Go ahead. Implement Austerity at your own peril
by Daniel Becker
(This is a long post. The time for sound bite debate to the demise of learned discussion is over for we are flirting with danger.)
Via a post at Financial Armageddon I learnt of a paper looking at the relationship of austerity implementation and social unrest. It is recent, dated August 2011.
Jacopo Ponticelli, Universitat Pompeu Fabra
Hans-Joachim Voth, UPF-ICREA, CREI and CEPR
Discussion Paper No. 8513
August 2011
Centre for Economic Policy Research
The Financial Armageddon article shows the first chart of the paper which presents: the relationship between fiscal adjustment episodes and the number of incidents indicating instability (CHAOS).
“CHAOS is the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in asingle year in each country. The first set of five bars show the frequencies conditional on the size of budget cuts. When expenditure is increasing, the average country-year unit of observation in our data registers less than 1.5 events. When expenditure cuts reach 1% or more of GDP, this grows to nearly 2 events, a relative increase by almost a third compared to the periods of budget expansion. As cuts intensify, the frequency of disturbances rises. Once austerity measures involve expenditure reductions by 5% or more, there are more than 3 events per year and country — twice as many as in times of expenditure increases.”
This is a rather disturbing chart. Certainly the recent events in England play into the subject of this paper. That WE are now setup for our version of austerity implementation, this paper should be put in the hands of all the staff members of congress and the president. If I had my own national news show I would have in the corner of the screen the above chart along with the google map of all the riot locations in London and in big letters: Cut SS, MC, Medicaid. Really? You want to go there?
There is more to this paper than just the apparent connection between austerity and upheaval. “Controlling for economic growth does not change our results. This suggests that we capture more than the general association between economic downturns and unrest.”
This is the most powerful statement of the paper. It implies that “Man” in all his glory is responsible for such social activity. It is not the “natural” course of economic activity that creates such volatile activity. It is the economic policy implementedthat determines whether there will be unrest or not. Currently, the proposed austerity is based on an a priori of “we’re broke”. It is stated with the authority of natural cause. Mother Nature Economy did it’s thing and well…we’re broke. All we can do is rebuild after the storm. Yet, an economy is totally of human design. The republican who stated that the conservative movement was making reality was more correct than their fantasizing of control and power would allow them to realize. Thus I delve into this paper more after the jump.
There are two points that need to be understood if we are to apply the lessons of this social economic paper. Point 1:
“However, countries with very high levels of constraints on the executive show a weaker degree of association…Table 10 demonstrates that in countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative – more spending buys a lot of social peace.”
So, some kind of governance that includes self determination is a mechanism for minimizing upheaval/unrest. I believe the American Revolution would be an example of upheaval in the face of “minimal executive” constraint. Finding that constraint of the executive is determinative does not mean such rights are exercised by the people to their benefit:
“The political economy literature on austerity suggests a paradox. There is no significant punishment at the polls for governments pursuing cut-backs (Alesina, Perotti, and Tavares 1998; Alesina, Carloni, and Lecce 2010), and no evidence of gains in response to budget expansion (Brender and A. Drazen2008).”
I don’t know what to make of such findings. Certainly there must be more in the details of the studies sited. If such lack of response by the electorate is true, then we are in deeper trouble than realized.
Based on this conclusion, the authors ask:
“Why, then, is fiscal consolidation often delayed, or only implemented half-heartedly?”
They suggest fear of unrest may be the reason and footnote the following:
14 Alesina, Carloni and Lecce (2010) also suggest that implementation of budget measures may be harder if the burden falls disproportionately on some groups.
I would hate to think that austerity measures are not implemented simply because of fear of a reprisal that appears to be short lived with no political loss to those implementing the policy instead of not implementing austerity because research and experience prove it to be actually harmful in it’s results and even contradictory to the desired outcome of greater prosperity with reduced risk of living. If the politico is acting based on the former, it show’s no conviction of ideology and philosophy. If they fail to acted based on the latter, it shows a lack of character of inquiry and enlightenment. In either case, Naomi Kline’s work notes that austerity is always implemented with some form of force. In our country the force appears to be consolidation and control of the media combined with massive amounts of spending thus control of the debate and knowledge of the subject matter. Though the police state is in place thanks to Bush/Cheney and the expansion under Obama.
