曼昆第10版讲义mankiw10e-irm-ch01

CHAPTER1

TheScienceofMacroeconomics

NotestotheInstructor

ChapterSummary

Chapter1presentsabriefintroductiontomacroeconomics.Thechapterexplainsthetypeofquestionsmacroeconomistsaddress,introducestheconceptofaneconomicmodel,anddiscussestherolesofpriceflexibilityandpricestickinessinmacroeconomicmodels.

Comments

Theamountofintroductionrequirednaturallydependsuponthestudents’previousexposuretomacroeconomicsinprinciplesorinothercourses.Itrytostresstherelevanceofmacroeconomics;agoodwaytodothisistobringincopiesofthatday’snewspapersandshowhowtheycontainstoriesrelatedtothecourse.Ialsostresstheimportanceofbasicmacroeconomicliteracyandemphasizethatmacroeconomicsteachesawayofthinkingaboutandunderstandingtheeconomyratherthanasetoffacts.Ihighlighthowmodelshelpusfocusonessentialsandavoidunnecessarydistractionsthatcanleadusastray.Onewaytodothisistoshowhowcommonsensecansometimesgiveincorrectanswers;anexamplefromthetextbookisthatprotectionistpoliciesdon’timprovethetradebalance.

ThesupplyanddemandmodelpresentedinChapter1providesavehicletoexplaintheroleofmicroeconomicsinmacroeconomicsandtoshowhowmacroeconomicsusesmanytoolsandideasfrommicroeconomics.Thelecturenotesemphasizethisandalsoexplainhowmacroeconomicsdiffersfrommicroeconomicsinitslevelofaggregationandinthatithasmoreofageneral-equilibriumfocus.Thetextbookworks,asdoeconomists,byusingdifferentmodelstoanswerdifferentquestions,butIreassurestudentsthatwealsoemphasizehowdifferentmodelsfittogether.

Thecompanionwebsiteforstudentsandinstructorshasbeenupdatedforusewiththe10theditionofMacroeconomics

(/mankiw).

Thesiteoffersasuperbsetofsoftware-basedfeaturesandaPowerPoint®tutorialforstudents.Inaddition,thePowerPointslidesforinstructorshavebeenupdatedandincludeanimatedgraphicsandotherinnovativepedagogicalfeatures.

Studentswillfindthewebsitebothhelpfulandfuntouse.ThewebsiteincludesSelf-TestsandFlashcardsthatprovideimmediatefeedbacktostudents,aDataPlotterthatstudentscanusetographandcomparemacroeconomicdata,afeaturetitledAGameforMacroeconomiststhatallowsstudentstomakepolicychoicesaspresidentoftheUnitedStates,andaMacroModelscomponentthatprovidesstudentswiththehands-onopportunitytomanipulatethemodelsofthetextbook.Thesesoftwarefeaturescanbeusedsimplyasasourceofadditionalexercisesforstudentstodoontheirown,ortheycanbeincorporateddirectlyintoclassroomdiscussions.Forexample,tointegratethesoftwareintoaclass,studentsmightbegivenanassignmenttodevelopapolicymemoforthepresidentthatrequirestheuseofboththeMacroModelsfeatureandtheDataPlotter.Theinstructormightthenrunamockcabinetmeetingandhavestudentspresenttheirfindingsandpolicyrecommendations.Thesoftwarealsocanbeusedtodesignadvancedessayquestionsforstudents.SomepossibilitiesandsuggestionsforusingthesoftwareareprovidedintheNotestoInstructorssectionofsubsequentchapters.

ThestudentresourcetitledStudentPowerPointTutorialsprovidesstudentswithananimatedsetofslidesthatwillhelpreinforcethematerialfromthetextandlectures.Thistutorialusessuperbgraphicsandadoseofhumortoenlivenmacroeconomics.Agoodwayofincorporatingthisfeatureistosuggestthatstudentsviewtheslidesafterreadingeachchaptertohelpdeepentheirunderstanding.

