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Inflation-unemployment trade-offs of Democrats, Republicans, and Independents: Empirical evidence on the partisan theory
DAVID J. SMYTH Louisiana
State
Baton
Rouge,
University Louisiana
SUSAN WASHBURN TAYLOR Kansas
State Manhattan,
University Kansas
Mation-Unemployment Trade-W% of Democrats, Republicans, and Independents: Empirical Evidence on the Partisan Theory* Recently economists have given much attention to the partisan theory of interaction between political motivations and the macroeconomy. The partisan theory implies that Democratic voters will be more concerned about unemployment relative to inllation than Republican voters. We test this hypothesis by estimating voters’ preference functions between inflation and unemployment using disaggregated Gallup Poll presidential popularity data. Using alternative nonlinear and logistic specifications and seemingly unrelated regression estimation procedures, we estimate the slopes of the indifference curves in the preference functions for respondents classified as Democrats, Republicans, and Independents. Wald tests show that we cannot reject the hypothesis that supporters of the Democratic and Republican parties and Independents have the same trade-offs between inflation and unemployment.
1. Introduction The political business cycle hypothesis of Nordhaus (1975) and MacRae (1977), under which politicians exploit the short-run Phillips curve to improve their popularity and increase their votes at elections, has fallen into disfavor. Only a few empirical studies (Tufte 1978; Frey and Schneider 1978; Laney and Willett 1983; Soh 1986; and Davidson, Fratianni, and von Hagen 1990) provide support for the hypothesis. Many empirical studies reject the political business cycle model. These studies include Hibbs (1977), McCallum (1978), Abrams, Froyen, and Waud (1980), Golden and Poterba (1980), Dinkel (1981), Beck (1982, 1984), Chappell and Keech (1986), Richards (1986), Haynes and Stone (1989, 1990) and Tabellini and La Via (1986). Moreover, Smyth, Washburn, and Dua (1989) show that the popularity gains that an administration can obtain from the generation of a political business cycle are small. *Smyth’s
research
was
supported
by the
LSU
1992, Vol. Journal of Macroeconomics, Winter Copyright 0 1992 by Louisiana State University OK%-0704/92/$1.50
Foundation.
14, No. Press
1. pp.
47-57
47
David J. Smyth and Susan Washburn
Taylor
Dissatisfaction with the political business cycle model has caused a number of economists and political scientists to adopt the partisan theory to explain interaction between political motivations and the macroeconomy. According to the partisan theory, political parties have different macroeconomic preference functions. Democratic politicians are inclined to support policies which decrease unemployment rather than inflation because their partisans are more concerned about unemployment than inflation. Republican politicians are more concerned about inflation than unemployment because their partisans are more concerned about inflation than unemployment. Independent voters have preferences about unemployment and inflation that are intermediate between those of Democrats and Republicans. Hibbs (1986) voices the generalization regarding members of the two major parties on which this theory rests: . . . the core constituency of the Democratic party consists of the downscale classes, who primarily hold human capital and bear a disproportionate share of the economic and broader social costs of extra unemployment. Up-scale groups form the core constituency of the Republican party; they hold financial capital and absorb the greatest losses from extra inflation. For this reason Democratic voters generally express greater aversion to unemployment and less aversion to inflation than Republican voters. There is considerable empirical evidence in support of the partisan theory. Studies by Hibbs (1986, 1987), Grier and Nieman (1987), Havrileksy (1987), Alesina (1987, 1988, 1989), Alesina and Sachs (1988), Alesina and Rosenthal (1989), Alesina and Roubini (MO), Chappell and Keech (1988), and Davidson, Fratianni, and von Hagen (1990) all find partisan effects to be significant. We can be quite confid ent of the finding that Democratic administrations do assign higher policy weights to unemployment and lower policy weights to inflation than do Republican administrations. Previous studies have not investigated whether or not such partisan policies are indeed what supporters want. Do Democratic and Republican partisans and independent voters actually have different trade-offs between inflation and unemployment? In the present paper we examine this question empirically. We do not attempt to determine whether Democratic politicians favor policy actions which reduce unemployment while Republican politicians favor a reduction in the inflation rate. Rather, we test to see if the un48
Inflation-Unemployment
Trade-Offs
derlying preferences of partisan voters conform to the behavior implied by the theory. We find no significant difference between the trade-offs of Gallup Poll respondents who classify themselves as Democrats, Republicans, and Independents. These results imply that the Democratic and Republican parties should have the same policies on inflation and unemployment if they want to please their supporters. Section 2 of the paper presents the model of the voters’ preference function; Section 3 describes the data; Section 4 outlines two alternative model specifications; Section 5 gives the empirical estimates and discusses them; our conclusions are given in Section 6.
