Political Cycle_alberto Alesina

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The Suntory and Toyota International entres for Economics and Related Disciplines

Political Cycles and the Macroeconomy by Alberto Alesina; Nouriel Roubini; Gerald D. CohenReview by: Philip R. LaneEconomica, New Series, Vol. 66, No. 261 (Feb., 1999), pp. 151-152Published by: Wiley on behalf of The London School of Economics and Political Science and The

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Econornica 1999) 66, 151-4

Book Reviews

Political Cycles and the

Macroeconomy.

By ALBERTO

LESINA ndNOURIELROUBINI,

with GERALD

D.

COHEN.

MIT Press,

Cambridge, Mass. 1998. xii

+

302 pp.

Paperback ?16.95.

This book

by

two leaders

in

the

field, provides

a theoretical and empirical exploration

of the relationship between political cycles and

macroeconomic performance. This topic

has been

the subject

of much

research over the

last decade, and the authors provide a

valuable service

in

presenting a unified treatment of the main contributions

in

this

burgeoning literature.However, the book is more than just a survey and presents many

new results.

A

brief introduction outlines the authors'

motivation and provides an overview of

the book's inain contributions. Chapters 2 and 3 present a consolidated account

of

the

canonical

political cycle

theories: the

opportunistic

and

partisan

models. In

each case,

the traditional

(1970s)

version

is

first laid

out before turning

to

contemporary

rational

expectations

variations. These

chapters

both

provide

a useful theoretical framework

for

the

subsequent empirical analysis

and stand alone

as a

textbook

treatment that

will

prove useful to researchers and students

alike.

The empirical

work

begins

in

Chapter 4,

with a time-series study of the US

data.

The authors test

for

political cycle

effects

both

in

macroeconomic outcomes

(growth

and

inflation)

and

in

policy

instruments

(monetary

and

fiscal

policy).

Relative

to

pre-

vious work, the approach is encompassing in the sense of investigating both opportun-

istic and

partisan

theories on

a

common, updated

data-set.

They

find

support

for the

rational

partisan theory:

Democratic

administrations are more

expansionary

than

Republican ones,

but these effects are concentrated

in

the first half of the electoral

cycle.

On the

other

hand,

there is

no

evidence

in favour of the

prediction

of the

oppor-

tunistic

theory

that

we

should observe macroeconomic

expansions prior

to elections.

Chapter

5

investigates

the

impact

of electoral

uncertainty

on

macroeconomic

per-

formance.

Building

on

Cohen's

doctoral

dissertation,

an index of

electoral

uncertainty

is

extracted from

polling

date

through application

of

option pricing techniques. Again,

the rational

partisan approach

is

supported

in

that

expected

inflation

(as

reflected

in

forward interest rates) rises, the more probable is Democratic electoral success. More-

over,

consistent

with the

presence

of

sticky

wages

or

prices, post-electoral partisan

effects on macroeconomic

performance

are

stronger,

the

more

unexpected

is the elec-

tion outcome.

The empirical analysis is extended

to a

panel

of industrial

countries

in

Chapters

6

and

7.

Again,

the

authors

move

beyond previous

work

by constructing

a broader and

deeper

database and

conducting

a

comprehensive

set of tests.

The

core

finding

is

that,

in broad

terms,

the results for the industrial

country panel

are

very

similar

to those

for

the

United

States.

As

such,

the

United

States

is not

exceptional,

in

contrast

to

the

working hypothesis

of the

'American

politics'

branch of

political science,

and

political

cycle

theories

are

relevant

in

understanding

macroeconomic

performance

across the

OECD. In addition, there is clear evidence that partisan cycles are larger in two-party

than

in

multi-party systems.

Having completed

the

investigation

of the direct

empirical predictions

of

opportun-

istic

and

partisan models,

the authors next consider

potential

interactions between

pol-

itical

cycle

theories and

some

institutional

features

that

have been

emphasized

in

the

recent

political economy

literature.

In

Chapter

8 it is

shown that

a

partisan political

system provides

an additional incentive to

establish

an

independent

central

bank. Such

delegation depoliticizes monetary policy

and

hence

eliminates

partisan cycles

in

inflation

and interest rates.

Moreover,

it

may also insulate the economy policy

from

opportunistic political cycles

since

the

government

is no

longer able to directly manipu-

late monetary policy during election years.

The

interaction between political cycles and

the budgetary process is examined in

Chapter

9.

