May 19, 2024

Economix: Insights on Stimulus From the Mafia

It is hard to prove that a burst of public spending can stimulate economic activity. Governments generally try the experiment in response to a downturn, and who is to say how quickly an economy would have recovered?

Believers in stimulus have pressed their case in recent years by examining changes in public spending that are unrelated to broader economic cycles.

Say, for example, in Italy, where the national government freezes spending on local projects when provincial officials are found to have Mafia ties.

That’s right, search engines: This blog post is about the Mafia.

A new paper by three Italian professors finds that freezes in government spending in response to public corruption do have a significant impact. For every $1 the government doesn’t spend, economic activity shrinks by as much as $2.

The paper was brought to my attention by Greg Ip of The Economist, who says it provides evidence that government spending can stimulate growth. Of course, it only demonstrates directly that cutting government spending can reduce economic activity. But happily, that point is more relevant to this political moment, as Democrats and Republicans decide just how much to cut federal spending.

(Mr. Ip, in turn, referred readers to a post by Olaf Storbeck, an economics reporter for the German newspaper Handelsblatt. The post is in English, and provides an excellent account of related research on the subject.)

The Italian economists saw an opportunity in a 1991 law that allows the Italian government to replace local governments suspected of corruption with appointed officials, and to freeze spending on public works projects while authorities look for evidence of Mafia involvement.

“Because of the sheer size of public works projects under the control of local administrations, these have become an extraordinarily lucrative business for the Mafia,” write Antonio Acconcia and Saverio Simonelli, professors at the University of Naples, and Giancarlo Corsetti, a professor at Cambridge University.

The large scale of the projects also means the resulting disruptions are significant. Italy has ejected and replaced 172 local governments as of 2008, creating a large set of experiments on what happens when public spending stops suddenly.

The result, according to the new paper, is a broader decline in spending.

The conclusion that such cuts have consequences is not consistent with a prominent piece of economic theory holding that changes in public spending will be mirrored by changes in private spending, with no net impact. It’s a good bet that proponents will find faults with the new paper, as they have with similar research. Indeed, the authors acknowledge their own statistical tests could not exclude the possibility there was no impact.

They also acknowledge the possibility that any drop in economic activity might be caused by political disruption rather than the loss of government spending.

For example, as the authors note, “The Mafia may relocate some of its business for fear that the whole area will be subject to intense police investigation.”

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