Rightly or wrongly, voters often hold the president responsible for the state of the national economy. Incumbent fortunes seem to turn with the economic tide. As a consequence, political campaigns often stress those aspects of the economy that appear favorable from the incumbent administration’s perspective or unfavorable from the challenger’s perspective.

Recent evidence suggests voters do respond to this approach. There are many factors that affect the economy. But as long as voters continue to vote in presidential elections as if they are presenting a mandate on the current economic situation, it should be expected that campaigns will continue to foster the view of presidential elections as referendums on the economy.

When campaigning against the incumbent Jimmy Carter, Ronald Reagan famously asked, “Are you better off today than you were four years ago?” At the time, inflation was rising, stagflation became the norm, and a recession seemed imminent. One simple way of determining the overall health of the economy is by examining what is referred to as the misery index, which is the simple summation of the inflation and unemployment rates.

The economic performance of each presidential administration can be gauged by the value of the misery index at the end of its term, in comparison to the value of the misery index at the start of the term. The comparisons in the table below for the last 10 elections date back to 1960 and cover six Republican and five Democratic administrations. The last two columns show how the misery index changed over the four-year period between elections and the subsequent popular vote share in the presidential election the incumbent president’s party received relative to the popular votes of the other major party.

At least back to 1960, every time the misery index fell, the incumbent party’s nominee received more total votes than the candidate for the other major party. The table also shows that if the misery index rises, then, with the exception of the 1972 and 2004 elections, the incumbent party was voted out of the White House. In the closely contested election of 1960 between Richard Nixon and John Kennedy, the misery index remained practically unchanged compared to 1956, and the popular vote for president was basically split between the two major party candidates.

The new benchmark misery index based on 2004 is 8.2. According to previous trends, the Republican candidate, John McCain, should be more likely to benefit from a misery index below this number. The Democratic nominee, Barak Obama, should be more likely to benefit from a higher misery index. The most recent data for September reveals the estimated unemployment rate to be 6.1 percent and the annual inflation rate near 4.9 percent. The current misery index of 11 is well above the 2004 benchmark value. Without a drastic reduction in one or both of these indicators before Election Day, the current economic climate appears to strongly favor a change in the party that will hold the White House.

Yet, as the 2000 election made clear, generating a plurality of popular votes does not guarantee electoral victory since the distribution of votes across states is important in the winner-take-all Electoral College system. Republican George Bush won the 2000 election by gaining a majority of Electoral College votes despite having fewer popular votes than the Democrat Al Gore. But such occurrences are rare, and have only occurred three times in our nation’s history.

The misery index is the simple summation of the unemployment and inflation rates. Reliance on such a measure to gauge voter support implicitly assumes all voters care about each of these economic indicators equally. There may be good reason to suppose that this is not the case.

The Republican base is generally considered to be wealthier white-collar employees, compared to the blue-collar workers who form the main constituency of the Democrats. Employment is more volatile for blue-collar workers. White-collar voters are more insulated in general during economic downturns, but are harmed more by inflation, which erodes the real value of their assets.

It would be expected that in order to satisfy their party’s core voters, Republicans, once in office, might focus more on reducing inflation, even at the cost of increased unemployment, while Democratic administrations would work in the opposite way.

The numbers presented in Table 2 bear this out. For each Democratic administration, unemployment rates were lower during the last year of a term than the unemployment rate at the start of the term, with an average reduction during the four years of almost 20 percent. Inflation rates, however, were generally higher in the fourth year than the inherited inflation rate, by 2.3 percentage points, which translate into a 90 percent increase. Inflation rate changes vary tremendously, though, with the full term of Lyndon Johnson in the latter part of the 1960s and the years of the Carter administration in the later 1970s providing most of the inflationary damage. Smaller inflationary increases occurred under each of Clinton’s two terms.

Under Republican administrations, unemployment rates fell only during Reagan’s second term, which followed a modest increase during his first term. On average, Republican administrations oversaw close to a 25 percent increase in unemployment during each four-year term. Conversely, inflation rates tended to fall during Republican administrations. But there were modest increases during Nixon’s second term (finished out by Ford) and during Reagan’s second term, which followed a large reduction in the rate of inflation during his first term. Even here, the best that can be said is that the rate of growth of prices slowed, but prices still increased overall. The Consumer Price Index itself has increased every single year since 1956.

In all likelihood, the misery index will remain higher than it was four years ago. Given recent trends, this suggests a strong likelihood that the incumbent Republican Party will lose the presidential election. Should this happen, past trends suggest that we can expect a reduction in unemployment over the next four years under a Democratic administration, but significantly higher inflation.

Jac C. Heckelman has been a frequent visiting research fellow at AIER. He is the Reinsch/Pierce Faculty Fellow and Professor of Economics at Wake Forest University.     

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