The political business cycle under rational voting behavior

This essay argues that politically motivated business cycles could persist in a democratic society even if the electorate votes in a rational, fully informed manner, provided that government policymakers have the means to systematically generate macroeconomic fluctuations. This cyclic outcome reflects the pReferences of an electorate that is composed of imperfectly altruistic voters belonging to different overlapping generations. Since each generation has a different horizon over which it would like to have elected politicians provide an optimal economic policy plan, an intergenerational conflict of interests situation arises. This conflict is placed into an explicit political context, whereby cycles become generated under the institutional constraint of periodic elections.     

Rationality and the political business cycle: The case of local government

The empirical results which have been reported support the hypotheses' implied by the model of rational political behavior set out in Section 2. In pre-election periods, local government development expenditures deviate significantly from their normal levels. The extent of deviation is approximately 20%.Consistent with the predictions of this model, it is found that incumbents not seeking re-election deviated far more in their pre-election discretionary budget expenditure than incumbents seeking re-election. The expenditure gap between the two types of incumbents is large and statistically significant. Incumbents not seeking re-election exhibit a deviation equivalent to 47% of the development budget, while those seeking re-election exhibit a 12% deviation.     

Random timing of elections and the political business cycle

In his 1975 paper, Nordhaus formally proves that governments whose aim is to be reelected, will generate ‘political’ business cycles. Empirical results do not confirm this proposition, especially in countries used to early elections. We show that if there is a non-zero probability for elections to be called before the legal term, the political business cycle will be less pronounced, even if no early election actually takes place; moreover, if the normal electoral cycle is interrupted before the legal term, one might observe an inversion of the business cycle, or no cycle at all.     

The information content of elections and varieties of the partisan political business cycle

This event study uses economic forecasts and opinion polls to measure the response of expectations to election surprise. Use of forecast data complements older work on partisan cycles by allowing a tighter link between election and response thereby mitigating concerns of endogeneity and omitted variables. I find that forecasters respond swiftly and significantly to election surprise. I further argue that the response ought to vary across countries with different institutional foundations. In support, I find that there exist three distinct patterns in forecasters’ responses to partisan surprise corresponding to Hall and Soskice’s three varieties of capitalism.     

Do fiscal rules dampen the political business cycle?

This paper develops and tests the theory that fiscal rules limit politicians' ability to manipulate the budget for electoral gain. Using panel data from the American states, I find evidence suggesting that stringent balanced budget rules dampen the political business cycle. That is, while spending rises before and falls after elections in states that can carry deficits into the next fiscal year, this pattern does not exist in states with strict “no-carry” rules. Neither binding gubernatorial term limits nor the partisan composition of government appear to significantly affect the magnitude of the political business cycle.     

Managing business political activities in the USA: bridging between theory and practice

The political arena in the USA is portrayed as a marketplace in which businesses and other groups compete to influence public policy decisions. Managers can view this political market as an opportunity to shape the rules of the game by which they operate but must realise that it is a very competitive arena. Drawing on concepts from business strategy advocacy activities like lobbying, making campaign contributions, and organising grassroots efforts are analysed in terms of opportunities for gaining competitive advantage. Results from case studies indicate that many businesses miss opportunities to build support among employees for political advocacy because few firms use bottom up approaches for political action committees or grass‐roots efforts. Suggestions for managers interested in improving the effectiveness of their business advocacy efforts are discussed. Copyright © 2001 Henry Stewart Publications     

Finding political capital for monetary tightening: Unemployment insurance and partisan monetary cycles

How do governments find the political capital to raise interest rates in pursuit of inflation stabilisation? Against common wisdom, this article shows that the ability of governments to exercise tight monetary policy largely depends on the level of unemployment insurance. Unemployment insurance is particularly useful to social democratic parties since their core constituency – labour – is the hardest hit by economic downturns. Empirical evidence from 17 OECD countries over thirty years demonstrates that high levels of unemployment insurance present a strong incentive for social democratic governments to respond more aggressively to positive changes in inflation. These findings resolve the puzzle of why partisan monetary cycles are not often observed in the literature and have important policy implications, given continued calls for scaling down social insurance.     

