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It’s Not Always The Economy, Stupid
Posted By Barry Ritholtz On September 3, 2004 @ 6:01 am In Finance,Politics | Comments Disabled
While we have been focusing on the Economic aspects of the campaign, some observers are keen to remind us that there are actually other factors which impact voters. In a recent article, Forbes  attempts to put to rest what they call “one of the hoariest pieces of conventional wisdom around.”
Their perspective? It’s not the economy, stupid.
That clever headline is (mostly) belied by the meat of the article. As their analysis reveals, it is, for the most part, the economy, stupid: “While the economy is certainly a factor, financial facts alone have proved poor predictors of political results.”
Other than James Carville and Ray Fair, not many people have claimed that economics alone were the determing factor; But they sure do look like a crucial part of the puzzle to getting elected.
How influencial is the economy? Forbes studied 7 economic variables from the past 14 presidential elections. These 7 predicted the winner just 64% of the time. Not a particularly impressive track record. However, when all of the “economic planets are in line, the economy predicts the election quite well.”
What were the seven factors considered? Stock market returns for the first six months of the election year and for the first three-and-a-half years of the incumbent’s term; GDP growth for the same two time periods; Personal Income growth; Unemployment; and the overall federal tax burden relative to GDP.
Looking at the Forbes methodology, we could see immediately why their track record was mediocre: 1) Job creation is inexcusably missing from the list; 2) GDP and Market performance of the first 2 years of a Presidency are mostly forgotten non-issues by election day; 3) Unemployment represents a long term dynamic that can be stable (or not) and is only significant when it is acutely poor; A much better measure would be the ease of job changing (its a better measure of economic confidence). 4) Lastly, the issue of overall tax burden reveals little; Consider instead how taxes are apportioned amongst and between economic strata, and between corporate and individuals; That’s certainly a more complicated method, but it has a much greater forecasting efficacy. (Do you want it fast or do you want it good?)
All these elements are messy to quantify; Hence, the editors are guilty of the sin of oversimplification. That said, they still manage to put out a fairly interesting table of results:
|Year||Candidates(Incumbent Listed First; Winner In Bold)||Economy Predicts||Comments|
|1948||Truman v. Dewey||Truman (weakly)||Four of seven variables favored Truman. The incumbent had good stock market numbers and strong growth leading up to the election. He defied the pollsters and won, despite mediocre growth and rising unemployment following the war|
|1952||Stevenson v. Eisenhower||Stevenson (weakly)||The economy looked fairly good for the Democrats as the stock market and growth numbers were up. But Eisenhower, a war hero of the first rank, won easily.|
|1956||Eisenhower v. Stevenson||Eisenhower (strongly)||Ike, going for re-election, was favored by every economic variable except recent stock market returns. He won everywhere but the deep south.|
|1960||Nixon v. Kennedy||Kennedy (strongly)||A poor economy strongly favored Kennedy over the incumbent party’s Nixon (five of seven factors). He needed the advantage as he won in a squeaker.|
|1964||Johnson v. Goldwater||Johnson (strongly)||Every economic factor was pointing to a Johnson win except one, unemployment, and even that was barely for Goldwater. No doubt he was also helped by sentiment following JFK’s tragic assassination; He won 61% of the vote.|
|1968||Humphrey v. Nixon||Nixon (weakly)||The economy had soured a bit since the last election, favoring Nixon in four of seven variables. The Vietnam war and George Wallace’s third-party challenge likely played a bigger role as Nixon won the popular vote by less than 1% over Humphrey.|
|1972||Nixon v. McGovern||Nixon (weakly)||Nixon was again favored just slightly by the economic predictors. But this time he won in a landslide.|
|1976||Ford v. Carter||Ford (weakly)||Four of seven variables favored Ford. But his pardon of Nixon helped lead to a narrow loss (2% of the popular vote) to Carter.|
|1980||Carter v. Reagan||Carter (weakly)||The variables we track favored Carter by a narrow margin. But we did not look at inflation, which skyrocketed on his watch, to say nothing of the Iran hostage crisis. Reagan asked, “Are you better off?” and won.|
|1984||Reagan v. Mondale||Mondale (weakly)||Growth was slow during Reagan’s first term, and the economy favored Mondale. But the economy was looking better by the end, and Reagan won 59% of the vote.|
|1988||Bush v. Dukakis||Bush (strongly)||Good economic numbers delivered in Reagan’s second term favored Bush over Dukakis, and he won handily.|
|1992||Bush v. Clinton||Clinton (strongly)||Slow growth and even a rising tax burden gave Clinton the nod over Bush. It was the economy in 1992.|
|1996||Clinton v. Dole||Clinton (strongly)||Economic factors again strongly favored Clinton, and this time they were the numbers on his watch. Clinton won reelection handily.|
|2000||Gore v. Bush||Gore (weakly)||The economy favored Gore, though just barely. He won the popular vote by a sliver and lost the office.|
|2004||Bush v. Kerry||Kerry (strongly)||This year, the economy favors Kerry, at least through the second quarter. But the numbers could shift and other issues, especially Iraq and terrorism, may loom larger.|
Who does the Forbes model (warts and all) pick to win in November? John F. Kerry
“As of June 30, the stock market for the year was off by 3.71%, and it was down 14.8% over the first three-and-a-half years of President Bush’s term. Unemployment has been up sharply. GDP growth since the last election was below the benchmark and has also been below average this year. Personal income growth has lagged as well. But the last three numbers could turn in the president’s favor.
Of the seven economic variables, only the individual’s tax burden was trending in a good direction for the incumbent, shrinking a dramatic 5.18%, albeit with a similar increase in the federal deficit.” (Our recent Business Week  discussion addressed similar issues, only with more nuance and complexity.)
With the convention wrapping up, its no surprise we didn’t hear a lot of speechifying about the economy. Its security, 9/11 and terror and the homeland. You play to your strengths.
It’s Not The Economy, Stupid 
Dan Ackman and Mark Hazlin,
Forbes, 08.25.04, 6:00 AM ET
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2004/09/its-not-always-the-economy-stupid/
URLs in this post:
 Forbes: http://forbes.com/home/business/2004/08/25/cx_da_0825economy.html
 Business Week: http://www.businessweek.com/bwdaily/dnflash/aug2004/nf20040830_5077_db049.htm
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