## Tuesday, April 13, 2021

### Inflation levels

March inflation is up. The CEA delivered a historic tweetstorm. It starts with

temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services

I'm glad for once to have nailed a forecast: That Fed and Administration's first response to inflation would be to invoke "temporary" factors, just as in the 1970s.  We'll see how that pans out.

The CEA goes on to "base effects,"

In the near-term, we and other analysts expect to see “base-effects” in annual inflation measures. Such effects occur when the base, or initial month, of a growth rate is unusually low or high..

This unusually large price decrease early in the pandemic made April 2020 a low base.

Since this is about the past, we can say something more definite. Yes, if you start from a low base, you can see a lot of growth. To get around the arbitrariness, let's look at price levels. Here is the recent CPI (blue) and CPI less food and energy (red). These are the levels of the CPI -- conceptually how many dollars it takes today ($271) to buy what$100 bought in 1983.

The last few months uptick is clearly visible. You can find your own "base month" by drawing a line. Yes, a line from last April to today shows an unusually higher slope, because last April was unusually low.

But to the extent that we're just seeing "reflation," a return of prices to normal after a steep covid-induced recession, the graph suggests that was over last summer. "Reflation" was over by September. Draw your own trends -- that's why I left some history in.

## Monday, April 12, 2021

### Conversations: covid and (separately) nonprofits

I did a few fun video conversations last week.

This is a conversation with Ryan Bourne, Megan McArdle, and Alex Tabarrok on economics and the year of covid. Direct link if the above embed doesn't work.

The conversation  is occasioned by the publication of Ryan's excellent book Economics in One Virus.  I am often asked for recommendations of general readable economics books. (i.e. no equations.) This is a gem.

Then I had a nice conversation with Mike Hartmann at The Giving Review, link here with transcript, (slightly edited, please refer to that if you want to quote me. The above is just a screenshot, you have to go to the link).

We explored my view that the US should eliminate the whole non-profit business, most of all the tax deductibility of contributions to non-profits, but also (less importantly) the non-profit corporate form. While many non-profits do a lot of good (my employer!) the system has become obscenely perverted, mostly as a tax-supported vehicle for political action, but also a tax dodge available only to the super duper wealthy, and a means of protection from the market for corporate control for flabby institutions. I trust that genuine useful charities will still attract donations -- maybe more -- from the substitution effect than they lose without tax deductions.

I've long been meaning to gather facts and figures to see if this salty opinion makes as much sense as I think it does, and I'm glad to learn about Philanthropy Daily, a resource that will be helpful.

Oh yes also a great GoodFellows with Bjorn Lomborg on climate. I love talking to Bjorn. He has an extensive command of the facts and science, and he's still an optimist that facts and science will actually make a dent in this debate. As global warming moved to climate change to climate crisis to climate justice to climate risks (financial) I'm less optimistic, but hope must be let out of Pandora's box.  Also

with Bari Weiss on media, censorship, free speech and assorted issues. Direct links, podcast  versions, and more all here

## Thursday, April 8, 2021

### Ip on Bidenomics

Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all.

There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy.

There used to be

"certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work."

By contrast President Biden's (really his team's) "embrace of bigger government" is founded on different economic ideas. To wit, abridged:

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. ...faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason.. said, that “‘depression economics’ applies basically all of the time.”

I guess I'm an old fogie.

## Tuesday, April 6, 2021

### A letter to Yellen

Secretary of the Treasury, and ex Federal Reserve Chair Janet Yellen recently hosted an important meeting of the Financial Stability Oversight Council.  This is the highest level body overseeing financial regulation in the US. It matters.

Her remarks start smoothly but critically, as one expects of a habitually well-prepared pro. A lot went wrong last year, from the treasury markets to another mutual fund bailout, and so forth. Bravo, it is time to get past celebrating how another bailout blowout saved the world and see if we can avoid another one.

And then,

We must also look ahead, at emerging risks. [To the financial system, the FSOC's purview.] Climate change is obviously the big one.

It is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability. We know that storms will hit us with more frequency, and more intensity. We know warming temperatures might disrupt food and water supplies, leading to unrest around the world. Our financial system must be prepared for the market and credit risks of these climate-related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets. On all these fronts, the Council has an important role to play, helping to coordinate regulators’ collective efforts to improve the measurement and management of climate-related risks in the financial system.

Dear.. May I still call you Janet? I have known you for 40 years, since you were kind to a young brash graduate student. In all that time you have always worked for sensible well-reasoned, quantitatively evaluated policy. I don't always agree, but you always have clear, careful and conservative (in the move-carefully sense, not the political sense) thinking behind your recommendations.

What the heck is going on? Surely you know this is nonsense?

## Monday, April 5, 2021

### San Francisco bans affordable housing

"San Francisco bans affordable housing," is the spot-on conclusion of a lovely post by Vadim Graboys (link to twitter).

The post is titled "54% of San Francisco homes are in buildings that would be illegal to build today" with an interactive graph of those homes.

Or, put another way, "To comply with today's [zoning] laws, 130,748 homes would have to be destroyed, evicting around 310,000 people."

