Happiness and the size of the state

Big government makes people unhappy. That's the message of this paper (via Division of Labour):

Life satisfaction decreases with higher government spending.

Which raises the question: if big government makes us sad, why do we vote for it?
One possibility is that people are awful judges (pdf) of their future preferences.
Another was pointed out by James Buchanan in this classic (read the lot, but scroll down for "Majority voting without benefit-cost constraints", which is the money shot for my purposes). He shows that if voters evaluate each individual government spending proposal seperately, majority rule can lead to bigger overall spending even though the  costs outweigh the benefits.
A third possibility is the status quo bias - people are scared to change, because the dangers of doing so loom larger than the benefits.
Whichever it is, there's a paradox here for libertarians. Although many are (rightly) sceptical of the notion of aggregate welfare, this does provide an argument for shrinking the state. The trouble is, it's a paternalistic one. If we want to shrink the state, we have to tell voters: "I know you don't want smaller government, but it's good for you." 
Another thing: the paper also found that globalization makes people happier; countries with greater openness to trade, and lower investment goods prices, are happier. However, aggregate income has no significant impact on happiness. Peter Mandelson will ignore this.
And another thing. Big government doesn't just make us unhappier. It also makes equity investors poorer. Marshall Stocker shows that there's a positive correlation (pdf) between changes in economic freedom and equity returns.

Comments

[AJE]

Regarding 'the paradox',

I think that it's possible to make the argument "I know you don't want smaller government, but it's good for you" without being paternalistic, if the argument is made via persuasion rather than coercion.

It seems to me there's a striking difference between saying "alcohol is bad for you so i'm going to prevent you, by force, from consuming it", versus "big government benefits political elites, not the geniune poor, and using reason and debate I'd like to educate you so that you might change your mind".

I have no quarms with egalitarians who want to educate me, it's when they use coercion (government) and not persuasion (markets) that i'd object.

Finally, the reason it appears to be a paradox is that you're assuming everyone must be bound by the same rules. In other words my own desire for limited government conflicts with Mr Xs desire for big government. I don't object to Mr X, and think he's perfectly entitled to participate in socialized health and income redistribution. I object to his attempts to force his fellow countrymen into doing the same.

With a few constitutional devices (such as a Clarke tax, I daresay), it's feasible that Mr X can participate in his big government, and I can participate in small government. My belief that he should be able to do this, if he wants to, and as long as he uses persuasion and not force to enlist others, shows why I'm not being paternalistic.

[Jim]

Maybe I'm misreading that paper or something, but the figures it gives for 'government share of GDP' seem a bit off to me. For example, the five countries with the lowest figures in Table A1 for 'government share' are Japan, Spain, South Korea, Norway and Finland, none of them previously known as bastions of small government. And the third of the set with the 'highest' government share are without exception developing countries. It's all a bit weird.

[Snafu]

"If big government makes us sad, why do we vote for it?" - I joined the 78% of the UK electorate who didn't vote for it!

[chris]

Jim - you're right, there are problems with the data on government spending in the Penn World Tables, which the paper uses. They're described here:
http://www.nottingham.ac.uk/economics/research/seminars/DP0001.PDF
Essentially, the PWT uses international prices, not local ones, in measuring spending. This means the PWT will increase the share of government spending in GDP in countries where the price of government services is lower than that of the non-government sector, relative to the rest of the world. This tends to bias upwards government shares in poor countries.
The question is: does this overturn the key finding? Bjornskov et al find that government spending reduces happiness even controlling for GDP and the prices of investment goods, which are correlated with this measurement bias. I don't know if this suffices to correct for this measurement problem or not.

[Jim]

Thanks for clearing that up, Chris. As for whether it overturns the key finding, I'd have to say 'yes' until they re-run their calculations with some more realistic data. It's also interesting that a previous analysis of World Values Survey data focusing only on 14 OECD countries claimed to "demonstrate that subjective appreciation of life is positively
affected by governments of the left and by the level (and kind) of welfare state development": http://www.psa.ac.uk/cps/2000/Radcliff%20Benjamin%20et%20al.pdf