Point 2:
“Further, we examine if the spread of mass media changes the probability of unrest. This is not the case. If anything, higher levels of media availability and a more developed telecommunications infrastructure reduce the strength of the mapping from budget cuts to instability.”
In their conclusion they flatly state: Contrary to what might be expected, we also find no evidence that the spread of mass media facilitates the rise of mass protests.
This suggests that cutting communications as some have done recently in an attempt to curb the upheaval is not a procedure that works in the long term. The focus of the complaint, materialized via upheaval will have to be addressed. It is not the ease of rallying the masses, the pep squad going viral that solely explains the materialization or degree of unrest. Though it may explain the reduction in strength of austerity implementation and resulting upheaval. I think the authors have stumbled upon the modern version of the printing press coming into existence and the effects it had.
The authors review current literature on the subject and find there is some confliction as to the effects of budget cutting. I’ll let you read it, but my take home is that it depends on what stage of national development the country is in as to the extent austerity will produce unrest, if the unrest is sustained post implementation and whether it promotes growth. They even site:
Giavazzi and Pagano (1990) and Alesina et al. (2002) find that cuts can be expansionary. Amongst the reasons suggested for this finding are a reduction in uncertainty about the course future spending (Blanchard 1990a), and a positive wealth shock as a result of lower taxes in the future (Bertola and Drazen 1993).3
I guess we know where the current meme comes from. Unfortunately the authors also note:
IMF interventions, on the other hand, often led to more frequent disturbances (Morrison, Lafay, and Dessus 1994).Similarly, Haggard, Lafay and Morrison (1995) find that IMF interventions and monetary contractions in developing countries led to greater instability.Recently, work by the IMF has suggested that austerity measures may be less expansionary than previously thought; they may well have the standard negative Keynesian effects as a result of lower demand (IMF 2010; Pescatori, Leigh, and Guajardo 2011).
Oh no! What is the IMF going to do now? I’m still praying for you Greece.
The author’s sum up the literature review with:
Remarkably, to the best of our knowledge, there exists no systematic analysis of how budget cuts affect the level of social instability and unrest in a broad cross-section of developed countries, over a long period.
Wouldn’t you think that such research would be considered key to one’s knowledge base before we start implementing policy that to date has been mostly tried and studied in 3rd world situations? Wouldn’t you think that the advising
the proof of effectiveness from these advising economist? Even medicine has acknowledged there is a difference between men and women other than genital development. The review of literature is clear. Start cutting and you will piss people off such that they express it ultimately in violent means though if you can ride it out the violence abates and prosperity looms until it doesn’t because people just plain have no money. The word for today is: Demand. Use it in a sentence as it relates to this discussion.
We can think that there are other issues involved when people protest, but the authors make it clear, austerity brings out the greatest number of people. For those considering how to handle the masses when the austerity gets implemented:
“The simple correlations suggest that these co-movements do not extend to all indicators of unrest equally – riots, revolutions, and demonstrations decline as expenditure rises, but assassinations and strikes seem – at a first pass – uncorrelated. Similarly, output growth seems to correlate negatively with assassinations, riots, revolutions, and demonstrations, but not with strikes.”
And: “This suggests that unrest reacts particularly strongly to budget cuts and growth when unrest levels are already high.”
Go ahead, implement at your own imperil. In case you think this connection of unrest/upheaval is related to how they measure it, the authors checked that variable: “We conclude that the way in which we measure unrest does not matter for our main finding.”
