Probably not forever, but we are living in strange times:
Now the theory needs major revision. Political leaders still wish to manipulate economic variables in their favor, of course. But economies, as well as voters, are not going along — and so the standard mechanisms for political business cycle theory are broken…
Under political business cycle theory, this [the IRA] should have helped Biden win favor with voters. Yet it has not worked out that way. Biden’s approval ratings remain anchored at all-time lows — whether these are justified is a separate question — and meanwhile a lot of the money is being spent on manufacturing in red states that Biden is unlikely to win. In political terms, a very large dose of fiscal policy just doesn’t seem to have helped.
Political business cycle theory also implicitly predicted that the Fed would be reluctant to pursue disinflation over the last year, for fear of inducing a recession and damaging re-election prospects for incumbents. The Fed proceeded in any case, even though its staff (incorrectly) expected a recession.
In economic terms as well, fiscal policy is less effective today than in it has been in the past. Many countries have higher debt and deficit levels, which raises the risk of short-run crowding out of private investment. And labor markets in many countries are tight, which limits the ability of fiscal policy to boost employment.
The world’s most radical economic plan currently belongs to President Javier Milei of Argentina. Milei explicitly campaigned on a platform of taking away benefits and limiting the number of commitments the government makes. He is now trying to carry out those promises, even though voters may not like the results. Nonetheless he has cast his lot in opposition to the “free lunch” mentality.
There is much more in the rest of my Bloomberg column.
