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LAFFER ASSOCIATES
Supply-Side Investment Research
May 19, 2016
10-yr T-Note: 1.86% DJIA: 17,526.62 NASDAQ: 4,739.12 S&P 500: 2,047.63 S&P 500 Undervalued: 151.8%
GAME ON [Updated 7/6/2016]
By Arthur B. Laffer, Ph.D.
Summary
To save you the agony of plodding through this fascinating, information-rich paper, I’ll get straight to the point: Donald Trump
will be the next President of the United States after having won an easy victory over Hillary Clinton in November 2016. The
reasons:
I.)
II.)
III.)
Section one shows that the essential characteristics of the narrative for the Trump campaign and the Reagan campaign
of 1980 are surprisingly similar, which would point to a Trump landslide.
Section two describes the poor state of the current economy using detrended GDP per adult, the ratio of employmentto-adult-population
and new home sales per 1,000 adults and how these measures strongly indicate a Republican
victory.
Using historical data for the Gallup poll question “are you satisfied” and presidential election dates, this section would
point to an overwhelming Republican win in November 2016.
IV.) Relying on voter turnout data this year versus earlier years and party selection, the Republicans have a large advantage
coming into the Fall election.
V.)
Basing our forecast on the past eight years of Congressional elections—House and Senate—as well as state elections
of house, senate and governors, the Republicans should be exceedingly confident about the upcoming presidential
election.
VI.) Taking careful measure of what both Hillary Clinton and Donald Trump have done in the public eye, Trump has the
issues on his side.
I. 1979-1980 How the Reagan Revolution Began
In early 1979, a group of Ronald Reagan acolytes—some 10 to 15 in total—got together in Justin Dart’s office at Rexall (the
corner of La Cienega and Beverly) and there they formed the original Reagan Executive Advisory Committee. With very few
exceptions (initially only me), this group had been called Reagan’s Kitchen Cabinet. Those present and those also invited
included Justin Dart, Holmes Tuttle, Jack Wrather, Bill French Smith, Bill Wilson, Earle Jorgensen, Ben Biaggini, Ted
Cummings, Alfred Bloomingdale, Charles Wick, Henry Salvatori et moi. I was the youngest of the group by three decades.
And, in fact, the only way Justin Dart could convince the others to let me be a member was that they needed someone to keep
the minutes of the meetings, i.e. as a secretary. In speaking with a reporter about the Kitchen Cabinet, here’s what Jus Dart
had to say: “In addressing the question of how many of Reagan's friends actually qualify as members, Dart said: ‘Damn fewer
than is generally advertised.’” 1 That just says it all.
The purpose of this committee was to provide guidance and support to the emerging presidential candidacy of one Ronald
Reagan. The members were to a person close, close, close friends and supporters of Ronald Reagan or husbands of Nancy
Reagan’s best friends. And the race for the White House began.
During this pre-primary and primary process, Ronald Reagan was disrespected and abused by a significant segment of the
Republican establishment. 2 He was called an empty suit, a trigger-happy California cowboy, only an actor, a person who
spoke words others wrote, a racist, a bigot, a divorcée, a war monger and the man who would start the Third World War. My
favorite slur came from none other than the Democratic Party’s “éminence grise” Clark Clifford, 3 who referred to Ronald
Reagan as an “amiable dunce.” The torrent of anti-Reagan epithets never stopped.
1
“Industrialist Justin Dart has declared President Reagan's 'kitchen cabinet',” United Press International, March 26, 1981.
http://www.upi.com/Archives/1981/03/26/Industrialist-Justin-Dart-has-declared-President-Reagans-kitchen-cabinet/4240354430800/
2
There is a display at the Young Americans Foundation in Santa Barbara of a number of these anti-Reagan videos by any number of Republican and
Democratic stalwarts.
3
As if receiving divine retribution for his nasty ways, Clark Clifford, who served as Secretary of Defense for President Johnson and as an advisor to
Presidents Truman, Kennedy and Carter, was indicted in the early 1990s on charges of conspiracy, fraud and bribery surrounding the Bank of Credit
and Commerce International scandal.
