Conclusion
The political macroeconomy refers to concepts, issues, and evidence on the interrelation between the economy and various political influences upon fiscal and monetary policies. Several linkages occur among macroeconomic politics, macroeconomic policies, macroeconomic policymakers, and macroeconomic events. Some important political influences on fiscal and monetary policies are partisan economic goals, presidential and Congressional reelection ambition, the president’s influence on the Fed, voter behavior, interest groups, and the media. Political influence on macroeconomic policies involves the interactions among the three policymakers, which are the president, Congress, and the central bank, along with the influence of the left and right political parties.
Fiscal and monetary policies affect the economy and the pattern of the business cycle. The state of the economy impacts partisan economic priorities, presidential approval and other measures of citizen sentiment, including voter behavior and the reelection prospects of the president and members of Congress. The condition of the economy also affects political and societal stability. Prosperity and perceptions of economic fairness promote greater societal well-being. Poverty and perceptions of economic inequity breed political dissatisfaction and discord among the economic classes.
An economic ideological divide occurs between the political right and the political left on the role of government versus market forces in the economy. The ideology of the political right tends to embrace the classical economic perspective that emphasizes the advantages of competitive market forces. The ideology of the political left generally supports the Keynesian outlook of government intervention to stimulate the economy during periods of slowdown because of perceived shortcomings of market forces.
A major theme of the political macroeconomy is the conflicting economic viewpoints of the political right and the political left on fiscal and monetary policies. Conservative sentiment advocates a small governmental role in the economy. This occurs through low government spending with a strong emphasis on national defense and lesser emphasis on social programs. The political right generally recommends low taxes across all economic classes. The political right and the classical macroeconomic outlook advise minimal government regulations on business.
The political left recommends a more active governmental role in the economy. The political left advises relatively high government spending with a strong emphasis on social programs and less focus on military spending. The political left often recommends higher taxes on wealthy individuals and corporations. The liberal view advocates for increased regulations on business to protect consumers, workers, and the environment.
Active fiscal and monetary policies are necessary according to Keynesianism and the political left. This is because the economy does not always automatically adjust to cure unemployment through market forces in a timely and effective manner. Interventionist stabilization policies are necessary because economic rigidities and inefficiencies inhibit the self-correcting mechanism of market forces from reaching full employment.
The interrelation among the main macroeconomic indicators lays the foundation for examining political influences on macroeconomic policy. Three important economic indicators are Real GDP or Real GDP growth, unemployment, and inflation. These measurements affect household economic well-being, consumer sentiment, business activity, voter behavior, presidential approval, and the reelection prospects for the in-party.
Interest rates are another major economic indicator. Interest rates affect the economy through the impact on debt-financed household and business spending. International trade is also important and related to Real GDP and unemployment. The trade deficit and GDP simultaneously influence each other. An increase in imports worsens the trade deficit and causes GDP to decline. This occurs because the trade deficit is an accounting component of GDP. As GDP declines because of a trade deficit, unemployment worsens in import-competing industries. On the other hand, lower GDP and rising unemployment tend to improve the trade deficit. This occurs because less income is available for spending on imports when GDP is low.
Finally, the up-and-down pattern of the business cycle is a significant economic measurement. The expansion and contraction phases of the business cycle identify the fluctuating gap between the actual economy and an efficient economy. An efficient economy occurs at the natural unemployment rate and potential Real GDP.
The expectational Phillips curve provides a framework for understanding the short-run inflation–unemployment trade-off and the dynamics of the business cycle. In addition, Okun’s law depicts the inverse correlation between RGDP growth and the change in unemployment. The expectational Phillips curve model combined with Okun’s law provides an approach for examining the association among inflation, unemployment, and economic growth. The behavior of these three economic variables is important because of the impact on citizen sentiment, voter decisions, partisan priorities, and policymaker actions.
Fiscal and monetary policies affect inflation, unemployment, Real GDP, and economic growth in the short run and in the long run. The effects of stabilization policies on the economy can be analyzed using the expectational Phillips curve and Okun’s law. Expansionary fiscal and monetary policies seek to expand economic growth and reduce unemployment with the possible negative side effect of rising inflation. Contractionary fiscal and monetary policies seek to reduce inflation with the possible negative side effects of slower real economic growth and rising unemployment.
Fiscal policy occurs through the political compromise between the president and Congress and involves the economic priorities of the two main political parties. Fiscal policy is the effect of taxes and government expenditures on the economy. The goal of expansionary fiscal policy is to reduce unemployment and consists of lower taxes and higher government spending. The objective of contractionary fiscal policy is to reduce inflation and consists of higher taxes or lower government spending.
