Bryan Caplan  

Keynesian Bets: What's Out There

Adam Smith on the Public Choic... Dwight Lee on Ebenezer Scrooge...
As far as I can tell, none of the comments on my Keynesian bet bleg point out or propose a Keynesian bet.  On Twitter, however, Noah Smith alerted me to the existence of the following Smith-DeLong bet:

If, at any time between 7/28/2012 and 7/28/2015, core consumer prices, as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%, then Brad DeLong agrees to buy Noah Smith one dinner at Zachary's Pizza at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 times the cost--including tax but excluding tip--of Noah's meal at Zachary's in Federal Reserve notes, or in alternative means of payment accepted by Zachary's should Zachary's Pizza no longer be accepting Federal Reserve notes at the date of the dinner. This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals.

If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary's.

1>0, so I'm happy to hear about this bet.  But you hardly need to be a Keynesian to have low inflation forecasts.  A totally atheoretical economist who knew about the TIPS market would make the same prediction.  Is there anything juicier out there?  I'd especially like contingent bets about nominal GDP growth and labor force participation conditional on fiscal and monetary policy.

P.S. Mmmm.  Zachary's.  Noah wins this bet either way.

COMMENTS (9 to date)
jmk writes:


[broken html code fixed--Econlib Ed.]

Rick Hull writes:

jmk you must be kidding.

"Senate Candidate Bets Congress $100 Million That the U.S. Government Cannot Run out of Money"

Does anyone for a moment doubt that that Uncle Sam cannot legislate, execute, or otherwise prod the Fed to print more dollars, even if only to buy Treasury debt, as deemed necessary?

The entire point of a bet is that someone would take the other side. Rather than propose something tautological, trivial, or ridiculous, you should instead propose something actually significant or controversial. This is not an exercise in rhetoric.

In response, I bet 100,000,000 USA Fun Tickets that the sun will rise tomorrow.

Rick Hull writes:

Please excuse my errant double negation. Uncle Sam would indeed legislate or execute (pun intended) the Fed as deemed necessary.

David Ray writes:

Caplan's and Henderson's bets weren't very juicy either?

Andrew writes:

Good luck pinning down a Keynesian for a bet. The logical choice would be a bet on the growth rate of nominal gdp or a drop in the unemployment rate following fiscal stimulus at the zero bound. But, Keynesians always backpedal quickly when fiscal stimulus doesn't have its intended effect, and claim that if only the fiscal stimulus were bigger (blame Republicans for limiting stimulus to only $787 billion), the economy would be surging.

muirgeo writes:

I was working on a bet with Prof Henderson over at Cafe Hayek.

George Balella Jr
....lets make the bet right now. If increases in goverment spending stay low (say 10 or 15% range or less) and we continue the rate off public sector worker lay offs ( >20 K/month) the economy will stall... ie < 2% GDP growth and no significant increase in jobs. Are you willing to take the other side and claim spending cuts and government layoffs will result in increased growth and jobs? And I'd be giving you the current trend, the prospect of the housing recovery, a not unlikely speculative boom and tons of privately accumulated capital all sitting around with the potential to make me look bad and loose the bet in the short term. Wanna Bet?

David R. Henderson
George, If we can clarify the terms a little and tweak them slightly, I would be willing to take the bet: even odds at $100. Specifically, if increases in government spending are below 4% (10 to 15 isn't low) and government employment (total at all levels) falls by 20K a month or more, we will have greater than 1.8% real growth and net growth in jobs. Why a number less than 2% growth? Because I think the expansion was anemic to begin with. And our bet is over the quarter we're in (winter) to the winter quarter of next year. Deal?

George Balella Jr
David R. Henderson David... so you want to bet that if we cut spending the GDP will fall to less than its 3 year average? That's not much of a display of confidence on your part. That would be making my point. Well actually the current 3 year average spending increase has been about 2.75%. My point is that if they cut spending significantly from the average GDP will go down more then the current CBO projection of 1.6%. So I would bet that if spending increases less than 2.5% then the GDP will be significantly less then its 3 year average of 2.13%.... say less than 1%. for the fiscal year. This assumes NO net hiring in the public sector. We could do $100 dollars to a favorite charity if you like.

[broken html codes fixed--Econlib Ed.]

Charlie writes:

The Noah-Delong bet is about the tail risk to inflation, as Noah is getting 49 to 1 odds. It is especially difficult to get that information from the TIPS markets. You either need to make an assumption about the functional form of the TIPS underlying distribution or you need bond options on TIPS. Even then, both are difficult to interpret, since they would be risk neutral probabilities.

Also, the bet has an inflation/unemployment connection that is Keynesian/monetarist...anybody that thinks aggregate demand is too low. That distinguishes the position from a lot of positions for instance Cochrane's whose position the bet is based on.

Ken P writes:

I'm not nearly as confident as Bryan about the capability of the TIPS market to predict future CPI increases.

TIPS has not weathered a real inflation storm and for the most part the investment community has grown complacent with decades of low inflation, which is akin to the "housing never goes down" mentality that helped derail markets on housing. Also, the people who are most concerned about inflation are (rightly or wrongly) not interested in TIPS much because they don't see a CPI buffer as much of an offset to the potential inflated prices of goods not covered by CPI. This keeps an important component of market knowledge out of the picture.

That said, TIPS is one of my priors and current its behavior reduces my expectations of high CPI increases.

The unemployment part of the Noah-Delong bet throws a wrench in things a bit. Unemployment can run together with or at odds with CPI. They seem more likely to move together if the economy were to go into a recession and more likely to move opposite if the economy were to improve. And then... you have the fed's bond buying being linked to unemployment and CPI factors.

Gre Jaxon writes:
"[Y]ou hardly need to be a Keynesian to have low inflation forecasts."

Indeed. All that is required is to admit that the Quantity Theory of Money is a hopelessly simplistic model. By appealing only to Menger's disequilibrium description of prices and observing the facts of the practice of Open Market Operations, one Austrian theorist has been talking about a kind of deflation defined as the shifting of demand from the commodity markets to the bond market - and acting on average to hold down prices of many sorts of consumer goods while gradually eroding the balance sheets of any bond issuers. See, for instance his short essay: "Federal Reserve As An Engine Of Deflation"

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