National Elections and Business Cycles

Economic issues receive a great deal of attention during presidential election campaigns in the United States of America as well as in other comparable places around the world. Though a multitude of issues exist, this essay aims to provide a concise framework for drawing contrasts and comparisons between economic issues and events and election campaign statements. One should expect seekers of the presidential office to issue statements about recent job growth, worker productivity, energy supplies, congressional actions, income taxes, and the like. Readers and informed voters can take a step back from those statements or claims and examine them using an aggregate demand-aggregate supply model. It simplifies reality by informing us about the economic state and a primary set of dynamic factors that influence the economy. In addition, one can use the model to contemplate the interdependencies among economic events, fiscal policy, and monetary policy. Armed with an understanding of that framework, readers will gain a better understanding of the cyclical natures of political campaigns and economic events and the critical challenges of synchronizing cycles and policies.

Keywords Aggregate Demand; Aggregate Supply; Economic State; Fiscal Policy; Election Campaigns; Model; Monetary Policy

Business & Government > National Elections & Business Cycles

Overview

Economic issues gain prominence during presidential election campaigns in the United States of America and in other places around the globe. Those issues and elections capture the attention of politicians, journalists and scholars from many angles. At the conceptual level, many scholars during the past three decades have focused on the complex relationships between the state of the national economy and the attributes of a presidential office holder or seeker. At the empirical level, it appears that researchers have a lot more work ahead of them in their search to uncover the nature of those relationships. As specific examples of the wide diversity in those efforts, one of the economists referenced in this essay views election results as a function of economic events and another holds the converse view. Acknowledging the uncertainty in the nature of a relationship between a set of presidential election results and a set of economic events, this essay merely serves to inform students and prospective voters by highlighting some key factors and issues that often make their way into presidential and other election campaigns.

Campaign Issues

A range of issues may arise during any given campaign for national office including: Energy prices; environment; health care; antitrust; poverty; crime; education; social security; minimum wage; unions; labor discrimination; international trade; federal spending; income taxes; fiscal policy; national debt; stock markets; monetary policy; interest rates; inflation; and unemployment. Invariably, voters will find the contenders focusing on the last two items in that list. On the one hand, this reduction can simplify matters for voters as they prioritize their own ranking of issues and seek to hear the opposing candidates' views on the issues. On the other hand, some candidates for political office and some students of economics may be familiar with the tradeoff between inflation rates and unemployment rates.

Comparing Campaigns & Economic Conditions

A purpose of this essay is to provide a concise framework for drawing contrasts and comparisons between campaign statements and economic conditions. The median voter model is a tool with which to simplify those economic and political realities. By extension, as already alluded in the paragraph above, candidates for a political office tend to move toward the preferences of the median, or swing, voter. Campaigns seem to increase in complexity and intensity when the results from popular polls indicate that voters are emphasizing one issue over the others. In the pages ahead, readers will find presentations of some economic goals, policies, and variables that tend to surface during political campaigns.

While on the campaign trail, presidential office seekers may make statements about recent job growth, worker productivity, energy supplies, congressional actions, income taxes, and the like. Sometimes the following issues receive little attention or factual data: The status of a federal budget, fiscal policy, and monetary policy; the recent trends in personal income, in income distribution, and in consumer confidence; the rates of unemployment, interest, inflation, and economic growth; and, so on and so forth. Therefore, it is important for politicians, voters, and students to realize some advantages by enhancing their awareness of a critical set of economic measures.

Five Goals of the National Economy

This essay condenses into a few pages a significant portion of information and it points readers toward other sources of information. As a primer available for and conducive to knowledge expansion, for instance, most introductory textbooks in economics list five goals for a national economy. In addition, those books highlight many of the inherent conflicts that exist among and between those goals. As a terse introduction to the conflict between two specific goals, this section begins with a general description of the five goals.

