By Bryan Caplan
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 quarters 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.