Back to ‘the economy, stupid’: How a slowdown will influence America’s presidential contest

By Edward Luce

Published: January 29 2008 19:13 | Last updated: January 29 2008 19:13

The issue of economics is not something I have understood as well as I should – John McCain, Republican presidential hopeful

In many electoral cycles, Senator McCain’s recent remark may have passed unnoticed. But in an election year when most Americans believe they are already in recession, he was advised promptly to read the book by Alan Greenspan, former Federal Reserve chairman, that he said he was carrying around.

For a long while it was assumed the 2008 presidential election would be dominated by Iraq, fear of terrorism, restoring America’s position in the world and other foreign policy issues. But then the subprime mortgage crisis began to unfold. With a majority of economists now forecasting a recession this year, economic worries have shot to the top of the list of voter concerns. In turn, that has strengthened the already robust conventional wisdom that 2008 will be the year of the Democrats.

So is it just a question of settling who is to be the Democratic nominee and then awaiting either Hillary Clinton’s or Barack Obama’s inevitable capture of the White House? Probably, says Ray C. Fair, a Yale economist whose widely cited forecasting model predicts a 52 per cent to 48 per cent Democratic presidential victory in November, even with a mild slowdown in growth.

But Mr Fair’s model, which has a 2.5 per cent margin of error, predicts a whopping 55 per cent to 45 per cent Democratic victory in November if that slowdown indeed turns into a recession. “Almost everything, including all the non-economic factors, suggests a Democratic win this year,” he says.

Should Mr Fair’s forecast prove anywhere near accurate, it would constitute something of a revolution in American political history. The last time a Democratic presidential nominee won the presidency with more than half the vote was in 1976 when Jimmy Carter defeated Gerald Ford. But that came little more than a year after the Watergate crisis had unseated Richard Nixon and cast a toxic pall over the Republicans.

The only other time since 1964 that a Democrat has won more than half the vote was in 2000 when Al Gore garnered a shade more than George W. Bush in an election eventually settled by the Supreme Court. It also came at the end of one of the longest periods of growth in American history, almost all of it under a Democratic administration.

“Al Gore lost the 2000 election in spite of the economy,” says Michael Feldman, who was a senior adviser to the then vice-president. “Because it was a time of economic contentment, the 2000 election was dominated by softer issues.”

Perhaps the most often cited recession election is 1992 when Bill Clinton deftly exploited George H.W. Bush’s allegedly inept handling of the downturn with the campaign motto, “It’s the economy, stupid”. But the recession had already ended by the time voters went to the polls – and Mr Clinton won only 43 per cent of the vote.

Many believe Mr Bush senior would have won re-election were it not for the 19 per cent vote garnered by Ross Perot’s isolationist third-party candidacy. Mr Clinton took 49 per cent of the vote in 1996 in a year when the economy was much stronger (Mr Perot again ran, taking just eight per cent of the vote). Thus recent history suggests it would be heroic to assume a thumping Democratic victory in November.

“The widespread notion that a downturn or a recession gives a clear advantage to the Democratic presidential challenger is not always supported by the facts,” says Michael Lind, a political historian at the New America Foundation in Washington. “The past offers just as much evidence that we could get a Republican president with a Democratic Congress in November as a Democratic control of both.”

History points to a slightly greater correlation between congressional election outcomes and the prevailing economic orthodoxy – if not necessarily the precise stage in the economic cycle. For example, the Democratic party controlled both branches of Congress for virtually all of the period between the late 1940s and late 1960s when Franklin Roosevelt’s New Deal commanded a broad consensus among voters. But the Republicans still won the White House 50 per cent of the time.

Likewise, many political analysts believe the Democratic victory in the 2006 mid-term congressional elections, which brought an end to 12 years of continuous Republican majorities in the House of Representatives, heralded a rejection of a generation’s worth of conservative economics – in addition to the anti-war sentiment on Iraq that clearly motivated many voters.

Most forecasters predict the Democrats will increase their majorities in the Senate and the House this November regardless of which party takes the White House. “An economic downturn would probably reinforce what is almost certainly going to be another good year for congressional Democrats,” says Charlie Cook, a Washington political analyst. “Voters already associate their economic anxieties and their other complaints – about corruption and inept foreign policy – with the Republican party.”

