Politics versus Economics in the Explanation of Government – revised version: Studying the Role of Political Competition in the Evolution of Government Size over Long Horizons

This paper uses annual data from 1870 and 2000 in Canada to test whether overtly political variables interact with macroeconomic variables through government size. We begin by asking whether Canada’s macro data is consistent with political cycles, i.e., the hypothesis that macro cycles have been caused by overtly political influences such as the timing of elections, the political ideology of the governing party, the size of the winning majority, and/or whether there was a minority government. After finding some evidence of a correlation between political variables and output growth (but not inflation), the paper explores whether the transmission mechanism for these cycles could be through government size. To test for this relationship, the analysis uses an error correction model constructed under the base case assumption that political variables have no separate influence on government size. Competition among political parties is assumed to lead government size to converge on an equilibrium that depends only on the underlying tastes and technology of the community. The addition of political variables to this structure then allows us to assess whether explicit political considerations can still explain sympathetic variations in real government size once a complete long and short run model of the economic factors at play has been fully specified.