People flock to gurus to unlock the secrets of happiness, psychologists extol the power of positive thinking and the pursuit of happiness, instead of being a right, has become a duty. Much has changed since the days of Jean-Jacques Rousseau, who thought that happiness was “a good bank account, a good cook and a good digestion.”
Economists have been quick to jump into the fray. Samuelson’s introductory text book on economics used to have a neat little formula: Happiness= Economic well-being/Material desire. Desire too much and you won’t be happy even if you are rich. Desire very little and you could be as happy as a king just by standing and staring. In India, economists used to talk of the backward-bending supply curve of labour, which showed that the supply of labour diminished if you paid too much for it. Why? Because workers used to run off to their villages as soon as they had amassed what they thought was a decent sum that would last them till the next harvest.
But we digress. Economists Ben Li and Yi Lu say that happiness has “a positive causal effect on economic growth.” Happy workers, they find, are more productive workers. So far so good. But the researchers go further: they find that sex imbalance, or not having a proper ratio of males and females in a society, is “negatively and significantly correlated with happiness.” Why is that? Because studies have shown that married people are happier than singles. In fact, Clark and Oswald (2002) found that getting married generates the same amount of happiness as £70,000 of income per year. Blanchflower and Oswald (2004) have taken that forward, proving that (i) sexual activity is positively related with happiness; (ii) money does not buy more sex or sexual partners; (iii) the number of sexual partners that maximizes happiness is one; (iv) homosexuality does not have statistically significant expect on happiness. Now Li and Yu find that “a country with a one-standard-deviation increase in happiness has an approximately two percentage points higher growth rate.” In other words, an absence of sex imbalances leads to happiness which, in turn, leads to?economic?growth. The implications are crystal clear: Ensure a sexually satisfied population and economic growth will follow.
Illustration: Jayachandran / Mint
Financial Crises and Economic Activity, by Stephen G. Cecchetti, Marion Kohler and Christian Upper, Bank for International Settlements
Ever since the current crisis started, economists have been trying to figure out how long it will last. We’ve had some scary comparisons with the Great Depression and Japan’s lost decades, but the authority on these matters have so far been Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University. Their research paper looked at past banking crises and found that the average duration of downturn was 1.9 years, which means it has historically taken an average of 1.9 years for the economy to bottom out. Of course, historical averages conceal more than they reveal—during the Great Depression, US output contracted by almost 30% while the downturn lasted four years. In an article in Newsweek in April this year, Reinhart and Rogoff wrote, “If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11–12 percent in 2011.”
Stephen G. Cecchetti, Marion Kohler and Christian Upper of the Bank for International Settlements take a fresh look at the subject. While they too study the history of past crises, they adopt a different approach. According to the researchers, they “attempt to exploit the variation across past crises in two ways: first, creating a comparison group of similar crises that could provide deeper information on how current events are likely to work out, and second, estimating how particular conditions affect the real impact of the crisis.”
Having done all that, what do they find? They predict that the US and UK will regain their pre-crisis level of output by the second half of 2010. They expect Japan to rebound even earlier. There’s one big caveat, though—the researchers say “the error bands around these point estimates exceed easily one to two years.”
The prediction that the countries most affected by the crisis will recover by the second half of next year flies in the face of the notion that the crisis is going to change the world. According to PIMCO boss and bond guru Bill Gross, the world is going to see a “new normal” of low growth for years. But Cecchetti and his colleagues have provided what was sorely lacking, which is an academic backing for the bulls.