Back in 2009, I made a bet with Bryan Caplan, with the winning condition for Caplan being that “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”, my interpretation being that the difference offsets the effects of the high US rate of incarceration. The EU-15 average rate was slightly below the US rate for 2009, and slightly above the US in 2010, so, for the first two years, the difference averages out to near zero.
If I were looking only at labor markets, I’d be grimly confident at this point. Although the eurozone encompasses some very different economies, overall, eurozone labor markets dealt with the immediate consequences of the global financial crisis relatively well. Meanwhile, the performance of the US labor market has been disastrous. The employment-population ratio has plummeted, back to the levels of 1970 before the large-scale entry of women into the labor market, while long-term unemployment is far above any previous level. Unsurprisingly, this is the time the Republicans have chosen to throw the long-term unemployed off benefits[1]. Meanwhile, the collapse of the housing market has greatly reduced labor mobility. The adverse effects of these developments are likely to persist for years, and the 2010 election outcome forecloses any hope of active policy response.
But that analysis ignores the impact of macroeconomic policy, and here the baleful impact of the European Central Bank comes to bear. While there is virtually no prospect of any further monetary or fiscal stimulus in the US there will probably not (unless there is a sustained shutdown of the Federal government) be much of a shift to actively contractionary policies of the kind being imposed by the ECB and the European Financial Stability Facility under the banner of ‘austerity’. I think it’s still possible that the ECB will find its position untenable, for example, if a new Irish government repudiates the deal that has just been imposed, or if German voters wake up to the fact that the people ripping them off are not Irish workers but German, French and British banks. But that’s a long shot, and a severe eurozone contraction can’t be ruled out.
fn1. This will probably reduce measured unemployment somewhat, by pushing long-term unemployed workers onto disability benefits, or into involuntary early retirement. But that statistical mirage, bought at the cost of massive human suffering, won’t make much of a difference in total.
{ 15 comments }
piglet 12.04.10 at 6:15 pm
Chris 12.04.10 at 10:19 pm
So basically Caplan’s chance of victory is the hope (?) that the EU will shoot itself in the foot even WORSE than the US is doing now and will do in the next 2 years of the Preemptively-Capitulating-To-Boehner Administration?
Yikes.
Brett Bellmore 12.04.10 at 10:24 pm
“Unsurprisingly, this is the time the Republicans have chosen to throw the long-term unemployed off benefits[1].”
Indeed, it is unsurprising. However much it may outrage in this context, that you get more of anything you pay for is still a valid observation. And anecdote or not, I do know people who ask me if my employer is hiring… So they can be sure NOT to put in an application.
mpowell 12.05.10 at 3:21 am
So basically Caplan’s chance of victory is the hope (?) that the EU will shoot itself in the foot even WORSE than the US is doing now and will do in the next 2 years of the Preemptively-Capitulating-To-Boehner Administration?
Well, I think Caplan’s bet was always premised on the idea that economic management in Europe was worse than in the United States. Although I’m sure this isn’t the mismanagement he was thinking of (I’ll bet Caplan is in favor of austerity to be honest).
I can see that Brett is going to base his political prejudices on a few anecdotal cases instead of the data that indicates that the ratio of job applicants to job openings is at an all time high. No doubt all those applicants are just pretending to look for jobs to placate their spouses…
Belle Waring 12.05.10 at 6:13 am
Brett: the unemployed lurkers (who want to stay unemployed at any cost) support me in email? Weak sauce.
Professor Booty 12.05.10 at 10:45 am
One thing that I haven’t heard mentioned in any discussions of the economy, from right or left, is whether it is surprising that as many as 10% of Americans might currently be unemployable. Neither side has a monopoly on complaining about the cluelessness of their countrymen, and there is ample objective evidence for it besides. What fraction of Americans don’t believe in evolution, or do believe that Obama is a foreign-born Muslim, or can’t name a single Supreme Court justice? Venn diagram them together, and it’s got to be >10%. Now throw in illiteracy, innumeracy, etc., and you are looking at a lot of people who seem un-hireable even at McDonalds.
chris y 12.05.10 at 11:49 am
Professor Booty, I can see how illiteracy or innumeracy might be a problem if you want to work for McDonalds, but how to you think unfamiliarity with basic political facts impacts your ability to take people’s orders and money in a restaurant?
