Edited by William F. Shughart II and Laura Razzolini
Chapter 20: Politics and the macro economy
Richard E. Wagner 1 Introduction Do macroeconomic conditions inﬂuence the electoral prospects of candidates? Do governing incumbents use their powers of ofﬁce to inﬂuence macroeconomic conditions so as to improve their electoral prospects? The evidence currently available seems pretty strongly to support an afﬁrmative answer to the ﬁrst question. There is more controversy about the second question, and for good reason. If the second question is answered in the afﬁrmative, it is possible that the very process of democratic competition for ofﬁce might interject instability into the economy. This possibility contrasts starkly with the traditional view of macroeconomic policy, where a central role of the state is construed as acting to keep stable what would otherwise be an unstable market economy. Rather than being an antidote or corrective for economic instability, politics might be a source of instability. This chapter explores some recent scholarship on the relation between political competition and economic stability. It starts by setting forth the traditional, Keynesian vision of the corrective or stabilizing state. This vision located the state as outside or exogenous to the economic process. Public choice scholarship has relocated the state to an endogenous position within the economic process, and in so doing has raised the prospect of the destabilizing state. The resulting hypothesis of a political business cycle starts from a consideration of the impact of macroeconomic conditions on the electoral support that incumbents can expect to receive. At this point the literature on the political...
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