The latter statistic is fun, but actually severely understates the damage of San Francisco's (and Palo Alto's!) zoning laws. The only reason current homes are illegal is that they were built under slightly less restrictive zoning laws. So that measures how much zoning laws have gotten stricter over time. It does not measure the much larger number of homes and apartments that were never built.

## Thursday, March 25, 2021

### Inflation options?

From Torsten Slok at Apollo. Torsten explains

Current pricing for caps and floors shows that the market sees a 30% probability that inflation will be above 3% for the next five years, and a 5% probability that inflation will be below 1%, see chart below. A similar worry about high inflation can be seen in 5-year breakevens, currently trading at 2.5%, the highest level since 2008.

A perpetual inflation worrier, I habitually confront the fact that bond prices don't signal inflation. I am forced to point out that they never do -- interest rates did not forecast the inflations of the 1970s, nor the disinflation of the 1980s. And I say inflation is unforecastable, a risk like a California Earthquake.

But for once there does seem some inflation risk in asset prices.

These are option prices. The main forecast remains subdued inflation. But these option prices are pointing to a larger chance that inflation does break out. More risk, not so much a sure thing. Also, it's not really screaming -- after all, we're about at the prices of July 2018.

In Torsten's view, despite these prices,

Five years of CPI inflation above 2.5% or 3% is in my view extremely unlikely.

## Wednesday, March 24, 2021

### Defining inequality so it can't be fixed

In one of their series of excellent WSJ essays, Phil Gramm and John Early notice that conventional income inequality numbers report the distribution of income before taxes and transfers. After taxes and transfers, income inequality is flat or decreasing, depending on your starting point.

 Source: Phil Gramm and John Early in the Wall Street Journal

If your game is to argue for more taxes and transfers to fix income inequality, that is a dandy subterfuge as no amount of taxing and transferring can ever improve the measured problem!

## Thursday, March 18, 2021

### Testimony on financial regulation and climate change

Update: An expanded and improved version of this post is at city journal, or here (pdf on my webpage

I had the honor of testifying at the Senate Committee on Banking, Housing and Urban Affairs, on Protecting the Financial System from Risks Associated with Climate Change Full video at the link, I start at 48:30 with slightly abridged version of these remarks.

Testimony of John H. Cochrane to US Senate Committee on Banking, Housing, and Urban Affairs

Chairman Brown, Ranking Member Toomey and Members of the Committee: Thank you for the opportunity to testify today.

I am John Cochrane. I am an economist, specializing in finance and monetary policy. My comments do not reflect the views of my employer or any institution with which I am affiliated.

Climate change is an important challenge. But climate change poses no measurable risk to the financial system. This emperor has no  clothes. “Risk” means unforeseen events. We know exactly where the climate is going over the horizon that financial regulation can contemplate. Weather is risky, but even the biggest floods, hurricanes, and heat waves have essentially no impact on our financial system.

Moreover, the financial system is only at risk when banks as a whole lose so much, and so suddenly, that they blow through their loan-loss reserves and capital, and a run on their short-term debt erupts. That climate may cause a sudden, unexpected and enormous economic effect, in the next decade, which could endanger the financial system, is an even more fantastic fantasy.

## Wednesday, March 17, 2021

### Back to the 60s.

Marginal revolution links to a great read on contemporary macroeconomics from J.W. Mason. It's mostly wrong, I think, but very thoughtfully puts together the wrong ideas behind contemporary policy macroeconomics.

Briefly, debt doesn't matter and there are no effective supply constraints. Borrow, spend without limit is the key to prosperity.

The fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift.

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.

It really does seem that on the big macroeconomic questions, our side is winning.

I have noticed the same thing. Few Republicans mention the idea that today's spending has to be paid by tomorrow's taxes, and consequently today's stimulus must be repaid by tomorrow's prosperity. His "side" won.  Until the well runs dry. (I also resist the assertion that economics must have political "sides," rather than an objective truth.)

But my interest in this particular post is to think about what it says about how thinking about economic policy is shifting, and how those shifts might be projected back onto economic theory.

The post is brilliant for systematizing the emerging view of economics in the Biden Administration, in much of the Fed, and its academic  allies.

The conventional view

Mason is captures refreshingly well the other "side," conventional macroeconomic wisdom that emerged after the debacle of the 1970s:

## Thursday, March 11, 2021

### Hoover Economic Policy seminar online

The Hoover Economic Policy working group seminars are now online for anyone who is interested. Follow the link and click "news and events." These happen on Wednesdays at noon, and are put up soon after. Interesting speakers, interesting discussion. Here's what's available so far:

Michael Bordo and Mickey Levy Wednesday, March 10, 2021 “Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record.”

Chad Jones Wednesday, March 3, 2021 “The End of Economic Growth? Unintended Consequences of a Declining Population.”

Eleni Kounalakis And Lee Ohanian “The Exodus of Firms from California: Facts, Reasons, Solutions.”

A Special Event in Honor of Secretary George Shultz Wednesday, February 17, 2021

### Paper, silver, deficits and inflation -- Chinese history version

A history of paper money and inflation in China, from Edward Chancellor's Wall Street Journal review of Jin Xu's Empire of Silver.  In these sparse paragraphs is most of monetary (and fiscal!) theory, along with a history I was not aware of.

