“Are you better off today than you were four years ago?” Voters consider, among other factors, state of the economy when voting for president  Misery Index = Unemployment Rate + Inflation Rate Incumbent party reelected when MI falls (*2000) Incumbent party voted out when MI rises (except 1972, 2004)  Election Calculator (2012)Election Calculator [Ray Fair]

PartyYearUNEMPINFLMI∆MIVote R R D D R R D R R R D D R R D

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

Unemployment Inflation UNUN I1I1 Phillips Curve

Political Business Cycles William Nordhaus Unemployment Inflation UNUN I2I2 UEUE I1I1

Political Business Cycles William Nordhaus Unemployment Inflation UNUN I2I2 UEUE I1I1

Political Business Cycles William Nordhaus Unemployment Inflation UNUN I3I3 I2I2 UEUE I1I1

Political Business Cycles William Nordhaus Unemployment Inflation UNUN I3I3 I2I2 UEUE I1I1

Political Business Cycles (variant) Unemployment Inflation UNUN I3I3 I2I2 UEUE I1I1 UHUH

Political Business Cycles (variant) Unemployment Inflation UNUN I3I3 I2I2 UEUE I1I1 UHUH

Partisan Business Cycles Douglas Hibbs Unemployment Inflation Democrats Republicans URUR IRIR UDUD IDID

Partisan Economic Performance DemocratRepublican  Unemployment  Inflation  Unemployment  Inflation level% % % % Avg Avg

Rational Partisan Business Cycles Alberto Alesina Unemployment Inflation URUR IRIR UDUD IDID UNUN IEIE I E = average ( I D, I R )

Rational Partisan Business Cycles Alberto Alesina Unemployment Inflation URUR IRIR UDUD IDID UNUN IEIE election: I E = average ( I D, I R ) Dems win: I E = I D Reps win: I E = I R

Evidence for Partisan Business Cycles Truman (1948) through Bush (2008) Partisan Growth Cycles –Democrats 4.3 > Republicans 2.8 Democrats 1st half 4.7 > Republicans 1 st half 2.0 Democrats 2 nd half 4.0 ≈ Republicans 2 nd half 3.5 –But annual record does not fit Partisan Unemployment Cycles –Democrats 5.2 < Republicans 5.9 Democrats 1st half 5.6 = Republicans 1 st half 5.6 Democrats 2 nd half 4.7 < Republicans 2 nd half 6.2

Growth by term year

Unemployment by term year

Evidence for Electoral Cycles in OECD Economies 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

India – Cole (2009) Comparison of districts w/ and w/o election, and over time Agricultural credit higher where elections Agricultural credit contractions in years prior Ag Credit targeted toward “swing” districts –Greater difference for public vs private banks –Wasteful (no correlation b/w ag credit and productivity) Write-offs greatest where majority party had most success

eee A Political Business Cycle? U T

Strategic Election Timing PBC tests valid for US PPC tests valid for fiscal---money ? RPT valid for US RPT varies for others (VRPT – Heckelman 2001) –Uncertainty over election timing Greater divergence in output, unemployment over the course of an administration Election effects depend on when election called (uncertainty) Evidence supports for Germany, not UK or Canada Evidence supports for pooled sample of Australia, France, Germany, Sweden, UK, US (Berlemann and Markwardt, EJPE 2006)