“Are you better off today than you were four years ago?”

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“Are you better off today than you were four years ago?” Voters consider, among other factors, economic conditions when voting for president Misery Index = Unemployment Rate + Inflation Rate 1960-2000 Incumbent party reelected when MI falls (*2000) Incumbent party voted out when MI rises (except 1972)

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“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 1960-2008 Incumbent party reelected when MI falls (*2000) - PowerPoint PPT Presentation

Transcript of “Are you better off today than you were four years ago?”

Page 1: “Are you better off today than you were four years ago?”

“Are you better off today than you were four years ago?”

• Voters consider, among other factors, economic conditions when voting for president

Misery Index = Unemployment Rate + Inflation Rate1960-2000

Incumbent party reelected when MI falls (*2000)Incumbent party voted out when MI rises (except 1972)

Election Calculator (2016)[Ray Fair]

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Party Year UNEMP INFL MI ∆MI VoteR 1956 4.1 2.9 7.0

R 1960 5.5 1.5 7.0 0.0 49.9

D 1964 5.2 1.2 6.4 -0.6 61.3

D 1968 3.6 4.7 8.3 1.9 49.6

R 1972 5.6 4.4 10.0 1.7 61.8

R 1976 7.7 4.8 12.5 2.5 48.9

D 1980 7.1 12.4 19.5 7.0 44.7

R 1984 7.5 3.9 11.4 -8.1 59.2

R 1988 5.5 4.4 9.9 -1.5 53.9

R 1992 7.5 2.9 10.4 0.5 46.5

D 1996 5.4 3.3 8.7 -1.7 54.7

D 2000 4.0 3.4 7.4 -1.3 50.3

R 2004 5.5 2.7 8.2 0.8 51.5

R 2008 5.8 3.8 9.6 1.4 46.5

D 2012 8.1 2.1 10.2 0.6 51.1D 2016 4.9 2.2 7.1 -3.1 51.1

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Macroeconomic Formulations

• Lucas supply functionY = YN + a*(Inflation – Expected Inflation), a>0

• Phillips Curve representationU = UN + b*(Inflation – Expected Inflation), b<0

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Unemployment

Inflation

UN

I1

Phillips Curve

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Political Business Cycles William Nordhaus

Unemployment

Inflation

UN

I2

UE

I1

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Political Business Cycles William Nordhaus

Unemployment

Inflation

UN

I2

UE

I1

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Political Business Cycles William Nordhaus

Unemployment

Inflation

UN

I3

I2

UE

I1

Page 8: “Are you better off today than you were four years ago?”

Political Business Cycles William Nordhaus

Unemployment

Inflation

UN

I3

I2

UE

I1

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Political Business Cycles (variant)

Unemployment

Inflation

UN

I3

I2

UE

I1

UH

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Political Business Cycles (variant)

Unemployment

Inflation

UN

I3

I2

UE

I1

UH

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Partisan Business CyclesDouglas Hibbs

Unemployment

Inflation

Democrats

Republicans

UR

IR

UD

ID

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Partisan Economic PerformanceDemocrat Republican

D Unemployment D Inflation D Unemployment D Inflation

level % level % level % level %

60-64 -0.3 -5.5 -0.3 -20.0 68-72 2.0 55.6 -0.3 -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 0.4 5.6 -8.5 -68.5

92-96 -2.1 -28.0 0.4 13.8 84-88 -2.0 -26.7 0.5 12.8

96-00 -1.4 -26.4 0.1 4.1 88-92 2.0 36.4 -1.5 -34.1

08-12 2.3 48.4 -1.7 -55.7 00-04 1.5 38.4 -0.7 -21.4

12-16 -3.2 -56.6 0.1 3.1 04-08 0.3 5.3 1.1 33.8

Avg -1.0 -17.2 1.4 21.1 Avg 1.1 21.5 -1.2 -14.1

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Rational Partisan Business CyclesAlberto Alesina

Unemployment

Inflation

UR

IR

UD

ID

UN

IE

IE = average ( ID , IR )

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Rational Partisan Business CyclesAlberto Alesina

Unemployment

Inflation

UR

IR

UD

ID

UN

IE

election: IE = average ( ID , IR )

Dems win: IE = ID

Reps win: IE = IR

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Evidence for Partisan Business Cycles Truman (1948) through Obama (2016)• Partisan Growth Cycles

– Democrats 3.6 > Republicans 2.8• Democrats 1st half 3.7 > Republicans 1st half 2.0• Democrats 2nd half 3.5 ≈ Republicans 2nd half 3.5

– But annual record does not fit

• Partisan Unemployment Cycles– Democrats 5.7 ≈ Republicans 5.9

• Democrats 1st half 6.2 > Republicans 1st half 5.6• Democrats 2nd half 5.2 < Republicans 2nd half 6.2

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Growth by term year

1 2 3 40.0

1.0

2.0

3.0

4.0

5.0

6.0

Democrats Republicans

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Unemployment by term year

1 2 3 44.0

4.5

5.0

5.5

6.0

6.5

7.0

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Evidence for Electoral Cyclesin 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

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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

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e ee

A Political Business Cycle?U

T

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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)