A Surefire Way For Governments To Provoke Riots, Chaos And Revolution

Economist Paul McCulley, formerly of PIMCO, has a great new paper out called Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? (.pdf), which is a cry for “irresponsible” monetary policy.

Basically, he says, in typical times, it would be the job of the central bank to act independently to counter governments that are borrowing and spending so much that they’re causing inflation.

But in a liquidity trap, the job of the central bank is to row in the same direction, and do everything it can to facilitate inflation and spending, even if on paper that seems irresponsible.

It’s a big paper, and we’re still going through it, but one thing he cites in there is another paper by economists Jacopo Ponticelli and Hans-Joachim Voth called Austerity and Anarchy: Budget Cuts and Social Unrest in Europe,. 1919-2009 (.pdf), which explores the link between, as the title states, austerity and social unrest.

What Ponticelli and Voth found, looking back over budget cutting over that 90 year period, is that the relationship between austerity and social unrest (riots, attempted revolutions, and even assassinations) is pretty clear.

Not only that, but the size of the cuts bear a close relationship to the volume of social unrest.

They write:

We use a long panel dataset covering almost a century, focusing on Europe, 1919 to 2009. The continent went from high levels of instability in the first half of the 20th century to relatively low ones in the second, and from frequently troubled economic conditions to prosperity. It thus provides a rich
laboratory of changing economic, social and political conditions. In terms of outcome variables, we focus on riots, demonstrations, political assassinations, government crises, and attempted revolutions. These span the full range of forms of unrest, from relatively minor disturbances to armed attempts to
overthrow the established political order. We compile a new index that summarizes these variables, and then ask  — for every percentage cut in government spending, how much more instability should we expect? 

The data shows a clear link between the magnitude of expenditure cut- backs and increases in social unrest. With every additional percentage point of GDP in spending cuts, the risk of unrest increases. As a first pass at the data, Figure 1 (below) examines 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 a single 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.

Exactly the same relationship can be observed in each of the four main subcategories of CHAOS. The frequency of demonstrations, assassinations, and general strikes rises monotonically with the scale of cuts. Only in the case of riots is there a small decline for the biggest cut-backs. In the case of demonstrations, the frequency of incidents appears to rise particularly fast as expenditure cuts pass the 3% threshold.

The strength of the link between austerity measures and unrest is our first important finding. Is the link causal? Other factors, such as generally depressed economic conditions, could drive up unrest and the need for cut- backs simultaneously. Controlling for economic growth does not change our
results. This suggests that we capture more than the general association between economic downturns and unrest. To demonstrate that causality runs from cut-backs to unrest, we refine the data in two ways: First, we analyse a more detailed dataset that gives information about the causes of each
incident. Second, we use recently-compiled data on changes in the government budget that follow directly from policy changes (Devries et al. 2011). For both types of additional evidence, we find clear indications that the link runs from budget cuts to unrest. We also conduct placebo tests with other types of unrest – inspired by ecological issues and world peace, for example – and find
no effect of budget measures. 

Click to enlarge this chart showing the relationship between the depth of the budget cutting and the frequency of various forms of civil unrest.

social unrest


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