 Hello everyone and welcome back to Conversations with Tyler today. I'm here with John Cochran I refer to John as a voice of sanity, but to the world as a whole He's known as senior fellow at the Hoover Institution and he also blogs at Grumpy Economist John. Good morning. Good morning These are the questions I want to ask you first why aren't real interest rates equalized across countries that's always bothered me Maybe start in right and easy. I don't know Like Brazil has very high real interest rates for decades right arbitrage doesn't seem to work Well, that's not an arbitrage. So an arbitrage is the opportunity to make a sure profit no risk So you got to invest in Brazil and you got to take the risks of investing in Brazil Which include usually currency risk, so real interest rate is is the interest that you get when you expect You you after the expected appreciation of depreciation of the currency then there's the legal risk and that they might expropriate your stuff so There's it looks like there's a profitable opportunity to invest in Brazil Put that way now it starts to look like everything else in finance There's a what looks like a profitable opportunity. There's risk Are people properly balancing the profitable opportunity the risk? So why is Tesla stock so high why your value stocks so low? You know, why does it look there? There's opportunities that you and I as an economist can't quite So set out what the risks are keeping other people from investing in But if you'd like to buy a Brazilian gold mine, I can arrange it for you Tyler Well, but look we know currencies are very close to a random walk, correct So it would seem the countries that have higher real rates of return higher discount rates They should have higher expected returns on their market Brazil is small relative to the world as a whole There's a lot of capital that could invest born Brazil without being Systemically much riskier and you would think that simply pursuing higher expected returns that ought to go away And real interest rates across the world should equalize, but they don't seem to well all sorts of Apparent opportunities should equalize. I urge you to start a hedge fund You know, so there are let's talk about what's documented here. There's the puzzle of Uncovered interest parity that it does seem you do seem to be able to make more money Investing in countries that have high interest rates now as you mentioned a high interest rate should go along with an expected depreciation of the currency and That pattern doesn't seem to be very strong On the other hand when it goes wrong it goes wrong big time and all at the same time So that our friends who have started hedge funds that do this sort of stuff Make make money for a little while and then they lose it all So there hasn't been a goldmine in people trying to exploit this thing It's one more hedge fund strategy that you're welcome to invest in like all the other hedge fund strategies I also say, you know, cross there is an interesting the larger question You know, why is China exporting capital not importing capital? Cross-border flows and it's one of those things that sort of bedevils us Free marketers we look at something that ought to happen more up For years people said why isn't there more cross-border investment then they started being huge cross-border investment Which is that has to go on container ships Money doesn't just flow investment means you put stuff on container ships and send it around the world And now all of a sudden No, there's too many trade flows and too much hot money and we can't have all this cross-border So it's it's there is more and more cross-border investment happening Now to the extent that many of our colleagues call it a puzzle and a savings glut and sudden stops and so forth I don't think judging The right price or the right market is what free market libertarians ought to be doing And that's why I'm a little uncomfortable with your question But say you take the major forecasters who are not at all stupid, right? It seems their real interest rate forecasts have been very wrong now actually literally for decades So what theoretical mistake are they making in your opinion? So let's talk about this to this nominal interest rate forecasts Where people for example for the last entire ten years everyone said well We're gonna exit quickly and we didn't then there's I don't think there's forecasts at the real rate But there's this long trend since 1980 of real rates going down and again, what we're playing the game that Hayek told us not to play of Try to try to say what the four, you know sitting around a Coffee table say what forces are moving prices around? There's all sorts of speculation about it. We can have fun. I can give you the five theories Why don't I don't believe in any of them? There are fundamentals here We have moved to a much lower growth economy So everyone jumps to let me back up everyone jumps to the savings gluts and the Federal reserves and this and that There's fundamentals that say low interest rates make sense The first one is We are moving to a lower growth economy to stagnation you and I are technical optimists We think this is temporary and will reverse But the fact is productivity growth has been slowing down and we're now a low-growth economy Well, a low-growth economy has lower real interest rates. That's just sort of the first principle of macroeconomics A low-growth economy has less opportunities for investment and therefore lower interest rates lower returns on capital It's weird that that's the first principle of macro and all these smart people get it wrong, right? What's their defect? Well, I don't Hard time figuring out what I think is right let alone why other people get things wrong and looking at people's heads It's another bad intellectual habit There's basic principles that say low interest makes sense low growth and for the moment the low inflation Microchip why we have low inflation but low and anchored inflation means this much less inflation risk and further more especially for the dollar people Bonds are very good. They're very safe investments because every time