What if the secret to happiness was … low expectations?

Most residents of rich, Western countries have relatively high earnings, but many also feel they can’t afford a reasonable lifestyle. Americans, for example, are getting richer but also more unhappy. Meanwhile Eastern Europeans, not generally known for their cheery disposition, are most satisfied with their comparatively lower income.

In 2018, research psychologists at Purdue and the University of Virginia compiled data from previous surveys to estimate how much income people needed to be happy. They found that, even after adjusting for purchasing power, people needed more money in richer countries. Recently the same data was adjusted for inflation and compared to average earnings in each country.

Residents of Eastern European countries tend to earn at least 70% of what they think they need to be happy, though it also does not take so much to feel satisfied. Slovenians are the most content with their earnings: Theirs is the only country included in the study where average annual earnings ($42,800) exceed the amount they think they need for a good life ($36,800). One of the few Western countries where people earn more than 70% of what they think they need to feel happy is Luxembourg. The countries where people are most stretched are New Zealand, the UK and Australia, where earnings only cover about one third of what it costs to be happy.

Of course, happiness is subjective. But what comes through in this research is that the affordability crisis is not just an American phenomenon, nor can it be solved by more government spending. In Sweden, for example, affordability is at least as big an issue as it is in the US, and like in the US one of the main culprits is housing. Many Western countries have building restrictions and rent controls that make buying housing more expensive.

The other problem, if I can call it that, may just be rising prosperity. As countries get richer, living standards increase — maybe faster than incomes do. It is worth noting that the countries that fall the most short on this “affordable happiness” scale tend to be in Latin America, which feature low levels of both desired and actual income. Again, the point is not that people in richer countries aren’t happier — in general, they are — but that the gains from happiness don’t keep up with rising income.

The original paper also finds diminishing happiness returns to income, and then actual negative returns: People become happier as they start to earn more, but at a certain point they start becoming less happy as their income rises. The explanation, the authors speculate, could be that once someone’s basic needs are met, they become more focused on material goals and social comparisons. Even in Denmark — one of the happiest nations in the world, according to a separate (annual) survey with different methodology — average annual income covers only 66.8% of what people say they need to feel happy.

Capitalism may have made hundreds of millions of people rich and delivered more material wealth than the world has ever seen, but it also moved the goalposts. And market distortions that created shortages and increased prices over the last several years caused a cost-of-living crisis that still afflicts most rich countries.

One tempting conclusion from this research is that we’d all be happier with a simpler, less materialistic life. But this would be the wrong lesson. The desire for more also accelerates progress and contributes to rising living standards. Perhaps some Kiwis would be happier if they moved to Slovenia and experienced a lower cost-of-living on their New Zealand wages. But they might not be so happy if they suddenly got paid like Slovenians.

A better lesson is that it pays to remove the distortions to commerce and economic activity that drive up prices. Nearly all the richer countries where people aren’t earning enough to be happy also face aging populations and big debts, and growth in a lot of Europe is stagnant. That means things could soon get even more expensive — just as a lot of people are getting poorer.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

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