The Magazine

The Economy and the Election

If the past is any guide, Bush looks formidable.

Apr 12, 2004, Vol. 9, No. 30 • By JAMES PIERESON
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THE STATE OF THE ECONOMY is looming, as it always does, as a key issue in the presidential election. The Democrats are hammering President Bush for some 2 million jobs "lost" during his tenure in office, and for the sluggish rate of job growth during the current recovery. These attacks appear to have struck a chord with the public, eroding the president's approval rating and elevating the jobs issue to a central role in the campaign.

President Bush, of course, can make a good case in his own behalf. His policies, he argues, especially his tax cuts, have put the economy on a path to recovery. The economy grew at a 3.2 percent clip in 2003, and independent forecasters are expecting growth of 4.5 percent in 2004. Last week the Labor Department reported that the economy created 308,000 new jobs during the month of March, the most since April 2000. This new report suggests that the expansion which began two years ago is beginning to generate large numbers of new jobs.

If we consult history and long-standing patterns of voter behavior, there is every reason to think that the economy is going to work strongly to the president's advantage (see chart). But will those patterns hold true this year?

Of course the economy is not the only issue that decides presidential elections. War and peace, and foreign policy crises of various kinds, have frequently been decisive as well. In 1952 and 1968, for example, the interventions in Korea and Vietnam were the key issues in the campaigns, and, indeed, forced incumbents Harry Truman and Lyndon Johnson into retirement, even though in both years the economy was strong and unemployment very low. This year the war on terrorism, and the intervention in Iraq, may be even more important than the economy in shaping the outcome of the race for the White House.

Still, it is probably safe to say that an incumbent president cannot hope to win reelection in the face of a weak economy, even though he may be able to point to important achievements in foreign policy. In the modern era, three incumbent presidents (Ford, Carter, and Bush) have been defeated for reelection, and in each case a weak economy was the chief reason.

Jimmy Carter's economic record was the weakest of any incumbent since Herbert Hoover. During the first three quarters of 1980 the U.S. economy contracted by nearly 4 percent in real terms; the unemployment rate hovered around 7 percent during the campaign, and inflation that year exceeded 10 percent.

The economic situation in 1980 was far worse than it was in either 1976 or 1992 when Ford and Bush were defeated for reelection. In each of these cases, the economy was growing, albeit too slowly to generate much in the way of job or income growth. The incumbents had to deal with unemployment rates that were well over 7 percent, and with a perception, promoted by their opponents, that they were out of touch with the difficulties of ordinary Americans. Ford faced the additional disadvantage of having been appointed, rather than elected, which diminished the advantage of incumbency. Yet, despite these troubles, Ford lost his reelection bid by a very narrow margin (51 percent to 49 percent), and George Bush lost to Bill Clinton in a race that many felt he should have won.

The fact that Presidents Ford and Bush might have won those races suggests that the unemployment rate is probably overstated as a deciding factor in presidential campaigns. Presidents Nixon and Reagan were re-elected in historic landslides despite fairly high unemployment rates. In Nixon's case, unemployment averaged 5.6 percent during 1972; and in Reagan's case it averaged 7.5 percent in 1984. Clinton won reelection by a comfortable margin with an unemployment rate of 5.4 percent--which is very close to where it is today.

The key factor seems to be not what the unemployment rate happens to be during the election campaign, but the direction of the overall economy. If voters are persuaded that things are improving, they will overlook a high unemployment rate in the belief that it will soon be falling. Voters, that is, appear to be more oriented to the future than to the past. Unemployment, moreover, affects just a small fraction of the electorate, while broader factors such as inflation or income growth affect everyone.

Where, then, does the economy stand as we move into the 2004 campaign? The recent "Blue Chip" forecasts that came up with the 4.5 percent real growth figure for 2004 is a survey of more than 50 independent economic forecasters. They expect slightly over 3 percent growth for the first three quarters. Inflation is expected to hold steady at around 1.9 percent. The prime rate of interest, currently 4 percent, is predicted to increase slightly to 4.5 percent by the end of 2004. The unemployment rate, 5.7 percent as of March, is expected to fall nearer to 5 percent by November. The economy is growing at a healthy clip, and is expected to continue to do so into 2005--at least according to the forecasters.

Will this be good enough for Bush to win? As it happens, Ray C. Fair, a professor of economics at Yale University, has developed a statistical model that employs just a few economic variables to make accurate predictions of the presidential vote. His model, first outlined in 1978 in The Review of Economics and Statistics, was initially tested against all presidential elections since 1916. Fair has adjusted and refined the model over the years, and has offered his own predictions (based on his model) for impending presidential races.

His original model was designed to predict the two-party division of the popular vote based on two variables: the percentage change in real per capita Gross Domestic Product (GDP) during the first three quarters of the election year and the annualized change in the rate of inflation (as measured by percentage change in the Consumer Price Index) during the first 15 quarters of the incumbent's term (that is, from the incumbent's inauguration to September 30 of the election year). Though Fair experimented with other variables, such as the unemployment rate, he found that these two provided the greatest predictive power.

