New School Politics

It’s the Economy Stupid

Eftychis | 19 01 2008

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It is no secret that Mitt Romney won the Michigan and Nevada primaries because of his strong economic background. While it is true that Romney faced little competition in Nevada and that he was a “native son” in Michigan, his business and executive experience is what put him over the top in the two primary states where the number one issue is the economy.

From the Detroit News-
The optimistic economic message former Massachusetts Gov. Mitt Romney brought to his native state was a big reason he finished on top of Tuesday’s Republican primary here. A solid majority of both Republican and Democratic primary voters said their motivating issue was the economy, according to the National Election Pool exit poll.

According to CNN’s exit polling data from Nevada, Romney beat his rivals on the economy by overwhelming margins. For the Democrats in Michigan, the story was the same. The economy was the most important issue by nearly fifty percent with Iraq a distant second. While it may be too early to tell who is taking a lead in either primary elections, it is clear what issue is becoming-the economy.

About a week ago Goldman Sachs predict that the US economy will find itself in a recession in 2008; which means a decline in economic growth for more than two consecutive sessions (two quarters). Many market analysts believe that recession began prior to the new year with the series of poor fiscal news last December.

One of the least known but best indicators of economic health is the Baltic Dry Freight Index. The index measures the price of shipping dry bulk goods (iron ore, wheat, coal, soybeans, etc…) by sea in cargo ships. A decline in this index means there are less consumers for those goods; currently the biggest consumers of those products are China, India, and the United States. The declining rates indicate a slow down in the global economy, a slow down that the dry bulk market will see before the retail and consumer reports here in the United States. The bulk market also suffers from a problem that much of the economy does. It had built new vessels anticipating continued demand, but the demand from China and India has decreased which means that there is no need for the hundreds of new ships on order. This parallels what has been happening in many other markets, there is a massive surplus of new homes across the US and Europe and thus housing prices have slumped; the same has happened with the automotive market and in other consumer areas such as electronics. On the flip side, supply for natural resources has not caught up to demand so natural gas, oil, grain, corn, copper, and even milk prices have soured anywhere from 4-50% over the past year alone. Consumers are being faced with high mortgage rates, a dollar worth less, and greater expense at their grocery store and the gas station. The dollar will simply not get you as far in 2008 as it did in 2007.

So how does this effect the election? The two states where Mitt Romney and Hillary Clinton did best (Michigan and Nevada) are the two states with the highest foreclosure rates and highest unemployment rates of any in the country. The pain that the citizens in these two states are currently feeling will unfortunately be felt throughout the country by November of this year.

Jim Cramer made an interesting point the other day; since statisticians first began measuring personal per capita income the incumbent party or candidate ALWAYS looses the election when per capita income decreased. By November 2008 average per capita income will have decreased due to economic decline in the first several quarters of this year.

This would imply that the Democrats will win this election no matter what; but the question that arises is what happens when a business man is thrown into the equation. Indeed, Mitt Romney did win an election in the most liberal state in the country and was able to do so while the state faced a massive fiscal crisis. If economic news continues to become more dire over the next several months (and it almost certainly will) then Mitt Romney will have a big advantage over his rival John McCain. Indeed, even Rudy Giuliani could benefit from the change in voters’ number one issue. In Florida he is now focusing on his fiscal record as Mayor and how he turned around NYC’s languishing economy during the 1990s. Even Mike Huckabee’s populist message may begin to resonate more strongly as the economy takes a turn for the worse. The one who this does hurt is John McCain who has almost no economic credentials and even opposed the Bush tax cuts which are considered a staple of accepted conservative economic policy. In addition, McCain also finds himself on the wrong side of the issue that Republicans have claimed to be their second most important issue-illegal immigration.

In the Democratic primary this should also favor Hillary Clinton as she appears to have an upper hand over Senator Obama among voters who consider the economy to be the biggest issue. Many voters become nostalgic when they recall the great economy under Clinton.

I am always skeptical of those who heavily blame or give credit to Governors and Presidents for the quality of the economy that existed when they governed. Outside of having (some) control over the governments budget, there is little they can do to effect monetary policy (controlled by the Fed) and there is nothing they can do to tackle cyclical events in the economy. Despite their lack of control, the Commander and Chief can set tone and direction. FDR and then Reagan changed the direction of the nation’s fiscal vision most drastically during the 20th century. Romney and Clinton most certainly have the same vision for a strong future American economy but their means to try and achieve that end will be drastically different.

The pundits have not been able to use past data to predict this election because well quite frankly 2008 is different than any previous election. I still believe the Democrats will have a major advantage come this November, but even if that is the case I see little reason why a voter should choose a Senator to fix the economy over a business man and turnaround artist.