CHAPTER 7

Partisan Political Business Cycle

Introduction

The last chapter focused on the electoral cycle. This chapter examines the partisan cycle (e.g., Hibbs 1982). The president supports policies that attain partisan macroeconomic goals according to the partisan model. Two contrasting partisan effects take place based on which political party occupies the White House. A liberal partisan effect occurs during Democratic incumbencies. A conservative partisan cycle occurs during Republican presidencies.

The president’s policy preference deviates from the median voter’s most preferred outcome in the partisan model. Presidents adopt the partisan macroeconomic agenda of their core constituencies. This result occurs because of political party dependency on campaign contributions from their core constituencies. To maintain financial funding, political parties embrace policies that satisfy the economic interests of their partisan backers. Partisan supporters reduce their financial contributions if political parties embrace policies that stray from the interests of the core constituencies. The partisan cycle consists of shifts in macroeconomic policy and performance each time the political party in control of the Oval Office changes. This occurs because the liberal and conservative partisan preferences differ from each other.

Macroeconomic Preferences of the Two Main Political Parties

The preferences of the liberal and conservative political parties occur to the left and right of the median voter’s most preferred outcome. This partisan divide arises because of the differing macroeconomic preferences of the core constituencies of the two opposing parties. Political candidates embrace policies that satisfy the economic interests of their partisan constituencies, which are their financial backers.

The conservative party tends to align with business and financial interests. These interest groups typically place a high emphasis on maintaining low, stable inflation. The conservative party is relatively inflation averse in its macroeconomic policies. The liberal political party tends to be associated with labor-related unions and organizations. These interest groups generally emphasize low unemployment as a major objective. The liberal political party is relatively unemployment averse in its macroeconomic preference.

Partisan Rhetoric in the Median Voter Model

The median voter model (as discussed in Chapter 5) predicts that the actual policies adopted by the two major political parties tend to converge over time toward the median voter’s most preferred outcome. This occurs as a political strategy to increase approval ratings. The political party with the policy nearest to the median voter’s preference tends to become the most popular among citizens.

Policy convergence toward the center occurs notwithstanding the opposing partisan rhetoric by the right and left parties. This occurs for two main reasons. First, partisan rhetoric by political parties mobilizes greater political engagement and voting among core partisan constituencies and followers. Active political campaigning by political parties for partisan goals motivates higher voter turnout among partisan supporters. Second, partisan rhetoric by the political parties motivates increased financial support for electoral campaigns. Partisan supporters and interest groups increase donations if their political parties strongly advocate policies in line with their partisan preferences.

After a presidential candidate wins the White House, however, the actual policy ends up being more centrist than suggested by the preelection partisan discourse. The elected president appeals to the median voter to increase approval ratings. In the median voter model, the incumbent deviates from partisan promises and embraces policies that accommodate the median citizen.

Liberal Partisan Cycle

Partisan macroeconomic theory generates different results than the median voter model. Partisan theory maintains that the two political parties not only express opposing partisan rhetoric but embrace different policies. The Democratic party is relatively unemployment averse according to the partisan model. The left party’s core constituencies include labor-related organizations and affiliations. High employment is a major economic priority of labor unions and other related interests. Liberal presidencies tend to support expansive fiscal and monetary policies to reduce unemployment.

Political liberals and economic Keynesians support stimulative macroeconomic policies to attain low unemployment. Expansive macroeconomic policies, however, often come at the cost of rising inflation in the long run. According to the partisan model, economic performance during a Democratic presidency typically consists of a pattern of declining or low unemployment in the short run combined with rising inflation in the long run.

Figure 7.1 shows the liberal partisan cycle in the expectational Phillips curve model.

Figure 7.1 Liberal partisan macroeconomic cycle

In Figure 7.1, inflation is measured along the vertical axis, and unemployment is shown along the horizontal axis. The initial equilibrium is point A at the cross between the short-run Phillips curve, S1, and the vertical long-run Phillips curve. Inflation is 3 percent, and unemployment equals the natural rate of 5 percent.