2. The Voters’
Preference
Function
Davis, Hinich, and Ordeshook (1970), Nordhaus (1975), MacRae (I977), and later writers on political business cycles and partisan theories assume that the voters’ preference function between inflation and unemployment is concave to the origin. Commonly the function is written as a quadratic so that
s = PO + PIP2 + pzu2 ;
(1)
where S = voter satisfaction with ment, P = inflation rate, U = unemployment rate,
the rates of inflation
and unemploy-
and PO > 0, pi < 0, R2 < 0. Such a preference function generates an indifference map with indifference curves concave to the origin. Totally differentiating (1) we have dS = 2&PdP + s&JJdu Along any indifference curve is
.
(2)
curve dS = 0, so the slope of an indifference
dP/dU = -WPJWIp) .
(3)
This is the voters’ trade-off between inflation and unemployment. At any particular combination of unemployment and inflation 49
David J. Smyth and Susan Washburn
Taylor
the trade-off depends on the ratio -&/l.3i. The more concerned voters are about unemployment relative to inflation, the larger is the absolute value of -&/pi. The partisan theory predicts that the ranking of the absolute values of -p2/p1 from largest to smallest is the following: Democrats, Independents, Republicans. In the sections which follow, we estimate separate social preference functions for those individuals who classify themselves as Democrats, Republicans, and Independents. We then examine whether the values of -l%Jpi follow this pattern and test to see if they differ significantly.
3. The Data We use monthly Gallup Poll data to estimate a disaggregated model of presidential popularity for the Reagan presidency. Each month the Gallup Poll asked the question, “Do you approve or disapprove of the way Mr. Reagan is handling the job of President?’ Gallup respondents were asked to identify themselves as “Democrat, ” “Republican,” or “Independent.“1 We define Pop as the percentage in each group who respond “approve” to the Gallup question. The unemployment rate, U, is the percentage of unemployed workers 16 years of age and older, seasonally adjusted. The inflation rate, P, is the inflation rate over the past twelve months calculated from the consumer price index, all urban consumers, all items, expressed as a percentage. Unemployment and inllation are both lagged one month to reflect the most recent information available to respondents. To incorporate a distributed lag in the voters’ perceptions of the economic variables we include a lagged dependent variable. As an incoming president cannot be held immediately responsible for the inflation and unemployment rates he inherits from his predecessor, we include a honeymoon variable, Z-I. H takes the value of 11 in the second month of President Reagan’s tenure and declines to 1 in the twelfth month with a value of 0 in all subsequent months. To allow for the Iran-Contra scandal we add a further dummy variable, N, that takes the value 0 until November 1986, and the value 1 in December 1986 and in all months thereafter. ‘Those individuals who identified major parties were included in the who answered “Independent.”
50
themselves “Independent”
with
any party other grouping, together
than the two with those
Inflation-Unemployment
Trade-Offs
We recognize that non-economic factors influence presidential popularity. Quantifying these factors for empirical use is d&cult, and we relegate them to the error term. We believe that our model is well specified due to the significance of the estimated coefficients and the absence of serially correlated errors. The estimation period is limited by data constraints to February 1981 to July 1986 and January 1987 to September 1987. From August 1986 to November 1986 there are no observations, and after September 1987 Gallup provides only a few monthly observations. We lose the January 1981 and December 1986 observations to the lagged dependent variable.
