Crime and Macroeconomics

The Banca D’Italia – Italy’s central bank – supports and promotes a wide range of research activity including quite a bit even in the area of economic history, which for an economic historian like myself is especially heart warming to see. The ongoing Euro Zone economic downturn and crisis naturally also spawns a lot of macroeconomic and monetary research with some interesting themes.  Guido de Blasio and Carlo Menon of the Bank of Italy have an interesting discussion paper out on the impact of the economic downturn on crime in Italian towns.

 

Discussion paper No. 925 – “Down and out in Italian towns: measuring the impact of economic downturns on crime” looks at the effect of local economic conditions on crime in Italian towns in the wake of the 2007-2009 economic slump.  De Blasio and Menon show that the economic downturn led to a significant increase in crimes that did not require specialized criminal skills or tool – for example, thefts – while more human and physical capital intensive crimes - such as robberies - actually declined.

Their empirical model is:

CRIMEi,t.r = a + β ECONACTi,t +Sn (dn Xi,t) +gi+ρrt + εi,t,r 

where i indexes spatial units, t years, and r regions; ECONACT is a proxy for economic activity in the area and Xi,t indicates time-varying covariates at the level of geographic aggregation. They have a (2004-2009) panel with area (g_i) and time-region (ρ_rt) fixed effects.  The variables are taken in logs making the coefficient β the elasticity of crime to economic conditions.

The spatial units are Local Labor Markets (LLM) as defined by the Italian National Institute of Statistics which are aggregations of two or more neighboring municipalities based on daily commuting flows from place of residence to place of work as recorded in the Italian population census. In 2001, 686 of them were defined and they had an average population of 83,084. 

The local economic activity measure is the sum of the total revenues (known as fatturato) of all private plants located in the LLM. The crime data is from a  dataset on criminal facts known as the “Sistema di Indagine” (Investigation System or IS), which supplements the information collected in victim reports with that on criminal facts that the police department collects in its day-by-day investigation activity which  the authors argue  can be considered as less spoiled by the underreporting issue that can affect the empirical analysis of crime.  IS criminal facts are available at the municipality-level for the years 2004-2009 and include 34 categories of crime. The authors focus on thefts, extortions and robberies (for economic-related crimes) and on murders, assaults and sexual crimes (for the non-economic related ones).

The results?  A 1 percent decrease in local economic activity resulted in a 0.6 percent increase in thefts and a 1 percent increase in extortions.  However, the impact of the crisis on economic-related offenses that are more involved and require some crime-specific human and physical capital, such as robberies is negative.  They also find that the slowdown did not have any effect on noneconomic-related crimes, such as murders, assaults or sexual crimes.   Moreover, they found the intriguing result that in regions where organized crime was more pervasive – the impact of the slump on crime was more muted.

When they split the sample into LLMs belonging to regions where the control of organized crime was more prevalent - Campania, Sicilia, Calabria, Puglia – versus  the remainder, they find that the regions where organized crime was pronounced found no effect of the economic slump on economic-related crimes.  They offer two potential explanations for this: 

1. Public sector employment is more important in the Italian south and therefore the weight of the public sector in organized crime regions is more significant than elsewhere: as a result, the public sector might act as an economic buffer that reduces the impact of the slump on criminal activity.  However, the authors find that controlling for LLMs with the highest share of public sector employment did not change the results.

2. Organized crime acts as an illegal monopolist that raises entry barriers for criminal activity: in areas controlled by the Mafia, Camorra or Ndrangheta it is more difficult (and even dangerous) to turn to illegality when the reserve value of legal opportunities decreases.

I guess some of my suggestions  regarding the paper's methodology would include laying out more explicit discussion of the differences between "theft" and "robbery".  As well, I was unclear as to whether the private plants being referred to in the measure of local economic activity were all private firms or simply industrial firms.  If the latter, since the Italian south has less industrial activity relative to the north, it could make this measure a poorer proxy for economic activity in the south.

The authors conclude that national and local authorities should add criminality to the long list of social problems that can arise and need to be tackled during economic downturns. Of course, this is a bigger challenge for government than one might think given that the results suggest organized criminals are better at fighting local crime than the government authorities.  What I found intriguing is that the results suggest pervasive organized crime served as a barrier to opportunistic crime in the wake of an economic downturn – something one would think is what the public security apparatus of government should be doing. 

One simple definition of government is a legal institution that has a monopoly on coercive force.   Organized crime can be seen as an attempt at illegal entry into the activities of established government by establishing parallel private institutions that provide revenue generating “local public goods” with their own local monopoly on coercive force.  That organized crime can be more effective at combating the criminal upsurge from economic downturns than government is really for me a very interesting result.

