Most people don't realize that games were small back then because they had to be.

The value of being small for most users almost doesn't exist. If you have bandwidth limits then yeah download size is important but most don't.

So the only meaningful change optimizations make is "will it run well enough" and "does it fit on my disk".

Put more plainly "if it works at all it doesn't matter" is how most consumers (probably correctly) treat performance optimizations/installation size.

The sacrifices you talk about were made at explicit request of consumers. Games have to be "long enough" and the difference between enough game loop and grinding is a taste thing. Games have to be "pretty" and for better or worse stylized takes effort and is a taste thing (see Wind Waker) while fancy high res lighting engines are generally recognized as good.

I will say though while being made by indies means they are optimized terribly the number of stylized short games is phenomenally high it can just be hard to find them.

Especially since it is difficult for an hour or two game to be as impactful as a similar length movie so they tend to not be brought up as frequently.

Storage space is at a premium. The PS5 has about 650gb of usable space. At ~100gb/game which is not uncommon you can store 6 games on the console without needing to free up hard drive space.

Filesize matters, especially to people with limited bandwidth and data caps. The increasing cost of SSDs only makes this situation more hardware constrained.