Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The NSW Bureau of Crime Statistics and Research (BOCSAR) released an interesting study yesterday (March 13, 2012) – The effect of arrest and imprisonment on crime – which might be a strange topic for a Modern Monetary Theory blog to highlight. On the contrary, this type of research provides an invaluable reality check against those who think that entrenched unemployment during a recession is more efficient than fiscal initiatives that aim to directly generate public sector employment. We already know that that the daily real GDP losses that arise from an economy operating at less than full employment are massive. The BOSCAR report adds another loss in the form of higher crime rates. It confirms long-standing research findings that shows that unemployment causes higher property and violent crime rates.
The BOSCAR Report’s release was accompanied by the following Press Release – and attracted press coverage in Australia today.
The BOSCAR Report notes that:
Policy makers, the public and the media have been content to assume that any policy that increases the risk of arrest, the likelihood of imprisonment or the length of a prison term will of necessity result in a decrease in crime.
Indeed, there has been an increasingly strident approach to law and order in the neo-liberal years which has eschewed the previous “welfare society” approach which stressed the societal responsibilities in understanding crime (social exclusion, poverty, deprivation etc).
The Neo-liberal approach stresses individual responsibility and the advantages of free markets. Its rise to dominance has driven the so-called “get tough” approach to the way the state deals with crime (zero tolerance, three strikes and your out, etc) and a proliferation of privatised penal institutions.
I remember a Californian colleague drawing two intersecting lines on a piece of paper once (around 1995) when I was visiting his university. He asked me what they were – and was waiting for me to conclude that they represented a downward-sloping demand curve and upward-sloping supply curve. He told me that the upward-sloping line was the state spending on state prisons in California and the downward-sloping line was the state expenditure on education over time and that the intersection and just being reached.
The neo-liberal approach emphasises increased rates of detention, longer sentences (including mandatory sentencing), and in some nations increased use of capital punishment.
The overall emphasis on cutting government spending but the increased outlays on law and order spending has seen a squeeze on public spending in other areas, especially broad social welfare and education.
The BOSCAR Report says that its:
The central questions of interest in the current study are:
1. Does a higher risk of arrest reduce rates of property and/or violent crime?
2. Does a higher risk of imprisonment reduce rates of property and/or violent crime?
3. Do longer sentences reduce rates of property and/or violent crime?
In tackling these questions, the researchers had to control for other factors including bi-directional causality and the classic problem of “omitted variable bias … that is … [a failure] … to control for other factors that might influence crime”. The control variables used included regional income (for each crime region included), unemployment rates, and a proxy for heroin use.
I won’t go into the specific components of their research design and the econometric techniques they used to overcome the issues that plague these kind of studies. Those who know about these things can read the Report and those who don’t would find the exposition difficult anyway. My conclusion is that the methodology is reasonable and conforms with the best-practice techniques used in this sort of analysis.
The Sydney Morning Herald article (March 14, 2012) – When it comes to crime, harsher punishment doesn’t pay – said that:
Lengthening prison terms will do nothing to reduce crime in NSW, one of the most comprehensive reports on the criminal justice system conducted in Australia shows. The study … found that increasing the risk of arrest and imprisonment were much more effective.
Another major reason for falls in crime in the past decade was an improved economy and employment levels, which provided strong disincentives to crime. A 10 per cent increase in household income was estimated to produce an 18.9 per cent reduction in property crime and a 14.6 per cent reduction in violent crime.
So “increasing the severity of punishments … exerts no effect at all” on crime rates.
The Director of BOSCAR said that:
The best crime prevention tool in the long run is not tougher penalties or more police or better rehabilitation programs, it’s a strong and vibrant economy … If we just divert people from prison and do nothing to stop them reoffending, the money we save on prison will be spent responding to an increase in crime.
The results, which are consistent with studies from all around the world suggest that if we want lower crime rates then the most effective path is to reduce poverty and unemployment and redistribute national income more evenly.
The BOSCAR Report presented the following figures (Figure 3 and Figure 4) which shows the percentage change in property crime (Figure 3) and violent crime (Figure 4) to a one percent change in arrest (green), imprisonment (blue) and income (orange) over time – as estimated from their econometric model.
The BOSCAR Report says that the Figures show “the dynamic path of the change in property and violent crime rates following a one per cent increase in arrest rate, imprisonment rate and income” and:
The slopes of the curves for arrest and imprisonment on property crime (Figure 3) tend to flatten out, or reach a point of equilibrium after approximately 1.8 years. The slopes for arrest and imprisonment on violent crime (Figure 4), on the other hand, tend to take longer to reach the point of equilibrium (around 2.5 years for both). Put another way, the effects of changes in the criminal justice system and economic conditions tend to persist longer on violent crime than those same effects on property crime. This explains why most of the long-run effects are larger for violent crime as shown in Figures 3 and 4 and Table 4. The exception is income, which has higher short-term and long-term effects on property crime than it has on violent crime.
