Political Parties and Macroeconomic Policy

American Political Science Review

Volumn 71, Issue 4, 1977, Pages 1467-1487

  Hibbs, Douglas A ^a  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

Author keywords

[No Author keywords available]

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EID: 84972959926     PISSN: 00030554     EISSN: 15375943     Source Type: Journal    
DOI: 10.1017/S0003055400269712     Document Type: Article

References (33)

1. A detailed review of the theoretical and empirical literature on Phillips-curve inflation models is given in my Economic Interest and the Politics of Macroeconomic Policy, No. C/75-14, Center for International Studies, M.I.T., Cambridge, Mass., January 1976.
2. Copies of this monograph are available at cost from the C.I.S. Publications officer.
3. See, for example, A. Blinder and H. Esaki, “Macroeconomic Activity and Income Distribution in the Postwar U.S.” (mimeo., November 1976); Robinson G. Hollister and John L. Palmer, “The Impact of Inflation on the Poor,” in Redistribution to the Rich and the Poor, ed. K. E. Boulding and M. Pfaff (Belmont, Calif.: Wadsworth, 1972), pp. 240-70;
4. Charles E. Metcalf, An Econometric Model of the Income Distribution (Chicago: Markham, 1972); Lester C. Thurow, “Analyzing the American Income Distribution,” American Economic Review: Papers and Proceedings, 60 (May 1970), 261-69; and T. Schultz, “Secular Trends and Cyclical Behavior of Income Distribution in the United States: 1944-1964,” in Six Papers on the Size Distribution of Wealth and Income, ed. L. Soltow (New York: National Bureau of Economic Research, 1969), pp. 75-100.
5. These hypotheses have a distinguished pedigree. They have appeared, among other places, in Earl J. Hamilton, “Prices and Progress,” Journal of Economic History, 12 (Fall 1952), 325-49; Alvin Hansen, “Factors Affecting the Trend of Real Wages,” American Economic Review, 15 (March 1925), 27-42; John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, 1936); Jacques Rueff, “Nouvelle discussion sur le chomage, les salaires et les pris,” Revue d'Economie Politique (1951), 761-91; and Sidney Weintraub, An Approach to the Theory of Income Distribution (Westport, Conn.: Greenwood Press Inc., 1958). Weintraub, for example, has flatly asserted that”… only entrepreneurs and the actual unemployed have an unequivocal stake in maximum employment, while rentiers and the employed find their interests better served at lower levels of activity,” p. 60.
6. Clarence D. Long, “The Illusion of Wage Rigidity: Long and Short Cycles in Wages and Labor,” Review of Economics and Statistics, 42 (May 1960), 140-51.
7. Ronald G. Bodkin, “Real Wages and Cyclical Variations in Employment: A Re-Examination of the Evidence,” Canadian Journal of Economics, 2 (February to November 1969), 353-74.
8. G. L. Bach and James B. Stephenson, “Inflation and the Redistribution of Wealth,” Review of Economics nomics and Statistics, 61 (February 1974), 1-13; Raford Boddy and James Crotty, “Class Conflict and Macro-Policy: The Political Business Cycle,” Review of Radical Political Economics, 7 (Spring 1975), 1-19; Albert Burger, “Relative Movements in Wages and Profits,” Federal Reserve Bank of St. Louis Review, 55 (February 1973), 8-16; Hibbs, “Economic Interest”; Edwin Kuh, “Income Distribution and Employment over the Business Cycle,” in Brookings Quarterly Econometric Model of the United States, ed. J. Dusenberry et al. (Chicago: Rand McNally, 1965), pp. 227-78; Thor Hultgren, Costs, Prices, and Profits: Their Cyclical Relations (New York: National Bureau of Economic Research, 1965); and OECD, Inflation, The Present Problem (Paris: OECD Publications, 1970).
9. This has been proposed, for example, in William D. Nordhaus, “The Political Business Cycle,” Review of Economic Studies, 42 (April 1975), 169-90.
10. As one White House economist reportedly put it in April of 1975 “One hundred percent of the people have been hit by inflation. Only 10 percent really worry about unemployment.” Quoted by S. Golden, “High Joblessness Expected to Persist as a Condition of U.S. through Decade,” New York Times (April 21, 1975), p. 46.
11. George Katona, “Disputing Galbraith,” New York Times (December 22,1974), and George Katona et al., Aspirations and Affluence (New York: McGraw- Hill, 1971). Many of the results from these surveys appear in annual volumes of the Survey of Consumer Finances (Ann Arbor: Survey Research Center, 1960-72). Results of surveys taken before 1960 are available as mimeo reports from the SRC.