there's a recession bonds go up So there's there's every reason to hold bonds in particular For those lower than stocks on top of that you can put on your your frictions and your demographics and so forth But so I think it sort of makes sense, but I also I don't like aren't you if you're rising About things like this marine armchairs. Yes. Well, that's our job. So Why is there so much active funds management? So we all know for risk rebalancing it makes sense for liquidity it makes sense But it seems there's much more trading than can be accounted for for those motives Doesn't this mean markets are in some sense highly inefficient if everyone's paying all those fees So you ask two questions here one is active management and the other is trading And I'd like to distinguish them And this is it's kind of a puzzle in the Chicago free market. Let me ask your question even more pointedly If you believe in efficient markets and you believe in competition and things work out, right? We've been saying we've scientifically proven since the 1960s that high fee active managers Don't earn any more than the proverbial monkey throwing darts and a well managed low index so why do people keep paying for high fee active management and You know that Chicago free markets, we're not supposed to say oh people are dumb for 40 years 50 years now But there's a lot of it. It's it's one of those things It's slowly to active management slowly falling away the move towards passive index Investment is getting stronger and stronger There is also a there's a strong new literature which I'll point to my colleague here Jonathan Burk has written some good articles on it Somebody has to be at this is the puzzle efficient markets If everybody indexed markets couldn't be efficient because no one's out there getting the information that Good that makes markets efficient. So markets have to be a little inefficient and somebody has to do the trading And then your second question is about trading. Why is there this immense volume of trading? When was the last time you bought or sold a stock? You don't do it every 20 milliseconds, do you? So I'll highlight this if I get my list of the 10 great unsolved puzzles that I hope our grandchildren will have figured out Why does getting the information into asset prices Require that the stock be turned over a hundred times that that's clearly what's going on this this vast amount of trading Which is based on information or opinion or so forth. I hate to discount it at all just as human folly But that's that's clearly what's going on, but we don't have a good model yet You know, by the way, the only stock I ever sold was Brazil fund You sold it and you're telling me what a great opportunity Brazil is There are habit formation theories of equity returns, right as you well know the notion that the return on equity is So much higher than the return on bonds because if you suffered losses on equity would disrupt your habits And in a way that's form of risk aversion that doesn't exactly translate into the inverse of the discount rate, you know all that now Having observed almost a year of pandemic behavior. Do you now find habit formation theories more or less convincing? So let me clarify the the essence of the habit thing this is a paper that John Campbell and I wrote in the 1990s What we're trying to get at was not so much the level of the equity premium Why do stocks seem to pay reliably more than bonds so much for so long? It doesn't do a great job of that what it does a great job of is capturing But I think the essence of recessions is and that's a time when people get scared It's variation in in risk aversion when you think about what happens in a recession what happened last March What happened in 2008 what happens in every recession is not so much that people Want to consume less today and consume more tomorrow savings is people get scared. They don't want to hold risky assets They want to hold safe assets They act as if their risk aversion has gotten higher and that's what habits captures is consumption goes down relative to what you're used to You people get More risk averse are unwilling to take risks on stocks going forward And so the stock market goes down much more than the economy goes down because Recessions are kind of mild. That's really puzzling. You know, even people keep saying oh, this is the worst economy ever. No The economy, you know, we're back down to the level of 2017 So why do people why do these temporary fluctuations make asset prices go so crazy? I think there's something so I'm still there's something deep in that and when stocks went down in March I think people were scared as heck Whether the mechanism is habits or whether the mechanism is something involving Leverage and risk-bearing capacity and financial markets is less important So that was the deep point of the paper, which I of course are gonna keep saying I think is is right I'm prejudice in favor of it Be people do but people I think it's a deep feature I think there's something deep to it that when you are forced Even even a person a middle-income person America is is vastly better off than the average person in India Yet if you take somebody who's earning $200,000 a year and make them earn $50,000 a year This feels like a disaster to them As opposed to you take an average person of village in India and they get to earn $50,000 a year They feel wonderful. So the fact that people's feelings about Their consumption level and their actions, which is what counts in economics. They're they're they're, you know wanting to avoid a disaster Depends on their experience of their recent past. So I still like that Here's a question from a reader to paraphrase Finance was really exciting in the 70s and 80s. There was KaPAM, Black Shoals, Prospect Theory, etc But what big exciting things have happened since? Where should we be looking for the next great innovation in finance? I love this there is so you and I are now old enough to remember that Every age thinks of the previous age is as the great golden era I have a story Bob Lucas told the story that in the late 60s and 70s when he and his buddies