Mitt Romney's choice of Wisconsin Rep. Paul Ryan as his running mate has thrown the state of Florida back into play in the prediction markets, suggesting political handicappers do not think the Republican wunderkind's budget proposals will play well in the retiree-heavy state.
To be fair, these same markets gave Ryan only a 15.8 percent chance of getting the nod from Romney as of Friday morning. While those are non-negligible odds, the markets were more certain that Romney would play it safe and go with the more vanilla Tim Pawlenty or Rob Portman. As rumors of a Ryan pick gathered steam, his odds in the markets grew to well over 50 percent by 8 p.m., about four hours before the pick was confirmed.
When the markets were leaning in the Pawlenty/Portman direction, they gave Romney a 70.7 percent chance of winning the state of Florida. With Ryan officially on the ticket, Romney is clinging to a 56.3 percent likelihood of taking the state. We expect polls to follow this path in the next few days.
Market odds in key swing states
Ryan's budget proposals will be at the center of the presidential campaign in Florida. For better or worse, his policies, if enacted, would probably cost the state's older residents. Ryan's budget calls for cuts to Medicare in the form of reduced services and increased premiums. He has also pushed for privatization of Social Security. Both of these measures would offset planned tax cuts that would drop the top income tax rate from 35 to 25 percent.
By moving away from a safe pick to a more risky choice, Romney chose to add uncertainty to a race many said he was losing. This is reflected in the quick reaction of the prediction markets. The pool on the overall winner of the election, for example, has opened relatively wide bid/ask spreads, meaning the traders are unsure of the direction the campaign may take in the next few weeks as Ryan is introduced to the electorate.
While there is an increase in uncertainty, there is no change in the overall prediction. The potential swing states are stable, and so our current prediction of Obama with 61.2 percent likelihood of re-election is essentially unchanged from before the Ryan announcement.
Still, Mitt Romney has a clear path to winning the election; he must carry Florida, Virginia, Ohio and one additional state. The immediate impact of the Ryan pick has made the path more difficult, but the odds of a surprise twist have increased dramatically.
This is going to be interesting! Follow along in real time with PredictWise.com.
David Rothschild is an economist. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot and email him at thesignal@yahoo-inc.com.