The Body Economic (13 page)

In honor of Dr. Magnusson's wishes, we presented our data on the health impacts of previous recessions at the Reykjavík conference. We showed the historical evidence of how recessions increase the risks of suicides, the calamitous events that we had seen in the post-Soviet countries, and the divergent fortunes of East Asian nations. While Iceland had many strengths, the data suggested that if it implemented deep budget cuts to vital social protections—the very cuts in healthcare and social services that were being advised by the IMF—the risks to the health of its population would potentially be multiplied.

At the conference, arguments were put forward on both sides. Those who advocated austerity argued that it would inspire confidence in investors, who would bring money to help Iceland escape a further plummet into depression and prevent a public health disaster. But the data from prior recessions did not support this conclusion, which seemed more ideological than evidence-driven. There was no evidence from prior recessions that extensive austerity would stave off depression, but rather the opposite: austerity tended to increase unemployment, reduce people's spending, and slow down the economy.

The way to resolve this austerity debate was with data. The critical question was whether austerity or stimulus would improve public health and aid overall economic recovery. The debate hinged on a calculation called the “fiscal multiplier.” The multiplier is an estimate of how many dollars of future economic growth are created for each dollar of government spending. When a fiscal multiplier is greater than 1, it means that government spending has a multiplicative effect—each $1 of government spending creates more than $1 in future economic growth. When the multiplier is less than 1, it means that each $1 of additional government spending is destroying the economy, creating inefficiencies or taking away money from the private sector that would better boost the economy.

The IMF economists had assumed, without hard data, that the fiscal multiplier had a value of about 0.5 for all countries, meaning that government spending would shrink the economy. Hence, cutting budgets would boost growth. But their assumption was made without actually calculating the multiplier from real data. The IMF had also assumed that all forms of government spending were the same—that spending on elementary schools
would have the same economic impact as spending on the army. This made little sense. Without data on the sector-specific effects of budget cuts, even if the IMF promoted austerity, how would it know which cuts would be the most detrimental and which would do the least harm to the economy and maximize the prospects for recovery?

This situation called for a reality-based, data-driven approach, not theoretical mathematical models based on untestable assumptions. We recalculated the IMF estimates from real data, and disaggregated the data by different types of government programs. That enabled us to study the details of what spending or cuts actually did in each major area of government spending. We used over ten years of data from 25 European countries, the United States, and Japan, and found that the IMF's assumed multiplier value for Iceland was too low. The real multiplier had a value of about 1.7 in the overall economy: thus, austerity would have a recessionary effect.

Not only did the IMF underestimate austerity's economic harms, but it overlooked the even greater damage that resulted from cutting public health. Health and education had the largest fiscal multipliers, typically greater than 3. In contrast, defense multipliers were significantly less than 1, and so were bailout packages for banks. These figures made sense, because much of the money spent on defense doesn't actually build jobs in manufacturing and technology domestically anymore, unlike in previous years. Much of it actually leaves the economy, going to foreign contractors and to pay for non-recoverable costs like fuel for fighter jets. Nor do banker bailouts tend to stimulate the economy, as funds are more likely to end up stashed in offshore bank accounts and less likely to get reinvested into providing jobs or technology. Health and education programs, by contrast, conferred both short- and long-term economic payoffs. In the short term, these sectors were able to better absorb funding and turn it into productive work for teachers and nurses and technology firms. In the long term, the products of investments in education and health services were smarter and healthier workforces.
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When Icelandic journalists invited David to explain these findings in 2009, he described them this way: “It doesn't make sense to pull the engine out of a sinking plane. Now is the time to hit the accelerator, not the brakes.” Many economists echoed these concerns on financial grounds. Joseph Stiglitz, on Icelandic television, said: “If the IMF tells you to do austerity, kick them out.” But that advice would not be easy to follow. Like many of the East
Asian countries following the crisis there, Iceland had few options for getting capital, given its small central bank and a national debt already leveraged to over eight times its gross domestic product. Ultimately, it was forced to turn to the IMF as the lender of last resort.

But just before the government completed its IMF review of the loan agreement in early 2010, which would pay back IceSave and carry large austerity measures, something unusual happened: the president of this modern democracy rejected the plan and asking the nation's people what they wanted.
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It was a move triggered in part by the riots that began in early 2009. In January, upwards of ten thousand Icelanders took to the streets in protest, clashing with riot police around the parliament building. All things considered, the protest was relatively peaceful, resembling something closer to a street party than a clash with tear gas and Molotov cocktails. People hurled eggs, old shoes, and tomatoes at Parliament, while others pounded drums and started a bonfire to keep warm. Protesters called for a stop to budget cuts to pay for bankers' gambling, and an ousting of the “corrupt” government. Inside Parliament, the political leaders tried to shrug off the protesters as vagrants. But the protesters themselves made it clear who they really were. As one of them, Sturla Jonsson, told reporters, “I want to tell you that the people gathered here are not ‘activists' or ‘militants.' They are just ordinary adults of all ages.”
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Prime Minister Haarde was eventually forced out of office. “We very clearly noticed the protests,” said one member of parliament, “and we get the message that people want change.” A protest of ten thousand people may seem small; but for Iceland, it is staggering—amounting to 3 percent of the population. A proportionally sized protest in the United States would involve 10 million people.
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The protests prompted a major democratic move. In March 2010, a public country-wide referendum was held, the first since Iceland had voted on independence from Denmark in 1944. The choice of how to proceed with the bankers' debts was posed to voters: Shall we absorb the private debt to compensate the bankers and their risky investors in the IceSave scheme, drastically cutting our government budgets and sending our tax dollars to them? Or shall we say no to paying for the bankers' gambling and avoid a large dose of austerity, instead investing in rebuilding the economy? Ninety-three percent of Icelanders voted against paying for the bankers' debts.
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Stock markets were quick to react negatively to the vote. The attitude on Wall Street reflected the thinking of everyone from the seventeenth-century
philosopher John Locke to the ubiquitous Milton Friedman. Locke, whose writings underpinned the American Constitution, worried that democratic voting on policies about government spending could be risky; “tyranny of the majority” risked an angry mob seeking only to serve itself, knowing little about the complexities of economics, which were understood by an elite intellectual minority. Milton Friedman, the free-market economist, famously argued that economic decisions should be left to a computer, which would be willing to make tough, painful decisions. Perhaps ordinary people would be unwilling to make hard decisions about debt and budget cuts that were being advised by the International Monetary Fund—decisions that were vital to saving their own futures. If this perspective was correct, then Iceland's politicians had doomed the country by letting its people decide.
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Not all experts were critical of the democratic move, however. Robert Wade, who had warned of an impending global economic crisis before it happened, shared his advice with the Icelandic media. He recommended that money be put into public work programs (a là the New Deal), so that people who lost jobs could do real work again, rather than simply be given unemployment benefits. These people would then boost the economy by generating income to spend. Indeed, having too many unemployed young people could create a “lost generation” of youth who had never worked, or who might even emigrate and never come back. Wade encouraged businesses not to fire people but to move them to short-time work in order to keep them engaged with the labor market. He also called on the government to protect the pensions of those who relied on them, to ensure that the elderly were not cut off from basic needs.
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So the loud Icelandic “No” (
Nei
in Icelandic) was a true test of a major debate: were the voters of Iceland wrong, selfish, and ultimately ignorant of what was best for them when they followed the advice of Wade? Or should they instead have absorbed the bankers' debts and swallowed the bitter pill of austerity and the recommendations of Wall Street, Friedman, and the IMF?

