Bryan Caplan  

Mish Bet

Walter Block on Capitalism... Banks and Modigliani-Miller...
I'm back from the Kansas City econobloggers' conference.  My personal highlight: I managed to extract a bet from Mike Shedlock, a.k.a. Mish.  On the fiscal crisis panel, Mish predicted high unemployment for the next ten years.  This provoked a lot of heat but little light.  Over dinner, though, Mish and I hammered out the following bet:

If the official initially reported U.S. monthly unemployment rate falls below 8.0% for any month between now and June, 2015, I win $100.  Otherwise, Mish wins $100. 

Mish based his pessimism on the implausibility of rapid job growth in construction and other key sectors.  I saw this as misleading "near" reasoning - and took the "far" road instead.  My position:  During the last big recession in the Eighties, the unemployment rate fell about 1 percentage-point per year after the peak.  So while full recovery is indeed about five years away, it would be very surprising if unemployment stayed at 8% or more for three years, much less five.  Where will the new jobs appear?  If I knew that, I'd probably be investing in them instead of blogging about my bets!

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COMMENTS (25 to date)
ziel writes:

One thing in Mish's favor: the 80's recovery saw its growth in construction, in the wake of a lot of de-industrialization (the destruction of the rust-belt). Shifting into construction was relatively easy, as any blue-collar (or white-collar dropout) Tom,Dick or Harry could pick up a power saw and knock on doors and get work as interest rates plummeted and housing investment went through the roof.

Now, that is not an option - no way there can be a U.S. boom in construction. So there would have to be a boom in something else with equally transferable skills. I can't think of anything like that - "green jobs" ain't gonna cut it - maybe for engineers, but not for the average worker. I mean, if "green jobs" had any future, would a charlatan like Van Jones be its cheerleader?

So I think it's going to be much more difficult to grow the workforce during this "recovery".

The other question, which I'm surprised Mish didn't bring up, is how do we have a recovery when the fundamental problem that hit us - excessive debt throughout the system - has not been materially alleviated? The 80's recovery happened because the fundamental problem - the "wage-price spiral" - was broken by Volker's tight money and Reagan's union busting. The kind of tough choices needed today - namely, clearing of debt through bankruptcy and loss recognition - is being purposefully avoided.

Ted writes:

I don't like making bets about economic variables. There are too many thinks that can change in a short time. But, I do think the 80s situation is a bit different though, so it's likely a bad metric for what's going on here. That recession wasn't coupled with a lot of debt burden going forward. That recession wasn't coupled with a housing bubble, which I think is going to make people nervous about housing prices making them likely undervalued relative to fundamentals. Commercial real estate is likely to suffer as well in the future. It also wasn't coupled with a financial crisis, which will likely harm the financial industry for years since people will be playing with safe assets for quite some time and avoid a lot of risks, which will damage savings and growth. Also, and most importantly, with the 80s recession - monetary policy still had a lot of traction once Volcker tightened and then loosened. I don't think we are going to have that ability in the coming years.

That said, 8% for five years seems absurdly high.

Yancey Ward writes:

Shedlock will surely lose this bet. With his timeline, he is overlooking the effect of retirements on the workforce size. We might not fall below 8% in the next year, but we will surely fall below it in the next five years.

However, it won't be a rapid fall, and it probably won't fall fast enough to save Obama.

zidust writes:

Mish will lose this bet, but I think assuming 0.5% drop per year in the UE rate is a safer play:

Scott Sumner writes:

More $100 bills on the sidewalk; I'm starting to lose faith in the EMH. I'd be jealous of your skill at betting, but I know you have lots to mouths to feed.

Colin K writes:

Don't tell Paul Krugman, but peoples' UI benefits will also start to run out over the next year. I wouldn't be surprised if Mish's pessimistic view was right about under-employment, though.

Doc Merlin writes:

Are you guys using U-6 or U-3?

Mikeh writes:

Nice bet, you should have tried to get a peak oil parlay from him. The only way he wins is if those with a conservative bent (like himself?) can keep things the same, rather than letting all options open with the power of failure.

agnostic writes:

Yeah but the average person in the '82-'84 period had all that great new wave / MTV music to boost morale and get them out the door. They won't get that motivation nowadays.

More seriously, though, I wonder about how the falling levels of trust and confidence might make a difference. The GSS shows that trust has been falling steadily since the late '80s / early '90s. Unfortunately it wasn't measured in '81 or '82. Confidence in "major companies" has been at a steady all-time low since 2002.

Trust, confidence, "good faith," etc. all serve to lower transaction and monitoring costs, so we'd expect today's big recession to proceed more slowly toward recovery. But if I thought I knew how large the effect size was, I'd be making a bet of my own...

