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The Suntory and Toyota International entres for Economics and Related Disciplines
Political Cycles and the Macroeconomy by Alberto Alesina; Nouriel Roubini; Gerald D. CohenReview by: Philip R. LaneEconomica, New Series, Vol. 66, No. 261 (Feb., 1999), pp. 151-152Published by: Wiley on behalf of The London School of Economics and Political Science and The
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8/9/2019 Political Cycle_alberto Alesina
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Econornica 1999) 66, 151-4
Book Reviews
Political Cycles and the
Macroeconomy.
By ALBERTO
LESINA ndNOURIELROUBINI,
with GERALD
D.
COHEN.
MIT Press,
Cambridge, Mass. 1998. xii
+
302 pp.
Paperback ?16.95.
This book
by
two leaders
in
the
field, provides
a theoretical and empirical exploration
of the relationship between political cycles and
macroeconomic performance. This topic
has been
the subject
of much
research over the
last decade, and the authors provide a
valuable service
in
presenting a unified treatment of the main contributions
in
this
burgeoning literature.However, the book is more than just a survey and presents many
new results.
A
brief introduction outlines the authors'
motivation and provides an overview of
the book's inain contributions. Chapters 2 and 3 present a consolidated account
of
the
canonical
political cycle
theories: the
opportunistic
and
partisan
models. In
each case,
the traditional
(1970s)
version
is
first laid
out before turning
to
contemporary
rational
expectations
variations. These
chapters
both
provide
a useful theoretical framework
for
the
subsequent empirical analysis
and stand alone
as a
textbook
treatment that
will
prove useful to researchers and students
alike.
The empirical
work
begins
in
Chapter 4,
with a time-series study of the US
data.
The authors test
for
political cycle
effects
both
in
macroeconomic outcomes
(growth
and
inflation)
and
in
policy
instruments
(monetary
and
fiscal
policy).
Relative
to
pre-
vious work, the approach is encompassing in the sense of investigating both opportun-
istic and
partisan
theories on
a
common, updated
data-set.
They
find
support
for the
rational
partisan theory:
Democratic
administrations are more
expansionary
than
Republican ones,
but these effects are concentrated
in
the first half of the electoral
cycle.
On the
other
hand,
there is
no
evidence
in favour of the
prediction
of the
oppor-
tunistic
theory
that
we
should observe macroeconomic
expansions prior
to elections.
Chapter
5
investigates
the
impact
of electoral
uncertainty
on
macroeconomic
per-
formance.
Building
on
Cohen's
doctoral
dissertation,
an index of
electoral
uncertainty
is
extracted from
polling
date
through application
of
option pricing techniques. Again,
the rational
partisan approach
is
supported
in
that
expected
inflation
(as
reflected
in
forward interest rates) rises, the more probable is Democratic electoral success. More-
over,
consistent
with the
presence
of
sticky
wages
or
prices, post-electoral partisan
effects on macroeconomic
performance
are
stronger,
the
more
unexpected
is the elec-
tion outcome.
The empirical analysis is extended
to a
panel
of industrial
countries
in
Chapters
6
and
7.
Again,
the
authors
move
beyond previous
work
by constructing
a broader and
deeper
database and
conducting
a
comprehensive
set of tests.
The
core
finding
is
that,
in broad
terms,
the results for the industrial
country panel
are
very
similar
to those
for
the
United
States.
As
such,
the
United
States
is not
exceptional,
in
contrast
to
the
working hypothesis
of the
'American
politics'
branch of
political science,
and
political
cycle
theories
are
relevant
in
understanding
macroeconomic
performance
across the
OECD. In addition, there is clear evidence that partisan cycles are larger in two-party
than
in
multi-party systems.
Having completed
the
investigation
of the direct
empirical predictions
of
opportun-
istic
and
partisan models,
the authors next consider
potential
interactions between
pol-
itical
cycle
theories and
some
institutional
features
that
have been
emphasized
in
the
recent
political economy
literature.
In
Chapter
8 it is
shown that
a
partisan political
system provides
an additional incentive to
establish
an
independent
central
bank. Such
delegation depoliticizes monetary policy
and
hence
eliminates
partisan cycles
in
inflation
and interest rates.
Moreover,
it
may also insulate the economy policy
from
opportunistic political cycles
since
the
government
is no
longer able to directly manipu-
late monetary policy during election years.
The
interaction between political cycles and
the budgetary process is examined in
Chapter
9.