12. The analyses are presented fully in the section “Public Opinion Toward Inflation and Unemployment” in Hibbs, “Economic Interest,” pp. 24-40.
13. The class interests at stake in unemployment/inflation outcomes and policies show up in the policy positions taken by organized labor and capital as well as in the distribution of mass opinion. Throughout the postwar period, trade union spokesmen have invariably placed primary emphasis on the objective of full employment, while business elites have attached far more importance to price stability. A clear statement of labor's position is given by Nat Goldfinger, “Full Employment: The Neglected Policy?” The American Federationist, 79 (November 1972). Data on corporate thinking on the inflation and unemployment issues is presented in L. Silk and D. Vogel, Profits and Principles: The Social and Political Thinking of American Businessmen (New York: Simon and Schuster, 1977).
14. E. S. Kirschen et al., Economic Policy In Our Time, Vol. I (Amsterdam: North-Holland, 1964). With the exception of the balance of payments issue (the importance of which depends critically on the inational economic position of a given nation), the positions attributed to the various tendances were homogeneous, across countries. For a similar scheme, see Bruno Frey and Lawrence J. Lau, “Towards a Mathematical Model of Government Behaviour,” Zeitschrift für Nationalökonomie, 28 (1968), 355-80.
15. Actually there was one brief period of Socialistled rule in France after 1951: Guy Mollet's government of February 1956 to May 1957. Analysis of annual data shows that unemployment was lower and inflation higher during Mollet's government (as well as during the subsequent Center-Left government of Bourges-Maunoury) than during the right-wing Gaullist governments of the late 1950s and 1960s. The Center-Left governments of the middle 1950s clearly assigned higher priority to full employment and expansion than the Gaullist regime, which pursued policies geared to disinflation and economic “stabilization.” As a result, France's location on the “international Phillips curve” has changed dramatically.
16. (Contrast the data shown in Figure 1 to a similar display of average rates of inflation and unemployment reported by D. Smyth, “Unemployment and Inflation: A Cross-Country Analysis of the Phillips Curve,” American Economic Review, 61 (June 1971), 426-29, for the period 1950-1960.) Of course France's entry into the EEC in 1958 increased the importance of the external balance-of-payments constraint during the Fifth Republic. However, the deflationary policies of the Gaullist governments must be attributed to some extent to the priorities of the regime. See M Maclennan et al., Economic Planning and Policies in Britain, France and Germany (New York: Praeger, 1968).
17. Since the macroeconomic policies (and outcomes) of the 1960s were to a significant extent influenced by the performance record of the late 1940s and 1950s (especially in countries in which Social Democratic-led governments managed to maintain full employment after the war), the Socialist- Labor participation rate has been calculated over the entire postwar period (1945-69) rather than for the years 1960 to 1969 alone.
18. This has been suggested, for example, in reference to the difference in unemployment rates between North America and Western Europe, by Albert Rees, “The Phillips Curve as a Menu for Policy Choice,” Economica, 37 (August 1970), 227-38. Monetary policy instruments include interest rates and the supply of credit and money. Fiscal policy instruments include taxation and public spending.
19. Robert J. Flanagan, “The U.S. Phillips Curve and International Unemployment Rate Differentials,” American Economic Review, 63 (1973), 114-31. For additional evidence on cross-national variation in Phillips curves, see Ronald G. Bodkin et al., Price Stability and High Employment: The Options for Canadian Economic Policy (Ottawa: Economic Council of Canada, 1967).
20. Of course leftist governments have not been equally effective in this regard. For example, British Labour governments have been much less imaginative in developing macroeconomic policy (and have pursued a more centrist political strategy) than Swedish Social Democratic administrations. See the perceptive comparative analysis in Andrew Martin, The Politics of Economic Policy in the U.S.: A Tentative View from a Comparative Perspective (Beverly Hills: Sage Professional Paper in Comparative Politics, 1973). The best treatment in English of the archetypal Swedish model is probably A. Lindbeck, Swedish Economic Policy (Berkeley: University of California Press, 1974).
