Ask the Experts: It's the economy, stupid
Professor of Economics Chris Magee
Posted: September 28, 2012
Interviewed by Andy Hirsch
LEWISBURG, Pa. — Chris Magee, professor of economics, discusses the state of the economy, and how it can help predict the next president of the United States.
Question: What can the state of the economy tell us about who will win in November?
Answer: There are some models out there that have been predicting elections for decades. The Ray Fair Model looks at how a variety of economic factors relate to the incumbent party. The general theory is simple; if the economy is doing well, voters reward the incumbent party and re-elect them to office. If the economy is doing poorly, voters throw out the incumbent party and replace them with their challengers.
But history suggests that some of the things we think and talk about a lot, and that get a lot of attention from the media, don't really seem to matter when it comes to elections. The unemployment rate is a good example. Surprisingly, it doesn't seem to matter all that much what the unemployment rate is. What matters is how fast the economy is growing, and particularly how fast the economy is growing during the year of the election. Voters don't seem to reward the incumbents much for fast economic growth early on in their term. During the first half of Jimmy Carter's time in office, the economy was doing well and growing at a pretty fast rate. But he experienced a mild recession closer to the election and he ended up losing. Then Reagan came in and there was a pretty severe recession early on in his term. But the economy was growing rapidly in 1984, an election year, and Reagan won re-election by a landslide. People felt good about the state of the economy at the time of the election, and that's what really seems to matter.
Another factor that's a bit surprising is the focus voters seem to place on the national economy, versus the economy where they live and work. Economists often think people are going to be happy if they're doing well personally, and reward whoever is in office. But the research suggests that voters pay more attention to the economy as a whole and, based on that, form their perceptions of the party in power.
Q: How accurate are the economic models in predicting elections?
A: I give the economy a lot of predictive power. Some models claim to be extremely accurate. The Ray Fair model, which has been in use since the 1970s, using data that goes back to 1916, says you can predict over 90 percent of the variation in how well the incumbent party will do, based on the state of the economy. I think that overstates things a bit because he set up the model to predict the past elections accurately and there is no guarantee that the same model will be the best predictor of future elections. But the fact that you can predict past elections so well using reasonable economic variables does suggest that economic factors are the main driving force of the election. If you truly know the state of the economy, I think it's safe to say you can predict most elections fairly well, with the remainder being decided by the personalities of the candidates and external, random factors that pop up during a campaign.
Q: Based on how the economy is doing, what do you expect this November?
A: All signs point to a very close election. From a Republican's perspective, people's perception of the economy is still pretty poor. Most people see the economy as still largely being in a recession. And unemployment is still high, so when people are polled about what they feel the state of the economy is, they give it poor marks, as they probably should.
But there are several economic factors that are favorable to President Obama. The economy is growing this year. Historically we'd expect to see it expand more rapidly coming out of a recession, but it's still growing. Inflation has been very low over the past four years, and that seems to be linked to how well the incumbent party does. Finally, when you have an incumbent who is up for re-election that typically gives the party in office a boost. So in 2008, for example, George Bush couldn't run again, so there was no incumbent, and that tended to favor the party out of power (the Democrats at the time).
The polls right now have President Obama ahead of Governor Romney by about four percentage points nationally. The economic indicators suggest that the final vote will be much closer than that, but right now I think the odds are that President Obama will narrowly win re-election.
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