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. Sounds like one of those complicated financial contracts. I hope you ran this past the regulator.

  2. Are the respective sizes of the military forces relevant as a substitute for unemployment?

  3. Do you mean you have to wait until 2018 to collect on this? Its ONLY $100 U.S….!

    Neither you or Caplan are into big money bets obviously!!

    Raise the stakes JQ. You are on a winner I think or at least make it “real $100 US in 2018”.

  4. Alice,
    This is the kind of destabilising financial speculation that got us into all this trouble in the first place. Such contracts are clearly immoral gambling/profiteering and should be regulated out of existence.

    Snark warning: It was mildly amusing the first time, not so much on a second go – JQ

  5. What’s your source for annual incarceration rate for EU15 and USA? There are many possible definitions and publications, some data on my blog here:

    Also to be honnest: is your bet really about work market status (employment/population in selected age/sex groups), or did you bet about a normalization of “unemployment” between EU15 and USA which will hugely favour EU15 given the currently unbelievable USA unemployment numbers relative to USA E/P?

  6. I’m sure you realise you could be right and still lose. It’s not inconceivable to imagine the US incarceration rate spiralling well beyond its current level.

    [A situation not improved by the EU unemployment rate being boosted by redundant prison officers.:-)]

  7. Given the constraints this seems to be the sort of bet where at the end of it all you might get the other party to admit that they lost but you won’t get them to admit that they were wrong.

    Personally I don’t know why people are so down on the long term prospects of the EU. As a system of federalism it has a lot of advantanges over the USA system. For instance:-

    1. No centrally determined minimum wage or price regulation.
    2. No central tax powers and no serious prospect of any.
    3. The ECB seems to be more transparent and focused than the Federal Reserve.
    4. Limited capacity for central government borrowing.
    5. No significant scope for central government military expenditure.
    6. Good prospects for peaceful expansion.

    They also have all the routine good stuff like a common currency, free movement of goods and services, labour and capital.

  8. According to this link the US incraceration rate is the highest in the world (although Chinese incarceration figures may be dubious) and has been spiralling since Nixon’s 1971 war on drugs…if it spirals even more I am sure there are some US private jailers who would welcome it.

  9. The US war on drugs is ludicrous (our own isn’t that great either). One can only hope that if nothing else Obama will see the light and put an end to this madness. Unfortunately I think he is more socialist than liberal.

  10. 12# Terje – you never know with the US. They talk the talk of individual liberty and freedom but then are ready to jail at a much higher rate than any other country. Anything could happen in the US… How about a return to an old US production system – an incarcerated slave labour force?

    If the US had treally wanted to do something about drugs….Im sure they could have eradicated South American production decades ago (imagine if they had used their military might not to fight wasteful wars but to really fight the war on drugs at its source?) It wasnt on the agenda. Its easier to incarcerate the victims of drugs, low incomes or unemployment and allow some private firm to profit from taxpayers subsidies by managing the incarcerated. The US could be said to have a habit of chasing the tail, not the animal.

  11. They talk the talk of individual liberty and freedom …

    Plenty of Americans talk the talk of socialism and totalitarianism. And they implement more than their fair share of it.

  12. Terje#13 says

    “It is time to accomodate drugs and mitigate harm. Like Portugal.”

    Pardon me for noticing but your view sounds distinctly green.

  13. It’s worth noting though, that Sweden has an equally strong anti-drugs position, without anything like the consequences in the US.

  14. TerjeP (say tay-a) Says:
    May 30th, 2009 at 11:25 pm

    The US war on drugs is ludicrous (our own isn’t that great either). One can only hope that if nothing else Obama will see the light and put an end to this madness. Unfortunately I think he is more socialist than liberal.

    # TerjeP (say tay-a) Says:
    May 31st, 2009 at 10:06 am

    It is time to accomodate drugs and mitigate harm. Like Portugal.

    and which Portuguese government introduced this drug policy?
    Not the government of Antonio Guterres’ Socialist Party, was it?


  15. Gerard – credit where credit is due. Socialists are at times liberal on social issues. However on economic issues they are not. It is a pity to have to be so compromised in ones choices. Which is why I am so enthusiastic about having an option such as the LDP on the ballot.

  16. […] In 2009, the U.S. unemployment rate exceeded Europe’s for the first time in decades.  Apologists for European labor market regulation rejoiced, so I publicly bet that European unemployment would exceed U.S. unemployment over the next decade.  The original authors I targeted turned me down, even after I offered a 1 percentage-point spread.  But noted economist John Quiggin took the bait.  Our final terms: […]

  17. “I failed to anticipate EU austerity in general.”

    There are those who pointed out that austerity (for the periphery) was structurally inbuilt into the ECU. One can name Joseph Stiglitz and Bill “MMT” Mitchell for example. The ECU is a monetary union but not a transfer union. One ought to expect axiomatically that such a Union would exhibit austerity outcomes. Having said that, it’s easy to lose bets. I’ve lost a few myself.

    In the USA, they continue to run significant deficits. The 2017 deficit equaled 3.5% of gross domestic product, up slightly from the previous year. The US now has the military-industrial complex, the security-industrial complex and the prison-industrial complex as important deficit spending drivers, which are more or less quarantined from cutbacks. This form of capitalism is rational in a sense. Rather than leave the marginalized and criminalized on the streets to run an informal economy, throw them in state and federal prisons to boost the formal economy via more debt and deficit spending.

    It’s rational, if you are going to scrap people, to turn them into a source of income for some formal sector (the criminal justice and prison-industrial complex). It’s also rational to scrap people if there is a large labor surplus. I’m not arguing that it’s humane, merely that its rational within the rationality of capitalism. Capitalism is nothing if not good at following its own rationality to logical conclusions.

  18. 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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