… and the Pursuit of Happiness - Institute of Economic Affairs

… and the pursuit of happiness
wellbeing and the size of government
and policy costs is more possible and specific problems can be
addressed that are not within the effective reach of national
policies. One would therefore expect that the costs (benefits) of
government spending and interventions are larger with more
(less) centralised decision authority.
One of the few papers to distinguish between centralised and
decentralised decision-making, Bjørnskov et al. (2008b: 150),
concludes that ‘Local autonomy, however, increases well-being
only insofar as it neutralizes the detrimental impact of the government
sector.’ In other words, decentralised governments are likely
to make decisions and implement policies that are, on average,
neutral with respect to the wellbeing of their citizens. Centralising
political decision-making, on the other hand, makes it more likely
that the size and scope of the public sector grows to the extent of
being significantly detrimental to wellbeing (cf. Frey, 2008).
The other main question is whether economic development
increases national wellbeing. This topic is covered by Sacks,
Stevenson and Wolfers (in this volume), who show that economic
growth leads to higher subjective wellbeing in the long run. One
of the main drivers of growth, economic globalisation, also causes
higher levels of subjective wellbeing over and above its effects on
growth (cf. Bjørnskov et al., 2008a; Tsai, 2009).
At the individual level, people tend to get used to being richer
– at least to some extent – when national wealth has reached
a relatively moderate level. Likewise, most people adjust their
expectations somewhat downwards when they are consistently
disappointed (Stutzer, 2004; Dolan et al., 2008). As such,
reductions in private consumption resulting from higher taxes
to finance government spending may in principle cause only a
temporary reduction in wellbeing until individual expectations
and aspirations have adjusted. In practice, however, Di Tella et al.
(2003) show that people are not likely to adjust their expectations
fully. Because of this, economic growth is likely to lead to higher
wellbeing overall.
The government sector and its active role in society could thus
cause losses of happiness in the long run because of its effect on
economic growth. Activist government policies and a growing
public sector are likely to undermine both growth and globalisation
(e.g. Fölster and Henrekson, 2001; Bergh and Henrekson,
2011), and thus slow down the already slow trend towards greater
wellbeing. Given this, the apparently popular case for active
government involvement in increasing wellbeing seems misdirected.
As noted above, a number of studies find no basis for the
claim that government spending is positively associated with
happiness. High government spending instead tends to reduce
growth and may also be harmful to other factors contributing to
happiness.
In addition, the potentially positive effects of material
improvements may be less likely to be visible in the wellbeing of
countries. As a sizeable share of the population provides answers
that are close to the maximum happiness level in survey questions,
the inability to place one’s assessment of wellbeing higher
than the top category of the questionnaire constrains the surveys
at the top end, thereby making it more difficult to measure the
real effects of improvements within the group of countries that
already has high levels of wellbeing (see Ormerod and Johns,
2007; Stevenson and Wolfers, 2008). The real effects of government
spending in rich democracies may thus be underestimated.
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