Indeed, the sentiment of the American voter suggests something much worse for the Republican party as a whole than the prospect simply of taking the blame for a short-term economic downturn. The 2006 election took place after five years of robust economic growth from which many – if not most – Americans derived scant improvement in income.

The stagnation of median household incomes since 2001 poses a far tougher structural problem for defenders of the status quo than the latest quarterly economic numbers. “What is so depressing about the Republican party right now is that it is not acknowledging the economic pain most middle-class Americans are experiencing,” says David Frum, a former speechwriter to George W. Bush, whose recent book, Comeback, warns that the Republicans face electoral banishment if they do not reform. “It is a party that has become so beholden to special interests that it cannot honestly address issues like healthcare reform even though the Republican voter is suffering from healthcare inflation as much as any other.”

US household income

Frank Luntz, a leading Republican pollster, agrees. He points to the “intellectual stagnation” of Republican ideas, which have dominated American politics for a generation. “The 2006 congressional election was just the beginning of the bad news for the Republican party,” he says. “This year it gets worse.”

Yet whoever becomes the Republican presidential nominee will have a reasonable opportunity to escape the likely fate of his colleagues on Capitol Hill. Whether it is Mitt Romney, Rudolph Giuliani or Mr McCain, all three can plausibly dissociate themselves from Mr Bush.

Had it been a more typical election when the Republican nominee was either the sitting president or the vice-president that would not have been possible. As it is, Mr Bush’s deep unpopularity need not rub off on whoever hopes to succeed him. “Presidential politics is largely about the individual characters of the nominees,” says Mr Cook. “And none of the leading Republican contenders is closely associated with Mr Bush.”

But the Republican nominee would have to go a stage further than simply dissociating himself from Mr Bush to produce an economic narrative that strikes voters both as convincing and empathetic. More than 70 per cent of voters believe the country is on the “wrong track” – a historically high measure of public dissatisfaction. That number could well deteriorate with up to 2m home foreclosures anticipated over the next 12 months.

So far, most analysts are unimpressed by the economic policies the Republican presidential hopefuls are offering. While their Democratic counterparts have been swift to produce their own fiscal stimulus plans in the last three weeks, the Republicans were slow off the mark, in some cases embarrassingly so. For example, Mr McCain’s initial remedy for the downturn was to suggest spending cuts – a measure that would deepen rather than counter any recession.

Mr Giuliani’s plan was little better. Having denied until this month that there were any clouds on the economic horizon, the former mayor of New York recently proposed a reduction in the corporate tax rate and incentives to boost investment. Economists pointed out that the counter-cyclical effect of Mr Giuliani’s tax cuts would begin to be felt only after the end of any recession.

Mr Romney, who is the most fluent on economics of the Republican candidates, was also criticised for proposing measures such as the extension of Mr Bush’s tax cuts (which expire in 2010) that would have little or no short-term effect on the economy. “In this general election, the Republicans probably cannot get away with their usual diet of optimism and tax cuts,” says Jared Bernstein at the Economic Policy Institute, a left-of-centre Washington think-tank. “They will have to come up with something more original.”

Tom Gallagher, managing director of International Strategy and Investment, a broker-dealer specialising in economic research, is even blunter. “Normally when Washington gets round to passing a fiscal stimulus plan, that is a signal that the recession is already over,” he says. “But the plans put forward by the Republican nominees would only begin to take effect by the time of the next recession.”

The two leading Democratic candidates have been awarded much higher grades for the content of their fiscal stimulus plans and for having reflected in their policy platforms the public’s sense of economic dissatisfaction since campaigning began a year ago.

Given her detailed expositions on economic policy, many assume that Mrs Clinton is better placed to exploit a recession than Mr Obama, whose campaign deals in larger generalities (even though his stimulus plan received more plaudits than Mrs Clinton’s).

But both are well positioned to move into a general election with a set of economic policies tailored to the mood of the electorate – including plans for universal healthcare, higher spending on infrastructure and a dose of populist scepticism about the downsides of globalisation.

Yet presidential elections, even during recession years, are never confined purely to the economy. Nor is it yet clear that the US is heading into recession. History also shows that American voters have a partiality for divided government. “If the Democrats believe they have sewn up the presidential election because the economy is turning down, they may be in for an unpleasant surprise,” says Mr Lind.

