If Gas Prices Surge Back to $4 Per Gallon, Will Trump be Re-elected?
Diving into economic models as political predictors
As the 2024 presidential election approaches, economic voting takes center stage, a phenomenon where voters base their decisions on the current state of the economy. This phenomenon, although not very surprising in theory, has substantial empirical evidence explaining which economic forces can sway the election one way or another. Analysts employ various models to forecast election outcomes; chief among them are the Fair Model and Moody's Model. They are both renowned for their predictive accuracy in correlating economic indicators with electoral results, and both currently predict Biden’s reelection in November—but by very small margins.
The Fair Model was created in the 1970s by Yale Professor Ray C. Fair and was considered quite radical at the time, as it predicted political outcomes without considering politics like the candidate’s platform (Sommer). Focusing on the growth of per capita GDP and inflation, the Fair Model predicts a variable called VP, which is the share of total votes the Democratic Party will win if it were a two-party (Democratic vs. Republican) presidential election. The regression model is the following:
If we apply this to Biden, the Democratic candidate, G is defined as the growth rate of real per capita GDP in the first three quarters of 2024, P is defined as the growth rate of the GDP deflator in the first 15 quarters of the Biden administration, and Z is defined as the number of quarters in the first 15 quarters of the Biden administration in which the growth rate of real per capita GDP is greater than 3.2% annually.
With current figures, the model currently predicts Biden winning 51.46% of the vote, but it is important to note that it does not take into consideration third-party candidates, nor does it differentiate between the popular and electoral college votes. Although it has a fairly accurate track record, the Fair model did mispredict Joe Biden’s election in 2020 and Barack Obama’s election in 2012. “But what his model does extremely well is provide a standard, historically based framework for understanding economic effects on the popular vote for the two main American political parties” (Miller). Although limited in scope, the Fair Model is a valuable tool to learn more about economic voting and its implications.
Moody’s Analytics, a well-established financial services and analytics company, has recently developed a different model for predicting the outcomes of US presidential elections that takes into account a wider variety of economic variables: gasoline prices, inflation-adjusted household income, mortgage rates, and consumer confidence (Miller). Similar to the Fair Model, Moody’s model predicts Biden’s reelection, but it’s no easy climb. Any significant changes in the aforementioned variables could flip the predicted victor. A particular component of interest is gas prices. According to Moody’s model from 2020, gas prices are seen by nearly all voters almost daily, making it one of the most visible economic indicators, with rising prices creating the sentiment that the economy is suffering and the status quote is unsatisfactory. “All else equal, if gas prices surge back close to $4 per gallon, Trump will win” (Miller). Although it is incredibly difficult to predict changes in oil prices given their volatile nature, Moody’s experts currently project them to be around $3.50/gallon on November 5, 2024 (Griffiths).
Additionally, Moody’s model finds that a jump in mortgage rates to more than 8.5% would severely impact housing affordability, potentially jeopardizing Biden's electoral prospects. Although the executive office has no control over these rates, they will likely keep a watchful eye over the Federal Reserve, which has the power to lower interest rates to increase housing affordability. Finally, real household income has been increasing recently—a good sign for Biden’s reelection campaign—but economists predict that a recession before election day could decrease Biden’s chances significantly (Werschkul).
Compared to Fair’s model, Moody’s has proven to be more accurate when he runs his model on presidential elections since 1980; it only falsely predicted Biden’s win in 2020, which they attribute to the unpredictable nature of the COVID-19 pandemic and the resulting economy it created. Although various political polls currently predict Trump beating Biden, the economic models have a different story to tell. Nevertheless, “the only thing you can probably count on for sure, the report concludes, is that the election will be close” (Miller). In the end, while economic models point towards Biden's reelection, the unpredictability of economic factors means the outcome is still anyone's guess. To make sure your voice is heard, whether you have something to say about the candidates’ platforms or how much it costs you to fill up your tank, cast your vote on November 5th!
References
Fair, Ray C. n.d. “President and House 2024.” Ray C. Fair. Accessed March 3, 2024. https://fairmodel.econ.yale.edu/vote2020/indeane2.htm.
Griffiths, Brent D. 2024. “Economists Say a Spike in Gas Prices Could Hand Trump the White House.” Business Insider. https://www.businessinsider.com/biden-trump-rematch-moodys-analytics-model-predictions-2024-2024-2.
Miller, Rich. 2024. “What Economic Models Say About the 2024 Presidential Election.” Bloomberg. https://www.bloomberg.com/news/newsletters/2024-02-05/what-economic-models-say-about-the-2024-presidential-election.
Sommer, Jeff. 2023. “The Fed's Decisions Now Could Alter the 2024 Elections.” The New York Times. https://www.nytimes.com/2023/11/17/business/federal-reserve-economy-2024-elections.html.
“Trump v Biden: who's ahead in the polls?” 2024. The Economist. https://www.economist.com/interactive/us-2024-election/trump-biden-polls/.
Werschkul, Ben. 2024. “These 4 economic variables could 'easily flip' the 2024 election for Biden or Trump: Moody's.” Yahoo Finance. https://finance.yahoo.com/news/these-4-economic-variables-could-easily-flip-the-2024-election-for-biden-or-trump-moodys-164335231.html.