Dr Eric Crampton: Not liking these odds

If next week’s American Presidential election is a coin toss, that coin looks increasingly weighted toward Trump.

In early October, the race was much closer to a fair coin toss. But over the past three weeks, Trump's chances, across a range of markets, rose to about 65% before falling back to just under 60%.

There have been arguments that wealthy supporters have been trying to inflate Trump’s perceived chances by betting on him.

But prediction markets are self-correcting. If some traders try to skew the odds, everyone else can profit by taking the other side of their bets.

It is not just a theoretical prediction. It has also been demonstrated in lab experiments. Adding these kinds of ‘manipulators’ increased the prediction market’s accuracy.

Consider a simple analogy. If you are pretty good at cards, you might be more likely to show up for poker night if you know that a millionaire who is a terrible gambler will be attending.

So, there are about two chances in five that America will avoid a second Trump presidency. If you think those odds are wrong, Kiwis can trade at Australia’s BetFair. The markets there are thick: you could put $100,000 into the market either for or against Trump with negligible effects on the odds.

Neither election outcome is particularly appealing.

Both parties’ shift toward protectionism is well-canvassed.

Less appreciated is the accelerating drift away from fiscal discipline. Under current policy settings America’s debt-to-GDP ratio is on track to hit 125% by 2035. The Committee for a Responsible Federal Budget’s projections have it rising to 134% under Harris’s policies and 143% under Trump’s.

Harris’s Democrats are likely to stifle technological innovation through punitive use of competition law and regulatory policy. Meanwhile, Trump says he would appoint Robert Kennedy Jr, who has argued that Wi-Fi causes cancer and ‘leaky brain’, to deal with health and food policy.

But policy differences between the two parties are probably the least important aspect of this election.

Gracefully conceding a lost election rather than encouraging riots should be a minimum prerequisite for winning a party’s nomination.

Instead, America’s electorate has better than even odds of selecting a candidate who should never have been nominated.

Whatever the coin toss result, New Zealand needs to be hedging its bets about America’s stability.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE