President Nixon's Political Business Cycle
ANN MARI MAY AND ROBERT R. KELLER
It is unfortunate that the politics of economics has come to dictate action more than the economics of economics.
Richard M. Nixon1
The political business cycle is a manifestation of the politics of economics dictating action. The quest for reelection, it is argued, may lead politicians to manipulate the economy for political gain. A political business cycle occurs when political manipulation of the economy results in a pattern of "relative austerity in [the] early years" of an incumbent politician's term and a "potlatch right before the election." 2
The evidence on the existence of a persistent presidential political business cycle pattern is mixed. 3 Nevertheless, a number of studies conclude that a political business cycle occurred during President Nixon's first term. 4 In many studies, the existence of a political business cycle from 1969 to 1972 is inferred from a macroeconomic pattern of postelection recession and pre-election prosperity. The problem is that these studies do not "examine whether the government tries to manipulate the economy . . . but whether economic conditions actually do correspond to this pattern." 5 In addition, the recession-prosperity pattern by itself does not explain who manipulated the economy, why the economy was manipulated, or how the economy was manipulated for political gain. Thus, by stressing a recession-prosperity pattern of correlation, much of the literature relies on circumstantial evidence that is too indirect; simple correlation substitutes for investigating causal relationships and explaining the mechanisms that generate a political business cycle.
Our paper presents evidence that uncovers causal relationships and explanations for the postelection slump and the pre-election boom that occurred between 1969 and 1972. The analysis begins by examining monetary and fiscal policy