Do Conservative Governments Make a Difference in Fiscal Policy? Evidence from the U.S. and the U.K

Article excerpt

In a recent paper, Ott, Belova, and Dolgopolov (2003) examined the effects of partisan politics on monetary policy for the United States and the United Kingdom (UK). They actually tested Secretary Simon's (1980) question "Do conservative governments make a difference in monetary policy?" (1) In his speech before the Mont Pelerin Society, William E. Simon developed his vision for the future of the nation in a program he called "An Action Program to Achieve National Goals." In this program, Simon elaborated on the use of monetary and fiscal policy to achieve the nation's goals (i.e., price stability, employment opportunity, economic and export growth and strong dollar). The program he put forth was quite comprehensive, one that required the coordination of national economic policies. Simon's action program consisted of five recommendations referred to as "rules." Rules 1, 2 and 3 were fiscal rules for addressing budget posture, the level of federal spending in relation to gross domestic product (GDP), and the tax burden. Rule 4 was the money rule, setting the growth rate of money, while rule 5 dealt with the scope of federal regulation. Simon's rule 4 was the focus of an Ott, Belova, and Dolgopolov (2003) paper. Simon's rules 1, 2, 3 and 5 are the focus of this paper. More specifically, we try to answer the question: "Do conservative governments make a difference in fiscal policy?" The next part of the paper offers a theoretical and empirical overview of the effects of partisan politics on fiscal policy along the lines of political cycles research. Section three formulates the testable hypothesis and discusses data and methodology, while the fourth section presents the empirical results. The final section offers some concluding remarks.

Theoretical and Empirical Overview: The Political Cycles' Literature

The theoretical role of political parties in fiscal policy has been the favorite topic of many analysts since the 1970s. It has been investigated through the lines of the political cycles literature, in which governments act in favor of their own political interests and/or the interest of particular interest groups. As a result, their actual policies can give rise to political cycles distinguished into electoral cycles (EC) and partisan cycles (PC). Electoral cycles are defined as persistent cyclical patterns of key policy and target variables across electoral terms, regardless of the political party in power. (2) Partisan cycles are persistent differences in such patterns conditional upon the ideology of the party in power.

The first-generation PC models were developed by Hibbs (1977) and feature the idea that policy should be more expansionary, output growth and inflation should be higher, and unemployment should be lower under non-conservative/ interventionist governments (socialist, left-wing governments) than under conservative/libertarian ones. (3) They are based in the conventional view that interventionist parties have a preference for equality, redistribution, social benefits to the unemployed, public provision of human and physical capital and a higher degree of public intervention in the economy. Therefore, they have a tendency to spend, regardless of both the revenue levels accruing to government and macroeconomic conditions (Cowart 1978, 432). By contrast, libertarian or pro-market governments have a preference toward smaller state intervention in the economy, leaving more room to the market forces to generate economic growth. Therefore, they have a tendency to tax and spend less and run balanced and small budgets.

The first-generation PC (and EC) models took no account of the new classical-rational expectations revolution in macroeconomics and the collapse of the Philips curve. This gap was filled by the second-generation of models in the early and mid 1980s (Alesina 1987; 1989; and Alesina and Sachs 1988). According to rational expectations, partisanship has only temporary effects. …