Forenhancingyourclassroomlectures,IstronglyrecommendtheuseofthePowerPointslidesforinstructorsthatareavailableonthewebsite.Thisresourceincludesexplanationsofthetext’smodelsandcasestudies,alongwithnotestoinstructors.Thepresentationsareorganizedbychapter,andyoucaneasilyaugmentthembyinsertingyourownslides.

UseoftheEWebsite

TheEwebsiteprovidesarichsourceofdataforsupplementinglecturesanddesigningclassprojects.AgooduseofthisresourceforChapter1istocreategraphsofrealGDPgrowth,CPIinflation,andtheunemploymentrateoverthepastfewyearstoprovideanup-to-datepictureoftheeconomy’smaineconomicindicators.Locatethedataonthewebsite’sdatapageandchoosetheappropriatesettingstocreateagraph.

ChapterSupplements

Thischapterincludesthefollowingsupplements:

1-1 TheRecentBehavioroftheU.S.Economy:AGuidetotheCaseStudies

1-2 PresidentialElectionsandtheEconomy

1-3 WhenIstheEconomyinaRecession?

1-4 EconomicRhetoric

1-5 AdditionalReadings

LectureNotes

1-1 WhatMacroeconomistsStudy

Economicsisthestudyofhowpeople,businesses,andgovernmentsbehaveandinteractintheproductionandallocationofgoodsandservices.Traditionally,economicsisdividedintomicroeconomics,whichstudiesthebehaviorofindividualsandorganizations(consumers,firms,andthelike)atadisaggregatedlevel,andmacroeconomics,whichstudiestheoveralloraggregatebehavioroftheeconomy.Sincethisbookstudiesmacroeconomics,weseektoexplainphenomenasuchasinflation,unemployment,andeconomicgrowth,andwearenotconcernedwith,say,thedemandfororsupplyofpeanuts.

Inmacroeconomics,wedotwothings.First,weseektounderstandtheeconomicfunctioningoftheworldwelivein;andsecond,welookatwhetherwecandoanythingtoimprovetheperformanceoftheeconomy.Thatis,weareconcernedwithbothexplanationandpolicyprescriptions.

Explanationinvolvesanattempttounderstandthebehaviorofeconomicvariables,bothatamomentintimeandastimepasses.Modernmacroeconomicsrecognizesthatitisimportanttofocusonmorethanjustshortperiodsoftime,andsoithasanexplicitlydynamicfocus.Wethustrytoexplainthebehaviorofeconomicvariablesovertime.Thismeansthatwewishtoexplainthebehavioroftheeconomybothinthelongrunandintheshortrun.

Supplement1-1,“TheRecentBehavioroftheU.S.Economy”

Figure1-1

Figure1-2

Figure1-3

Supplement1-2,“PresidentialElectionsandtheEconomy”

Supplement1-3,“WhenIstheEconomyinaRecession?”

CaseStudy:TheHistoricalPerformanceoftheU.S.Economy

Perhapsthethreemostimportantindicatorsofthemacroeconomicperformanceofaneconomyarerealgrossdomesticproduct(GDP),theinflationrate,andtheunemploymentrate.RealGDPisameasureofthequantityofgoodsandservicesproducedintheeconomyinagivenyear.ThehistoricalrecordshowsthatrealGDPhasrisensubstantiallyovertime,althoughthisgrowthisirregular,andthereareperiodswhenoutputactuallyfalls.Theinflationrateisameasureofhowpricesarechanging,onaverage.TheinflationratehasusuallybeenpositivebutlowintheUnitedStates,indicatingthatpriceshavetendedtogouponaverage,butnotataparticularlyrapidpace.TherehavebeenperiodsinU.S.historywhenpriceshavetendedtofall.Theunemploymentratemeasuresthepercentageofthosewhoareseekingworkbutdonothavejobs.ThereisalwayssomeunemploymentintheU.S.economy,althoughthelevelfluctuatessubstantially.Theunemploymentratehasgenerallybeenlessthan10percentbutroseto25percentduringtheGreatDepression.

