Wednesday, August 10, 2011

Political Economy, Austerity and Chaos

In a new paper from CEPR, authors Jacopo Ponticelli and Hans-Joachim Voth explore the relationship between policies of austerity and social and political upheaval.  The paper, entitled AUSTERITY AND ANARCHY: BUDGET CUTS AND SOCIAL UNREST IN EUROPE, 1919-2009 explores various relationships between social spending and political and social turmoil.  The paper concludes that
one possible reason why austerity measures are often avoided fear of instability and unrest.  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. This may act as a potent brake on governments. In line with our results on expenditure, Woo (2003) showed that countries with higher levels of unrest are more indebted. High levels of instability show a particularly clear connection with fiscal consolidation.

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. 
Austerity has consequences beyond the direct impact on the populace...  Policy makers have to be careful to not piss off The Masses too much through economic retrenchment.  It can lead to very dire consequences.  And those consequences can spin left (as in Russia in 1917) or right (as in Germany in 1930).  But in either case, there was violence and long-term implications for humanity.

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