Austerity and the rise of the Nazi party

An NBER study by Gregori Galofré-Vilà, Christopher M. Meissner, Martin McKee, David Stuckler

The current historical consensus on the economic causes of the inexorable Nazi electoral success between 1930 and 1933 suggests this was largely related to the Treaty of Versailles and the Great Depression (high unemployment and financial instability). However, these factors cannot fully account for the Nazi’s electoral success. Alternatively it has been speculated that fiscally contractionary austerity measures, including spending cuts and tax rises, contributed to votes for the Nazi party especially among middle- and upper-classes who had more to lose from them. We use voting data from 1,024 districts in Germany on votes cast for the Nazi and rival Communist and Center parties between 1930 and 1933, evaluating whether radical austerity measures, measured as the combination of tax increases and spending cuts, contributed to the rise of the Nazis. Our analysis shows that chancellor Brüning’s austerity measures were positively associated with increasing vote shares for the Nazi party. Depending on how we measure austerity and the elections we consider, each 1 standard deviation increase in austerity is associated with a 2 to 5 percentage point increase in vote share for the Nazis. Consistent with existing evidence, we find that unemployment rates were linked with greater votes for the Communist party. Our findings are robust to a range of specifications including a border-pair policy discontinuity design and alternative measures of radicalization such as Nazi party membership. The coalition that allowed a majority to form government in March 1933 might not have been able to form had fiscal policy been more expansionary. 

In 'The terrible price of austerity' Frances Coppola (Yep, looking at you, Schäuble) puts it into today's context.

"we know that fiscal consolidation tends to affect the poor the most. So why did it cause better-off Germans to vote for extremists?

Better-off they may have been, compared to the poor and the unemployed, but they didn't see it that way. They resented government policies that cut their wages, raised their taxes and reduced their pensions and benefits when they were already suffering because of the economic depression. And they also resented those who were poorer than them, because the really poor received some government support, while they got nothing:

    .....austerity measures contributed to votes for the Nazi party among middle- and upper-classes who, despite the depth of the Depression (i.e., after controlling for the level of output and employment) still had something to lose and may have resented government austerity in the face of Depression (a pocket book motive) and while other segments of society received benefits from relief or automatic stabilizers. 

They were what Theresa May dubbed the "Just About Managing", and I have called the "in-betweeners".  They bore the full brunt of tax rises, spending cuts, the deliberate wage-price deflation imposed by Brüning, the extremely tight monetary policy needed to maintain the gold standard and the effects of the Depression itself. They weren't wealthy enough to weather the storm unscathed, but they were too well-off to receive any support. And the public services on which they relied were being cut to the bone. They saw no future for themselves or those they loved. They became angry and desperate - and desperate people are cannon fodder for extremists."

Small wonder then that people voted for Brexit and Germany has still not formed a new government. Instead, it is engaged in preliminary talks here and there and over there in order to avoid the most dreaded outcome: new elections. Merkel knows it would be her kiss of death and hand the AfD at between 15 and 20% of the votes with the SPD in the teens.

Coppola concludes:

"Learn from your history, Europe, before it is too late. Unless there is radical loosening of the fiscal straitjacket into which too many countries have been tied, your political crisis, when it comes, will be terrible indeed."

Read also Bill Mitchell's 'The path out of the low wage trap is limited by fiscal austerity' and in particular 'Germany – a most dangerous and ridiculous nation'.