Wednesday, August 17, 2011
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.
Posted by Stuart Staniford at 8:45 AM