The financial crisis beginning in 2007 is thought by many economists to be the worst recession since the Great Depression. Early on, the World Health Organization warned us that “it should not come as a surprise that we continue to see more stresses, suicides and mental disorders”; “the poor and vulnerable will be the first to suffer”; and “defending health budgets” will become more difficult. But the report was remarkably vague (in fact, totally absent of any data), so it was difficult to truly understand what the detailed impact of recession would be on public health – and therefore, what we should do about it.
Well, the data are in…and they don’t look pretty.
In this post, we describe:
 the causes of the crisis and their immediate effects on healthcare,
 the economic and social determinants of population health during recession,
 the causes and consequences of the ongoing food crisis (with a simple explanation of speculation), and
 what we’re supposed to do about it.
First, we have to acknowledge how the crisis evolved, to understand its varied public health impacts. The recession really started when banks sold “subprime mortgages”, home loans to poor people who could not reasonably afford to pay them back, in order to continue their practice of bundling these investments together and selling them at high profits through mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which are high-risk investments that derive their value from mortgage payments and housing prices. As more and more of these investments were sold under the false premise of generating fantastic returns, the banks created a massively-inflated housing market – a “bubble” – that popped in 2006 when mortgage-holders began to default on their loans. Suddenly investors realized that their investments were unsound, and so they engaged in a massive sell-off, withdrawing their funds from banks, sparking a “liquidity crisis”, meaning that banks had no liquid assets to lend anymore. Credit was hard to find, stalling the business cycle as regular businesses couldn’t obtain loans to build infrastructure, purchase equipment, or expand their workforce. The housing market crash led to a ripple effect in the overall stock market, first in the U.S. and then in Europe and the rest of the world. The end result was a $2.3 trillion lost in retirement savings, $1.2 trillion lost in investments, and $14 trillion lost in overall household wealth. These losses accompanied a rise in unemployment to 10% as businesses without credit could not afford to pay their workers, and consumers could not afford to purchase goods and services without their savings. Early on, as mortgage interest rates overwhelmed the poor and 10% of U.S. mortgages went into delinquent or foreclosed status, the Alameda County Department of Public Health published a report revealing that more than 3 in 10 foreclosed residents in Oakland, California sacrificed medical care due to inadequate finances.
To date, much of the discussion about the health impact of recession has focused on this issue of healthcare and healthcare costs, particularly in the United States. The main concern is that loss of employment results in the loss of employer-sponsored healthcare insurance. The uninsured rate in the U.S. has now peaked at 17%. State budgets are facing a $160 billion deficit, of which only $60 billion this year will be offset by federal government stimulus dollars. This has placed great pressure on state comptrollers to cut funds for Medicaid, the healthcare program for poor and uninsured adults in the United States. As a condition of receiving stimulus funds, states cannot restrict Medicaid eligibility criteria (which requires that a person is not only poor, but also disabled, pregnant, or has children). But they are restricting what Medicaid pays for, by cutting benefits. Furthermore, because so many sick adults are childless, many remain uninsured: almost half of these uninsured people have a chronic medical condition, and are three times as likely as the insured to have been unable to pay for basic necessities such as housing or food due to medical bills. Their mortality rate goes up 40% simply by virtue of being uninsured. In 2010, nearly one-third of these uninsured adults used up all or most of their savings to pay medical bills. The Kaiser Family Foundation has covered this issue extensively.
But there is a major problem with restricting our discussion of the health impact of recession to healthcare budgets or to the United States: the impact of recession has been global, and its effects are often not through the healthcare sector. In fact, many are surprised to learn that health care is not a principal determinant of population-level health outcomes: a minority (~10 to 15%) of deaths in the United States are thought to be due to inadequate healthcare access or poor services. So we need to talk about the broader determinants of health—the social and economic determinants—to understand the overall causes of mortality.
