'Are you better off...?' perception, reality, and politics

Democratic presidential candidate Al Gore should keep an eye on the stock market.

A crash could wipe out his chances for election. It would damage both voters' perceptions of prosperity and, in short order, their spending patterns.

That's what two economists who use mathematical models to predict the election are saying.

Right now, both models reckon the bustling economy - now in its 10th year of expansion - gives Mr. Gore a slight edge over the Republican candidate, Texas Gov. George W. Bush.

But that Gore victory margin is so narrow that it is within the error factor in their forecasting models.

"Almost a dead heat," concludes Ray Fair, an economist at Yale University in New Haven, Conn.

"Too close to call," agrees David Wyss, chief economist of Standard & Poor's DRI, a consulting firm in Lexington, Mass.

Assuming the economy will remain fairly strong until November, Mr. Fair gives Gore 50.8 percent of the presidential vote.

Mr. Wyss, assuming a modest 3 to 3.5 percent annual growth rate for the nation's output (real gross domestic product) in the second half of this year, calculates a 51.3 percent vote for Gore.

Both economists' formulas are based on the results of post-World War II elections, the status of the economy prior to election time, and other factors. These include incumbency and a historical bias in favor of Republicans.

Voter fatigue costs an incumbent party 3 percent of its potential supporters for each term in the White House, reckons Wyss. That doesn't help Gore.

The vice president is aided by the husky economy. "It's the economy, stupid," Bill Clinton reportedly said during his first campaign for the presidency.

But, notes economist Irwin Kellner, "Good times don't guarantee the incumbent party will win."

Blaming the office-holder

Since 1932, the incumbent party has lost the election four times despite a growing economy. Democrat Adlai Stevenson, for instance, lost to Republican war hero Dwight Eisenhower in 1952.

With the Vietnam War dragging on, Democrat Hubert Humphrey was defeated by Richard Nixon.

Bad times, or a belief that the economy is in poor shape, clobber incumbents and their parties.

When Jimmy Carter ran for reelection in 1980, the economy had sunk into recession. He had earlier appointed Paul Volcker to be chairman of the Federal Reserve, even after Mr. Volcker warned him that he would have to brake the economy to fight inflation. President Carter lost to Ronald Reagan.

Clinton beat George Bush partly because recovery from the 1990-91 recession was so slow, most people thought the economy was still in a slump in 1992.

Contrary to popular views, the Fed has conducted monetary policy with little regard for politics.

"More often that not over the second half of the 20th century, the Fed raised interest rates during presidential election years," notes Wright Investors' Service in Milford, Conn. The average increase in short-term rates has been half a percentage point.

In 1988, Fed chief Alan Greenspan presided over a two-percentage-point increase in short-term rates. This time, the Fed chairman has voted for six interest rate hikes since last June amounting altogether to 1.75 percentage points - so far.

'Better times' under Democrats?

If a Democrat occupies the White House, the economy has, on average, performed better over the four-year presidential term, says Mr. Kellner, a professor at Hofstra University, Hempstead, N.Y.

That's the record. It doesn't take account of which party controls Congress or other factors affecting economic policy. Factors influencing the economy can also carry over from a previous administration.

By the end of four years, economic growth after inflation has averaged more than 20 percent under Democratic presidents. Growth averaged 12 percent when Republicans occupied the White House. Buying power grew 16 percent under Democrats, 14 percent under Republicans.

The jobless rate moves higher under a Republican president.

Also, interest rates are higher.

On the other hand, inflation starts higher under a Republican presidency, and then winds up somewhat less at the end of four years than under a Democrat. That presumably reflects the poorer performance of the economy, says Kellner.

"For business and investors, a Democrat in the White House has unambiguous advantages - at least if the past is any guide," notes Kellner.

Corporate profits grow faster under a Democratic regime. Except for the second year of a term, the stock market as measured by the Dow Jones Industrial Average has fared much better under Democratic presidents.

As for the budget, deficits have been smaller under Democratic presidents. Perhaps that is no surprise considering the defense-spending buildup and tax cuts engineered by President Reagan.

At the moment, economists expect the Fed to raise rates one or two more times this summer. Kellner says the Fed's willingness to take the foot off the brakes depends on whether stock-market prices stay down enough "to take the steam out of the economy." He figures the Fed would like the Dow index under 10000, the Nasdaq under 3000.

Investors won't like that view.

(c) Copyright 2000. The Christian Science Publishing Society

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK