Democratic Nominee Will Have Edge in Fall Even If Economy Turns
Bloomberg
By Alison Fitzgerald
March 24, 2008

March 24 (Bloomberg) -- Seven months before Election Day, rising home foreclosures, shrinking financial assets and gasoline approaching a record $4 a gallon are daily reminders that the U.S. economy may be the worst in almost 30 years.

Even if a recovery begins this summer, Americans won't feel the difference until much later. That's why when the polls open Nov. 4, the Republicans, who have controlled the White House since 2001 and Congress for much of that time, will have ceded a key advantage to the Democrats.

Recessions shaped four presidential elections in the past half-century -- in 1960, 1976, 1980 and 1992. Each time, the candidate from the party trying to retake the White House won. A model that uses economic data to predict presidential race outcomes has the Democrats getting 52 percent of the votes cast for the two major party candidates, says Ray Fair, the Yale University professor who developed it.

"The economic environment, based on all of the data I've ever seen, is the most powerful indicator of how the party in power will do," says Jody Powell, a top aide to Jimmy Carter. He speaks from experience, having worked on Carter's victorious 1976 presidential campaign and his 1980 loss to Ronald Reagan, which was flanked by two recessions.

"The economy will likely be the dominant issue" this year, Powell says.

More than history will be on the side of Democrats Hillary Clinton or Barack Obama in the campaign against John McCain, the presumptive Republican nominee. The economy issue "is not something I've understood as well as I should," McCain, 71, told reporters in New Hampshire in December.

`Sound Bite'

"If I'm the Democratic National Committee, I'm taking that sound bite and using it over and over," says Daniel Clifton, head of policy research at Strategas Research Partners, an investment-strategy group in Washington. "People will wonder, `How can we elect this guy at this time of economic uncertainty?"'

Most Americans believe the U.S. is already in a recession, according to a Feb. 21-25 Bloomberg/Los Angeles Times poll. Half said the economy will still be in bad shape in six months, and 27 percent said it will be worse. Consumer confidence this month dropped to a 16-year low, according to a Reuters/University of Michigan preliminary index.

"This whole `change' message is working because whatever is happening out there now is not working," Clifton says.

Many voters are being pinched by the subprime-mortgage market's collapse. As many as 2 million families will face foreclosure in the next three years, says the Center for Responsible Lending, a Durham, North Carolina, group that fights abusive-lending practices.

Gas Up 71 Cents

Gasoline prices, which have jumped 71 cents a gallon in a year, may break through $4 this summer, according to the Department of Energy.

Life savings also are stressed. The Standard and Poor's 500 Index has fallen 9.5 percent this year. Overall, home prices may drop as much as 20 percent this year from their 2006 peak, Standard & Poor's says.

The downturn is unlikely to end before the election, says Nouriel Roubini, chairman of RGE Monitor, an economics- consulting firm in New York. By fall, employers likely will be shedding more than 100,000 jobs a month, he says. Employers unexpectedly cut jobs in February for a second consecutive month. Payrolls fell by 63,000, the most in five years, according to the Labor Department.

McCain's economic program largely consists of embracing President George W. Bush's tax cuts, proposing a reduction in the corporate rate and eliminating congressional earmarks.

Iraq Trip

The Arizona senator last week underlined his main concern - - foreign policy -- with a trip to Iraq and other Middle Eastern nations. While he was traveling, the Federal Reserve was trying to save Bear Stearns Cos. from collapse and intervening in the markets.

His top economic adviser, Douglas Holtz-Eakin, argues that the party in power isn't as likely to be punished for a recession as some believe.

"I don't accept that as casually as some people might," he says. "In the end, this election is about the capacity for leadership."

McCain's pledge to not raise taxes and to make Bush's reductions permanent "is the most important thing in the near- term," says Holtz-Eakin, former director of the Congressional Budget Office.

No Broad Plans

Obama and Clinton have offered proposals on taxes and the mortgage market. Neither has offered a broad plan to pull the economy out of a recession or position it for future growth. Obama, 46, an Illinois senator, has pushed a $1,000 tax cut for lower-income people. Clinton, 60, a New York senator, has called for a moratorium on home foreclosures.

Clinton last week proposed a $30 billion program to help homeowners and communities hit by rising foreclosures. She and Obama also support a plan by Senator Christopher Dodd of Connecticut to have the Federal Housing Administration insure more loans.

The Bloomberg poll showed voters believe Clinton would do a better job than McCain on the economy. They preferred McCain over Obama on the issue.

Obama spokesman Bill Burton argues that the Iraq war, Bush's tax cuts and a "lack of oversight" of financial markets have hurt the economy

"This recession is the very culmination of what happened in the last seven years," Burton says. McCain "will have a very hard time getting away from the results."

`Fiscal Irresponsibility'

Clinton also blamed Bush for the economic downturn, accusing him of "fiscal irresponsibility," as she put it on March 17 in Philadelphia. On oil prices, she said, "there is no sense of urgency or presidential leadership."

Even if the economy continues to grow moderately, Yale University's Fair says his forecasting model shows a Democratic victory. A recession, he says, would make matters worse for the Republicans.

The model uses inflation, economic growth and other data, including how long the incumbent party has held office and the unemployment rate. It has a margin of error of about 2.5 percentage points because Fair says it cannot account for all variables. This year's race, for example, may be affected by racism or sexism.

Fair's model would have correctly predicted the winner of the two-party vote in all but three elections since 1916, according to a 2002 paper published on his Web site. Before the three most recent elections, he correctly forecast who would get more votes without always getting the margin right.

Not Too Close

In August 1996, he said the data suggested a narrow victory for Bill Clinton in a race that was too close to call "with any confidence." Clinton won 49.2 percent of the popular vote; Republican Robert Dole got 40.7 percent.

In July 2000, Fair forecast a "very close" election with a "slight edge for the Democrats." Al Gore won the popular vote, but Bush got more electoral votes and became president. In July 2004, Fair forecast Bush would win 57.5 percent of the two- party vote; he got 51.2 percent.

Should the economy continue to falter, the political damage may spread to congressional races, especially in hard-hit states like Ohio and Michigan, says Stuart Rothenberg, editor of the Rothenberg Political Report in Washington.

"The president's party usually gets a disproportionate amount of the blame," says Rothenberg.

To contact the reporter on this story: Alison Fitzgerald at Afitzgerald2@bloomberg.net

Last Updated: March 23, 2008 20:01 EDT

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