Paper money, Ms. Xu tells us, dates back to the Tang dynasty in the ninth century, when the authorities allowed merchants to exchange bronze coins for promissory notes, known as “flying cash.” Two centuries later, in the time of the Song dynasty, merchants in Sichuan were using private exchange notes in place of the cumbersome iron coinage. The Song emperor issued his own paper money against deposits of coin. The jiaozi, as these notes were called, proved so popular that they traded at a premium to cash.

The convenience of paper money proved its undoing, however. The first temptation was for the Song authorities to make the jiaozi inconvertible, severing the connection with metal reserves. The next step was to increase the issue of paper money, both to feed the people and, more pressingly, to fund the fight against the Mongol invaders. The inevitable outcome was inflation, followed by the collapse of the currency.

## Wednesday, March 10, 2021

### Woke wars good and bad news

R.A. Fisher, famous statistician, is canceled by Cambridge University, along with a pretty nice stained glass window

Bari Weiss has a tremendous essay by  on the state of affairs in elite secondary schools, but including the first inklings of secret resistance. Coverage below.

The New York Times allows Brett Stephens to be critical of California's Ethnic Studies Follies. A short excerpt below. Others have slammed the curriculum more effectively, but the source makes this notable.

A group of courageous University of Chicago students sets up "The Chicago Thinker" a well-produced news website devoted to "defend conservative and libertarian perspectives in a community that is increasingly intolerant of such voices."

The Academic Freedom Alliance is launched, not just to talk and expose censorship but also to offer concrete and even legal help to those targeted. Spend some time browsing the website. We need not just voices, but institutions of civil society to defend free speech and thought, and this is a great initiative. It adds to the Foundation for Individual Rights in Education (FIRE) and the Heterodox Academy

*****

Bari Weiss  (I have reordered many paragraphs by my topics) What's it like at fancy schools these days?

A Harvard-Westlake English teacher welcomes students back after summer with: “I am a queer white womxn of European descent. I use [ she | her ] pronouns but also feel comfortable using [ they | them ] pronouns.” She attached a “self-care letter” quoting Audre Lorde: “Caring for myself is not self-indulgence, it is self-preservation, and that is an act of political warfare.”

“We don’t call them Newton’s laws anymore,” an upperclassman at the school informs me. “We call them the three fundamental laws of physics. They say we need to ‘decenter whiteness,’ and we need to acknowledge that there’s more than just Newton in physics.”

### A conversation with Tyler Cowen

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here  and embed below

Update:

My comments on efficient markets and active management provoked a lot of email.

I mentioned Jonathan Berk, and should have mentioned his coauthors Rick Green and Jules Van Binsbergen, on how active management can persist even though investors don't make any money on it. The basic idea is really clever:  A manager has 5% alpha skill on $10 milllion, i.e. he can earn$500k, but the skill does not scale. So he earns 5%, charges 1% fee, investors get 4%.  Investors see his great performance and rush in.  Now he has $50 million assets under management. He still earns$500k. He charges 1% fee, and investors get zero alpha. It’s equilibrium – if investors leave,  alpha to investors goes up again, and they return. Investors are earning the same zero alpha they get on the index so why not. And that’s about what we see. Fees persist in equilibrium, fees are equal to alpha on average, alpha post fees are about zero, flows follow performance. The seminal paper is "Mutual Fund Flows and Performance in Rational Markets" Jonathan B. Berk, Richard C. Green  Journal of Political Economy 2004  112 1269-1295 and a series following, here . It's not a perfect theory, but the glass is nearer full than empty, and it's a lovely supply and demand starting place to understand an industry that persists for decades.

More generally, the average fund earns no alpha, almost guaranteed by free entry. The trouble is distinguishing the good ones from the bad ones, on ex-ante characteristics. The filters used by academics are pretty weak -- past returns, ratings, education of principals etc. On the other hand, now we just move it all up to the meta-game. Picking managers is no different than picking stocks. Skill on skill, alpha on alpha, fees on fees...

### Inflation outlook at NRO. 1970s all over again?

Essay on monetary policy in National Review Online

Short version: The Fed's monetary policy has returned to the intellectual framework of the late 1960s. At best "expectations" now float around as an independent force, manipulable by speeches, but not tied to patterns of action by the Fed as analysis since the 1980s would require.

If you follow the conventional reading of how monetary policy works, that observation leads to a natural prediction:  we're on the verge of reliving 1970s inflation. (Fiscal policy, entitlements, regulation and cities seem to be headed also to 1970s policy on steroids.)

True, the Fed says "we have the tools" to stop inflation should it break out. But that tool is to rerun 1980. Does the Fed have the will? Will the Fed really induce a 2 year agonizing recession to bring down inflation, followed by 15 years of historically unprecedented high interest rates? Or will the Fed do what it did three times before that -- half-hearted interest rate rises that brought milder recessions, and a quick backtrack? Having even a nuclear weapon is useless if people stop believing you will use it.

I don't follow that conventional reading, so I'm not confidently predicting inflation. I worry more about fiscal affairs directly than about the Fed, which leads to a fear of a larger but less predictable inflation, that the Fed will have little power to stop. But mine is definitely a minority view.

