1 / 28

4. Politico-Economic Interactions in Canada: An Empirical Assessment

4. Politico-Economic Interactions in Canada: An Empirical Assessment Kurs Public Choice WS 2010/11 4. Politico-Economic Interactions in Canada: An Empirical Assessment Introduction Popularity Function Government Reaction Function Discussion and Conclusions Introduction

Sophia
Download Presentation

4. Politico-Economic Interactions in Canada: An Empirical Assessment

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 4. Politico-Economic Interactions in Canada: An Empirical Assessment Kurs Public Choice WS 2010/11 © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  2. 4. Politico-Economic Interactions in Canada: An Empirical Assessment • Introduction • Popularity Function • Government Reaction Function • Discussion and Conclusions © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  3. Introduction • For the past 30 years, scholars have debated the importance of political factors in explaining persistent cyclical deviations from long-term government growth. • Whereas most economists tend to view cyclical fluctuations as resulting from purely economic factors, proponents of politico-economic models hold that the cyclical behavior of government policy reflects the interaction between economic structures and political incentives. • Attempts to model this interaction have come in three variants: i) In the electoral cycle variant, incumbents seek to synchronize the timing of economic benefits with elections to improve their chances of winning office. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  4. Introduction ii) Another variant of the politico-economic approach focuses on partisan cycles linking the ideology of the party in power to the performance of the economy (Hibbs 1977) or government budgets (Cameron 1978; Tufte 1978). • A third variant offers a synthesis of the electoral and partisan cycle approaches. In this variant, incumbents normally pursue partisan policies but switch to electoral policies if reelection seems threatened (Frey and Schneider 1978a, 1978b). • Politico-economic models soon came under attack: • The idea of politically induced multiyear cycles relies on the governmentbeing able to fool the electorate by undertaking electoral or partisan manipulations of the economy. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  5. Introduction • This contradicts the dominant paradigm of rational expectation. With well-informed voters, rational parties would find it impossible or counterproductive to induce regular multiyear cycles. • Furthermore, the rigidities and delays that are built in the policy process preclude the possibility of manipulating government activity. • There has been a recent revival of politico-economic models: i) In response to the theoretical objections based on rational expectation, a new generation of models has emerged that suggests that electorally induced cycles may be consistent with rational behavior in a context of rational ignorance among voters, asymmetric information between voters and policymakers, and political uncertainty. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  6. Introduction • Several recent empirical studies suggest that the electoral and partisan cycle hypotheses, while perhaps initially overstated by their proponents, retain more plausibility than their critics have allowed. • Recent developments have given a new momentum to the idea that incumbent parties jointly respond to electoral and partisan goals. The idea, which was formalized 38 years ago in a series of papers by Frey and Schneider, is now gaining wider recognition in scholarly circles. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  7. Introduction • Two behavioral linkages are central to the Frey and Schneider approach: The first linkage (voters‘ evaluation function) concerns the behavior of voters in response to government induced changes in economic conditions. The logic behind this linkage rests upon the assumption of retrospective evaluation by the voters: the degree of support for the government will depend on how they are satisfied with its performance. The second linkage (government reaction function) concerns the opportunistic behavior of governments in reaction to economic fluctuations, changes in government popularity, and partisan factors. The logic behind this linkage is that governments seek to influence economic conditions as a way of influencing voters‘ behavior toward favorable electoral outcomes. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  8. 2. Popularity Evaluation Function • As with earlier popularity function studies, we assume that voters‘ behavior is related to the current and past state of the economy as well as to important political variables. • We hypothesize that the government loses popularity if the rate of unemployment and the rate of inflation rises, ceteris paribus, and if the real growth of disposable income falls. • We estimate the Canadian government popularity function with the following equation: POPLEADt = α1 PREMIERt + α2 DEPRECIATIONt-1 + α3 UNEMPLOYMENTt-1 + α4 INCOMEt-1 + α5 INFLATIONt-1 (1) • The theoretical expected signs of the political coefficients are α1>0, and α2<0; those for the economic coefficients are α3 and α5<0 and α4>0. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  9. 2. Popularity Evaluation Function • The OLS estimates for the Canadian government popularity function over the period 1954/2-1992/4: POPLEAD = 29.2 + 5.96 (2.75) PREMIER – 0.60 (2.49) DEPRECIATION – 3.76 (7.57) UNEMPLOYMENT + 1.54 (1.85) INCOME + 0.11 (0.21) INFLATION R² = .408, Durbin-Watson = 1.97, df = 150 • All the parameter estimates have the theoretically expected signs and are statistically significant. • An increase of 1% in the rate of unemployment reduces the government popularity lead by almost 4 percentage points, whereas an increase of 1% in the real disposable income increases government popularity lead by about 1 ½ percentage points. