Business Cycles and Election Years

Economists have long noted that the biennial national elections are a short-run stimulus to the economy, because Congress does not want to be held responsible for rising unemployment and falling income. But this does not mean that elections actually keep the economy on an even keel. Politically influenced business cycles have repeated themselves nearly every four years for far more than a century.

Next year is not just an election year; it is a presidential election year. After the beating that Republicans suffered in 1986 as a result of their economic policies, it is certain they will want to rev up the economy in 1988. That defers the recessionary lull to 1989 or early 1990 (before the elections), and that would be right on the regular schedule for a slowdown.

What happened in 1985-86? Under the normal four-year cycle, we should have experienced a recession, but we had no more than a slowing down in the rate of growth. A similar situation occurred in 1966, when we had only a mini-recession.

The escalation of the War in Vietnam during 1965 changed the course of the economy at the time. Likewise, the collapse of OPEC power, weakness in many other primary commodity markets, depreciation of the dollar and falling interest rates all contributed to low inflation with good consumer spending and enough investment to keep production growing in 1985-86. Our unemployment declined slightly while other countries experienced continuing increases in joblessness.

This year started on a high note, with growth of more than 4% in the first quarter. But pessimists are finding fault with every favorable number, just as they have for the past 12 to 15 months.

Admittedly, economic reports have varied, but ours is a complicated and diversified economy. Thus, it is not surprising that the GNP keeps rolling along because of strength from varying sectors of the economy.

Laws That Still Work

A likely contributor to growth in 1987 and 1988 is the gradually improving real trade balance. Some powerful laws of economics do work: The dollar is down and net real trade is up.

There also will be some good inventory figures, more new jobs, high government spending--as usual--and an eventual recovery in business investment. The disincentives of the tax reform bill may be wearing thin.

We are not poised for a takeoff, as in 1984, but we do have enough growth left in the cycle to carry us through the next two years.

After the presidential elections, however, the forces of recession loom large. No matter who runs, no matter who wins, there will be change. And with such change, there will be uncertainty about how things will work out for consumers and businesses under a new Administration.

In such situations, there often is hesitation over taking on new projects. That is the nature of the political cycle. While new programs are being unveiled in early 1989, it would be not at all surprising to find the economy slowing down enough to tip us into recession.

There now are fears of inflation. These forecasts may go hand-in-hand with recession, but having the two at the same time would be unusual. We do not often have embargoes and revolutions, such as those in the 1970s, and the inflationary factors now are much milder than were the last decade’s energy and food price increases.

If we have simply normal upward market pressures on raw materials, including oil, along with normal bargaining for wage increases and further dollar depreciation by about 10% annually, we are not in for escalating inflation.

All of the crude analyses about the inevitability of high inflation emerging from low inflation are not supported by economic history. Productivity has improved during the recovery since 1982--quite smartly, in fact, in manufacturing--so there are inflation buffers.

The mood of the public and economic commentators changes day-to-day or week-to-week on the basis of important appointments, other major news events and swings on economic charts. Actually, the economy is steady, but sluggish by historical standards. All told, I expect the continuation of present trends until we reach 1989 or 1990.

I’ve been surprised that America’s politically influenced business cycles have not spread to other countries. This has happened apparently because other nations--such as Great Britain, which just held early elections--are on different political cycles.