Happy Now?

On May 13, 2009, at Arizona State University, Barack Obama delivered his first commencement address as President of the United States. At one of the most frightening economic moments in America's history, it was a chance to be a mentor, a teacher, and the nation's inspirer-in-chief.

Did the president urge the graduates to get out there and create the growth and jobs our country needs? Did he inspire them to be the next generation of great American innovators and entrepreneurs? No; instead, he told the graduates that people who "chase after all the usual brass rings" display "a poverty of ambition." He averred that this thinking "has been in our culture for far too long." He told them they could do better than trying "to be on this 'who's who' list or that top 100 list."

If you're a free marketeer, you've faced this charge a thousand times: You are a materialist. Meanwhile, your progressive interlocutors are interested in the higher-order things in life--such as fairness, compassion, and equality. Your vision for America might be wealthier, but theirs is happier.

Free enterprise emphasizes creativity, meaning, optimism, and control of one's own life and seeks to escape from under the heavy hand of the state. It is traditional in its American values, yet perpetually new in its outlook.

Progressives have been making this case for generations. Their reasoning is clear. When people pursue "the usual brass rings" in the free market, there are winners, and there are losers. Many people get rich; many others do not. These differences may reflect merit and they may not. But one thing is for sure: Income inequality will result. And inequality, for many progressive leaders and intellectuals, is the enemy. In their view, it leads to an unjust, unhappy, Hobbesian, all-against-all society.

A modern, compassionate society, they believe, can do better than the current system with its rising inequality. But that means employing more than soft rhetoric. We also need policies that weaken the free-enterprise system by lowering the rewards it brings to the winners as well as the consequences to the losers. As candidate Obama famously told Samuel Joseph Wurzelbacher--"Joe the Plumber"--on the campaign trail in October 2008, "I think when you spread the wealth around it's good for everybody."

Adherents to this philosophy believe that the best ways to meet their objectives are forced income redistribution, expansion of the state, or both. This is why the landmark policy initiatives of the past year--from health-care reform to financial-market regulation--have had bigger government and rising income redistribution at their core. Bureaucracy and taxes are not incidental to these policies, and not a mere cost of doing business; they are part of what many of our leaders seek to create and what they see as a better, fairer America.

It is factually incorrect to argue that income inequality has not risen in America--it has. The U.S. Census Bureau measures economic inequality through what is known as a Gini coefficient, which ranges from 0 to 1. Zero means no inequality (everyone has the same income) and 1 indicates perfect inequality (a single person has all the income). Between 1970 and 2005, the Gini coefficient in America increased by more than 20 percent, from 0.39 to 0.47.

As many progressives see it, this is a major problem, because inequality makes people unhappy. This argument has to be taken seriously, because, at first blush, the data appear to support it: Poorer people in almost every community tend to be unhappier than richer people. For example, the 2004 General Social Survey found that if you have an annual salary of less than $25,000, you are less than half as likely as someone earning more than $75,000 to describe yourself as "very happy."

It doesn't even matter if you have plenty to get by in life. The evidence seems to show that simply having less than others makes you unhappy. This proposition was demonstrated in a famous experiment at Harvard University's School of Public Health in 1995. In it, a group of students and faculty were asked to choose between earning $50,000 per year while everyone else earned $25,000--or earning $100,000 per year while others made $200,000. The researchers stipulated that prices of goods and services would be the same in both cases, so a higher salary really meant being able to own a nicer home, buy a nicer car, or do whatever else they wanted with the extra money. However, the results showed that those materialistic perquisites mattered little to most people: Fifty-six percent chose the first option, hypothetically forgoing $50,000 per year simply to maintain a position of relative affluence.

Many have taken these results at face value: Inequality brings misery. That might be halfway acceptable to some if they thought inequality reflected differences in merit between people--in other words, if hard work and excellence were the primary explanation of why some people have more than others. But many progressives--even those who have done quite well themselves--reject this idea. Rather, they talk first and foremost about discrimination, luck, and exploitation. The 2005 Maxwell Poll on Civic Engagement and Inequality asked whether people agreed with the following statement: "While people may begin with different opportunities [in America], hard work and perseverance can usually overcome those disadvantages." Eight in ten Americans agreed, as well as more than nine in ten political conservatives.

Among those who disagreed, however, we find more than a third of political liberals with above-average incomes. For these progressive stalwarts, hard work and perseverance in America are useless when pitted against the faceless, amoral capitalist juggernaut. For those who believe this, of course, the only morally acceptable solution is to short-circuit free enterprise through forced equality. A world defined by economic equality, the redistributionists believe, will be both a fairer and a happier one. And bringing the top down is every bit as good as bringing the bottom up, because greater equality is the goal. Forced redistribution through taxation has other benefits, as well. It gets people out of the rat race for things they don't really need. They use fewer of the earth's resources and don't lord silly possessions over their neighbors. And with the taxes people pay, the government has more money to do all the good things governments can do.

Income equality is how redistributionists define the path to greater enlightenment and happiness for the rest of us. And that is why they are so willing to offer policies that sacrifice entrepreneurship for higher taxes, self-government for growing bureaucracies, individual achievement for powerful unions, and private businesses for federally managed corporations.

One problem with the redistributionists' approach is that it's based on a flawed premise--that greater income equality will bring us greater flourishing and happiness. A careful reading of the data demonstrates a crucially important truth, and one we overlook to our great peril: Inequality is not what makes people unhappy.

To understand this, we need to understand the concept of earned success. Earned success means the ability to create value through effort--not by winning the lottery, not by inheriting a fortune, and not by picking up a welfare check. It doesn't even mean making money itself. Earned success is the creation of value in our lives or the lives of others. It is what drives entrepreneurs to take risks, work hard, and make sacrifices. It is what parents get from raising happy children who are good people. It is the reward we enjoy when our time, money, and energy go to improving our world.

People who feel they have earned their success are much happier than people who feel they have not. In the working world--as opposed to, for example, lotteries--success is typically earned through effort. In 1996, the General Social Survey asked 500 American adults the following question: "How successful do you feel in your work life?" Some 45 percent answered "completely successful" or "very successful." The rest said that they were "somewhat successful" or less so. Among the first group, 39 percent said they were very happy in their lives. In the second group, just 20 percent said they were very happy.

It turns out that this difference in happiness levels is not explained at all by differences in income. Imagine two people who are the same in income, as well as in education, age, sex, race, religion, politics, and family status. But one feels very successful, the other does not. The successful person will be about twice as likely as the other to report feeling "very happy" about his or her life. Similarly, the University of Michigan's Panel Study of Income Dynamics study asked several thousand people in 2001 whether they agreed or disagreed that they were responsible for their success. Those who "agreed" or "strongly agreed" with the statement spent 25 percent less time feeling sad than those who "disagreed" or "disagreed strongly" that they were responsible for their success.

Now, the self-described "completely successful" or "very successful" person may well be richer than the "somewhat successful" person, on average. That's because money frequently follows success in a capitalist system. But it's not the money that brings the feeling of success (and hence happiness). The money is just a metric of the value that the person is creating.

It's easy to confuse the two--money and earned success. But money is merely the symbol of earned success, important not primarily for what it can buy (although that's nice, too) but for what it says about how we are contributing, and the kind of difference we are making. That's why rich entrepreneurs continue to work so hard. They already have enough money to meet every need they could ever have. But they still crave earned success like the rest of us, and so they are driven to create more and more value. The economist Joseph Schumpeter--often called the godfather of modern entrepreneurship--said of entrepreneurs, "The financial result is a secondary consideration, or, at all events, mainly valued as an index of success and as a symptom of victory."

In a country such as the United States, where people are above the level of subsistence, a man of modest means who believes he has created something of value will tend to be much better off than a rich man who has not earned his success. The big problem is not that unhappy people have less money than others. It is that they have earned less success.

The way for the poor man to earn his success is through a system that rewards merit, hard work, education, and street smarts. It is through a system that matches skills and passions; that penalizes free-riding, laziness, and poor judgment. It is, in short, the free-enterprise system.

This finding is consistent with what many other social scientists have found in the past. Most notably, my AEI colleague Charles Murray's seminal work in Losing Ground showed that the American welfare system before 1996 was a failure precisely because redistributed, unearned income could not solve the problems that plagued the poor.

An untrained observer of American society might be forgiven for thinking that the current debates about health care, financial-market regulation, and cap-and-trade are about economics. After all, the terms of the debate are taxes, government spending, and regulation of private profit-making activity. But in reality, these are part of America's new culture war, waged by many of our nation's political leaders and articulated by the president when he told college students that pursuing the "usual brass rings" had been part of our culture for far too long.

The discomfort so many Americans feel with the direction of our country is not due to the fact that our leaders' attacks on our free-enterprise system will lower economic-growth rates (although they most certainly will). The problem runs much deeper. People cherish free enterprise so much more than government because they know intuitively that it allows them to earn their success, and in turn to achieve the greatest levels of happiness.

This is why, even as the unemployment rate in the private sector soared in January 2010 and Wall Street scandals erupted, Gallup still found that six in ten Americans said they would prefer to work for business than for government (despite the fact that, on average, the government pays much better than the private sector). It is also why, when the Ayres-McHenry company asked Americans during the depths of the recession in 2009, "Overall, would you prefer larger government with more services and higher taxes, or smaller government with fewer services and lower taxes?" Twenty-one percent favored the former, while 69 percent preferred the latter.

Free enterprise emphasizes creativity, meaning, optimism, and control of one's own life and seeks to escape from under the heavy hand of the state. It is traditional in its American values, yet perpetually new in its outlook. It naturally disdains the soul-sapping nature of Big Bureaucracy and the protected mediocrity of Big Labor, and has a healthy suspicion of the Faustian tendencies of Big Business--divorced from the entrepreneur's ethics--to crawl into bed with the government. In short, free enterprise is an act of self-expression--a declaration of what we truly value--and the ultimate "social issue" for Americans.

Americans may not naturally put free enterprise in such rhapsodic terms, which plays into redistributionists' sleight of hand in telling the electorate that free enterprise is just one economic alternative among many, and not a very fair one at that. The truth is that free enterprise is not just a money machine--it is a happiness machine. Conservatives are caught flat-footed if all they have to say about the administration's economic policies is that they are bad for efficiency.

To win the new culture war, the sizable majority in favor of free enterprise must claim the moral high ground. We must show that while we often use the language of commerce and business, what we really believe is that the purpose of free enterprise is the pursuit of happiness.

Arthur C. Brooks is the president of AEI.

Photo Credit: iStockphoto/ Brandon Jennings

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