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Never forget: ‘It’s the economy, stupid’


Mitchell Harvey

By

August 5th, 2018


Some people are hoping that Trump doesn’t see the beginning of a second term. Mitchell Harvey explains why they shouldn’t hold their breath and how Trump might be a continuing fixture in their lives.


To state the obvious, Donald Trump is one of the most divisive and controversial Presidents in recent history. He currently has a disapproval rating of roughly 53% and an approval rating of only 41.3%.[1] Such poor ratings could lead a hopeful Democrat to conclude that he cannot win a second term. Unfortunately for them, however, history suggests that Trump is on track to serve the full eight-year maximum.
 
‘It’s the economy, stupid’ is as true today as it was when coined roughly 26 years ago.[2] Please have a look at the below graph:[3]

The blue line represents US real GDP percentage growth from 1930 to 2016. The red areas represent periods of recession. The triangles mark US elections. If the triangle is green, the incumbent won. If the triangle is black, the incumbent lost. If the triangle is purple, the incumbent didn’t run again. Some of the incumbents didn’t run again due to death (such as Roosevelt), some chose not to run (such as Lyndon Johnson and Harry Truman) but most were not eligible to run as they had served their two-term maximum period. It may be useful to do some simple analysis by inspection.
 
Firstly, we find that there have been thirteen elections between 1930 and 2016 when the incumbent was running for re-election. Out of those thirteen elections, the incumbent won nine. That’s a winning rate of 69.23%. We can immediately say that incumbent’s usually win. But that’s not a very interesting insight – we already know that. Let’s take into account recessions. There have been seven elections involving an incumbent candidate where the economy entered into a recession in the most recent term of office. That doesn’t include elections where the economy was in recession at the beginning of the president’s new term (for example, I haven’t included Roosevelt’s re-election in 1936 nor Eisenhower’s re-election in 1956). Out of those seven, the incumbent won re-election only twice. That’s a pretty big change in prospects. Flipping the question slightly, what is GDP doing when the incumbent loses his re-election campaign? Every single time the incumbent has lost, the economy has either been in recession at the time of the re-election campaign or has just recovered from a recession. This has important consequences for Trump’s prospects: It seems that a recent recession is a necessary condition for the incumbent to lose.
 
Consider the next graph. It is exactly the same, except it has a purple, horizontal line at a 2.5% GDP growth. A quick glance suggests that it seems pretty hard not to be re-elected if GDP growth is at 2.5% at election time. Both Eisenhower and Reagan saw the economy enter recession during their time in office, but they still won re-election. GDP growth was almost 2.5% when Eisenhower was re-elected, and GDP was well above 2.5% when Reagan was re-elected. However, Henry Ford and George Bush Snr both lost re-election despite the economy recovering to above 2.5% growth at the time of election. Nonetheless, in both of these situations the economy had only just come out of recession at the time of the election campaign. The fact that the economy was recovering may not have even registered with voters. In other words, if the country has already experienced a sustained recovery from recession at election time, the incumbent is in with a very good chance of re-election.

This brings us to Donald Trump. Since his election in 2016, GDP growth has floated at around 2%. That is until recently when GDP growth shot up to 4%.[4] The economy is going phenomenally well. That’s not even talking about the unemployment rate, which is at an excellent 4%.[5] In short, the data is looking good for an incumbent’s re-election.
 
However, none of the above means that Trump automatically wins. He has an approval rating of only 40% or so for a good reason. Trump’s behaviour and language in a host of circumstances has been ethically repugnant and simply unsuitable for the office he holds. Though many may feel that they have been let down by the mainstream media, that does not at all justify the attacks and abuse Trump has hurled at democracy’s crucial fourth estate. Moreover, while his regulation-cutting spree is likely to boost the economy, his approach to international trade is demonstrably ignorant, foolish and short-sighted.
 
Secondly, the above discussion has been entirely based on inspecting one variable; GDP. There has been no econometric testing or any other form of statistical analysis completed here. My 2.5% growth rate choice was entirely arbitrary.
 
I also haven’t taken into account the fact that some of the Presidents that chose not to run for a second term may have known they were likely to lose. This may have created a bias in our data set.
 
Finally, there is still a chance of a US recession before the next US election. Inflation is finally starting to pick up and interest rates are starting to rise, putting pressure on financial institutions and hindering credit expansion. More specifically, the Federal Reserve is actively raising interest rates: a common precursor to a future downturn. But then again, this is all only just starting to happen and some future contraction may not occur any time soon.
 
Nonetheless, despite all of the above provisos, history clearly demonstrates that it is very difficult to lose an election campaign when the economy is doing well. If Trump can maintain three to four per cent GDP growth, an unemployment rate of less than five per cent and avoid a recession before the next election, he would be in a position from which no president has ever lost re-election in the last 86 years. In such circumstances, I’d be willing to bet he wins a second term.

 

Further reading

[1] ‘How popular/unpopular is Donald Trump?’, FiveThirtyEight, accessed on 31 July 2018, < https://projects.fivethirtyeight.com/trump-approval-ratings/>

[2] Kelly, Michael (October 31, 1992). “THE 1992 CAMPAIGN: The Democrats — Clinton and Bush Compete to Be Champion of Change; Democrat Fights Perceptions of Bush Gain”. The New York Times.

[3] Data Source: U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, 31 July 2018.

[4] Trading Economics, United States GDP Growth Rate, accessed on 31 July 2018, <https://tradingeconomics.com/united-states/gdp-growth>

[5] Trading Economics, United States Unemployment Rate, accessed on 31 July 2018, < https://tradingeconomics.com/united-states/unemployment-rate>

Image sourced from: https://www./?ickr.com/photos/gageskidmore/8566717881

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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