Written by Sam Siberell
In a world where 57% percent of countries are democracies[1], voting obviously has a large impact on global outcomes, but do people always vote with policy in mind, or money? In my high school government and politics class, I was told to keep in mind that “a lot of people vote with their wallet, not their head.” This means that people will be more likely to vote with their own financial considerations in mind, rather than social or political policies. Of course, this principle doesn’t apply to everyone, but if it was taught in class, there has to be some truth to it, right? This article aims to explore the extent to which voters vote with their wallets, rather than on other policies.
For this article, I will be using data from elections in the United States. At $20.94 trillion[2], the U.S. is by far the nation with the highest GDP. As a result, many investors have stakes in American assets, through stocks, bonds, real estate, etc., to turn a profit through investing. For many of these investors, the FED fund rate is important, as it has a large influence on the U.S. economy. The FED fund rate is the rate at which commercial banks borrow and lend their excess reserves to each other overnight[3]. To simplify, the Fed rate is the minimum cost of borrowing for financial institutions in the U.S. This rate is set by the Federal Reserve Bank of the United States, a body independent of politics, whose goal is to ensure continued economic growth and prosperity. When the rate is high, consumers are inclined to save, and are less likely to borrow as interest rates increase; when low, the opposite inclinations arise. Because the FED operates independently of the Presidency, any change in a President’s popularity based on the FED rate could indicate that people base their satisfaction on their financial health, rather than the actual candidate and their policies. This would indicate that people do, in fact, think with their wallet rather than focusing on the President’s political agenda.
In order to develop an understanding of how changes in the FED might affect a Presidential approval rating, we can find the correlation coefficient using the following data. This coefficient is representative of the relationship between different data sets, and indicates whether or not there is a correlation between movement in one and movement in the other. If there is a correlation, there is a possibility that presidential approval and interest rates are connected. Using data on the changes in the FED fund rate, American approval rating of Presidents, and global approval ratings of the U.S. Presidents, we can discern whether or not an impact on investments changes the public’s opinions on these Presidents, and if voters truly do vote with their wallet in mind.
Interestingly enough, over the last three U.S. presidencies, a negative correlation is shown between the FED rate and their approval ratings in the United States. At -0.47, the data implies that as the FED rate goes up, Americans approve of their President less. This correlation is moderate, but is significant enough to not be ignored, the same cannot be said, however, for the approval of the international community. At r = 0.022, the correlation is negligible, changes in the FED fund rate don’t meaningfully change foreign approval.
This trend can be better seen when the data is placed on a line graph. During years where the FED rate has risen, a downtrend in approval ratings generally follows and vice versa.
The relationship found between domestic approval and the FED rate makes sense, as the FED will lower interest rates at times where they promote spending, to disincentivize saving and encourage adoption of loans. In these situations, the economy is free to move of its own accord, and people will be satisfied with their leadership as they play a part in said economic success. The international community, however, does not benefit in the same way. Although lower interest rates may promote the American economy, and therefore boost profits on foreign investment in U.S. markets, this seems to make no impact on foreign opinions of the U.S. and its leaders. This is likely because the majority of people outside of the United States cannot afford large investments in the United States, and will hear about U.S. leadership through the news, which would likely focus on political policy rather than monetary policy.
To summarize, the old saying “people vote with their wallet, not their mind” may be true, as American voters approve of their leaders more in times of economic growth than those where the FED moves towards disinflation. On the other hand, this relationship may not necessarily be causational; it may be pure chance that Presidential approval rates tend to trend up when interest rates are low, and trend down when interest rates are high.
Even if the Fed rate is not the reason that approval ratings are higher, a booming economy (which can be initiated by periods with low interest rates) generally leads to more support. While it may not necessarily be true that people vote with only the economy in mind, in the future, to gain more voters, the data shows it may prove beneficial for candidates to promise a low interest rate, as they will garner support from their voting constituents.
Works Cited:
[1] DeSilver, Drew. “Despite global concerns about democracy, more than half of countries are democratic.” Pew Research Center, 2019, https://www.pewresearch.org/fact-tank/2019/05/14/more-than-half-of-countries-are-democratic, Accessed November 25, 2021
[2] “GDP – Current USD.” World Bank, 2021,https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations= US&most_recent_value_desc=true. Accessed November 25, 2021
[3] Chen, James “Federal Funds Rate.” Investopedia, edited by Erika Rasure, https://www.investopedia.com/ terms/f/federalfundsrate.asp. Accessed November 26, 2021
[4] Board of Governors of the Federal Reserve System (US), “Federal Funds Effective Rate [FEDFUNDS].” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FEDFUNDS, Accessed November 26, 2021
[5] Gallup, “Presidential Job Approval Center.” Gallup Analytics, https://news.gallup.com/interactives/185273/presidential-job-approval-center.aspx. Accessed November 26, 2021
[6] Ray, Julie “U.S. Approval Ratings Rally From Record Lows.” Gallup News, October 19 2021, https://news.gallup.com/poll/355979/ratings-record-low-trump-exits-rally-biden.asx. Accessed November 26, 2021