health.

Behavioral Economics Insights

Behavioral economics, a subfield integrating insights from psychology and economics, provides a framework for understanding how happiness and confidence affect economic decisions.

It examines how cognitive biases, heuristics, and emotional states influence economic behavior, challenging the traditional economic assumption of rational decision-making.

Through this lens, the impact of happiness and confidence on economic decisions is studied not as anomalies but as integral aspects of human behavior that significantly shape economic outcomes.

Hopefully, it’s clear why the confidence indicators of the Confidence Board and the University of Michigan are being watched.

Wrap Up

That America isn’t happy anymore is noteworthy in and of itself.

But this unhappiness has knock–on effects, from macroeconomic policy to the labor market to individual job decisions.

America needs to turn its frown upside down.