• First in the list is efficiency, which occurs as existing resources generate larger amounts of output in combinations that are valued most by society and consumers.
• Second, full employment occurs when everyone who is eligible for work and desires it actually has a job.
• Third, an equitable distribution of income occurs with the relative movement toward a situation of greater equality in which, for example, ten percent of the population earns ten percent of the income in comparison to a prior situation.
• Fourth, price stability occurs when an inflation rate is as low as possible, stable across time, and consistent with expectations.
• Last, economic growth occurs when there are annual increases in Real Gross Domestic Product (RGDP), which by definition is the constant dollar value of final goods and services produced in the United States during any given year.

To obtain finer detail on these goals, readers again are encouraged to consult textbooks commonly used in introductory undergraduate-level courses in economics including those by Arnold (2005), Guell (2008), and/or McConnell & Brue (2008). Though any contender for the nation's highest political office can refer to any of these goals to launch a debate with their opponent, the rates of economic growth, unemployment, and inflation seem to be the favorite goals in the list. The latter two usually receive the greatest amount of attention and make for a lively and perhaps endless debate. One reason for its presence in a political debate is the inverse relationship between inflation rates and unemployment rates as seen in the Phillips Curve, which is a key concept to keep in mind now and for future reference.

If recent elections are any indication, the trade off will certainly stimulate bantering between opposing candidates and political parties. At this juncture, the reader may begin to imagine how a focus on one side of the equation would add complexity to a public debate between two contenders for a political office. In order to understand that relationship, we need to turn our attention to the basic elements of the national economy.

The Aggregate Demand-Aggregate Supply Model

The aggregate demand-aggregate supply (AD-AS) model informs us about the locus of national output and price level and the set of factors that influence those levels. This section presents the model in a simplified form placing an emphasis on the trade off between inflation and employment. Working in a stepwise manner toward that purpose, readers and students alike become aware of the need to understand graphs and to know that a demand line or curve is downward sloping to the right. This is true whether one is studying microeconomics or macroeconomics. As a specific case in service to this purpose, the supply line or curve in macroeconomics is J-shaped; alternatively, it takes the form of a backward-L shape with a smoothed elbow instead of one with a right angle.

Two key reference points provide essential information. One key reference point is the output level that corresponds with the vertical segment of the AS curve. That segment suggests national output is at its maximum. Another key reference point occurs where the AD and AS curves intersect. That intersection represents the actual macroeconomic equilibrium output and price level. One can then compare an actual output level to a maximum or potential output level in order to interpret the state of the national economy. Keep in mind that those equilibrium points can occur in the horizontal segment or in the vertical segment of the AS or somewhere in between. In other words, the location of the AD is a highly important feature.

General movement of that actual level toward its potential level typically requires a change in aggregate demand and/or a change in aggregate supply. Students also learn that these curves shift rightward or leftward depending upon the stimulus or determinant. In the table below is a summary listing of the determinants of aggregate demand and aggregate supply.

In examining a textbook graph with respect to movements in AD and/or AS, one needs to pay particular attention to the horizontal gap between the levels of actual output and maximum or potential output. That attention will allow the reader to ascertain whether the economy needs to expand or contract while recognizing the conflicts among three goals: Economic growth, full employment, and price stability. By extension, one needs to observe changes in the price level that are associated with changes in the actual output levels. By the way, readers should keep in mind that an increase in the price level is, by definition, inflation.

Changes in Aggregate Demand

Let us limit the case to one in which AD changes, which is actually the most dynamic. Furthermore, for the sake of brevity, the critical focuses are governmental expenditures and business investment expenditures. For reasons presented in more detail in the next section, any increase in these two forms of expenditures is likely to move AD rightward possibly inducing increases in the level of real output and/or possibly generating increases in the price level. When AD continues to move rightward in the horizontal segment of the AS, for instance, the actual output level rises without inflation. This means that the economy is expanding and growing; adding more workers into the production process, and increasing personal incomes.

