Growing up in a recession

By Paola Giuliano and Antonio Spilimbergo

Economic crises have a traumatic effect on peoples’ psychology and attitudes, as superbly illustrated by John Steinbeck in The Grapes of Wrath and Of Mice and Men, both written in the middle of the Great Depression. The experience of the dramatic years during the Great Depression had a large impact on people and, ultimately, helped forge the social beliefs and attitudes that sustained a political system for many years. The Great Depression gave the state a new role in stabilizing the economy, created a new political alliance that dominated the US for several decades, and prompted the Keynesian revolution and the birth of macroeconomics. The most recent crisis has also left deep scars, which will affect the economy for many years to come.

What are the psychological and political effects of an economic crisis? Recent research can give an answer to this question. We studied the impact of severe recessions on individual’s broad beliefs and attitudes.

We looked at answers to the General Social Survey, a nationally representative sample that gathers information from about 1,500 American every other year and has been conducted since 1972, to analyze how economic shocks have affected the attitudes of different generations in the US. The basic idea was to match macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey.

There is an important challenge in analyzing the effects of shocks on individuals’ beliefs. Individuals go through many experiences over their life cycle and it is important to control for all these additional factors. In particular, other non-economic factors, including wars and the culture revolutions, can affect various generations in different ways. For instance, Strauss and Howe (1991) argue that a cycle of various generations explains major events in US history. According to these authors, US history is explained by the succession of four types of generations: idealistic, reactive, civic and adaptive. The succession of these four types is independent of economic events.  So, for instance, the generations growing up during the Great Depression could have been affected also by the experience of World War II.

In order to disentangle the effects of economic distress from other nationwide events, we used the fact that there is considerable heterogeneity in the economic growth across the nine US regions. For example, in any year, New England may be in a severe recession while the rest of the country experiences positive growth. It turns out that a severe regional recession strikingly alters the attitudes and beliefs of individuals growing up there. Recessions do alter perceptions, especially of people between the ages of 18 and 25. Recession-influenced respondents expressed a stronger preference for government redistribution and tended to believe that success in life was more a matter of luck than hard work; as a result they are also more likely to vote for a democratic president.

Four points are worth noting:

• First, the effects of a severe recession experienced are large when the individual is between the ages of 18 and 25 – the so-called formative age – during which social psychologists think most of social beliefs are formed; the effects are not so strong when the recession is experienced later in life.
• Second, these effects are permanent because attitudes of recession-stricken individuals remain significantly altered many years after the severe recession ends.
• Third, we control for individuals’ endowments such as income, level of education, and ownership of a house that could also have an impact on beliefs. We thus measure the direct effect of a recession on beliefs; this effect could be even bigger if we added also the indirect effect through the personal endowments, which are also affected by a recession.
• Fourth, our estimation represents a lower bound of the effect of a recession on beliefs because our identification strategy relies only on regional shocks implicitly ignoring the effects of nationwide recessions.

That same pattern is found in an analysis of the World Value Survey, which includes data from 37 countries. When we work with this larger sample of countries, we also found that coming of age in a lousy economic environment breeds the belief that success in life depends more on luck than effort, which in turn leads to more support for social welfare policies. In addition, we found a positive association between experiencing a macroeconomic disaster and both left-wing ideology and affiliation with a left-wing political party.

Why do beliefs on the importance of luck, the role of the state, and redistribution matter for the economy? Today’s experiences and beliefs shape tomorrow’s political climate, and, ultimately, determine policies. Thomas Piketty (1995) has shown that people who believe that luck plays a big role are more comfortable with higher taxes. Similarly, Alberto and Angeletos (2005) and Benabou and Tirole (2006) show that the interaction between a belief in fairness or “in a just world” respectively are able to generate an “American” equilibrium with laissez-faire policies and just-world beliefs and a “European” equilibrium with social welfare and a more pessimistic view about how just the world is.

So, is it possible that the experience of the current severe recession is forming a generation that will want more state intervention, believe more in redistribution, and accept higher taxes? Large political realignments in the US have often coincided with traumatic economic events. Hopefully, this reserch sheds some light on how economic conditions could affect beliefs and attitudes.

Paola Giuliano is an Assistant Professor of Economics in the Global Economics and Management Group at UCLA Anderson School of Management. Antonio Spilimbergo is an advisor at International Monetary Fund. They are the authors of the paper ‘Growing up in a recession’, published in the Review of Economic Studies.

The Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journal, with a reputation for publishing path-breaking papers, and is essential reading for economists.

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Image credit: Recession. By LilliDay, via iStockphoto.