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,

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.

U.S. Life Expectancy Falling In Some Parts

I learned long ago when working in applied economics that averages (means or median data) often hide as much information as they impart.  To really understand an issue, we need to look at the variation or distribution.  Therein always lies a tale.  Yves Smith at Naked Capitalism (also the author of Econned), brings our attention to one such disturbing long-run indicator: life expectancy.  Despite the overall average life expectancy in the U.S. having risen significantly over the last decades, this longer lifespan is not evenly distributed.  In some counties in the U.S., life expectancy has been declining – and that was before the Great Recession/Workers Depression/Financial Unpleasantness.  (italic emphasis is mine; bold is from original):

Life Expectancy Fell in Many Counties in the US BEFORE the Crisis

A rising tide did not lift all boats even when the economy looked a lot better than it does now. As Francois T, an MD and medical researcher, wrote:

If you need ONE Indicator of how a nation is doing, it ought to be female life expectancy at birth. It is a tell tale sign that a lot of good things, (or bad things) are happening in the nation under study. … people severely underestimate the real repercussions and total costs of a decrease in female life expectancy at birth.

He pointed to a just-released study, Falling behind: life expectancy in US counties from 2000 to 2007 in an international context. Some of its major findings:

Large swaths of the United States are showing decreasing or stagnating life expectancy even as the nation’s overall longevity trend has continued upwards, according to a county-by-county study of life expectancy over two decades.

In one-quarter of the country, girls born today may live shorter lives than their mothers, and the country as a whole is falling behind other industrialized nations in the march toward longer life…

Some US counties have a life expectancy today that nations with the best health outcomes had in 1957 … Five counties in Mississippi have the lowest life expectancies for women, all below 74.5 years, putting them behind nations such as Honduras, El Salvador, and Peru. Four of those counties, along with Humphreys County, MS, have the lowest life expectancies for men, all below 67 years, meaning they are behind Brazil, Latvia, and the Philippines.

And get a load of this:

Despite the fact that the US spends more per capita than any other nation on health, eight out of every 10 counties are not keeping pace in terms of health outcomes. That’s a staggering statistic.

Yet looking at this map (click to enlarge), …

And remember, the data in this study goes through 2007. It will take a few years to find out what impact the crisis has had on the health of America’s citizens.

Life expectancy is strongly correlated with real income and socio-economic status within society.   Yes, from a medical standpoint, it’s smoking, type 2 diabetes, obesity, and hypertension that are what limit life expectancy (once child mortality is defeated).  But the incidence of smoking, obesity, etc. is all highly correlated with real income, status, and quality of health care.   Rich people generally don’t smoke, can afford to eat high-quality nutritious food, and get quality health care.  Poor people tend to smoke, get high-fructose corn syrup instead of nutrition, and get lousy health care, if any.

The U.S. simply doesn’t get value for money for all the money it spends on healthcare.  It’s the healthcare system that’s broken.

Who’s Ignorant on Spending? Voters or “Experts”?

The new Republican-led Congress is trying to get started on it’s campaign promise cut spending. Apparently it’s not as easy as they thought.  Part of the problem is their ignorance about the federal budget and budget process (see GOP Cuts Budget with Axe).  But not understanding the difference between an appropriation bill and an authorization bill isn’t their big challenge. I’m confident that even the slow learners will pick that up eventually.

The bigger problem in cutting spending has the econ-blogosphere all atwitter.  It seems that Americans only really want cuts to some big, non-specific, generic “government spending”.  When it comes to actually cutting what the government spends in on particular programs, they sing a different tune. They don’t want cuts to Medicare, or to Social Security, or to the military (if it affects the base/contractor near them), or to education, or to WIC, or most anything else except maybe foreign aid. My guess is they will also oppose cuts to foreign aid once they figure out that much U.S. foreign aid actually subsidizes our sale tanks/planes/corn produced just down the street. Conservative columnists like Bruce Bartlett have described it as “Voter Ignorance Threatens Deficit Reduction”. Catherine Rampell of the NYTimes weighs in similarly with “Keep Your Government Hands Off My Government Programs!”, which documents how large numbers of government spending-beneficiaries don’t think they get any benefits from the government, including 40-44% of Medicare and Social Security beneficiaries. Even Krugman has weighed in on the topic.

Most of this commentary has adopted a tone of “it’s hard to cut spending and the deficit when voters are so ignorant”.  But I wonder if the the ignorant part isn’t the voters, but rather the self-styled pundits and politicians who are the ignorant ones.  Voters are going along with the generic “cut spending in concept” because they’ve been repeatedly sold and preached propaganda claiming that we have a “deficit crisis”.  (We don’t have a deficit or debt crisis in the U.S. –see here, here, and here.) Voters, when polled, go along with saying they want to cut spending because that’s what’s popular – it’s what we’re told over and over. It’s a popular thing to say that government is all waste. Our culture is built around the idea that only private-profit seeking is “productive” or “valuable”.  But when voters are asked about specific programs, they do see  the value. They know that Social Security is necessary. Medicare is necessary. Government spending on education, infrastructure, basic research, science, and the like are all necessary government services. The private sector will not provide those services in the proper quantity or at an efficient price.  Hence they oppose specific proposed cuts in polls. It may be the voters, who depend on the value of those government services, know the value better than the pundits, experts, and politicians who aren’t personally familiar with these programs because they’re in the elite, higher income group.

Technology, Growth and Printing Press

We know that new technology and information technology in particular can spark enormous long-run economic growth. Today we’re in the middle of an explosion of new info technologies based on computers, networks, and the Internet.  The last time the world experienced a similar phenomenon was probably the invention of printing via moveable type by Gutenberg in Mainz, Germany around 1450.

A new study of the diffusion, spread, and growth triggered by printing at the city level is summarized at voxeu.orgInformation technology and economic change: The impact of the printing press.

Part of what’s new here is the study of growth at the city-level.  A few interesting observations:

I find that cities in which printing presses were established 1450-1500 had no prior growth advantage, but subsequently grew far faster than similar cities without printing presses. …The estimates suggest early adoption of the printing press was associated with a population growth advantage of 21 percentage points 1500-1600,

…Printing presses were not set down at random across European cities. Cities that adopted the printing press 1450-1500 subsequently enjoyed unusual dynamism.

…Cities that adopted print media benefitted from positive spillovers in human capital accumulation and technological change broadly defined. These spillovers exerted an upward pressure on the returns to labour, made cities culturally dynamic, and attracted migrants.

The paper includes some nice maps showing the spread of printing through Europe 1450-1500.

Overall, I think one lesson we can take away is that it does make sense for cities/small states to invest in creating conditions and early adoption of new technology.  This is another role for government. Leaving adoption to the random effects of a totally private market risks letting the growth go to other cities/states.