4. Alternative
Model
Specifications
We fit the model in two different the three-equation system: “Pi
=
ai@O,i
+
+ (1 -
Pl,iP’
‘Yj)POp-,.i
+
ways. The first is to estimate
&?.iU’
+
PS,iH
+ Ui )
+
P4,iN)
(4)
where i = D, i = R, and i = I denotes Democrats, Republicans, and Independents. The variables and coefficients are defined above and u is the disturbance term. Any disturbance in a particular month, such as an international conflict, will simultaneously affect Democrat, Republican, and Independent approval ratings. Thus the error terms in the three equations will be contemporaneously correlated. Seemingly unrelated regression (SUR) is the appropriate estimation procedure in this situation. We estimate the nonlinear SUR system by maximum likelihood. The variable Pop is based on respondents making a discrete choice as to whether or not they approve of President Reagan’s performance. We thus have a probability model with replications on Pop for each month.’ The range of values that Pop can take is bounded by zero and 100. The actual range of values differs widely for the three sets of respondents. Maximum and minimum values are: Democrats, 51 (May 1981 and May 1986), 17 (February 1983); Republicans, 93 (November 1984), 68 (January 1983); Independents, 72 (April 1981), 39 (January 1983). These wide ranges suggest that ‘For
discussion
of such
models
see
Kmenta
(1986,
W-78).
51
David j. Smyth and Susan Washburn
Taylor
an alternative model specification, the logit model, should be considered. Such a specification is conveniently estimated in the form
WWl(l~
- p”P)li= ai@O,i
+
P1,*P2
+
P2,iu2
+
+ (1 - CtJlIl[POp/(lOO-
P.3,iH
POP)]-,,j
+
PI,iN)
+ Vi.
(5)
Again we estimate the nonlinear SUR system by maximum likelihood. Note that the values of the estimated coefficients in (4) and (5) are not comparable because the coefficients have a different interpretation in each model. Fortunately, the ratio of the coefficients of P and V2 are comparable and the slope of the indifference curves at any point is once again given by the expression in (3).
TABLE
1. Estimates of OLS Model in Equation Democrats
Republicans
(4) Independents
53.089 (10.82)
101.350
(77.18)
(46.05)
PI Znf Zation
-0.184 (-2.57)
-0.053 (-3.07)
-0.126 (-4.37)
p2 Unemployment
-0.264 (-4.10)
-0.218 (-12.52)
-0.313 (-13.63)
PO Zntercept
p3 Honeymoon
-16.690 (-3.85)
p4 Iran
(Y Adjustment
Adjusted Durbin’s
52
3.211 (3.20)
R2 h
0.302 (1.19) - 13.349
(-11.51)
79.498
1.790 (5.26) -15.225 (-9.99)
(4.42)
0.836 (8.99)
(8.32)
0.852 1.28
0.763 -1.08
0.867
0.297
0.699
1.16
Inflation-Unemployment TABLE
2.
Estimates
qf Probit Democrats
PO Zntercept
0.231 (0.99)
PI Znf Zation
-0.008 (-2.37)
p2 Unemployment
-0.013 (-4.21)
p3 Honeymoon
p4 Iran
-0.796 (-3.87)
(Y Adjustment
Adjusted Durbin’s
0.141 (2.96)
R2 h
Model in Equation Republicans 3.026 (25.86) -0.0048 (-3.14) -0.016 (-10.46) 0.033 (1.47) -1.011 (-9.97)
Trade-Offs (5) Independents 1.206 (16.01) -0.005 (-5.17) -0.013 (-12.71) 0.076 (5.12) -0.623 (-9.36)
0.299 (4.21)
0.746 (7.82)
0.684 (7.99)
0.851 1.18
0.775 -0.09
0.867 1.51
5. The Results Tables 1 and 2 present the SUR estimates for the models in (4) and (5). The tables give the estimated coefficients with t-statistics in parentheses, the adjusted R2, and the Durbin h-statistics for each equation. Both specifications appear satisfactory. All the coefficients are significant at the 95% confidence level in both tables except the honeymoon variable for Republicans. The Durbin h-statistics do not indicate the presence of serially correlated errors. The upper part of Table 3 gives the values of -BJBr implied by the estimates. The two specifications yield quite similar implied values. The more concerned voters are about unemployment relative to inflation, at any particular combination of P and U, the larger is the absolute value of -&/PI. The partisan theory predicts that the ranking of the absolute values of -&/pi from largest to smallest is the following: Democrats, Independents, Republicans. The actual ranking is: Republicans, Independents, Democrats. The ranking of
53
David J. Smyth and Susan Washburn
Taylor
TABLE
Statistics
3.
