July 26, 2004 | Washington PostGoing back to the election of 1900, the Ned Davis Research data show that when the Dow Jones industrial average has fallen between the conventions and the elections, the incumbent party has lost seven out of 10 times. When the market has rallied right before the election, the incumbent party has kept the White House 13 of 16 times. All that is challenged by researchers at the UNIVERSITY OF IOWA. Studying elections is a specialty in Iowa, my home state, where the first-in-the-nation political caucuses every four years are the biggest things that ever happen. "Taking one measure and finding a correlation between that and the presidential election is not a sufficiently rigorous way to study the problem," business professor THOMAS A. RIETZ said. "It's not as simple a relationship as, 'The stock market went up, therefore the incumbent got reelected.' " His colleague in the political science department, MICHAEL LEWIS-BECK, tries to predict the presidential election with an economic model based on polls, economic growth, job creation and the incumbency advantage. These models are not perfect, either. The quality of new jobs -- a big issue this year -- isn't worked into most of them. Neither is foreign policy, which also looms large over the November election. Instead of unemployment, job creation is a key factor in the model developed by Lewis-Beck and Charles Tien of Hunter College in New York. As Democrats like to point out, Bush gets bad grades on that score. "What you see is that under the current administration there have been fewer jobs created than in any other" since World War II, Lewis-Beck said. Rietz uses a market to predict elections, but it's his school's own market. The University of Iowa runs a political futures market in which traders, using real money, can buy futures contracts on either Bush or Kerry to win the election. It's based on the "efficient market" theory of prices. The idea is that markets provide the most accurate estimate of what a company or a commodity or a politician is worth, because they reflect the combined decisions of all the people who are knowledgeable enough about the subject to risk money. The advantage of a market over polls, Rietz argues, is that polls reflect the opinions of votes picked at random -- whether they care about the election or not. The political futures market is based on the inputs of people who at least think they know what they are doing. "We've seen Bush ahead most of the time, but when Kerry picked Edwards it brought them up to a much closer race," Rietz said.
Contact: Thomas Rietz