Why Austerity Kills

By Dr. John Millar

In a recent book ‘The Body Economic – Why Austerity Kills. Recessions, budget battles, and the politics  of life and death’, David Stuckler and Sanjay Basu review the evidence from a worldwide natural experiment in political economic approaches to dealing with recessions: ‘austerity’ vs. ‘stimulus’ (http://thebodyeconomic.com/).

The Body Economic by Stuckler and Basu

The Body Economic by Stuckler and Basu

The austerity approach aims to reduce government debt and deficit by cutting government expenditures (healthcare, education, housing, unemployment) and privatizing as many services and businesses as possible. The stimulus approach is more tolerant of debt and deficit and maintains government investments in social services such as healthcare, education and unemployment. The most drastic austerity approach was applied in Russia in the 90s driven by a concern that once the Soviet Union collapsed, a rapid transition to capitalism was needed to prevent a return to communist political control. The approach advocated by economists such as Jeffrey Sachs and Milton Friedman was called ‘Shock Therapy’: massive rapid privatization and deep cuts to government healthcare and other services. The result was widespread unemployment and poverty and 10 million deaths (life expectancy dropped by 7 years). The deaths were mostly working age men due to suicide and alcoholism. The health of the population has still not recovered. Shock Therapy was successful in establishing capitalism but in a highly inequitable form: wealth concentrated in the hands of a few, an oligarchy.

Other countries from the Soviet bloc such as Poland and Belarus took a more gradualist approach as recommended by Joseph Stiglitz: slower privatization and the maintenance of essential social programs such as healthcare and education. This avoided a deterioration of population health and a quicker economic recovery.

In Southeast Asia in the late 90s, an austerity regime imposed by the IMF on Thailand resulted in widespread poverty, unemployment and hunger followed by a rise in HIV, suicide and infant mortality. By contrast Malaysia took a stimulus approach resulting in few negative health effects and a more rapid economic recovery.

When a severe recession hit Iceland in 2008, demands by the IMF for austerity were democratically resisted. So instead of austerity, healthcare spending was increased, a job-matching program was funded and debt relief provided by government for small businesses to sustain employment levels. As a consequence population health improved, homelessness was avoided and the economy made a good recovery (although many off-shore investors were left with considerable financial losses). And Iceland remains healthy and the happiest of all nations.

In Greece, Italy and the UK various forms of austerity have had serious health impacts including HIV epidemics, increased suicide rates and widespread hunger. And their economies have been slow to recover. By contrast, Sweden has invested in employment programs and maintained social programs thus preserving good population health and the economy.

The authors have three recommendations for dealing with recessions:

  1. “First do no harm”: ensure that government policies are reviewed for their health impacts.
  2. Help people return to work.
  3. Maintain social programs such as prevention and healthcare.

The evidence that emerges from this vast natural experiment in economics and population health is that an ‘austerity’ approach (smaller government, cutting taxes, balanced budgets, cutting social programs, privatizing and relying on economic growth and ‘trickle down’) has a damaging effect on population health and results in slower economic growth. In recessions, more government investment in important social programs such as healthcare, housing, education and skills training, jobs and unemployment services stimulates the economy, preserves the health of the population, reduces poverty and homelessness and results in a more rapid and equitable economic recovery.

To quote Stuckler and Basu: “Ultimately austerity has failed …because it is an economic ideology…that stems from a belief that small government and free markets are always better than state intervention. It is… a convenient belief among politicians taken advantage of by those who have a vested interest in shrinking the role of the state, in privatizing social welfare programs for personal gain. It does great harm…punishing the vulnerable”.

The lesson for Canada and BC is that, while economic growth and job creation are important elements of economic recovery there must also be public investments in social support programs. This will lead to a more rapid economic recovery, shared prosperity and improved population health.

Dr. John Millar

Dr. John Millar

– John Millar is a Clinical Professor Emeritus , University of British Columbia School of Population and Public Health, and Vice President of the PHABC.

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