Bryan Caplan  

Political Business Cycles: They're Alive!

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Twenty five years ago, political business cycles were a hot topic. The idea is that incumbents artificially juice up the economy during election years to improve their chances of re-election. By the time I was in grad school, though, conventional wisdom said that political business cycle theory did not hold water. Theoretically, it required voter irrationality; empirically, it was flat wrong.

I was therefore shocked to learn that two hot-shot political scientists, Christopher Achen and Larry Bartels, have recently revived a strong version of political business cycles. In their "Musical Chairs: Pocketbook Voting and the Limits of Democratic Accountability" they boldly defend a whole list of heretical views. And while I'd definitely like some good empirical macroeconomists to double-check their work, their evidence seems straightforward.

Achen-Bartels' main claims:

  • If we take seriously the notion that reelection hinges on economic competence, we should expect to see more economic growth when the incumbent party is reelected than when it is dismissed by the voters.

    But in fact:


    [W]ithout controls, it appears that voters are slightly less supportive of incumbents who turn out, upon reelection, to preside over high rates of income growth. Adding control variables produces an even stronger negative estimate for the effect of future income growth on incumbent vote margins.

  • After going over a lot of data, they bluntly report:

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

    In fact, it is hard to statistically improve on a simple model in which voters care only about income growth in the last two quarters before the election.

  • GDP growth in election years is only .4 percentage points higher than in other years, but income growth is a full 1.5 percentage points higher than other years. They argue that the greater effect of income growth should have been expected all along, because voters directly experience income, not production.

  • This pattern is stable, indicating that voters have yet to see through incumbents' trickery:
    In the period from 1947 through 1977, the average income growth rate was 1.5 percentage points higher in presidential election years than in other years; since 1978 it has been 1.4 percentage points higher in presidential years than in other years.

  • Achen and Bartels are not afraid to jump from their empirics to the Big Picture. Electoral victories are a blend of trickery (temporarily pumping up the economy during election years) and luck (last-minute scandals and spin doctoring, like the Swift Boat controversy). 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." On the contrary:

    Our view is that they do no such thing. Rather, they forget most of their previous experience and vote solely on the basis of how they feel about what has happened lately. The result is not a slightly distorted version of rational retrospection. It is something else altogether—a high-stakes game of musical chairs.

    Frankly, this is a scary story. It is easy to make today heavenly if you are willing to make tomorrow hellish. Think about how much credit card debt you could accumulate in the next six months if, heedless of the future, you really wanted to live it up. 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?

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


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    COMMENTS (9 to date)
    jaimito writes:

    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.

    Tim Shell writes:

    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?

    Tom West writes:

    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.

    spencer writes:

    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.

    Jim Glass writes:
    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.

    Mr. Econotarian writes:

    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.

    Tom Kaminski writes:

    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

    Saxdrop writes:

    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.

    David Blue writes:

    "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.)

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