- The Washington Times - Sunday, June 8, 2008

ANALYSIS/OPINION:

ANALYSIS/OPINION:

Polls are telling us the state of the economy is the No. 1 concern among voters this year. Pocketbook issues may well decide who wins the presidential election in November. At the moment, the economic outlook is not rosy.

Economists have developed models to predict the share of the popular vote going to the two major political parties in presidential elections. The best known was developed by Yale University economics professor Ray C. Fair in 1978 and updated in 1996.

The economic variables in Mr. Fair’s model are the growth rate of real gross domestic product (GDP) per-capita in the three quarters prior to the election, the number of quarters in the first 15 quarters of the incumbent administration’s current term that the growth rate in per-capita GDP was greater than 3.2 percent, and inflation as measured by the rate of increase in the GDP deflator in the first 15 quarters of the administration’s current term. (Dividing real GDP by population shaves about a percentage point off the annual economic growth rate.)

Mr. Fair’s full prediction equation also includes noneconomic “incumbency” variables, which take account of the party in the White House, how many successive terms it has been there, whether the president is or is not running again and whether the country is at war.

Polling data do not enter into the equation. Polls tend to be reliable only close to elections, whereas the Fair model has a track record of providing accurate predictions many months before elections.

When fitted to back data, the model correctly predicted the political party with the winning share of popular votes in all but a few presidential races since 1916. Most recently, it correctly predicted the 2004 election as well as the disputed 2000 election.

Major unknowns in the Fair model for this year’s election are economic growth and inflation, with the former carrying the most punch.

On May 21 the Federal Open Market Committee (FOMC) - the Federal Reserve’s policymaking group - published its latest economic projections, lowering its midpoint estimate of 2008 economic growth to 0.75 percent and raising its midpoint inflation estimate to 3.25 percent. Interpolating the Fed forecast to meet the Fair model’s data requirements and plugging the data into the voting model, the resulting prediction is that the incumbent party this November will capture less than 47 percent of the vote, a result that passes the statistical significance test of being less than 50 percent.

If you have confidence in the Fair model, you would have to conclude that the FOMC - a great model user itself - is indirectly predicting a popular vote victory for the Democrats in November.

The Fed is not forecasting a recession this year. But if a recession should occur, as many economists expect, the predicted Republican vote share falls below 46 percent.

According to the Fair model, a Republican victory in November would require economic growth in excess of 3.5 percent (at an annual rate) in the first three quarters of this year. This is just not in the cards.

Readers interested in predicting the 2008 presidential outcome from a reduced form of Mr. Fair’s model, using their own economic forecasts as inputs, can do so by logging on to Mr. Fair’s Web site: http://fairmodel.econ.yale.edu/vote2008/index2.htm.

Another talked-about voting model was developed by political scientist Douglas Hibbs in 2000. He estimated a simple two-variable equation, which he calls the Bread and Peace model, to predict the outcome of presidential elections. The determining variables are the weighted-average growth in long-term per-capita real disposable income and the cumulative number of U.S. military fatalities during wartime.

In a March Web posting, the author noted the poor outlook for real income this year and the continually rising number of war fatalities. Mr. Hibbs wrote that “the Bread and Peace model predicts a Republican two-party vote share of 46-47 percent and therefore a comfortable victory for the Democrats in the 2008 presidential election.” Military fatalities in Iraq, he said, will alone “depress the incumbent vote by more than three-quarters of a percentage point.”

Mr. Hibbs’ prediction is consistent with the result of Mr. Fair’s model based on Fed forecasts.

Some economists have used stock market indexes as predictive variables, but that seems a weak reed to hang Republican hopes on these days.

Economic models are error-prone and weighed down by historical data. You can never tell when they will go haywire. It is also worthwhile to remember, as was brought home to us eight years ago, that presidential races are decided by electoral votes, not the popular vote.

Alfred Tella is former Georgetown University research professor of economics.

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