Paul Kelly tells us that there are duelling ~~banjo’s~~ realities in the electorate, there are he tells us, “inside the beltway” theories suggesting that the government must win because the ~~Canberra press gallery says so~~ the economy is so good, and there is the “outside the beltway” shmucks…. that’d be you and me, who seem to be ignoring the journos wisdom and giving the Newspoll folks incorrect answers.

So let’s test the “Beltway Theory”.

Let’s create an index of economic strength so we can test it against voting behaviour as defined by Newspoll.

So to start, lets create a basic index that represents GDP growth, the interest rate as defined by the standard variable home loan rate and unemployment. GDP growth is easy, as it increases the index will move up, as it decreases the index will move down. All we need to do is weight it.

Interest rates and unemployment are different, as they go down the economic index must go up, so let’s weight the inverse of each of those. Then we add up the three weighted values and we’ll have a measurement that moves up with a good economy and down with a bad one.

To show how this all works, let’s use the first month of the series, December 1985.

GDP growth for this month was 0.141338%. That’s about 1.7% growth for the year.

So the first component of the index is W1*GDP where W1 is a weight we will give the GDP series. Let this weight W1=20 so that W1*GDP= 2.826756

The second component is the interest rate level which in Dec 1985 was 13.5%.

Taking the inverse of this: 1/13.5 = 0.074074. So for our index we need to weight this number. Let’s give it a weight of 100 so that the weighted value for the interest rate component in the index is 7.407407

Finally let’s do the same for unemployment. In Dec 1985 the unemployment rate was 7.8%.The inverse of 7.8 is 0.128205.If we give the inverse unemployment a weight of 100, the unemployment component of the index is 12.82051.

So the total index value for Dec 1985 is 2.827+7.407+12.82= 23.05468

Are these weights reflective of reality? Mostly. The highest value attained for each of the weighted values (GDP, Interest rates, unemployment) is 13.8, 16.5 and 22.7 respectively while the minimum values are -6.8, 5.8 and 9.1.

The highest index value was 22.7 which is its value today; the lowest was 9.1 in December 1992.

That’s not perfect, but it will do for the purposes of this test because that index moves up with good economic times and down with bad economic times. We are more concerned with the movement rather than the actual values.

So now we have our index, regress the governments’ primary vote since 1985 on its own lagged value and this economic index (we’ll call this ECONINDEX)

If the “inside the beltway” theory holds, then the coefficient for ECONONINDEX will be positive. The positive changes in the index should walk hand in hand with increases in the governments primary vote as estimated by Newspoll.

If the economic condition of the country seriously influences voter behaviour, then the coefficient for ECONINDEX should be a relatively large value AND be statistically significant i.e. have a Prob value less than 0.1, preferably less than 0.05.

So let’s test the theory by doing the regression.

Dependent Variable: GOVPRIMARY | ||||

Method: Least Squares | ||||

Date: 05/19/07 Time: 14:59 | ||||

Sample (adjusted): 1986M01 2007M05 | ||||

Included observations: 257 after adjustments | ||||

Variable | Coefficient | Std. Error | t-Statistic | Prob. |

C | 8.929002 | 1.725481 | 5.174790 | 0.0000 |

GOVPRIMARY(-1) | 0.758701 | 0.040235 | 18.85692 | 0.0000 |

ECONINDEX | 0.041177 | 0.020988 | 1.961928 | 0.0509 |

R-squared | 0.602035 | Mean dep var | 42.437 | |

Adjusted R-squared | 0.598901 | S.D. dep var | 3.8455 | |

S.E. of regression | 2.435473 | Akaike | 4.6297 | |

Sum squared resid | 1506.608 | Schwarz | 4.6711 | |

Log likelihood | -591.9246 | F-statistic | 192.12 | |

Durbin-Watson stat | 2.206406 | Prob(F-statistic) | 0.0000 |

The variable is significant enough, but its value of 0.04 suggests that the difference between the economy of December of 1992 and the economy of today is only worth 0.04*( 22.7-9.1) = 0.5576% to the governments primary vote.

Now that’s clearly twaddle by any yardstick. I created a couple of other economic measurements as well incorporating business expectations, and various weighting mechanisms and they all turned out to be in the same ballpark.

So lets look at this regression just for the Howard government period:

Dependent Variable: GOVPRIMARY | ||||

Method: Least Squares | ||||

Date: 05/19/07 Time: 15:17 | ||||

Sample: 1996M03 2007M05 | ||||

Included observations: 135 | ||||

Variable | Coefficient | Std. Error | t-Statistic | Prob. |

C | 12.87587 | 3.829054 | 3.362677 | 0.0010 |

GOVPRIMARY(-1) | 0.699339 | 0.067491 | 10.36189 | 0.0000 |

ECONINDEX | 0.001680 | 0.048245 | 0.034830 | 0.9723 |

R-squared | 0.473274 | Mean dep var | 43.110 | |

Adjusted R-squared | 0.465293 | S.D. dep var | 3.3607 | |

S.E. of regression | 2.457537 | Akaike | 4.6581 | |

Sum squared resid | 797.2126 | Schwarz | 4.7227 | |

Log likelihood | -311.4264 | F-statistic | 59.302 | |

Durbin-Watson stat | 2.044193 | Prob(F-statistic) | 0.0000 |

Lo and behold, its absolute twaddle. The index is irrelevant to the Howard government primary vote. Its value is so small its meaningless and the thing couldnt be more statistically insignificant if it tried.

Now let’s do it in a disaggregated way, where we’ll junk the index and look at the components of the index and we’ll throw consumer confidence and the yearly %change in the value of the ASX in there as well: And we’ll do it for the Howard era.

Dependent Variable: GOVPRIMARY | ||||

Method: Least Squares | ||||

Date: 05/19/07 Time: 15:23 | ||||

Sample (adjusted): 1996M03 2007M03 | ||||

Included observations: 133 after adjustments | ||||

Variable | Coefficient | Std. Error | t-Statistic | Prob. |

C | 0.745883 | 4.243908 | 0.175754 | 0.8608 |

GOVPRIMARY(-1) | 0.554957 | 0.070452 | 7.877036 | 0.0000 |

GDP | 1.291302 | 1.080009 | 1.195640 | 0.2341 |

INT | 0.677360 | 0.240362 | 2.818083 | 0.0056 |

UNEMP | 0.475960 | 0.200412 | 2.374910 | 0.0191 |

CONCONF | 0.093489 | 0.031964 | 2.924811 | 0.0041 |

ASX | 0.120735 | 0.063475 | 1.902078 | 0.0594 |

R-squared | 0.536205 | Mean dep var | 43.212 | |

Adjusted R-squared | 0.514120 | S.D. dep var | 3.2799 | |

S.E. of regression | 2.286292 | Akaike | 4.5429 | |

Sum squared resid | 658.6184 | Schwarz | 4.6950 | |

Log likelihood | -295.1052 | F-statistic | 24.278 | |

Durbin-Watson stat | 1.967456 | Prob(F-statistic) | 0.0000 |

So we have GDP that’s not statistically significant to the governments primary vote, we have interest rates working opposite to the beltway theory whereby interest rate increases walk hand in hand with increases in the governments primary vote, likewise with unemployment, the higher it gets, the higher the government primary vote can be expected to be, with only consumer confidence and stock market capitalisation experiencing increases that walk hand in hand with increases to the governments primary vote – but by very small amounts.

So what do we have in the end?

Well we have a “beltway theory” that reckons governments live and die by the state of the economy, and we have the reality where GDP is meaningless to the governments primary vote, and interest rates and unemployment act completely contrary to the beltway theory. Strike 3 for Beltway – it’s just **J**ourno’s **T**alking **S**hit **A**s **U**sual.

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