Political Consequences of the Tax-Cut Comprimise

In many ways, It's obviously premature to talk about 2012 Presidential Election. We're a year away from even the primaries, with no Republican candidates having announced, and we don't know what the agenda will be for either President Obama or the new Republican congress.


Still, academic research suggests that none of this matters: election results closely correlate with economic performance. A good example of this school of thought is the "Bread and Peace" model by Economics professor Douglas Hibbs. His model looks at just two variables, Weighted Real disposable income growth over the term and military fatalities, but still manages to explain 88% of variation in post-war election outcomes.






 These models are not perfect, but provide a good tool to compare the electoral effects of competing policies. Macroadvisors, a widely regarded private-sector economic forecasting firm, has provided estimates of disposable personal income with and without the tax-deal:






While the Tax-Cut deal boosts overall income, it front-loads growth in 2011 and slows it considerably in 2012 due the the expiry of the pay-roll tax cuts and other Democratic provisions. Because voters make tend to place greater weight on growth right before the election, it's easy to see why this isn't electorally optimal for the Democrats.

Plugging these forecasts into the Hibbs model* bears this out: If the tax cuts don't get through Congress, President Obama is projected to be a slight favorite for reelection, netting about 50.7% of the two-way vote. If the Tax-Cut deal is implemented in it's current form, Obama can be expected to receive 49.95%. This difference seems small, but because the two forecasts are not independent, it is statistically significant.

It's important to stress that these results are completely dependent on Macroadvisor's economic forecasts. Still, using the knowledge currently available, it seems that the Tax-Cut compromise as currently negotiated is a net-negative for the Democrats.

The reverse would probably be true if the Democratic provisions are extended again in 2012, a situation that many people find likely. On the other hand, if the new Republican Majority implements further spending cuts, this could make the deal worse.

*This takes a bit of work, because the Macroadvisors forecasts are not per capita and inflation adjustment is done slightly differently in the model. Feel free to contact us for details.

The other issue is that the baseline involved is slightly murky, as Ezra notes. But it closely corresponds pretty closely to the "current" baseline if you go through the weeds of their public blog.