were developing rational expectations and Getting all the stuff that got them Nobel Prizes in Chicago They felt awful because all the hot attention was going to MIT and Harvard And what people were doing there and they felt like they were out in the wilderness And they were they were of course looking back at this. This was in the 80s They were looking back at that as a great golden age and now the 80s. Oh, it's so boring here now Of course now we look back at the 80s as a great golden age. There's always this golden age of the past. Um Uh, what's going on now in in finance? I find uh fascinating and uh as I look out I'm the kid of a historian so I have a Always a broad aspect and I think of what our children will understand that we don't understand yet And all the puzzles out there to be Learned about them and it fills me both with excitement and dread that I don't have enough hours in the day To work on I mentioned one. Why is there so much trading? Here's a fundamental question We don't know about asset markets. What happened in in the last 10 years has been I think really deep Asset that feel the finance Turned from what I was doing sort of macro finance versus the behavior lists You want to put a psychological imperfections the heart of everything That kind of faded and an immense amount of effort went into the plumbing of finance. They call it Um institutional finance Which is up the plumbing failed in in 2008 and so we learned a tremendous amount about the plumbing and about liquidity and about all the ways in which Asset markets don't look like the simple models as you mentioned So, you know, you what's wrong with interest rates in brazil well rather than look to habits of everybody Or to psychological imperfections of everybody what people are looking to now is well, who's active in currency market? And uh, you know, our banks are active and how do their balance sheets look and the facts are just astounding It does look like when people put it when there's a lot of demand prices go up That shouldn't be that in in finance financial markets People putting in a bunch of orders shouldn't drive the prices up Well, there's these facts about trading involving the prices and flows So the institutional finance that that's the exciting thing that just happened And now we have a great new data point in front of us. So, uh, you know any scientific, uh field feels kind of Chaotic in the moment, but I still think it's an exciting place to be Now this is the hardcore podcast So we're going to plunge right into the fiscal theory of the price level and inflation So in your forthcoming manuscript, you summarized it as follows in one sentence quote The fiscal theory says that the price level adjusts so that the real value of nominal debt is equal to the present value of primary surpluses unquote Is that still true if on average g is greater than r namely the growth rate of the economy is higher than real interest rates The government has to pay on its debt Uh, yes easy question Uh, I'm glad it's so um, I wish I could say the manuscript is forthcoming It's turning into the key to all mythologies But there is a draft up. Uh, this is a big book project. I'm working on I put the drafts up on My website as it goes along and I just wrote a g greater than r Section last week. I knew this was coming That uh, so let me just back up the fiscal theory for those of you who haven't heard of it This is a attempt at the basic plumbing of where inflation comes from. It's not about the fed printing up too much money It's not about the magic of controlling interest rates But fundamentally money gains its value Because the government, uh, soaks it up the government can soak it up By charging taxes at the end of the day that seems perfectly obvious, but it actually Changes a lot about the how all of the monetary theory we do works. Okay, so It's related. It's among other things. I'm just backing up here for a second for our listeners Uh, it says that the distinction between money and government bonds isn't that important What matters is overall government debt and the government's ability to pay that debt back And inflation comes when people lose faith in the government's ability to pay back its debt They try to get rid of the debt because they know it's not going to get paid back What do you do with it? You buy stuff and that drives up the price of goods and services So that's your quick background. What is the fiscal theory of the price level now? aren't aren't are less than g stuff, um Is this is uh, it's a broader issue than fiscal theory. It's the question of debt sustainability And it's a big deal right now. Does our government have to pay back debt or can it borrow? Here's the strategy Borrow money and uh, never pay it back. In other words, just roll over the debt Let it grow at the interest rate Well for you and me that doesn't work Because the repo man comes calling But for the government if the economy grows faster than this rate of interest then the ratio of debt to gdp Will come back all on its own without us without the government having to do a lot to pay back that debt So this is the shining promise which is really so If that's true, and if it scales, this is the crucial thing if you can borrow more and the interest rates don't go up Then uh, government debt is a money machine. Nobody needs to work anymore. No one needs to pay taxes anymore You can tell that's not the case the questions. Why is that not the case? And when you look at the strategy, um, that's just not about so i'm going to route that back to the answer in your question In today's fiscal today's fiscal question has really nothing to do with the r greater or less than g Even though it's been a a technical issue that makes economists just Love writing papers about it because you get to do all sorts of limits and transversality conditions and and interesting models about it And and the reason is what's in prospect for the us is not borrowing once And then running no surplus or deficit for 40 years while we slowly grow out of the debt What's in prospect for the us is borrowing forever and ever So if if if the interest rate is one