Bet with Bryan Caplan

Bryan Caplan and I have now agreed on the settlement conditions for a bet on US_EU jobless rates while also agreeing to differ on the interpretation. The stake is $US100 and the agreed criterion is that, for Bryan to win, 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.

Since the implied difference in the proportion of the population who are unemployed is almost exactly equal* to the difference in the proportion of the population who are incarcerated, I interpret my side the bet as follows

Averaged over 2009-18, the sum of incarceration and unemployment rates in the US will exceed that in the EU-15

Caplan wants to leave incarceration out of the discussion and focus only in unemployment. Since we’re agreed on how to settle the bet, there’s no problem with differing on how to interpret the result.

I’ll do a longer post on the more substantive policy questions about the merits of labour market policies when I get some free time. But, for the moment I’d just like to make a “revealed preference” observation about the bargaining process.

Caplan initially proposed 1 percentage point, which I rejected with a counteroffer of 2.5. He rejected that and we ultimately settled on 1.5. Assuming our offers truthfully reveal our beliefs, that suggests Bryan’s point estimate for the average difference in unemployment rates is between 1.5 and 2.5 percentage points, while mine is between 1 and 1.5. Considering we have very different understandings of the economy, these estimates are pretty close.

* By my estimate the difference amounts to 1.3 percentage points, and it is still growing. (Apparently, the Dutch are closing prisons for lack of criminals H/T Nicholas Gruen

and So, 1.5 percentage points seems like a pretty good estimate for the average over the next 10 years.

26 thoughts on “Bet with Bryan Caplan

  1. Bryan Caplan (above) manages to be triumphalist and gracious all in one post. He is triumphalist about being “right” (on just about everything it seems) and gracious to J.Q. for nobly accepting defeat without a minor recount.

    The central issue re Bryan Caplan’s claims really has to do with the issue of cause and effect. There are more factors that are different between the USA and the ECU than just the flexibility of labor markets. Thus to ascribe the cause or all the cause of the USA’s better employment performance to labor market flexibility – and its relation to the economic cycle – is fallacious. There are other key differences between the ECU and the USA, which also play a part:

    (1) The USA is a monetary and transfer union. The ECU is only a monetary union.
    (Transfers from rich states to poor states via the Federal Govt. are at least possible in the USA.)

    (2) The USA runs larger deficits than the ECU. (In the euro area the government deficit to GDP ratio fell from 2.1% in 2015 to 1.5% in 2016, and in the EU28 from 2.4% to 1.7%. The US 2017 deficit equaled 3.5% of gross domestic product, up slightly from the previous year. Deficits are expansionary.)

    (3) The US dollar is the world’s reserve currency. (With this comes the advantage of seigniorage. As some put it: “In dollarization, the US Dollar has been the world’s reserve currency, and the United States economy has “enjoyed” the freedom to borrow and print ad infinitum without the usual penalties.” This maybe overstates the case but there is some truth in it.)

    (4) The US enjoys a strategic power advantage (economic and military) which permits it to distort and manipulate the world economy to its own advantage. (Anyone who claims this is not a real effect is either naive or disingenuous.)

    These factors illustrate that ascribing the cause or all the cause of the USA’s better employment performance to labor market flexibility – and its relation to the economic cycle – is either fallacious or at least not the whole story.

    It is possible to be right for the wrong reasons. Bryan Caplan needs to at least contemplate the possibility that there are more factors at work than he has explicitly acknowledged. Complex systems don’t have a single and simple cause and effect linkage between any two factors.

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