Obama, the Election and the Economy

Obama is currently the presidential frontrunner. Note that, on Intrade, the market odds of an economic recession in 2008 are rising in tandem with the odds that Obama will be elected President. Correlation does not prove causation but this correlation is worrisome.

UPDATE: It may not be clear what I mean, since even if Obama were elected he would not take office until 2009, and Intrade’s recession prediction refers to 2008. The point is that the prospect of a President with Obama’s stated values would raise expectations of tax increases and of other economically destructive measures, and such expectations would lead to reduced investment and hiring.

UPDATE 2 (Jan. 9): A rejoinder by Barry Ritholtz is here.

(This blog is an Intrade affiliate.)

Related: Obama-McCain: Political Inertia Coupling?

23 thoughts on “Obama, the Election and the Economy”

  1. why not clear the air and simply note that any Democrat if elected would fail by your standards but that what we have had for the past number of years has given us War, huge deficit, job losses, largergovt thanwe have ever had, terrible health coverage and on and on–yes: tax breaks for some…

    Meantime, socialistic (your term, doubtless) England now outdoes us for a standard of living.

  2. “…would fail by your standards…”

    He is not reporting an opinion or a preference, but a money-down prediction that the likelihood of a Democrat winning the election is correlated with the likelihood of a recession.

    I don’t think there is any rational basis to doubt that a Democrat being elected president will make the USA a less attractive place to do business, and that the economy will either slow or decline as a result. The Democrats base their entire appeal on taking more money out of private hands and having the Government engage in more activities.

    Criticisms of Bush are irrelevant. He leaves in early 2009 no matter what. The questions is what direction we take when he is done, and what the results will be. The markets are suggesting answers to those questions: We are going to elect a democrat, and the economy is going to suffer as a result.

  3. Joseph Hill,

    Lex said it well, but I would add that I make no secret of my electoral preferences and so what. Odds are a Democrat will be elected President and that the Congress will remain under Democratic control. I am merely pointing out that one measure of the likelihood of recession suggests that recession odds have increased as electoral frontrunner status has shifted from a Democrat who seems more likely to be pragmatic about economic measures to one who seems more likely to be leftist and doctrinaire.

    I didn’t look at the survey you mentioned, so I can’t comment about it except to say that I am skeptical based on its purported findings. But even if it were true that the UK had a higher living standard than the USA, why would would you attribute that outcome to more socialism in the UK?

  4. Sir–
    there are thoxe who say we have entered a recession. Perhaps what you are doing is saying: we will declare a recession the day after the Democrats take the White House. Till then, all is rosy. Perhaps for you but for many others, this is not the case.

  5. A second correlation could exist. Recessions hurt the incumbent and to the extent that the Republicans represent the incumbent President, the expectation of a recession could raise expectations of a Democratic victory.

  6. So its the Chicago School thesis now that recessions are not cause by a decrease in consumer spending, hiring, industrial manufacturing, or credit availability — but rather, the result of a single caucus, and/or a prediction forecasts almost a year in advcance — markets that are notoriously unreliable that far ahead of time?

    This post is a lot more revealing of your own biases than it about the markets or economy . . .

  7. Joseph Hill,

    … any Democrat if elected would fail by your standards…

    Unfortunately, that is true. The Democrats no longer seem to have any confidence in the American experiment and seek to transform us into a pale imitation of Europe. They are systematically hostile to business, commerce and innovation. They are increasingly technophobic seeing nothing but threat in any new technology. They see no value in saving and investment and promote policies to undermine those behaviors at every turn. Given these systematic tendencies, how can the outcome be good? If a person is dedicated to the ideals of individualism, entrepreneurialism, thrift, investment, personal responsibility, etc how can one view a Democrat victory as a positive sign?

    It’s ideas that matter, not the party that implements them. After the disaster of the 70’s when Leftist ideas dominated exclusively, even among Republicans, the economic ideas that have created our present prosperity have come from the right. Even during the Clinton administration, Rightwing ideas triumphed.

    Meantime, socialistic (your term, doubtless) England now outdoes us for a standard of living.