percent less than the growth rate that gives you one percent of gdp Sort of for free, but the us is borrowing five percent of gdp forever Uh, and that just uh, that that doesn't compute even if r is less than g So if r is less than g finally an answer question Big fiscal borrowing must be repaid by taxes Anything over one percent of gdp has to be repaid by taxes and if it isn't going to be repaid by taxes People are still going to try to get rid of that government debt and they'll cause inflation Now during the pandemic government dad is way up production is not up What's the prediction of the fiscal theory about price inflation? Uh, so, um economists should never make predictions. Uh, but theories make predictions Uh, theories don't make uncond, theories make conditional predictions theories make If x happens and you hold everything else constant then y ought to happen But economics is is awfully bad at making unconditional predictions You know, here's what's going to happen period and uh, I think it's a mistake to get into that game but let me tell you what the fiscal theory says Is um in part, uh, you know, I've been worried about inflation for 10 years and critics say look it still hasn't happened So da da da what a dummy you were um Government debt Fiscal theory is not particularly special here It just opens the possibility That if you have too much debt and you can't pay it back and bond markets get tired of you That there will be a sharp inflation to get rid of that debt rather than a default That's all the fiscal theory, um offers, which is in some sense pretty obvious. Well, that could happen so, um, uh Having built up a lot of debt. Are we in danger of some sort of run global financial sovereign financial crisis? And I think the answer is yes, you know, that's ken rogolf is out there. He's even More of a hawk than I am on these issues. Uh, most of the time So we're we're now it's a danger. It's like, uh, you know greek debt was great 2005 2006 low interest rates. Why hasn't greek debt exploded? I don't know Well, until all of a sudden it didn't The mechanism is like a run. It's like an earthquake. We're in danger of a rollover crisis that, uh, uh, bond markets look at 25 trillion of us debt And then in the next crisis, we want to borrow another 10 trillion. They say sorry guys, we're done And now everything that looks sustainable is all of a sudden not sustainable and the ours that were less than g Or suddenly a lot bigger than g. So you're sitting on a powder keg and that a powder keg a run a crisis If you could predict it happening, it would already have happened It's uh, it's one of those unstable situations. So I physical theory interest rate futures are inefficient in this explanation, right? Not inefficient. No Because because no long on volatility of interest rates. It's inherently unpredictable amount Efficient they're inefficient. We're now we're down to arguing about information versus risk premiums. I don't want to argue about it There is even an inefficient market. There's such a thing as a bank run. There's there's the There's everything looks fine until all of a sudden the bank run the black swan the and and that's the mechanism Of of the inflation so it can look fine Interest rates never forecast inflation We can get religious about efficient markets or not in the 1970s interest rates were not high ahead of inflation in the 1980s interest rates were not low ahead of disinflation As interest rates are kind of random walking just like exchange rates these these This is kind of like a deep fact of empirical finance asset prices don't seem to move on information about Fundamentals if you want to call them that like about cash flows they move on discount rate news There's another way of saying there's money to be made by buying Weighing when prices are low and selling when prices are high if you can wait a long time So it said the we're sitting on a powder keg We're sitting on the possibility of a run a crisis Which would be a sharp unforecast inflation Which the fed can't do so. Yes, it's about risk. It's it's not about forecast. That's a good way of putting it Now originally I thought the value of crypto assets would fall to zero due to an arbitrage condition I now think i'm wrong. What's your theory of the value of crypto? I think you're still right So that market's also inefficient No, it's not inefficient. Uh, it it you need a way to short bitcoin in your view. That's probably hard to do right now But if we had one Well, uh, you short bitcoin or here's why I think bitcoin eventually will will die Because it is a pure fiat unbacked Money it doesn't have a government that can raise taxes to soak up the extra money if needed It's not a promise of anything real. It's just a thing that's in limited supply because in order to short it You have to use up a lot of computer power But you can create substitutes So it's classic. I'm very interested to watch the crypto community relearn Centuries of monetary economics. It's classic mv equals py fiat money It has value because it has a liquidity use It's useful for anonymous transactions to put it politely Uh, and it's in limited supply because it it takes money to make it. But there's nothing that stops you from making substitutes Um, there's nothing that stops you from making derivative claims on bitcoin that trade just like bitcoin Uh, so if there's nothing that stops you from making substitutes, uh, or derivative claims Eventually that value has to go to zero that can take a long time Uh, so this is it. Um, I've written about this too prices can take So a market can be very slightly inefficient in rate of return and very highly inefficient in terms of prices Shorting bitcoin wouldn't work because it can go up for a long time before it goes back down again So if it costs you even a tenth of a percent per year to short the bitcoin And if you don't have the money to stand the market to market losses on the way That price can be out a lot very far out of line. So 1% inefficiency in rate of return can be a Factor of two or three inefficiency in terms of prices. And I think we see that all over the place Let me