1-2 HowEconomistsThink

TheoryasModelBuilding

Akeyelementofeconomicanalysis—bothmicroeconomicandmacroeconomic—isthestudyofmarketsandprices.Inaneconomy,goodsaretradedandexchanged.Wethinkaboutthisastakingplaceinmarkets.Theeconomist’sideaofamarketisanabstractrepresentationofarealmarket,where,forexample,farmersmightbringtheirproduceforsale.Economistsanalyzemarketsbythinkingaboutsuppliersanddemandersofgoods.Asanexample,considerthemarketforpizza.Thinkingfirstaboutthesupplyofpizza,aneconomistmightpositthatthenumberofpizzasthatpizzeriaswillputupforsaledependsonthepriceofpizza:thehighertheprice,themorepizzasupplied.Aneconomistmightalsothinkthatthesupplyofpizzadependsonthecostofthematerials,suchastomatoesandcheese.Thehigherthecostofcheese,thefewerpizzaswillbesuppliedatanygivenpriceofpizza.Turningtothedemandforpizza,aneconomistmightthinkthatthenumberofpizzasthatconsumerswillwanttobuywilldependonthepriceofpizzaandonconsumers’aggregateincome.

Ifwesupposethatthepriceofpizzaadjustssothatdemandequalssupply,weaddanequilibriumconditiontoourrepresentationofthepizzamarket,wherebythesupplyofpizza(Qs)equalsthedemandforpizza(Qd):

Qs=Qd.

Intermsofagraph,thisisequivalenttolookingforthepointwherethesupplyanddemandcurvesmeet.Wereturntothisexampleshortly.

Figure1-5

Theeconomyisacomplicatedsystem.Everyday,millionsofpeoplemakeeconomicdecisions.Theybuytheirmorningcoffee,theybuylunch,theywithdrawmoneyfromtheircheckingaccounts,theygotomovies,theybuyclothes,andtheyselloldtextbooks.Alloftheseareeconomicdecisionswithimplicationsfortheeconomy.Inmacroeconomics,wearetryingtounderstandthewaythatthewholeeconomyworks.But,obviously,wecannotconsidereveryindividualtransactionineverymarketintheeconomy.Instead,wehavetosimplify;wehavetoabstractfromreality;wehavetofocusonwhatisimportantanddiscardwhatisunimportant.

Totrytounderstandtheeconomyandfocusonwhatisimportant,wedoacoupleofthings.First,weaggregate.Insteadofworryingaboutindividualgoods—pizza,bread,automobiles,peanuts,andthelike—wethinkaboutsomeaggregateofthemall.WecallthisgoodrealGDPanddenoteitbythesymbolY.GDPstandsforgrossdomesticproduct.Itisameasureofthetotalproductionintheeconomy;indeed,explainingthebehavioroftheeconomyislargelyamatterofexplainingthebehaviorofrealGDPovertime.WeconsiderthedefinitionofGDPmorecarefullylater.

Thesecondthingwedoistobuildmodels.Modelsareabstractionsfromrealitythatserveasframeworksofanalysis.Justasaerospaceengineersbuildmodelplanestoputinawindtunnelandjudgethatthesemodelsneednotbeequippedwith“fastenseatbelt”signsbutshouldbeequippedwithwings,soeconomistsconstructrepresentationsoftheeconomythatincludeimportantvariablesandexcludeunimportantvariables.Manydifferentsciences,suchasmeteorology,physics,andbiology,usemodels.Ineconomics,asinmanyothersciences,themodelswithwhichweworkareusuallymathematical.Wedevelopmathematicalexplanationsoftheeconomyandusealgebraandgraphstohelpunderstandhowtheeconomyworks.Theaimofmacroeconomicsandthistextbookisnotsomuchtoprovidefactsaboutmacroeconomicsastogiveaframeworkofanalysisforcoherentthinkingaboutmacroeconomicissues.

Thepreviousanalysisofthepizzamarketisanexampleofamodel.Thismodelrepresentsthedeterminationoftheequilibriumpriceandquantitytradedinasimplesetting.Inconstructingthatmodel,wejudgedthatthepriceofpizza,thepriceofcheese,andaggregateincomeareallimportantinunderstandingthedemandforandsupplyofpizza;weimplicitlydecidedthatallothervariableswerelessimportantandcouldbeleftout.Knowingwhattoincludeandwhatnottoincludeinamodelistheartoftheeconomist;itrequiresjudgmentandskill.

