Macroeconomics and Presidential Elections

 

Commentators criticize many political campaigns as resembling beauty contests---looks, personality, and images created by public relations specialists ("spin-doctors") are viewed as dominating recent political contests. But there is a growing body of evidence that economic circumstances have powerful effects on the outcomes of major elections.

 

            Prosperity favors political incumbents and, apparently, the candidates of the party of the previous president. Economist, Ray Fair, has developed a simple statistical equation based on simple macroeconomic variables---unemployment and growth of per capita real income---that "picked" the winner in all but three presidential elections held between 1948 and 1994 (and his equation predicted both of those elections to be close).

 

            Republican President Hoover did not stand a chance of reelection in 1932; the Great Depression that began late in 1929 (the year he took office) continued to worsen until 1933. Democrat Franklin D. Roosevelt's reelection in 1936 occurred during recovery, as did his reelection in 1940---the economy had faltered again in 1937, recovering during 1938--1946. World War II yielded high levels of patriotic fervor and economic prosperity, ensuring Roosevelt's reelection for a fourth term in 1944. President Truman was reelected in November 1948---the month a business cycle reached its peak. Republican Dwight Eisenhower (a popular hero from World War II) defied the odds in besting Adlai Stevenson in 1952 when the economy was expanding, but his victory in 1956 occurred in the middle of an economic recovery from a 1954 recession (the economy weakened again in 1957).

 

            Richard Nixon blamed a minor recession in 1960 for his narrow loss to Democrat John F. Kennedy. President Lyndon Johnson was reelected by a landslide in 1964, in the middle of the longest economic recovery since World War II. His vice president, Hubert Humphrey, lost a close election to Richard Nixon in 1968 despite a relatively strong U.S. economy. Fair's equation picked Humphrey as the winner by a slim margin. (Humphrey's loss may have reflected dismay about Johnson's conduct of the unpopular Vietnam War.) Nixon was determined to win by a landslide in 1972; per capita income soared in that election year, and his wish (along with the wishes of most other incumbents) was granted.

 

            Gerald Ford (who became president after Nixon resigned amid the Watergate scandal) lost his 1976 bid for reelection to Jimmy Carter; the economy was still weak from the "energy crisis" and a severe recession in 1975. The economy recovered somewhat during 1976--1978, but double-digit inflation and growing unemployment in 1979--1980 doomed President Carter to his loss to Ronald Reagan.

 

            President Reagan's goal of stimulating rapid economic growth through incentive-based supply-side policies was frustrated when the FED followed disinflationary policies in the early 1980s; the period 1982--1983 was the deepest economic downturn that the United States had experienced since the Great Depression. However, a strong recovery that began in 1983 swept Reagan into another four-year term.

 

            This recovery continued through the 1988 election, which pitted George Bush against Michael Dukakis. Between 1983 and 1988, unemployment fell steadily, finally reaching a 5.5 percent rate---the lowest in nearly two decades. Inflation, which had been at double-digit rates in 1981, had stabilized by 1988 to a rate that most people perceived as tolerable. Economic growth continued a path of moderate recovery. Given this background, George Bush's victory in the 1988 election was no surprise.

 

            This analysis suggests that George Bush may have lost reelection in 1992 because of the recession of 1990--1992.  Fair's equation predicted a very narrow victory for Bush, but the upturn that began in late 1991 was shallow and widely described as a "jobless recovery." Only after Bill Clinton had taken office were corrected data found to indicate that growth during 1992 was faster than the data available at election time had indicated. Cold comfort, indeed, for Bush, who had joined with Ronald Reagan in stripping resources from data collection agencies (e.g., the Bureau of Labor Statistics) in attempts to help balance the federal budget.

 

            However, President Reagan's supply-side package looked a lot like Keynesian policies to stimulate Aggregate Demand---tax rates were cut[1] , and government outlays (military and domestic) grew, echoing policies launched 20 years earlier by the Kennedy administration as "Keynesian policy." The results were also similar. Budget deficits were much larger in the 1980s than in the 1960s, but otherwise, the expansions of 1961--1968 and 1983-1989 looked like twins.

 

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