As a chill sets in, it pays to check what plays in Peoria

With its grey-and-yellow brick Italianate façade dotted with bored, reclining cherubs, the Madison Theater in downtown Peoria speaks to another age, writes Hal Weitzman. In the 1920s, the largely blue-collar audiences at venues such as the Madison were seen as the truest test of a vaudeville show. If it played in Peoria, the saying went, it could not fail in the rest of the US.

These days, the doors of the Madison are closed, its awnings in tatters. But Peoria, a city of about 110,000 in central Illinois, retains its reputation as a typical US town, an indicator of trends in both the Midwest and the broader American heartland.

If Peoria is the quintessential American city, it sits in a state that can also be seen as mirroring the wider US. Measured by a host of demographic factors – race, age, income, education, industry, immigration and rural-urban mix – Illinois is the most representative state in the union, according to data from the Census Bureau.

Illinois is also typical in that the economy has shot to the top of voters’ concerns in the run-up to Super Tuesday next week, when the state joins 21 others – four of them in the Midwest – in primary elections for a presidential candidate.

In Peoria, concerns about the economy have been expressed very publicly. Caterpillar, the maker of construction equipment and heavy-duty engines, is based in the city and is its biggest employer. Last October the company – often seen as a bellwether for the wider economy – warned that the US was either in a recession or near to one. Buoyed by strong international sales, Caterpillar released healthy results last week but reiterated that it expected “anaemic growth” in the US economy.

Peoria itself is not yet suffering much. The city’s productivity is among the highest in the Midwest and it has largely been spared the foreclosures associated with the subprime mortgage crisis. While manufacturing remains the backbone of its economy, a healthcare boom has diversified employment. Nevertheless, Bernard Goiteen of the Center for Business and Economic Research at Bradley University in Peoria says local leading economic indicators suggest growth is slowing: in the third quarter of last year, job openings fell 6 per cent from the previous quarter, building permits were down by 25 per cent and new unemployment claims rose by 23 per cent.

These data may be a worrying signal for the Midwest and the broader US. The region represents about 25-30 per cent of the national economy, says Bill Testa, senior economist at the Chicago Federal Reserve. In spite of years of job cuts and international outsourcing, it is still manufacturing-intensive. Much of that manufacturing is of durable goods, a sector sensitive to downturns.

Across the street from the Madison, in the elegant ballroom of the Père Marquette hotel, the Peoria County Republican party held its annual Lincoln Day Dinner on Sunday night. Over chicken cordon bleu and Black Forest gateau, the talk was of volatile stock markets. “Sure, I’m worried about it – I’ve lost a couple of hundred thousand dollars in the past few weeks,” said Merle Widmer, vice-chairman of the Peoria county board.

On the other side of the Illinois river, in Caterpillar’s tractor plant in East Peoria, the issues are somewhat different. Steve Sanneman, who instals engines on the production line, says higher petrol and food prices mean he and his family are struggling to get by. “My biggest expense is just keeping a roof over our heads,” he says. “I’m working from pay cheque to pay cheque.” Mr Sanneman says the economy will determine his vote but has no great confidence in any of the candidates. “They talk a mean battle about the lower middle class but I don’t think they have a clue about what it’s like.”

Jim McConnoughey, head of the Peoria Chamber of Commerce and one of three candidates competing for the Republican nomination in Illinois’ 18th Congressional district, says economic issues are on the minds of most Peorians. “Rural voters are worried about higher revenues falling, young people are moving to take up jobs elsewhere and the growth of smaller manufacturers has elevated the issue of economic security.”

That view is echoed by Billy Halstead, chairman of the Peoria County Democratic party. “The economy is one of the top issues we’re hearing on the doorstep – what with the housing market the way it is – and we’re using it as a campaign tool. Unemployment isn’t high yet but a lot of our blue-collar manufacturing jobs that used to be in the city have gone.”

In Illinois, it is hard to see the economy changing the outcome of the Democratic primary. Barack Obama, who represents the state in the US Senate, has an insurmountable lead. But it could help Mitt Romney – who has pledged to fight for jobs in the industrial heartland – in the Republican primary.

At Northwoods mall in central Peoria, Brianna Brignall, a student, is working her shift at a concession selling calendars featuring John McCain, Rudolph Giuliani, Hillary Clinton and Mr Obama. When asked which has sold the most, she giggles and points to one featuring a confused-looking President George W. Bush. Called “I can’t wait”, it counts down the days until Mr Bush leaves office. “I guess a lot of people will just be glad to see him go,” she says.

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