The Interplay of Ideology and Advice in Economic Policy-Making: The Case of Political Business Cycles

Abstract

Political business cycle models propose an attractive rationale for presidents to manipulate the economy: it is a way to win votes. But there is little empirical support for the hypothesis. The problem with positing that vote maximization leads to political business cycles is clear: the incentive is universal; the facilitating economic and political conditions occur frequently; but the outcome occurs seldom. Why is it that only some presidents respond to the incentive only some of the time? What features of an administration might help us explain or predict the occurrence of such cycles? The issues here are not limited to economic policy-making: they raise questions about goal-setting and policy coordination. Focusing on economic policy helps to structure observations within an important but bounded context. This paper focuses on two critical aspects of economic policy-making: the president's economic ideology summarizes the administration's goals; the organization of economic advice provides a means through which they might be sought. The empirical section concentrates on economic policy-making in the two post-war administrations most in need of explanation: the Eisenhower years, when there were opportunities but no electoral cycles; and the Nixon administration, the most egregious instance of the political business cycle genre. The concluding section elaborates the classification and tentatively maps other administrations into the model.