Going to Extremes: Politics after Financial Crises, 1870-2014

Abstract

Partisan conflict and policy uncertainty are frequently invoked as factors contributing to slow post-crisis recoveries. Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. In this paper we study the political fall-out from systemic financial crises over the past 140 years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis. Importantly, we do not observe similar political dynamics in normal recessions or after severe macroeconomic shocks that are not financial in nature.

Bounded Confidence under Preferential Flip: A Coupled Dynamics of Structural Balance and Opinions

“…Recent data from Edelman Trust Barometer and Eurobarometer shows that people's trust decline with economic crisis. The study by Funke et al [77] show that economic crisis cause political fragmentation. Interestingly, the results in the BC-PF model suggest a possible link between these two lines of research, talking about agents' confidence levels or trust as a nexus that could connect economic variables with political variables.…”

“…Consequently, a possible interpretation of our results would suggest an increase in a country's political fragmentation after an economic crisis (due to the reduction in agents' confidence levels). Interestingly, a recent study by Funke et al [77] for 20 advanced economies and more than 800 general elections supports this point. Their study, which covers the period 1870-2014, reveals that after financial crisis government majorities shrink and polarization rises, which increases political uncertainty.…”

Entrenched time delays versus accelerating opinion dynamics: are advanced democracies inherently unstable?

“…It is conceivable within out model that western democracies have seen the unfolding of a slow but steady long-term acceleration of opinion dynamics, with the passing of the threshold of 7-15 months contributing to the recent emergence of political styles disrupting political conventions considered hitherto as fundamental [20]. External effects, such as the 2007-08 financial crisis [31,32], would induce in this view an additional temporary but sharp rise in β.…”

Does democracy die in recessions? A descriptive analysis of aggregate demand shortfalls and regime transition

“…Fetzer () has argued that austerity in Britain eventually led to Brexit – a ‘fiscal’ alternative to the Sumner hypothesis. Funke, Schularick, & Trebesch () find that increases in the far‐right vote share are predicted by financial crises, but are not predicted by large macroeconomic shocks. Finally, Bjornskov () applies the Bjornskov and Rode (forthcoming) approach to a question that is the inverse of the question posed here, namely, whether changes from one set of political institutions to another of the six classifications in the data set are associated with economic crises, and whether they prolong them, finding most of these effects to be clustered around instances of moving from one set of autocratic institutions to another.…”