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Bet with Bryan Caplan, Year 2

December 5th, 2010

Back in 2009, I made a bet with Bryan Caplan, with the winning condition for Caplan being that “the average Eurostat harmonised unemployment rate for the EU-15 over the period 2009-18 inclusive should exceed that for the US by at least 1.5 percentage points”, my interpretation being that the difference offsets the effects of the high US rate of incarceration. The EU-15 average rate was slightly below the US rate for 2009, and slightly above the US in 2010, so, for the first two years, the difference averages out to near zero.

If I were looking only at labor markets, I’d be grimly confident at this point. Although the eurozone encompasses some very different economies, overall, eurozone labor markets dealt with the immediate consequences of the global financial crisis relatively well. Meanwhile, the performance of the US labor market has been disastrous. The employment-population ratio has plummeted, back to the levels of 1970 before the large-scale entry of women into the labor market, while long-term unemployment is far above any previous level. Unsurprisingly, this is the time the Republicans have chosen to throw the long-term unemployed off benefits[1]. Meanwhile, the collapse of the housing market has greatly reduced labor mobility. The adverse effects of these developments are likely to persist for years, and the 2010 election outcome forecloses any hope of active policy response.

But that analysis ignores the impact of macroeconomic policy, and here the baleful impact of the European Central Bank comes to bear. While there is virtually no prospect of any further monetary or fiscal stimulus in the US there will probably not (unless there is a sustained shutdown of the Federal government) be much of a shift to actively contractionary policies of the kind being imposed by the ECB and the European Financial Stability Facility under the banner of ‘austerity’. I think it’s still possible that the ECB will find its position untenable, for example, if a new Irish government repudiates the deal that has just been imposed, or if German voters wake up to the fact that the people ripping them off are not Irish workers but German, French and British banks. But that’s a long shot, and a severe eurozone contraction can’t be ruled out.

fn1. This will probably reduce measured unemployment somewhat, by pushing long-term unemployed workers onto disability benefits, or into involuntary early retirement. But that statistical mirage, bought at the cost of massive human suffering, won’t make much of a difference in total.

  1. Declan Trott
    December 5th, 2010 at 08:23 | #1

    “overall, eurozone labor markets dealt with the immediate consequences of the global financial crisis relatively well”

    As you have pointed out in the past, European employment is less cyclical, due to higher firing costs and other reasons (see e.g. http://krugman.blogs.nytimes.com/2010/09/02/kurzarbeit/). Even if growth in both areas is similar, one would expect US unemployment to come down more rapidly if there is any kind of recovery at all (or EU to keep rising if things stay really bad).

  2. December 5th, 2010 at 08:46 | #2

    Pr Q said:

    But that analysis ignores the impact of macroeconomic policy, and here the baleful impact of the European Central Bank comes to bear. While there is virtually no prospect of any further monetary or fiscal stimulus in the US there will probably not (unless there is a sustained shutdown of the Federal government) be much of a shift to actively contractionary policies of the kind being imposed by the ECB and the European Financial Stability Facility under the banner of ‘austerity’.

    Pr Q’s comparative bet is not really apples-to-apples since the US labour market is two-tiered, with a huge (significantly illegal) immigration sector which has soaked up most of the employment growth over the past year (at much lower wage rates). That means that the US’s authorised job seekers (and therefore official statistics) are at a great disadvantage. The EU has nothing like this, with a much more homogenous market overall.

    And the US recession has greatly amplified this statistical discrepancy. The Pew Centre reports that most new jobs went to non-Americans whilst native-born American job market went backwards:

    In the year following the official end of the Great Recession in June 2009, foreign-born workers gained 656,000 jobs while native-born workers lost 1.2 million, according to a new analysis of U.S. Census Bureau and Department of Labor data by the Pew Hispanic Center.

    As a result, the unemployment rate for immigrant workers fell 0.6 percentage points during this period (from 9.3% to 8.7%) while for native-born workers it rose 0.5 percentage points (from 9.2% to 9.7%).

    Also, even as immigrants managed to gain jobs in the recovery, they experienced a sharp decline in earnings. From 2009 to 2010, the median weekly earnings of foreign-born workers decreased 4.5%, compared with a loss of less than one percent for native-born workers.

    This data does not really disentangle lawful from unlawful immigrant job takers. But the evidence on earnings suggest that firms are hiring marginal workers from the black market rather than lawful job hunters.

    Nor is the EU alone in being plagued with obstreperous and obscurantist macro-economic policy making. For every EU “austerity-monger” I can present a US Tea Party “deficit hawk”. And the US also has to cope with state governments who are constrained in their ability to raise funds either from the Federal government or bond market.

    Also, I am dubious about the tactic of classifying the US’s long-term incarcerated as potential job-seekers. There is a huge submerged ice-berg of demoralised men in the US, who are not likely to ever be part of the normal labour market.

