Solving the Crime Puzzle: The Answer is Interest Rates

May 24th, 2011

Crime is down, even with a pretty lousy economy and a 9.5% jobless rate in 2010.  The New York Times is stumped, with a headline blaring “Crime Baffles Experts.”  Here’s the answer:  Recessions don’t incite people to rob and plunder.  Last year violent crime dropped 5.5% and property crime 2.8%, after  a 4.6% plunge in 2009. 

In my new book RUSH:  Why You Need and Love the Rat Race, I argue that low interest rates fight crime waves.  Why?  Because low interest rates tell us that tomorrow is worth waiting for.   If the world were ending next year (where are those Rapture preachers?), even SNL’s Church Lady might be tempted to misbehave.  Think of those New Orleans looters swiping Cadillacs after Hurricane Katrina – they cared less about the consequences of tomorrow.  They let the good times roll right out of the broken plate glass of the showroom.   

Here’s the logic:  As an economist, the best measure of time I can find is the prevailing interest rate.  When interest rates are high, it tells us that tomorrow counts for less.  It is not worth investing today.  From a business point of view, very few financed projects will pay off if interest rates are high (the “hurdle rate”).  However, when interest rates are low, it tells us that we should invest today because any return will be prized more in the future.  During the German hyperinflation of the early 1920s, prices and interest rates jumped higher each hour.  The price of a cup of coffee could go up as the waitress was pouring.  Teachers got paid at 10 am and brought their banknotes to the playground so their relatives could pick them up and then buy things immediately. 

Likewise, the hyperinflation of Zimbabwe in recent years has acted like a neutron bomb on the economy.   Coincidentally, in 1919 when Yeats wrote “things fall apart; the centre cannot hold,” interest rates were jumping sharply, the British pound slid in value, and Europe was preparing for a terrible bout of post-War War I inflation. 

The “Buchholz hypothesis” says that the crime rate is importantly a function of interest rates.  This solves the puzzle of the Great Depression.  Most commentators on crime say that a lousy economy leads to crime.  But during the Great Depression, crime rates fell, as they did in 2008-10.  Why?  Because interest rates fell, too.  People did not give up on tomorrow, even as they suffered economic distress.

Don’t stop thinking about tomorrow.  ‘Cause if you do, all hell breaks loose.

READ MORE IN RUSH: Why You Need and Love the Rat Race

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