1. Introduction
Psychologist and economists are now trying hard to understand the effect of the subprime mortgage crisis on happiness. The happiness index of most countries fell quite substantially during the 2007–2008 financial crash. Particularly, regions in Western Europe, North America, and South Asia suffered from substantial declines in the happiness index between pre- and post-crisis. They have fallen to a “happiness trough” in 2009 (for more detailed analysis of the available global data on national happiness see World Happiness Reports 2019:
https://s3.amazonaws.com/happiness-report). On average, credit-to-GDP reached a peak in the third quarter of 2009. Noteworthily, the credit cycle can be explained by the credit-to-GDP based on most of the literature [
1,
2,
3]. The credit data from 42 economies provided by Bank for International Settlements (BIS) indicate that the national average of credit-to-GDP reached a historical peak in the third quarter of 2009 (Source: BIS credit-to-GDP gap statistics). Both results appear to provide evidence on the credit-happiness link. On the other side, the study of happiness in what has become known as the “economics of happiness” has led to much debate over the link between national economic conditions (or income inequality) and subjective well-being [
4,
5,
6,
7,
8,
9]. Given that credit spreads reflect the state of the business cycle ahead [
10,
11], the fluctuation in the credit cycle would likely cause the increase and decrease in the happiness index as well. For this reason, examining the relationship between the credit cycle and happiness, our chief concern in this paper, is important.
Many studies have confirmed that the credit cycle booms and busts hold risks for the economy. Housing demand increases and house prices rise are well explained by credit expansion [
12,
13,
14,
15]. Other than this, excess credit growth aggravated the harmful effects of financial stress and risks on the real economy. Specifically, a 1% increase in pre-crisis lending translates into a 0.2% increase in the cumulative loss in real output [
16]. One distinguishing reason for this effect is that while the increase in the supply of bank loans increases the level of non-performing loans, it does not lead to higher profitability [
17,
18,
19,
20]. In addition, flows of bank loans to the non-financial private sector drive the build-up of current account imbalances in the deficit countries [
21,
22,
23,
24]. Thus, excess credit growth may crowd out real economic growth [
25,
26,
27]. The credit contraction depressed investment, employment, and sales growth of firms and it explains most of the negative real effects [
28,
29]. The investment of bank-dependent industries falls substantially [
30]. During the Great Depression, the credit crunch explained a substantial fraction of the aggregate decline in employment [
31].
In recent decades the research on happiness has been linked to economics [
6]. The attention on the relationship between happiness and income is a part of a broad, ongoing controversy. Many of the basic theory of happiness-income in existing literature follow Easterlin [
32,
33] and assign income a central role in affecting happiness in the short term. They state that at a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow (the strength of the association diminishes with higher income). The above research has also been questioned. Stevenson and Wolfers [
34] find that economic growth associated with rising happiness by examining the relationship between changes in happiness and income over time within countries. Some researchers believe that the degree of wealth of the country should be considered when examining the relationship between personal income and happiness [
4,
35,
36,
37,
38]. Beyond income, however, many social scientists have documented that happiness is associated with the person’s state of health and ageing [
39,
40], income inequality [
41,
42], natural environments [
43,
44], level of education [
45], financial crisis [
46], and quality of governance [
47,
48].
Extant studies on the effect of credit on happiness have primarily focused on the empirical investigation of the micro-level personal and household debt. While personal (or household) debt and happiness are robustly and negatively associated in cross-sectional studies [
49], a random-effects meta-analysis of seven studies showed a weak link between debt and happiness (
) [
50], resulting in considerable debate on whether personal debt substantially matters for mental health [
51,
52,
53]. Many social scientists, however, have documented that the impact of different types of debt on subjective well-being is heterogeneous. One intriguing result is that happiness was negatively affected by subjective debt (worry about debt), but was statistically insignificant by objective debt (debt-to-income ratio) [
54]. The other is that the different sources of housing debt have different effects on happiness, and only nonbank housing debt significantly reduces happiness [
55]. This attention on the relationship between personal (or household) debt and happiness at the micro-level is also part of an ongoing controversy on whether expansion and recession of credit lead to a lower level of happiness. Moreover, given the prevalence of debt in a modern economy, these discussions of whether debt decrease can lead to happiness omit a critical macro-level variable—the credit cycle.
