As health care reform's chances improve, Democratic party election prospects for 2010 and 2012 drop

As I predicted a few days ago, President Obama is now telling Democratic members of the House that, instead of being hurt by a vote in favor of the party's health care reform package, they actually will benefit from passage of the proposed legislation.

He is quoted as having said "all Democrats would benefit from a health care win."  He also argued that his Presidency would receive a significant boost if the health care reform package is passed.

This is a narrative that party liberals, sensing a unique opportunity to balloon the government's role in health care, desperately want their more moderate and conservative House members to believe.

But trading at the prediction market Intrade, where investors make or lose real money if their bets are wrong, are telling a story completely opposed to the one being told by President Obama and senior House Democrats.

It's generally well known that the Intrade contract tied to the passage of the health care reform package has gone up noticeably over the course of the last month.  This is clearly evident in the price history graph below.  It suggests that the chance of the health care bill becoming law by June 30th has increased from 30 percent to about 70 percent.

If President Obama's story is correct, and passage of the bill will be good for all House Democrats -- and for the Obama Presidency -- then the bill's improving prospects over the past month should have been reflected in at least two key ways.

First, there should have been an increasing likelihood that the Democrats will be able to hold on to their majority in the House after this fall's elections.

Oops!  The Intrade contract on that subject shows exactly the opposite (see below).  

While the chances of health care reform becoming law increased, the chance of the Democrats holding on to the House dropped from 58 percent to 52 percent. 

Second, for the President's argument to hold water, the chance of the Democrats retaining the Presidency through the next election also should have increased over the course of the last month.

Oops again!  The Intrade contract for this topic once again shows trends going in exactly the opposite direction (see below).    

A month ago, the chances of a Democrat -- presumably President Obama -- winning the next Presidential election were about 58.5 percent.  At the end of the day yesterday, the chances were down to about 55.5 percent.

There are, of course, all kinds of caveats one should make about these numbers.  I've argued in my previous article, for example, that the health care reform Intrade contract probably overstates the chances of the Democratic billl becoming law.

But, even with all those caveats, the story is pretty transparent.  If health care reform passes, it will be bad for House Democrats overall, and it will be bad for the Democrat's chances of holding on to the Presidency come 2012.

These numbers may not fit with the left-wing, Big Government objectives of President Obama -- who (moderate and conservative House members note!) made it very clear he'd rather be a "good" one-term President instead of a "mediocre" two-term President.

But the numbers do reflect actual bets made by people wagering their own hard earned dollars.

And, besides, remember what what House Speaker Nancy Pelosi  said earlier today: "I love numbers. They're so precise."

Update (3/18, 8 pm) - Don't buy what I've just written?  Consider this.  Over the past few days, the health care reform ("Obamacare") contract at Intrade has been at its highest level ever.  And today, for the first time ever, President Obama's average net approval rating turned negative at the polls tracked by RealClearPolitics.com.

Intrade's "Obamacare" contract: how much does it really tell us?

I am generally a big fan of prediction markets like Intrade.  I find them to be a great way to get a quick read on how future events are likely to play out.

My feelings on this subject are one reason I have been following Intrade's health care reform ("Obamacare") contract over the past few months.

Lately, though, I have started to question the information value of the contract's trading prices.

The contract currently suggests that there is about a 75 percent chance that the Democratic health care reform package will be passed by June 30th of this year.

Frankly, this seems quite a bit at odds with a wide range of estimates ("whip counts") currently out there about who is likely to vote no and who is likely to vote yes on the reform package.  (See, for example, this detailed whip count .)

Now, don't get me wrong.  I am not saying that the various whip counts predict the imminent demise of the current reform package.  But most counts of definite "yeas" and "neas" have the "neas" noticeably exceeding the "yeas," and even counts that allow for a more subtle assessment of the situation suggest that passage of the package is far from a done deal.

Why the disconnect?

Well, one obvious reason might be that those of us not intimately involved in the current reform package negotiations simply cannot fully appreciate how far along those negotiations are.  Individuals closer to the process may recognize that the package's chances are quite high, and may be leveraging this information by buying the contract (and thus causing its price to go up).  In fact, Intrade's CEO has been quoted as saying that a lot of the recent trading volume in the health care reform contract is coming out of Washington DC.

But I wonder if there are other explanations which tend to diminish the value of this contract as a predictor of what's going to happen with the Democratic plan.

First of all, note that volume in the contract is not particularly high.  There have been only a few days where volume reaches into the several hundred contracts.

The low trading volume, however, means that it doesn't take much to move the contract's price in one direction or the other.  And I think there are at least two factors that might be causing the volume in recent weeks to support upward exaggeration in the contract's price.

One factor is, I believe, that the White House and Congressional Democrats have made a concerted effort in the past few weeks to convey the impression that the reform package's chances are much higher than they actually are.  I will write more on this strategy and its objectives in a later posting.  I think many observers will agree, however, that Democratic publicity in favor of the reform package has been much more extensive in the past few weeks, without any commensurate increase in publicity opposed to the package.  This publicity may well be causing Intrade traders to overestimate the likelihood of reform's chances of passing.

This first factor has been amplified, I suspect, by a second factor, which is that buyers and sellers of Intrade contracts are -- I suspect -- more likely to be supporters of the President and his reform efforts than opponents.  I assume that Intrade traders have noticeably higher incomes and education levels than the average American, and people with that demographic profile supported the President quite strongly in the last election.