How can we study the larger population relationship between recession and health? It turns out that if we measure the economy in terms of gross domestic product (GDP, a measure of total value of goods and services produced in a country), we come out with all sorts of counter-intuitive results when studying population health: previous researchers have reported that recession actually resulted in reductions in mortality (and gained a lot of press because of it…the press has been quite funny, alluding to theories as varied as “people behave better when they’re poor, smoking and drinking less” to “the weather has been a contributing factor”). It turns out that many of these researchers made critical statistical mistakes. One recent study, based on only 21 data points, concluded that health improved during the Great Depression. But if you reanalyze the data in disaggregated form (by city and state level, rather than averaging across the whole country), and correct for preexisting changes in mortality—such as the steady changes in infectious disease or cancer incidence that were resulting from other social changes at the time—you get the opposite result.
GDP is a terrible measure of what actually happens to people during recessions; unemployment is a better measure because the GDP just reflects an arithmetic mean income (and more billionaires were created in the last year, during the recession, than in the previous decade, artificially elevating average GDP). Furthermore, just correlating unemployment and mortality is not good enough—we should account for the delayed impact of change in unemployment on changes in mortality rates, and account for a number of other confounding factors like demography changes.
When we do this type of analysis on multiple sets of data—studying not only the Great Depression but also the East Asian Financial Crisis of the late 1990s and the Eastern European mortality crisis after the fall of the Soviet Union—we find that recessions seem to cause suicides, homicides, heart attacks and alcohol-related deaths. But we also find a couple of key caveats : first, that whether or not these deaths increase during a recession is critically dependent on how the government responds; second, that good social support systems tend to mitigate negative mortality effects of recession; and third, that how fast economic change happens critically affects mortality rates (presumably because people need time to prepare for drastic changes in their lives). These are the critical social and economic determinants of the effect of recession on health.
Recent data show that when European countries respond to recession by funding “active labor market programs”–programs that rapidly reintegrate the unemployed into jobs or preserve jobs for the lowest income sector–they were able to neutralize the impact of recession on mortality in their countries. This statistically explains why Spain has done so much worse than Finland and Sweden in terms of public health during recession. Curiously, active labor market programs determine more about changes in mortality than does healthcare spending; in other words, we can spend a lot of money on medicine, but it doesn’t seem to neutralize the negative effect of producing stress among households by causing job and income loss. Social support programs seem to be the key to health outcomes. During the Great Depression, the period of government spending on job and social welfare programs correlates to a period of 10% decline in mortality. In contrast, when Eastern European countries cut social welfare budgets, and mortality rates rose by about 40%–the worst peacetime mortality crisis in the past half-century. Further study of the post-Soviet crisis reveals that easy access to alcohol and very rapid economic changes increased the devastation caused by recession, while membership in social clubs (like church groups) buffered some people from economic turmoil by providing social and material support to their members.
Through subsequent analysis, it’s become clear that how governments spend their money – not just how rich a country is – determines a lot about the country’s mortality. GDP does seem to increase life expectancy, but the benefits of wealth exhibit diminishing returns after about $5000, as shown in the figure. Furthermore, the benefits of wealth seem to depend on how unequal your community is: in places with a high income inequality, wealth doesn’t translate into better health. Higher social welfare spending (spending on programs to improve food, housing, and social support) seems to be the key to translating GDP into better mortality outcomes. While higher GDP is associated with lower mortality (each $100 increase in GDP is associated with a 0.11% fall in mortality), a comparable rise in social welfare spending is associated with over a sevenfold greater reduction in mortality than a similar magnitude rise in GDP (0.80% versus 0.11%). Furthermore, when adjusted for social welfare spending, the association of GDP with lower mortality is cut by about two thirds (from 0.28% to 0.11%). This means that the potential health benefits of increased wealth crucially depend not just on increasing income, but on what fraction goes into social welfare spending from governments.
The issue of spending on social welfare is particularly relevant for populations in poor countries, who are now facing the brunt of rising food prices. Prices of maize, wheat and sugar have all increased by over 70% over the past five years, and the UN declared this as a major cause of new famines. When global food prices spiked in 2007–2008, 100 million people were added to the ranks of the world’s hungry, pushing the total number over 1 billion for the first time in history. A spike in food prices is now recurring in these first few months of 2011. Why have food prices become so volatile? Official economic explanations include: reduced production due to bad weather (caused in part by climate change), increased oil prices that make fertilizer and transport more expensive, increased demand for biofuels which takes land away from food production, export restrictions and the panic buying that can follow, financial speculation, and increased demand from countries like India and China that have new middle-income populations eating more meat. While these all possibly contribute to high food demand and a subsequent rise in prices, many of these factors are long-term evolving problems. They don’t explain why sudden spikes occur in the price of food.