Figure1-6

Wecanusethemodelofthepizzamarkettoanswercertainquestions.Forexample,wemightwonderwhateffectanincreaseinconsumers’incomesmighthaveonthepriceofpizza.AnincreaseinincomewouldimplythatatanygivenP,consumerswoulddemandmorepizza.Thedemandcurvewouldshifttotheright.Thus,weseethatpriceandquantitybothrise.Similarly,anincreaseinthepriceofmaterialswouldcausethesupplycurvetoshiftin,raisingtheequilibriumpriceofpizzaandloweringthequantitytraded.

Figure1-4

Thisexperimentistypicalofthewayeconomistsuseamodel.Theychangeonevariable,takenasgiven,andlookattheeffectonothervariablesthatthemodelexplains.Variablestakenasgivenfromoutsidethemodelareknownasexogenousvariables;variablesexplainedwithinthemodelareknownasendogenousvariables.Atypicalexperimentwithaneconomicmodelthusinvolveschanginganexogenousvariableandlookingattheeffectonendogenousvariables.Thisisknownasacomparativestaticexperiment.

FYI:UsingFunctionstoExpressRelationshipsAmongVariables

Economistsusemathematics—particularlygraphsandalgebra—tohelpunderstandtheeconomy.Forexample,wehavethusfarsaidtwothings:

1. Thesupplyofpizzadependsonthepriceofpizzaandthepriceofmaterials.

2. Thedemandforpizzadependsonthepriceofpizzaandaggregateincome.

Amathematicianusessymbolstoexpressconceptssuchasthesemorecompactly:

1. Qs=S(P,Pm);

2. Qd=D(P,Y).

HereS()andD()arefunctions:theyindicaterelationshipsamongvariables.Qs,Qd,P,Pm,andYarevariables,denotingthequantityofpizzasupplied,thequantityofpizzademanded,thepriceofpizza,thepriceofmaterials,andaggregateincome,respectively.Anexampleofasupplyfunctionis

Qs=15P–2Pm.

Anotherexampleis

Qs=13(P/Pm).

Veryoftenineconomics,wedonotknowverymuchabouttheexactnatureoftherelationshipsamongvariables,andsowepreferthegeneralfunctionalnotationusedearlier.

Figure1-5

Wecanillustratetheserelationshipsonadiagram.Thisdiagramshowsthatthesupplyofpizzaincreaseswiththepriceofpizza,andthedemandforpizzadecreaseswiththepriceofpizza.Toremindusthatthequantityofpizzasuppliedalsodependsonthepriceofmaterials,Pmissometimesputinparentheseswhenwelabelthesupplycurve.Similarly,wesometimesputYinparentheseswhenwelabelthedemandcurvetoremindusthatdemandalsodependsonincome.

Supplement1-4,“EconomicRhetoric”

TheUseofMultipleModels

Macroeconomistsuseamultitudeofmodelsbecausedifferentmodelsareappropriatefordifferentquestions.Ifwewantedtounderstandtheeffectsofgovernmentdeficitsoninterestrates,forexample,wewouldnotwanttouseamodelthatincludedthepriceofcheese.Animportantaimofthetextbookistodemonstrateeconomists’methodsofanalysisanduseofmodels,andsothetextbookworksaseconomistsdo,byusingdifferentmodelstoanswerdifferentquestions.Partoftheskillofbeinganeconomistislearninghowtointegratethesedifferentmodelsintoacoherentviewoftheeconomy.

Prices:FlexibleVersusSticky

Wenotedearlierthatmacroeconomicsisconcernedwithbothexplanationandpolicyrecommendations.Notsurprisingly,muchofthedebateamongmacroeconomistshastodowiththeirdifferentviewsonpolicy.Essentially,thesedebatesoftencomedowntowhetherornottheeconomy,leftonitsown,doesagoodjobofallocatingresources,orwhethergovernmentinterventioncanimproveupontheperformanceoftheeconomy.Thisthemerecursthroughoutouranalysis.

