Political Cycles and the Macroeconomy.

• Author: Keech, William R.

By Alberto Alesina and Nouriel Roubini with Gerald D. Cohen Cambridge, Mass.: MIT Press, 1997. Pp. xii, 296. $20.00.

More than two decades ago, articles by William Nordhaus and by Douglas Hibbs launched the systematic study of the relationship between political motivations and the nature of macroeconomic policies and outcomes. Nordhaus, perhaps inspired by watching the machinations of the Nixon administration in its recent reelection drive, created a model to show how the desire for reelection might lead incumbents to stimulate the economy just before elections, with adverse effects to be experienced subsequently ("The Political Business Cycle," Review of Economic Studies 42 [1975]:169-90). Hibbs presented an econometric demonstration that unemployment is lower and economic growth is higher under Democrats than Republicans, and an estimate of how much ("Political Parties and Macroeconomic Policy," American Political Science Review 71 [1977]:1467-87).

Those two articles stimulated a great deal of research and scholarship elaborating and testing opportunistic electoral-cycle models in the tradition of Nordhaus and partisan models in the tradition of Hibbs. At the same time, macroeconomics was undergoing the rational-expectations revolution, which challenged the then conventional Keynesian wisdom that politicians could control the performance of the economy.

The field of macropolitical economy blossomed under those two countervailing developments. The first was a logical extension of the public choice "movement," dating from the mid-sixties, into macroeconomics. That development involved the scholarly recognition that policy makers do not necessarily act as benevolent dictators maximizing the general welfare, but rather may maximize their own political goals. Those goals have been operationalized as maximizing votes, ideological goals, or some combination of the two.

The second development, in its starkest form, led to the "policy ineffectiveness proposition," attributed to Robert Lucas. This proposition asserted that macroeconomic policy makers were in a game not against nature but against economic agents who understood the economy, were already optimizing, and might act so as to defeat policy interventions by the government. The implication was that policy makers could influence real macroeconomic variables such as growth and unemployment only by surprising economic agents. (There was still no doubt that policy makers could influence...