Election 2000: It's still the economy

Yale University economist Ray Fair expects a lot of phone calls from journalists in the next several months. That's because he maintains an economic formula that predicts the results of presidential elections. And it has a reasonable record of success.

Right now that model says it is a close call between the Democratic and Republican candidates.

Last November, his equation gave the Republicans "an edge."

But the economy actually grew somewhat faster than Professor Fair had projected for the fourth quarter of 1999. That makes the race a little tighter.

To Fair, it doesn't matter for his prediction which candidates Republicans and Democrats nominate. He assumes that "whoever goes through the primaries is a reasonable vote getter."

What counts in presidential elections is the economy. Voters look only at the economic record of the party in power. Most voters' memories are short. They don't consider the performance of the opposition party when last in power.

Further, Fair's model assumes that the economy in the few years up to the election is the most important predictor. Among the factors considered is the growth rate of real per capita gross domestic product (the nation's output of goods and services after inflation) in the first three quarters of the election year.

This means that what Alan Greenspan and his colleagues at the Federal Reserve do tomorrow at their policymaking session in Washington and a similar gathering March 21 is crucial to Gore's chances of succeeding Clinton.

The Fed is widely expected to raise short-term interest rates 0.25 percent tomorrow and do the same in March. It already raised interest rates 0.75 percent last year.

The goal is to slow the economy from its recent brisk growth to a pace that will keep wage increases moderate and maintain a low inflation rate.

But this is a tricky business. Economists - including those at the Fed - can't predict precisely the impact on the economy of specific interest-rate moves.

Should the economy slow sharply, Mr. Greenspan in effect will have put a Republican in the White House.

A full-fledged stock-market bust, if it sharply restrained consumer purchases, would also hurt the Democrats.

"But a strong economy between now and the election will make for a narrow Democratic victory," says Fair.

In election years, the Fed tries not to appear to be taking political sides. So it doesn't usually change monetary policy sharply in those years.

The combination of an inactive Fed and a jump in pork-barrel spending by members of Congress seeking to please their constituents, usually has been great for the economy, notes Brian Trumbore, editor of a new Web site, stocksandnews.com.

With a husky economy, the stock market, as measured by the Standard & Poor's 500 index, has not had a down presidential-election year since 1940.

But Mr. Trumbore, who used to work with William Gross, a famed bond mutual-fund manager, isn't so sure for 2000. He's become a market bear.

The Fed, he says, must be "hoping and praying" that a 0.5 percent interest-rate hike will be enough to slow the economy a little. "But I don't think that will do it," he says. So he suspects there will be further rate increases after March - and close to election time.

Some Wall Street observers have been wondering if the Fed has lost its clout. The economy keeps running along nicely despite its interest-rate moves. Moreover, they worry that the stock market is overpriced and that Fed warnings have no impact, especially since the Fed helped prevent stock-market meltdowns in 1987 and in the Asian-Russian crisis in 1998.

No problem, maintains Bruce Steinberg, chief economist at brokerage firm Merrill Lynch. "The Fed has as much power to influence the economy now as at any time in the past." At some level of interest rates, the economy would come to "a screeching halt."

But that isn't the Fed's intention. And Mr. Steinberg forecasts a 3.5 percent real growth rate by the second or third quarter of this year.

Fair's Web site lets you crank in your own statistics to make a prediction (fairmodel.econ.yale.edu). Using Steinberg's numbers, the site indicates that the Democrats would get 51.6 percent of the vote. But there's a 2 percent error margin. So it's still anybody's game.

(c) Copyright 2000. The Christian Science Publishing Society