Political Theories of the Business Cycle

1. Political Theories of the Business Cycle Jac C. Heckelman Associate Professor of Economics Wake Forest University

2. Macroeconomic Formulations • Lucas supply function Y = YN + a*(Inflation – Expected Inflation), a>0 • Phillips Curve representation U = UN + b*(Inflation – Expected Inflation), b<0

3. Political Business Cycles Inflation I2 I1 Unemployment UE UN

4. Political Business Cycles Inflation I2 I1 Unemployment UE UN

5. Political Business Cycles Inflation I3 I2 I1 Unemployment UE UN

6. Political Business Cycles Inflation I3 I2 I1 Unemployment UE UN

7. Political Business Cycles Inflation I2 I1 Unemployment UE UN US

8. Political Business Cycles Inflation I2 I1 Unemployment UE UN US

9. Partisan Economic Performance

10. Partisan Business Cycles Inflation Democrats ID Republicans IR Unemployment UD UR

11. Rational Partisan Business Cycles Inflation ID IE IR Unemployment UD UN UR

12. Rational Partisan Business Cycles Inflation ID IE IR Unemployment UD UN UR

13. RE Political Business Cycles Inflation I2 I1 Unemployment UE UN US

14. RE Political Business Cycles Inflation IE I1 Unemployment UN UE

15. RE Political Business Cycles Inflation IE IX Unemployment UN

16. Electoral Policy Cycles D R D Infl Defl e e e

17. Electoral Policy Cycles D R D Infl Defl

18. Electoral Business Cycles D R D Expan Recess

19. Electoral Business Cycles D R D Expan N* Recess

20. Electoral Business Cycles D R D Expan N* Recess

21. Evidence for Electoral Cycles • Political Business Cycles • Not for output or unemployment • Policy cycles in money, deficits, some fiscal • Partisan Business Cycles • Mixed for output and unemployment • Policy cycles in money and fiscal • Historical record (pre WWII) • Mixed for output • Questionable for money

22. Evidence for Partisan Business Cycles Truman through Clinton • Partisan Growth Cycles • Democrats 4.1 > Republicans 2.4 • Democrats 1st half 4.4 > Republicans 1st half 1.4 • Democrats 2nd half 3.9 ≈ Republicans 2nd half 3.4 • But annual record does not fit • Partisan Unemployment Cycles • Democrats 5.2 < Republicans 6.1 • Democrats 1st half 5.6 ≈ Republicans 1st half 5.8 • Democrats 2nd half 4.7 < Republicans 2nd half 6.5

23. Growth by term year

24. Unemployment by term year

25. Political Monetary Cycle, 1875-1934

26. A Political Business Cycle? Y e e e T

28. Strategic Election Timing • PBC tests valid for US • PPC tests valid for fiscal---money ? • RPT valid for US • RPT varies for others (VRPT) • Uncertainty over election timing • Greater divergence in output, unemployment over course of administration • Election effects depend on when election called