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Jan. 21, 2008 – Election year economics

January 17, 2008
Filed under Features

By Steve Bauer
Managing Editor
With the presidential primaries in full swing, we’re left to wonder if the campaign slogans and spirited debates splashed across our TV sets and local newspapers will bring more than just empty promises, but a real impact on the nation’s struggling economy. Some in the powersports industry have expressed a guarded optimism that fresh blood in the Oval Office could help turn around falling sales and profits.
But how much of an effect do elections really have on the economy, specifically when it relates to business growth during the election year? And is there past
evidence that a potential change in the
government’s fiscal policy can really cause investors to be more aggressive after an election takes place? The answers might surprise you.

A looming concern
A 2006 Gallup poll concluded that more than 72 percent of consumers believe the economy is immediately affected by an election or change of party control in the house. Surprisingly, the percentage for business owners polled who agreed with that belief was dramatically lower — only 30 percent. The large discrepancy begs the question of whether business views political change differently than consumers do.
“Absolutely it does,” said William Krentz, professor of economics for the Wharton School of Business at the University of Pennsylvania. “Studies going back to the 1920s show the business sector tends to have a thicker skin when it comes to political change, particularly presidential elections.”
Krentz says since the 1960s, economists have focused on what they’ve termed as “political business cycles.” These business cycles show the relationship between the electoral process and the subsequent performance of the economy. In the Nov. 3, 2006, issue of the Wall Street Journal, the newspaper published some of the most relevant findings to come out of these economic studies. They include:
Inflation — In the U.S., there is evidence of a post-electoral increase in inflation prior to 1979 but no evidence thereafter.
Monetary policy — There is evidence of a pre-electoral increase in money growth rates from 1960-1980 but none thereafter. Money growth, or the percentage change in money supply, is an important measure of monetary policy prior to 1980 when the Fed started to focus on the federal-funds rate as the main monetary policy tool. There is no evidence for the U.S. of an electoral cycle in the federal-funds rate.
Spending on federal programs – There is evidence of pre-electoral increases in government transfers (such as food stamps, Social Security and other cash payments) and other fiscal policy spending. This appears strongest before 1980 but has continued into recent elections.
Output — There is no significant pre-electoral increase in aggregate economic activity, meaning there is no evidence for pre-election manipulation of the economy. There is a clear partisan effect on economic activity, with real Gross Domestic Product being significantly higher under Democrats than Republicans in the first half of their terms.
Krentz adds that historically, presidential economic policies don’t show their effects on the economy until years into a particular term, and even less so when a president is dealing with an uncooperative House or Senate. He points to the end of the Reagan era and the beginning of the Clinton presidency as examples.
“Both presidents had complete opposite economic policies, yet both have been lauded for the economy’s success during their terms,” he said. “Were their policies that far ahead of the curve compared to other presidents? Of course not. The economy’s rise or fall depends on many things, and sometimes moves like tax cuts and government aid aren’t enacted until years after a president leaves office.”
Krentz says the business sector is more likely to react to a vast change of control in Congress more than anything else, as sweeping economic changes can come at a much faster clip when it’s brought forth by legislation. In fact, some of President Bush’s most influential policies affecting big and small businesses came when the Republican party had control over the House and Senate in the early years of his term.
“It’s not common to have such power as a president, and during the end of Bush’s first term, there was a tremendous amount of legislation passed that was favorable to small businesses in particular. We also saw quite a bit of speculating on the market by investors, putting a lot of money into sectors of business they felt would benefit immediately from these changes.”

Party politics
An issue further worth exploring is the effect political parties have on economic policy and business, and the relationship between the two is one that can’t be understated.
Gregory Renner, professor of political science and economics at the University of Minnesota, says that businesses pay close attention to congressional elections more so than presidential, because of the contrast in philosophies of the two parties when it comes to business.
“The biggest difference between the two parties is that Democrats seem to care more about unemployment,” Renner said. “What we’ve seen is that the business sector generally believes the election of Republicans seems to presage economic recession.”
Renner says that research conducted during the past 15 years of Congressional elections, however, point to an opposite trend.
“There was a time when we assumed that Democrats were the ‘tax-and-spend’ party, while the Republicans believed in balancing the budget,” he said. “Yet the deficit rose sharply under Reagan, again under Bush, declined under Clinton and is once again a real concern under the current administration. So those stereotypes need to be reassessed because they certainly haven’t come to fruition during the past four administrations.”
Renner adds that it’s not clear if the differences in economic outcomes for the two are due to expected policy changes — such as raising or lowering taxes — or the result of completely unrelated circumstances.

Any effect on powersports?
Krentz and Renner both agree any effect an upcoming election has on the powersports industry will closely follow the trends of the business sector, so any impact will be minimal.
“Anyone who thinks the market reacts to who’s in the White House doesn’t know economics or politics,” Krentz said. “Research has shown that there’s not much politicians can do to immediately affect the economy or certain industries such as powersports. Tax policies have a marginal impact. Bill Clinton raised taxes, and the market went up. George W. Bush cut taxes and the market went up.”
Renner states, however, that powersports and the outdoor industry as a whole can certainly feel an immediate, however minimal, effect post-election if an incoming president’s beliefs regarding the environment and issues such as logging sway heavily one way or the other.
“This was apparent in the months following Bush’s election in 2000,” Renner said. “People knew Bush was pro hunting and outdoors, and there was a slight trend of powersports and other recreational companies seeing stock prices increase because of investors putting funds in areas they knew would benefit from Bush’s election to office.”

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