Thursday, November 06, 2008

Economics and elections

Eighty-nine percent of people view the economy negatively, and 85 percent think the country is on the wrong track. NYT

Given the assumed complexities of economics its easy to understand why my much repeated economic election prediction method is generally greeted by a shrug of the shoulders. Not one to give in easily I’ve continued to refine this prediction process, for myself as much as anyone.

Obviously few people can speak authoritatively about economics, I sure can’t. But it turns out that we aren’t talking about hard data here, at least the average voter isn’t, but about emotion responses to the effects of prevailing economic conditions. That is not as flaky as it sounds, with the main measure being consumer sentiment.

Consumer sentiment is a well excepted economic tool, though one obviously less recognised by the political establishment. It is the word sentiment here that finally dawned on me – like market professionals household consumers work on an emotional level more than hard numbers. But apparently consumer sentiment figures are far from flaky.

I used something similar, certainly less than formal, to predict the 2006 swing to Democrats in the US. But the method assumed an uneven sentiment across the country. My focus was on the rust belt states while the Bush Republicans were selling a ‘booming market’ as though the market was the sum total of the economy.

The Republican focus on the markets was so blinding even their local Reps through the rust belt states were taken by surprise less than two weeks out from the election. When the heavyweights deigned to make a visit to these depressed areas it was far too late to modify their campaign.

That raises the second modifier to this election prediction model – economic dynamics are not uniform across a country, state or even city. There will always be areas doing well while others could be enduring trends as diverse as inflation , deflation, stagflation or even recession.

Of course this presidential/congressional election did not require any really in depth analysis. Once action was required to ensure there was no run on banks across the country the seal was set. Could there be any greater indication of consumer sentiment than the fragility of the whole banking system?


lindsaylobe said...

The problem with some economists is they often assume the world will react in the same rational manner as predicated in their classical economic models. I think it’s much more of an art form; the art of making predictions based on economic modeling suitably modified for human nature. Hence consumer sentiment as you say is of critical importance. So economics is always going to be subjective but nevertheless its disciplines are all helpful tools and lots of it boils down to uncommon common sense.

Markets never behave rationally but rather trade on short term sentiment and hence it is only historically over longer periods that valid fundamentals become evident, but when it is too late to do anything about it... Even then they don’t necessarily represent what happened in a particular regional sector.

In a nutshell I think politically sound policy is thwarted by a lack of critical information due to very poor regulation.

Within the vast sea of transactions that confronts us today I would point out one clear undeniable fact ……….just about all of the transactions can be traced back to a source which simply involves a contract between a seller and a buyer.

Keeping sensible track of those aggregations in a transparent and sensibly regulated manner will eliminate much of the fear factor and provide a consistent basis to make intelligent decisions.

It sounds easy and it is, but it requires a massive investment in systems and integrity which so far has been denied.

Best wishes

Cart said...

“…just about all of the transactions can be traced back to a source which simply involves a contract between a seller and a buyer.”
I guess the issue then is to read that across a range of different communities. Politically John Howard chose one dynamic, in Western Sydney, but I wonder if his mistake was skewing the whole by choosing one facet?
Of course that is the political rather than overall economic management, but fits the picture my mind is building. My admiration for Rudd is growing because there is no real evidence of a sectional approach to the issues.
In fact there isn’t much real evidence of anything from Rudd except, except for a largely relaxed populous, even despite the pressure on household budgets. I even like Rudd’s approach to regulation – “Become a bank, subject to bank rules and we’ll look at protecting you.” (paraphrased of course)

D.K. Raed said...

while I don't think it was by any means a sure-thing, even given the economic collapse, I will accept the victory! now perhaps we can look forward to experiencing some of the same nice little surprises you experienced with Rudd.

Cart said...

DK, I'll never convince you :) Still, I'm sure you will continue to enjoy the outcome.