Wednesday, September 24, 2008

Are the Republicans screwed?

In the wake of the announced monumental government bail out, the Troubled Asset Relief Program (TARP), the polls quickly turned to the Democrats. At the time, I wondered why voters believe that the Democrats would do a better job than the Republicans. Well, here is what I have figured out so far.

Voters don’t like negative economic growth.


The chart lists the third quarter growth rates (usually released in October) in an election year, where either there was a change of Administration or the incumbent Administration had completed its 8-year tenure. In 1980 and 2001, the incumbent party was ousted following a released third quarter of negative growth. In 1980.3 (third quarter of 1980), growth was -0.7%, and Carter (D) lost to Reagan (R). Again, in 2000.3, growth was -0.5%, and Gore (D) lost to Bush (R). Interesting that in both cases, the incumbent Democratic Administration lost to a new Republican Administration.

Voters like monster government deficits.

The chart illustrates the annual government balance as a percentage of GDP spanning the last six Administrations. The Republicans tend to run higher government deficits, either through reduced taxes or strong defense spending (in most cases). Voters like this because Republicans have held four of the six most recent Administrations, where the average deficit/GDP ratio spanning the four Administrations is -3.4% (including 2008.2).

Based on the fact that voters dislike third quarter contractions and strong deficit spending, McCain has got this thing wrapped up!

First, 2008.3 GDP is forecasted to be positive. Actioneconomics is forecasting 2.3%, Macroeconomic Advisers is forecasting 1.5% (which is what I used in the chart), and even Deutsche Bank, a forecasting group that is anything but sanguine about the U.S. economy, are projecting 0.7%.

Second, and especially if TARP passes, the government deficit is large, currently around 4% of GDP, and is approaching levels not seen since Bush, Senr. (-4.4%). The government has raised the debt once already this year, and will again if TARP is passes, which does not bode well for our deficit/GDP ratio.

I know that this is a little silly, but in all seriousness, the budget deficit is going to be a real problem for the next Administration.

Rebecca Wilder

1 comment:

  1. Have you noticed that the rest of the economy is positive for the most part? It sure will give people pause when the numbers come out.

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