Monetary policy is controlled by the Federal Open Market Committee of the Federal Reserve, with the Fed Chair playing the dominant role in leading the committee. Monetary policy is the influence of money supply and interest rates on the economy. The goal of expansionary monetary policy is to reduce unemployment and consists of higher money supply growth and lower interest rates. The purpose of contractionary monetary policy is to reduce inflation and consists of lower money supply growth and higher interest rates.
Rational voter theory maintains that the influence of the economy on public attitudes and voter behavior occurs through a rational opinion-making process. Each citizen votes for the political candidate who embraces policies that align with that voter’s preferred outcome. The median voter model is based on rational voter theory. The median voter model predicts that politicians and political parties take actions that converge to the median voter’s preference. This convergence arises as each of the two opposing parties compete by embracing policies that appeal more to the political center. Electoral pressures cause presidents to administer policies that align with the median voter’s sentiment, especially before elections. The goal of this political strategy is to attain high presidential approval and improve reelection prospects for the in-party.
One implication of the median voter model is the electoral cycle. This effect involves the concept of macroeconomic inconsistency versus macroeconomic consistency. If the median voter is shortsighted or naïve about the economy, then the median preference is dynamically inconsistent. The electorate, in this case, may be fooled into supporting a transitory economic boom that temporarily reduces unemployment before a presidential election but with greater inflation after the election. According to the electoral effect, the incumbent opportunistically manipulates the economy through stimulative fiscal and monetary policies to create a preelection economic expansion to boost the presidential vote for the in-party.
However, if the median citizen is informed and farsighted, then the macroeconomic preference is dynamically consistent. The electorate disapproves of opportunistic policies in this case. Voters are aware of the negative inflationary side effect of manipulative policy. An attempt by the incumbent to engineer the economy for temporary gain backfires, and less votes occur for the in-party in a presidential election.
The research is mixed on whether the median voter’s preference is consistent or inconsistent. Some research on presidential approval suggests that the median voter’s macroeconomic preference may be dynamically consistent. But other research on the presidential vote suggests that the median preference may be inconsistent.
Besides the electoral cycle, the other main PBC effect is the partisan cycle. The partisan cycle is not compatible with the median voter model. The partisan cycle effect may develop if a bimodal distribution of voter preferences occurs or if voter protest abstention takes place. The partisan influence model asserts that macroeconomic policies are based on the partisan agenda of the in-party to the White House rather than the median voter’s preference.
The partisan cycle predicts that stabilization policies and economic outcomes shift when the political party in control of the White House changes. The opposing macroeconomic agendas of the two parties align with the economic priorities of voters and interest groups that form the core constituencies of the political left and right.
Partisan economic pressures cause liberal administrations to choose policies that emphasize the attainment of low unemployment but with the possible side effect of rising inflation. Liberal presidencies are relatively unemployment averse. Liberal administrations support expansionary policies to reduce unemployment because of perceptions that market forces are often slow in adjusting to equilibrium.
Conservative presidencies tend to adopt policies that are relatively inflation averse but with the possible negative side effect of lower economic growth and higher unemployment. Partisan economic pressures cause conservative administrations to focus on maintaining low inflation. This creates a predictable business and financial environment for the invisible hand of competitive market forces to thrive. The political right and the classical macroeconomic view maintain that unemployment automatically adjusts to equilibrium through the self-correcting mechanism of competitive supply and demand forces in the labor and product markets.
Examination of unemployment and inflation during the period of 1961–2016 shows that the two PBC effects occurred idiosyncratically for different presidencies rather than systematically across all administrations. The economy exhibited partisan cycle characteristics of unemployment aversion for Democratic presidencies. Macroeconomic performance during most Republican incumbencies, on the other hand, seemed to show an electoral cycle pattern of declining unemployment during election years, followed by rising inflation after elections.
The business cycle data suggest that a mix of partisan and electoral effects may have transpired for most presidencies. Partisan effects may have occurred during the first half of presidencies for both Democratic and Republican terms. However, the electoral cycle effect of preelection economic stimulus may have occurred in the second half of presidential terms for most Democratic and Republican presidencies. Administrations may have pursued partisan macroeconomic goals in the first part of a term, but then shifted to macroeconomic opportunism in the latter part of a term as an attempt to increase the in-party reelection vote share.
Idiosyncratic PBC effects across presidencies should not be surprising. Many determinants affect macroeconomic policy and the business cycle. A single-cause explanation for macroeconomic policy and performance is too simplistic. Various interconnections occur between the macroeconomy and political influences on policy, including the electoral cycle, the partisan cycle, or some combination of the two PBC influences.
In addition, the president must have the power to dictate macroeconomic policy for the partisan cycle or the electoral cycle to take place. However, the president’s ability to influence fiscal and monetary policies is limited. In determining macroeconomic policies, a complex and fluid dynamic occurs among the president, Congress, the Fed, and the two main political parties.
