On April 20, the School of Public Policy (SPP), the Department of Public Policy (DPP), and the Political Economy Research Group (PERG) co-hosted a lecture by Professor Mark Hallerberg from the Hertie School of Governance. Discussing the political economy of financial crises, Hallerberg presented research on the importance of the timing of government spending.
Hallerberg explained that governments respond to financial crises in different ways. Responses can vary from the nationalization of banks to no response at all. Based on existing literature, Hallerberg noted that the average cost to taxpayers of governments’ responses to crises is 7% of GDP.
In his recent research with Christopher Gandrud, Hallerberg has been testing Philip Keefer’s model on the overall costs of financial crises. Keefer argued that democracies have lower fiscal costs than autocracies in handling crises. “Keefer’s data sets did not take time horizons into account, however,” Hallerberg highlighted.
Based on his analysis of the costs of responses to financial crises across a number of countries, Hallerberg concluded that there is no difference in fiscal costs under democratic or authoritarian governments over time. “Autocracies are more likely to realize costs now, whereas democracies are more likely to postpone costs until after the next election,” explained Hallerberg. “Deciding when to incur costs in response to financial crises is a strategic decision for governments. Politicians choose not only the size of the losses, but also when to realize them.”