Does the Fed’s Monetary Policy Threaten Inflation? (Contains Spoilers)

The central bank is headed back to the Seventies — a rerun that no one should want.

Does the Fed’s monetary policy threaten inflation? By conventional measures, yes. But those conventional measures have failed in the past. I believe that the short-run danger is less than it appears, but the long-run danger is larger.

If one reads Fed statements through conventional glasses, monetary policy seems to have been reset to the 1960s, and we know how that worked out.

## Tuesday, March 9, 2021

### Hope at the NYT: Douthat on cancel culture

Ross Douthat in the New York Times doubts that canceling Dr. Seuss is a good idea. That this essay made it in to the Times, of all places, and as of 9 AM Monday he has not yet been fired may give us some hope.

The most daring and revealing bit:

Just a few weeks ago the Amazonian giant decided to simply delete, without real explanation, a 2018 book by Ryan Anderson, a Catholic scholar and the head of the Ethics and Public Policy Center, called “When Harry Became Sally: Responding to the Transgender Moment.”

...I live and work among highly educated liberals, and I know that more than a few of them actually agree with the critiques of current transgender theory Anderson presents. They’re skeptical about the widespread use of puberty blockers for gender dysphoria. They’re wary about the implications for women’s spaces, women’s sports. They don’t share Anderson’s Catholic presuppositions, but they are, at least, J.K. Rowling liberals.

In the last stages of the same-sex marriage debate, I never encountered a flicker of private doubt from liberal friends. But in the gender-identity debate, there are pervasive liberal doubts about the current activist position. Yet without liberal objection, that position appears to set rules for what Amazon will sell.

That this admission could be printed in the New York Times strikes me as good news for free speech.

Let me be clear, as this is an explosive topic and I don't want my intent misconstrued. The question is not to judge anything about the gender-identity debate.  People I care deeply about lie on a trans spectrum, and I have learned a lot about their point of view. The question is whether public policy and medical or psychological fact on the issue can be discussed. Can evidence be sought, studies done, research discussed, books written and sold, and policy debated, actual science be performed? Can good progressives who work for the New York Times discuss these issues? Or is the current "activist position" on policy and medical issues undebatable? Nor is the issue, yet, legality of expression. Legality in a democracy only formalizes elite opinion. Amazon and Twitter censor first, law follows. Activists burn books first, law follows.

## Monday, March 8, 2021

### Pay toilets and NYT: a free market microcosm

Nicholas Kristof in Sunday's New York Times asks a pressing -- often quite pressing -- question. Why are there no public toilets in America? He is right. He calls for a federal infrastructure plan to fix the problem: "Sure, we need investments to rebuild bridges, highways and, yes, electrical grids, but perhaps America’s most disgraceful infrastructure failing is its lack of public toilets."

Now, put on your economist hat. Or even put on your reporter hat. Ask the question why are there no public toilets in America?

-------------------------------

## Friday, March 5, 2021

### GoodFellows interview with Ayaan Hrsi Ali

I learned a lot. The book is very interesting. Direct link in case the following embeds don't work.

### What about work or starve?

A young correspondent posed the following question:

I was wanting to know your opinion on the “work or starve” argument often made my leftists. ...they’re essentially saying that the exchange between the [worker] and the employer isn’t truly voluntary since if the worker doesn’t have a source of income, they can’t live. What would be your objection to this..?

First, someone has to work, or we all starve. So, if it is not going to be you work or you starve, it has to be you work or we send you to Siberia. If we are not actors in a market, we must be slaves to the state. Empirically, the incentive that the more you work the more you get has proved much more productive than appeals to patriotism, community sprit, the common good, or force.

Second, the best worker protection is competition. Many capitalists vying for your services in a free and open market is the best curb on one employer’s attempt to exploit its workers.  A good free marketer is always suspicious of the cronyism and protectionism of both capital and entrenched labor that pervades our economy.

Third, there is little objection to a robust safety net for those who are unfortunate so cannot work. Nobody starves,  not in the US, and not even in Libertarian Nirvana. But people who work harder, who apply their talents creatively in ways that serve their neighbors’ needs, do get to live a little better, to give them incentive to serve us all.

## Thursday, March 4, 2021

### Europe productivity -- and US too

Source Stephan Schubert

Source: Chad Jones "straight out of the Penn World Tables, and I first learned about it from Lee Ohanian and Jesus Fernandez-Villaverde"

In the top graph you get the impression that German and French workers are using up to date technology, including both machines, firm organization,  opportunities to trade in a wide market, etc. but that they simply choose to, are incented to, or forced to work fewer hours than US workers. Italy and UK are still plodding along 20% or so inside the frontier.

The bottom graph points a bleaker picture. I'm not an expert, but if labor productivity is high and total productivity is low, that means that the productivity of other inputs must be atrocious.  Chad (amazing expert on all things growth) "It is stunning to me that Spain and Italy have had negative TFP growth for 20 years."

I remember when real business cycles came out, and many were incredulous at the idea of negative productivity shocks. How can you forget how to do things? Well, maybe not for business cycles, but a society clearly can forget, and retrench. For centuries, remember, Italians looked up in wonder at the cupola of the Pantheon, the arches of the dry aqueducts, and wondered how they had been built.