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  10. 3. Government Reaction Function • The second linkage between the political system and the economy concerns the opportunistic behavior of governments in response to economic fluctuations and changes in political factors. • Following Frey and Schneider, we assume that governments induce both electoral and partisan cycles. • Governments manipulate policy instruments consistent with the ideology of the party in office as long as policymakers in government are not threatened by low popularity in the polls. • But if government popularity drops to low levels, public expenditure rises beyond what ideological influences and administrative constraints would normally allow. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  11. 3.1 Frey and Schneider General Model • A key variable in the Frey and Schneider model is the popularity lead deficit of the party in government. The LEAD DEFICIT variable is obtained by subtracting the popularity of the main opposition party from the popularity of the government and multiplying this difference by a dummy variable D taking the value of 1 in a situation of government popularity deficit (when the difference <0) and 0 otherwise. • In a situation of popularity deficit at election time, the government will try to increase its popularity by undertaking an expansionary policy. • In a situation of popularity surplus (when the lead deficit variable is coded as zero), the government seeks to achieve its ideological goals. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  12. 3.1 Frey and Schneider General Model • The Frey and Schneider general model is specified as follows: EXPt = α1 UNEMPLOYMENTt-1 + α2 US GROWTHt-1 + α3 REAL WAGE RATEt-1 + α4 LEAD · DEFICITt-1 + α5 LIBIDEOLt-1 + α6 CONIDEOLt-1 + α7 IDEOL · CONSTRAINTt-1 + α8 REELECT · CONSTRAINTt-1 (2) • The theoretically expected signs of the economic constraint variables are α1 and α3>0, and α2<0. The expected sign for the reelection influence variable (LEAD DEFICIT) is α4>0. The signs of the ideological influence variables are α5>0 and α6<0 because, by hypothesis, Liberal governments tend to expand budgets and Conservative governments tend to do the opposite. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  13. Table 1: Reaction for the Canadian Government – General Model, 1954-1992 (OLS-estimates) © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  14. 3.1 Frey and Schneider General Model • In summary, our first estimation lends empirical support to the part of the Frey and Schneider hypothesis stating that government expands its activity in times of popularity deficit. • However, there is little empirical support for the second part of the hypothesis: Party control does not appear to matter significantly in times of popularity surplus. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  15. 3.2 Permanent Reelection Hypothesis • The results of the general model indicate that reelection influences are significant but ideological influences are not. • One possible interpretation of this result is that partisan cycles have failed to materialize because Canadian governments have been unable (or unwilling) to free themselves from concerns with reelection and put their ideological goals into practice. • Following Downs’s perspective, we formulate an alternative model of government reaction, where the governing party seeks to maximize votes as its permanent goal. • The permanent reelection model assumes that government’s reaction to a popularity shortfall will be strong when it occurs shortly before and election and weak when it occurs a long time in advance. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  16. 3.2 Permanent Reelection Hypothesis • Like Schneider and Pommerehne (1980), we specify the permanent reelection model as follows: EXPt = α1 EXPt-1 + α2 UNEMPLOYMENTt-1 + α3 US GROWTHt-1 + α4 REAL WAGE RATEt-1 + α5 SHORTPOPt-1 + α6 DEPRECIATIONt-1 (3) • The permanent reelection effort is reflected by the incorporation of a dummy variable for popularity depreciation that takes the value 1, 2, 3, …, n, starting with the first quarter of each legislative period. The parameter α5 is expected to be positive and the parameter α6 is expected to be negative. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  17. Table 2: Reaction Function for the Canadian Government Under the Assumption of Permanent Reelection Effort, 1954-1991 (OLS estimates) © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  18. 3.3 Frey and Schneider Model (Special Cases) • One reason for the rather weak evidence in support of both models may be that they are not adequately specified to take into account the impact of special institutional features on Canadian government reaction function. This suggests that we should reformulate the Frey and Schneider general model in light of such special features. • One special feature lies in the relatively high frequency of minority governments. There have been 13 federal governments during the period 1954-1992, 6 of which were single-party minority governments. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  19. 3.3 Frey and Schneider Model (Special Cases) • Not having a sufficient majority in the House of Commons has several consequences that may be important for government’s reaction function: First, the duration of minority governments has been much shorter than that of majority governments. As a consequence, they have had less leeway than majority governments when using expenditure instruments to achieve their ideological goals. Second, in Canada, minority governments are formed the same way as majority governments. That is, the larger party has formed the government with the tacit support of one or the other smaller party. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  20. 3.3 Frey and Schneider Model (Special Cases) • We assume that on the one hand a majority government will be more responsive to ideological influences in a situation of popularity surplus than will a minority government. On the other hand, when its popularity falls below that of the main opposition, a minority government will respond more strongly to reelection influences than will a majority government. • These assumptions are formulated in the following equation: EXPt = α1 EXPt-1 + α2 UNEMPLOYMENTt-1 + α3 US GROWTHt-1 + α4 REAL WAGE RATEt-1 + α5 LIBIDEO1t-1 + α6 CONIDEO1t-1 + α7 LIBIDEO2t-1 + α8 CONIDEO2t-1 + α9 LEAD DEFICIT1t-1 + α10 LEAD DEFICIT2t-1 (4) © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  21. 3.3 Frey and Schneider Model (Special Cases) • Where the terms for ideology influences and reelection influences are marked with a 1 during legislative terms when the government enjoys a sufficient majority in the House of Commons and a 2 when the government is a minority government. A government has a sufficient majority when it has 50% or more of the seats in Parliament. This condition was met in 7 or 13 governments. • Another special institutional feature with potentially important effects on government’s reaction is the Quebec origin of the prime minister. The prime minister of Canada has been a Quebecer for almost three fourths of the period of analysis (104 quarters). © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  22. 3.3 Frey and Schneider Model (Special Cases) • This allows us to formulate a second special model of government reaction (model 5). The model predicts that • in periods of popularity surplus, a government reacts more strongly to ideological influences if the prime minister is from Quebec and less strongly if he or she is based outside Quebec, and • in periods of popularity lead deficit, the pressure to regain popularity to win the next election is strong if the prime minister is from Quebec and weak if he or she is from another province. • In both equations, the theoretically expected sign of the parameter α1 (lagged dependent variable) is positive The expected signs of the parameters for the economic constraints variables are α2 and α4>0, and α3<0. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  23. 3.3 Frey and Schneider Model (Special Cases) • The expected signs for the variables measuring the ideological influence of a Liberal government are α5, and α7>0, and the expected signs for the variables measuring the ideological influence of a Conservative government are α6 and α8<0. • It is also expected that the size of the parameters for ideological influence of the Liberal and Conservative parties in office will be larger, and the difference between them will be of higher significance when there is a sufficient majority in the House of Commons (model 4) and when the prime minister is from Quebec (model 5). © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  24. Table 3: Reaction Function for the Canadian Government – Special Instrumental Influences, 1954-1992 (OLS estimates) (1.43) (2.67) (-1.21) (1.10) (-0.19) -0.02 0.006* -0.003 -0.0002 -0.001 0.93 144 (1.40) (2.41) (1.21) (-0.43) (-0.89) © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  25. 3.3 Frey and Schneider Model (Special Cases) • A comparison of the results from Table 3 with those of Tables 1 and 2 shows that the predictive performance of the politico-economic model is higher when we take into account special Canadian political as well as institutional circumstances and lower when we do not. • When we split up our estimation of politico-economic interactions into legislative terms with or without sufficient majority in the House of Commons, we observe the expected differences in the variables for securing reelection and ideological goals. • From these results we can conclude that, in Canada, government (under Liberal leadership especially) has used expenditure instruments to secure reelection in periods of popularity deficit and has put its ideological views in practice during periods of popularity surplus, as hypothesized by Frey and Schneider. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  26. 3.3 Frey and Schneider Model (Special Cases) • Reelection influences have a quantitative impact on public expenditure in all the versions of the Frey and Schneider model that we report, but the significance of government’s reaction to reelection influences is higher when government does not have a sufficient majority or when the prime minister is based in Quebec. Government’s reaction to ideological influences becomes statistically significant only when • the Liberal party is in power, and • government has a sufficient majority in Parliament or the prime minister is from Quebec. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  27. 4. Discussion and Conclusions • In this article, we have shown that federal expenditure decisions are sensitive to (a) economic factors and (b) the interplay of reelection and ideological influences under certain conditions. • The electoral effect is significant in all versions (general and special) of the Frey and Schneider model that we report, although it is small compared to the impact of economic factors. • The influence of party ideology is not clearly visible in the general Frey and Schneider model, but its significance emerges when we adjust the general model to special Canadian political as well as institutional cases. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

  28. 4. Discussion and Conclusions • Federal Canadian politicians appear to pursue both ideological and opportunistic (reelection) goals, as predicted by the Frey and Schneider hypothesis, when we take into account • the majority/minority status of the government and • the provincial origin of the government leader. Literature: Francois Pétry and Howard r. Harmatz, 1995, Politico-Economic Interactions in Canada: An Empirical Assessment, Public Finance Quarterly 23/3, pp.305-335. © Prof. Dr. Friedrich Schneider, University of Linz, Austria

More Related