My Inet Lecture in Berlin

... due to family reasons, this must have been the shortest trip I ever took, but with 1,600 + hits on youtube on day one, it seems to have hit a nerve:

The whole thing was made more challenging by the (normally highly efficient) INET people not managing to upload my presentation, so that I had to speak without slides or a manuscript. At least, one finds out if one knows one's own stuff...

Unrest and Bond Yields

via Euronews

Trouble is - if a country descends into anarchy, the best plans for reform don't help you much. The bond market today definitely got worried, with Spanish 10-year yields pushing towards 5.5%. Not everything the markets do is rational (remember those rallies in Greek bond prices after each summit?), but this reaction has some good analysis behind it. Woo (1983) for example showed that countries with greater frequencies of strikes and other forms of unrest have bigger public debts -- a clear sign of an inability to cut expenditure and raise revenue in societies at the verge of fracturing. You can see how this kind of reaction can lead to a self-reinforcing downward spiral, with uncertainty undermining growth (a la Bloom), lower growth causing lower taxes and bigger deficits, resulting in more austerity (reinforced by some extra finger-wagging from Brussels and Berlin), and then you get round again with some more unrest plus so much less growth that the deficit actually goes up (as per the new and instant classic Delong + Summers paper). The final result? Greece. I don't think the probability of Spain ending up there is high, but give us half a dozen incidents like today, and the chances will go from, say, 5% to 25%.

Greece burning

I was on German radio yesterday morning, commenting on unrest in Greece. You can read (if your German is up to it) most of what I had to say in an interview with Der Standard from Austria. The punchline? We need to do what Wolfgang Schäuble already hinted at last week - reduce the extreme level of austerity in the policy mix, quickly, before most of Europe starts to look like Greece. 

When you don't want to be this right...

(image via libcom.org)

Last year, Jacopo Ponticelli and I wrote a paper looking at the link between austerity measures and unrest. We found a close one. The dramatic images from yesterday - with wide-spread rioting in Athens, building burning, etc. could not bear out our thesis with more force. And there is no question that this was about austerity, either ... normally a tough nut to crack in this context is the question if the link is really causal. Of course, academics always enjoy being able to say "I told you so", but this time, I would have preferred it if the Greeks had proven us wrong.

While there is a lot of understandable frustration with Greece's unwillingness or inability to implement reforms, the riots illustrate that austerity is reaching its limit. How many more budget bills can the government and the troika push through parliament? And what is the implication for the rest of Europe? For the moment, bond markets are a bit calmer, and equity markets are in party mood. The pictures from Greece tell us that the cheer of markets thanks to more austerity is bought in an unsustainable fashion. It's not the most likely scenario, but we may very well see a rapid deterioration in the growth outlook in Spain and Portugal, thanks to all the cuts and tax hikes being implemented now. If this produces yet more deficits and another round of austerity, the Greek scenario is beginning to look much more likely; somewhere along the way, the bond market will panic, and the mother of all bailouts could be on the agenda by mid-summer. Let's hope I am wrong. Even Wolfgang Schaeuble, whose pleasure in forcing austerity on deadbeat ClubMed countries has a been a constant at EU summits, seemed to hint last week that he is starting to change his mind. 

The Economist

The Economist in its "Economics Focus" column this week features Jacopo Ponticelli's and my work on unrest and austerity... as well as my earlier paper on Latin America, making a related point -- the more you cut, the higher the level of unrest will be. 

Facebook revolutions

The Arab spring and London riots created a lot of media hype about how the internet and cellphones can create mass movements. I was a bit sceptical, not least because Jacopo Ponticelli and I (in our paper on Austerity and Anarchy) didn't find much when we looked at media penetration and the likelihood of demonstrations, riots, etc. Now, Navid Hassanpour has a new paper on "Media Disruption and Revolutionary Unrest". He looks at what the effect is of cutting off cell phone service. Here is the abstract:

Conventional wisdom suggests that lapses in media connectivity - for example, disruption of Internet and cell phone access - have a negative effect on political mobilization. I argue that on the contrary, sudden interruption of mass communication accelerates revolutionary mobilization and proliferates decentralized contention. Using a dynamic threshold model for participation in network collective action I demonstrate that full connectivity in a social network can hinder revolutionary action. I exploit a decision by Mubarak's regime to disrupt the Internet and mobile communication during the 2011 Egyptian uprising to provide an empirical proof for the hypothesis. A difference-in difference inference strategy reveals the impact of media disruption on the dispersion of the protests. The evidence is corroborated using historical, anecdotal, and statistical accounts.