Before you get all "go USA", let us not forget the largest economic disaster of our own times. These are all relative to the US. How is the US doing? Productivity slowed down suddenly, sharply, and it seems permanently around 2000.

In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.  Economic policy should have one central goal -- get productivity growing again, or (in my view) get out of the way of its growth. This is the one little hope that has not been let out of the policy Pandora's box, focused on everything else right now.

Update:

John Fernald and Bing Wang date the recent slowdown at 2003. The end of the first tech boom has something to do with it -- but why hasn't the second tech boom shown up in more productivity?

Ed Prescott's famous Ely Lecture* looked at US vs. France and concluded high marginal tax rates reduced French working hours.

Many commenters chalk it up to culture and a preference for leisure. I'm old enough to remember when French people worked Saturday mornings and chuckled at the lazy English who took the whole weekend off. An important work of social science on this question here.

An excellent Vox Post by Fadi Hassan and Gianmarco Ottaviano on Italian productivity. Too much investment in the wrong places, not enough computers. I speculate also too-small companies. Labor laws, regulations and taxes make it desirable to stay small, private, family-run -- and thus local, non-financialized.

*BTW, looking up the citation, I learned that the AEA canceled Ely of the Ely lecture, and renamed the lecture series.

## Wednesday, March 3, 2021

### The puzzle of Europe

Here are two unsettling slides I made for a talk. Here is GDP per capita in US, UK, France and Italy and China (2020 dollars, source world bank)

To make the comparison easier, here is each country not including China, divided by the US:

Here are the 2019 numbers (in 2019 dollars, again World Bank) US: $65,297. UK$42,330. That's 35% less than the US. Or, the US is  54% better off than the UK.. France: $40,494. Italy:$33,228 That's 50% less than US. Or the US is 96% better off than Italy.  China: $20,261. And it's been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy... Once noticeably better off than the UK, and contending with France, Italy's GDP per capita is now lower than it was in 2000. GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it's getting worse. What the heck happened? It could happen here too. Maybe it already has, just not as bad. This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world's biggest free trade zone really is a striking fact to gnaw on. Sure, other things are not held constant. Perhaps what should have been the world's biggest free trade zone became the world's biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, "it would have been even worse" is a hard argument to make. Economists haven't been talking about Eurosclerosis for a while but I think we should. These are huge numbers. The worst estimates of climate change are 7% of GDP in 2100. And those are surely overstated (see the excellent new paper by José Luis Cruz and Estban Rossi-Hansberg) You may admire the NHS for saving money, but even if the 20% of GDP we spend on health care is totally wasted, we're still ahead. Lots of people admire the European model. Just how far Europe is behind the US is remarkable -- and getting worse. ### Goodman on single payer With the current focus on "equity" and "disadvantage," even in the midst of a pandemic, one might yearn for the simplicity of a government run system. Surely if health care were free at the point of delivery, paid for by taxes, all the inequities of health care would disappear, no? (Sure we might all get bad health care, but we'd all get the same health care, no?) No. John Goodman has a nice Forbes article explaining why and giving the evidence from UK and Canada. Bottom line: Nothing is free. Everything is rationed. If it is not rationed by price, it is rationed by political access or personal connections. Markets are the great leveler, as anyone can get money but it's hard to get friends and connections. When Britain founded the National Health Service It was often said "health care is a right." Aneurin Bevan, father of the NHS, declared, “the essence of a satisfactory health service is that rich and poor are treated alike, that poverty is not a disability and wealth is not advantaged." 30 years after the NHS began the Working Group on Inequalities in Health investigated and The Black Report found little evidence that the creation of the NHS had equalized health care access or health care outcomes at all. Here are the words of Patrick Jenkin, secretary of state for social services, in his introduction to the report: “It will come as a disappointment to many that over long periods since the inception of the NHS there is generally little sign of health inequalities in Britain actually diminishing, and in some cases they may be increasing. ..” .. 30 years after Britain had nationalized its health care system and replaced private care with public care, it appears that inequalities in access to health care and health care outcomes were not any different than if the NHS had never been established at all! ## Sunday, February 28, 2021 ### r < g r<g is an essay on the question whether r<g means the government can borrow and not worry about repaying debts. No. Abstract: A situation that the rate of return on government bonds r is less than the economy's growth rate g seems to promise that borrowing has no fiscal cost. r<g is irrelevant for the current US fiscal problems. r<g cannot begin to finance current and projected deficits. r<g does not resolve exponentially growing debt. r<g can finance small deficits, but large deficits still need to be repaid by subsequent surpluses. The appearance of explosive present values comes by using perfect-certainty discount formulas with returns drawn from an uncertain world. Present values can be well behaved despite r<g. The r<g opportunity is like the classic strategy of writing put options, which fails in the most painful state of the world. The essay is based on comments I gave at the spring NBER EFG meeting on Ricardo Reis' "The constraint on public debt when r<g but g<m." My discussion starts here at 4:48, Ricardo presents the paper (very good, worth listening to, many points I didn't get to) at 4:30 pdf for now, as translating equations to blogger is taxing. ## Saturday, February 27, 2021 ### Fiscal theory of the price level draft The Fiscal Theory of the Price Level is a book I'm writing on that topic. It now has a full draft, here Comments, typos, suggestions, complaints, parts you find too easy, part you find too hard, things you think are wrong, parts you find repetitive, parts you find need better connection, things I should add, things I should delete are all most welcome! I also did a 2 hour video mini-course on FTPL for the Becker-Friedman Institute last summer, with slides/notes here. Update: The video link is now fixed (2/1/2012) ## Monday, February 22, 2021 ### Econtalk on virus About a month ago, Russ Roberts and I had a great conversation about virus, vaccine, and tests for the Econ Talk podcast, and the free market approach. It's out now, here for the podcast, or embedded below and here video on YouTube. The podcast link already has some excellent comments. ## Thursday, February 18, 2021 ### Lipson on basic decency Why are people gloating over Rush Limbaugh’s death? Charles Lipson writes The gloating over Rush Limbaugh’s death ought to shock the conscience. That’s not a political statement. That’s a cri de coeur about how our basic sense of human decency has been warped by political differences. To take one example, a Yale Law professor tweeted he wasn’t just happy Limbaugh had died, he was euphoric. He’s not some drunk being carried out of a rowdy bar. He’s the Charles F. Southmayd Professor of Law and Philosophy at Yale Law School and the Director of Yale’s Center for Law and Philosophy. ... The New York Times chose to write about Limbaugh's "Legacy of Venom:", "Weaponizing conspiracy theories and bigotry." Could they not wait for his body to be cold? Or show less respect for the tens of millions of apparently deplorable fellow citizens who listened to him? This is not one more complaint about the woke left. This is a problem on both sides. Rush’s friends on the right are happy to claim the moral high ground when the left is degrading itself like this. But they only hold it for a moment. They act the same way when the opportunity arises. Do you think they would behave any better if a Nancy Pelosi was hit by a bus? Many would think it was the perfect time to share with the world how much they hated the Speaker, how glad they were to see her gone. Quite a few expressed that view when invading the Capitol a month or so ago. Lipson's main point, and mine: The point here is not only that this behavior is despicable, though it is. The point is that so many people think their views are righteous and worth sharing with the world. That smugness and moral self-righteousness are signs of our political divisions and the moral decay they generate. ... When prominent people celebrate Rush Limbaugh’s death they are, inadvertently, telling us something about the decay of our civic culture. They are showing that we are now behaving as if we are at war, a cultural and political civil war. In the process, we are losing our sense of respect for each other at a very basic level. No one has the moral high ground here. Far too many take every fleeting opportunity to cry, ‘Vengeance is mine.’ That cry springs from battles that both sides now consider life-or-death. That is not how political differences should be contested in a constitutional democracy. That is not how people in tolerant, liberal societies treat each other. For those who say, ‘We are better than that,’ it’s time to show it. Both sides of our partisan politics are acting as if this is a life or death battle, the point being to wipe the other side off the face if not of the earth, of our political life. As I have opined, if it is so, we need to change the winner take all rules of our game. My mother advised, if you don't have anything nice to say, don't say anything. George Shultz, who we have been remembering this week at Hoover, would not have behaved this way, even on the death of a deep ideological opponent. "Show respect" was one of his watchwords. He did, even to the Soviets. Let's try to keep comments polite on this one. ## Wednesday, February 17, 2021 ### Institutional culture Arnold Kling has an intriguing series of blog posts on the nature of universities and other institutions that are, as he says, cancel-bait. I removed the cancel-bait part and pass on his observation on the shift in institutional culture, visible in universities but also in corporate and nonprofit institutions and in our politics. 1. The older culture saw differential rewards as just when based on performance. The newer culture sees differential rewards as unjust. 2. The older culture sought people who demonstrate the most competence. The newer culture seeks to nurture those who are at a disadvantage. 3. The older culture admires those who seek to stand out. The newer culture disdains such people. 4. The older culture uses proportional punishment that is predictable based on known rules. The newer culture suddenly turns against a target and permanently banishes the alleged violator, based on the latest moral fashions. 5. The older culture valued open debate. The newer culture seeks to curtail speech it regards as dangerous. 6. The older culture saw liberty as essential to a good society. The newer culture sees conformity as essential to a good society. 7. The older culture was oriented toward achievement. The newer culture is oriented toward safety. Hence, we cannot complete major construction projects, like bridges, as efficiently as we used to. Why? Well, he passes on a theory which I don't necessarily agree with, though I haven't read the cited book. The increasing politicization of all institutions of civil society is a different force that has a lot to do with the new culture. But the observations seem perceptive no matter what the reason. Academic economics certainly seems much more careerist than it used to be, more about who has what title and job than about who wrote what interesting new idea. But maybe that perception is a sign of age. ## Tuesday, February 16, 2021 ### Vaccine math.$500 per shot?

I'm reading up on the $1.9 trillion "stimulus." This caught me eye: Biden's plan would set out$160 billion for a nationwide vaccine program that would help state and local governments get the vaccine into people's arms.

There are 328 million people in the US. $160 billion is just about exactly$500 per person.

Now, I am of the view that the government should have spent a lot more on vaccines, testing, public health and so forth, given the $5 trillion and counting it has cost the government, and more in lots GDP, jobs, years of school and so forth. This is likely the least bothersome line in the bill. Still, has the US really gotten to the point of health care sclerosis and dysfunction that it costs$500 -- on top of money already allocated -- to give someone a shot?