Zmplied Slopes and Wald
Estimates
Zmplied - p2/pI Democrats Republicans Independents Wald Statistics Democrats and Republicans Democrats and Independents Republicans and Independents
from
Table 1
Table 2
-1.434 -4.113 -2.484
-1.625 -3.333 -2.600
2.595
1.387
1.160
0.632
2.547
0.995
Democrats and Republicans is the reverse of that predicted by the partisan model. Are these differences in the indifference curve slopes for respondents with different party allegiances significant? To test the validity of the restriction that the slopes are equal, we apply a Wald test. This test is based on the extent to which the restrictions are violated when restricted rather than unrestricted estimates are used. The Wald test statistic is distributed asymptotically as a chi-square with degrees of freedom equal to the number of restrictions being tested. Here there is one degree of freedom. The test statistics obtained for pair-wise comparisons between Democrats and Republicans, Democrats and Independents, and Republicans and Independents are given in the lower part of Table 3. None of these test statistics are significant at the 95% confidence level. Accordingly, we cannot reject the hypothesis that supporters of the Democratic and Republican parties and Independents have the same trade-offs between inflation and unemployment.
6. Conclusions The empirical studies on the partisan theory cited 1 provide evidence that the Democratic and Republican follow different policies with respect to inflation and ment. However, we have found that Democratic and 54
in Section parties do unemployRepublican
Inflation-Unemployment
Trade-Offs
partisans and independent voters do not have different trade-offs betwen inflation and unemployment. Given these results, either the Democratic party or the Republican party or both are in error if they believe that their inflation and unemployment policies satisfy their partisans. Our results suggest that if they want to please their supporters, the Democratic and Republican parties should have the same policies on inflation and unemployment. Received: April 1991 Final version: July 1991
References Abrams, Richard, Richard Froyen, and Roger Waud. “Monetary Policy Reaction Functions, Consistent Expectations and the Bums Era.” Juurnal of Money, Credit, and Banking 12 (February 1980): 30-42. Alesina, Alberto. “Macroeconomic Policy in a Two-Party System as a Repeated Game.” Quarterly Journal of Economics 102 (August 1987): 651-78. -. “Macroeconomics and Politics.” In NBER Macroeconomics Annual 1988, edited by Stanley Fischer. Cambridge, MA: MIT Press, 1988. -. “Politics and Business Cycles in Industrial Democracies.” Economic Policy 8 (1989): 57-98. Alesina, Alberto, and Howard Rosenthal. “Partisan Cycles in Congressional Elections and the Macroeconomy.” American Political Science Review 83 (June 1989): 373-97. Alesina, Alberto, and Jeffrey Sachs. “Political Parties and the Business Cycle in the United States, 1948-1988.” Journal of Money, Credit, and Banking 20 (February 1988): 63-82. Alesina, Alberto, and Nouriel Roubini. “Political Cycles in OECD Economies. ” National Bureau of Economic Research Working Paper No. 3478, 1990. Beck, Nathaniel. “Parties, Administrations and American Macroeconomic Outcomes.” American Political Science Review 26 (March 1982): 82-94. -. “Domestic Political Sources of American Monetary Policy: 1955-82.” Journal of Politics 46 (August 1984): 786-817. Chappell, Henry, and William Keech. “The Unemployment Rate Consequences of Partisan Monetary Policies.” Southern Economic Journal 55 (July 1988): 107-22. 55
David J. Smyth and Susan Washburn -.
