Slow Growth Affects Elections

This article appeared on National Review (Online) on October 30, 2012.
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Several economists have examined the impact of economic conditions on presidential elections. I summarized this research in an article in the Washington Times in September 2003. In the nine years since then, the key issues have remained constant. What follows are my findings, excerpted from my earlier article, together with my best guesses about how that economic research relates to the current election.

Economic growth. “Yale econometrician Ray Fair… found ‘average unemployment rates… were not significant.’ What is significant, in Mr. Fair’s model, is the number of quarters before the election in which economic growth exceeds 2.9 percent.” During Obama’s tenure, real GDP growth exceeded 2.9 percent in only two of the past 14 quarters, the fourth quarters of 2009 and 2011. By this criterion, Obama will lose.

Stock prices. “One study by Richard Gleisner, and another by Stephen Hayes and Joe Stone, also found election results depended in part on the performance of the stock market.” Obama might benefit from the cyclical recovery of stocks, but not if voters are focused on either the short term (stocks fell since September 14) or next year. If Obama were left in charge of the looming “fiscal cliff,” he would, according to his plan, impose a 43.4 percent tax on dividends and a 23.8 percent tax on capital gains. Such taxes on investment returns would clearly sink stocks, and middle‐​income investors surely realize that this would devastate their 401(k) and 529 plans.

• After‐​tax income. “Douglas Hibbs found that most presidential results can be explained by growth of real, after‐​tax income per person. That figure depends on economic growth, but also on low inflation and low taxes.… The only times rising after‐​tax income failed to predict the winner in presidential races, according to Mr. Hibbs, were during unpopular wars in 1952 and 1968.” Measured in 2005 dollars, real after‐​tax income per person was $32,779 in the second quarter — essentially unchanged from $32,764 in early 2011 and down from $33,229 during the 2008 recession. By this criterion, Obama will lose. If voters are worried about future taxes or inflation (who isn’t?), that’s even worse for the incumbent.

Inequality. Harvard’s Alberto Alesina, with co‐​authors Rafael Di Tella and Robert MacCulloch, “examined 128,106 survey answers for Europe and the United States. Although the surveys showed many Europeans really do fret about ‘inequality,’ it turns out that in the United States, this is an issue that matters ‘only for a subgroup of rich leftists.’ ” To judge from this finding, Obama will win no votes — except among such “millionaires and billionaires” as George Soros, Warren Buffett, Tom Hanks, John Kerry and Nancy Pelosi — for attacking the top 1 percent, those earning more than $350,000.

My original conclusion about how the economy affects elections is relevant to this November: “When it comes to predicting presidential elections, the pace of economic growth clearly matters. The stock market matters. Inflation matters. Local economic conditions matter. Incumbency matters. War matters. But statistics on payroll employment and income inequality matter only to guilt‐​ridden multimillionaires, partisan journalists and political speechwriters.”