Our study makes three contributions to the existing literature on the credit cycle and happiness. First, we test and demonstrate the negative correlation between the credit cycle and happiness. This differs from the previous literature in that we analyze the impact of the credit on happiness from a macro perspective. For policy makers who are committed to improving national happiness scores, it is an interesting question to specify how to improve subjective well-being based on the negative correlation between the credit cycle and happiness. Second, we explore the transmission channels of the credit cycle on happiness. Several moderating variables have been found to moderate the relationship between the credit cycle and happiness in our study. However, the moderating effects between the credit cycle and happiness are different during credit expansion and recession. Three, we also found an interesting result, that is, the negative impact of the credit cycle on happiness will become positive as the value of the moderating variable changes. During credit growth or recession, this finding tells us that we can improve the happiness score by moderating variables. This can effectively reduce the negative impact of the credit fluctuations on subjective well-being.
The remainder of this paper is organized as follows.
Section 2 develops our research hypotheses.
Section 3 contains methodology and data source.
Section 4 empirically examines the impact of the credit cycle on happiness.
Section 5 further studies the moderating effect between the credit cycle and happiness. Finally,
Section 6 concludes our paper and provides some policy recommendations.
5. Moderating Factors between the Credit Cycle and Happiness
As the credit cycle has a negative impact on happiness, the next step in our study is to explore the transmission channels of the credit cycle on happiness. The empirical results in this part need to answer the question “Why the credit cycle has a negative impact on happiness”. In the study of Bhuiya et al. [
91], the debt can indirectly influence the life satisfaction of micro-borrowers through a number of channels, such as the increased levels of worry. Since the credit cycle has a different effect on happiness during the period of expansion and recession, we should also pay attention to the influence of credit on happiness in different stages of the credit cycle in the following empirical evidence. To investigate whether the relationship between the credit cycle and happiness changes over time, we verify the moderating hypotheses 2a, 2b, and 2c of our study by estimating the regression specification (4). The main influencing factors of happiness, such as GDP per capita, are added to the regression specification (4) as moderating variables, thus obtaining 8 estimation results of panel regression models. In addition, the data needs to be processed before the panel regression model is estimated. The observed values of the explanatory variable (the credit cycle) and the moderating variable minus their arithmetic average. Friedrich [
92] proved that this approach can get a standardized coefficient for the interaction term.
Table 5 and
Table 6 show the results of the panel regression after adding a variety of moderating variables during credit expansion and recession.
The moderating effects between the credit cycle and happiness are different during credit expansion and recession. As shown in
Table 5, healthy life expectancy and generosity can moderate the relationship between the credit cycle and happiness only during the expansion of the credit cycle. The interaction terms of the credit cycle and healthy life expectancy, generosity are −0.0008, 0.0071. They are statistically significant at the 1% level. Given the interaction effect of healthy life expectancy and the credit cycle, the regression coefficient of the credit cycle become
By solving this equation, it can be concluded that when life expectancy is less than 67.1250, the overall effect of the credit cycle on happiness is positive. When life expectancy is greater than 67.1250, the overall effect of the credit cycle on happiness is negative. In other words, credit growth tends to lower the average happiness score when life expectancy is greater than 67.1250. However, in countries with higher generosity scores, credit growth will help to obtain higher average happiness scores. The result can be reasonably explained that government debt affects the social welfare system. When the government faced high debt and budget constraints, the price of municipal bonds fell, yields rose, and financing costs rose, forcing the government to reduce spending. These cuts are mainly concentrated on public welfare expenditures [
93]. In countries with a high average life expectancy, the higher the debt they carry, the more likely they are to reduce government satisfaction. On the other side, credit growth indirectly increases the generosity of society by stimulating economic growth. In an environment of economic prosperity, people would tend to increase prosocial spending—spend money on others to get their own satisfaction [
65].
GDP per capita can moderate the relationship between the credit cycle and happiness only during the recession of the credit cycle. As shown in
Table 6, the interaction terms of the credit cycle and GDP per capita is 0.0019. It is statistically significant at the 5% level. This means that when a country’s GDP per capita is higher, greater credit helps to achieve a higher happiness score. Credit growth in a country/region may increase the profit rate, possibly resulting in higher investment, and then less unemployment [
94]. In addition, credit growth means an increase in the level of financialization in this country/region. Bumann and Lensink [
95] suggest that financial liberalization would improve the income distribution and resource allocation of this country. It led to lower the level of inequality in this country. Importantly, the study of Mikucka et al. [
96] found that reduced income inequality would significantly improve subjective well-being in richer countries.
Whether the credit cycle is during expansion or recession phases, social support, freedom and positive affect can moderate the relationship between the credit cycle and happiness. During credit expansion, the interaction terms of the credit cycle and social support, freedom, and positive affect are 0.0519, 0.0185, and 0.0222, respectively. Moreover, during credit recession, the interaction terms of the credit cycle and social support, freedom, and positive affect are 0.0358, 0.0173, and 0.0223, respectively. They are all statistically significant at the 1% level. The results indicate that enhanced interaction effects between the credit cycle and social support, freedom, and positive affect can significantly improve happiness scores. The incidence of mental disorders can be reduced during the periods of credit growth, which is mainly due to the support from society and the family [
58]. People with satisfactory social relationships are more likely to be happy, less sad, and more likely to improve their happiness [
76]. In addition, the credit can improve quality of life when people have adequate social support [
77]. For freedom, economic freedom is associated with smaller credit fluctuations and shorter credit recovery times [
82]. Economic freedom improves the credit dilemma in a country/region and reduces pressure and worries from the debt. Finally, when positive affect spreads in financial markets, high social expectations would push the loans from banks to other investments, pursuing higher returns and increasing subjective well-being.
Next, we turn to the regression specification (5) which a simple conversion of the regression specification (4) to more directly express the total effect of the credit cycle on happiness. The regression specification (5) that divides the impact of the credit cycle on happiness into a part that can be explained by the direct effect and a part attributed to the changes in the indirect effects of these moderating variables on the relationship between the credit cycle and happiness. To investigate whether the credit cycle has a chance to increase happiness, we verify the moderating hypotheses 3 of our study by estimating the regression specification (5). We mainly discuss the regression coefficient of the credit cycle term which is denoted by
The regression coefficient of the credit cycle term represents the total effect of the credit cycle on happiness.
Figure 1;
Figure 2 show the results of the total effect of the credit cycle on happiness during expansion and recession phases.
The total impact of the credit cycle on the happiness index will become positive by the changes in the moderating effects of the moderating variable. During the expansion of the credit cycle, social support, freedom, generosity, and positive affect have a significant positive moderating effect on the relationship between the credit cycle and happiness. As shown in
Figure 1, the impact of the credit cycle on happiness shifted from negative to positive if the score of social support reached 0.9496 (obtained by solving the equation
); or the score of freedom reached 0.9151 (obtained by solving the equation
); or the score of generosity reached 0.2412 (obtained by solving the equation
); or the score of the positive affect reaches 0.8372 (obtained by solving the equation
). Life expectancy has a significant but weak negative moderating effect on the relationship between the credit cycle and happiness. In general, during the expansion of the credit cycle, we can improve subjective well-being if one of the following four conditions holds: (1) the adequate support from the family and society, (2) enough freedom, (3) social generosity, (4) with positive and optimistic outlook.
During the recession of the credit cycle, GDP per capita, social support, freedom, and positive affect have a significant positive moderating effect on the relationship between the credit cycle and happiness. As shown in
Figure 2, the impact of the credit cycle on happiness shifted from negative to positive if the score of the natural logarithm of GDP per capita reached 12.7242 (obtained by solving the equation
). However, the maximum natural logarithm of GDP per capita is only 11.4608 according to
Table 2 Descriptive statistics. In addition, the impact of the credit cycle on happiness shifted from negative to positive if the score of social support reached 1.0154 (obtained by solving the equation
); or the score of freedom reached 1.0501 (obtained by solving the equation
); or the score of the positive affect reaches 0.9343 (obtained by solving the equation
). But the scores of social support and freedom will not exceed 1. Finally, during the recession of the credit cycle, only with a high level of GDP per capita or positive and optimistic, the negative impact of credit growth on happiness can be offset. This is consistent with the above empirical results that the negative impact of credit recession on national happiness is difficult to offset even with an addition of a moderating effect.
