Introduction
Elections are powerful tools within any democracy used by the populace to determine who their leaders will be. Politicians have also developed many ways and means of ensuring positive outcomes in elections through the manipulation of the electorate. With the economy being one of the key areas of focus within an election, it becomes an important point for use as a campaign tool. The incumbents will try to argue that the economy is doing well under their superintendence while the opposition seeks to argue otherwise. Political business cycle refers to when the incumbency takes active measures to manipulate the economy in order to create a positive image for themselves before the electorates thus ensure re-election.
Nordhaus (1977) Political Business Cycle Model
The Nordhaus political business cycle takes place when the incumbents are desirous of manipulating the economy for the pure purposes of the election. These politicians will take the time to study the populace and find out what the electorate need the most from an economic perspective. They will then find a macroeconomic way of ensuring that these particular interests of the populace are both met and seemed to be met in time for the election. This model takes place at the expense of areas of the economy that is not seemed to be of focus by the populace as well as at the expense of future economic strengths. The principle assumption made under this model is that the populace has a myopic memory. This is because elections happen in regular cycles and if the memory of the populace does not decay, they might realize what the incumbents are doing, thus costing them the election. The second assumption is that the electorate is only interested in the most manifest attributes of the economy, which are employment and inflation. This is because more complex economic aspects will be compromised and a vigilant populace might notice.
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Party Preferences over Economic Goals
In developing the opportunistic political business cycle model, Hibbs considered a scenario such as the democracies in the developed world, where there are only two major political affiliations. As a prerequisite of the scenario, Hibbs considered that individual party members do not have preferences, but wholesomely embrace the party positions. Considering the two above-mentioned economic manifestations of employment and inflation, one of the dominant parties may have a higher focus on employment while the other has a higher focus on inflation. The policy makers move to accomplish, not what is right for the economy at the given moment in time, but rather what the party and its members expect. The party, therefore, controls both the expectations of the members and the attainment of those expectations.
Alesina’s Political Business Cycle Model
Alesina’s political business cycle is based on the theory that it is the election itself that affects the economy and not the active manipulation of the economy by economic players. Alesina’s model concedes that economies are effected before and after the elections, but disputes the fact that these changes occur as a result of active opportunistic manipulation for the incumbents. Instead, Alesina considers a partisan scenario such as the one factored by Hibbs and with an electorate whose main emphasis is on employment and inflation. Normally, the two parties contending for leadership will take a different position on the two issues of employment and inflation. The positions taken will affect the conduct of the populace economically as they seek to adjust towards the party they believe will win the elections. It is these activities that cause changes in the real GNP of an economy.
Key Differences between the Structures of the Nordhaus and Alesina Models
The first major difference between the Nordhaus model and Alesina’s model lies on what causes the change in real GNP and why. Under Nordhaus, the changes are caused by the active, intentional and opportunistic manipulation of macroeconomic factors by the incumbency so as to cause the electorate to vote for them. Under Alesina’s model, however, it is the acts and omissions of the populace, in anticipation of the elections that occasion the envisaged changes. Nordhaus, therefore, factors an irrational and manipulative leadership that will make short-term economic manipulations for political gain and a gullible populace who will take the bait every electoral cycle. Alesina’s model considers a more rational political group who would not take advantage of power to manipulate the system. It also considers a more enlightened populace who understand how the policy will change depending on who wins the election.
Key Differences in the Predictions of the Nordhaus and Alesina Model
Nordhaus predicts that the voter has moral decay and is more interested in what happens today than what happened several years ago. Therefore, the voter will act as expected by the incumbency and elect them. However, since the political business cycle is a major macroeconomic risk with possible long term adverse consequences, the voter will still suffer immediately after the elections as the economy is adjusted to offload the effects of the manipulations made in the rundown for the elections. The politicians under the Nordhaus model will most likely end up in office but become extremely unpopular immediately after since they will be compelled to adopt policies that are contrary to the promises they had made at the elections. Under Alesina’s model, the populace is more in charge and the changes in real GNP will happen as the economy adjusts to the anticipated elections. In the case the anticipated outcome happens, there will be no more adjustments. However, in the case of a surprise victory, the economy will adjust in a jerked manner as the populace seeks to hurriedly adjust to the oncoming economic situation.