For more, see: http://www.nytimes.com/1998/10/11/us/clark-clifford-a-major-adviser-to-four-presidents-is-dead-at-91.html?pagewanted=all
103 Murphy Court, Nashville, TN 37203 (615) 460-0100 FAX (615) 460-0102
Laffer Associates Game On [Updated 7/6/2016]
In fact, the whole group of us received virtually no support from the Republican Party or the Party’s elders. It wasn’t until
Reagan had finally defeated George Bush, along with John Connally, Howard Baker, Phil Crane, Bob Dole and John Anderson
in the primary race, that there was any attempt to be conciliatory to Ronald Reagan’s presidential campaign by the Republican
powers that were. Even Barry Goldwater, whose career owed so much to Ronald Reagan, was cool at best to a Reagan
presidency.
I remember one post-Bush-defeat meeting of our committee when we had already secured the nomination and George Herbert
Walker Bush sat next to me and lightly apologized for referring to me as the “Voo-Doo Economist.” In truth, I had sort of
enjoyed the handle, and told H.W. Bush that I was delighted he finally had come to join us because I needed some fellow
Yalies to up the quality of our group. He laughed.
Things had been so vitriolic and bad during the primary campaign that a number of Republicans couldn’t in clear conscience
support Ronald Reagan at all and others could only support him in name only. And one of the primary contestants, John
Anderson, Republican Congressman from Illinois, was so offended by Ronald Reagan’s nomination that he decided to run as
an independent in the general election, which he did. While, in hindsight, John Anderson’s decision may now seem like a nonevent,
it sure wasn’t seen as a frivolous gesture back then. Ronald Reagan looked like a sure loser with both a moderate
Republican opponent and a sitting Democratic President, with all the privilege, prestige and power that the Office of the
President holds.
At the convention in Detroit City, I testified before the platform committee on what I thought Reaganomics would be—which
was lots of fun. But, the real drama occurred when it came time to select Ronald Reagan’s running mate. Showing no signs
of remorse or respect for the primary voters, the Party’s establishment conspired to browbeat Ronald Reagan into accepting
Gerald Ford as Ronald Reagan’s co-president running mate. They—the establishment—were absolutely certain that Ronald
Reagan would be blown away by Carter in November of 1980 and that the down ticket Republican candidates would get their
lunch handed to them. So much for the wisdom of Republican elders and insiders.
In other words, just like today in re Donald Trump, the party’s cognoscenti were forecasting a huge Reagan defeat that would
carry with it large numbers of House members and Senators. Reagan, they thought, would prove to be more devastating to
Republicans than either the Goldwater defeat of 1964 or the Ford defeat of 1976.
As you all know, none of this happened. We handily defeated Carter, even though we were behind in the polls as recently as
1 week before the election. 4 Reagan took 44 states and 50.7% of the popular vote to Carter’s 41% of the vote and Anderson’s
6.6% of the vote. Whodathunkit? I’m naturally an optimist, but I’ve never been more optimistic than I am today or than I was
in 1980, and I’ve never had more fun than I had in the several years before Ronald Reagan’s election. The Reagan saga of
1980 seems a lot like the Trump story today.
II. “It’s the Economy Stupid” – James Carville 1992
In the 2016 primaries, each and every Republican candidate promised lower tax rates, restrained government spending, sound
money and greatly lessened regulations. The mantra was repeal “Obamacare,” eviscerate Dodd-Frank and cut taxes. There
couldn’t have been a more supply-side, pro-growth field of candidates assembled in the entire history of our nation—not one
outlier. It almost became a Republican feeding frenzy as to who could propose the lowest tax rate and create the most growth.
Debates on economic issues were super boring and hyperbole as to who could be the most pro-growth supply sider infused
the air we breathe. In truth, every Republican, from Jim Gilmore to Donald Trump, understood that America was in free fall
and needed a huge dose of incentive alignments. There was very little room for debate on the issues because the candidates
all agreed with each other.
