NCPA - National Center for Policy Analysis

Betting on the Election

November 4, 2002

For some years, the University of Iowa has run a futures market on key elections. Investors can buy contracts for various electoral outcomes, with prices changing depending on events. Right now, contracts are available for 4 possible outcomes on Tuesday: Republican House/Republican Senate, Republican House/Democratic Senate, Democratic House/Republican Senate, and Democratic House/Democratic Senate.

On October 31, the prices showed a 1 in 2 chance of Republicans keeping the House and Democrats keeping the Senate. In other words, even money.

  • The chances of full Democratic control of Congress and of Republicans gaining full control are almost exactly the same at 1 in 4. [See Figure.]
  • However, in recent days the odds of full Democratic control have virtually doubled -- they were 1 in 8 just a few days ago.
  • Simultaneously, the odds of full Republican control have fallen from 1 in 3.
  • The most unlikely result, according to the market, is Democratic control of the House combined with Republican control of the Senate -- just 1 in 25.

The market's judgment seems pretty close to the mark.

It's hard to say which party will be more disappointed by continuation of the status quo. Both had hoped to make gains at the other's expense. But realistically, it was always the Republicans who had the most to lose. They had more seats in the Senate to defend (20 Republican versus 14 for Democrats) and had a powerful historical trend going against them. The party controlling the White House almost always loses in midterm elections.

Why Republicans seem to be getting a pass from voters on the economy is a mystery. In any case, it is clear that Democrats did little to exploit their apparent advantage on the economy. While they talk a great deal about it, they have never come forward with a meaningful economic stimulus program.

One thing that is certain is that the outcome of Tuesday's elections will tell us almost nothing about what will happen in 2004. Republicans lost big in 1982, yet Ronald Reagan came back to win easily in 1984. Similarly, Democrats lost big in 1994, but Bill Clinton won handily in 1996.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 4, 2002

For Iowa Electronic Markets


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