Taylor
“Party Differences in Macroeconomic Policies and Outcomes. ” American Economic Review 76 (May 1986): 71-74. Davidson, Lawrence S., Michele Fratianni, and Juergen von Hagen. “Testing for Political Business Cycles.” Journal of Policy Modelling 12 (1990): 35-39. Davis, O.A., M. J, Hinich, and P.C. Ordeshook. “An Expository Development of a Mathematical Model of the Electoral Process.” American Political Science Reuiew 64 (June 1970): 426-28. Dinkel, Reiner. “Political Business Cycles in Germany and the United States: Some Theoretical and Empirical Considerations.” In Contemporary Political Economy, edited by Douglas A. Hibbs, Jr., and Heins Fassbender. Amsterdam: North-Holland Publishing Co., 1981. Frey, Bruno S, and Friedrich Schneider. “An Empirical Study of Politico-Economic Interaction in the United States.” Review of Economics and Statistics 60 (May 1978): 174-83. Golden, David G., and James M. Poterba. “The Price of Popularity: The Political Business Cycle Reexamined.” American Journal of Political Science 24 (November 1980): 696-714. Grier, Kevin B., and Howard E. Neiman. “Deficits, Politics and Money Growth.” Economic Znguiry (April 1987): 201-14. Havrilesky, Thomas M. “A Partisanship Theory of Fiscal and Monetary Regimes.” Journal of Money, Credit, and Banking 19 (August 1987): 308-25. Haynes, Stephen E., and Joe E. St6ne. “An Integrated Test for Electoral Cycles in the U.S. Economy.” Review of Economics and Statistics 71 (August 1989): 426-34. -. “Political Models of the Business Cycle Should Be Reviewed.” Economic Znquiry 28 (July 1990): 442-65. Hibbs, Douglas. “Political Parties and Macroeconomic Policy.” American Political Science Review 71 (December 1977): 1467-87. -. “Political Parties and Macroeconomic Policies and Outcomes in the United States.” American Economic Review Papers and Proceedings 76 (May 1986): 66-70. -. The American Political Economy. Cambridge: Harvard University Press, 1987. Kmenta, Jan. Elements of Econometrics. New York: Macmillan Publishing Company, 1986. Laney, Leroy, and Thomas Willett. “Presidential Politics, Budget Deficits and Monetary Policy in the United States; 1960-1976.” Public Choice 40 (January 1983): 53-69.
56
Inflation-Unemployment MacRae,
Trade-Offs
C. “A Political Model of the Business Cycle.” 85 (April 1977): 239-64. McCallum, Bennett. “The Political Business Cycle: An Empirical Test.” Southern Economic Journal 44 (January 1978): 504-15. Nordhaus, William H. “The Political Business Cycle.” Review of Economic Studies 42 (April 1975): 169-89. Richards, Daniel. “Unanticipated Money and the Political Business Cycle.” Journal of Money, Credit, and Banking 18 (November 1986): 446-57. Smyth, David J., Susan K. Washburn, and Pami Dua. “Social Preferences, Inflation, Unemployment, and Political Business Cycles: Econometric Evidence for the Reagan Presidency.” Southern Economic Journal 56 (October 1989): 336-48. Soh, Byung Hee. “Political Business Cycles in Industrialized Democratic Countries. ” Kyklos 39 (January 1986): 31-46. Tabellini, Guido, and Vincenzo La Via. “Money Deficit and Public Debt: An Empirical Investigation.” Unpublished, September 1986. Tufte, Edward R. Political Control of the Economy. Princeton, N. J. : Princeton University Press, 1978.
Journal
Duncan
of Political Economy
57
State
Baton
Rouge,
University Louisiana
SUSAN WASHBURN TAYLOR Kansas
State Manhattan,
University Kansas
Mation-Unemployment Trade-W% of Democrats, Republicans, and Independents: Empirical Evidence on the Partisan Theory* Recently economists have given much attention to the partisan theory of interaction between political motivations and the macroeconomy. The partisan theory implies that Democratic voters will be more concerned about unemployment relative to inllation than Republican voters. We test this hypothesis by estimating voters’ preference functions between inflation and unemployment using disaggregated Gallup Poll presidential popularity data. Using alternative nonlinear and logistic specifications and seemingly unrelated regression estimation procedures, we estimate the slopes of the indifference curves in the preference functions for respondents classified as Democrats, Republicans, and Independents. Wald tests show that we cannot reject the hypothesis that supporters of the Democratic and Republican parties and Independents have the same trade-offs between inflation and unemployment.
1. Introduction The political business cycle hypothesis of Nordhaus (1975) and MacRae (1977), under which politicians exploit the short-run Phillips curve to improve their popularity and increase their votes at elections, has fallen into disfavor. Only a few empirical studies (Tufte 1978; Frey and Schneider 1978; Laney and Willett 1983; Soh 1986; and Davidson, Fratianni, and von Hagen 1990) provide support for the hypothesis. Many empirical studies reject the political business cycle model. These studies include Hibbs (1977), McCallum (1978), Abrams, Froyen, and Waud (1980), Golden and Poterba (1980), Dinkel (1981), Beck (1982, 1984), Chappell and Keech (1986), Richards (1986), Haynes and Stone (1989, 1990) and Tabellini and La Via (1986). Moreover, Smyth, Washburn, and Dua (1989) show that the popularity gains that an administration can obtain from the generation of a political business cycle are small. *Smyth’s
research
was
supported
by the
LSU
1992, Vol. Journal of Macroeconomics, Winter Copyright 0 1992 by Louisiana State University OK%-0704/92/$1.50
Foundation.
14, No. Press
1. pp.
47-57
47
David J. Smyth and Susan Washburn
Taylor
Dissatisfaction with the political business cycle model has caused a number of economists and political scientists to adopt the partisan theory to explain interaction between political motivations and the macroeconomy. According to the partisan theory, political parties have different macroeconomic preference functions. Democratic politicians are inclined to support policies which decrease unemployment rather than inflation because their partisans are more concerned about unemployment than inflation. Republican politicians are more concerned about inflation than unemployment because their partisans are more concerned about inflation than unemployment. Independent voters have preferences about unemployment and inflation that are intermediate between those of Democrats and Republicans. Hibbs (1986) voices the generalization regarding members of the two major parties on which this theory rests: . . . the core constituency of the Democratic party consists of the downscale classes, who primarily hold human capital and bear a disproportionate share of the economic and broader social costs of extra unemployment. Up-scale groups form the core constituency of the Republican party; they hold financial capital and absorb the greatest losses from extra inflation. For this reason Democratic voters generally express greater aversion to unemployment and less aversion to inflation than Republican voters. There is considerable empirical evidence in support of the partisan theory. Studies by Hibbs (1986, 1987), Grier and Nieman (1987), Havrileksy (1987), Alesina (1987, 1988, 1989), Alesina and Sachs (1988), Alesina and Rosenthal (1989), Alesina and Roubini (MO), Chappell and Keech (1988), and Davidson, Fratianni, and von Hagen (1990) all find partisan effects to be significant. We can be quite confid ent of the finding that Democratic administrations do assign higher policy weights to unemployment and lower policy weights to inflation than do Republican administrations. Previous studies have not investigated whether or not such partisan policies are indeed what supporters want. Do Democratic and Republican partisans and independent voters actually have different trade-offs between inflation and unemployment? In the present paper we examine this question empirically. We do not attempt to determine whether Democratic politicians favor policy actions which reduce unemployment while Republican politicians favor a reduction in the inflation rate. Rather, we test to see if the un48
Inflation-Unemployment
Trade-Offs
derlying preferences of partisan voters conform to the behavior implied by the theory. We find no significant difference between the trade-offs of Gallup Poll respondents who classify themselves as Democrats, Republicans, and Independents. These results imply that the Democratic and Republican parties should have the same policies on inflation and unemployment if they want to please their supporters. Section 2 of the paper presents the model of the voters’ preference function; Section 3 describes the data; Section 4 outlines two alternative model specifications; Section 5 gives the empirical estimates and discusses them; our conclusions are given in Section 6.
2. The Voters’
Preference
Function
Davis, Hinich, and Ordeshook (1970), Nordhaus (1975), MacRae (I977), and later writers on political business cycles and partisan theories assume that the voters’ preference function between inflation and unemployment is concave to the origin. Commonly the function is written as a quadratic so that
s = PO + PIP2 + pzu2 ;
(1)
where S = voter satisfaction with ment, P = inflation rate, U = unemployment rate,
the rates of inflation
and unemploy-
and PO > 0, pi < 0, R2 < 0. Such a preference function generates an indifference map with indifference curves concave to the origin. Totally differentiating (1) we have dS = 2&PdP + s&JJdu Along any indifference curve is
.
(2)
curve dS = 0, so the slope of an indifference
dP/dU = -WPJWIp) .
(3)
This is the voters’ trade-off between inflation and unemployment. At any particular combination of unemployment and inflation 49
David J. Smyth and Susan Washburn
Taylor
the trade-off depends on the ratio -&/l.3i. The more concerned voters are about unemployment relative to inflation, the larger is the absolute value of -&/pi. The partisan theory predicts that the ranking of the absolute values of -p2/p1 from largest to smallest is the following: Democrats, Independents, Republicans. In the sections which follow, we estimate separate social preference functions for those individuals who classify themselves as Democrats, Republicans, and Independents. We then examine whether the values of -l%Jpi follow this pattern and test to see if they differ significantly.
