2012 is Not about Unemployment. It's about Oil.

With U3, the primary measure of US unemployment, languishing around nine percent, many in Big Media now say that the jobless rate will be a key determinant of next year's election outcome.  But that's just a Democrat red herring.  There is virtually no historical correlation between the level of unemployment and the margin of victory (or loss) for the incumbent political party.  Even the unemployment trend matters little until the election year. 

Furthermore, as a mere symptom of economic disease, unemployment can be masked with economic quackery.  For instance, an incumbent might entice foreign governments to boost global oil supplies temporarily.  And if only the final year's trend affects an incumbent's reelection prospects, a cynical president might drive up unemployment for three years just to make it easier to reduce during the final few months of his first term in office.

Which final months matter?  The Bureau of Labor Statistics has published monthly unemployment (U3) data since 1948, so statistical analyses can be performed for presidential elections since then.  In order to verify that only the final few months matter and not the entire term, the analysis must begin with the 1952 campaign.  That's 15 presidential elections -- probably not enough observations for a robust forecasting model, but enough to influence campaign strategies.  The results are displayed on the following chart.

 

 

As shown, the September data were used as each president's final U3 value.  The October figures are published in early November, not always in time for the election.  Indeed, an analysis using the October values (not on the chart) indicated poorer correlation.  Perhaps the October results simply arrive too late to affect votes of the undecided.

According to the analysis, voters give the incumbent political party absolutely no credit for reducing unemployment over the four years prior to the election.  On the chart, the reliability of that predictor is shown as the longest bar along the bottom.  A second-order polynomial curve-fit produces an R-squared correlation near zero. 

The chart also shows that the two-year trend has some ability to predict electoral success or failure, but only about half as much as the trends during the final few months before the election.  Three of those R-squared values are displayed, and the best one (0.62) is the U3 trend between March and September of the election year.

The second chart shows the scatterplot and the polynomial curve-fit for the March-September U3 trend.  For instance, the 2008 value is: 5.1 - 6.2 = -1.1.  In other words, from March to September 2008, the U3 level got worse by 1.1 points.  And according to the model (the curved line), the incumbent Republicans should have lost the presidency by nearly ten points.  In fact, they lost by only 7.2 points, perhaps indicating that the Democrat challenger was weaker than his average predecessor.

 

If unemployment merely is the symptom of economic disease, what's the historical relationship between GDP and unemployment?  Kennedy administration economist Arthur Okun defined it as about minus 2.5 to one, with a one-quarter lag.  According to Okun's Law, a 2.5 percent annual drop in GDP causes unemployment to rise by one percentage point, offset by a quarter. 

Conversely, a 2.5 percent rise in GDP would reduce the current U3 rate close to the magical eight percent that pundits say Mr. Obama needs to get reelected.  However, according to the chart above, the pundits are wrong -- or are misleading voters deliberately.  Since 1952, the incumbent political party retained power in seven of eight presidential elections simply by improving U3 by as little as three-tenths of a point from March to September of the election year.

Therefore, if historical results are a guide, the president needs to grow GDP by just 0.75 percent.  That's only about 110 billion dollars in GDP growth.  And to accommodate the one-quarter lag, that growth must happen during the period from December 2011 to June of next year, not now. 

But Mr. Obama is an economic Typhoid Mary.  While he thrives on an 18-acre estate, shoots hoops, plays golf, flies on private jets, and vacations in exotic locales, seemingly every business sector he touches gets sick.

Furthermore, he stubbornly refuses to take the obvious path to prosperity: slashing spending.  There is good evidence that every dollar cut from government spending yields two dollars in private sector growth.  Why?  Partly because government workers get about twice the compensation of private sector workers.  In other words, for the same investment, the private sector typically produces twice the output.  (Milton Friedman's son, David, called it "Friedman's Law.")  As demonstrated by Spain's ill-fated "green energy" boondoggle, every "green" job created by government cost the private sector at least 2.2 jobs. 

Even a monetary policy of negative real interest rates hasn't offset the destruction of Mr. Obama's fiscal policies, so the Democrats can't get much more help from the Fed.  The Bush tax rate cuts already are extended, and it would be political suicide for the Democrats to cut more, so that too is a non-starter.

However, as mentioned earlier, there is a quick fix for the economy: oil production.  And since crude oil is a global commodity, the increased supply could come from outside the US and still boost the domestic economy.  So if Mr. Obama can convince foreign producers to pump more oil even while the EPA blocks domestic expansion, the economy will improve without causing Mr. Obama's eco-fascist campaign contributors to throw a temper tantrum. 

As with GDP and U3, there also is a historical relationship between oil price and GDP.  According to the US Energy Information Administration, a ten-dollar change in crude oil price causes GDP to rise or fall by about 0.2 percent within a year and about 0.5 percent during the subsequent year.  Therefore, Mr. Obama needs to have oil prices start falling now by about $30-40 in order to get the GDP up 0.75 percent by next June.  That should be enough growth to get U3 down 0.3 percentage points by September 2012.