### Test snafu

Wouldn't it be nice if there were a $5 test that works in minutes, and can find asymptomatic people who might transmit covid? Imagine how many schools, businesses, restaurants, weddings, churches, and so forth could safely open with such a thing. Imagine how much the reproduction rate of the virus could be crushed. There is! And it's sitting on shelves, one of the biggest casualties of the US federal monopoly on this simplest of all consumer goods. From detailed Wall Street Journal coverage “Antigen testing is one of the most powerful tools we have to hasten control to normalcy,” said Richard Pescatore, associate state medical director at the Delaware Department of Health and Social Services... The tests can quickly help determine whether someone is infectious. The tests detect cases by searching for pieces of proteins from the virus. They deliver results in minutes. Among the first rapid antigen tests cleared by regulators was the BinaxNOW, which is made by Abbott Laboratories, costs$5 and doesn’t require any equipment.

Costs $5 to the federal government. Imagine if Abbott could send it to you via Amazon or ship it in bulk to Wal Mart. Alas, rather than simply sell the tests on the open market, the federal government is the monopoly buyer, shipped them to states, and they sit on shelves: ### The wages of stimulus Discussing stimulus, a colleague passed along a factoid -- wages and salaries, he said, are running$20 billion a month or $240 billion a year below where they should be. If the "stimulus" were to aim entirely to replace all lost wages due to the pandemic, that would stop at$240 billion, not $1.9 trillion. (My colleague is usually a pro-stimulus type.) I forgot to get the source, so I tried to recreate it. Here are some documented numbers, total compensation of employees, wage and salaries. Feb 2019$9,228

Feb 2020 $9,659 Dec 2020$9,675

These are billions at an annual rate. Actually, by these numbers Dec 2020 is already above Feb 2020! That doesn't account for inflation, or missing growth. If we want to entitle ourselves to the trend, wages should have gone up $430 billion. Ok, still less than$1.9 trillion. (My snarky comment: trends are earned slowly, not laws of nature. Trends in wages come from higher productivity, expanding businesses, greater labor force participation, lower unemployment.)

One can argue for federal payments as insurance. Some people are definitely hurting, and some others are doing better. But the case for an overall "aggregate demand" shortfall seems weak. It is not always 1933.

### Inflation issues

In analyzing whether inflation is coming, Mickey Levy at Berenberg Capital passes along the above graph. These are price indices, so the upward or downward slope measures inflation. Is there inflation? That depends on whether you ask durable goods or services.

Why are we experiencing durable good deflation, and will it last? Part of the answer is quality adjustment:

## Friday, February 5, 2021

### A modest proposal for vaccine rationing

A mid-20s child of a good friend just got the vaccine. Why? He runs a micro-brewery, which his state deemed "essential," because it's "manufacturing."

As the WSJ reports

After nursing-home residents and health-care workers, the CDC says priority should go to those over age 75 and an expansive list of “frontline essential workers.”,

...“essential workers” ... include those who “work in transportation and logistics, food service, housing construction and finance, information technology, communications, energy, law, media, public safety, and public health.

media! Economics blogging should count, no?

What happens when a good is rationed? It is given out politically.

While many states have already given priority to police and firefighters, teachers’ unions are trying to cut to the front of the line and are blackmailing politicians by refusing to reopen schools. But teachers and child-care workers face less risk than other front-line workers since children are less likely to transmit the coronavirus.

Other unions are also lobbying for priority. The SEIU lambasted California Gov. Gavin Newsom’s well-advised decision last week to remove “essential” workers such as janitors from the state’s priority guidelines and base eligibility almost solely on age. “It’s like he’s putting us out to die,” griped SEIU United Services Workers West political director Sandra Díaz.

Industry groups including hotels, airlines and ride-share companies are also lobbying states to have their workers vaccinated first. Gov. Andrew Cuomo this week announced that restaurant, taxi and ride-share drivers would be next in line for vaccines. But why restaurant workers before retail workers or 60-year-olds?

The WSJ suggests rationing based on age.

The modest proposal: Why not let "industry groups" decide when they want the vaccine based on...hold your breath.. paying a market price to get it?  I wouldn't dare whisper that maybe individual people could be allowed to decide when to get the vaccine -- that is what we're talking about, when, not if --  by deciding when they want to pay for it, as our political climate cannot say out loud that anything should be rationed by willingness to pay. But surely, we can agree that profit-making businesses should be allowed to pay to get their workers vaccinated sooner -- if it's really important to them to do so -- rather than just by who has more political connections to be labeled "essential."

Fairfax schools says they're going to open up 2 days a week in March for some kids. Wanna know how? They're hiring thousands of unskilled classroom monitors to watch kids watch computer screens because their fully vaccinated teachers won't return to the building. This is nuts.

## Tuesday, February 2, 2021

### Trading halts and game over

David Battan writing in the WSJ brings come clarity to Robin Hood's trading stop.  It raises some questions for me, however. Much of the problem seems to stem from two-day clearing and settlement, and brokers lending people money to trade. Instant settlement and at least separating the lending activity from the trading activity ought to help. The institutions are really stuck with relics of a pre-computer world, it seems.

