Foreign Policy

What can the insurance coverage firm inform us concerning the Capitol Mob?

The events in the US Capitol on January 6th sparked much analysis of the reasons why people mobilize politically. Some have pointed to deep polarization, others to disinformation and still others to an economic crisis.

The relationship between business and protest is well documented. The phenomenon lasted at least as long as the first secession of the plebs in 495 BC. and is a cornerstone of Marxist theory. More recently protests have emerged in Thailand and Indonesia in response to the decline in financial markets during the 1997 Asian financial crisis. In 2011, protesters opposed austerity measures in Greece and the abolition of a fuel subsidy in Bolivia. Chile has just rewritten its constitution in response to such protests. And France had a “big debate” about economic fairness that was a direct result of the protests of the “yellow vest” movement in 2018.

Although scholars tend to believe that bad economic times are associated with more protest, the relationship is still far from concrete. One problem is that "bad economic times" as a concept tend to understand an individual's economic circumstances as one-dimensional made up of income only. For many, however, economic well-being also depends on other sources of wealth, such as accumulated assets or government support. We know that individuals can make up for the loss of their job by, for example, using savings to meet their immediate needs – this is known as “consumption smoothing”.

Researchers are beginning to find that people who cannot smooth their consumption are most likely to turn to an immediately available form of political participation: protest. It is more attractive than other policy options to address economic problems, largely because it can get the government to implement policies that increase well-being relatively quickly. Other forms of political participation, such as voting, work on long-term schedules.

Under what circumstances can potential protesters not smooth consumption? A comparison with insurance is helpful here. Insurance, in the case of consumption smoothing, is an inventory of assets that, when later exchanged for cash, act as income. Insurance has two forms: private and public. Private insurance (property) is an individual's stock of accumulated assets. Public insurance (think unemployment benefits) is funded by the government but does the same as private insurance. In both cases, the stock of available funds grows as more money is gradually deposited – whether through personal savings or tax contributions – and can be liquidated and used as income if necessary.

However, smoothing out consumption is much more difficult when a negative shock prevents wealth from being exchanged for cash. For example, in 2001 the Argentine government's Corralito policy prevented withdrawals from bank accounts. This stopped a bank run, but also made it difficult for people to make ends meet. When a person is no longer adequately insured to even out consumption, the benefits of protest outweigh the potential social and physical costs. And if the shock is bad enough, it can change the future expectations of many people at the same time, coordinate many decisions on an individual level and lead to a mass movement. Economic crises can therefore be a coordinating tool for collective action.

Data from 11 Western European countries between 2002 and 2018 show that this is the case. In an analysis based on survey data, the impact of a recent income shock (job loss within a year) on protest participation was less if the respondent had some form of income insurance. That is, people living with an employed partner or receiving unemployment benefits from the government were less likely to protest.

To see this effect, consider a hypothetical 30 year old recently unemployed high school graduate in the UK in 2016. She was a non-union member and a political moderator. If their income was not primarily from social security, the likelihood of a protest by an employed partner decreased from 5.7 percent to 3.2 percent. If she also received social security as income, her probability of protest decreased to 0.00001 percent.

In the entire population, the insurance also mitigates the protest as a whole. Note that wage cuts are generally associated with more protest. However, a simultaneous increase in savings has a negative effect on this increase. In general, savings increase when individuals are uncertain about the valuation of other assets: people sell investments, stop borrowing, and switch to cash because of uncertain sources of income. Having cash available is a sign that people are expecting to smooth consumption with assets accumulated. Meanwhile, rising unemployment generally correlates with more protest. Simultaneous increases in the equity markets reduce this effect: rising assets in the market alleviate worries about unemployment.

The economic security of households is therefore even more important than income. How does this apply to the unrest in the Capitol?

Participants in this mob included a CEO and someone who flew to Washington on a private jet. These people are likely to be very wealthy and not economically concerned. Other rioters, however, may have been: Donald Trump enjoys support among people concerned about changing labor markets and technologies that replace human work. On the other side of the political spectrum, participants in protests against Black Lives Matter draw attention to the brutality of the police force, but also highlight the systemic economic divide (in both revenue and assets) between black and white Americans following Centuries of disenfranchisement for black people

Differing tendencies towards racism, nativism, violence and evidence-based decision-making undoubtedly separate these two types of protests. It is clear, however, that neither set is solely about economic interests, but that household economic security underlies the ability and willingness of some participants to mobilize. The Biden government would therefore be wise to balance enforcement of the law with trying to resolve the underlying problems. Any opportunity to improve household economic security across the board is likely to help Biden unite the country and reduce protests along the way.

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