Sheffield Political Economy Institute (SPERI) Annual Conference Austerity vs. Growth: the Future of European Political Economy Sheffield July 3, 2013

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1 Sheffield Political Economy Institute (SPERI) Annual Conference Austerity vs. Growth: the Future of European Political Economy Sheffield July 3, 2013 The Great Recession and Health: From Neoliberal Austerity to Healthy De- Growth? Roberto De Vogli 1,2 1 School of Medicine, Department of Public Health Sciences, University of California Davis 2 Department of Epidemiology and Public Health, Division of Population Health, University College London, London, UK.

2 Manuscript (words): 5,528 Article (words): 7,986 Abstract (words): 285 Figures: 6 References: 86 Correspondence to: Abstract Roberto De Vogli, School of Medicine, Department of Public Health Sciences, University of California Davis. One Shields Ave. Med Sci 1-C Build. Davis, CA ( In 2008, the world experienced the worst financial crisis since the Great Depression. The crisis is the cumulative effect of macroeconomic changes initiated in the 1970s, which resulted in indiscriminate capital flow, excessive financial deregulation and high concentrations of income and wealth in the top distribution. More specifically, the economic downturn is a product of the global advent of the neoliberal policy paradigm and the diffusion of the free market efficiency ideology. Evidence indicates that the Great Recession led to increases in unemployment and suicides rates in Europe and the United States. Analyses on the health impacts of previous financial downturns showed that, in developing countries, adult and infant mortalities increased in times of economic shock. However, data also suggest favorable health trends. The crisis is associated with a reduction in road-traffic mortality rates and numerous studies have reported health improvements in times of recession and stagnation (healthy de-growth).

3 So far, policy responses to the crisis have failed to restore economic stability and address its underlying causes. They have consisted of large bailouts for the toobig-to-fail banks and austerity and budget cuts for the general population. If continued along these lines, these reforms risk hampering progress in public health worldwide. Redistribution and new regulations at the national and global level are necessary to restore economic stability. These changes, however, require the abandonment of neoliberal policies and ideology to craft a new global political economy in which markets are means to human ends, not vice versa. The crisis is certainly not over, and prospects for economic recovery remain uncertain, yet evidence suggests that governments can achieve a regime of healthy de-growth if they adopt strong social protections and a more egalitarian distribution of wealth. Keywords: Great Recession, Health, Financial Crisis, Neoliberalism, Austerity and Global Health Introduction

4 In 2008, the world experienced the worst economic crisis since the Great Depression. The Great Recession originated in the US with the crisis of subprime mortgages - high-interest loans given to otherwise unqualified individuals. These loans often included low interest rates that increased sharply after an initial period of time. Brokers then sold the scheduled repayments of these mortgages to Wall Street investment banks that pooled the risky loans and re-packaged them into mortgage-backed securities (securitization). After the securitization process, investment firms insured these securities through credit-default swaps - financial derivatives intended as forms of protection against bad loans - and re-sold the risk attached to these securities to other financial institutions. The proliferation of subprime mortgages and the rapid diffusion of credit-default swaps, created a discrepancy between the real and actual value of houses. When in 2008 this housing bubble inevitably burst the subprime mortgages market and the US economy deteriorated. As housing prices fell, those unable to meet the loan repayments no longer had the option of selling their properties to avoid bankruptcy. Since nobody knew which financial institutions were holding the toxic assets, banks stopped lending to each other and companies could no longer borrow money. Indebted consumers stopped spending, and the housing market collapsed. The stock market crashed and some banks virtually disappeared overnight. These failures emanated waves of shock throughout the entire economic system, resulting in the first global financial crisis in history. The crisis quickly spread to other economic and social sectors. It dissolved millions of jobs, generated countless foreclosures, increased poverty, reduced spending and consumption, and pushed innumerable companies into bankruptcy. Beyond the economic and social consequences, the Great Recession also resulted in changes in the health status of entire populations, worldwide. The aim of this article is to review studies on the health effects of the Great Recession and the historical evidence on associations between financial crises and health. Before addressing the health consequences of the crisis, this article investigates the main causes of the Great Recession in the context of the global

5 advent of the neoliberal policy paradigm and the diffusion of the ideology of free market efficiency. The paper concludes with a discussion of the policy responses to the crises and a list of potential solutions to restore financial stability and prosperity while promoting or safeguarding global health. The Causes of the Great Recession Indiscriminate Capital Mobility, Excessive Market Deregulation and High Concentrations of Wealth in the Top Distribution Although most authors would agree that the Great Recession was a product of multiple causes, there is a wide disagreement about the relative importance of these determinants. Free market economists and neo-conservative think tanks maintain that the drivers of the first financial crisis were unwise regulations (Calabria, 2009; Nichols, Hendrickson, & Griffith, 2011) and excessive government intervention in the economy (Taylor, 2009b). Most liberals and social democrats, however, argue exactly the opposite. What does the evidence suggest? Figure 1 shows trends over time in the frequency of banking crises and an index of international capital mobility (Kaminsky & Reinhart, 2008). Data show that financial crises are usually preceded by periods of rapid capital expansion and speculation. Both the 1929 Great Depression and the 2008 Great Recession were anticipated by years of excessive capital flow (Kaminsky & Reinhart, 2008), and deregulation of financial markets. The era preceding the 1929 crisis comprised large-scale global investments and indiscriminate financial movements across borders. As occurred in 2008, the unleashing of speculative financial markets at the end of the 20s produced a gigantic bubble (in this case in the stock market) that burst, causing one of the worst epidemics of banking crises and economic depression in history (B Eichengreen & Fishlow, 1998). The frequency of banking crises was very low during the post-war period ( ); a time characterized by low levels of capital mobility worldwide due to effective capital controls and fixed exchange rates. This clearly suggests the risk of financial crashes is augmented by too little, not too much government regulations, a view that even

