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

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.