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Which Economy is it, Stupid? Part III: Depends on whether you are an investor, home owner, or renter

- May 2, 2012

Following up on my recent posts (here and here) regarding which parts of the economy are more likely to affect voting behavior, I wanted to alert readers to a new paper by University of Minnesota political scientists Wendy Rahn and Philip Chen. Here’s the abstract from the paper:

Nearly three years after the official end of the Great Recession, the American economy is starting to show, at long last, some “moderate” improvement as the nation heads into a presidential election campaign in which the economy is likely to be a central issue. Yet some parts of the macroeconomy are more improved than others. Housing prices, for example, after having fallen more than 30% (or more, in certain hard-hit areas) off their 2006 peak, have yet to bottom out and it may be years before any significant price appreciation returns. The labor market, while evincing recently some signs of strength (though perhaps induced by better-than-typical weather conditions), is still anemic, and the employment-to-population ratio, which is considered by many to be a better barometer of labor market conditions, is still at historic lows. The U.S. stock market, on the other hand, recent wobbles notwithstanding, has been buoyed by rebounding profits in the corporate sector and unconventional monetary policy. However, it is unclear whether the Fed will engage in any more rounds of quantitative easing, and U.S. financial markets remain vulnerable to the European debt crisis.

American households are buffeted by these macroeconomic forces to different degrees, and when conditions in these various spheres diverge, as in the aftermath of the Great Recession, groups that are differentially affected may respond politically in ways that generate new lines of cleavage that add complexity to our traditional economic voting models. Using monthly survey data from the Michigan Survey of Consumers over the period 1992 to 2011, we examine the impact of unemployment, inflation, house and stock prices, and real income growth on people’s retrospective assessments of family financial well-being. Our innovation is to compare the effects of these variables for different groups of households defined by their asset-holding status: investors (directly or indirectly) in the stock market, homeowners without risky financial assets, and renters. We indeed find that people respond to aggregate economic conditions in heterogeneous ways. In particular, investors’ well-being is directly tied to movements in stock prices and is unresponsive to short-term fluctuations in the labor market. Homeowners and renters, on the other hand, are strongly affected by shocks to unemployment, with homeowners additionally showing sensitivity to trends in house prices. Interestingly, and contrary to several economic forecasting models, real income growth does not significantly influence any of these groups, a null result that we attribute to the fact that over the time period we study, the benefits of economic growth have accrued mostly to a very small segment of public. We conclude that economic voting models in use by political scientists need to be move beyond their traditional focus on growth, inflation, and unemployment to consider newer sources of economic vulnerability and their effects on political behavior and electoral choice.

Now, I want to be clear that what Rahn and Chen are studying here is not the direct relationship between economic conditions and vote choice. Recall that the original post by Nate Silver which motivated my response was looking at the macro-level relationship between economic conditions and election outcomes. Underlying this relationship has to be some sort of micro-level model, the simplest of which would simply be that worse actual economic conditions make respondents think their personal economic situation is worse, which in turn makes that individual more likely to vote against the president (or some other incumbent candidate). This is generally known as “pocketbook” economic voting; other scholars have argued that economic voting is more “sociotropic”, in so far as voters are concerned about the overall state of the economy, and not their own personal economic situation (although of course these can be and often are correlated.)

To the extent that one believes pocketbook economic voting is important or prevalent, then Rahn and Chen’s findings have important implications for how we think about the link between economic conditions and election results. (Moreover, even if one thinks voters are more sociotropic, I’d guess that the factors they identify also affect sociotropic evaluations as well.) Namely, the search for a “silver bullet” economic indicator (like Silver’s embrace of job growth in this post) is doomed to fail not simply because we lack the necessary data to test these hypotheses thoroughly, but because different parts of the economy may matter to different parts of the electorate. Rahn and Chen’s work suggests that this intuitively plausible hypothesis has legs; future research extending this intuition into models that explain actual voting choices would be an exciting next step.

Rahn and Chen’s full paper is available here.