Looking at the relationship of austerity policy involving taxes:
Higher taxes and lower expenditure are associated with more unrest, but the relationship is not significant. Tax increases have a positive sign, but the effect is not significant at standard levels of rejection (column 2). It is also small – a one standard deviation rise in the tax/GDP ratio increases unrest by less than 0.01 events. Overall, we find that improvements in the budget balance raise the level of unrest (column 3). As the results in columns (1) and (2) make clear, this reflects the impact of expenditure cuts, and not of tax increases.
And:
We find the same results as before – expenditure cuts wreak havoc, tax increases do so only to a small extent and insignificantly. Overall, the budget balance matters for predicting unrest.
Just to make sure no one gets this wrong: A change in budget balance predicts unrest if the balance is reduced via cuts. Kind of makes it difficult to accept that the masses want something for nothing. In fact, I would suggest “entitlement” as it has come to mean something for nothing is the wrong word to apply to government programs of which people pay for willingly via taxes and don’t get riotous if they are asked to pay more.
If we wanted to avoid the upheaval of austerity implementation we should consider:
In all specifications, the effect of GDP growth on unrest is negative. In contrast to the results for expenditure changes, the effect is not tightly estimated, except in the case of demonstrations, when it is also large – every 1% increase in GDP cuts the number of demonstrations by close to 0.4 events.
See, do something that actually improves the economy and people don’t protest! Wow, who’d a thunk it? Of course improving the economy such that people do not protest would mean having implemented something which produces an actually experienced improvement in the peoples lives. Something like real rising wages paralleling productivity rise and thus rising wealth. Unlike say, debt driven consumption only to have financing go away and then told to suck it up.
They look further at the connection of spending cuts vs economic growth and find:
In contrast, if expenditure changes are negative, they matter a great deal for unrest, driving up CHAOS by 0.19 incidents for each standard deviation of expenditure cuts. Next, we repeat the exercise for output changes. Increases in output do much to cut unrest (col. 3), with a one standard deviation increase in output (3.77%) reducing CHAOS by 0.2 incidents on average. In contrast, declines do not set off major disruptions to the same degree. Overall, the results in table 12 confirm that the relevant identifying variation for expenditure changes comes from cuts; for output changes, it comes from positive growth, not recessions.
This paper kind of makes you think about our current governance of Wall Street/Corp influence and apparent dominance of policy choices to the exclusion of polls showing people want no cuts in programs referred to as entitlements and instead have the budget balanced via tax revenue enhancement. Wonder what happens when virtual people known as corporations do not experience austerity yet have persuading influence over We the people’s choices via money into the election process.? I guess we are going to find out. As I have heard in the past: tort is the free market response to lax governance of the market. Is upheaval the same free market response to unresponsive policy toward the people?
My concern is that the initial response by those supporting and promoting austerity will be the furthering of the police state we have been developing since 9/11. Only it will also be fired up (pun intended) domestically. It is the response we have experienced in the past with the civil rights motion and even back to the labor movement. It appears that a police response is always the first response to protest as protest is interpreted as potentially criminal regardless of what the Constitution reads. Yet here we have a paper suggesting that all of it can be avoided. Combining this paper with the 2005 World Bank report on what creates wealth in a developed economy it appears to me that we have in our hands the answer to what appropriate economic policy should look like for our current situation.
I asked September 2008 if we could please broaden our discussion regarding the crisis. That has not happened. The discussion is still disjointed, segmented and narrow. Now I’m imploring that we broaden the discussion. Pleading!
“The political economy literature on austerity suggests a paradox. There is no significant punishment at the polls for governments pursuing cut-backs (Alesina, Perotti, and Tavares 1998; Alesina, Carloni, and Lecce 2010), and no evidence of gains in response to budget expansion (Brender and A. Drazen2008).”
Hmmm. Perhaps there is little overlap between those who vote and those who riot.
“In their conclusion they flatly state: Contrary to what might be expected, we also find no evidence that the spread of mass media facilitates the rise of mass protests.”
