1 - Introduction

Summary

GENERAL OVERVIEW

Economics and politics deeply interconnect. On the one hand, incumbents are likely to benefit from an expanding economy and challengers to thrive on misery. On the other, the outcomes of elections influence economic policy and the state of the economy. This book studies the joint determination of political and macroeconomic outcomes. It focuses on the United States, but we also briefly discuss how our work sheds light on the political economy of other industrial democracies.

A few basic ideas underlie our work. The first one is that the American political system is “polarized”. Contrary to the widely held view, particularly in the “rational choice” framework, that a two-party system generates convergence of party platforms (Downs (1957)), we posit that, when in office, the two American parties follow different policies. The degree of polarization has varied greatly in American history (Poole and Rosenthal (1991a, 1993b)), but the two parties have never fully converged. What is important for us is not that polarization is constant, but simply that it does not vanish.

The second idea is that policy polarization leads to macroeconomic cycles. The two major parties follow sharply different macroeconomic policies. Whereas the Republicans are relatively more concerned with inflation, the Democrats emphasize reducing unemployment. These distinctive objectives, coupled with uncertainty about the outcome of elections, make macroeconomic policy not perfectly predictable. The actual outcomes of elections then generate economic recessions and expansions even though predictable macroeconomic policies should not influence growth in an economy with rational agents.