We examined both the economic and the public health data to keep track of what happened after the vote—and compared that data to what was predicted to happen. We looked at Iceland's death statistics, which are collected by the World Health Organization's European office. Over the period from 2007 to 2010, the worst years of crisis, death rates continued to fall steadily throughout the country. There had been a slight rise in suicides after the market crash, but
not a statistically significant one: in 2007, there were 11.4 suicides per 100,000 people, rising to 12.1 in 2008 and falling in 2009 to 11.8. In an overall population of about 300,000, these were not meaningful changes, corresponding to thirty-seven suicides in 2007, thirty-eight in 2008, and thirty-six in 2009.
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Looking at another more sensitive indicator of stress, heart attacks, we examined data on hospital admissions. Given Iceland's organized healthcare system, it was possible to track every person in the country who was admitted to an emergency room, and to identify the health problem that had landed them there. In researching past European recessions, we found that heart attacks tended to have a short-term increase during banking crises. But we didn't find any increases in the heart attack rates in Iceland. There was a slight increase in the total number of people admitted to the cardiac emergency room, but only in week 41 of the year 2008, and only among women, not the working-age men among whom we tend to see a stress-related rise. Nor was this blip statistically significant when we looked at week-to-week fluctuations in Iceland's small population.
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Had we missed something that might indicate an increase in stress among Icelanders that is commonly observed in recessions? Was it too soon to see longer-term health effects? While it was possible that some people might forgo healthcare during recessions because they cannot afford it, this seemed unlikely. Iceland had maintained its universal healthcare system. Unlike the Russian people experiencing Shock Therapy, everybody had their healthcare costs covered, and hospitals and clinics hadn't closed, so access was not a concern.

To look for other health impacts of the crisis and Iceland's response to it, we turned to other sources of data about health and well-being in Iceland. To our surprise, we found that there had been an increase in upper airway respiratory problems. Perhaps there had been a rise in stress-related smoking, which would have been very possible given that one in three people in Iceland smoked. But, investigating more closely, we found that these respiratory problems had nothing to do with the financial crisis, but rather the eruption of the Icelandic volcano, Eyjafjallajökull, in April 2010. The population was exposed to toxic fumes that had covered the island for days.
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So we turned to data on mental health problems—perhaps these figures had risen? Again, we found no sign of a rise except for a mysterious blip in week 41. What had happened in week 41? That week, there were two stressful events. Prime Minister Geir gave his “God Bless Iceland” speech, leading
people to fear for the worst. And in the UK, to recover the British depositors' investments in IceSave, Prime Minister Gordon Brown invoked the UK's Anti-Terrorism Act of 2001, the same law that was applied to freeze and gain back British assets from Colonel Gaddafi of Libya. While we cannot disentangle which stressors may have triggered a short-term burst of hospitalizations of patients with extreme psychological distress, the correlation reinforced the idea that the stresses and anxiety had not only to do with the crisis per se, but also with whether policymakers responded to economic threats to reassure their people that they would be protected come what may.
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From a public health perspective, a rise in psychiatric admissions is also considered the tip of the iceberg. Only a few people with depression and mental health problems actually end up in psychiatric hospitals or seek help at doctor's offices; the rest are hidden away from the healthcare system. We evaluated two Icelandic Health Surveys, each of which had kept track of 3,783 people who came from the various social strata of Iceland's population: the first survey was conducted in 2007, before the meltdown, and the second in 2009, after it. Based on a standard measure of depression symptoms from the World Health Organization, we found that among men, there was a slight increase of 1.5 percent in symptoms of depression; again, however, these were so small that they were not statistically significant based on standard international criteria. Of note, more vulnerable groups—those with lower education, those who were single, and the unemployed—were also not at higher risk of symptoms according to the surveys. In contrast, women did appear to be more vulnerable to depression symptoms; their rate of symptom reporting increased by 2.4 percent, but this rise was again not large enough to be statistically significant. Overall, we could not find any compelling evidence that depression had significantly increased in Iceland as a result of the crisis.
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