Comments

[Peter T]

And the activities of the Camorra et al are not criminal? The definition is not a monopoly on coercive force, but a claimed monopoly on the legitimate use of coercive force. Is the use of force by the Camorra et al legitimate? And what "local public goods" are they generating? Their main activity is extortion, which is surely not a public good of any kind.

[Livio Di Matteo]

Peter:
I repeat:"government is a legal institution that has a monopoly on coercive force. Organized crime can be seen as an attempt at illegal entry into the activities of established government". So yes, the activities of organized crime are criminal. The "local public good" being provided is "protection" services which really means protection from themselves and others of their kind engaged in their activities.

[Bob Smith]

"What I found intriguing is that the results suggest pervasive organized crime served as a barrier to opportunistic crime in the wake of an economic downturn – something one would think is what the public security apparatus of government should be doing."

Yes, but the public security apparatus faces regulatory barriers in the performance of their duties that don't apply to the mob (i.e., fair trials, limitations on the ability to kneecap people, etc.), so it's not entirely surprising that they're less effective.

"Is the use of force by the Camorra et al legitimate? And what "local public goods" are they generating? Their main activity is extortion, which is surely not a public good of any kind."

Probably not. But I can't say that that is never true. If the local police are sufficiently inept or corrupt (surely not implausible in parts of Italy or other parts of the world), the mob (or their local equivalent) might actually provide value for their protection money (certainly relative to the local police). No doubt that's part of the reason for the enduring prevalence of those sorts of criminal organizations. And no doubt there are parts of the world where criminals have more legitimacy in the eyes of the locals than the local police force.

[Jason]

Couldn't organized crime also act as a central planner for crime in a region? They could keep crime directed towards the more capital intensive crimes by providing the training or capital and establishing which crimes should be committed. Though with the overall level of crime in these areas not changing significantly I guess this idea isn't very useful (unless maybe organized crime also brings levels of crime to some sort of saturation point, bringing nearly all would be criminals into crime already).

The idea that organized crime would provide protection from increased extortion makes sense. If someone is paying you protection money you should be providing the service they are paying for (even in that includes protection from your own thugs). Otherwise they might lose some credibility and receive less payments.

[Bob Smith]

"Though with the overall level of crime in these areas not changing significantly I guess this idea isn't very useful (unless maybe organized crime also brings levels of crime to some sort of saturation point, bringing nearly all would be criminals into crime already)."

Presumably, an organized crime "monopolist" wants to provide the "optiomal" (at least from their perspective) level of crime, enough to fleece their targets, but not enough to cause them to move or shut down their businesses, resist, or lobby for better policing. So you'd expect the crime level to more or less constant, regardless of changes in the supply of potential criminals (i.e., cause by a recession), since the monopolist will keep the others from entering the market (perhaps by making them an offer they can't refuse).

David Simon and Michael Burns chronicle a similar pattern in the US drug trade in their book "The Corner". Back in the 1950's and 60's, when it was difficult to get supplies of heroin, the drug trade was controlled by a handful of professional suppliers who, like good oligopolists, made sure that the drug trade was "controlled". Dealers were professionals, they were selective about who they would sell drugs to (i.e., not kids and, as a point of pride, not anyone they thought might be cops), and they were selective in the use of violence (minimizing the risk that society would decide to wage a "war on drugs"). They had a market, it was protected, they were collecting their oligopoly rents and had the muscle and incentive to keep it that way. From the perspective of a drug monopolist, this is profit maximizing behaviour (taking into account time spend in jail or the risk of death).

With the explosion in the availability of first heroin and later crack, that carefully managed drug trade broke down. Suddenly, anyone who could rub two nickels together could hop on an interstate, pick-up a package of drugs and, bang, they're a drug dealer. As competition increased, prices plumetted, dealers started selling to anyone who wanted to buy(including cops, who started making their living busting low-level street dealers too stupid to recognize an undercover cop) causing use to spread beyond the traditional core of hard-core junkies, and violence skyrocketed (as the US entered the era of teenagers spraying down street corners with tec-9 in an effort to win market share). Meanwhile, the income (and life expectancies) of drug dealers plummetted.

So that might be an example of "organized" crime (arising from the existence of limited number of suppliers of heroin or other hard drugs) providing a socially optimal (or, at least, socially preferable relative to the present, level of crime).

"If someone is paying you protection money you should be providing the service they are paying for (even in that includes protection from your own thugs). Otherwise they might lose some credibility and receive less payments."

Also, if they're doing it right, the extortionist is capturing his client's economic profit (leaving the client indifferent between carrying on business and shutting down). In effect, that makes the extortionist the defacto owner of his client's business (since he's entitled to all the profit). Unless he wants the client to shut down, any other money that comes out of the business come's out of the extortionists "fee" In that case, if you're an extortionist, and someone robs from your "client", they're in effect stealing from you. I suspect more than a few mobsters see things that way too.