Should the rightward movement of the AD enter into the intermediate range or elbow segment of the AS, then outputs, employments, and incomes continue to increase but so does the price level. It is in this intermediate range where the trade off between inflation and employment is most visible. As AD continues to shift rightward, equilibrium will eventually occur in the vertical segment of the AS. This means that output becomes static and inflation rates become larger. In order to reduce inflationary pressures, something needs to prompt a leftward shift in AD thereby inducing decreases in outputs, employments, and incomes.

Those decreases can result from reductions in investment expenditures and/or in government expenditures. Changes in government expenditures can occur directly through fiscal policy. Changes in investment expenditures can occur indirectly through monetary policy and its effect on interest rates. It is important to remember that investment is typically a direct function of interest rates. This means that an increase (a decrease) in interest rates prompts a decrease (an increase) in business investment expenditures. As critical components that influence economic events and activity levels, monetary policy and fiscal policy are the subjects of the next section.

Fiscal Policy & Monetary Policy

These two types of policy influence the state of a national economy. Fiscal policy refers to the use of federal tax revenues and governmental expenditures for purposes of managing national output, employment, and income levels.

• Fiscal policy usually results in an increase or a decrease in aggregate demand though changes in business taxes can increase or decrease aggregate supply. Because it takes a lot of time and negotiation to get a tax or spending plan through Congress and final endorsement by the President, monetary policy is relatively faster and more flexible than fiscal policy.
• Monetary policy is the other policy tool by which banking officials actively manage the level of economic activity at the national level. In contrast to fiscal policy, it involves actions by the Federal Reserve System, in conjunction with the United States Treasury, for purposes such as changing the nation's supply of money in order to increase or decrease key interest rates. Furthermore, the results of monetary policy influence the level of aggregate demand by providing various financial incentives for households and/or businesses to alter their spending plans through increases or decreases in their expenditures.

Some textbooks refer to monetary policy as the artful management of price level, business cycle smoothing, employment levels, and economic growth rates. To be the most effective, both monetary policy and fiscal policy require accurate timing and a precise estimation of economic state. In the next section, we turn our attention to applications of those policies and the aforementioned concepts and abstract relationships to real events beginning with coverage of business cycles.

Applications

Armed with an understanding of the conceptual framework as represented by the AD-AS model and its relationship to fiscal and monetary policies, readers are now ready to consider applying those components to the cyclical natures of political campaigns and economic events. In general, this section will present the reader with coverage of business and political cycles and some integral problems with respect to the timing of actions. More specifically, the reader will gain a better understanding of the difficulties in associating national economic performance with individual or group efforts to manipulate the economy.

National Business Cycles

Real gross domestic product (RGDP) oscillates naturally in wave-like form over time and through four phases of what we call the business cycle. Let's progress through the cycle starting with an upturn or increase in RGDP, which defines the expansionary phase as it continues upward until reaching the peak phase. Moving past the peak is the downturn or decrease in RGDP, which defines the contractionary phase as it continues downward until reaching the trough phase.

A section of the contractionary phase may contain an economic recession, which by official definition is a decrease in RGDP that occurs for six or more consecutive months. Economic growth, which by definition is an increase in RGDP throughout time, is sometimes observable over several business cycles. In other words, a comparison of the cycle peak-to-peak will reveal economic growth when there is an upward trend across those peaks. Consider the addition of some numbers to the business cycle.

The duration of the business cycle varies and is measurable in months. According to the National Bureau of Economic Research and data from the past 50 years or so, an economic contraction lasts about 17 months on average and an economic expansion lasts about 38 months. Certainly, most individuals would prefer to minimize the length of time in a contraction and to maximize it in the expansion. Examining that data with optimism, the average economic contraction lasts about 10 months and the expansion lasts about 57 months. Consequently, it seems highly likely that any presidential term in office will encounter a favorable and/or an unfavorable oscillation in the business cycle. A longstanding and unresolved issue is whether a relationship exists between economic events and office holders.