John writes:

[Comment removed for supplying false email address and for policy violations. Email the to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

jstaples writes:

Docmerlin, you make an excellent point. If it is U6 I think Mish stands a good chance of winning this one.

There is no way the government lets the U3 languish above 8% though. They will do whatever needs to be done to "massage" that number down to a more politically expedient integer.

In terms of real, productive employment though I just don't see where the next big bubble is going to come from. In the 80's it was construction, in the 00's it was the internet, in the late 00's we had housing again. We have nothing this time around.

Right now we are looking at mountains of private debt and market destruction by the government. I don't know if it is even possible to blow another bubble. The fed rate is already almost at 0%; that Ace in the Hole has already been played and look what it's getting us.

I hope Mish loses, but I definitely don't count him out.

chd527 writes:

I predict this bet will be won by Bryan Caplan, but not for the reasons he states. Caplan will win due to (1) contraction of the labor force and (2) governement manipulation of the employment statistics. We will not see another 80's or 90's era employment boom.

Jan writes:

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Tom Dougherty writes:

The official rate is the U-3. What I don't know from the above is whether the bet will be using the seasonally adjusted unemployment rate or the unadjusted rate. I would assume that the seasonally adjusted rate is used.

I like Bryan's chances of winning this bet. Five years is too long of a time period for the rate to stay 8% nationally. Two to three additional years is the best Mish can hope for the unemployment rate staying above 8%. If Mish had made the bet for the seasonally adjusted unemployment rate to equal or exceed 7% from now until June 2015, then I would feel much less confident in Bryan's chances of winning.

Gregor writes:

If you are using any recession post WW2 as a model, it's the wrong model. I have advocated repeatedly that people get clear on that issue first, before trying to make forecasts. One simply has to make a decision: is this an economic event that fits into post WW2 models? My answer: absolutely not.

MikeDC writes:

Would you care to make a lower bound bet on official, seasonally adjusted unemployment rate through the rest of this Presidential term?

As others have said, I think the terms of the bet with Mish are tilted firmly in your favor. However, I think Mish is probably right in that we're in for a long period of heightened unemployment.

I don't think it will reach and stay at 6% or less for any notable period of time.

Arnold Kling writes:

I think you have made a good bet. I would bet that within 6 months the mark-to-market on the bet will be close to 100 percent in your favor (meaning by then it will be obvious that he will lose).

Rahul writes:

Is the bet in nominal dollars or today's dollars?

If nominal then I think Mish is well hedged. If today's then you have a chance.

Nick writes:


Your website contains articles which border on antisemitism. You are certainly entitled to your beliefs but you are not really bolstering your credibility by espousing these views in public.

[N.B. both comments have been removed pending email verification and for other Econlib rules violations. (What is on their own websites is not pertinent to our removing the comments. However, their advertisement-like comments here border on spam; and one violated our standards by engaging in name-calling.)--Econlib Ed.

ftyler writes:

I'm surprised some people on here are so critical of gold. It has been the best performing asset class of the past decade and the fundamentals appear to remain in its favor because of the Fed's efforts to avoid deflation. For details on these fundamentals, I'd recommend reading the article below. Even though it's from last year it still applies, and there are also some other interesting pieces on this site about gold and the dollar:

Mr Econotarian writes:

France had 7 years of the 21st century above 8% unemployment, why is it so hard to belive that we won't end up like France? I see everyone's health care tax going up soon.

Trinh writes:

I agree with you. According to the BCDC definition of recession, as the time that business activity has reached the peak, then it falls until the business activity is at the bottom. Then, it will start to rise again. This is an expansionary period, and recession lasts about one year.So, if the unemployment falls below 8%, it will rise within a few months or a year not staying at that level for years.

jb writes:

Solid bet. Mish is reflexively pessimistic, almost instinctively so.

The one danger area for Bryan is, as others have mentioned, a health care disaster leading to economic stagnation, or malaise, if you will.

So I'd give Bryan about 70% on this one

MDH writes:

Why don't you do double or nothing for the Ten year average? I'd wager the Ten year average will be higher than 8%. :(

The bet is total guesswork, unless you know what the government plans to do in the next ten years. How high will federal deficit spending go each year? (The more deficit spending, the less unemployment.)

How high will taxes be? (The higher the taxes, the more unemployment) Net federal spending is the single most important factor in economic growth and employment, so unless you know what the government will do, your bet is akin to betting which bird will fly off the fence, first.

The guy who wins will proclaim himself a genius, and the guy who loses will say he would have won except for X and Y. Now there is a prediction you can take to the bank.

Rodger Malcolm Mitchell

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