Not sure why you’d expect otherwise. Some of the most significant riots on record occured before the invention of the telephone, let alone the tweet.
daniel,
Explain to me how the protest of the last decade in the US, whicth stopped cold in January 2008, have anything to do with austerity? Explain to me about the riots at every World Economic Summit? Are ‘Gay-Pride’ parades protests?
And I have yet to see US cops having any problems with peaceful protests. Once protest start acting like the looters in London they deserve the rubber bullets, water-cannon, and batons to restore peaceful order and protect people and property. Peaceful protests have nothing to fear from the cops. Violence should get met with handcuffs.
The reason things got out of hand in London was the incredibly pathetic response by the London police and the fact, unlike the Korean store owners in LA, the UK populance is totally disarmed and unable to even fight back. In the UK you can get arrested for assaulting a robber in your own home. Though I do give them points for rounding up the looters via CCTV one at a time…
And telling me about riots in the 30s or 60s is a joke compared to today. This isn’t the civil rights movement. Get a grip. These looters burned down 100 year old stores, stood in line and grabbed flat screens. They were criminals on a rampage.
And lastly, what part of we are spending way, way more than we are making do you not understand?? We borrowed 40% of the US budget this year and Obama PLANS to spend at that level of deficit for as long as the plan extends. Something that cannot continue, will eventually stop. We are finally coing to grip with the fact that we can’t continually increase the size and scope of the Federal Government. The Leviathon has arrived and now we are paying the piper.
Islam will change
Ah buff,
I almost put an exclaimer at the beginning that I was not and this paper is not specifically referring to the violent protest of London as a means to justify it.
I guess I should have.
As to the current debt, deficit debate, that’s been covered in other places. But to make clear my position. WE the people are not broke. Though, if we keep following the current plan and the proposed austerity, we will be experiencing economic contraction until we make a change in the ideology we choose to follow. Which means it could be for decades.
My position as stated does not mean I’m not for spending reduction. It’s just I would not choose to cut where the money is distributed in the broadest manor with the least influence of a middle man.
Care to address the broader issues raised in this posting?
Daniel,
“if we could please broaden our discussion regarding the crisis. That has not happened. The discussion is still disjointed, segmented and narrow. Now I’m imploring that we broaden the discussion. Pleading!”
No you’re not…you’re saying keep spending or I’ll shot this dog! On one hand you’re saying “I not opposed to cutting,” then on the other you say “well don’t cut anything cause I’m scared.”
It is pretty obvious that it will take a long time to get back to the type of economic growth that is going to save the entitlement ideology, so we have to start somewhere. If we try to wait it out, we would only be prolonging the pain, which would probably lead to greater unrest. So in reality you’re actually advocating for unrest.
Darren
The speciousness of your argument concerning spending reductions is found in the fact that you ride a one trick pony. Tell us how to cut spending without using the word entitlements and then maybe we will all marvel at the wisdom of your suggestions. Try not to lose sight of the fact that the “entitlement” most often referred to is Social Security, which people are entitled to because they have been contributing to the program in excess of the pay-go necessity of the current benefits. In effect current contributors have invested in that Trust Fund that so many like to make believe doesn’t hold water. In fact it holds Treasury securities backed by the full faith and credit of the USofA, just like the Treasuries that are currently the favored safe haven of so many investors across the nation and across the globe.
So tell us Darren what government spending do you suggest that we start to cut first. Don’t forget pre-funded programs and those programs with a separate and dedicated revenue stream do not contribute to the deficit. So only that spending which is funded from general revenues can be the source of cuts so that those spending cuts will have real impact on the general budget. Oh, and try to remember that the “unified budget” only exists in political talking points i.e. propaganda and distortions.
and the fact, unlike the Korean store owners in LA, the UK populance is totally disarmed and unable to even fight back
Strange as it may seem to a part of the US populace, I rejoice at the fact that UK populace is totally disarmed. Were it otherwise, it is probable that the looters would have also born arms, so the destruction of property would have been accompanied by the loss of many human lives (many, not just six).
Those who vote listen to FOX, those who riot are hungry.
