The Lost Popularity Function: Unemployment and Inflation's Relevance for German Voters

1. Prof. Dr. Friedrich Schneider Institut für Volkswirtschaftslehre Tel.: 0043-732-2468-8210, Johannes Kepler Universität Linz Fax: -8209 Altenbergerstraße 69 E-mail: friedrich.schneider@jku.at A-4040 Linz-Auhof http://www.econ.jku.at/schneider 3. The Lost Popularity Function: Are Unemployment and Inflation no longer Relevant for the Behaviour of German Voters? Studie von Gebhard Kirchgässner Public Choice SS 2012 Public Choice

2. Content • Introduction • Popularity Functions for Earlier Periods 2.1 Theoretical Reasoning 2.2.1 ResultsfortheCDUDominatedGovernment1951-1966 2.2.2 Results for the CDU and SPP Popularity 1951-1966 2.3 Results for the SPD Dominated Government 1971-1982 Public Choice

3. Content (cont.) • Popularity Functions After Reunification 3.1 Estimation Procedure 3.2 Summary of the Results up to the Schröder Government 3.3 Results for the Schröder Government • Concluding Remarks: Possible Reasons for the Differences Public Choice

4. 1. Introduction • It is common knowledge that the development of unemployment and inflation has an impact on the re-election chances of a government: the higher the unemployment and inflation rates, the worse are – ceteris paribus – the prospects of a government to win the next election. • There is a lot of empirical evidence for this relationship, in particular for Germany, but also for the United States, the United Kingdom, and many other countries. Public Choice

5. 1. Introduction (cont.) • Moreover, the impact of these two variables on the electoral success (or failure) of German governments from the fifties to the nineties can also be taken for sure, even if the corresponding evidence is based on survey and not on electoral data. • All this does not longer hold for the Schröder Government (1998 to 2005). When Gerhard Schröder started as German Chancellor, he told the voters that his performance should be evaluated according to his success in fighting unemployment. There was, however, hardly any success. Public Choice

6. Figure 1.1: Unemployment during the Schröder Government. Public Choice

7. 2. Popularity Functions for Earlier Periods 2.1. Theoretical Reasoning • The theoretical model behind the traditional approach of estimating popularity functions(going back to C.A.E. Goodhart and R.J. Bhansali (1970)), is the model of retrospective voting. • Applying the economic approach, one should expect that not past but the expectations of future economic developments matter, i.e. that voters are not backward but forward looking. Public Choice

8. 2. Popularity Functions for Earlier Periods 2.1. Theoretical Reasoning (cont.) • Correspondingly, there has been an intense debate whether voting is forward or backward looking. Actually, both matter.) • However, as, for example, M. Lewis-Beck (1988, p. 132) shows, expectations of future economic developments largely depend on past economic performance. • Thus, the model of retrospective voting might be seen (and can consistently be estimated) as a reduced form of a more general model. Public Choice

9. 2. Popularity Functions for Earlier Periods 2.2.1. Results for the CDU Dominated Government from 1951 to 1966 • We apply the traditional approach for (West) German popularity functions and use monthly data of unemployment and inflation as explanatory variables. • With monthly data for the period from January 1951 to October 1966, dominated by the Christian Democrats and the two Chancellors Konrad Adenauer and Ludwig Erhard, we get the following results for the two major parties. Public Choice

10. 2. Popularity Functions for Earlier Periods 2.2.2. Results for the CDU and SPD Popularity from 1951 to 1966 Public Choice

11. 2. Popularity Functions for Earlier Periods 2.3. Results for the SPD Dominated Government from 1971 to 1982 For the period of the social-liberal coalition with the Chancellors Willy Brandt and Helmut Schmidt, the results are: Public Choice

12. 3. Popularity Functions after Reunification 3.1. Estimation Procedure • We estimate three equations: • for the government (GP), consisting of the CDU/CSU and FDP, • for the parliamentary opposition (OP), consisting of the SPD and the Greens, and • for the other smaller parties (OTH), the most important one of those being the PDS. Public Choice

13. 3. Popularity Functions after Reunification 3.1. Estimation Procedure (cont.) • Following the theoretical model we apply the least squares estimator for seemingly unrelated regression equations (SURE) and restrict the coefficient of the lagged dependent variable to the same value in all equations. • After the unification, the PDS always had some members in the Bundestag, but before 2005, this has been a rather small minority. Public Choice

14. Table 3.1: Estimate for the Kohl Government after Unification; Monthly Data, 12/1991 – 09/1998; 82 Observations. Public Choice

15. Table 3.2: Estimates for West Germany; Monthly Data, 02/1991 – 09/1998; 92 Observations. Explanations see Table 3.1. Public Choice

16. Table 3.3: Estimates for East Germany; Monthly Data, 12/1953 – 12/1996; 58 Observations. Explanations see Table 3.1. Public Choice