The Democrats, once O’Malley, Webb and Chafee exited stage left, were pulling each other further and further to the “Free
Lunch Tax the Rich” ticket. Already way over-subsidized, students were promised free college by Sanders, and America would
have a $15 federal minimum wage everywhere. And then there was expanded free health care, huge tax increases on Wall
Street exploiters and on the rich in general. The Walton family was singled out as the perfect example of what’s wrong with
America: one family whose net worth was close to $150 billion and whose legacy company, Walmart, paid workers’ wages so
low that full-time employees qualified for welfare. The Democrats defined their enemies as the most successful innovators,
investors, job-creators and employers in America.
The Democrats also, in their never-ending debates, careened further and further toward “from each according to his ability and
to each according to his need” paradise. The most enthusiastic crowds were energized by the endearing, wild-eyed,
septuagenarian Socialist whose unkempt, long white hair became emblematic of “enough is enough already”: Uncle Bernie
Sanders. Who doesn’t love Bernie Sanders? Or, as his throngs of acolytes scream, who doesn’t “feel the Bern?”
4
Reagan’s surge in polls is generally attributed to the presidential debate held one week before the election took place, on October 28 th , immediately
after which Reagan appears to have moved into a 3 point lead. See: Lydia Saad, “Late Upsets Are Rare, but Have Happened,” Gallup, October 27,
2008. http://www.gallup.com/poll/111451/late-upsets-rare-happened.aspx
2
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Laffer Associates Game On [Updated 7/6/2016]
Hillary’s and Bernie’s kabuki dance is far from over. The continued Sanders’ humiliation and exposé of Clinton is profoundly
damaging to the Democrats’ prospects, while the Republicans have just chosen their candidate. Someone ought to tell that
to Bill Kristol.
What is patently obvious from the rise of Bernie Sanders and the massive, hard fought battle in the Republican primary is that
economic discontent is at an all-time high. The electorate wants economic change NOW.
But, then there’s Hillary Clinton’s take on the economy and the Obama record. Like Pat Buchanan’s protectionist niche some
20 years ago, there is a segment of America that truly likes the Obama record. But, that segment is not even close to being
large enough to elect a winner.
Hillary Clinton’s political and academic credentials are second to none—Wellesley undergraduate, Yale Law School,
Watergate trial activist, Rose Law firm lawyer, First Lady, Senator from New York, and President Obama’s Secretary of State.
She has been indefatigably toiling her way through the political superstructure to be the next President of the United States:
the incarnation of an Obama third term and protector of the Obama legacy. This tack that she has taken is helpful in the
Democratic primary, especially among African Americans, but is a very large mistake in a general election and reflects poorly
on her political judgement.
Judging from the three most important metrics of the economy: i.) detrended real nondefense GDP per adult from 1950 to the
present, ii.) employment as a share of adult population during the post-World War II period, and iii.) new housing sales per
1,000 adults over the past 55 years, anyone who runs on the Obama record is at a great, great, great disadvantage.
Just look at each of these three measures of economic performance:
30%
26%
22%
Eisenhower I
Eisenhower II
Kennedy
Johnson
Figure 1
Real Nondefense GDP Per Adult Detrended 5
(quarterly, 1Q-50 to 4Q-15)
Nixon I
Nixon II
Carter
Reagan I
Reagan II
H.W. Bush
Clinton I
Clinton II
Bush I
Bush II
Obama I
Obama II
30%
26%
22%
18%
18%
14%
14%
10%
10%
6%
6%
2%
2%
% Deviation from Trend
-2%
-2%
Note: Real GDP per Adult Trend = 1.88% Average Annual Growth from 1Q1950 to 4Q2015
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Laffer Associates
Even when a president’s term ends on a high note, as was the case with Presidents Kennedy, Reagan and Clinton, it is a
challenge for the incumbent party to maintain the White House. Thus, given that detrended real nondefense GDP per adult as
a measure of our country’s economic performance has ended on very low notes for Obama, “W” Bush and Bush Sr., it is clear
5
Note: the gray vertical lines in figures throughout this paper represent the election dates of these individual presidents. The reason for this (rather
than placing vertical lines on inauguration dates) is that we’re using economic metrics throughout this paper as indicators of votes rather than as
descriptors for the success or failure of presidential policies.
