A very belated link to a very belated article that I wrote for Zahranicna Politika, a Slovak foreign policy journal. The original English text of the article, which was translated and published in Slovak, is posted below. The chart that I am referencing in the article appears in this entry. It was written immediately after the election with an audience in mind that did not follow all the events as they unfolded. Yet even for me it is interesting to reread it now after some time has passed and the events of last fall are a bit more blurry.
In the aftermath of the historic presidential election, commentators around the world are often interpreting the election of Barack Obama as a rejection of the policies of G. W. Bush and the triumph of social progress in the United States. Some have proclaimed we are living in the “post-racial” age, others have concluded "It's the economy, stupid!" However, as the initial electric excitement cools, it is essential to remember that Obama's victory was neither obvious nor a given as late as the beginning of September, when the economy was already slowing down and quickly heading for a downturn. So how did he close the deal?
As the Republican convention came to a close in the first week of September and McCain's recently chosen running mate Sarah Palin exploded into national consciousness, the polling data triggered a sense of helplessness and many headaches among Obama supporters. According to the Gallup Poll from September 7, 48% of voters indicated they would vote for McCain, 3% more than Obama and more than ever before. After 8 years of Bush, with a deteriorating economy and a massively unpopular war, Obama was losing in the polls. During those early September days, it looked like despite the lowest approval ratings of the incumbent president on record, Republicans had a solid change of winning. This contradicted all conventional wisdom: only once since 1856 has the Party in the White House managed to retain the presidency during a definable economic downturn. McCain's lead in the polls was truly mind-boggling: how could this be and what happened since then that catapulted the Democratic ticket to victory?
The answer to both those question can be summarized by two words: Lehman Brothers. On September 14th, the bankruptcy of one of the largest investment banks set off a chain of events that completely redefined the landscape of the race. The same day, another major bank, Merrill Lynch, was saved from the same fate by being acquired by Bank of America. Two days later, the US government seized control of AIG, one of the world's biggest insurers. Shocked by the failure of these institutions, the credit markets completely seized up and borrowing practically evaporated, creating a real threat to the functioning of financial markets and their ability to support the daily operations of businesses far from Wall Street. If there was any hesitation about the seriousness of the situation, it was all but gone when the treasury secretary and the chairman of the Federal Reserve unveiled their massive $700 billion proposal to bail out the troubled banks. The public was stunned and outraged.
These unprecedented events did more than just expose the fragile state of the financial system. The credit crisis completely changed the discourse about the economy, which until then was commonly defined by a heavy dose of sugarcoating and denial. It needs to be clarified that it was no secret that the economy was ailing at least since the summer of 2007. In the first two quarters of the year, 1.4 million US homes were foreclosed on and by the end of August the economy shed roughly 700 thousand jobs at the same time when energy and food prices were skyrocketing. And yet, until Lehman's failure, the policy makers had a habit of underplaying the seriousness of the problems. The Treasury Secretary Henry Paulson was on record multiple times as saying that the problems in the sub-prime mortgage market did not pose a serious problem to the economy and were contained. The investors were seemingly not particularly worried either and the stock market was happily chugging along: until August, the Dow Jones index was not too far off from its all-time highs. Even as economists were increasing their odds of a recession, it was still a subject to debate, not a given. On the campaign trail, the candidates themselves did not pay much attention to the economy over the course of the summer. Perhaps it was this denial corroborated and fueled by the administration that allowed voters to defy conventional wisdom and seriously consider the incumbent party candidate, despite the clearly deteriorating conditions. However, during that dramatic week in September, the luxury of sticking their heads in the sand was taken away from the electorate. No longer was the administration able to sugar coat things. On the contrary: if they wanted to pass a bailout package quickly, they needed to convince everyone as fast as possible how extremely dire the circumstances were. In short order, the band aid was ripped off and the wound it exposed was deep and ugly.
To understand how shaken the public was from these events in the weeks that ensued, one needs to look at the consumer confidence indicators. While consumer confidence has already declined significantly in 2008, in October, the Conference Board index dropped 23%, the third largest month-over-month decline ever, and reached the lowest level on record. In more real-life terms, the impact of this plunge on confidence could be observed in the sales of retailers, the ultimate gauge of Americans’ well-being: while shopping saw a significantly reduced growth in September, by October, most retailers were reporting a decline in spending, with some as large as 17%. In a matter of weeks, Americans went into panic mode and the discourse about the crisis increasingly involved comparisons with the Great Depression. According to Google Trends, the mention of "Great Depression" in the US increased more than tenfold in September.