    Most of these unfortunate people have been victims (and perpetrators) in the US’s various Class, Culture and Drug Wars over the past few decades. It would be more accurate to classify them as disabled war veterans.

    As with illegal immigration, the EU has nothing like this kind of labour market segmentation.

    To summarise: More than 10% of the potential workforce in the US has a compromised legal status, being either illegal immigrants or felons. Both these categories make apples-to-apples comparisons with the EU job market somewhat invalid, and to the detriment of “normal” US labour statistics.

  3. Ikonoclast
    December 5th, 2010 at 09:10 | #3

    It appears that Prof JQ and Jack Strocchi disagree about many things. Yet, one thing they both agree on is that US is a mess. As Jack said “More than 10% of the potential workforce in the US has a compromised legal status, being either illegal immigrants or felons.” If this is true, it is a massive indictment of the immoral brutality and ugliness of the American system.

    The US is an evil system, as are the Chinese, North Korean, Russian, Iranian systems to name a few more. What a mess humans have made of the world.

  4. Jarrah
    December 5th, 2010 at 10:48 | #4
  5. December 5th, 2010 at 11:44 | #5

    Ikonoclast @ #3 said:

    It appears that Prof JQ and Jack Strocchi disagree about many things.

    Actually I agree with, and defer to, Pr Q on pretty much everything to do with standard economics. With a my Statistics 101 and an undistinguished pass at Commerce I am not about to tell my nerdy grand mother how to suck eggs.

    We disagree vehemently over what Stove called “the festering slums [of academe], such as sociology and anthropology”. Here formal expertise counts for little, “the rankest amateur, if he could get his foot in the door, would be sure to raise the tone of the place out of sight, morally of course, but even intellectually”.

    The problem is that the US economy, which everyone is interested in, has fundamentally different different anthropology from the rest of the OECD, at both ends of its labour market ie from Wall Street to Mean Streets, with Main Street squashed into the middle.

    But economists always gloss over this because it does not fit their abstract models. This makes straightforward comparisons between the US and EU very dodgy. I do not think that the outcome of the Quiggin-Caplan bet will prove much at all.

  6. December 5th, 2010 at 12:43 | #6

    Pr Q said:

    the ECB will find its position untenable, for example, if a new Irish government repudiates the deal that has just been imposed, or if German voters wake up to the fact that the people ripping them off are not Irish workers but German, French and British banks.

    There is plenty of financial, fiscal, factor and forex blame to go around in the PIIGS crisis. Speaking as an EU citizen I can share the irritation of the conscientious and diligent German tax-payer with most of the EU’s soft economic under-belly.

    For sure, lets get stuck into some City and Swiss financiers, they certainly deserve a good flogging. But so does the Italian “government” and Greek “workers”. These countries did not need a property bubble to fall off the economic cliff.

    Bankers dodgy financial practices are the root of most economic evil in the post-modern world. But its not as if banker lenders unilaterally forced NINJNA houshold borrowers to take out gigantic loans. In the US the government “banks”, Freddie & Fannie [FMx2], made the running to force more credit down the accommodating throats of “under-served communities”. Even Pr Q presciently suggested. FMx2 are the black-hole of the bail-out.

    Governments improvident pro-cyclical fiscal practices come a close second. Many PIIGS countries have spectacularly generous welfare systems which are unsustainable on current demographic settings.

    And then there are factoral issues, with many labour markets under-performing. These reflect some countries meagre endowments, or inhospitable environments, for the accumulation of human capital. I am thinking of a certain laid-back Mediterranean country with a well-deserved reputation for fun-in-the-sun and moonlighting.

    And finally there is the 800 lb gorilla in the living room: forex. We all know that Pr Q would rather cut off his right arm than admit any inherent defect in the EU Economic and Monetary Union. But it does seem like the strong euro is a millstone around the more tardy economic performers.

  7. December 5th, 2010 at 12:44 | #7

    Pr Q said:

    the ECB will find its position untenable, for example, if a new Irish government repudiates the deal that has just been imposed, or if German voters wake up to the fact that the people ripping them off are not Irish workers but German, French and British banks.

    There is plenty of financial, fiscal, factoral and forex blame to go around in the PIIGS crisis. Speaking as an EU citizen I can share the irritation of the conscientious and diligent German tax-payer with most of the EU’s soft economic under-belly.

    For sure, lets get stuck into some City and Swiss financiers, they certainly deserve a good flogging. But so does the Italian “government” and Greek “workers”. These countries did not need a property bubble to fall off the economic cliff.

