Yesterday, the White House issued its budget report for the 2011 fiscal year. Overall, this is pretty dry reading, as one can imagine, even for those of us who are politically obsessed. But there is one section that I always examine with a close eye - that's the economic assumptions underlying the report. And looking at the White House's assumptions leaves me a bit worried.
The White House's assumptions can be found on page 13 of the report. They contain many positive projections. For example, the White House projects fairly strong economic growth each year between now and 2020, with inflation-adjusted annual growth of 2.7% this year, rising to 4.3% in 2012. The report also foresees low inflation with annual inflation not exceeding 2.1%.
The key disturbing projection is the unemployment rate. The White House forecasts that, by the end of this year, unemployment will have dropped only marginally to 9.8%. The unemployment rate is predicted to drop about 1% a year in 2011 and 2012, with the rate falling to 7.9% by the end of 2012.
A couple of thoughts occur looking at this. If the unemployment rate is at 9.8% by the end of this year, we're going to get creamed this November. The healthcare debate has already put us in a negative position with the voters but nothing trumps a weak economy for causing voters to give the boot to the incumbent party. I'll leave it to the political experts here to figure out what sort of losses we might face, but I'm sure the results won't be pretty.
Looking ahead to 2012, I wonder what our chances would be if unemployment is at 8% on Election Day. The only presidents reelected with high unemployment I can remember are FDR and Reagan. The rest of the incumbents serving during times of high unemployment suffered defeat - e.g., Hoover, Ford, Carter, Bush I. FDR's reelection in 1936 is easily explainable by the fact that, as bad as unemployment was in 1936, it was still much lower than it had been in Nov. 1932. Reagan's victory in 1984 is perhaps a better example to study. Reagan was reelected by a landslide despite the fact that the unemployment rate was 7.2% on Election Day. But we need to keep in mind that the unemployment rate was even higher when Carter ran for reelection (7.5%). Also, the inflation rate and interest rates (especially mortgage rates) were much higher in 1980 than 1984 - a factor that, no doubt, also played a part in Reagan's win. By way of comparison, the unemployment rate was 6.9% when President Obama was elected (and 7.7% when he took office).
Another comparison we might examine is President Clinton's reelection in 1996. When Clinton beat Bush, the unemployment rate was 7.4%. By November 2006, the rate had fallen to 5.4%.
The last comparison I'd like to discuss is Bush's reelection in 2004. In November 2000, the unemployment rate was an amazingly low 3.9% (a reminder to those who still fail to appreciate President Clinton's economic stewardship). Four years later, the unemployment rate was at 5.4% and we all know how that election turned out. It's certainly not my intention to offer Bush as a source of inspiration on anything but -- well, the facts speak for themselves.
A few big caveats are in order. The White House's forecasts are just that - forecasts. They're not gospel from up high and they could very well turn out to be wrong. If economic growth turns out to be significantly stronger than projected (and the final quarter growth figure for 2009 offers us some hope that the White House's projections may, in fact, be overly conservative), then the unemployment rate will be significantly lower in Nov. 2008. Secondly, let's keep in mind the examples of 1984 and 2004 - presidents are sometimes reelected despite high unemployment (Reagan) or rising unemployment (Bush). Other non-economic events can also impact the results (Bush's immediate handling of 9/11 and the apparent relative cost-free success - leaving aside the very different reality - of the Iraq invasion most likely delivered some votes to Bush that might, otherwise, have gone to Kerry). Lastly, and perhaps most critically, if there's one overriding theme that covers all of these results it's that presidents who are presiding over an extended economic recovery at the time of their reelection tend to be reelected. Despite the negative unemployment forecast, the President's budget report does predict the recovery continuing through and past 2012.
I offer this diary not to discourage us but, rather, simply to discuss the economic horizon envisioned by the White House and the implications of that horizon.