Riots, Recessions and Fear

It is funny (read: not funny) that the global economy is cooling down just as parts of England are boiling over. As Chris remarks “social orders are more brittle than we like to think.” It doesn’t appear to take much to dip fragile recoveries back into recession, or at least financial panic. It doesn’t appear much incentive is needed to engage in looting, just an expectation you will get away with it. So it seems to make sense to infer that policy can’t actually do much to improve things.

But, Chris and I disagree on how much macroeconomics can really do to improve circumstances. In the long run it is the supply side of the economy – the capital, land, labour and innovations – which drive how well off we are. There is always unemployment and fear for one’s job or firm, likewise there is always theft and violence. But as I’ve argued, getting macro wrong has terrible short-run highly unequal effects. Similarly, getting policing wrong may have led to an extra couple  of nights of rioting. Little in the grand scheme of things, but important to those involved.

Getting macro policy right could make me $100,000 better off over my lifetime. A one percentage increase in the unemployment rate is associated with a 6-7% decrease in initial wages for someone like me, who graduated at the trough of the Little Depression. The effects are persistent, with long-term indirect effects including “poor job match, lower prestige placements, and fewer opportunities for training and promotion.” This dispersion of suffering has the effect of causing people to fear and worry about it, and this effect has consequences.

The rioting, as David Allen Green argues, was both sporadic and did not touch most of the communities of the UK. It is likely, I agree, that in terms of national crime figures, the riots may not even show up. However, many people spent nights afraid on their streets, afraid in their homes because London burned and shops were raided.

But for most people their day to day lives were not effected. If you didn’t watch the news most people wouldn’t have noticed the riots, many people are not in fact doing any worse personally than if we had not had a recession and an anemic recovery. However, they feel like they might have done. I think this is the most worrying thing about the short run things we can influence, like macroeconomics or policing. They set the current conditions in which policy for the future is set.

The long run consequences of the Little Depression are nowhere near those of the Great Depression, and are unlikely to be so. But people with dangerous views are not so dangerous when life is generally benign, when things it becomes more likely their dangerousness will inflict itself on others. Bad short run outcomes can lead to bad long run outcomes.

For example, look at the United States economy. It badly needs more demand. Congressional Republicans have made the possibility of a default on the US’s debt a real, if unlikely possibility, despite this the US can still borrow incredibly cheaply because growth prospects for the US are so poor. The US badly needs more demand to recover and the Federal Reserve can provide that. However, some members of the Fed refuse to believe they can offer more help. Kocherlakota is one, he presents himself as a Inflation Hawk, keen to defend the little guy from the dangerous threat of inflation.

But, he is in fact an in fact an Inflation Cuckoo, he doesn’t understand how to do his job, he has snuck into a nest of monetary policy experts, but definitely doesn’t belong there. Normally this would not matter, the Fed would err slightly from time to time under his influence, but not so much as to crush an economy. Today his dissent is helping put the United States, and much of the world, halfway towards a lost decade in a way that wouldn’t be possible if macro had been done in the first place. That’s why I’ve stopped saying Great Recession and started saying Little Depression.

Likewise, the petition which calls for rioters to “loose [sic] their benefits forever” is a consequence of getting policing wrong and giving the impression that a third day of rioting wouldn’t be met with a robust enough police response. Once the police were out in force the rioters backed out because they thought they’d be caught.

Now there is little chance of this becoming law. It is frowned upon to change the law after an act to make punishment harsher. It sets up the odd position of rapists being able to claim post-prison benefits when someone who stole a mountain bike will not. It also would need the creation of a large, cumbersome bureaucracy to monitor benefit claims at a time when Government expenditures are being squeezed. But the urge to respond with more authoritarianism will be hard to resist.

The fear of short run failures creates an awful atmosphere in which to focus on achieving long run success. Short run policy may have only weak to no direct effect on long run economic and social trends, but its indirect effects may be far more important.