Does the economy still decide elections?

For decades, it was believed that elections were essentially economic referendums. But Brazil and the United States are beginning to suggest that this relationship may be changing.

For much of the 20th century, democratic politics seemed to follow a simple rule: when the economy is doing well, governments are re-elected; when it is doing poorly, they are replaced. Elections functioned almost as a periodic referendum on economic performance.

This idea has become one of the cornerstones of modern political science. The concept became known as “economic voting”: voters would evaluate governments primarily based on economic indicators such as growth, inflation, income, and employment.

This hypothesis has been supported by numerous classic studies. From Anthony Downs, in his economic theory of democracy, to later works by political economists such as Alberto Alesina, the premise seemed solid: the economy was the primary determinant of election outcomes.

But contemporary politics is beginning to suggest that this relationship is becoming less clear.

Two countries illustrate this shift well: Brazil and the United States.

Brazil and the economy that isn't dominating the election

Brazil’s current economic situation is one that, in theory, should benefit any sitting government.

In recent years, several indicators have shown positive trends. We have seen economic growth over the past few years. Unemployment is on the decline. And other factors, such as the reduction in deforestation in the Amazon and the country’s removal from the so-called “hunger map,” are also making headlines.

According to traditional political science theory, this set of indicators should yield clear electoral results. However, the economy does not seem to dominate the Brazilian political debate with the intensity that theory would suggest.

Part of the explanation lies in the political polarization that has taken hold in the country over the past decade. In highly polarized environments, economic data ceases to function as a neutral indicator and comes to be interpreted through an ideological lens.

The same indicator can be presented as evidence of success by one group and as proof of failure by another. But there is also a structural factor that is less often discussed.

The mystery of Brazilian interest rates

The Brazilian economy exhibits an intriguing characteristic: its apparent ability to withstand extremely high interest rates. The benchmark interest rate remains close to 15%. In traditional macroeconomic models, interest rates at this level should lead to a significant slowdown in economic activity.

International experience points precisely in that direction. In the early 1980s, the tight monetary policies adopted in the United Kingdom during Margaret Thatcher’s administration led to a severe industrial recession and a sharp rise in unemployment.

In the United States, similar measures implemented by Paul Volcker led the economy into one of the most severe postwar recessions. Brazil, however, appears to be responding differently. Even with extremely high interest rates, the economy continues to grow moderately and unemployment remains relatively low.

This raises a provocative hypothesis: perhaps monetary policy has less of an impact on the Brazilian economy than conventional models assume.

Several factors may explain this resilience. A strong presence of targeted credit. The significant weight of the commodity export sector. Cash transfer programs. Fiscal expansion during certain periods and the low sensitivity of productive investment to the benchmark interest rate.

If this interpretation is correct, the transmission of monetary policy in Brazil may be weaker than conventional economic debate suggests.

Inflation as perceived by voters

Even when macroeconomic indicators are positive, voters’ economic perceptions may differ. Elections are rarely decided by aggregate statistics. They are decided by people’s day-to-day experiences.

In this regard, inflation plays a central role. Even when annual inflation remains within the targets considered acceptable by economists, persistent increases in the prices of food, rent, or basic services can create a sense of declining purchasing power.

Behavioral economics shows that voters react more strongly to perceived losses than to overall gains. Thus, a country may experience economic growth and strong employment indicators yet still face voter dissatisfaction if families feel the cost of living is rising. The economy as measured by official indicators does not always reflect the economy as experienced in everyday life.

A clear example of a measure that failed to have the expected impact due to behavioral factors is the recent approval of an income tax exemption for people earning up to R$5,000 per month. Although this was a major economic initiative, it did not have the impact that surveys had predicted. Taxpayers had more money left over, but given the general level of debt, this benefit ultimately went unnoticed. In other words, there is more money circulating in the economy, but taxpayers did not feel this benefit.

Interestingly, if the government had maintained withholding taxes and refunded them to taxpayers, rather than stopping the withholding altogether, it might have had a greater perceived impact, since taxpayers would have received a substantial refund rather than having their taxes withheld in small increments. In other words, it is a matter of perception, which far outweighs the actual benefit despite the same economic effect.

The United States and Post-Economic Policy

In the United States, the phenomenon takes on a different form.

In recent years, the U.S. economy has shown strong performance. Among these indicators are consistent growth, historically low unemployment, and robust job creation. Even so, the political landscape remains deeply divided.

This is because new factors have begun to compete with the economy as key determinants of voter behavior. Issues such as immigration, national identity, cultural conflicts, and regional inequalities have taken center stage in the political debate. American politics has become less of a contest over economic policies and more of a conflict between different visions of society.

Democracies in Transition

What Brazil and the United States suggest is that contemporary democracies are undergoing a major transformation. For much of the 20th century, elections functioned as economic referendums. Today, they increasingly resemble cultural, identity-based, and symbolic referendums.

The economy remains a key factor, but it no longer holds a monopoly on explaining election outcomes. Political polarization, information fragmentation, and identity-based disputes have come to share that role. In this new environment, voters make their decisions not only based on income or employment, but also on political affiliation, values, and narratives.

An old insight from Keynes

This tension between the real economy and political perceptions is not entirely new. Nearly a century ago, John Maynard Keynes observed that economic decisions are often guided by “animal spirits”—expectations, emotions, and narratives that shape collective behavior.

Democratic politics may be going through something similar. Even when economic indicators are positive, public perception can take a different turn.

When the economy stops calling the shots

If an interest rate of nearly 15% does not significantly slow down the Brazilian economy, an inevitable question arises. Perhaps we are overestimating the power of monetary policy and underestimating the influence of other factors—fiscal, social, and external—that drive the country’s economy. If this is true, a political consequence follows almost naturally.

The economy may no longer be the main factor in the elections, not only because of political polarization, but also because traditional economic policy tools no longer produce results as clear-cut as they did in the past.

For a long time, it was believed that prosperity led to political stability and that economic crises led to electoral defeats. But contemporary democracies seem to function differently. The economy continues to shape the material lives of societies. But elections are increasingly decided by perceptions, identities, and narratives.

And when policy is guided less by indicators and more by interpretations, predictability disappears—even for economists.