Fiscal Policy and Presidential Elections

Fiscal Policy and Presidential Elections 
After the recession of 1990-91, the economy was slow to recover. At the time of the 1992 presidential election, the unemployment rate still languished at 7.5 percent, up two percentage points from when President George H. W. Bush took office in 1989. The higher unemployment rate was too much of a hurdle to overcome, and Bush lost his reelection bid to challenger Bill Clinton. Clinton- campaign slogan was: “It- the economy, stupid.”
 
The link between economic performance and reelection success has a long history. Ray Fair of Yale University examined presidential elections dating back to 1916 and found, not surprisingly, that the state of the economy during the election year affected the outcome. Specifically, Fair found that a declining unemployment rate and strong growth rate in GDP per capita increased election prospects for the incumbent party. Another Yale economist, William Nordhaus, developed a theory of political business cycles, arguing that incumbent presidents, during an election year, use expansionary policies to stimulate the economy, often only temporarily. For example, evidence suggests that President Nixon used expansionary policies to increase his chances for reelection in 1972, even pressuring the Federal Reserve chairman to pursue an expansionary monetary policy.
 
The evidence to support the theory of political business cycles is not entirely convincing. One problem is that the theory limits presidential motives to reelection, when in fact presidents may have other objectives. For example, the first President Bush, in the election year of 1992, passed up an opportunity to sign a tax cut for the middle class because that measure would also have increased taxes on a much smaller group—upper-income taxpayers.
 
An alternative to the theory of political business cycles is that Democrats care more about unemployment and less about inflation than do Republicans. This view is supported by evidence indicating that during Democratic administrations, unemployment is more likely to fall and inflation is more likely to rise than during Republican administrations. Republican presidents tend to pursue contractionary policies soon after taking office and are more willing to endure a recession to reduce inflation. The country suffered a recession during the first term of the last six Republican presidents, including President George W. Bush. Democratic presidents tend to pursue expansionary policies to reduce unemployment and are willing to put up with higher inflation to do so. But this theory also has its holes. For example, George W. Bush pushed tax cuts early in his administration to fight a recession. Bush, like Reagan before him, seemed less concerned about the impact of tax cuts on inflation and federal deficits.
 
A final problem with the political-business-cycle theory is that other issues sometimes compete with the economy for voter attention. For example, in the 2004 election, President Bush- handling of the war on terror, especially the war in Iraq, became at least as much of a campaign issue as his handling of the economy.
 
SOURCES: Burton Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” Journal of Economic Perspectives (Fall 2006): 177-188; Economic Report of the President, February 2007; Ray Fair, Predicting Presidential Elections and Other Things (Stanford, Calif.: Stanford University Press, 2002); and William Nordhaus, “Alternative Approaches to the Political Business Cycle,” Brookings Papers on Economic Activity, No. 2 (1989): 1-49.
Question: (CaseStudy: Discretionary Fiscal Policy and Presidential Elections) Suppose that fiscal policy changes output faster than it changes the price level. How might such timing play a role in the theory of political business cycles? Is this a valid role for fiscal policy? Discuss

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