Dan Becker,
The paradox: the central banks’ strategy is to inflate away bad debt (US/Euro zone insolvent banks) in the “system”. That is at odds with the austerity thing.
See japan since 1990 for the results of monetary/fiscal momenta at odds.
The key question asked by this post is the same one I asked in the london unrest one: Which is cheaper, unemployment benefits, food, housing projects, and schools? Or prisons?
We are about to see what happens when rulers decide it’s prisons.
profundador,
The idea that its good that the populance cannot defend itself from predators, that you must stand by and watch everything your family has built be burnt to the ground, to be unable to defend your loved ones or protect yourself in the face of evil – well is just plain insane. And the UK is about to find out the true costs.
Islam will chnage
Daniel,
I have, multiple times on this blog. Your post is basically a justification for the violent looting that occurred in London. It was a threat that you will shoot your dog (as someone below pointed out) if you don’t get your government handout.
This is all about what kind of government will we have in the future. One that support individual liberty or individual dependence on government. One that is sustainable or one that as Obama proposes runs trillian dollar deficits forever. What we are seeing are the people on the government gravy train upset when there parasitic lifestyle is threatened. We see that in Wisconsin, Ohio etc. The problem is the host can sustain some level of parasites, but tehre is a point when they kill the host. And we are there. The left is running out of other-people’s-money.
Islam will change
Go read the actual piece of research and then tell me it and my posting is: “justification for the violent looting that occurred in London.”
Or should I assume you have read the original paper and just don’t know how to read that type of literature? I say this because their main question, as I noted in my post was: Why don’t austerity measure get implimented more often or to a greater degree?
This is not about justification. This is about documenting what happens when a specific policy is put in action. Simple and basic research.
Well, you can call me socialist loon if you want, but I think that police forces, courts of justice and prisons are powerful instruments by means of which the populace defends itself from predators (*). And I also think that, despite all their failures and shortcomings, those instruments provide real and efective defense for the whole community. Such an important goal will never be attained, I think, if people stuck themselves to that do-it-yourself, cow-boy mentality that some US citizens are so proud of.
(*) In fact, predators are part of the populace, so there is no reason to suppose they would not bear arms also.
I would like to point out that the death and destruction toll of the well-known 1992 Los Angeles riots was considerably high:
Widespread looting, assault, arson and murder occurred, and property damages topped roughly $1 billion. In all, 53 people died during the riots and thousands more were injured (http://tinyurl.com/4xvbs9a)
If such are the results of the widespread arming of the people, then I cannot see what are those disadvantages the English are supposedly suffering.
Ironic mode ON:
Well, perhaps unemployment benefits, food, housing projects and schools are cheaper than prisons, but money is not the only thing on earth! What about bilding character?
Ironic mode OFF
buffpilot: “This is all about what kind of government will we have in the future. One that support individual liberty or individual dependence on government.”
Democracy or plutocracy? A gov’t that supports the freedom of people, or one that supports the freedom of corporations?
To be fair about it G Gordon Liddy seems to think a stint in prison after his Watergate conviction did wonders for his character. He can’t stop going on about it on his wingnut welfare radio show.
Min,
We are not a Democracy! We are a Republic!
Democracy-Representative government with derived power from Rule of the Majority
Republic-A series of Representative Democracies with derived power from a charter
O,
“provide real and efective defense for the whole community.”
but it’s after the fact….how effective!
You do realize that the science says that the more the population is armed the less crime exists don’t you?
Hmmm. I thought that a republican form of gov’t, as stated in the U. S. Constitution, meant one with an elected executive. References?
Min,
Both have an elected Executive, the question is, where is the power derived from? In a Democracy you are subject to Mob Rule. We are a Republic because we have a Constitution that overides the vote of the majority, and power is to be distributed among the states, not centalized in a Federal Government, although our constituion does give the centralized federal government some power to complete specific tasks.