In
addition to
discussing
how
institutional
features affect fiscal outcomes
?
The London
School
of
Economics and Political
Science 1999
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152
ECONOMICA
[FEBRUARY
(e.g. hierarchialand transparent
fiscal procedures arguably
induce more fiscal discipline
than collegial and
opaque systems),
the authors present evidence that two-party
systems
adjust
more
quickly to fiscal
shocks than multi-party
coalition systems, with the latter
more rapidly
accumulating larger amounts of debt
in response to adverse
shocks. This
suggests a trade-off in the design of political systems: two-party systems may generate
larger partisan cycles, but are better
able to respond
to shocks. Finally, Chapter 10
recapitulates
the book's main findings and speculates
as to the relevance
of political
cycles to
future
macroeconomic
performance.
The authors predict that central bank
independence and international
monetary
and financial integration
will
attenuate,
but
not elimiinate,partisan conflicts regarding
the unernployment-inflation
trade-off. How-
ever,
the
pressing
need
for fiscal
consolidation
in
many countries
will
likely
lead to
intense partisan and distributional
conflicts over
the precise design of
fiscal
adjustment
programmes.
Overall,
this volume
is
a
fine achievement. The authors write
with
appealing
clarity
and successfully convey a sense of intellectual excitement about this field of research.
Throughout
the
book, the
authors signal the many
issues
requiring
future
research,
and
the book is
a
potential
goldmine
for
graduate
students
trawling
for dissertation
topics
in
this area.
Among
the extensions
that
would
be desirable are the
inclusion of
developing
countries
in
the
empirical analysis,
and
conditioning
the
macroeconomic
transmission
of
political cycles
on
characteristics
such as a
country's degree
of
openness
to trade
in
goods and capital.
This
excellent book
is a must-have for all economists
and political scientists inter-
ested
in the
interaction
between
politics
and macroeconomics and
is also
suitable
as a
textbook
for course modules
in this
area.
Trinity College Dublin and CEPR PHILIPR. LANE
RewavrdingWork: How to Restore
Participation
and
Self-Support
to Free
Enterprise.
By
E. S.
PHELPS.
Harvard University Press, Cambridge, Mass. 1997. x + 198
pp.
?16.50.
The
premier
labour market
problem
in
the United
States in the
past twenty years
has
been the rising inequality
of
wages.
This
foreigner might
be
excused for
observing
that
the same
comment
applies
to the United
Kingdom.
The
present
short volume
argues
for a graduated wage subsidy applicable
to the
employment
of
low-wage
workers
as a
solution to this difficulty. In the United States the subsidy would kick in at 4 (slightly
below the federal minimum
wage
at
the
time the book
was
written)
and
phase
out
gradually, disappearing for workers
earning
more than
12 per
hour
(roughly the aver-
age wage).
The author's justifications for this
subsidy
are as
follows. (1) Unemployment and
low returns to
work
among unskilled workers create a
variety
of
negative externalities,
such
as increased
crime and
intergenerational spillovers. (2)
A
rich
country,
especially
one
founded,
as
Phelps beautifully
argues
in the
Epilogue,
on notions
of
fellow-feeling
and
comity,
not
merely
on
rugged individualism,
should
be
ashamed
of such
inequality.
(3) The net costs
of
such a subsidy are small or zero once
one accounts
for
reductions
in
transfer programmes, increased productivity of higher-skilled workers (as
the
employment of low-skilled workers rises), and reduced burdens of social problems.
In
many ways, this is an extremely frustrating and annoying book. The
externality
argument
is
unconvincing:
One
might
instead
argue that,
to the extent that
there are
externalities
among workers, they
flow
mainly
from
higher-
to lower-skilled.
This alter-
native underlies recent theories of
endogenous growth.
It
militates against subsidizing
the
low-skilled to
internalize
externalities,
and instead
perhaps justifies
subsidizing
education and
training.
Those who have thought about
and studied employment tax credits have
pointed
out and
even
(Burtless 1985)
measured
the
impact
of the
stigma that eligibility for such
credits
may
attach to the subsidized
employee. Admittedly, the stigma would be
less
under a broadly applicable wage subsidy, but it would hardly disappear and would still
reduce
employers' responsiveness
to the subsidy. More broadly, the author never
addresses the
likely impact
of
the subsidy on low-skilled employment-would it
really
?
The London School
of Economics and
Political Science 1999
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