Forecasting Obama's chances in 2012

Over the weekend, the New York Times reported on Yale economist Ray Fair's forecast (PDF) that the economy will rebound and President Obama will win a substantial re-election victory:

[Fair's model forecasts real annualized growth in gross domestic product of 3.69 percent for the first three quarters of 2012. A survey of leading economists by Blue Chip Economic Indicators shows an average forecast of 3.2 percent growth in real G.D.P. in 2012, while the Congressional Budget Office estimates 3.4 percent. Plug either of these estimates into his election algorithm and the result is the same: President Obama wins.

In the quarter that just ended, however, the economy was growing at a rate of just 2 percent. If that sluggish pace continued — or, more ominously, if there were a double-dip recession or a steep plunge in the markets — that forecast would change.

Under those circumstances, regardless of other issues or the identity of President Obama’s opponent, the model shows the president losing.

I would be more cautious. First, I'm reluctant to place much stock in the details of Fair's model due to his history of making ad hoc changes to the model specification (see Larry Bartels and Douglas Hibbs for more [PDFs]).

In addition, I think Fair's estimate overstates the likelihood of an Obama victory given what we know today. The Philadelphia Fed survey of professional forecasters revised its forecast of 2012 growth downward last week from 3.6% to 2.9% (somewhat lower than the Blue Chip 3.2% figure or CBO's 3.4%). If we plug that value into Alan Abramowitz's simple linear fit of second-quarter GDP in election years and presidential election performance, we find Obama right around where President Bush was in 2004:

Many people forget, but Bush's re-election victory was one of the narrowest in recent history. Obama is truly on the knife's edge, especially once you consider the uncertainty around economic performance in 2011 and 2012. Here, for instance, is the estimated range of uncertainty in 2012 GDP growth among forecasters surveyed by the Philadelphia Fed:

What makes the 2012 campaign especially hard to predict is that Sarah Palin has a significant chance to be the GOP nominee (currently estimated at 20.9% on Intrade) despite having what seem to be unprecedented negatives for a serious presidential candidate at this point in the election cycle. Here, for instance, is an update of my previous chart comparing the trajectory of Palin's favorable/unfavorable ratings to Hillary Clinton at the equivalent stage in the 2008 election cycle:

Obama should lose if the economy is bad, but we don't have a good precedent for a presidential nominee who enters the primary campaign with an unfavorable rating of 52%. It's possible that Palin would significantly underperform the forecast, giving Obama a chance in circumstances where he might otherwise face near-certain defeat.

Update 11/23 10:09 PM: I edited a sentence above to clarify that Palin's negatives seem to be unprecedented for a serious presidential candidate at this stage in the election cycle. Also, Matt Yglesias notes that the Fed governors and reserve bank presidents are more optimistic about GDP growth in 2012 than the sources cited above ("Central tendency": 3.6%-4.5%, "Range": 2.6%-4.7%).

Update 11/24 8:40 AM: The Weekly Standard's Jay Cost raises concerns about the GDP/election results graph above:

False positives are also a possibility. They are why I am suspicious of graphs that show a tight relationship between a single economic factor and electoral outcomes, like this one which tracks election results against Q2 GDP. There are so many economic variables that we could compare to electoral outcomes, which points to a critically important, yet often forgotten, caveat about statistical analysis: if we run enough tests, at some point we will wind up with a false positive, thinking that we've hit upon a causal relationship when in fact we haven't. For instance, suppose your friend gives you a hundred coins and asks you to test to see which, if any, are rigged. You have about a 70 percent chance of getting heads 13 out of 16 times on at least one coin, even if all of the coins are fair. That would be a false positive, i.e. you conclude that the coin is rigged when in fact it isn't. By the same logic, if we run enough tests between economic variables and election outcomes -- sooner or later we are going to "find" something that isn't actually there.

All of this is why that old phrase "lies, damned lies, and statistics" is so often repeated. We always need to check statistical results against common sense, being sure to strongly favor the latter. For instance, I'd ask: how many people thought to themselves in November 1948, "Hmm...well I like the cut of Tom Dewey's jib, but boy-oh-boy GDP last May was really strong, so I'm going with Harry Truman!" Probably not that many! That's not to say that there is no relationship between presidential outcomes and Q2 GDP, in fact I think there is one. Instead, my point is that common sense suggests that the graph is perhaps overstating it, or at least inducing us to oversimplify what is in fact a very complicated relationship.

Cost then shows a plot of "final election outcomes against the Gallup question of 'who do you trust more to handle the economy,'" arguing that "the relationship is much less fuzzy."

Two points are worth noting. I disagree with Cost's suggestion that the relationship between pre-election economic growth and presidential election outcomes is overstated, oversimplified, or a potential false positive. While it's certainly true that the data set is extremely small and that the mechanics of the relationship between growth and the presidential vote are complicated, the correlation is extremely strong and holds across a range of different measures of growth. See in particular the weighted-average measure of real per-capita income growth in the Bread and Peace model of Douglas Hibbs, which produces a very tight fit to the data (the most significant deviations are well-explained by a measure of military casualties that Hibbs uses as a second predictive variable):

It's certainly true that you can often produce a tighter fit to the data by using subjective measures of economic satisfaction, approval of the president or his economic performance, etc. instead of raw economic data (see, for example, the Tom Holbrook plot reproduced in this post), but that doesn't mean the relationship with the economic fundamentals isn't real.