6 some who formerly championed for market deregulations are finally supporting (Posner, 2009). [Fig. 1] However, the economic conditions that preceded the Great Depression and the Great Recession also present important similarities in not only excessive international capital movement, but also in the high concentration of wealth and income in the top distribution. The decades that preceded both crises were times of stagnating workers wages and skyrocketing profits for a minority of rich investors and corporations in the US where both global crashes originate. Figure 2 shows historical trends over the last century in the US, on the percentage of income owned by the top 1% of the population and fluctuations over time of a financial deregulation index (Philippon & Resheff, 2008). The combination of these trends portrays some striking parallelisms: peaks of economic inequalities coincided with peaks of excessive deregulation of financial markets (or financial liberalization.) When supplementing these trends with those presented in Figure 1, it is possible to infer that the two greatest global crises in recent history were associated with indiscriminate capital mobility, high concentration of income in the top distribution and excessive market deregulation. [Fig. 2] There are various mechanisms connecting income inequality and crises. As the wealth gap widens, more money flows to the top social classes, while workers wages stagnate or decline. As the wealthy escalate their spending, they induce the rest of society to follow suit. This forces the poor and the middle class to overborrow money. As Figure 3 shows, between 2003 and 2007, US consumer debt more than doubled (Kumhof & Ranciere, 2011). A similar trend also occurred from 1925 to 1929 (Kindleberger, 1986). While promoting consumers indebtedness, high inequalities in wealth and income provide the wealthy with large amounts of surplus capital to invest in short-term gains and highly speculative financial assets. Together with the deregulation of financial markets, both heavy borrowing at the

7 bottom and over-investment in short-term profiteering at the top promote price distortions and asset bubbles. Since the prices of assets cannot increase forever, these inflations can lead to financial meltdowns. [Fig. 3] High inequalities also promote financial instability through regulatory or policy capture: when governments, instead of making decisions based on public priorities, advance the special interests of certain groups. In the last two decades, governments have been increasingly dominated by the vested interests of powerful financiers, who have acquired enough economic and political power to push for policies that promoted financial deregulation. Although financial liberalization has proven to be disastrous for the general population, these policies have also resulted in redistribution of income from the bottom to the top wealth quartiles (Anderson, 2009; Cassidy, 2009; Gills, 2008; Keys, Mukherjee, Seru, & Vig, 2010; Obstfeld & Rogoff, 2009; Stiglitz, 2004; Taylor, 2009a). In addition to multiples authors supporting the causal nexus between inequality and crises (Rajan, 2010; Reich, 2010), even IMF economists have recently argued for restoring the bargaining power of low income groups as the most effective strategy to prevent future meltdowns (Kumhof & Ranciere, 2011). However, indiscriminate capital mobility, excessive market deregulation and high inequalities are not the ultimate causes of the Great Recession. These historical trends are the effects of the global advent of the neoliberalism and the diffusion of free market efficiency ideology. More Than Thirty Years of Neoliberal Policies The two decades after World War II were characterized by government interventions promoting employment and financial stability. Banks were highly controlled by government and were viewed as public utilities, while usury and reckless investing were discouraged. In the US, the period following the approval of the 1933 Glass-Steagall Act, had the fewest amount of banking failures in

8 history (Moss, 2009). Between 1945 and 1971, developing countries experienced no banking crises, 16 currency crises and only one simultaneous banking and currency crisis; (Barry Eichengreen & Bordo, 2002). At the time, there was the Bretton Wood System of fixed exchange rates, in which every nation agreed to exchange its currency at a fixed rate for a certain amount of US dollars -- the US government exchanged dollars on demand for gold at a rate of $35 per ounce. During this system s operation, there were no abrupt exchange rates fluctuations (Bordo, Eichengreen, Klingebiel, & Martinez-Peria, 2001). By the beginning of the 70s, however, the neoliberal revolution began. In August of 1971, Richard Nixon unexpectedly subverted the fixed exchange rate system, thereby re-structuring the global financial system. This marked the ending of the age of economic stability, and a new era of high finance and speculations gradually re-emerged. With the fixed exchange rate system abandoned, national currencies were no longer tied to anything of real value. As a result, economies became more vulnerable to unpredictable fluctuations in exchange rates, speculative attacks and rapid capital flight. Consequentially, since the 1970s, currencies have become three times more volatile on average (Patomäki & Teivainen, 2004). Currency transactions increased 200-fold, experiencing a daily turnover volume estimated at $3.2 trillion in 2007 (BIS, 2007). After the Nixon shock, financial deregulation spread rapidly to the rest of the world. Reforms included lifting controls on international capital movements, the privatization of national banks, the deregulation of interest rates, the elimination of credit controls and the escalation of financial innovations - including the derivatives that caused the 2008 crisis (Philips, 2008). Deregulation policies created a playing field for the rapid, undisturbed and untaxed movement of capital worldwide, and indirectly encouraged the concomitant proliferation of offshore financing to the Cayman Islands, Andorra, Monaco, Bermuda, and Switzerland. While some maintain that the rise of neoliberalism was a neo-conservative plan, this argument is not entirely adequate. Let us consider the US. In 1982, Reagan approved the Garn-St. German Depository Institutions Act, which eliminated