In applying his model to successive elections, he observed that while it was accurate in most cases, it was very wide of the mark in predicting the outcome of the Clinton-Bush-Perot three-way race in 1992. The model predicted, prior to the election and based on the economic conditions then prevailing, that Bush would win by a wide margin, with around 54 percent of the two-party vote. The economy during 1992, while not growing rapidly, still expanded at a rate of 2.2 percent (real GDP per capita) with very low inflation. These conditions should have been sufficient to give Bush a comfortable victory. Instead, he lost by about the same margin by which he was expected to win.

Why such a large error for this particular election? Fair noted that, while the economy was expanding during the election year, overall growth had been very slow throughout Bush's four-year term. There were few quarters of robust growth; and there was a mild recession in 1990 and 1991. The lack of good economic news during Bush's term may have generated a sense of gloom or pessimism about the economy that could not be dispelled by modest growth during the reelection campaign. Perhaps voters had formed an assessment of the economy over the entire term and were less influenced by the short-run news than assumed by the original model.

On the basis of such reasoning, Fair added a "good news" factor to his model which he defined as the number of quarters during an incumbent's term in which real GDP expanded by an annual rate of more than 3.2 percent. Such growth would certainly qualify as robust, and would be highlighted to the public by the president and his economic team. On the other hand, in the absence of such good news, an incumbent will be placed on the defensive by a challenger who will link a weak economy to his opponent's ineffective policies. Fair suggests this is what happened to George Bush in 1992, since he could point to only two quarters of good economic news during his entire term (the first quarters of 1989 and 1990), while he presided over several quarters of weak or negative economic reports.

Fair's model thus predicts the incumbent party's share of the two-party vote using three economic variables: (1) growth in real GDP per capita during the first three quarters of the election year; (2) the average increase in the rate of inflation over the 15 quarters of the presidential term up to the election; and (3) the number of quarters during the term in which growth in real GDP per capita exceeded 3.2 percent.

Testing his model against election results from 1916 through 2000 (22 elections), he reports that all of these factors have an effect on the outcome. For every 1 percentage-point gain in real GDP, the incumbent gains .69 percent of the vote, and for every "good news" quarter, he gains .84 percent of the vote. Inflation has the opposite effect: For every 1 percentage-point increase in inflation, the incumbent party loses about .78 percent of the vote.

These factors, significant as they are, are nearly matched in importance by the simple fact of incumbency. According to this model, an incumbent running for reelection starts out with an advantage of about 4 points, other things being equal. Obviously, an incumbent has many advantages: He has already won an election; he carries the trappings and symbolism of the presidential office; and he can control the agenda to a certain degree. Incumbency alone may explain why Clinton won reelection in 1996 with a modest economic record, but Gore lost in 2000 with a stronger economy.

WHAT, THEN, does Fair's model have to say about the outcome of this year's presidential contest?

The news is, in fact, very good for President Bush. In a note posted on his website ( on February 5, Fair predicts that President Bush will receive 58.7 percent of the two-party vote in November, more than enough for a comfortable victory. This prediction is based on a forecast of 3.0 percent growth in the first three quarters of this year, an average inflation rate of 1.9 percent over the course of his term, and three quarters of economic "good news" through the first quarter of 2004. Since growth is forecast to be strong during the second and third quarters as well, the president's hand will only be strengthened (in terms of this model, at least) as we move closer to the election.

In this case, the conclusions from the statistical analysis accord with those of basic common sense. Incumbents riding a strong economy are always difficult to unseat, provided that they run aggressive campaigns highlighting those favorable conditions. An incumbent president in wartime has other factors working in his favor. The polls suggest nothing like the margin for President Bush that the model predicts, but it is not out of line to expect a fairly decisive victory for the president in November.

Democrats, of course, will point to weak growth early in his term, along with job losses, but these attacks are likely to lose their force as favorable economic news is reported during the campaign. The president, meanwhile, will be able to point to solid economic growth that began in mid-2003 and is expected to continue at least into next year. "Stay the course," he will argue, much as Ronald Reagan did in 1984, stressing that his policies are working.

Yet we know that economic conditions alone rarely decide presidential elections. There is, obviously, the crucial issue of terrorism and the war in Iraq. It is possible to envision both good news and bad news on these fronts. The handover of sovereignty may help stabilize Iraq; more leaders of al Qaeda may be captured; we may be spared further terrorist attacks on our soil. The public might then reasonably conclude that the president's policies are working--in which case it would become all but impossible to defeat him. Still, one must entertain the possibility that events will move in the other direction, in which case the foreign policy questions may overwhelm the economic factors in electoral importance.

Nevertheless, it seems unlikely that the economy will prove an impediment to George W. Bush's reelection. The flurry of attention focused on the export of information technology jobs is but a diversion from the big economic picture, which looks to be highly positive, particularly in light of the March jobs report. Given current forecasts and assuming a sharply focused campaign that highlights recent economic gains, President Bush should be able to use the economy as an asset in his bid for reelection.

James Piereson is executive director of the John M. Olin Foundation.