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Popicinio - Adolfo Lujan

The economic crisis and the crisis of subjective well-being

Jorge Guardiola | 31 July 2013

It is time to recognize the usefulness of creating institutions and policies that aim to guarantee people's welfare instead of conditioning them to market imperatives.

I received a kind invitation from The Broker to write a few lines on our research ‘From market needs to human needs: Spain and the economic crisis’, co-authored by Monica Guillen-Royo of the University of Oslo. The research was presented at the OECD-Universities Research Conference ‘Economics for a Better World’ in Paris at the beginning of June 2013. I will present the results and conclusions, and address some matters for discussion that could be derived from the research and may be of interest to The Broker’s readers.

Our paper attempts to reflect on the economic crisis in Spain using data from 2012 for the city of Granada. Granada is located in Andalusia, one of the hardest hit regions of Spain in terms of job destruction since the start of the crisis. Andalusia has one of the highest unemployment rates in the country, averaging 35% in 2012 (37% for women and 65% for people under 25). The province of Granada displays similar unemployment rates to the regional average, but the increase is remarkable, as in 2008 the unemployment rate was only 15%.

We conducted a representative survey of 1,472 households in Granada, asking the respondents about their subjective well-being (SWB) by including questions related to their life satisfaction, financial satisfaction and material needs satisfaction. We also created several variables to determine whether income at household level has increased or decreased within the past two years. We asked about the employment status and level of education of the interviewee  and the other members of the household.

From the empirical estimates, we concluded that education and being employed are important correlates of SWB. In relation to unemployment, the results contrast with past research indicating that, with unemployment rates over 25%, people tend to see unemployment as normal, thereby weakening the negative effect of unemployment on SWB. Contrary to what we would expect, the influence of income and its possible loss seems to be a bad predictor of SWB. Income has a weak and non-robust relationship with SWB, except when it comes to the satisfaction of material needs.

From the perspective of SWB, these results strongly support the claim that policy interventions should focus more on social policies, such as reducing unemployment and keeping people in education, rather than abiding by the requirements of financial markets, which have dominated the Spanish political agenda in recent years. Taking into consideration the importance of employment and education, and the low importance of income in generating SWB in the context of a crisis, it seems feasible to discuss these results in terms of scientific knowledge on the drivers of SWB and to inspire the creation of public policies and institutions that could foster SWB, recognizing that knowledge conditions public action. However, we go one step further and propose at least two interrelated branches of discussion to find paths to escape from the economic crisis, namely how to diagnose and monitor the crisis and who should be involved in this diagnosis. We give some insight into each according to our perspective, in the light of the results of this paper and the situation in Spain.

The first branch of discussion refers to diagnosing and monitoring the crisis. The nature of the diagnosis could condition the identification of the causes and the solutions. In the literature on social indicators there is general agreement that diagnosis should result from deep reflection and political action that go beyond single macro magnitudes as a measure of prosperity, such as public deficit and public debt. However, the contractive or austerity policies implemented in Spain, and in several countries in the European Union, are usually identified with the efforts of the government to instil confidence in international financial investors [1] by controlling the risk premium [2] and to avoid a possible bailout. In the meantime, the result of the economic crisis and economic austerity has worsened life dimensions, not only those studies empirically in our research, but also others related to social cohesion, such as the increase in poverty, [3] income inequality, [4] and strikes and demonstrations. [5]

Correct diagnosis could permit us to accurately recognize the crisis from a human and social perspective. However, in a broader perspective, going beyond market needs to address human needs entails the risk of reaching the negative conclusion that the world is permanently in crisis. As Johan Galtung, founder of peace research, put it in a recent book, Peace Economics: From a killing to a living economy, there is Crisis I, which is considered in this paper through the Spanish case and which refers broadly to the lack of growth and financial instability and, there is Crisis II, which is a permanent misery crisis affecting 20% of the world population, causing numerous deaths due to starvation and easily preventable and curable diseases. In spite of negative judgments, recognizing Crisis II as a reality and a general problem that affects humankind seems to be the necessary step for policy and institutional action that could also avoid Crisis I.

