Political Business Cycle - Incumbent Advantage

Political Business Cycle – Incumbent Advantage

The Political Business Cycle is an idea based on politicians implementing short-term economic growth policies before the election in order to boost popularity among the incumbent candidate.

These policies are predicted to only have short-term positive economic growth and negative long-term economic growth outcomes. Thus, creating a cycle of economic expansion before an election followed by an economic recession.

Policy

An example of a policy that a politician would implement would be a policy that increases government spending.

This would in the short run increase economic growth and decrease the unemployment rate. You see these policies implemented a lot during a recession, as it is used to lessen the effects of a recession or reverse it completely.

There is a drawback to these policies which is that an increase in government spending means the government is now spending more money than they are bringing in. Which means they need to make up the difference.

They can either print the money, increase taxes, or sell bonds. This means in the long run if they print the money inflation will increase, or in the long run, there will be a greater tax burden on the people, or if they sell bonds, they will just be rolling over their debt.

So, in the short run, this policy will help the people and make them feel economically safe and secure, therefore happier. Yet in the long run, the people will have to face the consequences of this policy whether that’s inflation, taxes, or future government debt.

Incumbent Advantage

The reason politicians do this is that they know voters have very short memories. If a voter is employed and his investments are growing at the time of the election, they will be likely to vote for the incumbent candidate because why vote for someone new who could potentially implement a policy that would get you unemployed and cause an economic recession.

If voters’ lives are good, they don’t want change, therefor politicians do what they can to make voters’ lives good right before the election regardless of the consequences of what occurs after the election.

Democrats and Republicans

We can also see business cycles appear in US politics with the Democratic and Republican parties. It seems that Democratic candidates care more about the unemployment rate, while Republican candidates care more about inflation.

So, when a Democrat is in office the theory is that you will see the unemployment rate will decrease and you will see inflation increase. Then when you see a republican arrive in office you will see a reversal, the unemployment rate goes up and inflation decreases.

Since a politician’s main goal is to get elected and then reelected, they implement policies that match with their voters. For Democrats, that’s implementing policies about decreasing unemployment and for Republicans, that’s implementing policies on decreasing inflation.

The theory of the Political Business Cycle shows us a theoretical scenario of the way politicians implement policies if their main incentive is to win elections and their voters are only focused on the short term.