9 regulations on the savings and loans industry, allowing banks to start commercial lending programs and to invest in corporate bonds. In 1984, Reagan escalated deregulation by introducing securitization: the Secondary Mortgage Market Enhancement Act provided investment banks with new opportunities to buy mortgages, pool them, and resell them in slices with varying levels of risk. They could, then, issue securities backed by these pools to the lenders, who could then sell them to investors. By the time that this act was approved, the building blocks of the global financial artchitecture that led to the crisis were set in place. However, Clinton equally contributed to escalating financial deregulation policies, particularly by passing the 1999 Gramm-Leach-Bliley Act. This bill marked a watershed in the proliferation of the financial products that caused the last global crisis. It repealed the 1933 Glass-Steagall Act- which was developed by Roosvelt in response to the 1929 crash - to dismantle several banking regulations as a means of controlling speculations. Specifically, the bill abolished the wall separating investment banks from commercial banks, and insurance companies. It also repealed requirements for banks to hold specific levels of cash reserves. The rescinding of the Glass-Steagall Act allowed large commercial lenders to underwrite and trade very profitable new speculative instruments. However, it was the passage of the Futures Modernization Act in 2000 that completed the financialization of the US economy, by repealing all bans against single-stock futures, and prohibiting federal regulation of over-the-counter derivatives including the infamous mortgage-backed securities. (Kloner, 2000) The undoing of the New Deal s and Bretton Wood System s most important regulations caused radical changes not only in the US, but worldwide. Since the 1990s, multiple new financial products such as currency derivatives, credit-default swaps, and mortgage-backed securities have quickly proliferated. Particularly in the new century, the derivatives market embraced almost anything at hand from trading the future value of currencies, food and oil, to gambling with the prospect of weather conditions. By 2008, over-the-counter derivatives surged to $680 trillion (BIS, 2010). In the same year, credit-default swaps reached over $50 trillion,(tett, 2009) while mortgage-backed securities rose to $3 trillion in 2007

10 (Johnson & Kwak, 2010). The indiscriminate proliferation of complex financial instruments that both created and burst the housing bubble did not concern most free market economists, however. The proponents of financial innovation justified the introduction of these risky instruments on the ground that they were conducive to stability and wealth creation (Edmunds, 1996; Geithner, 2008). Since the abandonment of the Bretton Wood System and the beginning of a new financial liberalization era, however, the world experienced more stock crashes, economic recessions, banking suspensions and banking failures than before (Moss, 2009). Prior to the 2008 financial collapse, the worst economic shocks affected low and middle-income nations. Between 1973 and 1997, developing countries experienced 17 banking crises, 57 currency crises and 21 twin crises (Barry Eichengreen & Bordo, 2002). In the years following, crises continued to strike all over the world, especially in Latin America and Eastern Europe. However, rather than questioning the effects of global neoliberalism, prominent commentators pointed their fingers at the inefficiency and corruption of national governments as causes of these crises (Friedman, 1999). The Market Efficiency Ideology For more than 30 years preceding the crisis, the theory that markets are essentially self-correcting and require little or no government intervention remained virtually unchallenged among free market economists. Whistle-blowers, who warned about the trouble of the housing bubble, were treated with derision. In 2006, the year before the beginning of the financial collapse, the IMF assured everyone that, notwithstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008 (Makridakis, Hogarth, & Gaba, 2009). Yet, even after the crisis, many free market economists and media pundits persist in blaming government interventions or consider the economic meltdown an unforeseen error of an otherwise well-functioning economic system an anomaly like a black swan. However, various authors have warned that when left

11 unchecked, financial markets are crises-prone. Richard Kindleberger (2001), highlighted that bursts of speculation, economic bubbles and crashes are common features of capitalism. Similarly, Hyman Minsky (1982) argued that unfettered market economies tend to be periodically exposed to surges of speculation and cycles of boom, bust and depression (Kindelberger, 2001). However, Karl Marx was the first to provide a systematic, critical account of capitalism and describe its inherent predispositions. First, he recognized that capitalist societies are inexorably affected by continuous revolutions of the mode and means of production (Marx, 1980), since market actors are on a perpetual search for new strategies to maximize profit and out-compete rivals. The imperatives of a constantly expanding market, and capitalism s universalizing tendency to go beyond its limiting barriers, inevitably promote a continuous metamorphosis of the economic order (Marx, 1973). This was later defined as creative destruction, a process of unlimited business innovation, in which old markets are continuously destroyed and perpetually replaced by new, emerging ones (Schumpeter, 1943). In effect, the last global crisis was triggered by an indiscriminate proliferation of financial innovations developed out of the inherent tendency of market societies to perpetually devise new methods of accumulating capital. Perhaps, the most important contribution Marx left to posterity, however, is his insights on the anarchy of the market, or the idea that capital is inherently uncontrollable (Marx & Engels, 1848/1998). Today s world dominated by hordes of hedge funds, mutual funds, investment banks and futures, that make countries more vulnerable to bankruptcies, layoffs, cuts in social spending and civic unrest fits within this hypothesis. In spite of the importance of these insights economist John Maynard Keynes, questioned the anarchy of the market hypothesis. Although Keynes did not challenge the fundamental assumption that unfettered free markets have a builtin predisposition to crash at intervals, he showed that it is possible to reduce the risk of financial instability. Indirectly, the post-war era of financial stability and economic prosperity supports this: unfettered free markets may have an

12 inclination to crash from time to time, but if governments regulate them effectively they can function efficiently and advance human quality of life. The Great Recession and Health Since the beginning of the 2008 financial crisis, The World Economic Forum estimated that 40% of the world wealth has evaporated (Conway, 2009b). Since the eve of the meltdown in 2007, global unemployment has increased by more than 30 million people, and 60 to 100 million people in low-income counties have been pushed into severe poverty (ILO & IMF, 2010). But, how has the financial crisis also affected our health? Health Effects of the Great Recession Since the eruption of the global financial meltdown there has been a general increase in Europe s suicide rates, reversing a decade of steady declines (D. Stuckler, Basu, Suhrcke, Coutts, & McKee, 2009). Figure 4 shows trends over time of standardized death rates for self-inflicted injuries in Europe, confirming that suicide rates declined until 2007 to then shift direction and rise for at least three years from 2008 to 2010 (data for 2011 and 2012 are not yet available). [Figure 4] In Greece, a country hard hit by the crisis, suicides have increased by 17% from 2007 to 2010 (Kentikelenis et al., 2011). Moreover, there was a 40% rise in the first half of 2011 compared with the similar period in 2010, with suicide attempts significantly elevated among persons with high scores of economic distress (Economou, 2011). In Italy, another country heavily affected by the Great Recession, between 2008 and 2010, there were about 290 suicides and attempted suicides in excess attributable to the crisis (De Vogli, Marmot, & Stuckler, 2012). [Figure 5]