Suppose a Democratic presidency is in power and macroeconomic policy is expansionary. The Democratic incumbency is relatively unemployment averse based on the assumptions of the partisan model. Through expansive stabilization policies, macroeconomic demand rises, and the economy moves upward and to the left along the short-run Phillips curve, S1, from point A to point B.

Unemployment temporarily dips below the natural rate along with rising inflation. Unemployment falls from 5 percent to about 3.75 percent. Unemployment declines as business firms hire more workers to raise production to meet higher macroeconomic demand caused by expansionary policy. Inflation rises because greater macroeconomic demand for goods and services bids up their prices. Inflation rises from 3 to 5 percent.

In the long run of the liberal partisan cycle, the short-run Phillips curve shifts right from S1 to S2, and the economy moves from point B to point C. Unemployment rises and adjusts back to the natural rate through the self-correcting mechanism. Workers adjust their inflationary expectations upward and seek higher wages to compensate for higher product prices caused by higher macroeconomic demand and expansionary policy. Employers respond to higher labor costs by reducing output and jobs. Unemployment rises and returns to the natural rate. Additionally, businesses shift the higher labor costs along to consumers as a further increase in product inflation. Inflation rises from 5 percent to about 6 percent.

In the long run of the liberal partisan cycle, unemployment rises and adjusts back to the natural rate, while inflation rises further. The liberal partisan effect creates only a transitory decline in unemployment below the natural rate. The short-run and long-run outcomes of the liberal partisan cycle are summarized in Table 7.1.

Table 7.1 Liberal partisan cycle

Conservative Partisan Cycle

The conservative political party is relatively inflation averse according to the partisan cycle model. The Republican party’s core constituencies include pro-business and pro-banking affiliations. Low, stable inflation is a major goal of business and financial interests. Low, stable inflation reduces business and financial risk.

According to the partisan influence model, Republican presidencies support disinflationary policies to maintain low inflation. Disinflationary policies, however, often come at the cost of greater short-term unemployment. Figure 7.2 shows the conservative partisan cycle in the expectational Phillips curve framework.

Figure 7.2 Conservative partisan macroeconomic cycle

The starting equilibrium is point C at the cross between the short-run Phillips curve, S2, and the vertical long-run Phillips curve. The economy is at the natural unemployment rate of 5 percent along with inflation of about 6 percent. Suppose the Republican party is in the White House and the macroeconomic policy is contractionary or disinflationary. Conservative presidencies are relatively inflation averse according to the partisan theory. The Republican presidency adopts contractionary stabilization policy and macroeconomic demand declines.

The economy consequently moves from point C to point D along the short-run Phillips curve, S2. Unemployment rises above the natural rate along with lower inflation. Unemployment rises from 5 to 6 percent, while inflation declines from 6 to around 5 percent. For example, a contractionary monetary policy causes interest rates to rise. Consequently, economic investment, consumer spending, and employment decline. Businesses reduce employment and production because of lower macroeconomic demand. Additionally, inflation falls. Lower macroeconomic demand from a contractionary policy compels businesses to reduce product prices to induce consumers to purchase goods.

In the long run, the Phillips curve shifts leftward from S2 to S1 through the self-adjustment mechanism. The economy moves from point D to point A. This takes place as workers reduce their demands for higher wages in reaction to lower product price inflation caused by lower aggregate demand and contractionary policy. The lower labor costs allow firms to decrease product inflation further. Lower real labor costs also enable firms to raise output and jobs. Unemployment therefore decreases and returns to the natural rate, while inflation declines further. Unemployment falls from 6 to 5 percent, while inflation falls from about 5 to 3 percent.

The overall pattern of the conservative partisan cycle consists of lower inflation, rising unemployment, and slower economic growth in the short run. In the long run, unemployment decreases and returns to the natural rate through the self-correcting mechanism of labor market forces. The economic slowdown is alleviated in the long run. The short-run and long-run effects of the conservative partisan cycle are summarized in Table 7.2.

Table 7.2 Conservative partisan cycle