So I guess I depressed Peter in my comments on his class warfare piece, and enjoyed the conversation thereafter. As a separate post, I thought I'd give you a link to one of the veterans in using economics to predict elections. Prof. Ray Fair of Yale was one of those I read intently writing my dissertation in the 1980s, and he still maintains a model for predicting presidential and Congressional elections. He predicts a very close election, with Obama winning 50.3% of the two-party vote:
For a moderately growing economy, which the US model is now forecasting, the election is predicted to be close. The current US model forecast is probably somewhat more optimistic than consensus, but with slightly slower growth in 2012, the election would still be predicted to be close. If the economy suddenly starts to boom---say 5 or 6 percent growth---Obama would be predicted to win by a comfortable amount. If the economy suddenly goes into another recession---say minus 5 or 6 percent growth---the Republicans would be predicted to win by a comfortable amount. As of this writing the economy in 2012 looks like it will be ok, but not great, which means a close election---essentially too close to call.
The economic variables in Fair's model are growth in per capita GDP and inflation, along with the number of quarters of blow-out growth. That blow-out growth quarter is a forecasted on for the third quarter of 2012, consistent with the political business cycle story I told in comments on Peter's post. (Fair's model of elections is tied to a broader model for the economy that he has maintained for decades.) Fair notes that his forecast assumes extension of the payroll tax holiday to year-end 2012. If it had not happened, the predicted two-party vote share for Obama would have fallen to 49%.
At least there's one area for smiles: Democrats are expected in Fair's model to take 46.7% of the two-party vote share in Congress in 2012. But not extending it would have increased that share, which may be why the House Republicans agreed to it.