3. The Data We use monthly Gallup Poll data to estimate a disaggregated model of presidential popularity for the Reagan presidency. Each month the Gallup Poll asked the question, “Do you approve or disapprove of the way Mr. Reagan is handling the job of President?’ Gallup respondents were asked to identify themselves as “Democrat, ” “Republican,” or “Independent.“1 We define Pop as the percentage in each group who respond “approve” to the Gallup question. The unemployment rate, U, is the percentage of unemployed workers 16 years of age and older, seasonally adjusted. The inflation rate, P, is the inflation rate over the past twelve months calculated from the consumer price index, all urban consumers, all items, expressed as a percentage. Unemployment and inllation are both lagged one month to reflect the most recent information available to respondents. To incorporate a distributed lag in the voters’ perceptions of the economic variables we include a lagged dependent variable. As an incoming president cannot be held immediately responsible for the inflation and unemployment rates he inherits from his predecessor, we include a honeymoon variable, Z-I. H takes the value of 11 in the second month of President Reagan’s tenure and declines to 1 in the twelfth month with a value of 0 in all subsequent months. To allow for the Iran-Contra scandal we add a further dummy variable, N, that takes the value 0 until November 1986, and the value 1 in December 1986 and in all months thereafter. ‘Those individuals who identified major parties were included in the who answered “Independent.”
50
themselves “Independent”
with
any party other grouping, together
than the two with those
Inflation-Unemployment
Trade-Offs
We recognize that non-economic factors influence presidential popularity. Quantifying these factors for empirical use is d&cult, and we relegate them to the error term. We believe that our model is well specified due to the significance of the estimated coefficients and the absence of serially correlated errors. The estimation period is limited by data constraints to February 1981 to July 1986 and January 1987 to September 1987. From August 1986 to November 1986 there are no observations, and after September 1987 Gallup provides only a few monthly observations. We lose the January 1981 and December 1986 observations to the lagged dependent variable.
4. Alternative
Model
Specifications
We fit the model in two different the three-equation system: “Pi
=
ai@O,i
+
+ (1 -
Pl,iP’
‘Yj)POp-,.i
+
ways. The first is to estimate
&?.iU’
+
PS,iH
+ Ui )
+
P4,iN)
(4)
where i = D, i = R, and i = I denotes Democrats, Republicans, and Independents. The variables and coefficients are defined above and u is the disturbance term. Any disturbance in a particular month, such as an international conflict, will simultaneously affect Democrat, Republican, and Independent approval ratings. Thus the error terms in the three equations will be contemporaneously correlated. Seemingly unrelated regression (SUR) is the appropriate estimation procedure in this situation. We estimate the nonlinear SUR system by maximum likelihood. The variable Pop is based on respondents making a discrete choice as to whether or not they approve of President Reagan’s performance. We thus have a probability model with replications on Pop for each month.’ The range of values that Pop can take is bounded by zero and 100. The actual range of values differs widely for the three sets of respondents. Maximum and minimum values are: Democrats, 51 (May 1981 and May 1986), 17 (February 1983); Republicans, 93 (November 1984), 68 (January 1983); Independents, 72 (April 1981), 39 (January 1983). These wide ranges suggest that ‘For
discussion
of such
models
see
Kmenta
(1986,
W-78).
51
David j. Smyth and Susan Washburn
Taylor
an alternative model specification, the logit model, should be considered. Such a specification is conveniently estimated in the form
WWl(l~
- p”P)li= ai@O,i
+
P1,*P2
+
P2,iu2
+
+ (1 - CtJlIl[POp/(lOO-
P.3,iH
POP)]-,,j
+
PI,iN)
+ Vi.
(5)
Again we estimate the nonlinear SUR system by maximum likelihood. Note that the values of the estimated coefficients in (4) and (5) are not comparable because the coefficients have a different interpretation in each model. Fortunately, the ratio of the coefficients of P and V2 are comparable and the slope of the indifference curves at any point is once again given by the expression in (3).