Intryingtounderstandtheroleofpolicyinmacroeconomics,ourconclusionsdependcruciallyonwhatwebelieveaboutthebehaviorofprices.Inourexampleofthepizzamarket,wesupposedthatthepriceofpizzaadjustedtoequatesupplyanddemand—wesupposedthatthemarketcleared.Inthiscase,themarketdoesagoodjobofmatchingupsuppliersanddemanders,andallmutuallybeneficialtradesarecarriedout.Insomemarkets,pricesareindeedveryflexible,butinothermarkets,wehavemuchlessconfidencethatmarketclearingoccursatalltimes.Instead,wethinkthatsomepricesaresticky—slowtoadjust.Forexample,laborcontractsoftensetwagesforanumberofyearsinadvance,andmail-ordercatalogspostpricesthataresetforanumberofmonths.

Economiststhususuallythinkthat,formacroeconomics,itisreasonabletosupposethatpricesarecompletelyflexibleinthelongrunonly.Intheshortrun,weoftenmakeanassumptionofpricestickinesstohelpusexplainthebehavioroftheeconomy.

Oneotherdifferencebetweenmicroeconomicsandmacroeconomicsisworthmentioning.Inmicroeconomics,weusuallyfocusonasinglemarket.Inmacroeconomics,wepayattentiontohowoutcomesinonemarketaffectwhatgoesoninanothermarket.Forexample,weoftenthinkaboutboththemarketforgoods—realGDP—andthemarketforlabor.Firmshireworkerstoproducegoods.Themoregoodsfirmswanttoproduce,themoreworkerstheywillwanttohire.Soanincreaseinthedemandforgoodsmaytranslateintoanincreaseddemandforworkers.Similarly,thewagesthatworkersarepaidareusedtobuygoods,sooutcomesinthelabormarketcanaffectthedemandforgoods.Allofthesethingsaregoingonatonce,soweneedtobeabletothinkaboutalotofmarketsatonce.Macroeconomicsdevelopsawayofputtingmarketstogether.Ineconomists’terminology,muchofmacroeconomicshasageneral-equilibriumfocus,incontrasttomicroeconomics,whichtendstohaveapartial-equilibriumfocus.

MicroeconomicThinkingandMacroeconomicModels

Althoughmicroeconomicsandmacroeconomicsareseparateaspectsofeconomicinquiry,theymakeuseofmanyofthesametools.Indeed,thedistinctionbetweenmacroeconomicsandmicroeconomics,thoughsometimesuseful,isalsosomewhatartificial.Modernmacroeconomicsrecognizesthatgoodmacroeconomicanalysisisusuallybasedonsoundmicroeconomicsandthusemphasizesthemicrofoundationsofmacroeconomicbehavior.Attimesinthetextbook,theuseofmicroeconomictoolsisexplicit;atothertimes,itisimplicit.Forexample,weoftensupposethatindividuals’consumptiondependsontheirincome(asinthepizzaexample)withoutgoingintodetailsaboutthemicroeconomicsbehindthechoicestheymake.

FYI:TheEarlyLivesofMacroeconomists

TheNobelPrizeineconomicsisawardedannually.Anumberofwinnershavebeenmacroeconomistswhoseworkwediscussinthisbook.TheseincludeMiltonFriedman(1976),JamesTobin(1981),FrancoModigliani(1985),RobertSolow(1987),RobertLucas(1995),GeorgeAkerlof(2001),EdwardPrescott(2004),EdmundPhelps(2006),andChristopherSims(2011).

