Political Business Cycle:

The setting for the regime is parliamentary democracy. In such a milieu, the government is sensitive to the electoral process. The elections are the outcomes of business, working class and other group interests. The thrust of Kalecki's theory is: of whose interests does the government consider in making policy choices?

A government spending program could ensure full employment in a capitalist regime if sufficient unutilised capacity to employ the labour force existed. However, business would be averse to government intervention designed to deliver full employment. The opposition to government intervention by the capitalist class is not comprehensible at first glance.  Because profits rise with full employment output. Additional government spending is unaccompanied by increased taxation. However, the fear of strengthening worker voice and of inflationary pressures is overpowering. Under a capitalist system, business has an edge over government because private investment, and the level of employment it determines, depends on the state of confidence. However, once the government establishes itself as an employer of last resort, it can be indifferent to investor optimism and pessimism. Thus, budget deficits are viewed with hostility by the capitalist class. There is no complaint against policies that strengthen profit-making activity like protectionist tariffs, regulation of trade unions and so on. Short-lived and moderate cycles would emerge from a situation where the government would stimulate the economy only to withdraw at the first signs of an upswing under the guise of an unviable financial position and then re-enter when unemployment approached alarming levels. Thus, there would be a swing between combating employment and inflation.

The cycle is related to politics. Consider a party, earlier in opposition that is elected to clamp down on a wage-price spiral. The new party in power implements a deflationary package. The effects of the stance become eventually evident in growing unemployment. Discontent resurfaces and  the possibility of defeat at the next election looms large. A sharp policy reversal is the result. In sum, the stop-go cycle consists of two moments: overacting too  late as a consequence of doing too little earlier.  

Kalecki foresaw increasing government encroachment in the areas traditionally devoted to private enterprise. Initially, the government would enter spheres that did not impinge on private activities like physical and social infrastructure. There would be no protests from businessmen as the returns on private investments would not be affected. However, the capitalist class feared that the next step would be the takeover or nationalisation of transport and public utilities. Again, businessmen would not be averse to government support of consumption by means of family allowances, price subsidies for basics, children's allowances and so on. Private enterprise is not affected. However, a regime of permanent full employment would be resisted strenuously. The confidence and demand of the working class would grow. While it is true that with full employment, profits would rise, Kalecki believed that the capitalist class would take a cut in profits in favour of power over the working class.

An additional reason is tacit: A purposeful stance towards full employment might entail a redistribution of income. Incomes policies, then, would be energetically opposed.   

Can stimulating business optimism be adequate for pulling an economy out of a recession? Kalecki thought not. While pro-cyclical interest rate policies might blunt the duration and amplitude of the cycle, full employment will not be attained even in the boom although the level of employment will fluctuate less. If the measure is repeated period after period, a situation can be envisaged when the rate of interest is negative and a corporate income tax is transformed into a subsidy. None of these have any bearing on the mood of businessmen whose behaviour is coloured by their expectations of the future founded on the data of the present. During a particularly severe downturn, investment plans would be immune to any fall in the interest rate. Tax stimuli might be ineffective as the shift in the investment schedule is larger than any movement along the curve. Consequently, it is not inconsistent with encouraging private investment to induce public investment as well. The capitalist class would not resist public investment financed by borrowing. What they would strenuously resist is output generation by subsidising consumption and a regime of full employment.