One long stream of research concerning the influences of economic events and incumbency characteristics on election outcomes is available through the works of Fair (1996). Those studies provide some evidence that economic growth rates and inflation rates are reliable and valid predictors of election outcomes. In brief, the work by Fair also suggests that voters tend to compare parties on the basis of economic events that occurred both recently and during the entire term in office. Most importantly, those works illuminate how the relative currency of economic events relates to election results while providing additional insight with respect to the complex role of timing.

Problems in Timing

In terms of the challenges that timing presents, this section of the essay shifts the attention of readers from the influence of timing on elections to its influence on national policy formation and implementation. Certainly, it takes time for decision makers and policies to work toward accomplishing the five economic goals. Furthermore, the decision processes often begin with an attempt to pinpoint which of the five goals need attention and when.

Textbooks in economics usually point to three lags or types of problems with regard to timing.

• First, the recognition lag advances the idea that it takes time to measure state of economy. For example, although data collections are ongoing, the tabulation and analysis of that data take time before a larger picture emerges.
• Second, the administrative lag advances the notion that it takes time to craft an agreement on a specific course of action. For example, it literally takes an act of Congress, which is very time consuming, when formulating fiscal policy.
• The third is the operational lag, which advances the view that it takes time to realize an impact from the policy initiative.

Analysts can ultimately assess the effectiveness of the monetary policy or the fiscal policy of choice, but long after the problem identification and resolution phases are complete. Usually hindsight clarifies vision, which may or may not translate into foresight. Additional complications may enter the next round of policy formation especially when political elections draw near.

Political Business Cycle

Timing is critical when attempting to smooth the business cycle. It is also a highly challenging component for those who seriously contemplate an appropriate course of action with respect to monetary policy and/or fiscal policy. At this juncture, reader attention shifts from efforts considering the five economic goals to those considering one goal-election or re-election. According to an unfavorable and perhaps realistic perspective on those actions, some candidates for political office will pursue election campaign strategies to attract the attention of the median voter and others. In doing so, they are partaking in and perpetuating the political business cycle.

These actions amount to politically-motivated fiscal policy, which aims for short-term improvement in the economic state just before national elections (Guell, 2008). Drawing from the information presented earlier regarding business cycles and so on, pre-election tax cuts or spending increases may be entirely inappropriate for the current state of the national economy. Some economists suggest that expansionary fiscal policy usually occurs before elections and contractionary fiscal policy usually occurs afterwards though they assert that the evidence is virtually nonexistent or weak, suggesting the genuine need for further inquiry. Furthermore, one may wonder whether politicians look to monetary policy in case fiscal policy is temporarily unavailable due to budgetary stalemates between those politicians on Capitol Hill and those in the White House. At any rate, some economists assert that monetary policy is more expedient, flexible, and politically palatable though it is typically considered a longer reach for politicians in comparison to fiscal policy.

Those policies, whether taken separately or together, represent the capacity to affect the state of the national economy. In terms of the interrelationship between presidential terms and economic growth rates, Table 11.1 in Guell (2008; p. 150) provides some relevant data and descriptive statistics suggesting that growth rates in the fourth year of a term, on average, are slightly higher than those for the first year of a term. Those data are available from the Bureau of Economic Analysis, which is a subunit of the US Department of Commerce.

At the least, the tabulations from Guell (2008) and the findings from Fair (1996) emphasize the need for additional work clarifying the nature of interrelationships among economic events, national elections, and the behaviors of politicians and voters. In summary, this essay aims to temper the notion of causation between a presidential figure and the national economic state. Furthermore, the author hopes that readers and informed voters alike are more prepared, in part because of this essay, to recognize questionable statements about economic events whether they originate from presidential candidates, elected officials, and/or journalists.

Conclusion

In closing, this essay represents an attempt to help readers primarily understand some key economic concepts and variables and secondarily for them to build the capacity to see more clearly through the usual hyperbole surrounding election campaigns.

Terms & Concepts

Administrative Lag: A problem in timing attributable to the amount of time required to craft an agreement for addressing the economic state.

