Proof That Financial Crises Make Countries More Liberal

Pelosi

Turns out recession-bound Americans don’t cling to guns and religion as much as they cling to Democrats. We elected Barack Obama, didn’t we?

A great paper by UCSD professor Lawrence Broz shows that banking crises lead to a more liberal chief executive.

From which the obvious conclusion is that the right creates a financial crisis and the left gets to clean up the mess (via The Monkey Cage and FT Alphaville).

Here’s Why The Left Is Back On Top >

Liberalism peaks around four years after the financial crisis

Two years after the subprime crisis, liberalism is way up

Even minor financial crises make countries more liberal

2007 Germany was a rare exception

Not just the chief executive... the common man is more likely to call himself a lefty

When the economy starts losing money, people turn liberal

Notes: Current account data are from the IMF's World Economic Outlook (WEO) database. Subprime projections to 2012 are IMF estimates. Missing data as follows: Canada 1983 (t-5 to t-4), Germany 1977 (t-5 to t+2), Spain 1974 (t-5 to t+2), and United Kingdom 1974 (t-5 to t+5).

Source: Lawrence Broz via The Monkey Cage

So this is why liberals initially run a bigger budget deficit

Notes: The structural budget balance, or cyclically adjusted budget balance, is the fiscal deficit that would be incurred if the economy was at full employment. Fiscal data are from the IMF's World Economic Outlook (WEO). Missing data as follows: Canada 1983 (t-5 to t-4), Denmark 1987 (t-5 to t-2), Germany 1977 (t-5 to t+2), Greece (t-5 to t-4), Iceland 1985 (t-5 to t+5), Iceland 2008 (t-5 to t+2) Spain 1977 (t-5 to t+5), Sweden 1991 (t-5 to t+5), and Switzerland 2007 (t-5 to t+2).

Source: Lawrence Broz via The Monkey Cage

Bank regulation is weak in the lead-up to big crises

Notes: Data on bank regulation and supervision are from Abiad et al. (2008). Scores range from 0 to 3, with higher values indicating more (or better) regulation. See Appendix C for their coding details.

Source: Lawrence Broz via The Monkey Cage

Bank regulation is strong in the aftermath of crises

Source: Lawrence Broz via The Monkey Cage

Republican presidents show less fiscal restrain than Democrats

Notes: Between 1974 and 2008, the federal budget balance averaged -3.2 % of GDP under Republican administrations (Ford, Reagan, GHW Bush, and GW Bush) and -1.3 % of GDP under Democratic administrations (Carter and Clinton). Data are from the Congressional Budget Office.

Source: Lawrence Broz via The Monkey Cage

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