In

addition to

discussing

how

institutional

features affect fiscal outcomes

?

The London

School

of

Economics and Political

Science 1999


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152

ECONOMICA

[FEBRUARY

(e.g. hierarchialand transparent

fiscal procedures arguably

induce more fiscal discipline

than collegial and

opaque systems),

the authors present evidence that two-party

systems

adjust

more

quickly to fiscal

shocks than multi-party

coalition systems, with the latter

more rapidly

accumulating larger amounts of debt

in response to adverse

shocks. This

suggests a trade-off in the design of political systems: two-party systems may generate

larger partisan cycles, but are better

able to respond

to shocks. Finally, Chapter 10

recapitulates

the book's main findings and speculates

as to the relevance

of political

cycles to

future

macroeconomic

performance.

The authors predict that central bank

independence and international

monetary

and financial integration

will

attenuate,

but

not elimiinate,partisan conflicts regarding

the unernployment-inflation

trade-off. How-

ever,

the

pressing

need

for fiscal

consolidation

in

many countries

will

likely

lead to

intense partisan and distributional

conflicts over

the precise design of

fiscal

adjustment

programmes.

Overall,

this volume

is

a

fine achievement. The authors write

with

appealing

clarity

and successfully convey a sense of intellectual excitement about this field of research.

Throughout

the

book, the

authors signal the many

issues

requiring

future

research,

and

the book is

a

potential

goldmine

for

graduate

students

trawling

for dissertation

topics

in

this area.

Among

the extensions

that

would

be desirable are the

inclusion of

developing

countries

in

the

empirical analysis,

and

conditioning

the

macroeconomic

transmission

of

political cycles

on

characteristics

such as a

country's degree

of

openness

to trade

in

goods and capital.

This

excellent book

is a must-have for all economists

and political scientists inter-

ested

in the

interaction

between

politics

and macroeconomics and

is also

suitable

as a

textbook

for course modules

in this

area.

Trinity College Dublin and CEPR PHILIPR. LANE

RewavrdingWork: How to Restore

Participation

and

Self-Support

to Free

Enterprise.

By

E. S.

PHELPS.

Harvard University Press, Cambridge, Mass. 1997. x + 198

pp.

?16.50.

The

premier

labour market

problem

in

the United

States in the

past twenty years

has

been the rising inequality

of

wages.

This

foreigner might

be

excused for

observing

that

the same

comment

applies

to the United

Kingdom.

The

present

short volume

argues

for a graduated wage subsidy applicable

to the

employment

of

low-wage

workers

as a

solution to this difficulty. In the United States the subsidy would kick in at 4 (slightly

below the federal minimum

wage

at

the

time the book

was

written)

and

phase

out

gradually, disappearing for workers

earning

more than

12 per

hour

(roughly the aver-

age wage).

The author's justifications for this

subsidy

are as

follows. (1) Unemployment and

low returns to

work

among unskilled workers create a

variety

of

negative externalities,

such

as increased

crime and

intergenerational spillovers. (2)

A

rich

country,

especially

one

founded,

as

Phelps beautifully

argues

in the

Epilogue,

on notions

of

fellow-feeling

and

comity,

not

merely

on

rugged individualism,

should

be

ashamed

of such

inequality.

(3) The net costs

of

such a subsidy are small or zero once

one accounts

for

reductions

in

transfer programmes, increased productivity of higher-skilled workers (as

the

employment of low-skilled workers rises), and reduced burdens of social problems.

In

many ways, this is an extremely frustrating and annoying book. The

externality

argument

is

unconvincing:

One

might

instead

argue that,

to the extent that

there are

externalities

among workers, they

flow

mainly

from

higher-

to lower-skilled.

This alter-

native underlies recent theories of

endogenous growth.

It

militates against subsidizing

the

low-skilled to

internalize

externalities,

and instead

perhaps justifies

subsidizing

education and

training.

Those who have thought about

and studied employment tax credits have

pointed

out and

even

(Burtless 1985)

measured

the

impact

of the

stigma that eligibility for such

credits

may

attach to the subsidized

employee. Admittedly, the stigma would be

less

under a broadly applicable wage subsidy, but it would hardly disappear and would still

reduce

employers' responsiveness

to the subsidy. More broadly, the author never

addresses the

likely impact

of

the subsidy on low-skilled employment-would it

really

?

The London School

of Economics and

Political Science 1999

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