Pocketbook predictions of presidential elections: pocketbook variables are almost always good indicators of electoral outcomes

Business Economics, Oct, 2004 by Patrick L. Anderson, Ilhan Kubilay Geckil

Political scientists have long known that "pocketbook issues" strongly affect the fortunes of presidents and other political leaders. Economists studying this relationship have established that certain economic factors--such as growth in income, inflation, and unemployment--directly affect the votes of the incumbent party in the presidential elections. Other institutional factors, such as the number of terms a party has occupied the oval office, also appear to affect voting patterns. We present a set of simple "rational voter" economic models, which includes economic and institutional factors largely known in advance of the election. Such models typically explain about 75 percent of the variation of the popular vote in presidential elections since 1916. Such time series models, however, are bedeviled by the lack of observations, since presidential elections are only held every four years. To address this weakness, we specify and estimate a model with two methodological improvements. First, we use voting and economic data from the twenty largest states over elections since 1980, estimating parameters using pooled estimation techniques. Second, we improve the specification of the relevant variables, such as unemployment and the incidence of "limited wars," to more accurately reflect the motivations of contemporary voters. Our pooled state model forecast for 2004 indicates that economic conditions favor a narrow re-election for the incumbent President. We point out how some elections cannot be entirely explained with a rational voter model.

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Politicians have recognized that voters are interested in their pocketbook at least since the days of the Roman Empire. (1) Indeed, in one recent presidential campaign, the incumbent was unseated by a challenger who made a mantra out of the phrase, "It's the economy, stupid." Economists in recent decades have begun to quantify the relationship between electoral support and economic conditions. In some sense, this can be viewed as a rigorous response to the famous question posed by another presidential challenger: "Are you better off today than you were four years ago?"

In this paper, we start by briefly reviewing the standard approach to forecasting the results of presidential elections on the basis of pocketbook issues, as most comprehensively presented by Fair (2002). We outline how a rational voter model is consistent with public choice theory and other aspects of economic reasoning and describe a small group of variables that has been shown to consistently explain voting behavior in presidential elections. We note serious weaknesses in these models, most of which can be traced to a small number of observations over a very long time period. To address these weaknesses, we suggest two methodological improvements, which allow for the use of significantly more data, explicitly estimate differences in the responses of voters from different states, and improve the specification of variables such as unemployment and war. We then specify and estimate a model with these innovations and present results from different states. As a test, we compare the predicted response of voters in the 20 most populous states to the economic conditions in the year 2000 with their actual voting behavior. Finally, we offer a conclusion about the limits of economic rationalism in voting behavior and suggest that some elections--such as the 1992 election, and potentially the 2004 election--are not fundamentally about economics.

The Standard Approach

Microeconomics is based on utility theory, which is founded on axioms regarding consumer behavior. Consumers are assumed to be rational in defined ways. For example, consumers are assumed to prefer more goods to fewer goods and consumption now to consumption later. Upon these axioms the whole structure of microeconomics is based, and the rest of economics generally follows.

The advent of public choice theory has expanded the use of these axioms into the realm of political behavior. (2) Public choice theory provides a rigorous economic understanding for what philosophers and peasants have known for thousands of years; politicians operate under their own set of incentives, which are not always consistent with those of the people they govern. It should be straightforward then to apply a similar public choice theory to the voters. (3) Such a "rational voter" model is simple to develop. We define an economic rational voter model using axioms adapted from microeconomic theory, as well as a simplified notion of voter incentives.

The assumptions

Voters hold the incumbent party responsible for economic performance. This is a doubly simplifying assumption. First, in the United States of America, a Republic with three branches of government and a federal system, it is not entirely within the President's power to set economic policy for all states. Second, voters could view presidential elections as referendums on a number of issues--e.g., regional, personal, partisan. This assumption results in a model of voting as a referendum on the incumbent party's record of economic performance during the president's term in office. (4)