Chapter 10 - Set Point Theory and Public Policy

Abstract

Set point theory implies that government policy interventions have no lasting effect on people’s happiness. Cross-section and time series studies presented here belie this proposition. Life satisfaction is currently higher in European countries with public policies that provide more generous benefits for those who have lost jobs, with active labor market measures that facilitate returning to work, and where fiscal and monetary policies result in lower unemployment. In China between 1990 and 2010, despite a remarkable quadrupling of people’s real incomes, life satisfaction failed to increase and arguably declined as full employment and safety net policies were abandoned. Contrary to set point theory, the evidence is that employment policies are of major importance for people’s happiness.