One controversial explanation for these spikes is speculation, which occurs when a farmer negotiates with a banker that the banker will buy the harvest at a fixed price several months into the future (the contract is called a “derivative” because it is “derived” rather than based on current real agriculture prices, and since the contract concerns a future business trade, this derivative is called a “future”). Usually, the banker doesn’t physically receive the product when the futures are due. He has negotiated a contract with a recipient miller or producer that uses the agricultural product, and the banker makes money by selling the product at a higher price than the purchase price (the farmer often sells for less, given the guarantee of being able to sell the full harvest). Bankers organize commodity index funds, which are investments speculating on a basket of dozens of commodities, often oil and metals (ores), but increasingly also agricultural commodities. These are not based on real goods and services, and just focus on buying and selling derivatives at small differences in price to make profits. Hence, the fundamentals of these funds differ from other forms of trade—they’re highly volatile, and often bets are placed on other bets, and futures are traded perpetually into the future. Trading is largely automated by computer programs to lower transaction costs. The result is that small changes in the market result in rapid buy-ins or sell-offs, producing famine or rotting overstocks of grain with all the fickleness of the stock market. Harpers had a fantastic article showing how Goldman Sachs created a famine through their speculation in the wheat market; a more technical report is available here from a German food policy thinktank.
While many people are talking about solving the food crisis through increased production—particularly deploying new technologies for agriculture—we shouldn’t forget what Amartya Sen demonstrated: that there’s plenty of food for the world, but not enough money among the poor to buy it. If food prices soar and the poor remain without assistance, then famine is inevitable regardless of whether we produce enough food; the food will remain rotting in warehouses rather than being purchased by those who need it. The answer to this problem is therefore very similar to the answer about what to do when rich countries face high unemployment: generate social protection programs to protect people from volatile economic cycles, and create policies to prevent future volatility (regulating the financial sector, and investing in small-scale agriculture).
Can governments afford to spend on social protection programs? Frankly, they can’t afford not to. The idea that deficits are bad is true, but largely overblown; deficits are sustainable at levels far higher than those seen around the world currently. More importantly, deficit spending is critical during periods of recession in order to engage with recovery. For all the debt that states report being in, only small increases in taxes are sufficient to offset them; a 1% increase in California’s tax rate is thought to resolve its deficit, but no one is willing to make the move to increase taxes, particularly on the wealthy (who claim to require this money to stimulate the economy, but actually hoard it in savings rather than spending it in a manner that stimulates economic growth). As the Nobel Prize-winning economist Paul Krugman writes, “The only way we could have avoided a prolonged slump would have been for government spending to take up the slack. But that didn’t happen: growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level… The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances… we have a lot of evidence from other countries about the prospects for ‘expansionary austerity’ — and that evidence is all negative. Last October, a comprehensive study by the International Monetary Fund concluded that ‘the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.’”
In addition to deficit spending, there are creative ways to generate revenues for social protection programs, since raising income taxes on the populace is politically difficult. One of the most interesting proposals is the financial transactions tax, or Robin Hood Tax (remember the Tobin Tax?) that places a 0.05% tax on risky financial derivatives–discouraging the type of investments that led to the recession in the first place, while generating potentially billions of dollars at little to no cost for the banking industry. The proposal has made it to the G20, with France taking a big stake in pushing it forward. Take a look at this video that’s going viral in Britain:
The bottom line is that countrieswilling to spend on strong social safety nets experience less devastation from recession. That devastation will likely include morbidity and mortality, so while excuses abound for politicians to avoid spending during recessions, the willingness of those politicians to forgo excuses and invest in social welfare will critically determine the future health of their citizenry.