Aggregate Demand: The amount of real domestic output that households, businesses, governments, and foreign buyers collectively desire at given price levels.

Aggregate Supply: The amount of real domestic output available at given price levels.

Business Cycle: Regular patterns of upswings and downturns in Real Gross Domestic Product over time through the following four phases: Expansion, peak, contraction, and trough.

Economic Contraction: A decrease in Real Gross Domestic Product over time.

Economic Expansion: An increase in Real Gross Domestic Product over time.

Economic Growth: An upward trend in Real Gross Domestic Product over several business cycles.

Efficiency: The outcome from producing more output with the same or lesser amounts of input.

Equitable Distribution of Income: Observed as the distribution of income becomes more equal; for example, arrival at the point at which 10 percent of the population earns 10 percent of the national income from a point of inequality.

Fiscal Policy: Actions by Congress and the President to alter the economic state involving changes in government expenditures and in tax rates.

Inflation: A general rise in the overall level of prices; measured using the Gross Domestic Product deflator and/or the Consumer Price Index.

Full Employment: Occurs when the unemployment rate is at its lowest point, without inflation.

Monetary Policy: Actions by the Federal Reserve System to alter the economic state involving changes in interest rates.

Operational Lag: A problem in timing attributable to the amount of time required for assessing the impact of policies on the economic state.

Political Business Cycle: Occurs with an engagement of fiscal policy for short-term gain for the explicit purpose of obtaining votes during political election campaigns.

Price Stability: The state in which the price level is constant and/or the inflation rate remains unchanged.

Real Gross Domestic Product: An inflation-adjusted measure for the dollar value of all final goods and services produced domestically during the course of one fiscal year.

Recognition Lag: A problem in timing attributable to the amount of time required for obtaining measurements on the economic state.

Determinants in the Aggregate Demand-Aggregate Supply Model

Bibliography

Aguiar-Conraria, L., Magalhães, P., & Soares, M. (2013). The nationalization of electoral cycles in the United States: a wavelet analysis. Public Choice, 156(3/4), 387-408. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89047054&site=ehost-live

Arnold, R.A. (2005). Economics(7^th ed.) Mason, OH: Thomson South-Western.

Canes-Wrone, B., & Park, J. (2012). Electoral business cycles in OECD countries. American Political Science Review, 106(1), 103-122.Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=72675591&site=ehost-live

Fair, R. (1996). Econometrics and presidential elections. Journal of Economic Perspectives, 10(3), 89-102. Retrieved December 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9610023620&site=ehost-live

Guell, R. C. (2008). Issues in economics today(4th ed.). Boston, MA: McGraw-Hill Irwin.

Julio, B., & Yook, Y. (2012). Political uncertainty and corporate investment cycles. Journal of Finance, 67(1), 45-84. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=70359944&site=ehost-live

McConnell, C. R. & Brue, S. L. (2008). Economics(17^th ed.). Boston, MA: McGraw-Hill Irwin.

Suggested Reading

Alesina, A., Rubini, N. & Cohen, G. (1997). Political cycles and the macroeconomy. Cambridge, MA: MIT Press.

Blomberg, S., & Hess, G. (2003). Is the political business cycle for real? Journal of Public Economics, 87(5/6), 1091. Retrieved December 20, 2007, from EBSCO Online Datbase Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9656581&site=ehost-live

Boix, C. (1997). Political parties and the supply side of the economy: The provision of physical and human capital. American Journal of Political Science, 41(3), 814. Retrieved December 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9707154096&site=ehost-live

Drazen, A. (2000). The political business cycle after 25 years. NBER/Macroeconomics Annual, 15(1), 75-117. Retrieved December 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=5123135&site=ehost-live

Klein, M. (1996). Timing is all: Elections and the duration of United States business cycles. Journal of Money, Credit & Banking, 28(1), 84-101. Retrieved December 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9603271066&site=ehost-live