TABLE
1. Estimates of OLS Model in Equation Democrats
Republicans
(4) Independents
53.089 (10.82)
101.350
(77.18)
(46.05)
PI Znf Zation
-0.184 (-2.57)
-0.053 (-3.07)
-0.126 (-4.37)
p2 Unemployment
-0.264 (-4.10)
-0.218 (-12.52)
-0.313 (-13.63)
PO Zntercept
p3 Honeymoon
-16.690 (-3.85)
p4 Iran
(Y Adjustment
Adjusted Durbin’s
52
3.211 (3.20)
R2 h
0.302 (1.19) - 13.349
(-11.51)
79.498
1.790 (5.26) -15.225 (-9.99)
(4.42)
0.836 (8.99)
(8.32)
0.852 1.28
0.763 -1.08
0.867
0.297
0.699
1.16
Inflation-Unemployment TABLE
2.
Estimates
qf Probit Democrats
PO Zntercept
0.231 (0.99)
PI Znf Zation
-0.008 (-2.37)
p2 Unemployment
-0.013 (-4.21)
p3 Honeymoon
p4 Iran
-0.796 (-3.87)
(Y Adjustment
Adjusted Durbin’s
0.141 (2.96)
R2 h
Model in Equation Republicans 3.026 (25.86) -0.0048 (-3.14) -0.016 (-10.46) 0.033 (1.47) -1.011 (-9.97)
Trade-Offs (5) Independents 1.206 (16.01) -0.005 (-5.17) -0.013 (-12.71) 0.076 (5.12) -0.623 (-9.36)
0.299 (4.21)
0.746 (7.82)
0.684 (7.99)
0.851 1.18
0.775 -0.09
0.867 1.51
5. The Results Tables 1 and 2 present the SUR estimates for the models in (4) and (5). The tables give the estimated coefficients with t-statistics in parentheses, the adjusted R2, and the Durbin h-statistics for each equation. Both specifications appear satisfactory. All the coefficients are significant at the 95% confidence level in both tables except the honeymoon variable for Republicans. The Durbin h-statistics do not indicate the presence of serially correlated errors. The upper part of Table 3 gives the values of -BJBr implied by the estimates. The two specifications yield quite similar implied values. The more concerned voters are about unemployment relative to inflation, at any particular combination of P and U, the larger is the absolute value of -&/PI. The partisan theory predicts that the ranking of the absolute values of -&/pi from largest to smallest is the following: Democrats, Independents, Republicans. The actual ranking is: Republicans, Independents, Democrats. The ranking of
53
David J. Smyth and Susan Washburn
Taylor
TABLE
Statistics
3.
Zmplied Slopes and Wald
Estimates
Zmplied - p2/pI Democrats Republicans Independents Wald Statistics Democrats and Republicans Democrats and Independents Republicans and Independents
from
Table 1
Table 2
-1.434 -4.113 -2.484
-1.625 -3.333 -2.600
2.595
1.387
1.160
0.632
2.547
0.995
Democrats and Republicans is the reverse of that predicted by the partisan model. Are these differences in the indifference curve slopes for respondents with different party allegiances significant? To test the validity of the restriction that the slopes are equal, we apply a Wald test. This test is based on the extent to which the restrictions are violated when restricted rather than unrestricted estimates are used. The Wald test statistic is distributed asymptotically as a chi-square with degrees of freedom equal to the number of restrictions being tested. Here there is one degree of freedom. The test statistics obtained for pair-wise comparisons between Democrats and Republicans, Democrats and Independents, and Republicans and Independents are given in the lower part of Table 3. None of these test statistics are significant at the 95% confidence level. Accordingly, we cannot reject the hypothesis that supporters of the Democratic and Republican parties and Independents have the same trade-offs between inflation and unemployment.
6. Conclusions The empirical studies on the partisan theory cited 1 provide evidence that the Democratic and Republican follow different policies with respect to inflation and ment. However, we have found that Democratic and 54
in Section parties do unemployRepublican
Inflation-Unemployment
Trade-Offs
partisans and independent voters do not have different trade-offs betwen inflation and unemployment. Given these results, either the Democratic party or the Republican party or both are in error if they believe that their inflation and unemployment policies satisfy their partisans. Our results suggest that if they want to please their supporters, the Democratic and Republican parties should have the same policies on inflation and unemployment. Received: April 1991 Final version: July 1991
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