CS Question #1: What are the effects of pre-election policies?

There is another side to the political business cycle. The very same policies that can stimulate an economy can hurt it in the end. Long-term effects of these policies can increase inflation and create long-term recessions by slowing business investment. In most cases, politicians begin to reverse these policies immediately after an election. They know that the next election is years away! Politicians begin increasing taxes and cutting spending on programs. They also slow the growth of the money supply and allow interest rates to rise. The political business cycle explains the boom and bust patterns of a democratic economy. It looks at the election cycles and the policies enacted by incumbent politicians.

CS Question #2: What is the political business cycle?

The unemployment rate is an important indicator of the political business cycle. When unemployment is low, it is very difficult to defeat an incumbent politician in an election. Generally, the voting public does not want to make changes to a strong economy. When the rate of unemployment is low, the voters feel secure. This makes them less likely to vote for a politician who wants to make changes. When unemployment is high, the incumbent politician has a hard time winning an election. If many individuals are out of work, the overall economy will be poor. The voting public will demand changes in government policies. From January of 1979 to November of 1980, the U.S. unemployment rate rose from 5.9 percent to 7.5 percent. Remember that each percent represents hundreds of thousands of American workers. In the presidential election of 1980, Ronald Reagan defeated the incumbent, President Jimmy Carter. The same situation occurred when George Bush took office in 1988. The unemployment rate rose nearly 3 percent in four years. In the 1992 presidential election, Bill Clinton defeated President Bush.

CS Question #3: How can unemployment rates affect the chances of an incumbent politician winning re-election?

The structure of a government and its political parties also affects the political business cycle. The United States has a two-party political system. Two-party systems lead to greater influence over political business cycles. One party usually has majority rule over the government. This makes it easier for incumbents to manipulate policies. In other governments, there are dozens of political parties. This is the case in many European nations. Faction governments are run by a coalition of parties. These governments make it difficult for one party to manipulate the economy, and therefore each party has less of an effect on the political business cycle.

CS Question #4: How does the two-party system of government affect the political business cycle?

Further Thought:

1. Is it ethical for an incumbent politician to influence the economy in order to win re-election?
2. What are the possible benefits of the political business cycle?
3. Why do voters rate an incumbent politician based on the state of the economy just before elections?