Economics and elections

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

One of the goals of my urban economics classes is to demonstrate how we can use economics, and data analysis, to understand a range of events in real estate markets, in cities, and in our society more broadly.

Tomorrow's midterm election provides us with a great set of teachable moments. I'm using the effect the economy can have on the election to illustrate some basic techniques of data analysis, critical thinking, and "storytelling;" and, as always, how "Reading for Life" can help us make sense of the world.

Today, I'd like to share just a few of these points, focusing less on the data analysis techniques and more on some interesting stylized facts and research results (mainly results from other people's research).

While much debate surrounds causes, timing, and attribution, the objective fact is that, by some measures, the economy is in the worst shape since the Depression. The next two figures show how two indicators, growth in GDP per capita and inflation, fared during the terms of the postwar presidents since Truman. (The data go back to 1947 and so the early part of Truman's term is omitted. The data run through Q2 of 2010, so the last few months of the Obama administration are also omitted). Let me start with two indicators that previous research has tied to electoral performance.FIGURE 1. President Obama, so far, has faced a lower growth rate of GDP per capita than any other postwar president. Of course, it's early days, and whatever our partisan leanings, we all hope for better performance in the next two years. Nevertheless, the anemic performance of GDP growth is a challenge for Democrats (who, of course, also control the House and the Senate, at least by the simple definitions of "control.")
FIGURE 2. On the other hand, Obama has held office during a period that's exhibited lower average inflation than we've seen during any other postwar President's term.

Are Presidents responsible for “their” economic averages?
A huge body of research argues the effects of economic policies (taxes, subsidies, deficits, regulations…) and Presidents (and other politicians) do affect these policies. However, the economy has a lot of inertia (lags) built in, and there is a lot of luck involved. (Luck, of course, can be good or bad.) Policies have their lags, too. The economy can react to the perception of future policies and uncertainty in the same. But fair, or not, there is a lot of evidence that election outcomes are affected by the performance of the economy, even over short periods.

Economist Ray Fair (Yale) has published several papers and a book about how to forecast U.S. elections according to the state of the economy. Recently he extended his work from Presidential elections (as in his book) to House elections, in “Presidential and Congressional Vote-Share Equations,” American Journal of Political Science, 53(1), January 2009, pp. 55-72

Ray Fair’s prediction of this week’s Congressional election
Fair’s model has three equations: for the Presidential vote, the “on-term” House vote, and the midterm House vote. The economic variables are derived mainly from growth in GDP per capita and inflation. Other variables include whether there is a Presidential election, and if there’s a war on. Fair’s latest forecast (10/29/10) is that the Democratic share of the House vote will be 49.2%, i.e. a razor-thin Republican majority. He doesn’t forecast Senate results.

What about unemployment?
Fair’s model shows the House vote as closer than most political pundits. The two main economic drivers in his model are GDP per capita growth and inflation. Current low inflation numbers are helping to keep it close. I think the other thing this model misses is our high unemployment and its extraordinary average duration. See the next two figures:


These are even worse than might be expected from our recent growth in GDP; see for example the analysis by the Federal Reserve Bank of San Francisco. High unemployment, and high duration, and how they are now driving foreclosures, are subjects my colleagues and I have discussed elsewhere.

Debate will continue on the efficacy of the policies of the Administration and Congress; between Republicans and Democrats; and the debate that’s always on within the parties.

Despite my PhD in economics, I’d never argue that elections are only about my favorite subject.

But objective data, and past research on elections, show that the state of the economy has an important effect on the electoral fortunes of the party in power. Fairly or not, economic conditions favor the Republicans this time around.


More "Reading for Life"

• Fair, Ray C. Predicting Presidential Elections, and Other Things. Stanford University Press, 2002.
• Gelman, Andrew. Red State, Blue State, Rich State, Poor State. Princeton University Press, 2008.
• Tim Besley's 2002 Lindahl Lecture, Principled Agents.
• William Easterly, Michael Kremerb, Lant Pritch and Lawrence Summers, Good policy or good luck? Country growth performance and temporary shocks. Journal of Monetary Economics, 32(3) December 1993, pp. 459-483.
  

