Thursday, January 8, 2009

Monetary Policy and the Crime Rate

Mark Thoma directs us to an interesting article by James Q. Wilson on the link between the economy and crime rates. Wilson notes that while economic conditions can explain some of the variation in the crime rates, there are other important contributors:
Economists who have checked this view have discovered that it is often true, but not always. They have found, for example, that the burglary rate goes up by 2 percentage points for every 1-percentage-point increase in the unemployment rate. That sounds like a big change until you realize that if the unemployment rate rises from 6% to 8% (which is about what it is in California now), the burglary rate will increase by 4%. Because burglaries aren't measured all that accurately (some are never reported, and police vary in how they report the statistics), it's not certain that we would even notice so small an increase.

A lot of other factors affect the crime rate as well. It often goes up when the population gets younger, and when drug abuse becomes more common. Murder rates are profoundly influenced, at least in big cities, by gang activity. We don't have good ways of understanding why gang activity changes, though we suspect that changes in behavior are influenced by what the police do, whether gang truces have worked and whether gangs are fighting over drug and other illegal transactions.

All these imponderables make it difficult to fully understand why crime rates rise and fall...[So] [w]hy do crime rates change? If you have any good ideas, let me know.
Professor Wilson, how about monetary policy? That is what Garett Jones and Ali M. Kutan find in their study Volatile Interest Rates, Volatile Crime Rates: A New Argument for Interest Rate Smoothing:
Good monetary policy requires estimates of all of its effects: monetary policy impacts traditional economic variables such as output, unemployment rates, and inflation. But does monetary policy influence crime rates? By extending the vector autoregression literature, we derive estimates of the dynamic effect of higher interest rates on crime rates. Higher interest rates have socially and statistically significant positive effects on rates of theft and knife robberies, while effects on rates of burglary and assault are smaller and statistically insignificant. Higher interest rates have no effect on homicide rates. We conclude that monetary policy influences the rate of economically-motivated crimes.
These findings suggest that Greenspan's low interest rate policies that fueled the housing bubble also lowered the crime rate.

3 comments:

  1. How did this paper not make it into the AER? It brings to mind David Hendry's article where he showed a statistically significant relationship between cumulative rainfall in the UK and the inflation rate.

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  2. Anonymous:

    That is not a fair comparison. Unlike the rainfall-inflation rate study, there are theoretical reasons to expect a causal link here. Moreover, this study can be seen as simply bridging the gap between (1) the empirical literature showing monetary policy affects the real economy and (2) the empirical literature showing a link between economic conditions. and crime rates

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  3. I have a problem with this line of thought. If loose monetary policy caused the unsustainable boom that led to the bust that led to the unemployment that led to the increase in crime....then did not low interest rates ultimately cause the crime wave, not high rates? Its going to take the philosophers to sort this one out....

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