3
Jan-48
Jan-50
Jan-52
Jan-54
Jan-56
Jan-58
Jan-60
Jan-62
Jan-64
Jan-66
Jan-68
Jan-70
Jan-72
Jan-74
Jan-76
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Laffer Associates Game On [Updated 7/6/2016]
that the economy is shouting for a party change. This does not bode well for the Democratic Party, which continues to endorse
the current status quo.
And to confirm GDP growth’s implications, we also have the disappointing measure of employment to adult population. Again,
there is every reason on Earth to change parties now. There literally has been no Obama recovery, and Hillary Clinton
promises she’ll do more of the same. The U.S. has about 10 million fewer jobs per year than we would have had if the ratio
of employment to adult population were what it was in mid-2000.
Just compare the ascent of the employment to adult population ratio for the eight years of Obama to the Johnson years, or
even to the Nixon years, and especially to the Reagan and Clinton years. This Obama economy really isn’t a recovery, let
alone a strong recovery, as one would expect should have happened following the devastating collapse of the Great
Recession. Why would Hillary Clinton want to run on the Obama record? It’s beyond me.
65
64
63
Eisenhower I
Eisenhower II
Kennedy
Johnson
Figure 2
Civilian Employment-to-Population Ratio
(monthly, Jan-48 to Mar-16, percentage points)
Nixon I
Nixon II
Carter
Reagan I
Reagan II
H.W. Bush
Clinton I
Jan-90:
63.2
Clinton II
Apr-00:
64.7
Bush I
Bush II
Dec-06:
63.4
Obama I
Obama II
65
64
63
62
Sep-03:
62.0
62
61
60
Feb-79:
60.1
Dec-91:
61.2
Mar-16:
59.9
61
60
59
58
57
56
55
Jul-48:
57.1
Oct-49:
54.9
Mar-53:
58.1
Jul-54:
55.0
Jan-56:
57.8
Apr-58:
55.2
Jun-60:
56.5
Sep-61:
55.0
Aug-69
to Dec-
69: 58.1
Jun-71:
56.2
Nov-73 to
Mar-74:
58.2
Jun-75:
55.8
Feb-83 to
Mar-83:
57.1
Nov-10:
58.2
59
58
57
56
55
54
54
Source: Bureau of Labor Statistics
Using detrended real GDP per adult and total employment per adult, there have been two elections since Truman was elected
in 1948 that appear to contradict my economic improvement hypothesis—the Nixon election in 1968 and the Obama reelection
in 2012. Both of these elections appear to have had very strong extraneous factors at work. For Nixon’s success, the huge
outrage against Johnson’s handling of the Vietnam War could well have overpowered the seemingly good economy and for
Obama in 2012 a high racial sensitivity quotient could also have tipped the scales. If anything, today the war and racial
sensitivity issues operate against the Democrats.
What I beg you to look at carefully are the virtually identical precipitous drops in the economy immediately preceding the
Presidencies of Ronald Reagan and Barack Obama and the totally opposite results during their respective Presidencies. I just
can’t see how a pro-Obama candidate can win in 2016.
4
Laffer Associates Game On [Updated 7/6/2016]
And, of course, without a housing recovery, there can’t be prosperity, and, as shown in Figure 3 below, there is very little
prospect for a housing recovery anytime soon.
