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Important stories about money and politics in the race for the White House
The author is Chief Economist at UBS Global Wealth Management.
Traditionally, consumers’ views on the economy have been viewed as a leading indicator of political trends. If consumers are happy, incumbent politicians usually do well. If consumers are dissatisfied, they will say, “It’s the economy’s fault, idiots,” and incumbent politicians will rapidly expand the ranks of unemployed people. But in today’s Alice in Wonderland world, everything has been turned upside down. Politics is driving (and distorting) the economy.
Economic data relies heavily on research evidence. While most official data is presented authoritatively as an absolute measure of economic activity, the reality is that this authority is built on the highly dubious foundation of asking people how they feel. Today, fewer and fewer people can be persuaded to respond to any type of survey. Declining participation rates mean that the number of people responding to surveys is changing (by definition). Something special must motivate someone to fill out a survey form.
One such motive is politics. Political partisanship robs people of objectivity and takes them into a world of fantasy. People who go out of their way to complete surveys for politically motivated reasons are unlikely to take the time and effort to objectively examine their responses. Politically influenced survey respondents respond with gut feelings.
In the United States, the Michigan Consumer Sentiment Survey shows significant partisan bias. At this point, we have a Democrat in the White House, so Democrats will tell pollsters that in this best of worlds, everything is for the best. Republicans are considering a Biden presidency and have told pollsters that the economy is in dire straits. Four years ago, this position was reversed. Similarly, the position four years earlier had reverted under the Obama administration to one where Democrats were optimistic and Republicans were disappointed. However, this partisanship is relatively new. Before President Obama took office, evidence of political bias in survey responses was much less obvious.
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Sentiment in Michigan rose in August and September, suggesting U.S. households were becoming more optimistic about the economy. But the details showed growing pessimism among Republicans. Only Democrats actually told pollsters they were more optimistic. It’s no coincidence that Republican pessimism and renewed Democratic optimism coincided with President Joe Biden dropping out of the race and Vice President Kamala Harris winning the nomination. This fact alone does not change the current economic situation, but it does change the polarized political filter through which everything in the United States is currently viewed.
This polarization extends beyond the survey headlines. For example, Republicans are much more likely than Democrats to say they think inflation is high. Over the past three years, there have been some significant differences in regional inflation that may be correlated with differences in political perceptions. Recently, however, regional differences have become less pronounced and no longer justify the extent of the partisan perception gap. This particular political bias is even more troubling because US Federal Reserve Chairman Jay Powell has previously cited inflation expectations as a motivator for policy changes.
This shouldn’t be thought of as just a consumer problem. Business confidence data is easily influenced by the political situation. Whenever economists have had a bad week and need a pick-me-up, they can turn to the Dallas Fed’s manufacturing sentiment survey. The comments section of this report is often hilarious, with overtly partisan political opinions sprinkled throughout the statements made by survey respondents. It is simply unreasonable to expect that such bias will not extend to the supposedly objective answers in the data section of the report.
In an increasingly polarized society, where worldviews are shaped by the partisan nature of the media we consume, survey evidence is less likely to capture economic reality. Indeed, in the United States and other countries, people seem to have a tendency to say one thing and do the opposite. Recurring pessimism in business confidence data coincides with stabilization or improvement in business production. Consumer disappointment in the survey is accompanied by a solid increase in overall spending.
If political partisanship is tainting research results, economists and investors will increasingly need to challenge the conclusions of research-based evidence. In the absence of an unbiased opinion, the emphasis should be on data based on observable, objective facts.
