Why the Midterms Might Not Be So Bad for Dems

Many republicans are looking forward to November as a repeat of 1994, when popular anger against an overreaching, reformist Democratic Party enabled the GOP to pick up 56 seats in the House of Representatives. But Republicans might be well advised to look at an earlier midterm election as a precedent: 1934.

When elected in 1932, Franklin D. Roosevelt swept into office along with a Democratic Congress just after the economy fell apart. They quickly stabilized the system, injected deficit-fueled stimulus into the economy, and passed far-reaching reforms. Then, as now, Republicans and talk-radio demagogues accused the president of being an un-American, currency-debasing socialist. They promised that all of Roosevelt's efforts—from the Civilian Conservation Corps to the Securities and Exchange Commission—would fail.

But the recession ended in March 1933, and the economy grew by 16.9 percent and 11 percent in 1933 and 1934, respectively. The unemployment rate started to come down from sickeningly high levels. In October 1934, the Dow Jones industrial average stood at 95—up nearly 90 percent from February 1933. And in November 1934, the Democrats increased their already-large majorities, picking up nine seats in both the House and Senate.

History doesn't repeat, but it sometimes rhymes. In 2009 and 2010, Democrats passed Keynes-inspired stimulus efforts and pushed through health-care reform over the uniform and frequently shrill opposition of Republicans. The economy stabilized and a recovery began to gain traction. Fast-forward to October 2010. Assuming recent trends continue, the U.S. economy will be in its sixth quarter of GDP growth, and the rancor of the health-care debate will be a distant memory. While not producing nearly enough jobs, the economy will be producing a sufficient number to bring the unemployment rate down. Should the stock market simply move sideways, it'll still be 70 percent higher than its March 2009 nadir. Is this a setup for an electoral wipeout?

"It's the economy, stupid" has become a political cliché. But both number crunchers and political scientists have shown that economic trends in the months leading up to elections can have great power in forecasting outcomes. Given the deep recession that started in January 2008 and the utter collapse of the financial system in the fall of 2008, John McCain and the Republicans were toast.

When he plotted polling data on "trust in government" against growth in disposable income, John Sides, a political scientist at George Washington University, found a high degree of correlation. "The economy explains about 75 percent of the variance in trust." When the economy is doing well, people are less disgusted with Washington and "they approve of the president and their senator more." As a general rule, the president's party loses seats in the midterm. But University of Denver political scientist Seth Masket, who has charted income growth in the three quarters before the fall midterm campaign season over the last 16 cycles, found that "if the economy seems to be growing and people are making more money, they tend to reward the party that's in power a little more." Translation: an expanding economy over the next seven months could lessen projected Democratic losses.

Yale economist Ray Fair has developed a relatively simple and highly accurate economic model for predicting what percentage of the total vote parties will receive in presidential and congressional elections. It relies on inflation and economic growth over the seven quarters before the election. Fair, who has a somewhat optimistic take on growth for 2010, says Democrats are likely to get a 51.6 percent voting share this fall. "The Democrats are not going to gain seats, but it doesn't look like there will be anything like a disaster."

One caveat: high unemployment and housing—factors not considered in Fair's model—may play an outsize role in people's feelings about the economy. And perception can matter as much as the underlying economic reality. Running against one-party control may be a winner in the fall campaign. But running against a weak economy? Perhaps not. On CNBC, Jack Welch, the rock-ribbed Republican former CEO of General Electric, detailed the signs of revival at the companies with which he works. If they're counting on the poor economy alone, he said, "Republicans are going to get an awful shock."

Daniel Gross is also the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy.