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

Political Theories of the Political Theories of the Business CycleBusiness Cycle

Political Theories of the Political Theories of the Business CycleBusiness Cycle

Jac C. HeckelmanJac C. Heckelman

Associate Professor of EconomicsAssociate Professor of Economics

Wake Forest UniversityWake Forest University

Macroeconomic Formulations

• Lucas supply functionY = YN + a*(Inflation – Expected Inflation), a>0

• Phillips Curve representationU = UN + b*(Inflation – Expected Inflation), b<0

Political Business Cycles

Unemployment

Inflation

UN

I2

UE

I1

Political Business Cycles

Unemployment

Inflation

UN

I2

UE

I1

Political Business Cycles

Unemployment

Inflation

UN

I3

I2

UE

I1

Political Business Cycles

Unemployment

Inflation

UN

I3

I2

UE

I1

Political Business Cycles

Unemployment

Inflation

UN

I2

UE

I1

US

Political Business Cycles

Unemployment

Inflation

UN

I2

UE

I1

US

Partisan Economic PerformanceDemocrat Republican

Unemployment Inflation Unemployment Inflation

level % level % level % level %

60-64 -0.3 -5.5 -0.3 -20.0 68-72 2.0 55.6 -0.3 -6.4

64-68 -1.6 -30.8 3.5 291.7 72-76 2.1 37.5 0.4 9.1

76-80 -0.6 -7.8 7.6 158.3 80-84 0.4 5.6 -8.5 -68.5

92-96 -2.1 -28.0 0.4 13.8 84-88 -2.0 -26.7 0.5 12.8

96-00 -1.4 -26.4 0.1 4.1 88-92 2.0 36.4 -1.5 -34.1

00-04 1.5 38.4 -0.7 -21.4

Avg -1.2 -19.7 2.3 89.6 Avg 1.0 24.5 -1.7 -18.1

Partisan Business Cycles

Unemployment

Inflation

Democrats

Republicans

UR

IR

UD

ID

Rational Partisan Business Cycles

Unemployment

Inflation

UR

IR

UD

ID

UN

IE

Rational Partisan Business Cycles

Unemployment

Inflation

UR

IR

UD

ID

UN

IE

RE Political Business Cycles

Unemployment

Inflation

UN

I2

UE

I1

US

RE Political Business Cycles

Unemployment

Inflation

UN

I1

UE

IE

RE Political Business Cycles

Unemployment

Inflation

UN

IE

IX

D D R

Defl

Infl

e ee

Electoral Policy Cycles

D D R

Electoral Policy Cycles

Infl

Defl

D D R

Recess

Expan

Electoral Business Cycles

D D R

Electoral Business Cycles

N*

Expan

Recess

D D R

Electoral Business Cycles

Recess

Expan

N*

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

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

Growth by term year

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0 1 2 3 4 5

Republican Democrat

Unemployment by term year

4.0

4.5

5.0

5.5

6.0

6.5

7.0

0 1 2 3 4 5

Republican Democrat

Political Monetary Cycle, 1875-1934

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarters since last election

Independent Treasury Federal Reserve

e ee

A Political Business Cycle?Y

T

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