I think Darrin has it exactly right that too much security seems to produce a sclerotic economy, at least in these times, and several Scandinavian countries, seeing the handwriting on the wall, have traded a bit of security for economic flexibility in recent years. Some day a really smart economist may figure out a way to avoid this tradeoff, but for now, we’re stuck with it. My argument is that when we think about policy, we should be thinking about economic growth, AND economic justice, AND subjective well-being (a clunky term that I much prefer to “happiness”). I don’t think we can be formulaic about it, since specific world economic circumstances will make for different sorts of trade-offs. My own values would give justice priority over subjective well-being, when those kinds of tradeoffs have to be made. But I also think that acknowledging that trade-offs have to be made is a big step from where we are now. Justice and subjective well-being are essentially ignored, and all policies are directed at providing economic stimulus.
As for the empirical story on the relation between economic inequality and subjective well being, Darrin may be right (he probably knows the literature better than I do), but I thought Ed Diener had found that economic inequality reduced well-being.