13 The Anglo-Saxon world has also experienced the effects if the financial downturn. A study conducted by Reeves and colleagues (2012) estimated that during the recessionary period after 2007, there were an estimated 4750 excess suicide deaths in the US. In the UK, between 2008 and 2010 there were an estimated 846 more suicides among men and 155 more among women than expected based on historical trends (Barr, Taylor-Robinson, Scott-Samuel, McKee, & Stuckler, 2012). These findings are consistent with previous studies that found similar associations after economic crises experienced in other wealthy nations, including Japan and New Zealand (WHO, 2009). Historical evidence also showed a sharp increase of mortality and suicides in Eastern Europe after the collapse of the former Soviet Union and the implementation of economic shock therapy, a particularly radical version of austerity and neoliberal economic reforms (De Vogli & Gimeno, 2009). How has the Great Recession affected population health in the developing world where large proportions of population already live in poverty? Although little or no research has investigated the association between the 2008 financial meltdown and health in low and middle-income countries, historical evidence shows that economic shocks have increased adult and child mortality rates in Thailand, Mexico, Peru, Indonesia and other developing nations (Baird, Friedman, & Schady, 2009; WHO, 2009). Another review indicated that in developing regions such as Africa, low-income Asia and Latin America, recessions are associated with increases in infant mortality and worsening nutritional outcomes (Ferreira & Schady, 2009). Healthy De-Growth : Health Improvements in Times of Recession While financial crises are associated with rising unemployment, social instability and the rise of suicides, evidence also shows that they can generate positive health outcomes. Although the 2008 economic downturn led to increased suicides rates in Europe, there has also been an overall reduction of all-cause mortality rates, The crisis has been very harmful for those who have lost their jobs and businesses, but overall, at the population level, the negative effects of

14 the crisis have been compensated by the positive effects in the average health of the rest of the population. Several studies have reported an overall reduction in mortality during times of economic recessions, except for suicide rates (Gerdtham, 2006; Ruhm, 2008a, 2008b; Tapia-Granados, 2005a, 2005b, 2008). Similarly, a review of economic recessions in Europe between 1970 and 2008 found that, although suicides tended to rise, road traffic fatalities fell, producing a slightly favourable net effect on overall mortality (D. Stuckler, Basu, S, Suhrcke, M, Coutts, A, McKee, M, 2009). In effect, during economic recessions, health outcomes may improve, not only because of a reduction of road traffic fatalities, but also because of a decrease in exposure to dangerous working conditions, overwork and pollution. Recessions may also increase leisure time which, in turn, can lead to health- and wellbeingenhancing activities. Favorable health outcomes in times of crises are more likely to be experienced by nations with stronger social protection and higher social spending. Access to social buffering mechanisms allows people to re-integrate into the workforce after job loss, through income subsidies and programmes. Evidence shows that these types of support decrease risks of depression and suicidal ideation (Jäntti, 2000; Vuori, 2002). Furthermore, the association between unemployment and suicide varied according to the level of investment in unemployment and family support programmes: in countries with low investment such as Spain, there was a positive correlation between unemployment and suicide; in countries with high social investments such as Sweden, however, a sharp increase of unemployment resulted in suicide reductions (D. Stuckler, Basu, S, Suhrcke, M, Coutts, A, McKee, M, 2009). A study comparing the effects of the 1997 financial crisis in Thailand, Indonesia and Malaysia found that, although the crisis increased mortality rates in Thailand and Indonesia, Malaysia did not experience similar adverse health effects because it rejected the IMF and World Bank structural adjustment programs that required cuts of government spending and austerity in times of financial hardship (Hopkins, 2006). Another study on the transition of Eastern European countries after the 1989 collapse of the former Soviet Union showed that nations which

15 borrowed from the IMF - versus those which did not - implemented greater government budget cuts and had about 18% greater tuberculosis incidence rates. A study on the US Great Depression found American states that introduced greater social welfare spending as a result of the New Deal experienced faster reductions in infant mortality, respiratory diseases, and all-cause mortality (Fishback, 2007). Evidence also shows that recessions do not necessarily lead to worsening health outcomes when governments commit themselves to a more egalitarian distribution of resources. Notable examples of healthy de-growth - rising life expectancy in times of economic recession include those experienced by Japan and Finland. In the 1990s, Japan suffered an economic recession that lasted for more than a decade, but experienced faster reduction in chronic diseases mortality than in preceding years of economic growth (Kondo, Subramanian, Kawachi, Takeda, & Yamagata, 2008). As for Finland, the collapse of the Soviet Union in 1989, a nation with which Finland had strong economic relations and trade ties, caused the Finnish s GDP to drop by a third. Surprisingly, the Finnish all-cause mortality rate also dropped - more sharply during this recession than in the subsequent economic boom. As incomes fell, alcohol consumption declined by more than 10% and road traffic injuries dropped by one-half (Valkonen et al., 2000). Another revealing case of healthy de-growth, has been experienced by Cuba after plunging into an economic crisis following the special period after the collapse of the former Soviet Union. Cuba faced an oil and economic crisis that severely undermined its food production system. In spite of the sudden deterioration of its economy, the health of the Cuban population actually improved (Franco et al., 2007). Between 1989 and 1993, while the Cuban Gross National Income (GNI) in international dollars per capita decreased by almost 20% - from $2,539 to $2,040 - life expectancy at birth steadily increased from 74.4 to 74.7 years. [Figure 6]