The political legislation cycle

The economic theory of legislation holds that laws, even when they do not involve financial resources, redistribute property rights. Politicians supply legislation to groups with the highest political return. By the same logic, politicians should supply legislation when doing so has the highest political return. The dynamics of the supply of legislation should follow the pattern suggested by the political business cycle theory. We develop a model of government’s and voters’ behavior where a legislation cycle is the strategy to hold the government (coalition) together. Under certain assumptions, the model predicts that the approbation of laws should be concentrated at the end of the legislature and be positively related to the fragmentation of the government coalition. We test these restrictions on data about the supply of legislation by the Italian Parliament during legislatures from I to XIII (1948 to 2001). The empirical analysis provides strong support to the theory: a legislation cycle occurs when the conditioning phenomena that the model indicates are satisfied.     

Governments,trade unions and the macroeconomy: An expository analysis of the political business cycle

We have briefly reviewed the state of the art of research on the political business cycle in the context of a simple textbook model of the macroeconomy. It has been demonstrated that the government-generated political business cycle vanishes as expectations turn rational. Even then, however, non-inflationary policies apparently are time inconsistent. Hence, democracies seem to be stuck with some sort of inflationary bias.Countries with fairly centralized wage bargaining and strong labor unions have to deal with a second political source of instability in the macroeconomy: if the labor union's program contains political items such as equal educational opportunities for working class children, extended co-determination, a more equal distribution of wealth, and the like, they will prefer to see those parties in power who show the best prospects of implementing those items. So the trade union's wage bargaining strategies take into account how bargaining results influence the state of the economy and, hence, the reelection prospects of the ruling government — and they will do so in different ways, depending on whether the union prefers the government to the opposition party or vice versa.     

Government approval in Italy: Political cycle,economic expectations and TV coverage

This paper analyses government approval in Italy – which has become a key aspect for electoral support in the new party system of the Second Republic – exploring the influence that TV coverage exerts on approval net of traditional accounts of government support. Relying on both aggregate time series and pooled individual-level surveys analyses, it is shown that communication has a sizable impact on government approval. The popularity of Centre-Left and Centre-Right governments is affected evenly by the economy but differently by the news coverage of their activity. People with lower political interest are the most reactive to news coverage of government performance.     

Testing the satisficing version of the political business cycle 1905–1984

This paper develops a test of the satisficing version of the political business cycle. Previous tests have focused on maximizing models of political behavior and are not sufficiently general to test for satisficing behavior. Using annual U.S. data for the period 1905 to 1984, we find evidence supporting the satisficing version of the political business cycle model, but we reject the maximizing version. In accordance with the satisficing hypothesis, we find that increasing inflation or unemployment and decreasing monetary base growth in the third year of a presidential term are followed typically by reversals during the election year.We wish to thank Gordon Tullock and two anonymous referees for valuable comments.     

The global economic crisis and domestic political agendas

There is an ongoing debate within the economic voting literature about whether the economy's salience systematically fluctuates over time or is constant. The recent global economic slowdown provides leverage to test the proposition that voters give greater weight to economic performance when it is weak. Data on voters' issue priorities from 2000 to 2011 shows that voters were more likely to consider the economy an important issue during periods of bad or volatile economic performance. A weak economy also focuses voter attention on corruption and crime while reducing attention to social policy and foreign affairs. Crime rates, terrorist attacks, globalization, and the level of development also affect the economy's place on the electoral agenda. Thus one impact of the recent financial downturn was a shift toward economic voting in countries where it was deepest.     

Managing business political activities in the USA: bridging between theory and practice — another look

This paper provides a review and reflection of Gerry Keim's fine paper on managing US business political activities (BPA). It begins by setting the larger context in which BPA is both practised and studied. It critiques the concept of market‐based competition and extends it by suggesting that non‐market competition can take on a myriad of forms dependent on strategy and structural considerations, among other things. It also provides some sober reminders about the nature of difficulties encountered between academics and practitioners in bridging the gaps of understanding between these constituencies. It also looks at the nature of ‘buyers’ and ‘sellers’ in the public policy marketplace and expands upon the nature of the products being exchanged. Lastly, the paper reviews the nature of strategy and competitive advantage in the non‐market environment and recommends a practitioner focus on innovation and the acquiring of the resources needed for institutionalizing it in their public affairs and BPA efforts for achieving non‐market success. Copyright © 2001 Henry Stewart Publications