Timing Is All: Elections and the Duration of United States Business Cycles
Klein, Michael W., Journal of Money, Credit & Banking
THEORIES OF POLITICAL BUSINESS CYCLES predict that the quadrennial election cycle in the United States should affect the timing of the peaks and troughs of United States business cycles. Various political business cycles theories have different implications concerning this relationship. The opportunistic political business cycle model (Nordhaus 1975, Lindbeck 1976, Tufte 1978) suggests that a business cycle trough (that is, the beginning of an expansion phase of the business cycle) is likely in the period before an election as an incumbent attempts to increase the chance of reelection. This model also suggests that a business cycle peak (that is, the beginning of the contraction phase of a business cycle) follows soon after an election as the preelection stimulus is reversed. Alternatively, partisan political business cycle theories suggest that the likelihood of a peak or a trough following a presidential election depends upon which party was victorious. Rational partisan theory (Alesina 1987) suggests that a business cycle peak marking the end of an expansion is more likely in the wake of a Republican presidential victory than at other times and less likely after a Democratic presidential victory than at other times. Conversely, a business cycle trough is less likely after a Republican has won a presidential election than at other times and more likely after a Democrat has won than at other times.(1)
The predictions of these political business cycle theories correspond to the popular view that in politics timing is all. Previous empirical research on these theories, however, only addresses the timing issue indirectly by focusing on the amplitude of macroeconomic variables before and after elections or across the tenure of different parties (for example, Alesina and Roubini 1992). In this paper we provide a more direct test of the temporal links between political and economic events. We use duration analysis to test whether the likelihood of the occurrence of a business cycle turning point in the United States (that is, either the end of a contraction or the end of an expansion) is significantly affected by the occurrence and the outcome of an election.
Duration analysis is particularly well suited for analyzing the temporal links between elections and business cycle turning points. Duration analysis allows for directly testing the determinants of the likelihood of the end of a business cycle phase in any period conditional upon the phase lasting up until that period.(2) The determinants of the timing of peaks and troughs that we focus on in this paper are the occurrence and the outcome of presidential elections. Duration analysis enables an estimate of the effect of elections on the likelihood of the end of a business cycle phase holding constant other factors. In particular, duration analysis controls for duration dependence that arises when there is a changing probability of the end of a business cycle as the cycle itself progress.(3)
The empirical results presented in this paper do not support the prediction from opportunistic political business cycle theory that a contraction is more likely to end in the period before an election than in other periods regardless of the political party of the president. We do find, however, a significant increase in the likelihood of the end of a contraction ceterus paribus in the two-year period before an election when there is a Democratic president. There is also evidence that expansions are more likely to end soon after an election than in other periods. This is consistent with predictions of opportunistic political business cycle theory.
This result for postelection business cycle effects is further examined in the context of rational partisan theory by disaggregating postelection periods according to which party won the election. Consistent with rational political business cycle theory we find a significant increase in the likelihood of the end of an expansion and a significant decrease in the likelihood of the end of a contraction following the election of a Republican president. …