ECONOMY

644 the role of the state in the economy
stable negative relationship between unemployment and inflation rates—the Phillips
curve (Phillips 1958)—and as a result undermined the influential contributions of
Hibbs (1977) andTufte(1978) to the literature on the economic significance of government
partisanship. For an exploitable Phillips curve to exist, governments would
have to be capable of systematically “fooling” economic agents—a violation of the
rationality assumption (Lucas 1972; Sargent and Wallace 1975; and Franzese, this
volume, for a further discussion). Thus it was impossible for left- and right-wing
governments to simply “select” different Phillips-curve locations in response to the
distributional preferences of their electoral constituencies, as postulated by Tufte and
Hibbs.
Later Alesina’s “rational partisan” model reintroduced the possibility of observing
real effects of partisanship, as a result of institutional rigidities in wage and pricesetting,
and of uncertainty regarding electoral outcomes (see Alesina, Roubini, and
Cohen 1997). Still, Alesina’s model predicted that the real economic effects (in terms
of output and employment) of partisanship would be temporary (disappearing once
wages and prices adapt to the post-electoral environment). Only their effects on
inflation were expected to persist.
Adifferent line of argument, meanwhile, considered how the process of macroeconomic
demand management is influenced by the broader institutional environment
in which it takes place. Alvarez, Garrett, and Lange (1991), for example, identify a
non-neutral role for government in influencing the wage-setting behavior of politically
powerful union movements. Centralized union movements are more likely to
internalize the effects of their wage demands on the economy as a whole (Calmfors
and Driffill 1988). They also have considerable institutional capacity to deliver
economy-wide wage restraint. However, the real benefits to labor of delivering this
restraint are uncertain, unless credible assurances can be obtained that public policy
will encourage the productive reinvestment of profits in the domestic economy,
and will safeguard the welfare of workers (Przeworski and Wallerstein 1982; Lange
1984).
This uncertainty implies that governments can potentially play an important role
in influencing wage behavior. Common knowledge about parties’ ideological and
electoral commitments, renders left governments more credible as guarantors of the
protection of labor interests. Thus, the argument goes, in a centralized environment,
left governments are more capable than governments of the right of encouraging
wage restraint and achieving superior growth and inflation performance. Under a
right-wing government, uncertainty about the distribution of the economic benefits
of wage restraint will reduce the incentive for powerful centralized unions to act
cooperatively. In contrast, in a more decentralized environment, common knowledge
about the ideological and electoral commitments of left governments renders them
more likely to be taken advantage of by opportunistic fragmented unions, so that
their economic performance will tend to be worse than that of governments of the
right. Thus the appropriate role for the government, and the economic effectiveness
of governments of different partisan hues, is expected to vary depending on the
institutional context.