OPEC is meeting Wednesday (today) to discuss that very topic, so its decision might influence Mr. Obama's political fate.  Last week, Saudi Prince Alaweed said he wants oil prices to fall by about $30 per barrel. 

Reputable analysts blame the 2007/8 oil price shock on Saudi Arabia's refusal to increase production enough to satisfy rising global oil demand (PDF page 10).  Given that the Bush administration was bringing democracy to Saudi Arabia's neighbors, perhaps the royal family decided it might be safer to bet on the Democrats instead.  In 2007, Democrats promised to cut and run from the War on Terror.

By tightening oil supplies, the Saudis could drive up global oil prices.  That, in turn, would drive down US GDP and employment and cause Republicans to lose the presidency.  There's no indication that the royal family had such objectives, but Mr. Obama seemed to think they did, based on the bow he gave the king after the election. 

But now, four years later, does the Saudi royal family want to help Mr. Obama get reelected?  If the potential spread of Bush's Iraqi democracy threatened the kings and princes, would an Obama-assisted spread of militant Islamic theocracies be any less threatening?  And the royal family probably was secretly counting on Israel to take out Iran's nuclear weapons program.  Now Mr. Obama appears to be rooting instead for Iran, Saudi's rival.

Given those factors, the news from Wednesday's OPEC meeting should be quite fascinating.

An hour ago, OPEC announced that it could not agree on raising its output, with Iran leading the opposition:

 

http://finance.yahoo.com/news/OPEC-unexpectedly-decides-to-apf-97548906.html?x=0&sec=topStories&pos=1&asset=&ccode=

 

Is Iran using this as a bargaining chip with Mr. Obama to keep him from taking action against Iran's nuclear program or its human rights violations?  If so, will Mr. Obama pacify Iran simply to boost his chances of getting reelected?  Mr. Obama agrees to let Iran have nuclear weapons in return for raising oil production, which in turn boosts the president's poll numbers.

Update (10:58 AM EDT):

An hour ago, OPEC announced that it could not agree on raising its output, with Iran leading the opposition.

Is Iran using this as a bargaining chip with Mr. Obama to keep him from taking action against Iran's nuclear program or its human rights violations?  If so, will Mr. Obama pacify Iran simply to boost his chances of getting reelected?  Mr. Obama agrees to let Iran have nuclear weapons in return for raising oil production, which in turn boosts the president's poll numbers. 

With U3, the primary measure of US unemployment, languishing around nine percent, many in Big Media now say that the jobless rate will be a key determinant of next year's election outcome.  But that's just a Democrat red herring.  There is virtually no historical correlation between the level of unemployment and the margin of victory (or loss) for the incumbent political party.  Even the unemployment trend matters little until the election year. 

Furthermore, as a mere symptom of economic disease, unemployment can be masked with economic quackery.  For instance, an incumbent might entice foreign governments to boost global oil supplies temporarily.  And if only the final year's trend affects an incumbent's reelection prospects, a cynical president might drive up unemployment for three years just to make it easier to reduce during the final few months of his first term in office.

Which final months matter?  The Bureau of Labor Statistics has published monthly unemployment (U3) data since 1948, so statistical analyses can be performed for presidential elections since then.  In order to verify that only the final few months matter and not the entire term, the analysis must begin with the 1952 campaign.  That's 15 presidential elections -- probably not enough observations for a robust forecasting model, but enough to influence campaign strategies.  The results are displayed on the following chart.

 

 

As shown, the September data were used as each president's final U3 value.  The October figures are published in early November, not always in time for the election.  Indeed, an analysis using the October values (not on the chart) indicated poorer correlation.  Perhaps the October results simply arrive too late to affect votes of the undecided.

According to the analysis, voters give the incumbent political party absolutely no credit for reducing unemployment over the four years prior to the election.  On the chart, the reliability of that predictor is shown as the longest bar along the bottom.  A second-order polynomial curve-fit produces an R-squared correlation near zero. 

The chart also shows that the two-year trend has some ability to predict electoral success or failure, but only about half as much as the trends during the final few months before the election.  Three of those R-squared values are displayed, and the best one (0.62) is the U3 trend between March and September of the election year.

The second chart shows the scatterplot and the polynomial curve-fit for the March-September U3 trend.  For instance, the 2008 value is: 5.1 - 6.2 = -1.1.  In other words, from March to September 2008, the U3 level got worse by 1.1 points.  And according to the model (the curved line), the incumbent Republicans should have lost the presidency by nearly ten points.  In fact, they lost by only 7.2 points, perhaps indicating that the Democrat challenger was weaker than his average predecessor.

 

If unemployment merely is the symptom of economic disease, what's the historical relationship between GDP and unemployment?  Kennedy administration economist Arthur Okun defined it as about minus 2.5 to one, with a one-quarter lag.  According to Okun's Law, a 2.5 percent annual drop in GDP causes unemployment to rise by one percentage point, offset by a quarter. 

