16

Since 2008, whenever the possibly of an election is brought up, the Conservative Party of Canada repeats the same point: elections are bad for the economy.

For example, here's an excerpt of Jim Flaherty's speech in 2010:

That is the risk of an unnecessary election, an election that would jeopardize our economic recovery, just as we enter the home stretch.

Recently, Prime Minister Harper repeated that point:

“All of these things should remind everyone, should remind everybody in Canada, should remind all the parties in Parliament, that the global economy remains extremely fragile. It does not take very much to make us all, not just in Canada and the United States but all around the world, very worried,” he said.

“The fact of the matter is this should be a wake-up call that we cannot afford to take our focus off the economy to get into a bunch of unnecessary political games or, as I said, an opportunistic or unnecessary election that nobody was asking for.”

The argument - that elections harm the economic growth or recovery - seems a bit absurd. I'm not alone to think so; it's been mocked by economists and columnists alike. Unfortunately, I have not seen any evidence supporting either side's argument.

So, is there any empirical data supporting the claim that elections are bad for the economy?

  • 1
    It would seem like by simply spending money on election personal, infrastructure, and campaigns, an election might actually stimulate the economy enough to offset any negative effects. Also, if a new leader inspired more confidence in the economy than an old incumbent, then an election could also have positive effects, at least on stock market values. – Mark Rogers Mar 19 '11 at 23:26
  • The same claim is made in Italy as well. The underlying theory is that economy needs leadership to thrive - or in other words a stable government can sell government bonds for cheaper, because of the longer term prospects and credibility. – Sklivvz Mar 19 '11 at 23:36
  • This really should be two questions, since there are two types of political systems where elections are held. One sort is the US-type, where elections are held on a regular basis -- every X years. The second is the UK-type system, where elections must be held at maximum once every X years, but the party in power chooses when to hold the elections. In the US system, the effect of the elections can be predicted, since it is known when they are held, but in the other systems, there may be a stronger or weaker (or different) effect because of the lack of notice. – Martha F. Mar 21 '11 at 17:21
  • @Martha F. : That only covers 2-party systems. In multi-party systems (which are actually more common), government usually is a coalition. There's no such thing as "the party in power". As a result, a common reason for elections is a severe disagreement between the parties in power. The consequence is that elections tend to happen when the ruling parties are electorally weak, not strong. – MSalters Mar 22 '11 at 10:54
  • @MSalters -- Oops. You're absolutely right. That adds a third case, since I'd imagine that economic difficulties might lead to coalitions falling apart. I was trying to point out that the answers so far look only at the US, and that elections are a very different matter in other countries. This is rapidly looking to me like an unanswerable question without further clarification. – Martha F. Mar 22 '11 at 20:40
8

There are several papers that discuss trends, although proving causality in a system as complicated as the economy is probably impossible. This analysis shows trends surrounding U.S. elections, and even suggests some investment strategies

Based on discussions above and the notion that the S&P 500 Index seems to bottom approximately two years into presidential terms, we can construct a hypothetical test for two investors that calculates the dollar return for two simple alternative investment strategies...Imagine that the first investor had consistently purchased the S&P 500 Index 27 months before presidential elections and had sold near election time on December 31 of the election year. Because a 27-month period seems to provide better returns than other studied periods before the election, a 27-month period was selected for this test. This strategy kept Investor 1 out of the market from January 1 of the inaugural year through September 30 of the second year during the test period. On the other hand, imagine further that Investor 2 bought the S&P 500 on the first trading day of the inaugural year of each presidential election during the test period and liquidated the portfolio on September 30 of the second year of the presidential term.

Here are the results, in chart form:

enter image description here

Similarly, this article in Kiplinger talks about how growth slows approaching any midterm US election, but picks up just before the election. The article speculates that uncertainty is the problem, and as polling clears up the likely election winners, the economy stabilizes. Of course, the recent economic movement following Mr Bush's and Mr Obama's elections have bucked the trend a bit.

If uncertainty is truly the culprit, then it's not so much elections that are bad for the economy, but elections where a likely outcome is unclear.

  • Just to be double sure, this data all reflects American elections and economy, not Canadian or otherwise. – Dogmafrog Mar 21 '11 at 5:10
  • +1 just for the very last sentence. All other things being equal, someone planning to invest capital is more likely to do so when there's no uncertainty associated with the change of governmental interference. – user5341 Apr 6 '11 at 16:47
  • 2
    Economy as a whole is much more than just the stock exchange. Later is proven to be driven by investor emotional state, thus it can be better explained by psychology then economics. – vartec Nov 16 '11 at 14:09
  • Investor one invests over a period of 27 months. Doesn't investor 2 invest over a shorter period if he only invests from Jan to the following September (21 months)? So even if the rate of return was the same for investor 1 and investor 2, wouldn't investor 1's graph look better simply because he had held the shares for longer? – Kenshin Dec 18 '13 at 22:22

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .