Is It the Economic Policy, Stupid?

Incumbent politicians have a well-known advantage in seeking re-election. Using the Economic Freedom of North America dataset, we examine how changes in economic policy during an incumbent governor's tenure influence the probability of losing their re-election bid. Put simply, does economic policy matter for the incumbent advantage? The results suggest that a decrease in economic freedom increases the probability of an incumbent loss, regardless of the governor's party. A decomposition analysis indicates that these results are primarily driven by the government spending sub-index. Furthermore, a more granular analysis suggests that: (1) increases in government consumption spending and government employment are associated with a lower probability of re-election among Democratic incumbent governors, but a higher probability among Republicans; (2) increases in transfer payments relative to personal income reduce the likelihood of re-election, regardless of party; and (3) among Republican incumbents, increases of income taxation and of top marginal tax rates are associated with a higher and lower, respectively, probability of losing re-election. Finally, controlling for a variety of demographic, political and socioeconomic factors, we find that high unemployment increases the probability that an incumbent loses re-election, while increasing net population migration reduces it.