Conversely, a 2.5 percent rise in GDP would reduce the current U3 rate close to the magical eight percent that pundits say Mr. Obama needs to get reelected.  However, according to the chart above, the pundits are wrong -- or are misleading voters deliberately.  Since 1952, the incumbent political party retained power in seven of eight presidential elections simply by improving U3 by as little as three-tenths of a point from March to September of the election year.

Therefore, if historical results are a guide, the president needs to grow GDP by just 0.75 percent.  That's only about 110 billion dollars in GDP growth.  And to accommodate the one-quarter lag, that growth must happen during the period from December 2011 to June of next year, not now. 

But Mr. Obama is an economic Typhoid Mary.  While he thrives on an 18-acre estate, shoots hoops, plays golf, flies on private jets, and vacations in exotic locales, seemingly every business sector he touches gets sick.

Furthermore, he stubbornly refuses to take the obvious path to prosperity: slashing spending.  There is good evidence that every dollar cut from government spending yields two dollars in private sector growth.  Why?  Partly because government workers get about twice the compensation of private sector workers.  In other words, for the same investment, the private sector typically produces twice the output.  (Milton Friedman's son, David, called it "Friedman's Law.")  As demonstrated by Spain's ill-fated "green energy" boondoggle, every "green" job created by government cost the private sector at least 2.2 jobs. 

Even a monetary policy of negative real interest rates hasn't offset the destruction of Mr. Obama's fiscal policies, so the Democrats can't get much more help from the Fed.  The Bush tax rate cuts already are extended, and it would be political suicide for the Democrats to cut more, so that too is a non-starter.

However, as mentioned earlier, there is a quick fix for the economy: oil production.  And since crude oil is a global commodity, the increased supply could come from outside the US and still boost the domestic economy.  So if Mr. Obama can convince foreign producers to pump more oil even while the EPA blocks domestic expansion, the economy will improve without causing Mr. Obama's eco-fascist campaign contributors to throw a temper tantrum. 

As with GDP and U3, there also is a historical relationship between oil price and GDP.  According to the US Energy Information Administration, a ten-dollar change in crude oil price causes GDP to rise or fall by about 0.2 percent within a year and about 0.5 percent during the subsequent year.  Therefore, Mr. Obama needs to have oil prices start falling now by about $30-40 in order to get the GDP up 0.75 percent by next June.  That should be enough growth to get U3 down 0.3 percentage points by September 2012.

OPEC is meeting Wednesday (today) to discuss that very topic, so its decision might influence Mr. Obama's political fate.  Last week, Saudi Prince Alaweed said he wants oil prices to fall by about $30 per barrel. 

Reputable analysts blame the 2007/8 oil price shock on Saudi Arabia's refusal to increase production enough to satisfy rising global oil demand (PDF page 10).  Given that the Bush administration was bringing democracy to Saudi Arabia's neighbors, perhaps the royal family decided it might be safer to bet on the Democrats instead.  In 2007, Democrats promised to cut and run from the War on Terror.

By tightening oil supplies, the Saudis could drive up global oil prices.  That, in turn, would drive down US GDP and employment and cause Republicans to lose the presidency.  There's no indication that the royal family had such objectives, but Mr. Obama seemed to think they did, based on the bow he gave the king after the election. 

But now, four years later, does the Saudi royal family want to help Mr. Obama get reelected?  If the potential spread of Bush's Iraqi democracy threatened the kings and princes, would an Obama-assisted spread of militant Islamic theocracies be any less threatening?  And the royal family probably was secretly counting on Israel to take out Iran's nuclear weapons program.  Now Mr. Obama appears to be rooting instead for Iran, Saudi's rival.

Given those factors, the news from Wednesday's OPEC meeting should be quite fascinating.

An hour ago, OPEC announced that it could not agree on raising its output, with Iran leading the opposition:

 

http://finance.yahoo.com/news/OPEC-unexpectedly-decides-to-apf-97548906.html?x=0&sec=topStories&pos=1&asset=&ccode=

 

Is Iran using this as a bargaining chip with Mr. Obama to keep him from taking action against Iran's nuclear program or its human rights violations?  If so, will Mr. Obama pacify Iran simply to boost his chances of getting reelected?  Mr. Obama agrees to let Iran have nuclear weapons in return for raising oil production, which in turn boosts the president's poll numbers.

Update (10:58 AM EDT):

An hour ago, OPEC announced that it could not agree on raising its output, with Iran leading the opposition.

Is Iran using this as a bargaining chip with Mr. Obama to keep him from taking action against Iran's nuclear program or its human rights violations?  If so, will Mr. Obama pacify Iran simply to boost his chances of getting reelected?  Mr. Obama agrees to let Iran have nuclear weapons in return for raising oil production, which in turn boosts the president's poll numbers. 

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