Wednesday, August 17, 2011

Government Austerity and Political Instability


In light of the recent riots in the UK (not to mention Greece, Spain, etc) this paper by Ponticelli and Voth is very timely.  The paper takes a sample of European countries from 1919 to 2009 and looks at the incidence of various forms of political instability as a function of government austerity.  The graph above provides the take-away for most people.  The y-axis is number of incidents of instability per year per country while the various shaded bars represent increasing amounts of austerity (measured as the cut in government budget divided by the country's GDP).  The "Chaos" group is simply the sum of all the other kinds of problems.  Clearly, the larger the cutback, the higher the chance of resulting social problems.

You might wonder if the cause was just the poor economic performance that occasioned the cuts rather than the cuts themselves - they tested that idea and it doesn't seem to be so.  You might wonder if tax increases have the same effect as expenditure cuts - they didn't.  (Though one wonders whether this generalizes from Europe to the US).

Thus cutting the government budget back is a difficult and dangerous business at best and governments should try to manage their budgets to avoid putting themselves in a position to need to make large and abrupt cutbacks.  Current plans in the US to cut the budget presumably carry this kind of risk in coming years.

I went over the paper and wasn't able to find any obvious methodological flaws - the impression I came away with was of a careful and well-done piece of analysis.  I'm not a specialist in this field of course, so take that for what it's worth.

4 comments:

Belette said...

Nice, thanks. Though I don't think that it goes backwards: this doesn't show that the UK riots were caused by austerity.

ChrisInGa said...

To me the interesting number would not be assassinations, strikes, and demonstrations. It would be violent crime rate, non-violent crime rate, and riots.

rmjblog said...

Interesting, quite impressive to me the correlation between assassinations and cuts.

In the end, there is a saturation of the unrest with the cuts, also quite funny.

I wouldn't say that there have been riots in Spain. I would call it protests It has been quite more constructive than what has happened in the UK

Alexander Ac said...

Hi William,

not only we had UK riots, be also we have quite a rapid rise in burning of fat-cat cars in Berlin...:

"At least 135 cars have been torched this year, compared with 54 in 2010, authorities said." reported by CNN...

http://edition.cnn.com/2011/WORLD/europe/08/18/germany.burning.cars/#0_undefined,0_

austerity? Not likely...

not a very efficient way to reduce CO2 :-)

cheers,

Alex