Will Pocketbooks Pick the President?

By Beacon Staff

The economy is in poor shape. So Democratic Sen. Barack Obama will win the November election with 51.5 percent of the two-party vote.

At least that is what Yale University economist Ray Fair predicts, based on a model that uses mathematics and economic data going back to the 1916 presidential election. It assumes voters make their presidential choices in large measure on the status of their pocketbooks.

“The economy seems to matter” in elections, says Fair, in an understatement. So he suggests Senator Obama should push economic issues as he campaigns in the months ahead. And he figures that the Democratic candidate would win with a higher margin if the economy were more clearly in recession this year.

Another model put together more recently figures Obama, rather than squeaking to victory, will win with a sweeping majority of 54.8 percent of the two-party vote.

Both Fair and Chris Varvares, president of Macroeconomic Advisers, the St. Louis-based consulting firm that put together the other model, concede that other factors beside the economy do matter in this year’s election.

Tax policies, Iraq, race, globalization, conservative radio, and consumer perceptions may influence the vote, notes Varvares.

These other factors, says Fair, may account for his model’s margin of error of 2.5 percentage points, plus or minus.

Nonetheless, after recognizing that an incumbent president has an advantage, the two models depend on the economic numbers for their results and have done better than many sophisticated political analysts in their predictive ability.

Varvares says his model gets it right in 12 out of the last 14 presidential elections.

Both models had trouble with the electoral battle between Vice President Al Gore and George W. Bush in 2000. The actual nationwide vote favored Gore, as the models predicted, but the models didn’t take account of the electoral vote and the Supreme Court decision.

Since the economy probably is vitally important to the fall election, here’s some news on its status from last month, news that will probably be cherry-picked by both parties for the favorable bits or unfavorable elements:

• The Census Bureau reported that real median household income (after inflation) climbed 1.3 percent between 2006 and 2007 to reach $50,233; the official poverty rate last year was 12.5 percent, not statistically different from the year before; and the number of people without health insurance declined from 47 million in 2006 to 45.7 million in 2007. Adjusting for inflation, median income in 1999, the year before the last recession, was statistically the same as in 2007, but up 29.7 percent since 1967.

Sounds good.

But to Robert Greenstein, the news is “disquieting.” The executive director of the Center on Budget and Policy Priorities, a Washington think tank keen on boosting the welfare of lower-income people, notes that the poverty rate was lower in 2001 (11.7 percent) – the start of the last recession – than in 2007. Further, never before in the United States has poverty been higher at the end of a multi-year economic expansion (2001-07) than at its beginning. The number (although not the percentage) of Americans living in poverty in 2007 increased from 2006 by 816,000 to 37.3 million. With the economic slump of today, poverty is probably higher now, Mr. Greenstein holds.

• Every two years, the left-of-center Economic Policy Institute (EPI) in Washington reviews “The State of Working America” just before Labor Day. The new report finds that although Americans were working harder and smarter, with their productivity resurging in the 2001-07 period by a rapid 2.5 percent annually, all the benefits in income have gone to the well-to-do.

For the first time since the Census Bureau began to keep track in the mid-1940s, real incomes of middle-class families are lower at the end of this business cycle than they were when it started. “Prosperity is eluding working families,” the report states.

Moreover, the report notes, there was a 1.1 percentage point decline in the labor force in the 2000-2007 business cycle. That translates to about 1.4 million people who weren’t working or actively job hunting. Those out of work for six months or longer rose from 12.1 percent of the unemployed in the 1990s to 19.4 percent in the 2000s.

The EPI report maintains the old saying “the rich get richer” is coming true. Income inequality is higher in the US for any year except 1928. Some $400 billion of pretax income flowed from the bottom 95 percent of earners to the top 5 percent in the last few years, reflecting in part the Bush tax cuts. That’s a loss of $3,660 per household in the bottom 95 percent, EPI calculates.

But another old saying, that Americans can work hard and pull ourselves up by our bootstraps does not describe most people’s experience. Some income mobility exists. But increasingly that’s not the case. For example, about 60 percent of families that start in the bottom fifth of family income are still there a decade later. And 52 percent of families that start in the top fifth finish there at the end of the decade.

Whether such numbers will have any impact on the November election remains to be seen. Greenstein’s wish is that the new president and Congress set a national goal of halving poverty over the next decade. Former British Prime Minister Tony Blair did manage to reduce poverty considerably in his decade in office.