Economics, the most imperialistic of the social sciences, is
always testing the borders of related fields. Several years ago some
economists invaded the territory of political science and applied
their expertise to election forecasting.
Economics now offers two distinct approaches to predicting
election outcomes. One has its roots in macroeconomics, examining
how national economic performance affects voting. The other is
grounded in microeconomics, using a real financial market in which
participants can place their bets on the election results.
Which approach is best? You can decide by using the Web sites
The first approach is most closely identified with the work of
Professor Ray Fair, a macroeconometrician at Yale who has examined
all two-party presidential elections since 1916.
His most recent forecasting model, which involves variables like
the growth of economic output, the inflation rate and whether a
candidate is an incumbent, has generated extremely accurate
predictions: during the period 1916-1992, his equation had only two
Right now, Fair's model forecasts a narrow victory for Vice
President Al Gore, with 50.8 percent of the popular vote. But he
considers the election a tossup, and the prospects could change,
depending on what happens to the economy in the next few months.
Readers who want to see the implications of various economic
scenarios can visit the Web site at http://fairmodel.econ.yale.edu
and click on "Predict the 2000 presidential elections" to make their
A quite different approach to election forecasting has been taken
by some researchers at the Tippie College of Business at the
University of Iowa. On their Web site at http://www.biz.uiowa.edu/
iem/index.html, you can buy and sell political candidates B not with
campaign contributions, but by participating in an online futures
market in presidential elections.
Here is how it works. The Iowa Electronic Market has issued
securities for the Democratic, Reform and Republican parties that
are tied to the popular vote. If the Republican candidate, for
example, receives 52 percent of the popular vote, participants will
get a payoff of 52 cents for each Republican share they own on
A security that will be worth 52 cents a little more than four
months from now should be worth slightly less than 52 cents today
because of the time value of money, so the current price at which
people are willing to buy and sell a Republican share should give a
pretty good forecast of the popular vote in November.
As this column was being written, the forecasts were 48 percent
for the Democrats, 3.5 percent for the Reform Party and 48 percent
for the Republican Party -- a dead heat. If this stalemate
continues, it suggests that Reform Party voters and Green Party
voters may have a much bigger say in the November election than most
experts now forecast.
The Iowa Electronic Markets involve real money, although the
maximum opening balance for a trading account is limited to $500.
And, yes, it is legal: the Commodity Futures Trading Commission has
ruled that as long as the IEM conforms to certain guidelines, the
commission will not intervene.
The electronic market is operated by the researchers at the
University of Iowa as an economic experiment, with the goal of
better understanding speculative markets. …