The second branch of discussion, closely related to the previous one, concerns the actors involved in this crisis. In a similar vein to Galtung's interpretation, sociologist José María Tortosa discusses the existence of several interrelated crises in the world that form a single one. The world is not only experiencing an economic crisis, but also an energy, ideological, food, environmental, democratic and hegemonic crisis. As the crisis is multidimensional, it is also feasible to assume, or at least hypothesize, that the relationship of the crisis to SWB is also multidimensional. As a consequence, understanding the crisis from a holistic perspective requires a multidisciplinary approach that seeks people-centred solutions to escape from economic deprivation. Multiple views would provide a better understanding of human nature and the drivers of welfare and stimulate the creation of institutions and public policies that, based on the principle of social justice, could guarantee everybody’s basic needs above greed, capital accumulation and financial speculation.

It seems fair that people who are affected by policies and institutions should be consulted. In fact, they should be considered stakeholders in their own SWB instead of objects. Asking people about the drivers of their quality of life, or at least using models that avoid presumption or imputation of wellbeing drivers, could foster the governability of people and help to design happiness-driven policies. That is, to substitute top-down policies that are defined without the people, but which affect the people, by bottom-up policies that are defined taking into consideration people's views, instead of one decision maker’s view or international investment needs as is the case in Spain. Of course, in Spain this approach faces several institutional problems that we have to be aware of. For instance, interest rates and exchange rates are in the hands of the European Central Bank, which reduces governability. The need to reduce the deficit as a priority has been agreed with the European Union. This creates serious institutional limitations to the government’s efforts to foster individual happiness. Unfortunately, in the current Spanish context, putting happiness-fostering policies in practice seems to be wishful thinking. Even so, it is necessary to recognize the usefulness of creating institutions and policies that aim to guarantee people's welfare and basic needs instead of conditioning them to market imperatives, creating the illusion of financial stability as a tool for human development.

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Footnotes:

[1] Financial market support comprises endorsement of debts, nationalization of banks in difficulties or concession of direct loans. The huge monetary cost for the government involved in these operations is difficult to estimate, but there is a general feeling among the population that it has been retrieved at the expense of the Spanish welfare state.

[2] The risk premium is the difference between the profitability of the Spanish ten-year bond and the German one, the latter assumed to be the safest in terms of capital repayment. This risk is perceived to be subjective and the causes of an increase or decrease in the risk premium include the trust of markets, other countries’ actions, the ability of leaders to convince investors regarding the solidity of the economy, their declarations and other leaders’ declarations from other institutions and the publicity of the result of several macro magnitudes. Generally speaking, it depends on the expectations of investors without meeting any criteria of justice. The Risk Premium in Spain was below 100 in 2008, but peaked above 600 in July 2012. Meanwhile, the account in the government budget used to pay the public debt increased from 16,609 million euros in 2008 to 38,590 in 2013.

[3] Caritas, a Catholic organization that gives social support to excluded and deprived people who cannot satisfy their basic material needs, published that 1,015,276 people asked them for help in 2011, 2.7 times more than in 2007.

[4] The percentage of people that earned less than 60% of the national median equalized disposable income has risen from 19.6 in 2008 to 20.7 in 2010.

[5] For instance, the number of strikes increased by 36.4% in 2012. Among the demonstrations, the Indignados (the ‘indignant ones’) movement is one of the greatest expressions of public discontent in Spain, composed by heterogeneous members of society who called for more social and economic rights from the government for the most vulnerable people, instead of paying attention and lending economic support to financial stability and the banking system. Discontent with this form of inequality is not only Spanish, but seems a global phenomena.

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About the author

Jorge Guardiola

Associate Professor at the Department of Applied Economics in the University of Granada, Spain.

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