tell you why I'm not maybe not yet converted to the fiscal theory and see if you can change my mind And it's the same issue with crypto assets as with dollars and t-bills So they're pretty close substitutes, but they're not perfect substitutes So if they're perfect substitutes, we're in the world of finance All the curves are perfectly horizontal arbitrage determines everything and there's one blade of the scissors But if they're even somewhat imperfect substitutes, and I think they are ether and bitcoin dollars and t-bills Then you're in the donald petinkan world with a downward sloping demand curve based on Something like it could be liquidity could be risk could be whatever There's a downward sloping demand curve upward sloping supply curve. It's the world of mittenfriedman Irving Fisher Something like the old-fashioned quantity theory and the fiscal theory is a special case of that when only one blade of the scissors cuts But in a lot of settings, I think both blades of the scissors matter Now what am I getting wrong there? so the fiscal theory does Does not require that money and treasuries are perfect substitutes Uh, it allows that which is the lovely fact given the greater and greater substitutability of all financial assets But you can add liquidity demands for all sorts of stuff very easily in the fiscal theory. So Liquid treasuries traded There's an on-the-run off the spread that liquid treasuries have slightly different interest rates than Unliquid treasuries money can trade at a different interest rate than treasuries No problem whatsoever to have a variety of assets That have a variety of liquid discounts in the in the fiscal theory The question is do these liquidity spreads Do they determine the price level if you hold the The dog and the tail don't have to be in exactly the same place The question is if you hold the tail does the dog wag And the central problem with the view you mentioned the classic monetary problem There are these spreads, but the government does not control the quantity of money It doesn't even pretend to control the quantity of money anymore So you need a liquidity demand for some special asset money And you need the government to control that supply if you want that to determine the price level Instead the price level is determined by fiscal theory And then the quantities of money versus other assets are determined by people's desire for for various liquidity Pretty things so all the liquidity ends up doing is it ends up driving slight interest rate spreads If the government doesn't give you enough money, then you have a little bit higher interest rate spread on one asset versus another But that's not the key for determining the price level when the government doesn't control the supply of money Healthcare i'm a big fan of your proposal for what I think you called time consistent health insurance So you buy health insurance and you buy insurance against your premia going up So if later on you develop a serious condition, you're insured against the fact that your insurance costs more right Now why hasn't no one done this because it does make sense Ah people did it until it was made illegal And who did it when where oh god it was in the 1990s, um Which insurance company this is deep in uh So a good a better word for it that mike can and kato came up with is health status insurance That you can insure yourself against the risk of getting sick in the future And uh one insurance company started offering the right to buy health insurance in the future if you're sick now Which is essentially that's the beginning of the idea also In the good old-fashioned health insurance starting in the 1990s was guaranteed renewable Meaning if you bought the health insurance now, you had the right to continue buying that health insurance without your premiums going up If you got sick that's essentially the same thing as health status insurance So uh private insurance was working its way in this direction And why did it take so long it wasn't dominant back then right? This is another example of market inefficiency um come on Technical innovation takes a remarkably long time to spread Uh, and this is a technical innovation. So one thing is just it takes time for institutional Especially in the incredibly regulated industry where you have 50 state regulators who have to bless every single contract Takes a long time and then it was maybe illegal Under obama care, which why isn't happening, you know, it's it's taking a united airline still hasn't figured out that southwest knows How to get people on planes faster That sort of stuff takes time but also um The reason is why wasn't this in health insurance to start with? Uh when health insurance first started up, um, there wasn't this thing of a disease of a pre-existing condition Of a uh something that we get news that's going to make you really expensive You either kind of die or you didn't die and that was the end of that um, so uh very expensive health that is very persistent and where you need insurance against ongoing future expenses That can't be done in a one-year contract. That's also, uh, you know something that we didn't have until the 1960s or 70s Institutions take a while to adapt. Um, you gotta take a longer review here Tyler But I do want to advertise it for for our listeners who haven't heard about it We're still in this, uh, you know pre-existing conditions is the original sin of markets The whereby the government must completely score up your and my health care. That is not true Uh free markets can handle the question of pre-existing conditions your need for long-term insurance Term life insurance has had it forever If you buy term life insurance, uh, when you're young and healthy you get to keep that insurance no matter how sick you get As time goes on. So this there's no failure of insurance markets. That means we can't have How much do you worry about superior genetic information? Making it hard for insurance to actually serve insurance purposes So it would be fairly priced you could buy it, but you're just paying the value of your treatment plus a small fixed cost Yeah, um, you know You're you've