1-3 HowThisBookProceeds

Macroeconomistsfacedifficultiesasscientistsbecausetheycannotconductexperiments.(Theyhavethisincommonwithsomeotherscientists,suchaspaleontologistsorastronomers.)Butmacroeconomistsdoseektounderstandthebehavioroftheeconomy,whichmeansunderstandingthebehaviorofeconomicdata.Wemakeprogressinmacroeconomicsbylookingatthedata,observingcertainpatterns,buildingmodelsthatmayhelpexplainthosepatterns,andthenseeingifthosemodelsareconsistentwithotheraspectsofthedataornewdatawhentheycomein.Afirsttask,therefore,istoexaminethedataofmacroeconomics.Wethenproceedtodevelopmodelsthatexplainthebehavioroftheeconomyinthelongrun,whenpricesareflexiblesothatmarketsclear.Here,weinitiallystudytheclassicalmodelinwhichthecapitalstock,laborforce,andtechnologyaretakenasgiven.Wenextextendtheclassicalmodeltoincludegrowthinthecapitalstock,laborforce,andtechnologicalknowledgetoexplaineconomicgrowthintheverylongrun.Followingthis,weconsidermodelsoftheeconomyintheshortrun,whenpricesmaybesticky.Nextwediscusssomeadvancedtheoreticaltopics,includingmacroeconomicdynamics,modelsofconsumerbehavior,andmodelsofinvestmentbyfirms.Finally,thelastsectionofthebookconsiderspolicydebatesoverthestabilizationoftheeconomy,governmentdebt,andfinancialcrises.

CASESTUDYEXTENSION

1-1 TheRecentBehavioroftheU.S.Economy:AGuidetotheCaseStudies

ManyofthecasestudiesinthetextbookaddresstherecenthistoryoftheU.S.economy.Takentogether,thecasestudiesprovideapictureoftheU.S.economicexperienceduringthiscentury,particularlyoverthepastseveraldecades.Thefollowingisanoverview:

ForabasicpictureofU.S.economicperformance,theChapter1casestudy“TheHistoricalPerformanceoftheU.S.Economy”showsthebehaviorofrealGDP,inflation,andunemploymentsince1900.Thelong-runpictureshowsthatGDPgrowsthroughtime,althoughthisgrowthisofteninterruptedbyrecessions,mostrecentlyin2007to2009.TheChapter9casestudy“TheSlowdowninProductivityGrowth”notestheslowdowninthelong-rungrowthrateexperiencedbytheUnitedStatesandothercountriesthatbeganintheearly1970s.AnotherChapter9casestudyhighlightstheimportanceofdifferencesinmanagementpracticesasareasonwhycountrieshaveexperienceddifferencesinproductivityperformance.TheChapter14casestudy“InflationandUnemploymentintheUnitedStates”showsunemploymentandinflationoverthepastfourdecadesandillustratesthestagflation(highunemploymentandhighinflation)ofthe1970s;thiscontrastswiththerelativelystablegrowthofthe1950sand1960s.

TheChapter10casestudy“HowOPECHelpedCauseStagflationinthe1970sandEuphoriainthe1980s”explainshowtheexperienceofthe1970swasinlargemeasuretheresultofsupplyshocksassociatedwithincreasesinthepriceofoil.TheUnitedStatesthusenteredthe1980swithveryhighinflationratesbyhistoricalstandards.EliminatingthisinflationwasatoppriorityforFederalReserveChairPaulVolcker,whopursuedatightmonetarypolicy.Nominalinterestratesroseintheshortrunbutfellinthelongerrunastheinflationratefell,asdiscussedintheChapter11casestudy“DoesaMonetaryTighteningRaiseorLowerInterestRates?”Asaresultofthesepolicies,theU.S.economyalsoenteredwhatwasatthetimethemostseverecontractionsincethe1930s.

Althoughmonetarypolicywascontractionary,fiscalpolicyinthe1980swasexpansionary.Taxeswerecut,andspendingrose.Thefallingovernmentsaving(riseinthegovernmentdeficit)causedthedebttoreachalevelunprecedentedinpeacetime(seetheChapter17casestudy“TheTroublingLong-TermOutlookforFiscalPolicy”foralong-runperspectiveonthedebt).

Ultimately,thetightmonetarypoliciesdidsucceedindecreasinginflationandinflationexpectations,andtheeconomygraduallyreturnedtofullemployment.Thisrecoverywasaidedbyafallinoilpricesinthemid-1980s(theChapter10casestudycitedabove).Bytheendofthedecade,outputwasclosetothenaturalrate,andinflationwaslow.ThequestionofwhethermacroeconomicpolicyisresponsibleforreducedvolatilityofeconomicactivityinthedecadesfollowingWorldWarIIisconsideredintheChapter16casestudy“IstheStabilizationoftheEconomyaFigmentoftheData?”

