Estimating Elections’ Effect on the Economy

Will Uncertainty Clouds Carry into 2020?

Executive Summary

With the 2020 election right around the corner, we looked back at presidential election years in the post-World War II era to see how elections might impact the economy. Several studies in the past have analyzed the effect of macroeconomic performance on the outcome of the presidential election. The consensus is that the macroeconomic performance is a reliable predictor of the election outcome.1 There is less consensus, however, on how elections might impact the economy. Initial economic theories suggested that politicians may try to stimulate the economy to help their reelection campaigns. More recent experience has led many to suggest that elections may reduce economic activity, as individuals or businesses choose to delay large purchases or investments in the face of political uncertainty.

Looking over the past 70 years, election years do not appear to be statistically different from the year preceding or following them and, if anything, exhibit higher rates of growth and investment. This pattern holds true, even when we adjust our analysis to account for outliers and recessions. There are several facts that might explain these counter-intuitive results. With only 18 elections since World War II, it is difficult to separate the effect of election uncertainty from the multitude of other factors that can affect macroeconomic data. Moreover, economic policy uncertainty can affect the economy outside of election years, as this past year has shown. Economic policy uncertainty has also been steadily increasing over time, while most major economic variables have been moderating. These divergent trends could obfuscate a more nuanced relationship between these two variables. Overall, while academic literature suggests that policy uncertainty can have some negative economic impacts, it is difficult to discern this relationship in prior U.S. election cycles.

Economics of the Presidential Election: Does Data Mirror the Theory?

The deleterious effects of uncertainty on economic growth have been in the spotlight over the past year, as trade policy has clouded the economic outlook and pushed some businesses to hold back on capital expenditure and hiring plans. With 2020 looming, it is worth considering the potential impact of uncertainty stemming from this next election cycle. In general, a lack of clarity regarding government spending, taxation and regulation can make it difficult for businesses and individuals to be sure that they are making the optimal long-term decision. Election years can heighten this economic policy uncertainty. In competitive elections or those with particularly polarizing candidates, businesses may choose to delay large investments and individuals may delay large purchases until they can better anticipate policy. While this makes intuitive sense, its appearance in the data is less clear.

Our analysis looks at the relationship between election cycles and economic activity in the postWorld War II era. Although there are annual data going back to 1929, the economic record of the Great Depression and World War-II is very different from the post-war period. There were seven years of double digit growth or decline from 1929 to 1947 and there have been zero since 1948. Furthermore, all of the presidential elections in this period saw the same outcome, a comfortable victory for Franklin D. Roosevelt.

We used several methods to uncover any potential effect that election cycles may have on the economy over the past 18 presidential elections (i.e., 1948-2016). First, we calculated the percentage point change in the growth rate between the year before the election and the election year for gross domestic product (GDP), personal consumption expenditure (PCE), employment, private domestic investment and business fixed investment (BFI) as well as the difference in consumer confidence and the percentage point change in the unemployment rate. The middle group in Figure 1 show the results, which suggest that the economy seems to strengthen, not weaken, during election years. On average, businesses do not appear to curb hiring, nor do they seem to hold back on investment. Though even without seeing a slowdown in the run up to the election, it is possible that the resolution could improve conditions for economic growth.

Download the full report