Political Business Cycles: They're Alive!

The political economical cycles are not worse than they are because politicians and their advisers accepted the (wrong) idea that there are no such cycles, that voters do not make up their minds on the basis of last minute experience. Now that you know and the politicians know, you can expect a more energetic pre-election pumping up.

My second answer is that the world, in fact, is worse, ie in countries where politics is more a hardball (frequently hard bullets) thing than in the USA, governments save budgets to be spent 2 -3 weeks before elections, and this is a normal, expected habit. Juan Domingo Peron was a master, he used to send to each family a Pan Dulce (a traditional sort of fruitcake), a bottle of sidra (weak sparkling wine) and toys for the children for Christmas, accidentally just before elections. He never lost an election.

It is clear that election outcomes are more strongly correlated with short-term GDP growth than with long-term GDP growth.

Wouldn't this just mean that elections, when they are close, are decided by a small percentage of "undecideds" who make up their minds at the last moment?

Why isn't it more like 1000% of GDP?

1. Politicians are not amoral. Most enter the field to promote what they consider good. They may be willing to pass measures they don't approve of in order to get elected (and thus continue to promote their good), but I *strongly* doubt that more than a small minority are willing to destroy what they've been allowed to govern simply to continue in power.

2. Because the voters may be stupid, but they're not *that* stupid. You can juice the economy, but if it truly appears that you are destroying it (in a way obvious to the majority of voters), then you're in trouble.

Most modern economies have a well-enough educated population that catastrophic measures (rather than simply bad ones) will cost votes rather than gain them.

Bryan take the points raised here back to your argument raised sometime back about why if the wealthy vote for their self interest why they would ever vote Democratic.

When you look at the data what you find is a pattern of Republicans being extremely guilty of the final year boost while Democrats produce a better overall economy. So under this analysis you get two conflicting trends -- do voters vote on the overall picture or just on their recent experience?

But the other side to the question that needs to be brought into the debate is that the four year economic cycle seems to be dying. The economy has gotten much much more stable over the last quarter century. Since the double recessions around 1980 the economy has only had two minor downturns. Economists have been debating if this improved performance is just a matter of luck, or have there been structural changes in the economy
that have made it less cyclical -- technology generating better inventory controls and planning, etc. Another part of the more stable economy is inflation, and while disinflation is one reason for a more stable economy, our understanding of inflation has declined over the period.

But the general conclusion I think I have seen among economists is that the political cycle is not nearly as strong as it use to be.

They totally reject the view held by the legions of political science Pollyannas who claim that on average voters "respond sensibly and systematically to actual economic experience under the incumbent administration."

This may be easier to accept if one remembers that to get their results this doesn't have to apply to the "average" voter, but only to the few points of marginal, generally uncommitted swing voters needed to turn an election.

So why haven't our leaders done the equivalent? At the end of 2004, the national debt was only 64.8% of GDP. Why isn't it more like 1000% of GDP?

Decreasing political returns. Goosing income a little swings the marginal voter. Running up debt a lot begins to scare the average voter.

We often wonder why democracy doesn't perform better. After reading Aachen and Bartels, I once again find myself wondering the opposite: If this is how voters think, why isn't the world a lot worse?

Almost all the world is worse than the US. Most is a whole lot worse.

Democratic politics perverting economic policy as polticians buy votes in the short run at the economic cost of the long run is a very typical cause, from the developed world (Germany, 12% unemployment and 0% growth) to third-world nightmares.

Of course, the phenomenon is hardly unknown in the US too.

But we should consider why the US continually does as well as it does, relative to all the rest.

Has anyone actually proven that politicians can create short-term economic growth dependably?

While voters may reward short-term economic growth, I really doubt that most politicians can actually deliver it.

For decades Ray Fair has been modeling economic influences on elections in his "Presidential Vote Equation," and he appeared to have got things pretty well worked out. For the last election, though, he was substantially off: he predicted that President Bush would get 57.7 percent of the two party vote. It seems that non-economic factors may have played a much greater part than his model suggested. His failure at this stage makes me highly skeptical of any simple macro calculation.

Another reason for skepticism is that the argument, at least as presented by Brian, assumes that the voting public has a clear sense of precisely how the economy is doing in the run up to the election. But anyone who has followed pre-election opinion polls should recognize that the average person often has a wildly distorted idea of current economic performance. And isn't Brian the one who consistently argues for the economic illiteracy of the average person? If that's so, then this influence would have to be unconscious. So this is what we're being asked to believe: the voter, unable to articulate the true state of the economy, unwittingly perceives the increased growth in GDP (or in personal income or whatever) and votes accordingly. Excuse me if I remain doubtful. tk

I don't know how this influences this debate, but I recently came across a paper that supposedly corrects for varying effects in the dependant economic variable. That is, if one uses inflation or GDP, the model will yield different results since they often move in different directions,

http://userwww.service.emory.edu/%7Eskrause/pdf/pbc01.pdf

This paper supposedly uses the revealed preferences of incumbant parties to detect whether an opportunistic or political cycle is at work. I believe it was published earlier this year in the Southern Economic Journal. The linked version is an earlier working version I believe.

"Why isn't it more like 1000% of GDP?"

Some politicians can't be re-elected, because of term limits. For them, there is no reason to boost the economy temporarily.

Many, many politicians hope to be elected for more than one term. If you hope that you may be elected time after time, it would be crazy to sacrifice long term growth prospects for a one time boost. What you want is the most long term growth you can get, consistent with bribing the electorate enough (just enough!) to win your next election every time.

Some politicians can only be elected for one term, because of term limits. These are most subject to the temptation to boost the economy temporarily.

What's rational for an individual politician may not be rational for the party machine. One politician may decide that for him, nothing beyond the next election counts. But how much control does he have over all the party activists who'll have a different conception of their self interest? (And, for irrational volunteers and donors, a different conception of the common interest for which they are making personal sacrifices.)

Rather than destroy the party's ability to win future elections, it may make sense to talk back to or even walk away from a desperate politician who's thinking only of his next election, not of your whole future with the party. (Whether that future is about rent-seeking or idealism makes no difference. Either way, you're making a long-term calculation.)