spent too much time teaching econ 101 where where we find where we've we're at five percent We figure out that markets can handle 95 percent and then you're going to focus on the last five percent and tell me No, the government's got to run everything It does so like any insurance, uh health status insurance you have to buy it before Information is revealed that you're sick. Uh, that's fairly reasonable Now, uh, one answer to that is let's do this at the family level So I can buy, um health status insurance before I conceive a child For that child and then if there's a genetic, uh problem That that's knowable then um Then the kid, uh, then the kid is covered the other answer. So I will have, uh, you know, it's perfectly reasonable Probably an hour Unless you're in a two o'clock in the morning drinking, uh, drinking stuff with libertarians It is allowable for the government to step in when there's a you know Very clear market failure. I would be fine with uh, when we start this up and you tyler have some genetic You know known genetic quantity that means you're going to be more expensive The government gives you a lump sum Here's 50 grand and we'll put that in your health status insurance account And that will fund your higher insurance payments for the rest of your life See you later. Uh, there's you know, there's a clear argument for lump sum transfers To be ex post insurance mediated by the government If that's all the government did and then left the rest of the health care and insurance Industry free to cut throat free market innovative competition drive out the incumbents serve you and be better That'd be fine with it Now here's a quotation from you online, which I I didn't follow. I'd like for you to explain I think you're talking about second or third best here But you're out quote. It has made me a tentative supporter of medicare for any. What did you mean? I mean The biggest original sin I see now in our health care system is across subsidies Uh, the government wants to provide for poor people And other people and it doesn't want to make them pay. We're old people. They don't want to pay But the government doesn't want to raise taxes and provide their health care So what the government does is it tells hospitals? For example, you must treat everybody who walks in the emergency room Hospitals say that's nice. Where are we getting the money from? And then the government says, well, uh, you can overcharge private, you know Employer provided insurance which will force employers to give and you can overcharge the few, uh cash bank customers who come in Well, the problem with that is you can't allow competition if you're overcharging people Then you can't allow hospital b to come in and say, you know, we're we're gonna offer a less price And we won't even have an emergency room and so you've killed competition and then I think is the the Original sin that the the deepest problem in our health care system We talk about, you know, they just recently said hospitals have to disclose prices heavens disclose prices Well, that says that's a sign. This is a horribly uncompetitive business You know an airline that tried to not disclose prices till you get off the plane would be bankrupt because no one would go there This competition in the airlines So how do we solve this problem? You know just forcing hospitals to To post prices they have to cross subsidize the medicare medicate that doesn't pay anything like what it costs from something else Because the government is not paying so That's why you're in my health care. You and me don't need health insurance Uh, we you know what we have enough money We need maybe something catastrophic If we get something that costs 10 million dollars, which is you know, you have to get some really rare former cancer for that Uh, you and me could afford to pay for this like we pay for our FET bills Why can't we be in the total free market? Well, uh, because there's this cross subsidy going on So here's the deal. Why don't we that I said tentatively Uh, let the government just forthrightly raise taxes Pay for health insurance for poor people indigent people We could do a lot better job for the schizophrenics on the streets And for whoever the government wants to pay their health care do that on budget Allocated so we can all see what the government's paying for and then You and me can be freed to the mercies of an unbridled competitive free market And if somebody wants to come in and offer us care cheaper and set up a new hospital They don't need a certificate of need. They don't need all the other stuff They can come in and and offer us whatever they whatever we're willing to pay for and We would get far better care far cheaper Much more medical innovation than we do now So you and me could be free to the wonders of the free market If we would pay taxes to support whatever the government wants to support them We can look at the budgets and see what that is. So that is We're kind of the worst of all systems Right now in that this system of cross subsidies is just atrociously wasteful and And inefficient it does provide reasonably good care, but at just hugely more expense than than it should So, uh, that's a second best. Yeah In the year 2004 you were national gliding champion. Tell us what you achieved Uh, and so I fly gliders which are beautiful-looking airplanes without engines And uh, the way they work. I was only champion in one class, which wasn't the very high profile class. I have to admit But you competed in the world championship in Hungary, correct? Yes, I did I did I didn't do that great, but I had a wonderful time in Hungary This is a serious sport. Uh, what you do is you It's about speed and you uh, you try to find these rising currents of air called thermals and you glide to the next one Our typical races around here in california will be two to 300 miles or more Uh, I I did one at 90 miles an hour last year. I've done them over 100 miles now This is average over 300 miles flying without an engine Uh, altitude's up to 18 000 feet around here and that's Ohio on the east coast and you're racing these guys It's like a sailboat race in three dimensions at 100 miles an hour Flying out over the the deserts of Nevada. It's just absolutely wonderful and the game is speed Can you can you go to airport a airport b and? Uh, your gps shows you where you've been and come back and and do it two minutes faster than the other guy How good or bad is the government's regulation of gliding? An uneasy truce, um pretty bad, but uh, just enough to let it survive the government Regulation inefficiency Uh, the FAA, but what should they do that they don't what should they allow? Uh, gliding is is They should the so they have killed the domestic Industry that makes gliders. There's only a couple left in europe Certification of aircraft under the FAA is a disaster This is more visible in general aviation power go down to your local airport And you will see what looks like a Cuban car lot Full of designs from the 1950s It's just incredibly difficult to certify a general aviation airplane The standards for pilots licenses are ridiculously too high And america is one of the best places in the in the world when you go around the world You will notice if you're a pilot how empty the skies are because everywhere else has regulated general aviation completely to death And the private rules associated with gliding are they cosean and wealth maximizing or are they all screwed up? Uh, I served for a while on the rules committee that sets the rules for gliding competitions Which was a wonderful experience as far as me understanding political economy and just what's wrong with congress I had all sorts of wonderful ideas on the scale of health status insurance And my proposal to reform the issuance of treasury bonds That went exactly as far in the rules committee as my proposals have gone in washington so It's a it's an interested eventually reason prevails many of the Psychological biases you see in many sports are there that denial. I was a safety advocate So I had some rules in mind that wouldn't hurt the competition But that would do a lot to increase the safety of this thing And uh all the same things that you know bicycle racers said no we can't have helmets We won't be able to see glider pilots have the same response to any rules that uh that make things a little bit safer So it was a great education So there's finance economist john cochran policy economist and blogger and reformer john cochran And glider and gliding reformer john cochran. How do they all fit together? How many dimensions are needed to explain the whole john cochran here? Oh, I don't I think it's all totally consistent part of part of one piece And what's the consistent theme that one sees in the gliding as well and the thinking about gliding I try to You know, we're all bad at reflecting what our own Uh mental strengths and weaknesses are I try to reduce things down to a very few fundamental principles and a logical structure That's what when I was in college. I was a physics major. I was great at physics and I I nearly flunked chemistry because physics My peak intellectually was Electricity magnetism where there's like three equations and everything follows from that My book on asset pricing we start with one equation and it has three sides and everything follows from that Similarly, I I did some work in gliding trying to apply optimal portfolio theory to the theory of Optimal gliding So I try to put things together in a logical structure physical theory of the price level I'm trying to put it's now the dam books up to 600 pages and I'm trying to Think about all of monetary policy in the structure of one simple present value equation So that's my habit of mind. Uh, I I really admire people with different Habits of mind my historian friends who can keep Unbelievable numbers of facts and there were citations in their head at one time. Like I just can't do that um mathematician friends who are great at seeing logical structure of things without The vision I I admire that but that's that's my one uniting thing Now I knew your father's work before I ever had heard of you in particular His book on historians and historiography of the italian renaissance. That's eric cochran for those of you who don't know What is it intellectually that you learned from your father? Oh my god, so much and I so this tells you something. It's a great book, by the way Everybody else who's ever heard of my father heard of laurence in the forgotten centuries, which is the one I'll uh, I'll recommend online That you've read the historiography book says and I don't know how you do it that you know, you've read everything that there is Which is sort of this big thing. Uh, he was a major influence in my life One the historical perspective, uh, you know, I think that a lot he was also um The writing in forgotten centuries was wonderful in my my best read paper of any is uh writing tips for phd students Which passes along a lot of eric cochran's writing tips for his history graduate students He's an unusual man. He took us to uh florids where I spent a lot of time as a kid and Forced us into the local culture He was also very connected to the community of the south side of chicago Sent me to public schools there, which was another culture, so I certainly learned to navigate other cultures and we had a Fantastic dinner table where I cut my teeth on many things intellectually. I don't agree with a lot everything. He did He was a converted catholic Who was also historian who read the minutes of the council of trint and the original latin? That was a uh, that was a challenge for a young uh For a 16 year old atheist But uh, uh, there's a lot of there's a lot of that left in me Now I also knew your mother's work before I knew your work in particular her translations of paola rasi Especially rasi on vico. What is it intellectually that you learned from your mother? And my mother I didn't know any of this about you until preparing for this podcast. I might add I'm just amazed at the range of it. You know, yes, my mother She taught french at the lab schools while I was growing up Remarkable woman and after my father died sadly just as I got back to the university of chicago She took on this career of translating