Measuring The Cost Of Austerity

Simon Wren-Lewis

Simon Wren-Lewis

How do we count the cost of fiscal austerity? The most obvious question to ask, at least for a macroeconomist, is how much higher GDP would be without it. This is what Oscar Jorda and Alan Taylor did in some recent research, which I discussed in this post. All I did in my post was translate this percentage into the amount of output lost per household, because I think that kind of number is easier for non-economists to relate to.

Many macroeconomists today might point out that this is an overestimate of the true cost of austerity, because to the extent that we are collectively producing less because we are working less, we should offset this GDP number with the benefit of the extra leisure we are enjoying.

Many other people, including I hope some macroeconomists, might think that was just silly, and gets things the wrong way round. To the extent that this fall in GDP is associated with a rise in unemployment, that increase in unemployment does much more harm than the amount of goods that unemployed person might otherwise have produced. Chris Dillow has a useful post on this, and the evidence is in my view overwhelming. Exactly why macroeconomists continue to get this backwards will have to be the subject of another post.

David Stuckler, who is in the sociology department at Oxford but who I do not think I have ever met, looks more generally at the impact of austerity on health. Together with Sanjay Basu from Stanford, they have written a book called ‘The Body Economic: Why Austerity Kills’. There is a NYT OpEd by them here, a Mark Thoma synopsis here, and for those who like podcasts an interview (with transcript) here. What Stuckler and Basu do is essentially cross examine a large amount of health data across countries and across time, looking at the relationship between recessions and particular austerity measures with health, including deaths. The examples are varied and interesting: for example how improvements in child mortality and reductions in tuberculosis and whooping cough in the 1930s were correlated with the extent to which state governors embraced Roosevelt’s New Deal (will we see the same with Obamacare?), to how HIV has increased and malaria returned to Greece as a result of health cutbacks.

Of course what we are talking about here are particular forms of fiscal tightening: cuts to welfare and health programmes in particular, but more generally measures that hit the vulnerable poor rather than the rich. A programme to reduce government deficits that only involved increasing taxes on the reasonably well off would have a far less serious impact on health. Their book is also about how best to use public money to most effectively improve health outcomes, and how cutting this money in the short term not only has a negative impact on health, but can also raise costs in the longer run.

For this reason, it would be pointless to say that X amount of fiscal contraction leads on average to some Y deterioration in health outcomes. Nevertheless, the frustration the authors clearly feel is self evident. Talking of the UK government’s new regime for disability testing, they say “It was hard for us, as public health researchers, to understand the government’s position. The Department for Work and Pensions, after all, considered cheating a relatively minor issue.” Talking more generally of austerity, David Stuckler says: “These are massive uncontrolled experiments with entire populations. Had austerity been organised like a drug trial, with a board of ethics, it would have been discontinued, given evidence of its deadly side-effects and the failure of its purported economic benefits to accrue.”

Now some might say that because austerity need not necessarily involve measures that have large negative health outcomes, statements like this, and indeed the title of their book, is alarmist. This is similar to the Troika saying that they are quite right to insist on fiscal contraction so that the interest on Greek loans can be repaid, because it is up to the Greek government how it chooses to reduce its deficit. Typically, however, the same people who make that kind of excuse are also those who want to direct austerity to cutting spending rather than raising taxes, and who complain about the ‘burden’ of social programmes.

Let me end by quoting the conclusion of their New York Times article. “One need not be an economic ideologue — we certainly aren’t — to recognize that the price of austerity can be calculated in human lives. We are not exonerating poor policy decisions of the past or calling for universal debt forgiveness. It’s up to policy makers in America and Europe to figure out the right mix of fiscal and monetary policy. What we have found is that austerity — severe, immediate, indiscriminate cuts to social and health spending — is not only self-defeating, but fatal.”

This column was first published on Mainly Macro


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