The Case for a Midterm Election Surprise

The Case for a Midterm Election Surprise

By: David Barrosse, CEO of Capstone

August 8, 2022 — As I have said many times, Capstone is in the prediction game. We make predictions about state and federal policy and then conduct the complex task of modeling or financial analysis to help our clients understand how to benefit from the future policy landscape. Neils Bohr is often credited with saying, “predictions are difficult, especially about the future.” This is undoubtedly true in the worlds of policy, investing, and corporate decision-making. It means that we approach our work with both humility and an enormous amount of process.

Our prediction process is heavily influenced by the work of Philip Tetlock, author of a book called Superforecasters. Tetlock is a cognitive psychologist by training, and the basic conclusion of the book is that the secret to making better predictions is to reduce the impact of cognitive biases on the prediction. For example, recency bias leads us to give more importance to things that happened most recently, ignoring the longer-term history. So, the goal of a “Superforecaster” is to eliminate one’s cognitive biases. This is, of course, easier said than done.

Completely eliminating cognitive biases is probably impossible for humans. However, reducing their impact can be achieved by following several processes. We employ base rates, Bayesian adjustments, pre-mortems, and other techniques designed to improve our accuracy.

There is a strong correlation between the difficulty of the forecast and the value that the prediction will generate.

Our clients are not engaging us to make easy predictions. Although we can say with near-perfect accuracy that the sun will rise tomorrow, it is not a prediction that will generate any value for our clients. In fact, there is a strong correlation between the difficulty of the forecast and the value that the prediction will generate. Our recent work on the reconciliation bill, now called the Inflation Reduction Act (IRA), is a good example of this principle. The number of variables and influences on the prediction was staggering, making the prediction enormously tricky. However, our team of Max Reale, Josh Price, Hunter Hammond, and Grace Totman created significant value for our clients by having our odds of passage remain consistently high, at times, twice as high as the consensus estimates. Since the bill’s impact on numerous industries is large, Capstone clients were able to monetize our prediction.

Another way Capstone makes value-added predictions is to look for surprises by examining a narrative that runs counter to a strong consensus. For example, at the moment, political pundits and organizations that make election predictions believe that there is an 80% chance that Republicans will win control of the House of Representatives in the upcoming November elections. These pundits take into consideration several variables, such as the historical phenomenon that the President’s party often suffers heavy Congressional losses in the election, lower voter turnout for mid-terms, the President’s approval rating, Congressional approval ratings, and polling in individual races.

Capstone would look at this situation and build a counter-narrative and then stand back and see if we think the narrative is plausible. Sometimes we build the anti-consensus case and end up believing that the consensus is actually correct (most of the time it is). However, sometimes we are surprised and find that the narrative we created leads us to believe the consensus is wrong. In these examples (such as with the reconciliation bill), we are able to deliver enormous value to our clients.

Sometimes we… find that the narrative we created leads us to believe the consensus is wrong. In these examples (such as with the reconciliation bill), we are able to deliver enormous value to our clients.

So let’s examine the mid-term elections, specifically the race for control of the House of Representatives and see if we can identify a surprise over the horizon. As mentioned above, the election prediction website FiveThirtyEight.com gives 80% odds to Republicans garnering enough seats (218 seats out of 435). The base rate for this prediction would seem to support this conclusion. Since 1946, the President’s party has lost an average of 25 House seats in the midterm election. Only Bill Clinton in 1998 and George W. Bush in 2002 gained seats in the House. This phenomenon is often attributed to low turnout in the President’s party driven by buyer’s remorse and often a failure to get much done in the first two years of a presidency.

In this case, buyer’s remorse is a serious issue. President Biden’s approval ratings stands at 39% at the moment, a couple of points lower than where Trump stood at the same point in his presidency. A number this low means most independents and some Democrats are dissatisfied with President Biden. This does not bode well for Democratic voter turnout in November. A number of factors goes into the low approval rating, but inflation seems to be a new and important one. High inflation has not been a factor in U.S. elections since the early eighties. It is definitely a factor now, and some pundits claim it is the dominant variable, generating significant anger amongst voters who must pay higher prices for everything they buy.

So how would we create a counter-narrative for the consensus that Republicans will win control of the House in November? I would make the theoretical case that Democratic voter turnout in November will significantly surprise on the upside, not because of a great love for the President, but because of several unique factors:

  1. Roe v. Wade – The Supreme Court decision to overturn Roe v. Wade and turn the abortion rights issue over to the individual states is political dynamite. Public support for legal abortion has remained steady at 62% for many years. The recent defeat of an anti-abortion ballot initiative in Kansas by nearly 20 points, a state that went for Trump by 11% in 2020, showed that even voters in deeply red states have strong feelings on this issue. The issue has the ability to energize Democratic turnout while simultaneously depressing turnout of independents and moderate Republican women.
  2. Legislative Achievements – Democrats have achieved a significant amount of popular and bipartisan legislation in the first two years of the President’s term. Historic gun control, unprecedented support for domestic semiconductor manufacturing, support for military families exposed to toxic burn pits, and a rapid increase in the size of NATO with the accession of Sweden and Finland to the treaty block. If the reconciliation bill becomes law, as Capstone expects, it will create $369 billion of spending on energy security, extend ACA subsidies, and achieve long-sought after drug price reform. Climate spending in particular, has the potential to energize a younger Democratic base who has long been disappointed by Congressional inaction on the issue.
  3. Inflation – Overall inflation is clearly a negative variable for Democrats. However, not all inflation is equally bad for voters. Gas prices peaked this summer at just over $5.10, falling rapidly to the $4.30 level and likely to fall further as the summer driving season ends. This is an important change ahead of the November elections. At the same time, wage inflation continues to be strong, a fact the average voter sees as a positive.
  4. Trump Effect – In two presidential elections, Donald Trump showed an impressive ability to turn out Republican voters, many of whom were infrequent voters. This ability was driven by his near constant control of the news cycle and high popularity ratings amongst his base. The most obvious problem for Republicans is that Trump will not be on the ticket in November and the staggeringly high turnout number seen in 2016 and 2020 will naturally fall as a result. However, the Trump Effect is potentially even more problematic for Republicans. Trump’s popularity has declined with Republicans, at the same time that his influence in myriad Republican primaries has remained high. This creates the potential for a worst-case scenario for Republicans where voter turnout is depressed, and their House candidates are on the more extreme end of the political spectrum.

Simply accepting the consensus’ view as always correct will mean never being able to identify a surprise.

Having examined this counter-narrative many times, I am convinced that the 80% odds given by 538 to Republicans is wrong. In fact, I believe the odds are much closer to a 50-50 toss-up. However, my main point is that this is a methodology that Capstone often uses to attempt to predict surprise outcomes. Simply accepting the consensus’ view as always correct will mean never being able to identify a surprise. Engaging in intentional counter-narrative thinking is an essential part of how we find valuable surprises for our clients.

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