Economic and political cycles interlinked

Suppose the government’s policy determines the state of the economy with a lag that equals one term of the government. Also assume that voters re-elect the incumbent in a good economy, but choose the challenger in a bad economy. This voting pattern is empirically realistic and may be caused by voters not understanding the lag between the policy and the economy. Suppose there are two political parties: the good and the bad. The policy the good party enacts when in power puts the economy in a good state during the next term of government. The bad party’s policy creates a recession in the next term.

If the economy starts out doing well and the good party is initially in power, then the good party remains in power forever, because during each of its terms in government, it makes the economy do well the next term, so voters re-elect it the next term.

If the economy starts out in a recession with the good party in power, then the second government is the bad party. The economy does well during the second government’s term due to the policy of the good party in the first term. Then voters re-elect the bad party, but the economy does badly in the third term due to the bad party’s previous policy. The fourth government is then again the good party, with the economy in a recession. This situation is the same as during the first government, so cycles occur. The length of a cycle is three terms. In the first term, the good party is in power, with the other two terms governed by the bad party. In the first and third term, the economy is in recession, but in the second term, booming.

If the initial government is the bad party, with the economy in recession, then the three-term cycle again occurs, starting from the third term described above. Specifically, voters choose the good party next, but the economy does badly again because of the bad party’s current policy. Then voters change back to the bad party, but the economy booms due to the policy the good party enacted when it was in power. Re-election of the bad is followed by a recession, which is the same state of affairs as initially.

If the government starts out bad and the economy does well, then again the three-term cycle repeats: the next government is bad, with the economy in recession. After that, the good party rules, but the economy still does badly. Then again the bad party comes to power and benefits from the economic growth caused by the good party’s previous policy.

Overall, the bad party is in power two-thirds of the time and the economy in recession also two-thirds of the time. Recessions overlap with the bad party in only one-third of government terms.

Of course, reality is more complicated than the simple model described above – there are random shocks to the economy, policy lags are not exactly equal to one term of the government, the length of time a party stays in power is random, one party’s policy may be better in one situation but worse in another.

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