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

1. “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) Incumbent party voted out when MI rises (except 1972, 2004) • Election Calculator(2012) [Ray Fair]

3. Macroeconomic Formulations • Lucas supply function Y = YN + a*(Inflation – Expected Inflation), a>0 • Phillips Curve representation U = UN + b*(Inflation – Expected Inflation), b<0

4. Phillips Curve Inflation I1 Unemployment UN

5. Political Business Cycles William Nordhaus Inflation I2 I1 Unemployment UE UN

6. Political Business Cycles William Nordhaus Inflation I2 I1 Unemployment UE UN

7. Political Business Cycles William Nordhaus Inflation I3 I2 I1 Unemployment UE UN

8. Political Business Cycles William Nordhaus Inflation I3 I2 I1 Unemployment UE UN

9. Political Business Cycles (variant) Inflation I3 I2 I1 Unemployment UE UN UH

10. Political Business Cycles (variant) Inflation I3 I2 I1 Unemployment UE UN UH

11. Partisan Business CyclesDouglas Hibbs Inflation Democrats ID Republicans IR Unemployment UD UR

12. Partisan Economic Performance

13. Rational Partisan Business CyclesAlberto Alesina Inflation IE = average ( ID , IR ) ID IE IR Unemployment UD UN UR

14. Rational Partisan Business CyclesAlberto Alesina Inflation election: IE = average ( ID , IR ) Dems win: IE = ID Reps win: IE = IR ID IE IR Unemployment UD UN UR

15. Evidence for Partisan Business Cycles Truman (1948) through Bush (2008) • Partisan Growth Cycles • Democrats 4.3 > Republicans 2.8 • Democrats 1st half 4.7 > Republicans 1st half 2.0 • Democrats 2nd half 4.0 ≈ Republicans 2nd half 3.5 • But annual record does not fit • Partisan Unemployment Cycles • Democrats 5.2 < Republicans 5.9 • Democrats 1st half 5.6 = Republicans 1st half 5.6 • Democrats 2nd half 4.7 < Republicans 2nd half 6.2

16. Growth by term year

17. Unemployment by term year

18. 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

19. 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

20. A Political Business Cycle? U e e e T

22. 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)