Political Business Cycles: They're Alive!
By Bryan Caplan
Twenty five years ago, political business cycles were a hot topic. The idea is that incumbents artificially juice up the economy during election years to improve their chances of re-election. By the time I was in grad school, though, conventional wisdom said that political business cycle theory did not hold water. Theoretically, it required voter irrationality; empirically, it was flat wrong.
I was therefore shocked to learn that two hot-shot political scientists, Christopher Achen and Larry Bartels, have recently revived a strong version of political business cycles. In their “Musical Chairs: Pocketbook Voting and the Limits of Democratic Accountability” they boldly defend a whole list of heretical views. And while I’d definitely like some good empirical macroeconomists to double-check their work, their evidence seems straightforward.
Achen-Bartels’ main claims:
If we take seriously the notion that reelection hinges on economic competence, we should expect to see more economic growth when the incumbent party is reelected than when it is dismissed by the voters.
But in fact:
[W]ithout controls, it appears that voters are slightly less supportive of incumbents who turn out, upon reelection, to preside over high rates of income growth. Adding control variables produces an even stronger negative estimate for the effect of future income growth on incumbent vote margins.
It is clear that election outcomes are more strongly correlated with short-term GDP growth than with long-term GDP growth.
In fact, it is hard to statistically improve on a simple model in which voters care only about income growth in the last two quarters before the election.
In the period from 1947 through 1977, the average income growth rate was 1.5 percentage points higher in presidential election years than in other years; since 1978 it has been 1.4 percentage points higher in presidential years than in other years.
Our view is that they do no such thing. Rather, they forget most of their previous experience and vote solely on the basis of how they feel about what has happened lately. The result is not a slightly distorted version of rational retrospection. It is something else altogether—a high-stakes game of musical chairs.
Frankly, this is a scary story. It is easy to make today heavenly if you are willing to make tomorrow hellish. Think about how much credit card debt you could accumulate in the next six months if, heedless of the future, you really wanted to live it up. So why haven’t our leaders done the equivalent? At the end of 2004, the national debt was only 64.8% of GDP. Why isn’t it more like 1000% of GDP?
We often wonder why democracy doesn’t perform better. After reading Achen and Bartels, I once again find myself wondering the opposite: If this is how voters think, why isn’t the world a lot worse?