US elections trigger recessions?

The sub-prime crisis, like all other crisis, will spawn a mountain of literature, all claiming to have the best explanation for it. The distant rumble you hear is from the avalanche of econometrics that is coming our way. Clearly, it is not just the underworld that profits from crises. Economists also manage to make nice things out of them.

I have a very low opinion of this brand of economics, which is like a farmer trying to get a bit more out of the arid land that lies on the edges of his property by growing pulses there. Or, to use a more current example, you can liken it to investments in sub-prime mortgages -- you put in a lot of effort but the returns are not only uncertain, they are also very low.

However, even though I am not an economist, I have decided to get in with the first wave of the avalanche. I make no pretence to establishing causality, as economists claim to do. For me the more humble correlation is enough.

And my explanation is this: Since 1945 a US presidential election has very often been accompanied by a recession. But let me make it clear: this does not mean that an election is a necessary condition for a recession. Far from it. Indeed, it is not even a sufficient condition. But somehow it seems to happen with unfailing regularity.

US Recessions since 1945	Duration of recession/Election in
1. Feb. 1945-Oct. 1945	8 months/Nov 1944
2. Nov. 1948-Oct. 1949	11 months/Nov1948
3. July 1953-May 1954	10 months/Nov1952
4. Aug. 1957-April 1958	8 months/Nov1956
5. April 1960-Feb. 1961	10 months/Nov1960
6. Dec. 1969-Nov. 1970	11 months/Nov1968
7. Nov. 1973-March 1975	16 months/Nov1972
8. Jan. 1980-July 1980	6months/No election
9. July 1981-Nov. 1982	16 months/Nov1980
10. July 1990-March 1991	8months/No election
11. March 2001-Nov. 2001	8 months/Nov 2000
Source: NBER

So even if presidential elections alone do not cause a recession, they do seem to trigger them. To see how, study the accompanying table and judge for yourself how "robust" the evidence is. (See? I have learnt the jargon also.)

The table shows a total of 11 recessions. Of these, only one lasted only six months and four lasted eight months. The remaining six were for 10 months or more. There is nothing to be said one way or another about which party causes, so to speak, longer recessions. The duration clearly depends on economic factors.

It is also clear that the number of recessions since 1980 has come down. Between 1945 and 1980 there were as many as nine. Since 1980, there have been only two! This is amazing. Economists have sought to apportion the credit for this reduction to either monetary policy or fiscal policy. But that suggests a sudden dawning of wisdom after 1980. In all likelihood, though, it is probably not a feat of economic management at all but just pure blind chance.

What is not chance, however, is the propensity of the US economy to go into a recession around the time of a presidential election, either before or after. I have absolutely no idea why this happens but happen it does. This, incidentally, confirms my belief that economic inflexion points can't be explained by economic factors alone and you need to look at political factors as well. Economists who say, "Oh, that is politics and I can't factor that in" are not being very useful. Economic data without their political context are, in my view, completely (I repeat, completely) useless.

When we look at the really long US recessions, of which there were two -- one during 1973-75 (16 months) and the other during 1981-82 (also of 16 months) -- it does look as if the Republicans have a higher capacity to bear the pain of recession because both the long ones happened when they were in power. Even the recessions of 10 and 11 months (barring the 1948-49 one) happened during Republican rule.

This says something about the attitude, if not the ideology, of the party. Their pro-capital bias seems to reflect itself not only in Bush-type tax breaks for the rich but also in a less sympathetic attitude towards labour. You are not in a hurry to help.

What does this link between America's presidential elections and its recessions mean in such a highly financially integrated or globalised world? There has been a lot of analysis of transmission mechanisms and so on by economists. But perhaps what needs to be examined in much greater detail is the use of its political power by the US. To put it bluntly, how will the US use its global power to blunt the effects of the recession that appears to be looming large on its horizon?

The Plaza Accord of 1985 via which the US used its muscle to get Japan to back off on exports shows how political muscle is used to achieve economic objectives. The question today is not whether the same sort of thing can be replicated, because of course it can. (Some American think tanks even want exchange rates to become a part of WTO negotiations!) The real issue is in what measure the US will use its power, especially in arranging a cheap recapitalisation of its banks and in making sure that the dollar's decline is smooth instead of being a sudden tumble.

Article by T C A Srinivasa-Raghavan