If my assumptions are correct about Intrade buyers and sellers and their political leanings, the recent Democratic publicity campaign may have had a particularly amplified impact on the health care reform contract, as Intrade traders allowed their investment activity to be influenced by their desire to have the President and House Democrats succeed.

Now, I realize that I am, in essence, arguing that Intrade traders are making irrational investment decisions.  And that's not an argument one should make lightly if -- as I do -- one believes that market participants tend to act in accord with their economic and financial best interests.

But I think there is relevant precedent when it comes to Intrade and contracts tightly associated with President Obama.  Consider the Intrade contract for whether or not the 2016 Summer Olympics would take place in Chicago (North America).  The image below (hat tip ) shows the last month of the contract's price and volume history.

President Obama made a strong public commitment to Chicago and its campaign to be the 2016 host city.  This public commitment may have influenced Obama-friendly Intrade buyers and sellers, who had the contract trading at levels as high as 65 in the days leading up to the site city selection decision.  Nevertheless, the decision ended up going against President Obama, causing the contract to lose all of its value.

Note, as well, that this contract was traded even more heavily in its final days than the current Intrade health care reform contract.

There is, of course, one final possible explanation for a disconnect between the current trading prices of the Intrade health reform contract and the actual chances of health reform passing.  It is possible that the contract's value is being manipulated to make it seem that support is building for the Democratic plan.  There is no public data, however, on who is buying and selling the contracts, so we can only speculate as to whether or not manipulation is taking place.

Anyone willing to call up Intrade and ask whether George Soros has an account with them?

(For what it's worth, this posting argues that it is unlikely the Intrade contract is being affected by either insider trading or manipulation.  To be honest, I'm not fully convinced by the arguments.)

What will the President say to health care reform fence sitters?

President Obama will soon start meeting one-on-one with members of the select group of House of Representatives who will determine the fate of the President's health care reform package.

The conventional wisdom is that these conversations will be relatively simple.  Almost all of the House members with whom the President will meet are Democrats, so most people expect the President's discussions to focus on the long-held Democratic desire to have all Americans covered by some kind of health insurance.  President Obama will "tug on the Democratic heartstrings," the storyline goes, and appeal to each member's sense of duty to bring the long-desired ideal of universal health care to fruition.

The President will do this, it is assumed, to outweigh the concerns many members have about the impact a vote in favor of health care reform may have on their  reelection prospects this November.

Also to address those concerns, the President is expected to promise substantial White House and Democratic Party help to House members concerned about their reelection prospects.

But I think these expectations substantially underestimate not only the sales skills of the President, but also the ability of the President and his advisers to think strategically.

Instead of being defensive, I expect the President to pursue a potentially powerful alternative approach that could be very effective with many wavering House members.

In particular, I think the President is going to tell each member that he has no intention of letting his health care reform package be a negative come the November elections.

He will explain, instead, that, once health care reform passes, he intends to counter the "just say no" Republican Congressional strategy by offering up a variety of centrist proposals that Republicans will not be able to reject without coming across as truly obstructionist.  To give a sample of things to come, he probably will point to his latest education reform proposal.  (Do you really think it's just a coincidence that the President's education reform plans were announced right now, at the key juncture in the health care reform battle?)

Finally, the President will claim that, far from being a liability in the fall, the Representative's vote for health care reform and the rest of President's proposals will be seen as part of an impressive series of actions likely to improve the American economic security and standards of living.

All of this will seem completely logical to many of the House members -- mainly because it actually makes a lot of sense.

If the President can resist his innate tendency to tack left on just about any issue, it will, indeed, serve him best to move to the center if he wins the health care reform battle.  This will allow him and the rest of the Democratic Party to regain the support of independents and diminish the likelihood of substantial electoral losses in November.  It also will present a sharp constrast to the Republicans if the GOP continues with a "just say no" strategy.

The approach to the upcoming one-on-one discussions that I've just outlined also has one final advantage: It gives each House member a rationale for "following their heart" and voting in favor of that long-held Democratic ideal of universal health care.

What does all this mean for Republicans?

First and foremost, it means they should not underestimate the impact the President's discussions are likely to have on the voting intentions of key House members.  After the party's recent successes in Virginia, New Jersey, and Massachusetts, the GOP may think it has the President's number. Nothing could be further from the truth.  The President's upcoming discussions have a real potential to land a knockout punch to any chances the Republicans had of halting the Democratic health reform package..

Second, the GOP quickly has to develop and communicate a counter strategy that ensures key House members cannot rationally accept  the President's arguments.  Republicans have to put forward at least one believable alternative scenario that plays out better for most of the critical House members if they vote no on reform than if they go with the President.

I will not attempt in this posting to outline what such a strategy might be.  Frankly, I am not sure at this point what it would look like.  Perhaps some of you can put forward some helpful ideas.

But I do know this.  A GOP strategy of simply saying "Vote no, or we'll really go after you in the fall" isn't going to cut it with a lot of the House members.  As it stands, the GOP is going to go after these House members in the fall anyway.  And, as I described above, President Obama is likely to bring a much more compelling offer to the table.

Update: I discussed all of this a bit via Twitter with Karl from Hotair.com and Patterico.com .  He questioned whether the President really wants the GOP to stop being obstructionist, since he may feel it works in his favor.  A reasonable perspective, although I'm not sure I agree.  More importantly, he doubts that there is really any strategy the GOP can have with the Democrats who are on the fence, since Republicans "have no leverage" with those House members.  That may be the case, but I think it's worth our while to do some brainstorming to make really sure it's the case.  The stakes certainly warrant a stab at some out-of-the-box thinking.