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What Will Determine the Outcome of the 2004 Election

Posted By Barry Ritholtz On February 27, 2004 @ 6:59 am In Finance,Politics | Comments Disabled

Simple analysis: the 2004 Presidential election will turn on economic issues — notably, jobs.

Complex analysis: While a number of other issues will continue to get media play — the Iraq situation, the National Guard story, Gay Marriage — I’m not convinced that these are outcome determinative. They will very likely reinforce partisan views, perhaps moblilize one side or the other. They may impact some (but not many) swing voters. Perhaps the negative issues softens up the incumbent up a bit, and distracts his team from pursuing their own media agenda.

But none of these are unequivocably conclusive.

Tactical considerations aside, these are not the strategic issues (and I’m all about strategy) which will swing an election. More likely, these issues offset to some degree the awesome advantage incumbency gives a sitting President. But I remain unconvinced they will swing the election.

On the other hand: Two charts demonstrate where Presidential vulnerability lay. The first, from Thursday’s WSJ [1], shows the increasing job losses in rust belt state Ohio. As much as the Dems would like to blame this on W., its part of a longer term trend going back decades. The past few years do look particularly awful, however:

wsj_kerry_fights_on_two_fronts.gif [1]
Source: WSJ [1]

This is not the chart which will swing the election. Manufacturing jobs have been leaving the Mid-West for a long, long time. And while it probably is not a good election strategy to say, “Hey, that’s global trade for ya!” — just ask Greg Mankiw — this is by no means a new phenomena.


But here’s where a crucial vulnerability comes in. As the chart (below) shows, it is different this time: Something very unusual is happening economically, and the White House has been tone deaf to it.

This is not a new meme for readers of this site, as we have been saying this since last June [2], and [3] too [4] many [5] times [6] since [7] then [8]. But the following is not quite a mainstream idea — yet.

This is the chart that can swing the election. It’s the key White House vulnerability: The economic structure of both the job market and indeed, the entire economy has changed. There are fundamental reasons why jobs are not coming back post-recession. These involve structural changes, like outsourcing and increased productivity — as well as more mundane factors. I have yet to hear anything from this administration recognizing these structural changes.

As this chart shows, a seismic shift has occured in a basic aspect of the economy. THAT is the vulnerability of any incumbent — when something very different is occuring, and the White House fails to notice it.

Nonfarm Payrolls (% change from recession end)
non_farm_payrolls_feb_2004.gif [9]
Source: Chart of the Day [9], February 10, 2004

In fact, most economists (in and out of government) have overlooked these changes. Example [10]: “There’s a puzzling lack of employment growth for this stage of the recovery,” says Harvard University professor Lawrence F. Katz. “But the U.S. still has a dynamic economy that hasn’t shown any signs of tipping into a long-run decline in jobs.” There are some exceptions: John E. Silvia, chief economist of the fixed-income division of Wachovia Securities, is one; Anthony Chan, chief economist at Banc One Investment Advisors is another.

But the most significant exception is the New York Federal Reserve [11], who released a report titled: “Has Structural Change Contributed to a Jobless Recovery [12]?”

Even that report was overlooked — or at least never publicly mentioned — by the White House.

This is a key vulnerability: Not only is there a significant economic issue, but we have an Administration which has failed to recognize these fundamental changes.

This chart screams “seismic shift,” in something very basic in the broader economy. THAT is the the vulnerability of the incumbent — a commitment to dogma (i.e., Supply Side economics), puts blinders on. We see no awareness or acknowledgement of this change.

Of course, you cannot craft a creative response to a problem that you simply refuse to recognize. An incumbent whose economic views get effectively be painted as “old school” or “hopelessly out of touch with a modern and rapidly changing world” is potentially vulnerable to “new economic ideas.” Think Bush the elder and the supermarket scanner.

My own theory about the economy is all over this blog, but to reiterate: We have just come out of the biggest bubble in Human history. There was massive overinvestment, tremendous overspending, all of which has lead to significant overcapacity. In a post-bubble environment, one cannot merely stimulate your way out of the business cycle. What it will take mostly is time — something no President wants to say. “Hey, voters, just wait a decade or so and jobs will return.”

During the interregnum, policymakers can identify the biggest obstacles towards job creation, and do what they can to remove them. They may determine its rising health care costs, or high taxes on small businesses, or its the expenses of IRS filings for new workers, or litigation exposure or whatever. Identify the key issues, and deal with them.

There’s the entire election for you: How the Jobs issue gets defined. The party out of power has a few months (at most) to clarify this definition. Since they have a contested primary (while the incumbent party does not), they have an opportunity to frame the issue, and to some degree, define the debate in a very public manner — for now.

The Dems have done a good but-not-great job at this. The have made what seemed like a walk appear like a close race. But the election is still 8 months away, and they are nowhere near over the hump. There’s plenty of time for an October surprise (Bin Laden, you’re on!).

Still, this remains the White House’s greatest vulnerability. Until the other side recognizes and exploits it, the President remains the front runner in the 2004 contest.

In Ohio, Kerry Fights on Two Fronts [1]
David Rogers
Wall Street Journal, February 26, 2004


Has Structural Change Contributed to a Jobless Recovery? [13]
Authors: Erica L. Groshen and Simon Potter
Federal Reserve Bank of New York, August 2003 Volume 9, Number 8
http://www.newyorkfed.org/research/current_issues/ci9-8.pdf (PDF [14])

Chart of the Day [9]
February 10, 2004


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/02/what-will-determine-the-outcome-of-the-2004-election/

URLs in this post:

[1] WSJ: http://online.wsj.com/article/0,,SB107775244670039415-search,00.html

[2] June: http://bigpicture.typepad.com/comments/2003/06/the_new_product.html

[3] and: http://bigpicture.typepad.com/comments/2003/07/recession_is_ov.html

[4] too: http://bigpicture.typepad.com/comments/2004/02/a_new_kind_of_w.html

[5] many: http://bigpicture.typepad.com/comments/2003/09/structural_job_.html

[6] times: http://bigpicture.typepad.com/comments/2003/07/it_really_is_di.html

[7] since: http://bigpicture.typepad.com/comments/2004/02/is_the_job_mark.html

[8] then: http://bigpicture.typepad.com/comments/2003/08/gdpjobs_disconn.html

[9] Image: http://www.chartoftheday.com

[10] Example: http://www.businessweek.com/bwdaily/dnflash/feb2004/nf20040226_2314_db038.htm

[11] New York Federal Reserve: http://www.ny.frb.org/

[12] Has Structural Change Contributed to a Jobless Recovery: http://www.newyorkfed.org/research/current_issues/ci9-8.html

[13] Has Structural Change Contributed to a Jobless Recovery?: http://www.ny.frb.org/research/current_issues/ci9-8.html

[14] PDF: http://www.newyorkfed.org/research/current_issues/ci9-8.pdf

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