Political leaders from lower socio-economic backgrounds are more likely to run bigger budget deficits during their time in office. That is the central finding of research by Bernd Hayo and Florian Neumeier, to be presented at the Royal Economic Society''s 2014 conference.
The researchers analyse data on fiscal deficits from OECD countries over the period 1980-2008 to investigate whether there is a link with the socio-economic backgrounds of the presidents and prime ministers during those years. Among the findings:
· Over the tenures of lower-class leaders, the deficit-to-GDP ratio is roughly 1.6 percentage points higher than that of upper-class leaders. Over time, this effect increases to almost 12 percentage points.
· In political systems characterised by stronger constraints on policy-makers in the form of checks and balances or government fractionalisation, the impact of personal status on fiscal deficit is lower but still significant.
Political economists typically assume that politicians behave purely opportunistically, in a narrow sense, when deciding on fiscal policies. But several implications derived from this conjecture – such as political budget cycle theory or approaches viewing the public budget as a common pool resource – find only little empirical support.
The approach applied in this study is different. Combining insights provided by sociology with economic research on intertemporal decision-making, the researchers draw a connection between political leaders'' socio-economic backgrounds, their time preferences or future orientation, respectively, and the public budget balance. They hypothesise that political leaders with low socio-economic status may be more prone to relying on deficit financing.
They test the hypothesis empirically using data on fiscal deficits from OECD countries over the period 1980-2008. As fiscal policy decision-makers, they choose the leading politicians of these countries, that is, either prime ministers or presidents. The results of the panel analysis are theory consistent and suggest that the tenures of lower-class leaders are associated with a deficit-to-GDP ratio that is roughly 1.6 percentage points higher than that of upper-class leaders.
Since the estimations take place in a dynamic model, the researchers can compute the impact in a long-run equilibrium: over time, this effect increases to almost 12 percentage points. Thus, the impact of personal status on fiscal deficits is not only statistically significant but also economically substantial and econometrically robust.
Moreover, the study finds that in political systems characterised by stronger constraints on policy-makers in the form of checks and balances or government fractionalisation, the impact of personal status on fiscal deficit declines. But it continues to be statistically significant and economically relevant.
The researchers interpret their findings as a causal relationship, as they start from a clearly formulated theory to the empirically testable hypothesis. This interpretation is further supported by estimates based on instrumenting the personal status variable, which could be endogenous, by parental status, which, almost by definition, cannot be linked to current fiscal deficits and is, therefore, uncorrelated with the error term. If anything, instrumenting personal background increases its impact on fiscal deficits.
The findings contribute to a growing branch of the economics literature showing that political leaders can have a significant influence on their countries'' economic performances. Given that the results are much stronger than those derived by applying common economic models of behaviour suggests that economics may benefit from integrating social science research.
For example, in the area of behavioural economics, where economists have already started incorporating psychological research, the result has been that we now have a much better understanding of economic behaviour. Given the size of the field, there is as yet very little economic research using insights from sociology, and this primarily involves literature on happiness or the ''identity economics'' approach.
The results presented in this study suggest that integrating sociological research into an analysis of economic problems has the potential to improve our explanations of important real world phenomena.
''Political Leaders'' Socio-economic Background and Public Budget Deficits: Evidence from OECD Countries'' by Bernd Hayo and Florian Neumeier, University of Marburg