Happiness Revisited: A Household Income of $75K?

Note from dshort: We've updated this commentary in the wake of the Census Bureau's release last month of the 2015 annual household income data from the Current Population Survey.

One of our favorite discussions on APViewpoint, which addressed "The Sad State of Happiness", included an indirect reference to a popular 2010 academic study by psychologist Daniel Kahneman and economist Angus Deaton. Their topic was the correlation between annual household income and day-to-day contentment. They analyzed more than 450,000 total responses to a Gallup weekly survey of households across the 50 states and DC. The survey was conducted in 2009.

A report in the WSJ summarized their findings:

"It turns out there is a specific dollar number, or income plateau, after which more money has no measurable effect on day-to-day contentment.

The magic income: $75,000 a year. As people earn more money, their day-to-day happiness rises. Until you hit $75,000. After that, it is just more stuff, with no gain in happiness."

Kahneman and Deaton distinguish between two concepts of happiness.

Emotional Well-Being: the day-to-day experiences that make life pleasant or unpleasant

Evaluation of Life: one's overall life satisfaction

The $75K number is the benchmark for the first of the two. As Deaton explained, "Giving people more income beyond $75K is not going to do much for their daily mood ... but it is going to make them feel they have a better life."

Incidentally, according to the Census Bureau, the mean (average) household income in 2009 was $67,976. That's 9.4% below the happiness threshold. The median (middle) household income was a much smaller $49,777. That's 33.6% shy of the magic number.

Not surprisingly, the Kahneman-Deaton findings have been controversial, largely as a result of the numerous variables that can impact the data. For openers, the size of the household can be a destabilizing variable. The Census Bureau's 2009 survey counted 117.5 million households and put the average size at 2.59 persons. So that $75K benchmark would be quite a stretch for a couple with several additional dependents. The latest Census Bureau annual data, six years later, puts the number of households at 125.8 million with an average of 2.53 persons per household.

Does Debt Spoil Happiness?

Certainly a massive ratio of debt service (mortgage, credit cards, college loans, etc.) could wipe the smile off the face of an otherwise happy household. That said, Federal Reserve data shows that debt service payments as a percent of disposable personal income peaked at 13% in 2007. It had dropped to 12.3% in 2009, the year that the Gallup survey was conducted. As of 2015 debt service payments had fallen further to 10.0%.

The Cost-of-Living Difference

A more compelling wildcard is the cost of living. Let's assume that the benchmark of $75K in 2009 remains the same in the latest annual household data, six years later. Here is a quick look at the equivalent Happiness Threshold for the 50 states and the District of Columbia using the current cost-of-living indexes per state and DC from the Council for Community & Economic Research.

In this 2015 snapshot, 34 states have an average cost of living below the national average; 16 states and DC come in above the average. The range across the states is substantial: The spread from Mississippi to Hawaii is $43,400. If we look at the granularity by city, it's even wider. Based on the 2010 data for selected cities posted on the InfoPlease website, the equivalent of $75K for Manhattan soars to the pricey neighborhood of $162,500.

Inflation-Adjusted Happiness
The Kahneman-Deaton study appeared in 2010 but was based on 2009 survey data. The 2015 annual Consumer Price Index for Urban Consumers (CPI) shows a 10.5% increase from the 2009 average. The equivalent index for Wage Earners and Clerical Workers (CPI-W) is up 5.5%.

Is the Happiness Threshold of $75K still valid if today's equivalent purchasing power, adjusted for inflation with the CPI, requires about $83K?

We believe the answer is ... probably ... "Yes".

Why so? Take a look at the monthly Census Bureau's data for real median household incomes since 2009.

The average of the monthly data points in 2015 was only 2.8% higher than the real (CPI-adjusted) median income in 2009. Yes, the cost of living has risen since 2009. But day-to-day contentment is greatly influenced by how we see ourselves in relation to others. In recent years household incomes have been on a treadmill -- nominally in motion, but in real terms essentially running in place. Also, much of the rise in the 2015 income is a result of changes in the Census Bureau's method of calculating income. For a sharply critical perspective on those changes, see David Stockman's The Biggest Washington Whopper Yet.

For more on median household incomes, see this monthly update.

The Happiest to Least Happy of the States

Let's assume that the $75K happiness threshold is still valid and sort the list of states in a different way: The distance between the cost-of-living adjusted 2015 household incomes and that $75K benchmark. By this calculation, Minnesota is the happiest state, with Delaware and Utah close behind. New York is the least happy state, with Hawaii and Maine close behind.

Of course, NYC cost-of-living substantially skews the New York data since that extremely pricy city accounts for about 43% of the state's population. To a lesser extent, Hawaii's happiness rating is hurt by relatively expensive Honolulu prices, the city being home to about 24% of Hawaii's total population.

We'll close this commentary with a snapshot of the Michigan Consumer Sentiment Index and its 12-month moving average, which adds another level of complication in gauging happiness.

If we view this popular confidence indicator as a crude gauge of day-to-day contentment, today's mood is definitely happier than the one that prevailed in 2009.

Note from dshort: The Kahneman-Deaton study mentioned here is entitled "High Income Improves Evaluation of Life but Not Emotional Well-Being." It appeared in the Proceedings of the National Academy of Sciences, 107, no. 38 (August 2010). The full text can be read on the PNAS website here or downloaded as a PDF file.

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