Thursday, April 19, 2012

Will the 2012 Election Lead to a Recession in 2013?

There are a lot of fears that the political uncertainty in 2012 is going to produce an economic recession next year, according to economic forecasters. More than 20 million Yahoo search hits exist for the term "recession 2013." Millions of them are connected to "politics" or "election."

Of course there are all kinds of articles that are sure we're headed for an economic recession if Barack Obama is re-elected. An almost equal number are convinced that a Mitt Romney victory would produce such an outcome. Regardless, there are a lot of people concerned about the economic future, according to a Bloomberg News poll.

Romney's camp hails support from money managers and investment strategists, according to Morgan Korn with The Daily Ticker. Obama's team can point to the rise of the stock market since the president was inaugurated, as well as historical evidence showing the market benefits more from Democratic presidents in the past.

Perhaps it's all about the uncertainty over the outcome, rather than who would actually win. In Korn's article, BlackRock Chief Equity Strategist Bob Doll said, "Markets and business folk…hate the uncertainty of all these temporary measures." And while an ABC News/Washington Post poll has Obama up by seven points, a Fox News poll has Romney ahead.

Do elections produce economic recessions in the following year in America? I looked at 38 elections since 1856. In 22 of them, an economic recession followed within a year of the election (excluding cases of ongoing recessions). Data comes from the National Bureau of Economic Research.

How about close elections? Of those 38 cases, 20 had a close election and a recession the next year, or had a blowout with no economic recession. In the other 18 cases, blowouts were followed by economic recessions, or close elections produced no economic problems. The finding was not statistically significant.

But maybe it isn't about close elections. Maybe economic recessions follow elections because politicians aren't willing to make the tough choices before facing the voters. "The probability is near zero that politicians will do anything meaningful before the election," Doll says. If politicians don't want that economic downturn next year, maybe a compromise can be reached on spending and taxes this year. Voters might even reward them for it.

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