THE MACRO INVESTOR
By STEVE LIESMAN
No Matter the Nominee, One Model
Says the Democrats Just Can't Win
Economically speaking, the Democrats don't have a chance in the November presidential elections.
So says the formula of Yale economics professor Ray Fair, who uses a variety of economic and historical data to predict presidential votes.
Mr. Fair has been tweaking his formula since about 1972 and it doesn't do a bad job of predicting the vote percentage of the incumbent. In fact, the standard error is a pretty decent: 2.4 percentage points. That is, if he predicts the incumbent will get 50% of the vote, the actual percentage is usually between 47.6% and 52.4%.
Obviously, that's a big enough range in a close election to get it wrong. (He used the formula on elections back to 1916; it would have predicted Hubert Humphrey beating Richard Nixon in 1968 with 50.2% of the vote, an error of just 0.6%.) But this time around, the landslide predicted for President Bush swamps the margin of error and then some.
I'm going to use columnist's prerogative for a few paragraphs here and leave you hanging as to Mr. Fair's precise prediction and how you can use the formula to make your own forecast, using your own assumptions.
Seriously, it's worth it to spend a minute discussing how the formula is produced and what Mr. Fair is trying to achieve. To start with, Mr. Fair doesn't appear to be on the GOP payroll; he told me recently that the latest results aren't to his personal political tastes. So he seems, pardon the pun, fair and balanced (I'm trying to be sued by Fox News).
Mr. Fair wants to know, if it is "the economy, stupid" when it comes to elections, then how much does the stupid economy matter? And, what economic factors really play a role? And if these factors can be figured out, can outcomes be predicted?
The conclusion from Mr. Fair's research is that economics can tell us a whole lot about behavior at the polls, as long as you take prior voting history into account and don't rely too much on any one economic factor. That brings us nicely to what is known as the Fair Model. There are four essential elements.
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By tinkering and tweaking with a variety of economic data, Mr. Fair has settled on three economic variables. The first is the economic growth rate in the three quarters immediately prior to the election (voters have short memories). The second is the inflation rate during the entire presidential term (they don't forget inflation). The third is what Mr. Fair calls Good News, which is the number of quarters during a presidential term that growth exceeds 3.2% (they have some memory for headlines).
Each of those three variables is then multiplied by its own individual constant and they are all added together (except, of course, the inflation rate is subtracted because it's a negative.) Then, a presidential constant is added that is specific to the president's party, whether he is an incumbent running for re-election and whether his party has previously been in power.
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OK, you've all waited long enough. So here's what you get when you plug in, roughly, the consensus economic forecast: President Bush runs away with it, in a laugher, with 58% of the vote.
Feel free to visit Mr. Fair's Web site1 and plug in your own forecasts. His book "Predicting Presidential Elections and Other Things" lays all of this out in detail.
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But you angry Democrats can save yourselves the trouble. I've tried to create a Democratic victory with the formula and it's nearly impossible. Only a complete collapse of the economy even gets you within the 2.4 percentage point margin of error. You'd have to have -2% growth over the next three quarters and a 4% inflation rate to get there.
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The reason for this has much to do with the specific presidential constant for George W. Bush. While I can't argue with the statistical reasons for it, this is my biggest gripe with the formula. President Bush is handed 55.57% of the vote before the economy is even factored in.
Looking back at past elections, Mr. Fair has found that incumbency is a very lofty perch. He's also found a slight edge for Republicans. And, it's significant that President Bush is running for re-election after the opposition party (the Democrats) had most recently occupied the White House. You old timers and presidential history buffs are now nodding.
The formula draws on similar situations -- since 1916 -- when an elected Republican president ran for a second term after he took the White House away from the Democrats. Those analogs include Ronald Reagan's manhandling of Walter Mondale, Mr. Nixon's mauling of George McGovern and Dwight Eisenhower's savaging of Adlai Stevenson. Those three Republicans walked away with an average of 59% of the vote. (Calvin Coolidge, as the incumbent, did win a second term in 1924 after replacing Warren Harding, but Mr. Coolidge was running for president for the first time.)
So, if anything, Mr. Bush's constant is, historically, understated. Ten points to the history buff who can find the fourth example.) Even giving Mr. Bush half the vote from the outset, which clearly understates incumbent power, produces a Republican victory using reasonable assumptions of growth.
Is there any hope for the Democrats (or, rather, the news media's hopes for a close election)?
I'd say a complete collapse of the economy looks unlikely. At least two quarters of strong growth seems like a good bet from here. But what if Mr. Fair's formula suffers from the same economic problem that plagues Mr. Bush? Namely, we've had strong GDP growth with lousy job creation. Mr. Fair uses GDP as a proxy for jobs because usually the two are closely correlated, but this time around, there's been a unique divergence. In the post-war era, you cannot find a time when GDP has been so strong and payroll growth so weak. Mr. Fair might learn, along with an unhappy Mr. Bush, that the two aren't interchangeable and growth that doesn't produce jobs isn't good economics or politics.
Whatever the results of today's jobs report, there's no changing the weak jobs numbers under the Bush presidency. But Mr. Fair notes that voters won't remember the total. They'll look at the current momentum, so job creation from now through November will weigh heavily in Mr. Bush's favor.
The war in Iraq could also hurt. This, of course, would undermine Mr. Fair's entire theory that it's the economy, stupid. But, at the very least, the Iraqi war seems to be motivating Democrats and it remains to be seen if that opposition has any wider electoral appeal. (I have my doubts, given the Nixon landslide amid the much more unpopular Vietnam War.)
Finally, the formula has been badly wrong only once: that was in 1992, when it predicted the incumbent would win with 51.7% of the vote. It was off by 5.1 percentage points. That, of course, was the last time a man named Bush ran for re-election.
If you'd like to reach Steve Liesman, write to him at steve.liesman@nbc.com2, and place "Attn: Macro Investor" in the subject line, or write to newseditors@wsj.com3 to have a comment published about the Macro Investor. |
