Bet with Bryan Caplan, Year 2
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. 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.