16 How did Cuba perform such a healthy transition? As oil reserves shrank, the country quickly adopted policies toward sustainable agriculture. Farmers began specializing in organic farming, and started to produce food for local consumption organizing into small cooperatives, local farming communities and urban gardens. As Cubans returned to their traditional diets, they sharply reduced consumption of saturated fats and red meat. As the price of oil became unaffordable, Cuban people walked and used bicycles more. This natural experiment resulted in improved health standards: obesity fell along with death rates attributable to diabetes, coronary heart disease and stroke (Franco et al., 2007). Policy Responses to the Great Recession: From Austerity to Rules, Regulations and Redistribution The social, economic and health effects generated by the Great Recession required prompt government interventions to rescue not only failing banks, but also those populations most adversely affected by the crisis. The countermeasures to aid the banking system were rapid and very generous. Governments used large sums of taxpayer money to buy the toxic mortgage debts that had accumulated from reckless investments during the years of financial speculation by the socalled too-big-to-fail banks. There were also reforms to the financial sector. In June 2010, the Obama administration approved a bill containing a series of financial regulations and rules on consumer protection (New York Times, 2010). However, these reforms did very little to regulate the derivatives at the root of the crisis and lacked any measure to impose size limits on the too-big-to-fail banks. The bill also failed to re-establish the barrier between the deposit and investment activities of banks. In Europe, too, there have been some policy proposals for reregulating the financial system. However, none have succeeded in regulating the derivatives market at the root of the crisis and reducing the size of big investment banks. Strikingly, although governments provided bailouts for the banks that caused the crisis, there were no specific interventions to buffer the people who have lost

17 their jobs, houses and companies due to the crisis. On the contrary, the victims of the downturn contributed to foot the bill for austerity packages. IMF economists estimated that, worldwide, the bailouts cost taxpayers a staggering $11.9 trillion, about a fifth of the entire globe s annual economic output (Conway, 2009a). In spite of the evidence indicating that austerity programs are detrimental to health standards, governments have passed a series of reforms that reduced access to basic human services in the healthcare, education and social sector that are critical in buffering vulnerable people from the adverse effects of financial crises. The politics of austerity and budget cuts revealed to be disastrous not only from a public health perspective, but also from an economic viewpoint. The Eurozone, where stringent relentless austerity policies have been implemented, most countries have reduced budget deficits relative to GDP with negative consequences including declines of GDP per capita and sharp rises of unemployment rates and public-debt-to-gdp ratios (EUROSTAT, 2013). In a recent empirical analysis, even the IMF, that championed austerity and structural adjustment programs in the developing world for over three decades, admitted that fiscal consolidation has contractionary effects on private domestic demand and GDP (Guajardo, Leigh, & Pescatori, 2011). While austerity reforms have worsened economic indicators and likely contributed to the rise of suicides in the Eurozone, very little has been done to address the root causes of the Great Recession: indiscriminate capital volatility, financial market deregulation and high concentration of wealth in the top distribution. 1. Rules to curb excessive capital flow, derivatives and speculation The 2008 financial collapse and the proliferation of financial crises since the late 1970s clearly showed that economic downturns are contagious; thus, they need to be addressed globally. They also demonstrated that the crises occurring during the neoliberal era share a common cause: the failure to regulate and restrict the massive amount of speculation and capital flow worldwide (Eatwell & Taylor, 1999). In 2010, two years after the financial collapse, the total volume of foreign currency transactions was about $955 trillion, off-exchange trading of financial

18 derivatives was estimated at $601 trillion and volume of shares and bonds was about $87 trillion. The value of all goods and services produced in 2010 or global GDP was $63 trillion (Central Intelligence Agency, 2013). In other words, the derivatives market is almost 10 times larger than the global economy. Without a set of new global economic rules and regulations, the risk of another financial collapse remains high (Volcker, 2009). There is a need for a set of comprehensive, stringent restrictions on global finance and taxes on international financial transactions to limit the damage global financial speculators are causing worldwide. Eatwell and Taylor (Anderson, 2009; 2000) advanced a proposal for a new economic architecture regulated by a World Financial Authority, designed to manage the threat of systemic risk and financial contagion. Others have advocated for an international reserve currency designed to address the large imbalances between countries in deficit (e.g. the US) and surplus (e.g. China). Recently, a group of economists have supported the Robin Hood Tax, a new Tobin Tax on speculative dealings in foreign currencies, shares and other securities of 0.05% (O'Grady, 2010), whose revenues would support a global fund to protect vulnerable populations from the effects of the financial downturn. 2. Regulation of financial markets and banking sector The financial system is also in urgent need of re-regulations. The banks that caused the 2008 financial collapse are now larger, still unregulated, full of toxic assets, and capable of neutralizing attempts to introduce financial regulations. It is essential to re-gain control of the banking system, either by nationalizing the insolvent banks or by creating regulations that ensure they finally serve public interests instead of engaging in risky speculation. A new Glass Stegall Act that separates real banks from investment banks must be urgently re-enacted. It is also crucial to create restrictions on the size of too-big-to-fail banks. During the New Deal, Roosvelt created a series of anti-trust laws (Patman, 1938), which were very effective in preventing monopoly formations, and in limiting the power of corporations to shape policies and control democracies at will. The 1936 Robinson-Patman Act also protected smaller trading firms and the public, by