In the context of the election, the September meltdown was not only an escalation of an already dreary economic picture. It gave voters a new set of lenses through which to assess the two candidates and provided them a unique chance to observe the two men responding to a crisis. When McCain declared that the fundamentals of the economy were strong the day after the bankruptcy of Lehman Brothers, his critics immediately seized it as an example of him being disconnected from reality. McCain's apparent denial of reality closely resembled the manner in which the Bush administration talked about the economy right until then – a rather unfavorable association which McCain needed to avoid at all cost. It is probably no coincidence that on that very day, Obama's chances of winning the presidency, as evidenced by the Intrade prediction markets, turned around sharply and never stopped going up (chart at the end). A little over a week after the crisis started, McCain announced a dramatic suspension of his campaign to focus on the bailout negotiations in the Congress and called on Obama to postpone the upcoming debate. Instead of helping his campaign, McCain ended up looking like the panicky and unfocused one when Obama responded cool-headedly: "It is going to be part of the president's job to deal with more than one thing at once. It's more important than ever to present ourselves to the American people." By the time of that first debate, Obama’s chances improved by 9% to 56% and the polls indicated a significant reversal from early September – Obama was leading by 4%.
As the terrifying economic news was coming out, the media was increasingly exposing news on McCain's running mate, Sarah Palin. Her first media appearance – the interview with Charlie Gibson on ABC – aired a few days before the credit crisis started. Just as the first bailout package was being negotiated in the Congress and John McCain suspended his campaign, the Katie Couric interviews on CBS were released. While Americans were contemplating the onset of the second Great Depression, they witnessed the Republican VP candidate unable to remember the name of a single newspaper. Not only did that dampen the enthusiasm about Palin, but it also brought into question McCain's decision-making. The critics wondered: how could he be trusted to safeguard the economy if the one big decision he made so far was so rushed and irresponsible? Most importantly, right when experience could have proven to be a tremendously reassuring attribute to the American people, McCain could not play that card due to his relatively inexperienced and seemingly ignorant running mate. The day after the first Palin interview aired on CBS, Obama's odds went up almost 3 points to 55%.
By the end of September, the debates were McCain’s last chance to prove himself as capable of dealing with the country's economic woes and reverse Obama's momentum. However, no such turnaround materialized. Not only did Obama score better in all three debates (and increasingly better – 51, 54 and 58%, according to CNN's polls), all three also portrayed McCain as lacking the likeability, temperament and coolness that Obama possessed. In the first debate, McCain struck all the wrong cords by barely looking at his opponent in addition to linking Russia's president Putin to KGB. In the second installment, he further damaged his likeability scores by memorably referring to Obama as "that one" and in the final debate he got carried away during the abortion discussion and spoke about women's health in air quotes, a gesture which did not go unnoticed by the commentariat and a key voter group – women. As if that was not enough, the Republican campaign launched a series of negative ads against Obama – his questionable affiliations, his supposed socialistic ideas. Not only was that a clear betrayal of McCain's own principles (he himself was burnt by similar tactics in the 2000 primary race against George Bush), but also a distraction from what the electorate probably cared more about – the collapsing economy. In the days following the final debate on October 15th, Obama improved his odds to 85% and his lead in the polls expanded to 6-7%.
While the campaign kept everyone in suspense until the very end, McCain’s team was never able to close the advantage that the Democratic ticket received in the month that started with the Lehman bankruptcy and ended with the last debate. As tempting as it may be to conclude that after all it was all about the economy, it should be remembered by historians and politicians in the future that the deteriorating economy did not seem to matter until very late in the race – and it took a near collapse of capitalism for that to kick in. In that sense, the election was not only historic because it symbolized the end of a racial barrier in American politics, but because it nearly led to the most counter-intuitive outcome. As strategists and political scientists ponder future electoral outcomes, they are well advised to use the “It’s the economy, stupid!” mantra carefully, because as the 2008 election showed, it may not be relevant until the circumstances are just right.