… and the Pursuit of Happiness - Institute of Economic Affairs

… and the pursuit of happiness
wellbeing and the size of government
Tullock (1981) famously provided an explanation for why
democracies tend to reach stable decisions, which rests on logrolling.
This explanation also gives an intuitive reason for why
democracies may reach too many decisions at too high a cost
to voters, and thus why government spending above a ‘nightwatchman’
level in many cases can be detrimental to national
wellbeing. Tullock realised that to reach decisions that are
supported by a majority and are unlikely to be overturned by the
next government, one has to combine support for different policy
proposals such that all groups will vote for the combined package.
This implies that relatively narrow groups, all with their own
preferred spending item, can push their policy agendas through
Parliament even though, individually, those policies may be to the
detriment of the majority of the population. The need to reach a
majority thus implies that overall spending is likely to be larger
than preferred by most of the population and that the structure
of spending will not reflect its preferences. Instead, spending will
reflect the preferences of those groups that have political influence
and which are likely to be pivotal in political bargains.
Further problems also point in the direction of excessive
spending that effectively would lower the wellbeing of most of
the population. Politicians deciding on government spending
arguably exploit voters’ income as a fiscal commons, as excessive
spending today can be covered by excessive taxes tomorrow
(Mueller, 2003). Such spending does not contribute to wellbeing
and may even reduce it as voters relinquish control of
their personal income. Now-classic studies also document that
spending may be too high owing to politicians’ log-rolling, their
preferences for ‘visible’ government projects, and the lobbying
activities of special interests (Tullock, 1959, 1981; Olson, 1965).
Likewise, as government grows, so does the power of a bureaucratic
elite with incentives to maximise budgets, personal staff or
both (Niskanen, 1971). As bureaucracies grow, controlling them
consumes more resources, such that a growing government automatically
triggers disproportionally higher expenses (Mueller,
2003).
One could argue that democracy allows voters to control politicians
better, which would counteract the tendencies towards
excessive government. The public choice literature also documents,
however, that the behaviour of politicians aiming to be
re-elected contributes to excessive spending and resource misallocation,
which is facilitated by a large share of voters that are
‘rationally ignorant’ (Downs, 1957). Politicians trying to win elections
have strong incentives to be seen to be ‘doing something’ for
specific groups in society. As such, subsidising important groups
of voters or special interests causes excessive spending as well
as additional spending that is allocated to purposes other than
providing beneficial public goods. In total, much public choice
theory and Austrian information economics implicitly predict
that government spending and other activities will either be
ir relevant or directly detrimental to wellbeing, when above some
absolutely necessary level.
Main determinants of national happiness
When confronting theory with the real world, the first question to
ask concerns the factors that determine the differences in levels of
wellbeing across nations. A growing literature has explored a large
number of different factors but found relatively few to be robustly
associated with wellbeing; Bjørnskov et al. (2008a), Frey (2008)
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