19 delegating an anti-trust team with the task of developing policies that could, whenever possible, break large enterprises into smaller pieces and establish regulations to avoid the influence of large speculators on prices. It is also necessary to pass new laws that incentivize the real economy instead of finance. The 1934 Securities and Exchange Act, which empowered small investors in search of stable and safe returns on long-term welfare of companies, is a good example of this. 3. Redistribution of wealth and strong social protection In order to promote economic stability, excessive inequalities must be reduced not only because they promote financial crashes, but also because they generate democratic deficits (Petrova, 2008). Mainstream policy proposals to end the Great Recession continue to be narrowly focused on budget cuts versus deficit spending. But to end the crisis and reduce the economic gaps at the root of financial instability, austerity for the rich and big finance must be adopted. Recently, some IMF economists have finally recognized that, redistribution policies that prevent excessive household indebtedness and reduce crisis-risk exante can be more desirable from a macroeconomic stabilization point of view than ex-post policies such as bailouts or debt restructurings (Kumhof & Ranciere, 2011). A fairer distribution of wealth can be achieved indirectly through a set of New Deal-style reforms that aim at full employment, progressive taxation and strong social security. A reduction of inequality can also be promoted by emergency policies to meet the urgent needs of people who have lost their jobs, businesses and their houses to the crisis. Social reforms must also include ad hoc legislations that nurture and protect small businesses and local enterprises from bankruptcy. However, economic re-distribution must also be promoted more directly through democratization of wealth in the workplace. In the 30s, Roosevelt promoted this by empowering small investors to participate in the management of corporations, and passing reforms such as The 1935 Wagner Act, which gave workers more freedom to form robust labor unions. The emergence of worker owned

20 companies in the last decades is a promising step toward a more egalitarian distribution of wealth, but largely insufficient to meet the urgent need for economic redistribution at the national and global level. The World at a Crossroad: From Neoliberal Austerity to Healthy De-Growth? The 2008 financial crisis should have taught us a clear lesson: the efficient market ideology may be plausible in theory, but not in practice. Unfettered free markets are expected to produce optimal and efficient outcomes only if a series of very restrictive assumptions are met: producers are small enough not to affect prices; capital does not move across national boundaries; producers and consumers are exposed to the same amount of information; and capital investment is provided to producers and consumers in the real economy, not to speculative investment. Given that such conditions are almost impossible to meet, unfettered free markets do not produce efficient outcomes and self-correct, but generate negative externalities and fail. History has shown that when they fail, unfettered free markets fail catastrophically unless governments step in and rescue the economy. This was clearly the case after the 1929 financial collapse. Similarly, in the aftermath of the 2008 Great Recession, it is government interventions, not free markets and speculative finance that can clean up the mess. The crisis is certainly not over, and prospects for economic recovery remain uncertain. However, evidence showing that times of economic recessions need not result in decreases in life expectancy, and can actually reduce mortality if governments step in with vigorous policies on behalf of vulnerable populations affected by the crisis, have important implications for policy. By adopting a more egalitarian distribution of wealth and strong social protections, governments can achieve, not only financial stability, but also a regime of healthy de-growth.

21 References Anderson, K. (2009). International perspectives on household wealth. Comparative Economic Studies, 51(2), Baird, S., Friedman, J., & Schady, N. (2009). Aggregate income shocks and infant mortality in the developing world. Paper presented at the Harmonizing Health and Economics, Beijing. Barr, B., Taylor-Robinson, D., Scott-Samuel, A., McKee, M., & Stuckler, D. (2012). Suicides associated with the economic recession in England: time trend analysis. BMJ, 345, e5142. doi: /bmj.e5142 BIS. (2007). Triennial central bank survey. Foreign exchange and derivative market activity in Basel, Switzerland: Bank for International Settlements (BIS). BIS. (2010). Semi-annual OTC derivatives statistics: Bank for International Settlement. Bordo, M., Eichengreen, B., Klingebiel, D., & Martinez-Peria, M. (2001). Financial crises: Lessons from the last 120 years. Economic Policy, April, 2001, Bosch, G. (2002). Working time reductions, employment consequences and lessons from Europe. In D. Figart & L. Golden (Eds.), Working Time: International Trends, Theory and Policy Perspectives (pp ). London: Routledge. Calabria, M. (2009). Did deregulation cause the financial crisis? Cato Policy Report, XXXI(4). Cassidy, J. (2009). How market fails: The logic of economic calamities: Farrar Straus Giroux. Central Intelligence Agency. (2013). The world factbook Retrieved from https://www.cia.gov/library/publications/the-worldfactbook/geos/xx.html Conway, E. (2009a, August 8, 2009). IMF puts total cost of crisis at 7.1 trillion, The Telegraph. Retrieved from 21

22 810/IMF-puts-total-cost-of-crisis-at-7.1-trillion.html Conway, E. (2009b, January 28). WEF 2009: Global crisis 'has destroyed 40pc of world wealth', The Telegraph. Retrieved from Global-crisis-has-destroyed-40pc-of-world-wealth.html De Vogli, R., & Gimeno, D. (2009). Changes in income inequality and suicide rates after shock therapy : Evidence from Eastern Europe. Journal of Epidemiology and Community Health, 63(11), 956. De Vogli, R., Marmot, M., & Stuckler D (2012). Excess suicides and attempted suicides in Italy attributable to the Great Recession. Journal of Epidemiology and Community Health. Eatwell, J., & Taylor, L. (1999). Towards an effective regulation of international capital markets. Internationale Politik und Gesellschaft, 279. Eatwell, J., & Taylor, L. (2000). Global finance at risk: The case for international regulation. New York: The New Press. Economou, M., Madianos, M, Theleritis, C, Peppou, LE, Stefanis, CN. (2011). Increased suicidality amid economic crisis in Greece. Lancet, 378(9801), Edmunds, J. C. (1996). Securities: The new world wealth machine. Foreign Policy(104), 118. Eichengreen, B., & Bordo, M. D. (2002). Crises now and then: What lessons from the last era of financial globalisation. National Bureau of Economic Research (NBER) Working Paper No Cambridge, MA. Eichengreen, B., & Fishlow, A. (1998). Contending with capital flows: What is different about the 1990s? In M. Kahler (Ed.), Capital Flows and Financial Crises. Manchester: Manchester University Press. EUROSTAT. (2013). Selected principal European economic indicators, Ferreira, F., & Schady, N. (2009). Aggregate economic shocks, child schooling and child health. World Bank Research Observer, 24(2),