At least that is the way it is supposed to be, but since nobody studies history or really understands how our system is supposed to work, and have become spoiled by the Nanny State, our centralized Federal Government over the years has overstated it’s power over the population without recourse.
Jack,
Where does the money come from to cash in the Treasuries? I am not opposed to raising taxes, but the problem is, it is not going to do much good. The only way to get any serious money into the revenue stream by raising taxes, is to ensure everybody pays, and the lower, middle, and upper middle class rates be increased from their current position.
There is massive resistance to this…..in other words…it most likely is not gonna happend.
If we were to start cutting now, small and across the board, there may come a point when we can get leaders who will advocate a growth economy and we may be able to save it with minimal pain.
As far as the entitlements go, the first and most important decision must be made first, and that is whether or not ObamaCare will be implemented? If it is, there is not a solution to the entitlements, and it will be quickly morphed into the Single Payer System, which is the original agenda, and the purpose of the ObamaCares design as it sits now. That pretty much will spell disaster for our system, and when that time comes, the debate will not be how to save it, the debate will be how to start over.
“pre-funded programs and those programs with a separate and dedicated revenue stream do not contribute to the deficit.”
I just don’t think you’re recognizing the reality of the situation. It doesn’t matter about the technicalities as far as what money is supposed to go where. When a Debt Death Spiral sets in….they will all go away anyway.
The real solutions have little to do with taxing and cuts in spending, they have to do with economic growth, trade, and energy.
Darren: “In a Democracy you are subject to Mob Rule.”
That’s not linguistics or lexicography. That’s BS.
The US Constitution guarantees the states a republican form of gov’t. The term is not defined in the Constitution, which suggests that there was general agreement about the term then. The Roman Republic was one of the models for the US, so that is a big clue.
When I was a kid in school, I was taught that a republic was a representative democracy. However, that was a couple of centuries removed from the time of the constitution, so we cannot say that that was what the founders meant. I did a little web searching, and it seems that Adams and Jefferson had different ideas about what constitutes a republic. However, one key point is that a republic has no king.
Here is a quote from a 19th century American Law Dictionary:
“Governments are also divided into monarchical and republican; among the monarchical states may be classed empires, kingdoms, and others; in these the sovereignty resides in, a single individual. There are some monarchical states under the name of duchies, counties, and the like. Republican states are those where the sovereignty is in several persons. These are subdivided into aristocracies, where the power is exercised by a few persons of the first rank in the state; and democracies, which are those governments where the common people may exercise the highest powers.” (A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.) http://legal-dictionary.thefreedictionary.com/Gov
O,
Read this from Powerline (which has a rich set of links also) about just how disarmed people in the UK are.
http://www.powerlineblog.com/archives/2011/08/malcolms-moment.php
To quote Instapundit: “When seconds count the police are only minutes away.”
Thank you for backing me up with the point about LA. The police and justice system proved unable to defend the populance from the predators during the LA riots. Only people who were armed and willing to defend themsleves succeeded.
Thanks for proving my point.
Islam will change
Thanks for proving my point
Los Angeles, 1992 (http://tinyurl.com/cplpm)
53 deaths
Property damage: 1 billion USD
England, 2011 (http://tinyurl.com/3ld639m)
5 deaths
Property damage: 200 million GBP (=330 million USD)
Yes, yes, you are absolutely right. It is obvious that the English should feel ashamed and envious when they look at the people of Los Angeles… Gun non-control works!!!
The LA riots in 1992 were focused at the police and justice system, and its core complaint was Racism
Well, I was only trying to show that the massive arming of population is not a garanty of public safety; in fact, it can make things much worse. I never intended to reflect on those malaises of US urban communities; you were the one who put them on the table, not me…
The riots in England were because of a bunch snotty do-nothings, anarchists, activists and professional protestors not getting their handouts
That may be, of course. Notwithstanding, I would like to point out that some US conservative voters would certainly say that the L. A. rioters were just a bunch of sons of welfare queens (you know, those lazy women who chose to depend on government handouts rather than working hard, blah, blah, blah).