The Impact of External Shocks, the Economy, International Conflicts, and Gasoline Prices on Presidential Elections

March 19. 2012 7:03PM

By Gil Medina, contributor

Spring Training and the Presidential elections cycle: A time for all teams to dream of the playoffs and for political pundits to speculate on the myriad factors impacting the outcome of a presidential election. It is the time of year that I reflect on how free agent signings, trades and minor league call-ups will impact the playoff picture. This year, I also spent some time reviewing articles and papers about extraneous factors impacting presidential elections.

Of special interest to me was a 2005 paper titled, Do Increases in Petroleum Product Prices Put the Incumbent Party at Risk in US Presidential Elections? The authors, economists Christopher S. Decker and Mark E. Wohar of the Department of Economics at the University of Nebraska at Omaha considered the impact of a variety of factors on the incumbent party losing a state previously carried. They summarized the conclusions of their research as follows:

“[T]here is credible evidence that the probability of the incumbent party losing a state previously carried increases with petroleum product price growth but only in those states that are primarily energy consuming in industrial composition. We also find that increases in the number of international conflicts, increases in real state per-capita income growth, and increases in state per capita grants-in-aid all reduce the likelihood of losing previously carried states while higher taxation growth increases this likelihood.”

In summary:

1.    The probability of the incumbent party LOSING a state it previously carried increases with:

a.    petroleum product price growth but only if the state has a large economy and/or industrial base

b.    higher state taxes

2.    The probability of the incumbent party WINNING a state it previously carried increases with:

a.    the number of international conflicts

b.    increases in real state per-capita income growth

c.    increases in state per capita grants-in-aid

Below are the fifteen largest state economies in the United States as measured by 2010 gross domestic product (or GDP - in millions):

 

1.      California                   1,936,400

2.      Texas             1,207,432

3.      New York                1,156,500

4.      Florida                         754,000

5.      Illinois                             644,200

6.      Pennsylvania                           575,600

7.      New Jersey                497,000

8.      Ohio                               483,400

9.      Virginia                         427,700

10.  North Carolina           407,400

11.  Georgia                         404,600

12.  Michigan                       372,400

13.  Washington                  351,100

14.  Maryland                       300,000       

 

 

 

Minnesota ranks 17th , Colorado 19th and Wisconsin 20th.

This is relevant because, according to Real Clear Politics, “It’s the swing states that decide the outcome for every [election]. States like Texas and California are sure things. Thus the red and blue states are at the mercy of the purple states. The big five 2012 [purple] states [are] Florida, Ohio, Virginia, Wisconsin and Colorado.”

Based on Decker and Wohar’s paper, gasoline prices could impact the outcome of the presidential election in Florida, Ohio and Virginia and may influence the outcome of the voting in Minnesota, Colorado and Wisconsin. If you also consider states like Pennsylvania, it is no wonder that the Obama campaign is so concerned with gasoline prices.

A recent ABC News/Washington Post poll makes it clear that President Obama’s path to re-election is fraught with many uncertainties. While the majority of respondents polled believe that the President will be re-elected, the poll also reflected the political effects that economic worries like rising gasoline prices can have on the outcome of the election. In the poll, the rising price of gasoline has surpassed the federal budget deficit as Obama’s single weakest issue. AND, the concerns about the deficit remain.

Gasoline prices gained 49 cents a gallon this year alone (to an average $3.79), and 89 percent of voters polled are concerned about the recent run-up in prices; 66 percent are “very” concerned about it. Americans disapprove of how the president is handling the price of gas by a 65-26 percent margin.  The President’s “Strong” critics outnumber strong “Approvers” by nearly 4-1.

His approval rating on handling the economy overall has lost 6 points in a month, to 38 percent, a mere 3 points from his career low in October. Intensity again is highly negative: Fifty percent strongly disapprove of the president’s work on the economy, up 9 points to a new high in his presidency.

According to the poll, economic attitudes seem to hold the key to the 2012 election. Just 31 percent of Americans say the President’s economic policies have made the economy better. Many Americans, 30 percent, believe his policies have made things worse, while 37 percent say they’ve had no real effect – hardly the sort of economic expectations the President wants as November nears.

Regarding state taxation policies, the Tax Foundation “State Business Tax Climate Index”, ranks the big five 2012 purple states in the following order in terms of business climate (From 1st to last regarding Tax Environment):

1.      Florida          –   5th

2.      Colorado        – 16th

3.      Virginia           – 26th

4.      Ohio           – 39th

5.      Wisconsin      – 43rd

Based on my reading of Decker and Wohar’s research findings, state tax levels could work against President Obama in at least two purple states, against him in two and probably against him in Virginia.

On the positive side for the President, the economy is improving, even if his approval rating on handling the economy is negative. The Bloomberg Consumer Comfort Index measures Americans' perceptions on three important variables: the state of the economy, personal finances and whether it's a good time to buy needed goods or services. Since its inception in December 1985, the comfort index has averaged minus 15.2.

The Bloomberg Consumer Comfort Index was minus 36.7 in the period ended March 4, the highest since April 2008, up from minus 38.8 in the prior period. The gauge on the state of the economy reached a one-year high, while the buying-climate measure climbed to a level last exceeded in December 2009.  

Household wealth climbed from October through December for the first time in three quarters on higher equity values. According to the Federal Reserve in its most recent flow of funds report, net worth for households and non-profit groups increased by $1.19 trillion, or 2.1 percent from the previous three months, to $58.5 trillion,

Regarding per capita income in swing states, the table below summarizes the information for the years for which full year data is available:

State

1980

1990

1995

2000

2001

2002

2003

2005

2006

2009

2010

 

Colorado

 

10,143

 

18,818 

 

24,865 

 

32,434 

 

33,455 

 

33,276 

 

34,283

 

37,946

 

39,491

 

41,344

 

42,802

Florida

9,246

18,785

23,512

27,764

29,048

29,596

30,446

33,219

36,720

37,780

39,272

Ohio

9,399

17,547

22,887

27,977

28,699

29,405

29,944

32,478

33,320

35,381

36,421

Virginia

9,413

19,543

24,456

31,120

32,338

32,922

33,671

38,390

39,540

43,874

44,762

Wisconsin

9,364

17,399

22,573

28,100

29,196

29,923

30,898

33,565

34,405

36,822

38,432

    Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business

Per capita income growth was positive but moderate in all five. This would seem to indicate that neither party will benefit greatly as a consequence of income growth.

In many ways, we can draw parallels with the 1992 presidential election. The campaign came on the heels of an economic slowdown. Exit polls indicated that 75% of voters thought that the economy was “Fairly Bad” or “Very Bad” while 63% thought that their personal finances were better or the same as four years before.

Bill Clinton won by a wide margin in the Electoral College BUT received only 43 percent of the popular vote against Bush's 37 percent and Perot's 19%. Independent candidate Ross Perot used his own money to advertise extensively, and is the only third-party candidate ever allowed into the nationally televised presidential debates with both major party candidates. Perot's popular vote made him the most successful third-party presidential candidate in terms of popular vote since Theodore Roosevelt in the 1912 election. 

Unless Obama can convince someone an independent to do a reprise of the 1992 election, 2012 promises to be a difficult election for the incumbent president.  Because of the power of the incumbency, I give the edge in the race to the president; but, then again, I picked the Philadelphia Phillies to win the World Series last year and am picking them again this year.


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