Wednesday, August 10, 2011

Austerity and Anarchy

A recent study by Prof Hans-Joachim Voth and Jacopo Ponticelli concludes that a positive correlation exists between budget cuts and social instability:
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 crosscountry 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.
The US might take a lesson from the European experiences of the 20th century. Follow the link below to read the entire study.

Source: Voth, H-J & Ponticelli, J (2011), Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009, Centre for Economic Policy Analysis.

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