Whilethe1990switnessedthelongestperiodofexpansionduringthepostwarera,thebusinesscyclehadnotbeenvanquishedastworecessionsoccurredduringthefirstdecadeofthe2000s.Theonsetofrecessionin2001isanalyzedintheChapter12casestudy“TheU.S.Recessionof2001.”Followingseveralyearsofexpansion,theeconomythenexperiencedadeepandprolongedrecessionbeginningattheendof2007,asdiscussedintheChapter12casestudy“TheFinancialCrisisandtheGreatRecessionof2008and2009.”Thesluggishrecoveryfromthatrecessionmayhavebeenexacerbatedbyuncertaintyconcerningthecourseofeconomicpolicy,atopicdiscussedintheChapter16casestudy“HowDoesPolicyUncertaintyAffecttheEconomy?”

ADDITIONALCASESTUDY

1-2 PresidentialElectionsandtheEconomy

Theinfluenceofeconomiceventsonpoliticsisapparentduringpresidentialelections.Economicpolicyprovidesaprimarytopicofdebateforthecandidates,andthestateoftheeconomyhasapowerfulinfluenceontheoutcomeoftheelection.Infact,accordingtoeconomistRayFair,onecanforecasttheoutcomeofapresidentialelectionwithremarkableaccuracybylookingathowwelltheeconomyisdoing.Historyshowsthattheincumbentpartyishelpedbygrowingincomesandishurtbyrisingprices.

Fairhasusedthehistoricalevidencetoproduceanequationthatforecaststhewinnerofthepopularvote(butnotthatoftheelectoralcollege!)usingthefollowinginformation:

whichpartyiscurrentlyinpower,

whetheranincumbentisrunningforreelection,

thenumberoftermstheincumbentpartyhasbeeninpower,

thegrowthinincomeperpersoninthefirstthreequartersoftheelectionyear,

therateatwhichpriceshavebeenrisinginthetwoyearspriortotheelection,and

thenumberofquartersduringthecurrentadministration(priortotheelection)inwhichthegrowthrateofrealincomeperpersonwasgreaterthan3.2percent.

Fair’sequationwouldhavecorrectlypredictedthewinnerofthepopularvotein21ofthe26presidentialelectionsfrom1916to2016.R.Fair,“PresidentialandCongressionalVote-ShareEquations,”AmericanJournalofPoliticalScience,January2009,55–72.The2014updatetoFair’sequations,availableat/,nowcorrectlypredictsvotesharesfortheWilson–Hugheselectionof1916.

TheelectionsitwouldhavemissedwereKennedy–Nixonin1960,Humphrey–Nixonin1968,Bush–Clintonin1992,Bush–Gorein2000,andClinton–Trumpin2016.PredictingtheBush–Clintonelectionwascomplicatedbythestrongshowingofathird-partycandidate,RossPerot.Fair’smodelassumesthatPerotdrewvotesawayequallyfromBushandClinton.Interestingly,theequationpredictedthatAlGorewouldlosethepopularvoteinthe2000election,wheninfacthewonamajoritybutlostintheelectoral-collegetally.Similarly,themodelpredictedClintonwouldfallshortinthepopularvotein2016,butsheactuallybestedheropponentby3millionvotes,whilelosingthepresidencyintheelectoralcollege.

Fair’sanalysisindicatesthatvotersapparentlyhaveashorttimehorizonwithregardtoeconomicevents.Thisprovidessupportfortheviewthatadministrationscanmanipulatetheeconomyinanattempttoimprovetheirreelectionchances.SeethediscussionofthepoliticalbusinesscycleinChapter16andalsoSupplements16-9,“DistrustofPolicymakers,”and16-10,“ThePoliticalBusinessCycle.”

Eventhoughthestateoftheeconomyisapparentlyveryimportantindeterminingpresidentialelectionoutcomes,thisneednotmeanthatvoterslookonlytotheirowneconomicwell-being.Researchbysocialpsychologistsandpoliticalscientistsonthemotivationsofindividualvoterssuggeststhattheyinfacttakeabroaderview.DonaldKinderand