Learning From Austerity In the Past. A Warning?

A poor economy is never popular with the populace.  But when the economy is slow and people are suffering as a result of government policies that impose austerity on them, people get downright upset.  They even get violent.  It’s something we should think about as virtually all major developed nations have embraced policies of cutting spending in the face of high unemployment.  History shows government budget  cuts do not restore growth.  That is a myth.

But history also shows that budget cuts go hand-in-hand with social violence, unrest, rioting, social instability and even revolutions. A new major historical study by budget cuts do have real effects.  Jacopo Ponticelli and Hans-Joachim Voth have just published their study in Voxeu.org.  Here is the abstract  (bold emphasis mine):

Austerity and Anarchy: Budget Cuts and Social Unrest in Europe,
1919-2009*

Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a stronger effect of cut-backs on the level of unrest.

Here’s another interesting passage:

Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While these are low- probability events in normal years, they become much more common as austerity measures are implemented. … We demonstrate that the general pattern of association between unrest and budget cuts holds in Europe for the period 1919-2009. It can be found in almost all sub-periods, and for all types of unrest. Strikingly, where we can trace the cause of each incident (during the period 1980-95), we can show that only austerity-inspired demonstrations respond to budget cuts in the time- series. Also, when we use recently-developed data that allows clean identification of policy-driven changes in the budget balance, our results hold.

The timing of this release is extraordinary.  We saw riots in 2008 and 2009 in Iceland, Latvia, and Bulgaria driven by austerity and “tax the people to pay the bankers”.  Of course the “Arab spring” was partly driven by bad economics in Tunisia, Egypt, and other mid-east countries.  We’ve seen Greece this year turn violent and lawless in areas due to the hopelessness of the austerity policies being forced on it by the EU.  Spain has been having extensive, largely peaceful protests until police decided they had enough. Now Britain has experienced riots, too.

This paper and the riots we are seeing illustrate an important concept of political economy.  Redistribution of income by government to the less fortunate and the unable is not just a question of altruism, or charity, or “caring” for them.  Redistribution also serves the interests of the rich, elite, and powerful.  When income inequality becomes too great and the government persists in policies that benefit only the existing holders of financial capital (like today’s austerity policies), social unrest soon follows.  Sooner or later the wealth and safety of the elites becomes endangered.