OK, first the facts, then speculation, and an invitation for commenters to correct me as I am not a master of these important plumbing issues.

## Monday, January 11, 2021

### Low Interest Rates and Government Debt

This is a talk I gave for IGIER at Bocconi (zoom, sadly) Jan 11 2021. Olivier Blanchard also gave a talk and a good discussion followed. Yes, some content is recycled, but on an important topic one must go back to refine and rethink ideas. This post has mathjax equations and graphs. If you don't see them, come back to the blog or read the pdf version. Update: Video of the presentations.

Low Interest Rates and Government Debt
John H. Cochrane
Hoover Institution
Prepared for the IGIER policy seminar, January 11 2021

1. Why are real interest rates so low? (And thus, when and how will that change?)

 Figure 1. 10 year US treasury rate and core CPI.

As Figure 1 shows, real and nominal interest rates have been on a steady downward trend since 1980. The size, steadiness and durability of that trend mean that we must look for large basic economic forces. “Savings gluts,” foreign exchange reserves, quantitative easing, lower bounds, forward guidance bond market frictions and so forth may be important icing on the cake, but they are not the cake. They cannot account for such a long-lasting steady trend.

The most basic economics states that the real interest rate equals people’s rate of impatience, plus growth times a coefficient usually thought to be between one and two. The interest rate is also equal to the marginal product of capital. In equations*, $r = \delta + \gamma g$.

 Figure 2. Real potential GDP growth.

Figure 2 presents the growth of potential GDP, as one easy way to look at long run growth trends. Potential GDP grew 4.5% in the 1960s, 3% in the 1970s, had a spurt in the late 1990s, and then settled down to less than 2% now. This slowdown in long-term growth is the great and unheralded economic disaster of our time. But that’s for another day.

The most natural explanation for the decline in real interest rates, then, is that growth has declined. A coefficient greater than one brings interest rates down faster than growth rates, opening the question that the interest rate r might even be below the growth rate g.

## Sunday, January 10, 2021

### FDA vs. Astra-Zeneca; bureaucracy vs. evolution and exponential growth

From Alex Tabarrok at Marginal Revolution, quoting Marty Makary, M.D., a professor of surgery and health policy at the Johns Hopkins University School of Medicine:

... the FDA needs to stop playing games and authorize the Oxford-AstraZeneca vaccine.  It’s safe, cheap ($2-$3 a dose), and is the easiest vaccine to distribute. It does not require freezing and is already approved and being administered in the United Kingdom.

Sadly, the FDA is months away from authorizing this vaccine because FDA career staff members insisted on another clinical trial to be completed and are punishing the company for inadvertently giving a half-dose of the vaccine to some people in the trial.

It’s like the FDA is holding out, pontificating existing excellent data and being vindictive against a company for making a mistake while thousands of Americans die each day...

My emphasis. Alex:

See also my post The AstraZeneca Factory in Baltimore. Thousands of people are dying every day. We have a vaccine factory ready to go. The FDA should lifts its ban on the AstraZeneca vaccine.

Alex understates the case. It is not just that "thousands of people are dying every day." It is that we are in the phase of exponential growth, and a new more infectious variant has just arrived bumping up the growth rate further. Every hour of delay means tens of thousands more will die.

We are in a fight of bureaucracy vs. exponential growth and evolution. Exponential growth and evolution are winning. Just how many thousands have to be on the left side of the trolley switch before the FDA stops allowing Astra-Zeneca to pull it? What's the risk aversion coefficient that justifies months of delay and another clinical trial?

More deeply, can the FDA ever figure out that the point here is to stop a pandemic? The mentality is traditional: we must provide a perfect vaccine to protect individuals, taking the disease as given, and people who die while we do more studies are worth the cost. That is simply not what's going on right now. The point of the vaccine is to stop a pandemic. The disease is growing exponentially, and mutating and evolving. The externality is everything. I know, it's awfully hard for bureaucracies to innovate and change mindset. Well, sometimes you have to.

For years the FDA was focused on, don't repeat thalidomide. Drugs must be safe. AIDS forced a hard reckoning. The people who are dying while you wait matter. But this is a third, even harder conceptual change. Stopping the spread of the disease matters. And the FDA does not have the years it took to make the AIDS change of mindset.

## Friday, January 1, 2021

### Nothing matters but reproduction rate R

The new strain and the need for speed by Alex Tabarrok on Marginal Revolution makes an excellent point. The new strain is more transmissible. That means the reproduction rate R is higher. For given behavior, the exponential growth is faster. If or where R was a bit below one and the virus contracting, now the virus is spreading exponentially again.

"a more transmissible variant is in some ways much more dangerous than a more severe variant. That’s because higher transmissibility subjects us to a more contagious virus spreading with exponential growth, whereas the risk from increased severity would have increased in a linear manner, affecting only those infected."

The recurring failure of our government response to this pandemic has been to get behind exponential growth. Here we go again. Wasted months when the vaccines were known to be safe. Wasted weeks to have thanksgiving dinner rather than  approve vaccine. Snafu after snafu in vaccine distribution. And CDC rationing that is designed to just about nothing to stop the spread.