US election depends on whether voters believe output has a unit root

8 Aug

Voters running unit root tests on election eve

This is not my area, but there has been a long debate since forever on whether real GDP is “trend stationary” or “has a unit root.” The Economist magazine discusses how this debate has unexpectedly erupted in the US Presidential campaign.

In the unlikely event you don’t know what a unit root is, here’s the Cliff Notes version:

Output is trend stationary if a downward movement is temporary, because it will be reversed until output again catches up to the previous trend.

Output has a unit root if a downward movement is permanent, and sets the “new normal” from which output starts growing again.

(This question also matters in developing countries of course, and it may even differ by level of development.)

Why does this matter in the US election?

If an incumbent inherits a large downward movement, then has an anemic recovery, is his performance below normal expectations? If he was stuck with a permanent downward movement, his “unit root” performance does not look so bad compared to the “trend stationarity” expectation that output should have regained the trend by now.