Barely two years ago, Tyler Cowen and I agreed to the following bet:

…U.S. unemployment will never fall below 5% during the next twenty
years.  If the rate falls below 5% before September 1, 2033, he
immediately owes me $10.  Otherwise, I owe him $1 on September 1, 2033.

Unemployment has been stalled at 5.0% for months.  But this January, the rate slipped to 4.9%.  I have therefore won the bet with almost 18 years to spare.

Per my Bettor’s Oath, I commend Tyler for having the courage to publicly bet on his pessimism.  (Unlike some people).  But it’s not out of line to observe that his extreme confidence was extremely out of place.  Where did he go wrong?  My port mortem: Like most news junkies, Tyler refuses to admit the near-insignificance of current events.  He loves the idea that the latest headlines reveal the latest deep truths.  I, in contrast, take the far view.  I form my views on the basis of long-run basic facts, and regard news as near-noise. 

The far view that guided my bet is rooted in the following graph for U.S. unemployment rate from 1948-2016.


There’s a strong pattern: While unemployment spikes fairly unpredictably, it reliably falls by about 1 percentage-point per year after it peaks.  So while I wasn’t confident about how high unemployment would go, I strongly expected it to recede at about its usual rate.  Since it peaked at 10% around January 2010, I expected it to get back to 5% by January 2015.  In the end, it took six years instead of five, but well within historic bounds.

My deeper incredulity, to be sure, was Tyler’s extreme (10:1!) confidence that unemployment had entered a durably high natural level.  This has happened in the past, but very rarely for a full two decades.  Furthermore, there were no dramatic warning signs the last time we entered the era of high unemployment, just as there were no dramatic advance warning signs we were exiting that era.  Here, as elsewhere, claims to gnosis do not impress me.  

Did I get lucky?  I’m happy to restart the bet the next time a recession hits.