Money can't buy well-being - US money supply not connected to Well-Being Index

American Demographics, May, 1997 by Elia Kacapyr

Most people would rather have more money than less. So when the Federal Reserve increases the national money supply and stimulates economic growth, this should boost our well-being, right?

Not necessarily.

There is no denying that brisk growth in the nation's money supply is associated with higher levels of economic activity. In fact, the Federal Reserve has been accused of stimulating the economy in this fashion prior to elections, with the intent of boosting an incumbent president's chances of re-election. The accusations get especially spirited if the incumbent president appointed several of the Fed's Board of Governors during a first term.

Along with the debate over such "political" business cycles, experts argue over exactly how to measure the nation's money supply. The most widely accepted method, known as M2, includes cash (coins and paper currency), all accounts at depository institutions (checking, savings, certificates of deposit, money-market accounts, etc.), and several technical items.

In 1996, the aggregate value of M2 grew 4.9 percent, up from 4.1 percent growth during 1995. Economic activity, as measured by the growth rate of the inflation-adjusted Gross Domestic Product, climbed 2.5 percent, versus 2.0 percent in 1995. The positive correlation between M2 and GDP doesn't hold every single year, but its overall coefficient of 0.5 is robust enough that M2 is one of the 11 statistics included in the Leading Economic Indicators.

Some components of the American Demographics Index of Well-being are obviously and directly affected by changes in the money supply. When the money supply grows, it's likely to boost employment and income, and perhaps productivity. Yet other factors related to well-being have a more tenuous connection to money. It's possible that the national money supply affects consumer attitudes and recreation spending, but many other factors come into play in these areas. The effect of M2 on complex social behaviors like crime and divorce is doubtless minimal compared with vastly more important factors. And there is no reason to believe that the number of endangered species would rise or fall due to changes in money supply. In fact, these suppositions are borne out by the small and insignificant correlation coefficient between annual growth rates of M2 and the overall Well-Being Index, a mere 0. 1.

The American Demographics Index of Well-Being was firing on all cylinders in the last month of 1996. All five major sectors were up from November levels. The overall index moved from 101.82 to 102.44 in December, a hefty one-month increase. The current reading indicates that well-being in December was 2.4 percent higher than in the base month of April 1990.

December's biggest gainer was consumer attitudes. After shooting up in mid-year, consumer confidence and expectations dropped slowly, only to bolt up again at year s end by 6.8 percent. The social and physical environment also registered good gains. Declines in crime and divorce rates pushed up the sector 3.9 percent. Productivity and technology forged ahead 1.1 percent, while the other two major sectors showed modest advances.

1996 was a good year for well-being in America. Annual growth in the Well-Being Index last year was 0.9 percent, slightly higher than the 0.8 percent measured in 1995. This is the fastest annual growth seen since 1984. It may or may not be related to the money supply, but it's interesting that the last time we made this much progress in well-being was also the year that Ronald Reagan won re-election.