The BOSCAR Report thus concludes that:
1. “the criminal justice system does exert a significant effect on crime but some elements of the criminal justice system exert much stronger effects than others. Increasing the risk of arrest or the risk of imprisonment reduces crime while increasing the length of prison sentences exerts no measurable effect at all”.
2. The impact of income on crime rates “are much stronger than those of the criminal justice variables”. The “income variable is picking up both the effect of an increase in real average weekly earnings and the effect of falling unemployment (the study used data up to 2008 so the impact of the current crisis was excluded).
The substantive conclusion is that:
… measures that affect the economic well-being of the community provide more potential leverage over crime than measures that influence the risk of arrest or the severity of the punishments imposed on offenders.
There are several research papers that find that rising unemployment causes an increase in crime and that reducing poverty and stabilising incomes reduce crime rates. The literature on this topic covers both mainstream and non-mainstream economics research and similar findings are found using different conceptual frameworks.
For example, there was a 2001 US study which was firmly rooted in the mainstream individual choice-theoretic framework used by orthodox economists. The reference is Steven Raphael and Rudolf Winter-Ebmer (2001) ‘Identifying the Effect of Unemployment on Crime’, Journal of Law and Economics, Vol. 44, No. 1 (April 2001), pp. 259-283. It is available from JSTOR if you have access.
Their theoretical approach is to consider “criminal activity as a form of employment that requires time and generates income, a “rational offender” should compare returns to time use in legal and illegal activities and make decisions accordingly. Holding all else equal, the decrease in income and potential earnings associated with involuntary unemployment increases the relative returns to illegal activity”.
That is about as mainstream as one can get. I could write a separate blog critical of that conceptual framework. But like many empirically-motivated research papers, the theoretical motivation is somewhat separable from the empirical strategy and this paper falls into that category.
I would develop a model of social exclusion and desperation with significant demonstration effects (which would emphasise the alienation) that accompanies unemployment and the lack of income support for the jobless.
But having said that, the authors of this paper use standard (and acceptable) econometric methodology and publicly-available data. So even if my theoretical stance differed, it is likely that I would have found the same results as appear in this paper and I used the same dataset.
This paper uses a methodology that allows them to separate out the possibility that “crime rates reverse cause unemployment rates”, which would make standard Ordinary Least Squares regression results biased.
They found that:
1. “unemployment exerts a consistent, positive, and highly significant effect on the total property crime rate”. That is, “higher unemployment unambiguously increases property crime rates”.
2. Using gender-specific unemployment rates taken from the Current Population Survey Local Area Unemployment Statistics Geographic Profile Series” to eliminate the biases encountered in examining violent crimes given that “the offending population is male and the victimized population is female”, they find “the effects on rape of the unemployment rate of the offending population are generally positive and sometimes significant.”
3. Between 1992 and 1997 (using US data) they found “the 2.5 percentage point decline in unemployment caused a decrease of 5 percent for burglary, 3.7 percent for larceny, 2.5 percent for auto theft, and 4.3 percent for robbery. Expressed as a percentage of actual declines, our estimates indicate that 28 percent for burglary, 82 percent for larceny, 14 percent for auto theft, and 14 percent for robbery is attributable to the decline in the unemployment rate. If we look at the overall property crime rate, slightly more than 40 percent of the decline can be attributed to the decline in unemployment”.
… the magnitudes of the crime-unemployment effects presented here relative to overall movements in crime rates are substantial and suggest that policies aimed at improving the employment prospects of workers facing the greatest obstacles can be effective tools for combating crime.
I noted that it is well documented that sustained unemployment imposes significant economic, personal and social costs that include:
- loss of current output;
- social exclusion and the loss of freedom;
- skill loss;
- psychological harm, including increased suicide rates.;
- ill health and reduced life expectancy;
- loss of motivation;
- the undermining of human relations and family life;
- racial and gender inequality; and
- loss of social values and responsibility.
The research also shows that increased crime rates accompanying higher unemployment. Many of these “costs” are difficult to quantify but clearly are substantial given qualitative evidence.
The simplest calculation reveals that the daily income losses alone of having that many people idle dwarf any reasonable estimate of microeconomic losses arising from the so-called “structural inefficiencies” or microeconomic rigidities (a favourite of the IMF) that have dominated public debate over the neo-liberal era.
Those economists who advocate a NAIRU-approach to price stability (including those self-proclaimed “realists” who consider MMT proposals such as the Job Guarantee to be a source of major inefficiency) are in denial when it comes to dealing with efficiency and inefficiency.
