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

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

Political Business Cycles Inflation I2 I1 Unemployment UE UN

Political Business Cycles Inflation I2 I1 Unemployment UE UN

Political Business Cycles Inflation I3 I2 I1 Unemployment UE UN

Political Business Cycles Inflation I3 I2 I1 Unemployment UE UN

Political Business Cycles Inflation I2 I1 Unemployment UE UN US

Political Business Cycles Inflation I2 I1 Unemployment UE UN US

Partisan Economic Performance Democrat Republican D Unemployment D Inflation level % 60-64 -0.3 -5.5 -20.0 68-72 2.0 55.6 -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 5.6 -8.5 -68.5 92-96 -2.1 -28.0 13.8 84-88 -2.0 -26.7 0.5 12.8 96-00 -1.4 -26.4 0.1 4.1 88-92 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 1.0 24.5 -1.7 -18.1

Partisan Business Cycles Inflation Democrats ID Republicans IR Unemployment UD UR

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

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

RE Political Business Cycles Inflation I2 I1 Unemployment UE UN US

RE Political Business Cycles Inflation IE I1 Unemployment UN UE

RE Political Business Cycles Inflation IE IX Unemployment UN

Electoral Policy Cycles D D R Infl Defl e e e

Electoral Policy Cycles D D R Infl Defl

Electoral Business Cycles D D R Expan Recess

Electoral Business Cycles D D R Expan N* Recess

Electoral Business Cycles D D R Expan N* Recess

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

Unemployment by term year

Political Monetary Cycle, 1875-1934

A Political Business Cycle?

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