US election bumper edition

From Challenger Chief Economist Dr Jonathan Kearns

The outcome of the US election will have important geopolitical and economic implications. Given this, it’s worth delving into what the data suggest about the likely result.

The latest national opinion polls give Democrat Presidential candidate Kamala Harris a lead of almost 3 percentage points over Donald Trump. However, the President is not determined by a national popular vote but by a majority of electoral college votes which are allocated to the winner of each state (or districts in Maine and Nebraska). To win a candidate needs to earn at least 270 college votes out of 538 available.

The President is likely to be determined by seven swing states: Arizona (AZ), Georgia (GA), Michigan (MI), Nevada (NV), North Carolina (NC), Pennsylvania (PA) and Wisconsin (WI). Harris holds a slight lead in the polls in three of these states (PA, MI and WI) while Trump is ahead in three others (AZ, GA, NC) and in Nevada it’s neck and neck.

If Harris wins these three states, and the other ‘likely’ states, she would have exactly 270 college votes and so would secure the Presidency. But in almost all polls the margin for these swing states is within the survey margin of error. And in recent years polls have tended to have a bias against the Republican candidate, although pollsters continue to adjust their methods to try to improve their accuracy. So all up, the polls don’t suggest a clear winner.

Another way to assess the likely winner is betting markets. They should take into account polls and any other available information, including the biases in polls. One market that covers the individual states highlights how the seven swing states will likely determine the outcome, with all other states having much higher probabilities of voting either Democrat or Republican. The seven swing states account for 93 college votes, with states likely to vote Democrat having 226 college votes and those likely to vote Republican 219 college votes. This demonstrates how crucial these swing states are to reach 270 votes. 

After the first debate, between Biden and Trump, the odds of Trump winning each of these seven states increased markedly. But since Harris became the Democrat candidate, and the second debate, all these states have moved toward a Democrat victory (i.e. the swing states are below the 45 degree line in the graph below comparing the odds after each of the two debates). Betting odds suggest three states (AZ, GA, NC) have a higher probability of electing Trump, two for Harris (MI, WI) with two absolutely line-ball (PA, NV)

Adding up the college votes for states based on whether the probability of a Trump victory is greater than 50%, and greater than 50% for Harris, suggests that Donald Trump would get the required 270 electoral college votes to be declared President. But with several states close to 50-50, the overall result is exceptionally close.

Despite the implication of betting markets on state outcomes, three different betting markets on the Presidency have the probability of Harris winning slightly exceeding that of a Trump win. But again it’s marginal.

The ability to implement policies depends not only on who wins the Presidency but also on the balance of power in the House and Senate, given most policies will need to be legislated. This matters since both candidates have inflationary spending plans and there are policies with harmful economic impacts, such as Trump’s proposed tariffs.

Betting odds suggest there’s about a 50-50 chance that one party will control the Presidency and both the House and Senate. There is a higher chance of a Republican sweep, around 30%, than a Democrat sweep, around 20%. This would give the winning President and their party the opportunity to implement their policies in full.

The other likely outcome is for the control of the House and Senate to flip with Democrats gaining control of the House and Republicans gaining control of the Senate. In this scenario, whether a Democrat or Republican wins the Presidency they would have to negotiate and likely compromise to get their agenda legislated. This would limit the more extreme elements of either party’s policy agenda.