23 Fishback, P., Haines, MR, Kantor, S. (2007). Births, deaths and New Deal relief during the Great Depression. The review of economics and statistics, 89(1), Franco, M., Orduñez, P., Caballero, B., Tapia-Granados, J., Lazo, M., Bernal, J., Cooper, R. (2007). Impact of energy intake, physical activity, and population-wide weight loss on cardiovascular disease and diabetes mortality in Cuba, American Journal of Epidemiology, 166(12), Friedman, T. (1999) The lexus and the olive tree (pp. 432). New York: Farrar, Straus, Giroux. Geithner, T. (2008, Feb 26, 2008). Risk management and challenges in the U.S financial system. Paper presented at the Global Association of Risk Professionals 7th Annual Risk Management Convention and Exhibition, New York. Gerdtham, U., Ruhm, CJ. (2006). Deaths rise in good economic times: evidence from the OECD. Economics and Human Biology, 4(3), Gills, B. (2008). The Swinging of the pendulum: The global crisis and beyond. Globalizations, 5(4), Guajardo, J., Leigh, D., & Pescatori, A. (2011). Expansionary austerity: New international evidence International Monetary Fund (IMF) Working Paper - WP/11/158. Washington, DC: IMF. Hopkins, S. (2006). Economic stability and health status: Evidence from East Asia before and after the 1990s economic crisis. Health Policy, 75(3), doi: Doi /J.Healthpol Kloner D, The Commodity Futures Modernization Act of 2000, Commodity Futures 29 ( 2001). ILO, & IMF. (2010). The challenges of growth, employment and social cohesion. Oslo: Joint ILO-IMF Conference in Cooperation with the Office of the Prime Minister of Norway. Jäntti, M., Martikainen, P, Valkonen, T. (2000). When the welfare state works: Unemployment and mortality in Finland.. In A. Cornia, Paniccia, R (Ed.), The mortality crisis in transitional economies (pp ). Oxford: Oxford University Press. 23

24 Johnson, S., & Kwak, J. (2010). 13 bankers: The Wall Street takeover and the next financial meltdown. New York: Panthen Books. Kaminsky, C., & Reinhart, K. (2008). Banking crises: An equal opportunity menace Working Paper Cambridge, MA: National Bureau of Economic Research. Kentikelenis, A., Karanikolos, M., Papanicolas, I., Basu, S., McKee, M., & Stuckler, D. (2011). Health effects of financial crisis: Omens of a Greek tragedy. The Lancet, 378(9801), Keys, B., Mukherjee, T., Seru, A., & Vig, V. (2010). Did securitization lead to lax screening? Evidence from subprime loans. Quarterly Journal of Economics, 125(1), Kindelberger, C. (2001). Manias, panics and crashes: A history of financial crises. London: John Wiley and Sons. Kindleberger, C. (1986). The world in depression, Berkeley: University of California Press. Kondo, N., Subramanian, S., Kawachi, I., Takeda, Y., & Yamagata, Z. (2008). Economic recession and health inequalities in Japan: Analysis with a national sample, Journal of Epidemiology and Community Health, 62(10), Kumhof, M., & Ranciere, R. (2011). Inequality, leverage and crises. IMF Working Paper. International Monetary Fund, Research Department. Washington, DC. Makridakis, S., Hogarth, R., & Gaba, A. (2009). Forecasting and uncertainty in the economic and business world. International Journal of Forecasting, 25(4), Marx, K. (1973) Grundrisse: Foundations of the critique of political economy (pp. 334, 408). New York: Vintage. Marx, K. (1980). Wage labor and capital. In K. Marx, F. Engels & J. Elliott (Eds.), Marx and Engels on economics, politics, and society (Vol. Chapter 2). Santa Monica: Goodyear. 24

25 Marx, K., & Engels, F. (1848/1998) The communist manifesto: A modern edition (pp. 41). London: Verso. Minsky, H. (1982). Can "it" happen again?: Essays on instability and finance. Armonk, NY: M. E. Sharpe. Moss, D. (2009). An ounce of prevention: Financial regulation, moral hazard and the end of "too big to fail". Harvard Magazine, Sept.-Oct New York Times. (2010, May 20). Major parts of the financial regulation overhaul, New York Times. Retrieved from regulation-graphic.html?_r=0 Nichols, M., Hendrickson, J., & Griffith, K. (2011). Was the financial crisis the result of ineffective policy and too much regulation? An empirical investigation. Journal of Banking Regulation, 12, O'Grady, S. (2010, 15 February). Hundreds of economists call for tax on currency speculation The Independent Retrieved from Obstfeld, M., & Rogoff, K. (2009). Global imbalances and the financial crisis: Products of common causes. Paper presented at the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, Santa Barbara, CA. Patman, W. (1938). The Robinson-Patman Act: What you can and cannot do under this law. New York: Ronald Press. Patomäki, H., & Teivainen, T. (2004). A possible world: Democratic transformations of global institutions. London: Zed Books. Petrova, M. (2008). Inequality and media capture. Journal of Public Economics, 92(1), Philippon, T., & Resheff, A. (2008). Wages and human capital in the US financial industry: NBER Working Paper No Cambridge, MA: National Bureau of Economic Research. 25