Although there has been previous literature in the relationship between credit (or debt) and happiness, one contribution of our study is that the impact of credit on happiness can be changed from negative to positive under the influence of regulatory variables. This study does not doubt the predecessors’ conclusions: debt has a negative impact on happiness [
49,
50,
51]. We investigate the relationship between credit and happiness from a macro perspective and give further policy implications to improve subjective well-being based on the negative correlation between the credit cycle and happiness. Social support, freedom, and positive affect as additional determinants of happiness throughout the credit cycle. We need to pay special attention to the moderating variables during the period of credit recession which can help to hedge the negative impact of credit growth on happiness.
6. Conclusions
Surveys from the international agencies show that during the 2008 international financial crisis, people’s happiness fell sharply and then fell into a “happiness trough”. At the same time, credit-to-GDP reached a peak in the third quarter of 2009. Previous literature put forward the “economics of happiness” theory, which triggered a heated discussion about happiness and economic. In this study, we test and demonstrate the relationship between the credit cycle and happiness using the fixed effects model. In addition, we explore the transmission channels of the credit cycle on happiness by adding the moderating effect. In particular, based on annual data for 42 economies in 2006–2018, we find the following empirical regularities. First, the credit cycle has a negative correlation with the happiness score. This means a country’s credit growth will reduce the overall happiness score in a country. The reason can be drawn from the conclusion of Gudmundsdóttir et al. [
58] that credit growth is accompanied by the rise of housing prices, the increase in luxury consumption and the prosperity of the gambling industry, which has severely hit the basis of the national economy and increased the probability of economic collapse in the entire country. Second, the transmission channels between the credit cycle and happiness are different during credit expansion and recession. Healthy life expectancy and generosity can moderate the relationship between the credit cycle and happiness only during the expansion of the credit cycle. GDP per capita can moderate this relationship only during the recession of the credit cycle. Whether the credit cycle is during expansion or recession phases, social support, freedom, and positive affect can moderate this relationship. Third, the total impact of the credit cycle on happiness will become positive by the changes in the moderating effects of the moderating variable. Based on our empirical results, we confirm the previous finding on the negative impact of credit (or debt) on happiness [
49,
50,
51]. However, one contribution of our study is that the impact of credit on happiness can be changed from negative to positive under the influence of regulatory variables.
Our findings present important implications for public mental health. In the context of fluctuations in the credit cycle, the national perception of happiness is inevitably affected by the negative impact of credit, and a good strategy for avoiding negative shocks can significantly improve subjective well-being. We find that the recession of the credit cycle is a better explanation of the decline in happiness than expansion. Therefore, social science researchers should pay more attention to the period of credit recession or economic downturn when studying the relationship between credit (or debt) and happiness. On the other side, social support, freedom and positive affect as additional determinants of happiness throughout the credit cycle. We need to pay special attention to the moderating variables during the period of credit recession which can help to hedge the negative impact of credit growth on happiness.
Our work is not without limitations, some of which open new avenues for future research. First, this article does not distinguish between long-term or short-term effects on the relationship between the credit cycle and happiness. Second, we used a single measurement for the dependent and independent variables. Third, this study assumes that happiness is measured on a cardinal scale. The happiness score used in this study is the national-level average scores in a country/region. It fails to pose a national-level average happiness score with 7 or 5 categories or with verbal labels, such as “very happy/happy/so-so/somewhat unhappy/very unhappy”. Thus, as a first extension, further research could examine the short- and long-term effects of the credit cycle on happiness. As a second extension, future research could study whether the impact of the credit cycle on happiness is spatially heterogeneous. On this subject, the World Happiness Report 2019 pointed out that the evolution of happiness is very different in the ten global regions.