21. See, for example, Robert Alford, Party and Society (Chicago: Rand-McNally, 1963).
22. For an argument that organized labor and the Democratic party in the United States are interpenetrated in a way that is at least partially equivalent to Socialist party-labor union alliances in much of Westem Europe, see J. D. Greenstone, Labor in American Politics (New York: Alfred A. Knopf, 1969).
23. See G. E. P. Box and G. M. Jenkins, Time Series Analysis; Forecasting and Control (San Francisco: Holden-Day, 1970), part III; and G. E. P. Box and G. C. Tiao, “Intervention Analysis with Applications to Economic and Environmental Problems,” Journal of the American Statistical Association, 70 (March 1975), 70-79. The scheme of Box, Jenkins, and Tiao is contrasted with the conventional structural equation approach in Douglas A. Hibbs, Jr., “On Analyzing the Effects of Policy Interventions: Box-Jenkins and Box-Tiao vs. Structural Equation Models,” in Sociological Methodology 1977, ed. D. Heise (San Francisco: Jossey Bass, 1977), pp. 137-79.
24. The British unemployment data (wholly unemployed as a percentage of the civilian labor force) were, obtained from the Ministry of Labour Gazette, various issues. In view of the unprecedented exogenously imposed economic crisis facing advanced industrial societies since 1973, the time series analyses are intentionally not taken beyond the fourth quarter of 1972.
25. For example, it is estimated that the earningsrelated benefits increased the unemployment income of a typical married male worker with two children from about 40 percent to 60 percent of average employment income. See OECD, Manpower Policy in the United Kingdom (Paris: OECD Publications, 1970).
26. Unfoitunately the picture is complicated by the fact that a number of other macroeconomic policy changes were implemented during the 1965-67 period. These policy changes are reviewed by Bowers et al., in “The Change in the Relationship Between Unemployment and Earnings Increases: A Review of Some Possible Explanations,” National Institute Economic Review (November 1970), 44-63. However, the survey-based analysis of D. MacKay and G. Reid in “Redundancy, Unemployment and Manpower Policy,” Economic Journal (December 1972), 1256-72, leaves little doubt that the new compensation law had a significant effect on the duration (and thus the rate) of unemployment. Also see the discussion by M. Feldstein, “The Economics of the New Unemployment,” Public Interest, 33 (Fall 1973), 3-42.
27. The models in this section were estimated with Kent D. Wall's ERSF program, which provides Full Information Maximum Likelihood estimates of Rational Distributed Lag Structural Form equations. Details are given in Wall, “FIML Estimation of Rational Distributed Lag Structural Form Models,” Working Paper No. 77 (Cambridge: National Bureau of Economic Research, Inc., March, 1975).
28. R. J. Meyers, “The Unemployment Problem: What We Can Learn from European Experience,” in Measuring Employment and Unemployment by the Joint Economic Committee of the U.S. Congress (Washington, D.C.: Government Printing Office, 1963).
29. Equation (8) is nearly identical to the model developed by C. R. Nelson for quarterly U.S. unemployment data over the period 1948(1)-1966(4). Nelson's model, incidentally, outperformed the MITFRB- Penn econometric model in short-term forecasting experiments. “The Predictive Performance of the FRB-MIT-PENN Model of the U.S. Economy,” American Economic Review (1972), 902-17.
30. See, for example, 0. Eckstein, “Economic Policy in the United States,” in Economic Policy in Our Time, Vol. II, ed. O. Eckstein et al. (Amsterdam, North Holland, 1964), pp. 1-88; and especially H. Stein, The Fiscal Revolution in America (Chicago: University of Chicago Press, 1969), Ch. 11-14.
31. Many analysts argue that Eisenhower's fiscal policies not only did little to combat the economic contradictions of the period but were also important causes of the 1957-58 and 1960-61 recessions. See W. Lewis, Federal Fiscal Policy in the Postwar Recessions (Washington, D.C.: The Brookings Institution, 1962); and Stein, The Fiscal Revolution in America.
32. D. Eisenhower, Waging Peace, 1956-61 (Garden City, N.Y.: Doubleday, 1965), pp. 461,462.
33. Cited in F. R. Dulles, Labor in America (New York: Crowell 1966), p. 394.