Wednesday, November 19, 2008

Politics: It's the Economy, Stupid

TORONTO, ONTARIO - With all of the discussion about how Barack Obama may or may not bring transformational change to the country (including on this blog), it is easy to lose sight of the primary reason why he won the election. All other factors like his professional, disciplined campaign, the unpopular war, and concerns about the judgment of his opponent in the end would not have mattered much if not for the state of the economy. As soon as it looked like the economy was in trouble, Obama suddenly became a shoo-in--it was, as was made famous in the 1992 Clinton campaign, "the economy, stupid."

It's rather amazing how well presidential election results have correlated with GDP growth in the past fifty years. Starting with the 1960 election that resulted in Democrat John F. Kennedy taking office from the Republicans, there has been an economic rule--if GDP growth falls below 2.5% in the two-year period before the election, then the incumbent party loses. The two-year time frame is necessary because the figures for the year of the election are not available at the time of the election, so an opposing party may credibly campaign against the incumbent party's performance, especially if there is a feeling of economic weakness. The best example of this was 1992, when the economy was actually recovering but the media hadn't reported it as such and Bill Clinton was able to successfully question George H. W. Bush's record from the negative growth in 1991.

In the table below, a "-" indicates that the GDP had dipped to 2.5% or below in the window, whereas a "+" indicates that it had not. (These figures are from Angus Maddison's web site.)
1959 7.42%, 1960 2.49% - {Shift}
1963 4.32%, 1964 5.79% + {Same}
1967 2.50%, 1968 4.76% - {Shift}
1971 3.12%, 1972 5.30% + {Same}
1975 -0.3%, 1976 5.24% - {Shift}
1979 3.40%, 1980 0.05% - {Shift}
1983 4.19%, 1984 7.28% + {Same}
1987 3.52%, 1988 4.21% + {Same}
1991 -0.2%, 1992 3.34% - {Shift}
1995 2.54%, 1996 3.75% + {Same}
1999 4.69%, 2000 3.69% + {Shift}
2003 2.52%, 2004 3.65% + {Same}

The only exception to a "+" re-electing the incumbent party and a "-" resulting in a shift in power was in 2000, and recall that Al Gore actually won the popular vote in the election, just not the electoral college.

This is not to say that the economy is the only factor, but when it is perceived to be clearly far from the 2.5% line, the results are pretty predictable. The solid economies around 1972 and 1984 were the biggest landslides for the incumbent during the period. When there was little or negative growth (around 1976, 1980, and 1992), there was turnover. When things were close to the line (including 1960 and 2004), there were nail-biter elections.

This year's election was little different. Head over to and look at the "SuperTracker" in the right-hand column. Before Lehman Brothers declared bankruptcy on September 15th, this year's presidential race was close, and in fact John McCain was about two points ahead. Within two weeks of the Lehman Brothers announcement, as other poor economic news snowballed, Barack Obama had opened up a lead of about 6%, and it stayed there for the rest of the race. While the GDP growth rate in 2007 was over 3%, in 2008 it is expected to be below 2%. Following the rule, it should have been expected that the incumbent party would lose.

The pattern may prove haunting for Barack Obama. If the economy does not turn around and experience at least 2.5% GDP growth by 2011, he'll be looking at the same scenario in reverse. With predictions such as that of Niall Ferguson for five years or more of little or no growth, it may be very difficult for him to be re-elected in four years--even during the Great Depression, Franklin Delano Roosevelt had economic growth (if not overall economic status) in his favor in 1935-6 and 1939-40 when he was re-elected.

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