In the run-up to the bursting of the housing bubble, investors in mortgage-backed securities comforted themselves with portfolio theory: by diversifying their investments, they could achieve higher returns with the same amount of risk.
The Obama re-election campaign’s strategists seem to be applying a similar diversification theory to their strategy for 2012. As Campaign Manager Jim Messina recently told USA Today, “Our entire goal here is to make sure we have many pathways to 270 electoral votes.”
The alternative pathways to 270 seem to focus on one path in particular: Virginia, Colorado and North Carolina, three historically Republican states that President Obama captured in 2008. The math works out such that if the president were to lose the traditional battlegrounds of Ohio, Florida and Pennsylvania, he could still win re-election largely on the backs of these new battlegrounds.
The problem with this strategy is that if risk is correlated, you can’t diversify it away. Mortgage ratings agencies and investors relearned this the hard way in 2008. Put together mortgages from Florida, Nevada, Arizona and California, and you may have geographical diversification, but that doesn’t help if they are all exposed to the same credit bubble.
The same is true of the 2012 electoral map, only the common political risk is the weak economy and persistent unemployment, not mortgages. Every one of the six states in these two paths to re-election has more people unemployed today than the day President Obama took office. Every one of these six states has a lower Democratic Party ID than when the president was elected. And in every one of these six states, the president’s approval rating is lower than his 2008 vote share, with recent polling in all six showing the president below the 50 percent level.
For the Obama campaign strategists to truly diversify their Electoral College options, they have to believe one of two things about the states in their different paths: First, they could believe that the demographics of a given state have changed so much in the last four years that the state will be more receptive to the president’s re-election. Second, they could believe that certain states will be more receptive to Obama’s campaign arguments than other states due to other uncorrelated intrinsics, like the local economy.
Both of these scenarios would help weaken the correlation that we have seen in voter opinion so far, and create more paths for the president to reach 270. So for example, if the rise in Hispanic voters in Colorado changes the demographic calculus there, the president could benefit. Likewise, if the economy in Northern Virginia has been insulated from the recession by the spending of the federal government, that could make the state more open to the president’s claims of progress on the economy.
Unfortunately for the president, these two states seem to be reverting to form rather than continuing the shift begun in 2008. Of all six battleground states in both paths to 270, Colorado and Virginia have seen the steepest declines in approval based on Gallup’s state-level polling.
Despite all this, there is a long year of politics ahead and the Obama campaign is smart to keep its options open before investing real resources. But like the housing bubble, after this Electoral College bubble bursts we are going back to basics. And we are more likely to see a close election fought out in traditionally close states like Ohio than in the expanded map of 2008.
Matt McDonald is a veteran of two presidential campaigns and was a White House aide under President George W. Bush. He is a partner at Hamilton Place Strategies.