It’s Families Stupid

In Nate Silver's recent post "What Do Economic Models Really Tell Us About Elections?" he argues that it's not much. All in all I agree with his conclusions, but for different reasons. He takes a look at GDP growth and the margin of victory/loss in a presidential election, and shows when you take away inflation, 43 percent of incumbents win reelection. He admits these numbers don't go into why, but that's where I come in.

The fact is GDP doesn't measure what voters really care about and can miss a lot of important aspects to a families quality of life. Pollster's never ask how many people know how much the economy grew in the last quarter. Instead they ask how they feel it is going, and since the majority of voters aren't economists, the only reference they can refer to is themselves. So they think about if they are able to pay the bills, put food on the table, and have healthcare for the members of their family. The reason why Nate's formulas are so off is because GDP, like most macro data, doesn't cover these things. Even basic data like average incomes still don't tell you the whole story. Take a look at the average income for individuals:

Whether incomes have gone up or down, it hasn't lead to a President, or his party, keeping the White House. This was the case in 1976, 1992, and 2000. While there wasn't much change between 2004 and 2008,  there was a drop in 2009 because of the Great Recession, and we all know who won that year.

While pollsters try and figure out what's on people's minds, economists need to try and start doing the same thing. A Washington think tank called the Economic Policy Institute came out with a report titled The Rising Instability of American Family Incomes, 1969-2004. The authors point out that "Part of the reason why family economic instability—sometimes called "income volatility"—has not been extensively examined is that aggregate economic statistics have been relatively stable and favorable. Neither the 1991 nor the 2001 recessions were particularly deep, and inflation and unemployment have remained historically low. Yet.. these broadly stable and favorable aggregate indicators mask many signs of declining economic security among American families."

The report came out in May of 2008, before the Great Recession, but some of the findings might surprise you. It turns out 15 percent of American's saw their salaries decrease between 1969 and 2004, causing serious strain within the family. Right at the turn of the century, levels of family income were extremely violent, where over half of American families saw their earnings drop.

Just because incomes were rising and unemployment was low, didn't mean all families were living the high life. Health care costs soared way over inflation, so even if there were two breadwinners per household, there was still a good chance they couldn't afford health insurance. Not to mention most people received coverage through their job. And future problems are becoming apparent. As the price of food has gone up, it will eventually start affecting a large amount of families.

The unemployment numbers that came out last week weren't good. And yes those and other macro indicators can show politicians where the state of the overall economy is right now. But if politicians want to actually do something about it, they need to look at the root causes of high unemployment, why food prices are rising, and figure out why the cost of health care has been rising. But they can't do this without getting the right information. If a politicians job is to get reelected, they will start demanding the information that will show them how to help their constituents, and economists will start figuring out ways to calculate it.