20
18
16
14
Kennedy
Johnson
Nixon I
Nixon II
Figure 3
New Home Sales per 1,000 Adults
(monthly, single-family homes, SAAR, Jan-60 to Mar-16)
Carter
Reagan I
Reagan II
H.W. Bush
Clinton I
Clinton II
8.4 is
average
Bush I
Bush II
Obama I
Obama II
20
18
16
14
12
12
10
10
8
8
6
4.3
6
4
4
2
2
0
0
Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15
Source: U.S. Census Bureau, Bureau of Labor Statistics
Far from being a change agent, once Obama took office, he doubled down on the Bush economic agenda, kept Bush’s key
economic advisors and thereby created further down-drafts for the economy.
The simple fact that absolutely leaps off these charts is the abysmal record attained by the 7+ years of the Obama
Administration. To be fair, the decline began when “W” took office and accelerated greatly when Bush, aided by Geithner and
Bernanke, bailed everyone out and spent huge sums of U.S. resources trying to stimulate the economy—all to no avail. To
me, the circumstances today are almost identical to those of 1980—16 years of bad economics about to be followed by a
political renaissance.
For Hillary Clinton, the Obama record on the economy will be her biggest negative come November. And the very fact that
she actually sought out and embraces this legacy speaks volumes about her judgement.
III. All Elections are Referenda on Incumbents
The Mood of the Country – The History of the Gallup Poll
Whether fair or not, Hillary Clinton is viewed as a Democratic insider and establishment regular. As such, she benefits greatly
in her ability to raise money and attract superdelegate support. But, there’s also a downside to being a Democratic insider
and establishment regular today. When the electorate is unhappy with the direction the country is heading, she’ll also be
blamed right along with the President and other members of his party. This is exactly what happened to the Presidencies of
Johnson, Nixon, Ford, Carter, Bush Sr., Bush “W” and presumptively Obama.
If any one of you remembers the contested Democratic primary of 1980 when Senator Ted Kennedy challenged his party’s
sitting President, you will be reminded of the current Democratic primary where Bernie Sanders continues to humiliate Hillary
Clinton, primary after primary. While Senator Kennedy lost in his quest to secure the Democratic nomination, he clearly
exposed all the weaknesses of President Carter, just as Senator Bernie Sanders is exposing Hilary Clinton’s vulnerability.
This can’t be good news for Mrs. Clinton.
For quite some time now, I have been using the Gallup poll question, “Are you satisfied with the way things are going?” as my
measure of the electorate’s level of discontent. This question has been posed by Gallup for years and years and, thus, the
5
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1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
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1996
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2002
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2008
2009
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2011
2012
2013
2014
2015
2016
Laffer Associates Game On [Updated 7/6/2016]
electorate’s response to this question reflects a consistent indicator over a long period of time: in fact, long enough for us to
get a sense of whether this measure is a reliable guide to help forecast election results (see Figure 4). It is:
In my paper “Senate Outlook” of October 2, 2014, I relied heavily on this Gallup question to arrive at my outlandish forecast of
a seven seat gain for the Republicans in that year’s Senate races. My forecast of a seven seat pickup was probably the most
optimistic forecast at the time for the Republicans. But, as it turned out, I was off by two! The Republicans actually picked up
nine seats—West Virginia, Montana, South Dakota, Arkansas, Alaska, Louisiana, Iowa, North Carolina and Colorado—and
lost none.
100%
90%
80%
70%
Figure 4
The Gallup “Are You Satisfied?” Survey
(Feb 2-5, 1979 through Feb 3-7, 2016)
In general, are you satisfied or dissatisfied with the way things are going in the United States at this
time? NOTE: This chart shows "satisfied"
Reagan I
Reagan II
H. W. Bush
Clinton I
Clinton II
W. Bush I
W. Bush II
Obama I
Obama II
100%
90%
80%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
Source: Gallup
The predictive power of this Gallup poll’s “are you better off?” question since the election of 1980 is pretty impressive. Both of
Reagan elections were right in sync with Gallup’s poll survey at November of 1980 and November of 1984. Likewise, Bush
Senior’s election in November of 1988 was seen as Reagan’s third term and was foreseen by the Gallup poll question.