It's a really nice study - cleanly identified, detailed, and timely. Let's see what the media make of it.

The sharp end of history

It's been a pretty exciting week on the beach... my paper with Jacopo Ponticelli about austerity and anarchy in Europe, 1919-20009, got a ton of press, including interviews with the BBC, France24, and Die Welt. The fact that London burned a mere week after we posted the working paper surely helped. Typically, with economic history papers, something that seems topical now, when you start working on it, will barely elicit a yawn when you are done. This time, we got lucky... we started working a year ago on the topic, inspired by the Greek protests and an invitation to do a paper on fiscal policy in historical context, for the Central Bank of Chile (a far-sighted lot, it turns out). I first finished a similar paper on Latin America, and then we got this one out.

I hope the paper doesn't become any more topical...via Haaretz, I found the photo above, of what Israeli protesters installed on Rothschild Boulevard in Tel Aviv.

Austerity and Unrest Over the Long Run

With riots in London last night and the heavy smell of tear gas still lingering over the Acropolis, Jacopo Ponticelli and I thought we'd look at the connection between budget cuts and unrest more systematically. The working paper is now out. We look at the extent to which riots, demonstrations, political assassinations and general strikes increase as governments cut expenditure in Europe, 1919-2009. Here is the abstract:

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 cross-country 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.

And here is our answer, in one slide:

The bars show the number of incidents - CHAOS aggregates them all, and then you have the components -- demonstrations, riots, assassinations, and general strikes. As the bars get darker, cuts get deeper. Once you cut expenditure by more than 2% of GDP, instability increases rapidly in all dimensions, and especially in terms of riots and demonstrations.

Sure, there are many incidents that can lead to an eruption of violence– from the killing of Mark Duggan in London last Saturday to a high-speed pursuit gone wrong (in the case of the Rodney King riots in LA in 1992). The more interesting question is -- why are cities at some points in time more akin to a tinderbox? Why does it only take one incident for massive violence, riots, or anti-government demonstrations to erupt? Even if there is something else that provides the spark, you want to know why there is so much dry wood around that you get a conflagration. Here, our results suggest that the role of budget measures is important.

We also use some additional, more detailed data on the causes of each demonstration to confirm our hypothesis that the link is causal. Incidentally, the same pattern is apparent in Latin America since 1937.

So, if you ever found yourself reading papers by Alesina and co-authors arguing that i. budget cuts can be good for growth ii. there is no punishment at the polls for governments cutting expenditure, and wondering why governments don't engage in more austerity - maybe here is your answer. Even if (and it's a big if, given the IMF's latest research) Alesina et al. are right, and growth can follow cuts, the pain may be concentrated amongst some groups. If these become massively unhappy... it can start to look pretty ugly out there in the streets, and I doubt that that'll be good for growth. As a matter of fact, Nick Bloom of Stanford has a bunch of fantastic papers showing just how painful uncertainty shocks are in terms of subsequent economic performance.

I should be more careful what I work on...

you see, first I worked on (historical) bubbles, and then NASDAQ blew up... then I did research on the sovereign debt defaults, and Greece imploded. In the fall, for a conference at the Bank of Chile, I did a paper on social and political unrest - assassinations, riots, anti-government demonstrations, violent overthrows of the government... and look what we get in the Middle East. The pejorative term for scholars changing research focus as events unfold is "intellectual ambulance chasers"... but what is this? A reverse Midas touch? At any rate, for a sample of South American countries, I looked at what drove levels of unrest. In particular, I show that budget cuts have a strong effect on the likelihood of instability - over and above the effects of an economic downturn. Here is a link and the abstract:

Efforts at fiscal consolidation are often limited because of concerns over potential social unrest. From German austerity measures during the 1930s to the violent demonstrations in Greece in 2010, hard times have tended to go hand in hand with antigovernment violence. In this paper, I assemble cross-country evidence from eleven South American countries for the period 1937 to 1995 about the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between austerity and instability. I examine the extent to which this relationship simply captures the fact that fiscal retrenchment and economic slumps are correlated, and conclude that this is not what is driving the effect. Finally, I test for interactions with various economic and political variables. While autocracies and democracies show a broadly similar response to budget cuts, countries with a history of stable institutions are less likely to see unrest as a result of austerity measures.

The paper will be out later in the year in a volume edited by Jordi Gali and Luis Felipe Céspedes. Right now, with a doctoral student from UPF, Jacopo Ponticelli, I am working on a related paper to see how much of this holds over the long run in a wider set of countries.