    Bankers dodgy financial practices are the root of most economic evil in the post-modern world. But its not as if banker lenders unilaterally forced NINJNA houshold borrowers to take out gigantic loans. In the US the government “banks”, Freddie & Fannie [FMx2], made the running to force more credit down the accommodating throats of “under-served communities”. Even Pr Q presciently suggested. FMx2 are the black-hole of the bail-out.

    Governments improvident pro-cyclical fiscal practices come a close second. Many PIIGS countries have spectacularly generous welfare systems which are unsustainable on current demographic settings.

    And then there are factoral issues, with many labour markets under-performing. These reflect some countries meagre endowments, or inhospitable environments, for the accumulation of human capital. I am thinking of a certain laid-back Mediterranean country with a well-deserved reputation for fun-in-the-sun and moonlighting.

    And finally there is the 800 lb gorilla in the living room: forex. We all know that Pr Q would rather cut off his right arm than admit any inherent defect in the EU Economic and Monetary Union. But it does seem like the strong euro is a millstone around the more tardy economic performers.

  8. Alice
    December 5th, 2010 at 15:24 | #8

    @Jack Strocchi
    Jack says “But its not as if banker lenders unilaterally forced NINJNA houshold borrowers to take out gigantic loans.”

    Well jack Im not so sure I agree. Substantial inducements (more than many may have seen in their savings accounts in their entire lives – UP FRONT) along with interest rates and repayment schedules that made their rent look damn cheap…

    comes pretty close to immorally misleadingly and fraudulently enticing inducing and seducing NINJA borrowers to the point where they could see if they could get a foot in to those rising house prices even for a year they might have more savings than they had before even if they couldnt keep the payments up,

    if not “forcing”….it was still strange risky unethical lending practices.

    It was a gamble for the lender and they persuaded desperate Ninjas to gamble..but who made the first move?? The Financial firms sent small armies of slick salesmen out with shiny white teeth and fancy cars to do the pitch and throw some attractive cash bundles at Ninjas to get them signed up? Im sure some Ninjas went looking for loans when they heard what their friends had put in their bank accounts up front.

  9. Alice
    December 5th, 2010 at 15:24 | #9

    should say above “that made their rent look damn expensive…

  10. Alice
    December 5th, 2010 at 15:48 | #10

    @Jarrah
    Cant imagine why you think there would be an improvement in those maroon dot actual unemployment figures in the US with austerity measures Jarrah. There will only be more people defaulting out of their houses. The Irish are already leaving Ireland because there is no work. I suppose thats one way to see the Irish unemployment rate fall. Force the unemployed to leave?

  11. Ernestine Gross
    December 5th, 2010 at 16:02 | #11

    ” …the ECB will find its position untenable, for example, if a new Irish government repudiates the deal that has just been imposed, or if German voters wake up to the fact that the people ripping them off are not Irish workers but German, French and British banks.”

    There are probably casual observations which would support the idea that ‘German voters’ should wake up to the people who are ripping them off are not Irish workers but German, French and British banks. However, mainstream media, such as the Sueddeutsche Zeitung, paints a different picture. According to the policy debates reported, the Irish workers are not a problem but rather serious and persistent dissatisfaction with the global financial system, particularly the Wall Street banks, but including the Swiss, the German, the French, the British and the Irish banks, the rating agencies, and the bonuses paid to bankers on top of their salaries that are adjudged to be too big, relative to Hartz IV (the German minimum social security entitlement). Hartz IV is so controversial that the highest court in the country has been involved, reaching the judgment that some aspects of Hartz IV are unconstitutional. There is an austerity program on in Germany. The less controversial items on the agenda, from the perspective of possibly the great majority of voters, is a financial transactions tax (no support from Washington, London, Zurich) and a tax on nuclear power generation. In short, I don’t think it is helpful portraying ‘the German voters’ as a homogenous body of ‘rich’ people who are ignorant of the facts and wrongly believe the Irish workers are ripping them off.

    Suppose the ECB would submit to US domination (ie printing money under the heading of ‘stimulating the economy’). I am confident in saying that one of the plausible consequences in several of the less damaged EU economies would be inflation. This would mean that those people who lost savings, intended to finance retirement (and avoid Hartz IV in Germany) would be penalised again. In my opinion, it is exactly the voters who did not cause the GFC who would oppose such an outcome. Moreover, such people are not confined to Germany, although the proportions of savers to non-savers may be markedly different.

    I am using the term ‘savings’ rather than ‘money’ because I am referring to monetary (currency units) values of wages and profits from small business operations that were not spent by individuals but put in the bank. One can loose ‘money’ without being a saver (ie Lehman).

    The term ‘stimulating the economy’ is one of these unfortunate macro-economic phrases. It is unfortunate because ‘the economy’ can mean different things to different people. The Rudd-government gave $900 to all people who had lodged an income tax return in the preceding year and whose income was less than a specified upper limit (the exact number I have forgotten). The Bush-government (“administration”) gave money to bail out Wall Street bankers. Both measures are said to aim at stimulating ‘the economy’ and macro-economists (not necessarily each and every one of them at all times) spend time arguing about which measure is more effective in terms of some macro-economic variables, always including GDP. But surely the underlying notion of ‘the economy’ in the Rudd-government’s measure is very different from that of the Bush-government. The notion of the former includes people – all of them, not just a ‘representative agent’ as found in macro-economic models that are said to have a micro-foundation.

    Macro-economics is part of the problem.

  12. Jarrah
    December 5th, 2010 at 16:03 | #12

    “Cant imagine why you think there would be an improvement in those maroon dot actual unemployment figures in the US with austerity measures Jarrah”

    It would probably get worse, at first. But medicine, while often bitter, is better than the sickness. The alternative is perpetual Keynesian hair of the dog, which is a short-term fix if any.

  13. jakerman
    December 5th, 2010 at 18:03 | #13

    The alternative is perpetual Keynesian hair of the dog, which is a short-term fix if any.

    What is your evidence that austerity produces a long term fix? Results from IMF imposed austerity shows significant negative effects such as a strong and consistent pattern of reduction in labor share of income , and an anti-democratic shift where the difference between democracies and nondemocracies disappears under IMF programs.

    That sounds like austerity is punishing the wrong people and bailing out the problem makers.

    You’d want very strong evidence that austerity is better than Keynsian counter cyclic spending before you dump your policy down on folks.

  14. Alice
    December 5th, 2010 at 18:47 | #14

    As for austerity measures and your bitter medicine Jarrah – There are already dead horses all over Ireland because people cannot afford to feed them and people are fleeing the place

    There is nothing left after they pay their mortgages, if they can pay them. The level of debt people have sunk into in the private sector in many once industrialised nations is because oif what it has cost them to get a basic roof over their heads, not even to speculate on a luxury property.

    Throw austerity at that level of debt and I hope people fight back (I also hope they think twice before giving their votes to the conservative austerity peddlers amongst us).

    You can have your bitter medicine Jarrah. Things are bitter enough for many without it.

    Entire nations of people should not be forced into failure to save what exactly Jarrah? So the banks can own vast swathes of houses people can no longer afford? Take back the money the taxpayers gave to the banks, to bail them out, with penalty interest and give it back to the people.

    You throw your austerity measures, your bitter pill, on top of the massive levels of private debt the people in many nations are carrying and there may well be a civil war in some of these countries. One thing I am sure of – all these false remedies and austerity will damage the conservative parties for decades to come. They are damaged goods now.

  15. hix
    December 6th, 2010 at 06:07 | #15

    @Alice

    Should we feel sorry now because people cant afford horses? Please.

  16. Alice
    December 6th, 2010 at 06:41 | #16

    @hix
    More people own horses in Ireland than in trendy Paddington hix. Please.

  17. paul walter
    December 6th, 2010 at 13:15 | #17

    Jarrah, your sort of medicine is always better when applied to someone else.
    Alice is making the point that the “austerity”is political and a form of banditry- remember 2007 GFM, Bernie Madoff, mega banks and the like?
    Quiggin seems to have indicated often enough here, as an economist, that much of this allegedly “new”economics doesn’t have a basis in economic reality and theory.
    It is more to do with selling political narratives, to get others to pay for high flying delinquents and justify the current highway robbery of the masses, peddled by Murdoch and co..

  18. Jarrah
    December 6th, 2010 at 16:29 | #18

    Paul, I opposed the bailouts too. I’m very consistent – I oppose excessive spending in all its forms. :-)

  19. jakerman
    December 6th, 2010 at 17:19 | #19

    I’m very consistent – I oppose excessive spending in all its forms

    Such a rubbery definition “excessive”. Everybody opposes “excessive” spending. But where the rubber meets the road one has to decided what that level means. Do you have more than tea party like slogans to define what you mean?

  20. Alice
    December 6th, 2010 at 21:09 | #20

    @Jarrah
    Jarrah I opposed the bailouts as well and now I oppose austerity measures. Let them tax the bankers.

  21. Jarrah
    December 6th, 2010 at 21:33 | #21

    “Do you have more than tea party like slogans to define what you mean?”

    Yes. But in deference to JQ’s edict, I’ll put them up in the Sandpit, as it has little to do with the bet with Caplan.

  22. Jarrah
    December 6th, 2010 at 21:34 | #22

    Actually, it’s closed. I’ll wait for a new one.

  23. Alice
    December 7th, 2010 at 05:58 | #23

    @Jarrah
    Jarrah – its not closed (only the radioactive sandpit is closed) . The real sandpit has fallen down to the bedrock.. thats all.

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