Bryan's 20-20 vision.
By Scott Sumner
On the first day of 2020, Bryan Caplan won his EU bet (that no country would leave the EU by December 31, 2019.) That gives Bryan a record of 20-0 in his public bets. What should we make of that record?
The odds of someone correctly predicting 20 consecutive coin tosses is more than a million to one. Not all of Bryan’s bets are even odds, but a look at the list suggests that the average bet is close enough to even odds that the 20-0 record is truly extraordinary.
I’m not impressed if someone tells me that Joe Shmoe in Dayton, Ohio has outperformed the stock market in 20 consecutive years. America has tens of millions of stock investors, and thus you’d expect a few dozen to have “million to one” type investment performances, just based on luck.
But there are very few public intellectuals who have 20 bets on politics and economics, and who report those bets on the internet. Thus, unlike Joe Shmoe, Bryan’s betting record really is quite impressive. But how impressive? And why has he been so successful?
When I look at his list of bets I mostly see positions that I would also have taken, if I had been a bettor. I would have expected Bryan to have won about 16 of the bets, simply because he took the more rational position. Some bets were against people who predicted that something unusual would happen.
However, not all of his bets were against people making highly implausible predictions. There were clearly some bets that he might easily have lost, such as the prediction (in 2008) that gasoline prices would fall sharply over the subsequent 10 years. That might have been a loss if not for the fracking boom. He might have also lost his bet on the 2016 election, had a few votes switched in Rust Belt states.
In other cases, Bryan took advantage of the fact that people put too much weight on recent events, as when he predicted the GOP would retake at least one branch of Congress in the next 8 years, as a time when the Republicans were in a funk.
I am most interested in Bryan’s bets on macroeconomics. This is partly because he seems to share my views on key issues:
1. Monetary policy during the Great Recession was tighter than it looked, and hence unlikely to lead to high inflation.
2. During recessions, unemployment rises sharply due to the interaction between sticky nominal wages and demand (NGDP) shocks. Then wages adjust and unemployment falls back to the natural rate.
3. Recessions are unforecastable, thus during any given 2-year period the best forecast is no recession.
In my blogging, I’ve frequently criticized the view that the Chinese economy was about to fall off a cliff, due to reckless lending and malinvestment. These factors can cause recessions in small open economies that rely on international capital flows, but in big economies such as the US, China, and Japan, recessions are almost always caused by tight money. Because monetary policy errors are hard to predict, recessions are difficult to predict. China hasn’t had a recession in decades because reckless lending and malinvestment do not cause recessions.
If you don’t believe the market monetarist view of recent events, then it might have seemed sensible to predict that unemployment would remain high, or that inflation would surge due to all the QE. In my view, Bryan is winning his macro bets mostly because he has the correct model of the economy. I seem to recall that Bryan agrees with my view that sticky wages are the only way to explain temporary periods of high (involuntary) unemployment.
That’s not to say that the natural rate of unemployment cannot increase, indeed this occurred in Italy and France during the 1980s. Bryan might have lost his unemployment bets. But the US economy seems to have a much lower natural rate of unemployment. And there are cases when printing lots of money leads to high inflation, but if the bond market is signaling low inflation ahead, then QE programs are likely to be merely accommodating an increased demand for liquidity.
If anyone is frustrated with my unwillingness to bet on macro issues, I have a simple response; bet with the financial markets. My view of the future is the market’s view. If you disagree with me, then you disagree with the market. Anyone can bet against my “market monetarist” model any time they wish. The Keynesians who (wrongly) thought that the austerity of 2013 would drive the US into recession were quite free to sell the stock market short, if they had had the courage of their convictions. The Austrians who predicted high inflation could have bought gold and sold T-bonds short.
I hope this post doesn’t come across as me trying to minimize Bryan’s performance, or me claiming I would have done just as well. I do believe that I would have won most of my bets, say 16 out of 20. But almost certainly not 20 out of 20. Thus Bryan’s performance truly is extraordinary, even accounting for the fact that he tends to take the more “sensible” side of many bets. He’s also won a number of “difficult” bets.