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Imagine you give $1 to billionaire Warren Buffett and another dollar to a homeless person.
Neither of their lives would change dramatically, but even pocket change will make Mr. Buffett measurably happier, according to thought-provoking new research by Betsey Stevenson and Justin Wolfers of the University of Michigan.
Their work challenges an enduring economic assumption – namely, that income doesn't improve the well-being of people, or countries, once they reach a certain level of wealth.
Put another way: You're never too rich to be economically irrelevant. And that conclusion has important implications for wealth redistribution, inequality, economic development and foreign aid.
"If you're a billionaire, giving you $1 has such a tiny influence on your well-being, but it's never zero, and that's an important distinction," Ms. Stevenson, a professor of public policy, explained in an interview.
"If it went to zero, it tells us we should dramatically rethink our societal goals. It would mean that economic growth no longer matters."
Yes, the dollar will do relatively less for Mr. Buffett's life. But the research also means that if you give both him and the homeless person a 10-per-cent income boost, they'll both experience the same increase in well-being and happiness, according to the study, "Subjective Well-Being and Income: Is There Any Evidence of Saturation?"
Prof. Stevenson, former chief economist at the U.S. Department of Labor, rebuts critics who say her work challenges the benefits of progressive taxation, whereby governments often tax wealthy individuals at a higher rate than the poor. At the same time, she said it's important not to trigger unwanted behaviour or unnecessarily choke off economic growth.
"I'm not saying growth is the only thing that matters or growth at all costs," she added. "What I am saying is that when you sacrifice growth, there is a cost there. It's not a free lunch."
Andrew Sharpe, executive director of the Ottawa-based Centre for the Study of Living Standards, said the work has important implications for measuring development across countries. But it doesn't mean that income redistribution is a mistake. "It doesn't mean we shouldn't tax rich people," he argued.
Prof. Stevenson and Prof. Wolfers said they set out to answer a fundamental question: Is there a point beyond which further economic development stops making people better off?
"And we find no evidence of that," she said.
The notion of a well-being saturation point derives from the pioneering 1970s work of University of Southern California economist Richard Easterlin, who famously theorized that increasing average incomes doesn't raise well-being. Faced with considerable evidence of a correlation between income and happiness, economists later modified the so-called Easterlin Paradox to suggest that the theory holds true, beyond a certain level of income.
Reached by e-mail, Prof. Easterlin said the new research doesn't necessarily contradict his.
"More money does not make you happier when you look at what happens to people over time as their income trends upward," he said. "So as you go from low-, to middle-, to high-income persons or countries with data for a given year, happiness goes up with income and the relationship does not change as you get to higher-income countries."
Prof. Stevenson acknowledged that her work doesn't explore the factors that may be driving the positive link between income and well-being, such as education, employment opportunities and the ability to buy things.
"We are not saying you should take the highest-paying job so you can buy the most pairs of shoes," she explained. "But what we do see when we look across countries where gross domestic product is higher, so is well-being and life satisfaction."