Political Competition and Convergence to Fundamentals: With Application to the Political Business Cycle and the Size of the Public Sector

Abstract

We address the problem of how to investigate whether economics, or politics, or both, matter in the explanation of public policy. We first pose the problem in a particular context by uncovering a political business cycle (using Canadian data for 130 years) and by taking up the challenge to make this fact meaningful by finding a transmission mechanism through actual public choices. Since the cycle is in real growth and it is reasonable to suppose that public expenditure would be involved, we then focus on investigation of the role of (partisan and opportunistic) political factors, as opposed to economics, in the evolution of government size. We ask whether the data allow us to distinguish between the convergence and the nonconvergence hypotheses. Convergence means that political competition forces public spending to converge in the long run to a level dictated by endowments, tastes and technology. Nonconvergence is taken to mean that political factors other than the degree of political competition prevent convergence to that long run. The general idea here is that a political factor can clearly be said to play a role in the evolution of public choices if it can be shown to lead to departures from a dynamic path defined by economic fundamentals in a competitive political system.The results of applying cointegration and error correction modeling to implement this idea indicate that public expenditure cannot serve as the required transmission mechanism. Of the political factors considered, only variation in the degree of political competition leads to substantial departures of public expenditure from its long run path defined by economic fundamentals. We conclude with some general implications of the analysis for future research.

Studying the role of political competition in the evolution of government size over long horizons

“…Although Conservatives appear to increase their spending to a lesser extent than do the Liberals, there is no statistical difference between the two. See Table 4(I) in Ferris et al (2006). 42 Including a trend in the cointegrating relation reinforces the conclusion that there are three cointegrating relations.…”

“…1) point out that it is permissible to add a stationary variable (SEATS) to a set of variables that are all I (1), provided cointegration is maintained in the enhanced set of variables. 28 In the longer working paper (Ferris et al 2006) we show that SEATS is significant also in the sub-periods 1921-2000 and 1945-2000, with the coefficient on SEATS falling in size as the sample period is shortened. 29 We also considered the possibility that the effect of competition is nonlinear.…”

“…16 The interested reader is referred to our longer working paper for details. See Ferris et al (2006). 17 As far as we are aware, there are no critical values for cointegration relationships with breaks occurring at known points.…”

“…Hence the ideological stance of the governing party doesn't appear to matter; all parties spend more when competition is reduced and do so to more or less the same extent. See Ferris et al (2006). hand, writers such as Weingast et al (1981), Kontopolous and Perotti (1999) and Persson et al (2004) suggest that representative governments suffer from a common pool problem in budgeting-a tendency to over-exploit the general taxpayer in order to deliver specific benefits to particular constituencies. Since the opposition is in a good position to extract concessions from a minority government wishing to remain in power, a positive coefficient on MINORITY would then be expected in an equation for government size.…”

“…Again, joint endogeneity was rejected. In Ferris et al (2006) we also considered various sub-periods. 39 When the equations were rerun over the 1945 to 2000 time period, the error correction term became insignificant, suggesting that short-run adjustment was distinctly different in the later time period.…”