26 Philips, K. (2008). Bad money: Reckless finance, failed politics, and the global crisis of American capitalism. New York: Viking. Posner, R. (2009). Introduction A failure of capitalism: The crisis of 08 and the descent Into depression (pp. xii). Harvard, MA: Harvard University Press. Rajan, R. (2010). Fault lines: How didden fractures still threaten the world economy. Princeton: Princeton University Press. Reeves, A., Stuckler, D., McKee, M., Gunnell, D., Chang, S. S., & Basu, S. (2012). Increase in state suicide rates in the USA during economic recession. Lancet, 380(9856), doi: /S (12) Reich, R. (2010). Aftershock: The next economy and America's future. New York: Random House. Ruhm, C. (2008a). A healthy economy can break your heart. Demography, 44(4), Ruhm, C. (2008b). Macroeconomic conditions, health and government policy. In R. Schoeni, House, JS, Kaplan, GA, Pollack, H (Ed.), Making Americans healthier: Social and economic policy as health policy. New York: Russell Sage. Schumpeter, J. A. (1943). Capitalism, socialism and democracy. London: George Allen & Unwin (Publishers) Ltd. Stiglitz, J. (2004). Capital-market liberalization, globalization, and the IMF. Oxford Review of Economic Policy, 20(1), Stuckler, D., Basu, S., Suhrcke, M., Coutts, A., & McKee, M. (2009). The public health effect of economic crises and alternative policy responses in Europe: An empirical analysis. Lancet, 374(9686), Stuckler, D., Basu, S, Suhrcke, M, Coutts, A, McKee, M. (2009). The public health impact of economic crises and alternative policy responses in Europe. Lancet, 374(9686), Tapia-Granados, J. (2005a). Increasing mortality during the expansions of the US economy, International Journal of Epidemiology, 34(6),

27 Tapia-Granados, J. (2005b). Recessions and mortality in Spain, European Journal of Population, 21(4), Tapia-Granados, J. (2008). Macroeconomic fluctuations and mortality in postwar Japan. Demography, 45(2), Taylor, J. (2009a). Getting off track: How government actions and interventions caused, prolonged and worsened the financial crisis: Hoover Institution Press. Taylor, J. (2009b). How government created the financial crisis, Wall Street Journal. Retrieved from Tett, G. (2009). Fool's gold: How the bald dream of a small tribe at J.P. Morgan was corrupted by Wall Street greed and unleashed a catastrophe. New York: Free Press. Valkonen, T., Martikainen, P., Jalovaara, M., Koskinen, S., Martelin, T., & Makela, P. (2000). Changes in socioeconomic inequalities in mortality during an economic boom and recession among middle-aged men and women in Finland. European Journal of Public Health, 10(4), Victor, P. (2008). Managing without growth. London: Sustainable Development Commission. Volcker, P. (2009). Statement before the Committee on Banking and Financial Services of the House of Representatives. United States House of Representatives. Washington, Dc. Vuori, J., Silvonen, J, Vinokur, AD, Price, RH. (2002). The Tyohon job search program in Finland: Benefits for the unemployment with risk of depression or discouragment. Journal of Occupational Health Psychology, 7(1), WHO. (2009). The financial crisis and global health: Report of a high-level consultation. Geneva: World Health Organization. 27

28 Figure 1. From the Great Depression to the Great Recession: Index of Capital Mobility and Number of Banking Crises, Reprinted from: De-Vogli, R. (In press). Neoliberal ideology: The missing "cause of the causes" of the financial crisis, austerity and increases of suicide in Europe [Letter to the Editor]. The Lancet. Data sources: Reinhart, CM and Rogoff KS. Dates for Banking Crises for 70 countries available at and Reinhart CM and Rogoff KS Banking Crises: An Equal Opportunity Menace JEL E6, F3, and N0,

29 Countries: Algeria, Angola, Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Canada, Central African Republic, Chile, China, Colombia, Costa Rica, Cote D Ivoire, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Finland, France, Germany, Ghana, Greece, Guatemala, Honduras, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Kenya, Korea, Malaysia, Mauritius, Mexico, Morocco, Myanmar, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Tunisia, Turkey, United Kingdom, United States, Uruguay, Venezuela, Zambia and Zimbabwe. Figure 2. When History Repeats Itself: The Fall and Rise of Financial Deregulation and Share of Total Income Going to the Top 1% in the United States, Reprinted from: De-Vogli, R. (In press). Neoliberal ideology: The missing "cause of the causes" of the financial crisis, austerity and increases of suicide in Europe [Letter to the Editor]. The Lancet. 29

30 Data sources: Share of total income for the top 1% families are from the World Top Incomes database (2010) and financial deregulation index from Philippon and Reshef. Wages and Human Capital in the US Financial Industry: NBER Working Paper 14644, Figure 3. Income Inequality and Household Debt (Mortgage Debt and Consumer Debt) in the United States,

31 Sources: Data on the Gini Index come from the Standardized World Income Inequality Database (SWIID); data on household debt (mortgage and consumer) come from the Federal Reserve Bank. Debt growth, borrowing and debt outstanding tables. Federal Reserve Bank: New York,

32 Figure 4. Standardized Death Rates in Suicides and Self-Inflicted Injuries per 100,000 in 41 European Nations Before and After the Great Recession, Data source: European Health for All Database,

33 Figure 5. Excess Suicides and Suicide Attempts due to Economic Reasons in Italy, Data source: Italian National Institute of Statistics (ISTAT),

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