A central idea in economics whether it be microeconomics or macroeconomics is efficiency – getting the best out of what you have available. The concept is extremely loaded and is the focus of many disputes – some more arcane than others. But my profession would be united in saying that developing theories about how efficiency is to be attained at any level is a core activity for an economic theorist.
At the macroeconomic level, the “efficiency frontier” is normally summarised in terms of full employment. The hot debate that has spanned the years is what do we mean by full employment but it is a fact that full employment is a central focus of macroeconomic theory.
We consider unemployment (beyond frictional levels) to be a source of inefficiency. No macroeconomic theory (or policy approach) would consider it unreasonable to aim to use our macroeconomic resources to the limit of their potential. The debate is what that limit actually is.
Those who prefer unemployment to a Job Guarantee during a recession fall into the category of economists who consider waste to be superior to productive use of labour.
It is just plain madness to ignore the huge costs that accompany such unemployment and then go about pursuing small costs (if they exist). One of the problems is that in pursuing these micro costs the government almost always will increase the macroeconomic costs.
We know that the losses encountered during a prolonged recession reverberate into tortured recoveries and that the damage that unemployment causes spans the generations.
Even before the crisis hit, these costs in most countries were huge as policy makers began using unemployment as a policy tool rather than a policy target as the obsession with inflation-targetting took hold.
Most people do not consider the irretrievable nature of these losses. Every day that unemployment remains above the full employment level (allowing for a small unemployment rate arising from frictions – people moving in-between jobs) the economy is foregoing billions in lost output and national income that is never recovered.
The magnitude of these losses and the fact that most commentators and policy makers prefer unemployment to direct job creation, shows the powerful hold that neo-liberal thinking has had on policy makers. How is it rational to tolerate these massive losses which span generations?
As noted, to some extent these losses are a mystery to society in general. While the unemployed and their families are certainly aware of them, the remainder of the society are less aware. For example, we might notice rising crime rates in our neighbourhoods but do not associate it with unemployment.
Neo-liberalism has also changed the way we think about unemployment. In the past we understood clearly that it arose as a result of a shortage of jobs.
However, in recent decades, we have been conditioned by a relentless (lying) press and government statements to perceive unemployment as an individual problem. So the unemployed are type-cast as being lazy; having poor work attitudes; refusing to invest in appropriate skills; and subject to disincentives arising from misguided government welfare support, and all the rest of the arguments that mainstream uses to obfuscate the social problem.
The focus in the public debate is to “blame the victim” and suggest that most are unemployable and prefer to live on welfare, where that support is available.
The overwhelming evidence from the informed research literature is that almost all the unemployed (when surveyed) prefer to work and are willing to take work if offered. The research shows that the unemployed are highly motivated to find work and are victims of a shortage of jobs rather than personal/individual deficiencies.
The dominance of the neo-liberal ideology led governments in most countries to have eschew the adoption of policies of direct job creation to reduce the rate of unemployment and to minimise these massive costs. Fiscal policy has became geared to the achievement of budget surpluses as some sort of token of prudent financial management.
After the release of the OECD Jobs Study, employment policy shifted from a demand-side emphasis (ensuring there were enough jobs) to a supply-side focus (active labour market policy) which targetted individuals with futile training programs divorced from a paid-work context and pernicious welfare-to-work rules.
While the governments were pursuing labour market deregulation and attempting to retrench the Welfare State in the face of persistent unemployment they were also deregulating financial markets. The lack of oversight of the latter is the fundamental reason we are now enduring the worst crisis in more than 80 years.
And now this Report from BOSCAR provides a further insight into why policies that target low rates of unemployment are beneficial – quite apart from the massive daily real GDP losses the overall society endures.
A low unemployment society enjoys lower crime rates and lower overheads that accompany high crime rates. If you have ever been to South Africa you will know that the security business is one of the fastest growing sectors and high income-earners live “trapped” lives behind large policed fences – which protect their gardens and housing.
By providing jobs at reasonable wages (so the minimum wage should allow for a socially-acceptable standard of living) to those who want to work the state is also ensuring lower crime rates exist.
Studies such as this should give policy makers pause for reflection on the strategies they use to deal with negative aggregate demand shocks. The neo-liberal approach is to tolerate the entrenched and high unemployment that results as they attack the fiscal capacity of the state to deal with it.
What will future crime rates be like in Spain and Greece and the UK as youth unemployment sky-rockets. In Spain, there are now around 50 per cent of available youth unemployed.
The current dominance of fiscal austerity will not only ensure real GDP losses are large but will also see rising crime rates and social dislocation. For those that have employment, we will have increased outlays on alarm systems, insurance schemes and the rest of the personal costs involved in defending our property and life.
The neo-liberal answer to the crime rates will be to get tougher – it will only worsen the situation.
Tomorrow, unless something else comes up I plan to answer a myriad of questions that I have been sent about MMT.
That is enough for today!