Degree Year

1987

Document Type

Thesis

Degree Name

Bachelor of Arts

Department

Economics

Advisor(s)

Edward Gamber
Hirschel Kasper
Robert Piron
James Zinser
Luis Fernandez

Keywords

Political, Business, Cycle, PBC, Politics, Presidential, Election, United States

Abstract

The idea of a politically-motivated business cycle is basically a conspiracy theory: "office-motivated" politicians, seeking to exploit the well-documented relationship between favorable economic news and votes for the incumbent president and his party, manipulate the timing of business cycles for their own electoral gain. This manipulation, theorists maintain, is effected through the use of any of several policy instruments including discretionary federal spending, government transfer payments, and the average tax rate, as well as pressure on the central bank to pursue a more accommodating monetary policy.

Theories of such a cycle seem to fall in and out of favor with each passing presidential election. William Nordhaus's pioneering paper, "The Political Business Cycle" (1975), emerged in the aftermath of Richard Nixon's 1972 re-election campaign, which even a former Nixon speechwriter described as a case of "open[ing] the sluices and letting the dollars flow." Edward Tufte, author of Political Control of the Economy, an in-depth analysis of the interdependence of economics and elections, has. acknowledged that Nixon's re-election was the inspiration for his book as well. Currently, after the supply shocks of the mid- and late-1970s, which in 1980 resulted in a (presidential) election-year recession for the first time since 1960, "there has been relatively little theoretical work on the 'political business cycle' for several years." With the re-election of Ronald Reagan in 1984, however, after which some observers claimed they detected a political cycle behind the economic growth patterns of the 1981-84 period , the next few years may well see a resurgence of political business cycle (PBC) literature.

In keeping with the present lull in new PBC theories, many economists, in reviews of PBC literature and elsewhere, have been sharply critical of the previous empirical work in this area. James Alt and K. Alec Crystal, in their 1983 book Political Economics. conclude a chapter on PBC' s by noting, "No one could read the political business cycle literature without being struck by the lack of supporting evidence." Several other studies, including those of McCallum (197B), Hibbs (1977 and 1978), Golden - Poterba (1980) and Beck (1982 and 1984), reject the notion of a PBC. Joseph Sulock recently conducted replications of several PBC models, all of whose original authors found evidence of a PBC, and reported that most of these models, when updated into the 1970s or even when truncated into a timeframe when political manipulation appeared most likely, performed poorly. Sulock admits, however, that the poor performance of these models may have been due to flaws in the models themselves rather than in the idea behind them.

Although much of the criticism of past empirical work on the PBC is well deserved -- indeed, some of these models are shockingly inept a review of both the theoretical and empirical literature on this subject will be necessary before moving on.

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Economics Commons

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