17. 3. Popularity Functions after Reunification 3.2. Summary of the Results up to the Schröder Government • Taking all results of tables 3.1 to 3.3 together, for this period as well as for the earlier decades of the Federal Republic of Germany, unemployment and inflation had a considerable impact on the voters’ decisions, at least as far as they are reflected in the survey results. • When unemployment and/or inflation rose, the government lost support, even if this was not always fully to the benefit of the (parliamentary) opposition. • With respect to unemployment this also holds for the new federal states, but not necessarily also with respect to inflation. Public Choice

18. 3. Popularity Functions after Reunification 3.3. Results for the Schröder Government • In 1998, the composition of the government changed. For the first time, the SPD formed a government with the Greens, which lasted until the general election of 2005. • Thus, the CDU/CSU and the FDP were the main opposition parties. • The PDS still played no significant role in the parliamentary process, in particular in the legislative period from 2002 to 2005, where it had only two members of parliament. Public Choice

19. 3. Popularity Functions after Reunification 3.3. Results for the Schröder Government (cont.) • Because the government can hardly be hold responsible for the economic situation just after its election, we exclude the first year of the new government. Thus, with monthly data from November 1999 to September 2005 we have 72 observations. • Performing again system estimates, we first used the most simple specification. Public Choice

20. Table 3.4: Estimates for the Schröder Government; Monthly Data, 11/1999 – 09/2005; 72 Observations. Explanations see Table 3.1. Public Choice

21. 3. Popularity Functions after Reunification 3.3. Results for the SchröderGovernment (cont.) • Compared to earlier results, there is a dramatic change of the impact of the economic variables on the popularity. For unemployment, we do no longer find a significant impact, and the impact of inflation, if it exists at all, might even go into the ‘wrong’ direction. • As shown, the latter holds for East as well as for West Germany (therefore also for the whole of Germany), and quite independent of the concrete specification of the estimated equation. Public Choice

22. Table 3.5: Popularity Functions for the Schröder Government – West Germany. Public Choice

23. Table 3.6: Popularity Functions for the Schröder Government - East Germany. Public Choice

24. 4. Concluding Remarks: Possible Reasons for the Breakdown of the Traditional Results • What does this imply? Do we have to take away the traditional concept of popularity and voting functions or should one even assume that there will be no relation anymore between economic development and the electoral success of German governments in the future? • The interesting question is how far voters have been holding responsible the government for economic developments. Public Choice

25. 4. Concluding Remarks: Possible Reasons for the Differences • On the one hand, governments usually try to exculpate themselves for bad economic developments, sometimes even rightly, but they do not always succeed. • On the other hand, they always claim authorship for positive economic developments, quite independent of whether they really contributed to them or not. Public Choice

26. 4. Concluding Remarks: Possible Reasons for the Differences • Thus, we have to distinguish how far • governments are really responsible, • governments claim to be responsible, and • governments are hold responsible by the electorate for economic development. • The answers should be different for the two variables, the unemployment and inflation rates. Public Choice

27. 4. Concluding Remarks: Possible Reasons for the Differences • Even if it is often stated that employer and employee organisations are mainly responsible for labour market development, from the beginning of the Gerhard SchröderGovernment claimed to be responsible. • The Hartz legislation in 2002 was intended to demonstrate that the government has means to influence this development, and this legislation actually had some impact, even if the main effect occurred after the demission of the Schröder Government. Public Choice

28. 4. Concluding Remarks: Possible Reasons for the Differences • Insofar it is astonishing that the estimates presented above do not provide more evidence that labour market development had an impact on the different popularity series, in particular in West-Germany. Public Choice

29. 4. Concluding Remarks: Possible Reasons for the Differences • This is different with respect to inflation. Since January 1999, and obviously since the change of the DM to the Euro in January 2002, it is obvious that the situation is quite different. It is no longer the German Bundesbank, but the European Central Bank that is responsible for monetary policy in Europe and, therefore, also for the development of prices in Germany. To make the government responsible for this is apparently nonsense. Public Choice

30. 4. Concluding Remarks: Possible Reasons for the Differences • Nevertheless, there is at least evidence for West-Germany that inflation will no longer play a role for the decisions of voters. • In contrast to this, they might still hold it responsible for the labour market development. Once a government would succeed in staying in power for more than two electoral terms, we might get significant results again. • And if we do not consider the missing statistical significance, the results for the Schröder Government show, after all, the same (expected) pattern as the results of former governments. Public Choice

31. Source The Lost Populartiy Function: Are Unemployment and Inflation no longer Relevant for the Behaviour of German Voters? Gebhard Kirchgässner CESifo Working Paper No. 2882, Category 2: Public Choice, December 2009 (www.CESifo-group.org/wp) Public Choice