Some Personal Observations Inspired by President Obama's Visit

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Tuesday night I took a break from catching up on emails and letters (nope, still not caught up!) and on the spur of the moment called my wife Joan, who works across the street, to see if we could catch President Obama's speech a block away at library mall. (Obama's University Visit Was Not Simple, NYT 9/28/10; Obama rallies Democrats in Madison, Wisconsin State Journal 9/28/10)

As we had guessed, at 5:45 it was way past the time you could actually get to the mall around the fountain, between Memorial and Historical Society Libraries. So we headed up Bascom Hill, and found a nice spot about half way up. We could hear (barely). We couldn't see, of course, except we had a very clear view of the heavily armed security forces atop Memorial Library. (To some, the sight might remind them of 9/11, but to those of us of a certain age, it brings back an equally searing memory of 1963; the security's so necessary, more's the pity).

It was a perfectly crisp night, and the crowd was in a good mood, even those carrying Scott Walker signs (the Republican candidate for Wisconsin governor) in the middle of a crowd comprised (I am sure) mostly of Obama supporters.

It was billed as a campaign speech, of course. As a professional economist, when I listen to a political speech, whether Republican or Democrat, liberal or conservative, I go prepared to be disappointed by the level of discourse and policy prescriptions. As usual, my expectations were fulfilled. As far as I could tell from the speech, the major issue facing the republic -- other than excessive numbers of Republicans -- was the availability of student loans. While the sound was garbled at times, I think the financing of higher education rated at least 3 and maybe 4 mentions; an important issue to be sure, but I didn't know it was so important that it left no time for lesser issues like funding social security and medicare, or the right course for our efforts in Afghanistan.

Lest you think, "I knew it, Malpezzi's a raging tool of Karl Rove, I've even seen tea bags in his office"--well, no. I can dish it out equally when confronted with, say, John Boehner's recent speech on "economic policy" which contained little in the way of either economics or policy (Boehner Urges Ax For Economy Team, WSJ 8/25/10). (Although I must admit to some sympathy to his idea of showing Treasury Secretary Tim Geithner the door, given Treasury's repeated and willful refusal to do replace HAMP and its variations with an effective program to stem the huge external costs from record foreclosures--see our proposed Wisconsin Foreclosure and Unemployment Relief plan.)

In class, I often comment on public policy ideas, and on how to think about decisions, whether in business or the public arena, rationally and thoughtfully. I pride myself on choosing examples of good and bad ideas from across the political spectrum. Especially when I'm looking for bad ideas, I suffer from an embarrassment of riches, served up to our class by Republicans and Democrats alike. Maybe I don't always succeed in my goal of political even-handedness, but when I gave a class of 200 the chance to guess my vote in the 1991 election, they came within 5 votes of an even 3-way split between Bush, Clinton and Perot. (No, I won't tell you my vote. Well, I'll give you this one -- I didn't vote for Perot, and even I was a little surprised that I could mask my views enough for a third of the class to think I voted for him).

This posting might seem cranky so far, but I'm not really feeling cranky. Despite the disappointments on the policy side, I enjoyed the hour I spent on Bascom Hill with Joan and 26,000 of our closest friends. It was good to see a crowd revved up, yet -- dare I say it -- respectful? Maybe I need to adjust my expectations -- would I really want a world where politics was the province of economists? Should I really get cranky about the fact that we so often drop the gloves in political arguments and go all ad hominem on our opponents? It's a long tradition in our politics. If you think we're un-civil now, go read up on the raging fights, calumnies even, whenever some combination of Adams, Jefferson, Hamilton, Madison were in the room. Even Washington, trying so hard to stay above the fray, threw some elbows now and then. And Burr shot Hamilton, for heaven's sake. In the run-up to the Civil War, congressmen beat each other with sticks on the floor of the house. They had some real issues to fight about, not least slavery. And -- wait a minute -- we had a civil war! Bad as our recent wars have been, more Americans were killed in that combat than all our other wars combined, if we exclude World War II. So maybe I should get a little perspective. We're robust. Our country has survived worse than what's being thrown at it now, from within, and without. That doesn't mean we shouldn't push to raise our standards, but despite my frequent complaints about this or that policy decision, there's every reason for some optimism.

Of course the U.S. is not the only "robust society." I'll tackle a few international comparisons in a future post.