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Voting and the economic cycle

Abstract

Sophisticated voters assess incumbent competence by filtering out economic cycles (which they do not like) from trend growth (which they do). Naive voters on the other hand respond only to raw economic growth. This implies that voting in the aggregate should respond asymmetrically to the economic cycle. Upswings are rewarded by the naive, but punished by the sophisticated. Downswings are punished by all voters. Using an established dataset of over 400 general elections we find that the incumbent vote share (a) responds differently to trend growth than to the cycle, (b) does not respond significantly to positive variation in the economic cycle, and (c) responds significantly and negatively to negative realizations in the economic cycle. In contrast to standard formulations of the ‘grievance asymmetry’ this asymmetric vote response is found to be independent of trend growth.

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Fig. 1

Notes

  1. The trend and cycle are macroeconomic performance measures; hence, this paper is consistent with literature emphasizing ‘sociotropic’ economic voting (though it is quite feasible that changes in the trend and cyclical components of GDP translate into ‘pocketbook’ effects).

  2. One important exception is Palmer and Whitten (1999), who decompose macroeconomic data into expected and unexpected components. These are quite distinct from trend and cycle. For example, the economic cycle displays a lot of persistence—a recession in one quarter predicts recession in the next (and hence would be expected). Another approach, taken by Leigh (2009) and Kayser and Peress (2012), decomposes GDP into national and global elements in order to benchmark national performance.

  3. Note also that the duration of economic and electoral cycles are of the same order of magnitude. For the United States, Burns and Mitchell (1946) found that business cycle duration ranged from 6 to 34 quarters and more recently the National Bureau of Economic Research registered 7 postwar business cycles with a minimum duration of 6 quarters and a maximum of 43 quarters (see Everts 2006 for an examination of these numbers). These duration statistics compare with electoral cycles usually varying between 3 and 5 years.

  4. One (very plausible) element of this argument is that individuals cannot fully insure themselves against the vagaries of the economic cycle, and in particular the possibility of unemployment.

  5. Quadratic utility is not just a mathematical convenience—Woodford (2003) derives it as a second-order approximation to the utility function (which can take very general form) of a representative agent. In the New Keynesian literature upswings and downswings both generate dispersion in the distribution of prices in the economy, given some degree of price rigidity, which changes consumption patterns and is detrimental to welfare.

  6. It should also be acknowledged that GDP (whether expressed in terms of raw or decomposed measures or volatility) is not the only potential macroeconomic driver of the vote. Carlsen (2000) and Jordahl (2006) analyze inflation and unemployment. However, GDP is certainly the prominent overall measure of macroeconomic performance. For instance, Stigler (1973) writes that “income is a more comprehensive measure of economic conditions than unemployment”. Peltzman (1990) writes that “voters… probably give greater weight to income growth than to unemployment and inflation.” Wlezien and Erikson (1996) and Hibbs (2006) also stress income growth as the primary macroeconomic performance measure.

  7. Incumbent ‘responsibility’ also undoubtedly varies across institutions and countries. Important advances here include Powell and Whitten (1993) and Whitten and Palmer (1999).

  8. This chimes with Peltzman’s (1990) argument that only permanent improvements in the voter’s welfare should be rewarded.

  9. A related consequence is the Downs (1957) ‘paradox of voting’.

  10. In differing contexts, Peltzman (1990) and Gomez and Wilson (2001) find evidence to support some degree of ‘sophistication’ in the electorate.

  11. Indeed, Soroka (2006) and Singer (2013) find a strong negative correspondence between the extent to which voters regard the economy as an important issue in survey data, and the overall performance of the economy.

  12. This literature began with Bloom and Price (1975), who found in favor of asymmetry in US congressional elections. Using international data, Kiewiet (1983) and Lewis-Beck (1988) rejected it. Nannestad and Paldam (1997) found asymmetry using Danish microdata and Pacek and Radcliff (1995) also found an asymmetric response in emerging economies.

  13. One could equally imagine a continuum of voters, differentiated by their political knowledge.

  14. An alternative way of modeling the naive voters, leading to the same conclusions, would be to assume an infinite discount rate. One problem that sophisticated voters have with a boom today (i.e., a positive value for \(\widetilde{y}_{t}\)) is that by construction it entails slower growth in the future. If this is discounted completely, then only \(y_{t}\) (i.e., output today) determines the vote.

  15. The earliest usable election in the sample is in 1977 (because the lagged incumbent vote share is a control variable), and the latest is in 2002. In the small number of instances where WDI series were unavailable, we took comparable data from the IMF’s International Financial Statistics database.

  16. Transforming the data into logarithims prior to filtering renders the resulting series comparable across countries.

  17. An extensive econometric literature exists examining alternative means of decomposing time-series data into trend and cycle, and alternatives to the HP filter exist. Nonetheless, according to the World Bank, the HP filter is the most common method used to this end in applied macroeconomic research.

    Alternatives such as the Baxter and King (1999) band-pass filter differ substantially only at the end-points of the data. Because the election dates all fall well within the time period for which we have GDP data, no substantive differences emerge between the cycle estimates of the alternative filters. Using the Baxter–King filter does not change any of the results reported here in any important way.

  18. Following Hellwig and Samuels (2007), we used data from the year preceding the election if the election was held in the first six months of the year, and data from the year of the election itself if the election was held in the second half of the year. In principle, it would also of interest to examine how lagged performance (of both trend and cycle) may impact the vote. Honorable exceptions in this regard include Peltzman (1990) and Wlezien and Erikson (1996). However, because contemporaneous economic performance measures are the ‘industry standard’ in the economic voting literature, we follow suit in order that the results are more directly comparable.

  19. Jorgenson et al. (2008) describe the evolution of long-run US productivity growth: it slowed down in the 1970s and 1980s, and then resurged after around 1995. This characterization is also revealed in the HP-filtered series for \(\overset{\_}{y}_{t}\).

  20. The small (and unimportant) differences between the results in column 1 of Table 2 and Model 1 in Hellwig and Samuels (2007) can be attributed to data revisions.

  21. These results are entirely consistent with Quinn and Woolley (2001), who find an unconditional negative effect of volatility on the incumbent vote. On average, any volatility is bad for the incumbent.

  22. We are implicitly assuming that the degree of sophistication of the electorate does not correlate with the economic cycle.

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Acknowledgments

We thank Timothy Hellwig for providing data used in the empirical analysis, and also seminar participants at the University of Bristol, George Mason University, SOAS London University, the University of Leicester, the University of Paris 1 (Panthéon-Sorbonne), the University of York, and the Royal Economic Society Conference, Manchester 2014. We are also grateful to three anonymous referees and Georg Vanberg for constructive remarks. Remaining errors are our own. We are grateful to Timothy Hellwig for providing data used in the empirical analysis, and three anonymous referees and Georg Vanberg for constructive comments on an earlier version. We also thank seminar participants at the University of Bristol, George Mason University, SOAS London University, the University of Leicester, the University of Paris 1 (Panthéon-Sorbonne), the University of York, and the Royal Economic Society conference, Manchester, 2014.

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Correspondence to Andrew Pickering.

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Maloney, J., Pickering, A. Voting and the economic cycle. Public Choice 162, 119–133 (2015). https://doi.org/10.1007/s11127-014-0205-z

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Keywords

  • Economic voting
  • Competence
  • Political knowledge
  • Asymmetric voting

JEL Classification

  • D72