16/5/2007 Provisional draft Did the Decline in Social Capital Decrease American Happiness? A Relational Explanation of the Happiness Paradox S. Bartolini, University of Siena E. Bilancini, University of Siena M. Pugno, University of Cassino Abstract Most popular explanations of the happiness paradox cannot fully account for the lack of growth in U.S. reported well-being during the last thirty years (Blanchflower and Oswald (2004)). In this paper we test an alternative hypothesis, namely that the decline in U.S. social capital is responsible for what is left unexplained by previous research. We provide three main findings. First, we show that the inclusion of social capital does improve the account of reported happiness. Second, we provide evidence of a decline in social capital indicators for the period 1975-2004, confirming Putnam's claim to a large extent. Finally, we show that failed growth of happiness is mostly due to the decline of social capital and, in particular, to the decline of its relational and intrinsically motivated component. 1. Introduction This paper provides evidence that the decline of social capital can contribute to explain the happiness paradox. The latter was formulated by Easterlin (1974), who showed two stylized facts: that people in industrialized countries are not becoming happier over time despite economic growth, and that people with a higher income than others, at any given point in time, do report higher levels of happiness. If more income makes an individual better off, why does an increase in the income of all not improve everybody’s lot? Further evidence of the paradox has been provided by subsequent research and it has attracted interest on the determinants of well-being. The literature introduced by Easterlin has become a booming industry by now. This literature is fed by the abundance of data on self-reported well-being, which proved to contain relevant information on the well-being of individuals. Econometric studies have detected, among others, the importance of income aspirations, unemployment, inflation and social capital for people’s well-being (Oswald, 1997; Blanchflower and Oswald, 2004; Easterlin, 1995; Frey and Stutzer, 2000; Di Tella and McCulloch).2However, not all these variables, usually omitted from utility functions, can aid in explaining the happiness paradox. In order to do so, they need to have a trend that can offset the positive impact exerted by rising income on well-being. For instance, unemployment and inflation cannot be used to explain the paradox simply because they do not exhibit a rising trend. Income aspirations have progressively attracted wide consensus due to their potential in explaining the paradox. In fact, the shift in income aspirations may, in principle, compensate for the positive impact of rising income on well-being. Two sources of aspirations dynamics have been pointed out. Aspirations can be linked to one’s past income or to the income of one’s reference group. The former case has been often referred to as a hedonic adaptation to a consumption standard, while the latter is linked to the tradition emphasizing the importance of social comparisons in determining consumption choices (Veblen, 1899; Duesenberry 1949). In both cases, economic growth tends to raise income aspirations with negative effects on happiness. Growth triggers a Hedonic Treadmill (people adapt their aspirations to past living standards) and a Positional Treadmill (people compare their income to that of others and set their aspirations accordingly), which may partly or completely offset the positive effect exerted on well-being by rising absolute income. However, the shift in income aspirations cannot fully account for a decreasing trend in happiness. Reasonably, it can account for, at most, a stable trend. In fact, aspirations must concern that which individuals consider relevant per se and not what is regarded as unimportant. In other words, one can aspire to a greater absolute income only if absolute income is considered relevant. If only relative income matters, then it is relative income that becomes the object of aspiration and, hence, adaptation occurs with respect to relative position. Therefore, the total negative effects of the hedonic and the positional treadmills cannot go beyond the elimination of any benefit accruing from income growth.1 Summing up, a declining trend in happiness remains partly unexplained at the current state of the literature.2 As a remarkable example, Blanchflower and Oswald (2004) observe that a negative time-trend of well-being in the US between 1974 and 1998 persists, even if controlled, for relative 1 The empirical evidence on these issues is controversial: Blanchflower and Oswald (2004) show that the effect of an increase in the income of others does not completely compensate for the increase in one’s own income (also Stutzer (2004), Luttmer (2005)). On the other hand, some research shows that the impact of the income of others is as strong as that of one’s own (see Ferrer-I-Carbonell 2005). 2 Di Tella and McCulloch (2005) further attempt to give an answer to the happiness paradox by adding to the conventional arguments of the utility function other aggregate variables, like unemployment rate, inflation, average divorce rate, life expectancy, pollution, and crime, and by attempting an estimate of their contribution to reported well-being. However, “introducing omitted variables worsens the income-without-happiness paradox” (Di Tella and McCulloch 2005:1, emphasis added), at least for Europe.3income, alongside the other usual socio-economic controls. They thus conclude asking for more research on this point. Our thesis is that the decline in U.S. social capital can account for what is left unexplained of the happiness trend. In particular, we test the hypothesis that the decline in the quality and quantity of intrinsically motivated relations may have played a major role in the evolution of happiness over the last thirty years. The possible role of social capital in explaining the happiness paradox is still an open question, currently explored by a few pioneering studies (Helliwell (2003, 2006), Helliwell and Putnam (2005). Bruni and Stanca (2006) focus on the relational dimension of social capital. These studies show a positive impact of social capital on happiness. However, since they do not analyze trends of social capital variables, they do not allow drawing