Fiscal Policy and Presidential Elections: Update and Extension

Cuzan, Alfred G., Bundrick, Charles M., Presidential Studies Quarterly

According to two articles previously published in this journal, fiscal policy exerts a predictable effect on the outcome of presidential elections in the United States (Cuzan and Heggen 1984; Cuzan and Bundrick 1992). It appears that, independent of economic conditions, fiscal restraint is rewarded but fiscal expansion is rejected at the polls. These findings are consistent with those of William Niskanen (1975, 1979) and Sam Peltzman (1990, 1992), the only other scholars, both economists, who have explored the impact of fiscal policy on American presidential elections.(1)

This article updates, deepens, and extends the earlier work. The 1992 and 1996 elections are added to the set, for a total of thirty-two elections (or thirty, depending on data availability--see below) extending across a period of well over a century, one of the two longest data series that, to the best of our knowledge, is accounted for by any one presidential elections model.(2) An improved specification of the multiple regression model, one that uses the percentage of the two-party vote, rather than the percentage of the total vote, and which adds the number of consecutive terms that presidents of the same party have occupied the White House, results in a respectable fit with the data. Finally, analysis of the relationship between fiscal policy, presidential incumbency, and election outcome shows that it is not incumbency but fiscal policy that accounts for the success of sitting presidents. This last finding raises intriguing questions about the role of presidential leadership in democratic government.

Fiscal Policy and Presidential Elections: Testing an Implausible Hypothesis

Following Cuzan and Heggen's original article, published in this journal (see also Cuzan and Heggen 1985; Cuzan and Bundrick 1996), it is hypothesized that the outcome of presidential elections is contingent on fiscal policy. If fiscal policy is expansionary, incumbents are defeated; if it is cutback, they are reelected. By incumbents we mean the president or his party's candidate, along with his team. Fiscal policy is expansionary if F, the ratio of federal expenditures to gross national product (GNP) between election years, rises at a rate that is equal or greater than during the previous presidential term; it is cutback if this ratio declines or increases at a slower rate than in the previous administration (for a formal definition, see Table 1). There is a third possibility: a steady-state fiscal policy, where the ratio stays the same for two consecutive administrations. However, there is not one such case since 1872. Thus, de facto, fiscal policy or FISCAL is a binary variable (more about this below). Note that what defines fiscal policy are not the changes in the absolute amount of federal expenditures but in the percentage of GNP spent. It is in this relative sense that terms such as federal spending or expenditures and size of the budget are used here.

TABLE 1
Definitions and Measurements of Variables

VOTE2             Percentage of the two-party
                    vote won by the
                    incumbent party candidate
                    (adapted from Fair 1996a).

ELECT             ELECT = 1 if incumbents (the president
                    or his party's nominee) win
                    reelection; ELECT = -1
                    if incumbents are defeated.

GROWTH (g3)       The annualized rate of growth
                    of real per capita
                    gross domestic product
                    (GDP) through the first three
                    quarters of the
                    presidential election year
                    (Fair, 1996a, 1996b).

INFLATION (p15)   The annualized rate of growth
                    of the GDP price
                    index in the first fifteen
                    quarters of the presidential
                    term (Fair 1996a, 1996b).

TERMS (T)         The number of consecutive
                    terms by presidents
                    of the same party
                    affiliation.

PRESIDENT         PRESIDENT = 1 if the president
                    ran for reelection.
                  PRESIDENT = 0 if the president
                    did not run for reelection.

WAR               WAR = 1 in 1920, 1944,
                    and 1948; WAR = 0 all other
                    years (Fair 1996a, 1996b).

F                 Federal expenditures as a percentage
                   of gross national product.

                       F = Federal Outlays/GNP x 100

F'                Percentage change in F between
                    presidential election years.

                       F = [F.sub.t] - [F.sub.t-1]/[F.sub.t-1]

                  where t is an election year and
                   t - 1 the previous election year.

F"                The arithmetic change in F' between
                    presidential election years.

                  F" = [F'.sub.t] - [F'.sub.t-1]

FISCAL            Fiscal policy: expansionary (1), cutback
                    (-1), or steady-state (0).

                  FISCAL = 1 if F' > 2 and-2 [is
                    less than or equal to] F"

                  FISCAL = -1 if F' < -2 or F' < -2
                  FISCAL = 0 if-2 [is less than or equal to]
                    F [is less than or equal to] 2 and-2
                    [is less than or equal to] F"
                    (There is no case of a steady-state
                    policy in the data--see the appendix.)

                  The rationale for setting the threshold
                    value at +2 is that, to be recognized
                    as a change in fiscal policy, the
                    change in these ratios cannot be of
                    a trivial magnitude.

The theoretical rationale for a fiscal hypothesis of presidential elections rests on an economic analogy. It is assumed that federal spending (again, as a percentage of GNP) is equivalent to a "price" that the national government charges the economy for its services. When this price rises, voters-cum-consumers refuse to "buy" another term from the incumbents, casting their ballots, instead, for opposition candidates. On the other hand, when this "price" falls or rises more slowly than in the previous administration, voters interpret it as a sign of good fiscal management and hence are willing to return the incumbents to the White House for another four years.

We hasten to clarify that it is not necessary to believe that voters do, in fact, make these fiscal calculations before going to the polls. Rather, it is sufficient to suppose that the electorate can observe the effects of fiscal policy, is averse to those caused by fiscal expansion, and votes accordingly. In other words, voters cast their ballots as if they made the fiscal …

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Publication information: Article title: Fiscal Policy and Presidential Elections: Update and Extension. Contributors: Cuzan, Alfred G. - Author, Bundrick, Charles M. - Author. Journal title: Presidential Studies Quarterly. Volume: 30. Issue: 2 Publication date: June 2000. Page number: 275. © 1999 Center for the Study of the Presidency. COPYRIGHT 2000 Gale Group.

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