    Depends on how you measure it. For example, if you just count access to “medical care” without accounting for the quality of that care, then England wins on measures of health care. If you take into account quality, then America wins. If you don’t care about class mobility, then England wins, if you do then America wins. If you value being able to easily start a business and expect to make it big, England loses big time.

    England has a higher standard of living measured by Leftist standards which values class stasis, group equality and material well being over class mobility, individual opportunity and freedom. I don’t think anyone disagrees that if you want to be a well cared for passive sheep, then England or any other European welfare state is the place to be. If you want to be free and take some risk to make the world a better place, you want to be in America.

  8. Mr. Ritholtz, you introduced the phrase “… single factor …”. Also, both Jonathan and I said correlated with, not caused by, a distinction we both made on purpose since causation is disputable, and is certainly not monocausal in any case.

    So, before you archly suggest anything about anybody’s biases, quote them accurately.

    Markets may be “notoriously unreliable”, but other prediction methods are worse. Finger to the breeze? A “panel of experts”? Todays prices reflect the response of people who are willing to put money at risk regarding what will happen. This has some value for prediction, and certainly for spotting trends.

    A recession is caused by all the stuff you mention. Nonetheless, the biggest single factor is probably government policy since the government is the 800 gorilla in the room. The tax code is probably the single most important factor in the economy, unfortunately.

  9. Jonathan:
    Correlation is not causation, but you seem to try to imply it anyway.
    Further, the recession (if it happens) will occur in 2008 not 2009, so there is no possible way to concoct a correlation between a recession and a possible Obama presidency.
    This is not analysis. It is little more than hysterical balderdash. It is inconsistent with the principles of social science.

  10. Balderdash is saying that an anticipated political event cannot cause an economic event to occur first. One example: Anticipating that the Smoot Hawley Tariff would pass was part of the cause of the stock market crash of 1929, even though the tariff would not take effect until later. Similarly, the economy could begin to take a downturn in 2008 in anticipation of Democratic control of congress and the presidency starting in 2009. Business have planning horizons that go out more than a year. JVBII has not made his case at all.

  11. The American experiment? the largest govt we have ever had? Balanced budget? the worst deficit we have ever had. Housing in the cesspool; jobs pay insufficient amount for many workers, if they have a job not yet outsourced; goods that poison made in China and sold to Americans. A war without end and for what purpose–to help spread our experiment?

    Bush regime a disaster, and recall, please, it is the view now of the American public and not just a cranky commenter.

    What did the American experiment promise? or suggest? the right to privacy? oh, right: the right to own automatic weapons, perhaps like those we gave to the Afghanistans, the ones now being used against our troops, while the poppy for opium grows at a rate not heretofore seen previous to our going into that country.
    Please tell me how 7 years of the Bush regime has furthered the American experiment. This is not the experiement that Madison or Jefferson had in mind.

  12. “socialistic (your term, doubtless) England now outdoes us for a standard of living”: don’t be silly, of course we don’t. If you believe that, you’d believe in Global Warming.

  13. Read beyond the headline. The article compares nominal per capita incomes in the UK and USA. This is not the same as a comparison of standards of living.

  14. ok…we are doing just fine. See though how the election show the feeling of American public as to how things have been done under the present administration.

  15. Someone here has never heard of purchasing power parity. It is best not to post if one doesn’t know whereof one speaks.

  16. The Bushies taught this old Republican that it is a GOP lie that government “can’t afford” any program. If you are stupid enough to print the money (or let Merrill Lynch and cohorts “print” it) anything is possible, at least for eight years… Now we will reap what you boyz sowed.

  17. “…Now we will reap what you boyz sowed.”

    Now we are the Bush administration!

    I’d rather be the U of C Econ Department, if we had to be something other than a blog.

    Or even better, a random group of names from the Cambridge, Mass. telephone directory.

  18. Could be. There are lots of other reasons for the economy to be looking weaker recently. Maybe the apparent correlation that I see isn’t real. Maybe I am confusing cause and effect. Or maybe there really is something there — a political consensus shift to Obama (or to Obama/McCain from Clinton/Giuliani) that was the straw that tipped the economic consensus toward recession. It’s worrisome, not definitive. And how can we test my conjecture other than by observing how closely (or not) Obama’s fortunes correlate with economic sentiment?

    I look forward to your post.

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