Tuesday, June 05, 2007

Rediscovering partisan cycles 

I noticed a post on Angry Bear in which "Cactus" is attempting to show that "the economy does not perform as well when the President is a Republican than when the President is a Democrat." Bill Polley in a comment notes that what Cactus is finding is perhaps nothing more than a political business cycle. Having written my dissertation in the 1980s in large part on PBCs, let me add a couple of thoughts.

Jac Heckelman notes the research of Michael Klein (J Money, Credit and Banking 1996):
Instead of focusing on the actual values of the economic variables, Klein analyzes business cycle turning points, as identified by the National Bureau of Economic Research. He finds that 26 of the 34 presidential elections held from 1854-1990 were during an identified expansionary period. While expansions typically end in the period right after an election, he does not find that contractions are more likely to end in the period before an election. Thus, his evidence for political business cycles is somewhat mixed. Klein also finds that turning points differ by party control. Expansions are more likely to end following Republican victories, and contractions are more likely to end soon after Democratic victories. These partisan findings are much stronger after World War I.
Rising inflation has often accompanied defeat for Democratic candidates (LBJ and Carter), which in turn calls for contractionary policies. Cactus links to a post on money supply growth and GDP growth by presidential administrations, but this is confusing inflation and money growth and uses a dubious measure of GDP growth.

All the research done on PBCs up to 2000 lead Allen Drazen to conclude:
Although there is wide (but not universal) agreement that aggregate economic conditions affect election outcomes in the U.S., there is significant disagreement about whether there is opportunistic manipulation that can be observed in the macro data. There is a clear partisan effect in the United States (as well as in some other countries), with economic activity being lower in the first part of Republican than Democratic administrations, but still disagreement about the underlying driving mechanisms.
Drazen offers a way out of the box, in the form of a model that allows monetary policy to be independently determined but passively responding to activist fiscal policies. Fiscal policy could do two different things -- it could behave opportunistically to influence elections by flooding the economy with new spending just before an election (inflationary effects to come post-election), or it could behave partisan by favoring deficit spending more for one party than another.

Ah, but you say that it's the Republicans who deficit-spend now versus before. And indeed, the very effects we saw in partisan cycles pre-1980 disappear post-1980 with Reagan and a new focus on tax rates versus budget balance (that last bit is my conjecture, not at all supported by data in this post.) Heckleman points out this was true before,
In the earlier part of the Davidson-Fratianni-von Hagen, and Klein studies the Republicans, as the party of Lincoln and McKinley, had a large constituency base comprised of the industrial workers, and tended to support trade protectionism, the opposite of contemporary Republicans. It may still be true that significant differences in the structure of the business cycle occurred depending on which political party controlled policy, even in the period prior to the world wars, but since neither study examined these earlier time periods in isolation as they did for the later time period, that remains speculative.
The same can be said for Cactus, bridging two very different Republican parties (and, if Bill Clinton is a guide, two different Democratic parties.)

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