Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

How might the presidential election result affect the US economy?

On Wednesday morning, many Americans are going to wake up to a presidential election result that they viewed as inconceivable. This could translate into widespread economic pessimism, putting further downward pressure on an already struggling economy.

Voters in the United States are increasingly divided, and believe that it is highly unlikely that their preferred candidate will lose. This means that the election outcome will undoubtedly be seen as illegitimate by a large share of the population.

Whatever the result, many voters for the losing campaign will fear what could happen to the economy under the winner. With widespread fear comes increased uncertainty – and with uncertainty comes yet more pressure on the US economy.

Expectations of the election outcome and its economic effects

A recent large-scale representative survey of US voters finds that 87% of Democrats expect Joe Biden to win, while 84% of Republicans expect Donald Trump to win.

Figure 1 illustrates the distribution of survey respondents’ beliefs that the president will win re-election broken down by party. The average probability that Republican voters think Trump has of winning is 76% (with more than one in five saying that he will win with 100% probability). Among Democrats, the average probability assigned to a Biden victory is 74% (with almost 15% saying that he will win with 100% probability).

Figure 1: Distributions of perceived chances of Trump winning the 2020 presidential election

DATA US 1

Source: https://voxeu.org/article/political-polarisation-and-expected-economic-outcomes

In terms of the economic effect of a particular candidate winning the election, Americans hold fundamentally different conditional expectations about the economy over the next year depending on the presidential winner. This is despite the fact that presidents seem to have little discernible effect on the economy, especially over short time horizons (Blinder and Watson, 2016).

Republican voters expect a positive economic scenario if Trump is re-elected but a very dire one if Biden wins. They predict unemployment being three percentage points higher under a Biden-led administration after just one year. Democrats believe the opposite, expecting calamity if Trump is re-elected but an economic boom if their candidate wins.

Whatever the result, when the election is ultimately decided, one group of voters will become much more pessimistic about the future economic outlook. Voters on the losing side may also be more likely to question the legitimacy of the election’s outcome (as they did not foresee it as remotely possible). The winning group’s expectations, in contrast, will be largely unaffected (since they already expected to win). This means that whatever the result, the average macroeconomic outlook could deteriorate after the vote.

This is, in part, because voters who pay close attention to the election are actually less likely to agree about electoral outcomes than those who are less closely interested (see Figure 2). It is the voters who are closely following the election that tend to hold the most extreme views about either Trump or Biden’s chances of winning. In contrast, people paying less attention to the economy are much more likely to think that the election is going to be a close race.

Figure 2: Distributions of perceived changes of Trump winning the 2020 presidential election

DATA US 2

Source: https://voxeu.org/article/political-polarisation-and-expected-economic-outcomes

When the election uncertainty is resolved and a winner is eventually declared, the prior probabilities on the two possible outcomes will shift to the actual outcome. At this point, individuals’ beliefs will adjust accordingly.

Members of the losing party, given their pessimism about the economy under the other candidate, will become even more pessimistic about the future economic outlook. But members of the winning party will not become much more optimistic (since they already expected their candidate to win). This means that average economic optimism in the United States will decline.

Previous research suggests that changes in people’s expectations affect their consumer decisions (Coibion et al, 2019; D’Acunto et al, 2020). This means that election-driven changes in individuals’ beliefs could translate into their spending decisions, putting further downward pressure on an economy already struggling under the burden of Covid-19.

Author: Charlie Meyrick
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