Congress and the administration are frequently in opposition in determining fiscal policy. This is especially true if partisan gridlock or a divided government occurs. Partisan gridlock on fiscal policy happens if one political party has a majority of seats in Congress while the other political party controls the presidency.
Political influences on the Fed and monetary policy can also be complex. The executive and legislative branches, as well as financial interests, can have some indirect pressure on the monetary policy actions of the central bank. Congress has oversight power on the Fed, whereas the president appoints the Fed Chairperson. In addition, many members of the FOMC and the Board of Governors have career affiliations to the finance and banking industries.
Overall, a simplifying assumption of PBC theory is that the president indirectly determines fiscal and monetary policies. Criticisms of this assumption is one of the strongest challenges against the systematic occurrence of electoral and partisan cycle effects.
Also, the impact of stabilization policies on the economy must be accurately predictable for the electoral cycle or the partisan cycle to take place. Some uncertainty exists in this regard. Forecasting economic performance can sometimes be imprecise, particularly when attempting to predict the timing of expansionary and contractionary turns in the business cycle. Some ambiguity is inevitable.
The luck and partial unpredictability of the economy is a source of risk for the reelection prospects of the in-party. The political fortune of elected officials is tied to the volatility, uncertainty, and partial uncontrollability of the economy. The incumbent faces peril of losing reelection if the economy is in a slump on election eve, even if the weak economy is unrelated to the president’s policies. The incumbent stands a high chance of winning reelection if economic growth is high in an election year, even if the strong economy is unrelated to the administration’s actions.
Noneconomic factors also impact presidential elections and incumbent job approval. Some noneconomic influences on the presidential vote and incumbent popularity are similar. Other effects are different. Presidential scandals, voter opinion inertia, and the presidential honeymoon influence incumbent approval. The incumbency effect and political party duration affect presidential elections. War casualties impact both presidential popularity and election outcomes.
The economy affects Congressional House and Senate elections. Economic influence on Congressional elections is similar to economic influence on presidential elections. For on-term elections, the economy impacts the outcomes through the presidential coattail. If a strong economy causes the presidential reelection vote share to be high, then this spills over and causes the in-party Congressional vote shares to also be high because of the coattail.
For midterm Congressional elections, the economy indirectly affects outcomes through the presidential approval effect. If a strong economy causes incumbent popularity to be high in a midterm year, then this spills over and may cause the in-party House and Senate vote shares to also be high in the midterm election.
One noneconomic determinant on midterm elections is the balancing effect. The balancing effect on midterm Congressional elections counters the coattail effect upon on-term Congressional elections. The presidential coattail causes an increase in votes for legislators of the party that wins the White House in on-term elections. However, House and Senate vote shares for the in-party tend to decline in midterm elections through the balancing effect. Citizens tend to vote for the out-party in midterm elections.
Besides voting behavior and presidential approval, the economy affects other measures of public opinion. Some of these indicators are consumer sentiment, the social happiness index, voter participation rates, and macropartisanship.
Political and ideological factors also impact international economic policies such as trade. The political right generally adheres to the perspective of economic liberalism. This viewpoint embraces free trade. Economic liberalism maintains that unrestricted international trade especially benefits consumers. Competitive international market forces create lower product prices, greater variety of goods, and increased product quality.
The political left sometimes adheres to the neomercantilist perspective. This outlook is protectionist on international trade. Neomercantilism supports the use of trade barriers such as tariffs and quotas to protect workers from job displacement due to imports based on international economic competition.
Another perspective on globalism and international capitalism is economic structuralism. The structuralist view maintains that international trade, international finance, and globalism tend to benefit large MNCs and rich countries. On the other hand, LDCs, low-income households, natural resources, and the environment are often exploited because of the profit incentive of capitalism.
In summary, various linkages take place in the circular flow of the political macroeconomy. Economic, ideological, and political considerations impact international trade policy, whether free trade or trade protection, and the corresponding effect on consumers, businesses, jobs, GDP, and the environment. Partisan, electoral, ideological, and special interest factors influence the decisions of the fiscal and monetary policymakers. These policies affect the economy and swings in the business cycle. Macroeconomic events then influence citizen opinions and voting patterns in presidential and Congressional elections.
To be reelected, the president and Congress must consider voter opinions on the economy. The president and Congress must also take into account partisan economic platforms to maintain support from their political base. The Fed Chair may be influenced by the president, Congress, and financial interests. Various political determinants impact macroeconomic and international policies and the state of the economy. Simultaneously, the economy impacts partisan priorities, citizen attitudes, and voting. Although some general patterns appear to occur, politico-macroeconomic interactions are not fully systematic and not always predictable. Political macroeconomic interconnections take place in a fluid environment of political and economic uncertainty and idiosyncrasy.