-
Chapter 6 Elections and Macroeconomic Outcomes
- University of Michigan Press
- Chapter
- Additional Information
CHAPTER 6 Elections and Macroeconomic Outcomes Whoever loves discipline loves knowledge, but he who hates correction is stupid. —Proverbs 12:1 In October [of 1960], usually a month of rising employment, the jobless rolls increased by 452,000. All the speeches, television broadcasts, and precinct work in the world could not counteract that hard fact. —Richard M. Nixon (1962) In chapters 3 and 5, I presented evidence that called into question the existence of partisan differences both in the use of monetary and fiscal policy instruments and in macroeconomic outcomes. The scarcity of partisan differences, furthermore, appears to be general. Before and after capital mobility, under fixed and flexible exchange rates, under dependent and independent central banks—there is little evidence that parties of the left implement systematically different policies than parties of the right. Attempts to model the structural context in which parties must implement policies failed to bring partisan differences into focus in a manner that was easily assimilated to existing bodies of theory in comparative political economy. The empirical results in chapter 4 suggest an explanation for the absence of partisan differences. Perhaps the rigor of electoral competition forces survival-maximizing incumbents of various political hues to behave alike. Specifically, there is evidence that when structural conditions allow, incumbents will manipulate the most effective policy instrument they control in an expansionary manner in the period just prior to an election. In this chapter, I will examine whether such electorally timed 141 manipulations of policy instruments are transmitted to macroeconomic outcomes such as unemployment and growth. As mentioned in chapter 1, the contention that macroeconomic outcomes may be systematically tied to the electoral calendar has been challenged in the literature on both theoretical and empirical grounds. Rational expectations macroeconomic theory suggests that only unanticipated policy changes will have effects on growth and unemployment. Since the public can anticipate regularly occurring elections, any manipulation of policy instruments that is tied to the electoral calendar (such as those found in chapter 4) is not expected to have real effects. The fact that the empirical literature has failed to provide consistent support for a link between macroeconomic outcomes and the electoral calendar is consistent with this rational expectations critique of the political business cycle argument. There are, however, reasons to remain skeptical of both the rational expectations critique and the existing empirical literature. First, the rational expectations critique assumes that voters and market actors use “all available information ” to formulate their expectations of future policy. Notwithstanding pronouncements in the popular press that the 2000 U.S. presidential elections taught us that “every vote counts,” the literature on the “irrationality of voting” (Fiorina 1976; Aldrich 1993; Palfrey and Rosenthal 1985) and therefore the “rational ignorance” (Downs 1960) of members of the electorate is convincing enough to suggest that voters might use crude rules of thumb consistent with retrospective economic voting to formulate their expectations. If this is true, then the concern among rational expectations critics of the political business cycle model that voters cannot be systematically fooled loses some of its prima facie appeal. While it is plausible that voters, because they have little chance of deciding an election, have little to gain from building complex positive political economy models of candidate behavior or collecting information on individual candidates, is the same true for market actors? At first glance, the answer would be a clear no. In fact, unlike voters, market actors spend large amounts of time and money following the behavior of policymakers in an attempt to forecast future policy changes. Such behavior lends a surface plausibility to the rational expectations idea that actors will make use of all available information in formulating their expectations. But it also suggests a paradox. If, as rational expectations theorists predict, policy has no real effects, why do people spend so much time trying to predict the behavior of policymakers? The commuter train from Princeton, New Jersey, to Wall Street is filled with financiers who are attentive to every change in the facial expression of Federal Reserve Board 142 Capitalism, Not Globalism [44.200.26.112] Project MUSE (2024-03-29 06:44 GMT) chairman Alan Greenspan, but the economics department back at Princeton University is full of theorists who maintain that Greenspan’s manipulation of the money supply has no real effects. How do these groups of very smart, hardworking people persist in such apparently contradictory behaviors in such close proximity? One answer is that theorists maintain that it is only unanticipated policy...