Update 11/28 3:32 PM: Alfred Cuzán at the University of West Florida emails to note that he has also issued a conditional forecast under different assumptions about the state of the economy using the "fiscal model" (PDF).

[Cross-posted to HuffPost Pollster]

Comments

[David in Cal]

IMHO Palin's nomination efforts will be aided by the machinations of the New York Times. In 2008, they supported McCain over other Republicans, both editorially and in their usual slanted news coverage. But, once he had the nomination sewn up, they slammed him most unfairly, including an article implying that he had an affair with a lobbyist -- an accusation that turned out to be unsourced.

After they invited Obama to write a column on what he believed, they refused to give McCain the same privilege. Their editors demanded to change McCain's statement of his beliefs. When he refused to let the Times define his platform, they refused to print his article.

IMHO the Times is playing the same game with Sarah Palin. Recently they had a Sunday Times Magazine profile that was fair and balanced. If and when she's nominated, I expect the Times to treat her even worse than they did McCain.

[Jinchi]

Obama is truly on the knife's edge

I have a really hard time looking at your first chart and believing any prediction you could make about Obama's chances, even if you knew with certainty what the GDP growth rate will be in 2012.

Sure you've picked a point that falls nearly on top of Bush in 2004. It's also virtually on top of Eisenhower in 1956 (who won with 57% of the vote) and Ford in 1976 (who lost with 48% of the vote) and is a worse economic performance than Bush in 1992 (who lost with 46% of the two-party vote).

I'm willing to believe that a better-economy = a better chance of the incumbent winning. But that's at least a 10-point spread, and about even odds of winning in a blowout or losing in one.

[Rob]

Jinchi's point is consistent with the R-squared, which appears to show that 38% of the variability in vote share is historically explained by second-quarter GDP growth rate. That still leaves 62% explained by other factors, which seems to this casual observer like a lot. Perhaps Obama will be successful in comparing the competence of his Administration with that of his predecessor.

[David in Cal]

Leonard J Savage's famous book, "The Foundations of Statistics," postulates that someone's personal or Bayesian probability can be deduced based on the odds at which that person would make a bet. According to this definition, someone who believes that Obama's re-election is even money would be happy to take either side of that bet as long as got odds in his favor.

It could be an interesting mental experiment to think about what odds would induce us to bet that Obama will be re-elected or to bet that he wouldn't be re-elected. Personally, I have no idea what odds I'd need to take either side of that bet. However, someone who has confidence in some model should be happy to make a bet if he gets odds substantially more favorable than that model says are fair.

[Rob]

Further to David's comment, on Intrade, futures on Democratic success in the 2012 presidential election are going for about 57. Those who feel more confident than that about Obama's chances can place their bets. (Those who feel less confident can place their bets on Republican victory, now selling at about 42. Or you can buy both contracts and essentially bet against a third-party victory, thus locking in a small but almost certain profit--though one that's eroded by transaction costs and the time value of money.)

[bnyhan]

Good point! Will tweet about this...

[David in Cal]

Brendan sees to implicitly assume that Obama will be the Dem candidate. OTOH the Intrade odds quoted by Rob concern a Dem victory. What are the odds that Obama isn't the 2012 Dem candidate?

Within my lifetime, two incumbants who could legally have run opted not to: Truman in 1952 and Johnson in 1968. Ten others did run, including unelected Truman 1944, Johnson 1964, and Ford 1976. So, a very crude model might give a 2/12 = 17% probability that Obama will not be the Dem candidate in 2012.

OTOH if we take a shorter experience period, every one of the last 7 incumbants who could legally have run opted to do so.

[JP]

I think that the Palin 20 on intrade should not be used to gauge her chances of winning the GOP race. People will invest in futures contracts on the assumption that good news will come out on their investment and raise the value. A perfect example of this would be Palin. These folks are betting that Palin will announce her candidacy. This will trigger a buying spree on intrade and drive the price up. Then these folks will sell at the inflated price.
There's a Palin bubble on intrade.

[Kylopod]

@David in Cal

As long as he remains physically viable, I would consider it highly unlikely that Obama won't run. First of all, if he's going to drop out, it'll have to be very soon from now. In today's world, unlike in the 1960s, presidential campaigns begin essentially two years before Election Day. If Obama were to pull an LBJ in the spring of 2012 and suddenly drop out right then, it would have at least as devastating an effect on the Democrats' prospects as the removal of Thomas Eagleton from the vp slot in 1972.

Also consider that Truman and LBJ, though legally allowed to run in '52 and '68, would have essentially been seeking a third term, in which they would have ended up serving longer than any other president in history other than FDR. So I think there was less of a sense of legitimacy or necessity in their runs than there will be for Obama in 2012.