As the election gets down to the wire, pundits of all kinds are
speculating on the outcome. Usually, they look at polls, debates, press
coverage, advertising and such. Economists prefer to look at markets. They
are signaling that maintenance of the status quo is the most likely outcome,
with continued Republican control of the House and Democratic control of the
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.
The website for those interested is www.biz.uiowa.edu/iem. As
this is written on Oct. 31, the prices show that there is 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.
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. The
chances of that happening are just 1 in 25.
Anyone who feels that these odds are wrong is free to bet their
own money by buying a contract. However, my reading of the polls suggests
that the market's judgment is 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
Political scientist Larry Sabato has assembled a history of
midterm elections at www.centerforpolitics.org/crystalball. The record is
virtually unbroken since 1934. The sole exception was in 1998, when
Democrats picked up 9 House seats despite holding the White House. However,
they lost 2 Senate seats in the process, leaving Republicans in control of
both houses of Congress.
Given the strong proclivity of voters to punish the party
holding the White House in midterm congressional elections, Republicans have
to view continued control of the House with great relief. This is especially
so in light of their thin margin and the poor state of the economy, which
normally spells doom for the party in the White House. In 1982, for example,
in the midst of a similar economic downturn, Republicans lost 26 House
Why Republicans seem to be getting a pass from voters on the
economy is a mystery. It may be that they are becoming more economically
sophisticated as a result of increased stock ownership and the proliferation
of cable business programs. Thus the latest NBC/Wall Street Journal poll
shows 34 percent of voters primarily blaming the Sept. 11 terrorist attacks
for the economic slowdown, with 16 percent saying it is just the normal
business cycle. Only 12 percent said it was due to the Bush administration's
policies -- the same percentage that blames the Clinton administration.
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. The reason may be that voters are more inclined toward
Republican-style tax cuts for stimulus, rather than Democrat spending
programs. According to the same poll, 48 percent of voters favor more tax
cuts to stimulate the economy, with only 31 percent preferring more
Of course, elections affect the economy as well as the other way
around. Economist Augustine Faucher of economy.com thinks continued gridlock
is not all bad. Although it may stymie Republican efforts to make last
year's tax cut permanent and reform Social Security, it may also doom
Democrat plans for a big government prescription drug plan and a patient's
bill of rights that would increase lawsuits against HMOs. Thus budget
deficits are likely to be smaller under gridlock than if either party
controls Congress entirely.
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