Bryan Caplan  

Recession Bet

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At the Cato Holiday Party, I hammered out the following bet with outgoing Cato intern Jackson Taylor:
$200 on whether or not America will have a recession, defined as two consecutive quarters of negative real GDP growth, in the next two years. Q4 of 2017 being the end of the period. But if that quarter happens to be negative, then we can look to the next one to see if we were or were not in the middle of a recession.
We agreed on even odds.  But since - per my terms for betting with people I don't know well - he pre-paid me, I added $25 in the event that he wins to cover foregone interest. 

Why do I think I'll win?  Base rates.  U.S. quarterly GDP growth is about 3%, and there's a high short-run positive correlation for quarterly growth.  So we're extremely unlikely to have negative GDP growth for the next two or three quarters.  The chance we actually get two consecutive quarter of negative growth before the clock runs out therefore seems well below 50% to me, making this a good bet.

In any case, I commend Mr. Taylor on his willingness to bet his beliefs.  He's a model for his generation - and all generations.


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COMMENTS (5 to date)
Philip George writes:

Looking at the graph of growth in money supply (my measure) on http://www.philipji.com/item/2015-12-05/the-fed-is-set-to-squeeze-during-a-monetary-contraction I think it is likely you'll lose.

My probable scenario is a financial crash in the second half of next year and a recession in 2017. This is of course assuming the Fed doesn't do another QE during this period.

Ostap writes:

You're a bright guy, who bet against somebody who probably is also a bright guy, so I must be missing something here. Wouldn't it have been shorter just to say that the end of your period is Q1 2018 and drop the last sentence?

Kevin Dick writes:

It occurs to me that if I were a bright libertarian leaning recent graduate, betting $200 at even odds against Bryan Caplan on a bet that I thought was actually well in his favor would be totally worth Bryan's linking to my LinkedIn profile.

At worst, I get my name out there once endorsed as being a reasonable person by Bryan. But then there's a decent chance, I'll get another link announcing I beat Bryan in an economics-related contest.

Kudos to Jackson for constructing a no-lose proposition!

[Next time try to make the time frame shorter so the potential winning announcement comes sooner, bumping your fame earlier :-)]

ThaomasH writes:

Basically this is a bet on what the Fed will do and I do not see much economics in it. Why not bet on the reaction function of the economy to some monetary policy variable?

Justin D writes:

I'd suggest modifying the terms of the recession bet to focus on the labor market as the relevant indicator, or perhaps instead to rely on the judgment of the NBER as to whether a recession began before the end of 2017.

If Scott Sumner is correct and trend real GDP growth is just 1.2%, it wouldn't be surprising if two consecutive quarters of negative real GDP growth occurred during an expansion.

Conversely, we could also have a recession in which the two quarters of negative real GDP growth weren't consecutive, say, in which the first and third quarters of 2017 are sharply negative, but the second and fourth quarters of 2017 are slightly positive.

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