Brett Bellmore 12.05.10 at 12:31 pm
“Brett: the unemployed lurkers (who want to stay unemployed at any cost) support me in email? Weak sauce.”
Nah, if they wanted to stay unemployed at ANY cost, there wouldn’t be much to do. Wanting to stay unemployed as long as somebody is willing to pay them to do so? That’s a somewhat different matter. One, for instance, is a woman whose son is going to college. As long as she’s unemployed, her son gets a break on the tuition. She calculates that break is bigger than the difference between unemployment and what she could earn. She’s not being irrational… She’s just gaming the system.
I mean, what’s your point? That people don’t respond, at the margins, to incentives?
“So basically Caplan’s chance of victory is the hope (?) that the EU will shoot itself in the foot even WORSE than the US is doing now and will do in the next 2 years of the Preemptively-Capitulating-To-Boehner Administration?”
Why the next two years? The bet, as John describes it, runs through 2018. He’s just reporting on the first two year’s performance. I think it’s quite plausible that the EU will manage to screw up it’s economy even worse than ours in the next 7-8 years. There might not even BE an EU by the end of the bet.
Thomas Jørgensen 12.05.10 at 5:41 pm
Two years because that is the timeperiod until the balance in congress gets reshuffled again, and the presidency goes up for grasps, so predictions about the behavior of the political-economic system of the USA beyond that timeframe are on very shaky ground. In other words, the current crop of US politicians can be relied upon to screw the pooch without so much as a minium of lube, but the electorate cannot be relied upon to return them to office.
Predictions for the EU… *Walks out on a limb* eh, well, formal politics are actually somewhat besides the point here, as the political-economy of europe is mostly about the collective bargaining model, and I think it highly likely that the unions will take the argument about deficient (german) demand and use it to finally get some decent pay rises again, and that increase in demand will kick off a virteous cycle, and by 2012, conventional visdom will be all about US schelerosis. Not that this will be anyore sensible than the current conventional visdom..
Brett Bellmore 12.05.10 at 7:53 pm
No, that doesn’t make sense. The bet has 8 years left to run, there’s no particular reason Caplan has to win it in the next two. Presumably Caplan didn’t make his prediction for 10 years out based on his assessment of Obama’s performance during his first term, but rather more structural factors.
As you can see here, US unemployment has averaged 6-7% over the last fifteen years. (As far back as I could find EU numbers to compare, but the average was the same for the last forty.) Here are the comparable numbers for the EU. Average? Around 10%. I don’t think Caplan was taking the administration into account at all, he was just going with the odds.
Myles SG 12.05.10 at 9:24 pm
As you can see here, US unemployment has averaged 6-7% over the last fifteen years. (As far back as I could find EU numbers to compare, but the average was the same for the last forty.) Here are the comparable numbers for the EU. Average? Around 10%. I don’t think Caplan was taking the administration into account at all, he was just going with the odds.
It’s hard to be forward-looking. I would say that the average structural unemployment rate in the U.S. is due to increase, perhaps close to the European level (there’s also the question of econometrics, as the E.U. number is calculated in a different way, and frankly overstates unemployment by the American standard). I mean, structural unemployment rates are not comparable across regions; structural unemployment is bound to be extremely low in Massachusetts, and extremely high in Michigan. So for all I know, it could be a random toss.
liberal 12.07.10 at 3:37 pm
Brett Bellmore wrote,
Yep; that’s why, when the price of land goes up, the amount of land increases.
Nick 12.07.10 at 5:19 pm
It did in the Netherlands.
More Dogs, Less Crime 12.07.10 at 10:29 pm
Caplan does in fact favor austerity:
http://econlog.econlib.org/archives/2010/09/austerity_for_l.html
Bernard Yomtov 12.10.10 at 12:18 am
However much it may outrage in this context, that you get more of anything you pay for is still a valid observation.
Maybe not.
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