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A Rising Tide Lifts...Al Gore

Economic Trends

A Rising Tide Lifts...Al Gore

The Veep's edge is the economy

With the decks now cleared for a Bush-Gore race for the Presidency and opinion polls showing the two aspiring candidates running neck and neck, political pundits are busy assessing the issues that could determine November's election results. As the gurus see it, these run the gamut from the candidates' personalities and bread-and-butter items such as tax cuts and protecting Social Security to broad concerns like education and health-care reform and social issues such as abortion, gay rights, and gun control.

To economists who dabble in polimetrics--the arcane science of calculating how economic factors influence voting behavior--election results rarely turn on such questions, however. In their view, it is less the candidates' public images and positions that determine whether a party retains its hold on the White House than economic conditions in the period before the election. And what those conditions currently indicate, says Brian Nottage of Regional Financial Associates, an economic consultancy, is that "Al Gore is the probable winner by a wide margin."

Just how wide? According to RFA's econometric voting model, the Democratic candidate should rack up more than 53% of the popular vote in 24 states with a total of 301 electoral votes, and is likely to take five more states with 55 electoral votes by smaller margins (chart). Since only 270 electoral votes are required to win the Presidency, he would still be elected even if the GOP won all the states where the model projects a close vote.

Of course, econometric models have erred in the past--notably in 1992, when several predicted a Republican victory. But Nottage points out that they relied on nationwide variables to project the national vote at a time when several key regions were still mired in recession. By contrast, RFA uses local variables, such as growth in state per-capita product, as well as recent stock market and inflation trends to project the election results state by state. Applied to the past five elections, its model predicts the winner in every Presidential race and correctly calls an average 88% of the electoral votes.

To be sure, this year's election forecast is based on the state of the economy by the third quarter (which RFA projects as less buoyant than recent quarters). Because the model's economic variables reflect changes averaged over two years, however, it would take a dramatic worsening of economic conditions to make much of a difference.

The big exception, of course, is the stock market, which is a lot more volatile than the other factors. A huge market correction could shift the econometric odds in favor of the Republicans. But history hardly favors such an outcome: Since 1940, the Standard & Poor's 500-stock index has never produced a negative total return (appreciation plus dividends) in the fourth year of a Presidential term.By Gene KoretzReturn to top

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Will the Euro Fuel Trade?

A study suggests a huge boost

There's little question that trade is enhanced when several nations join a currency union or one nation adopts the other's currency. After all, the transaction costs of converting one currency into another are eliminated, and exchange-rate volatility no longer muddies the trade waters. The problem is that there's little agreement on the size of the positive effect.

While Europhiles who have championed the European Monetary Union think that the potential effect is large, most economists believe that intra-European trade may rise only slightly because of the Euro. Skeptics note that currency volatility doesn't seem to influence trade much over time, particularly now that it's comparatively cheap to hedge exchange-rate risks.

A new National Bureau of Economic Research study by Andrew K. Rose of the University of California at Berkeley suggests that the Euro skeptics will turn out to be wrong.

Using data on trade between some 186 countries, dependencies, colonies, and territories in five separate years from 1970 to 1990, Rose creates a so-called "gravity model" that allows him to estimate the effects of a number of variables on trade flows between two countries. Besides a common currency and exchange-rate volatility, these include such factors as distance, economic size, per-capita output, and political and linguistic ties.

Other things being equal, Rose finds not only that reduced exchange-rate volatility significantly increases trade between two nations, but that sharing a common currency has a far more potent effect. Nations with the same currency, he reports, trade three times as much with each other as they would with different currencies. By that measure, the vaunted trade benefits of the EMU may prove even greater than its advocates expect.By Gene KoretzReturn to top

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