and uh translated many many books for the university of chicago press I would occasionally read what she translated academic books from french and italian into english and uh, have you ever tried to read academic History french. Oh my god, and she managed to make sense of that stuff as well. Um, she was uh, uh, yeah, she was she was the other part of that dinner table where uh, uh, I I Both learned a lot and learned to think and all right, and then they they're you know, they listen to kids even when Uh, when they have academic friends around, uh, they listen listen to kids So I was expected to show up and claim my part and except for the one time when I was 12 years old And we had a bunch of historians over and I I piped up and said to my dad Dad, what's the council of trend anyway? And he said oh my god I could see his the look in his face. Oh, I haven't told my kid anything But I made that my wife, uh, beth farma did say do the same thing at age 12 Looked up and had dinner table full of finance people and said dad. What's arbitrage? Now your wife is also a well-known author. She has a well-received book about mermaids Right, it's fiction. It's called monstrous beauty How has having a wife who writes fiction influenced you intellectually? Uh, yeah, we uh, she's a really smart. She's not only a fiction writer She has a phd and economics from the University of Chicago and a smart person in all sorts of ways We don't we don't really do economics at the dinner table together, but we certainly debate, uh, we certainly learn a lot about politics and and uh current events and uh, I I don't delve too deep in her fiction, but it's uh, it's a very intellectual pursuit for her and she's really committed to writing great young adult literature not just uh, not just stuff that sells and so yeah, monstrous beauty is wonderful plus one Is it is her book after that which I recommend it's a secretly libertarian A young adult romance set in a in a world that comes after a pandemic. So Uh ought to have lots of good book sales now Do you think tuscan cuisine is underrated or overrated? Well, tuscan cuisine is wonderful What's your favorite in tuscan cuisine? Ah Oh my god, I mean how how can where do you start? Uh You know that the simple there's there's nothing like a ribolita on a cool winter day Tuscan cuisine is is supposed to be simple not not fancy Conquests second law sometimes called all Sullivan's law It says that organizations not explicitly set up as right wing tend to evolve to become left wing Why is this true? organizationally what happens That certainly is uh, I a trenchant observation of the current time Uh, I'm what I pause to think whether that's true of all places and times we live in a time when the cultural elite is moving sharply left In a sort of religious revival a great awokening Um So institutions, you know the ford foundation now is Uh sharply left is hilarious when you consider who henry ford was that's a great example all of our university so A non competitive institutions are moving sharply left the institutions of civil society are moving sharply left, but is that um Is that that's not always the case there was a reagan thatcher counter revolution in the 1970s so, uh You know, there's the natural tendency people in a comfortable society start feeling guilty and and like Telling other people what to do and how the government should spend other people's money um Fire economists right now moving so much to the left, but what's the most structural explanation for the mistake they're making The highest order account of what's going well economists have always been left right the american economics are much more left than 20 years ago Yes, and and uh passing that on um the uh, uh, I think the the single greatest uh Yeah, no, no, you're right. Uh, well economists, um So the the question is why has the left current within economics become more powerful? It always was sort of not left right a free market versus interventionist Uh debate that is the debate of all time. Um free market versus interventionists Lefty ideology gives you a a moral basis on which to go out and try to run things But economists You know people go into lots of people go into economics because they want to save the world And then you take some classes to say the best way to save the world is to stay the heck out of the way And that's kind of discouraging if you're a young millennial who wants to go in and save the world So we we go find but that's a levels explanation right not a change explanation I don't know you gotta give me three and i'll choose a b versus c Well, some of it could be the demographic composition of who becomes an economist has changed. I believe Okay, there's many more foreigners. I'm not sure of the net effect there It could also mean you just have more political spectra floating around But I think non-americans on average are more interventionist than americans And at least in terms of the flow of younger people, I believe there are more women And women on average are further to the left than our men Especially educated women who are probably not yet married. I'm not sure those are the reasons Okay Okay, so good good now we can have a debate I don't think that's true that the foreign many of the foreigners I know come from socialists the or or much more interventionist countries. They might god I love this free place tartan, you know an argentinian about About government thing. So I know a lot of libertarian foreigners. I do think So economics is a classic case of, you know, the wonders of free immigration Because uh listeners may not know, you know foreigners are In most many economics departments, there's few native born americans left We have scooped up the talent from around the world and they bring with them some political Inclination. So you're right Some of them tend to be more lefty Some of them tend to look at where they come from, you know, the people are the people pushing back against princeton's latest Woke outbursts are uh our eastern europeans who say hey guys socialism. We were there. You don't want it Foreigners, I do think are driving the the other unfortunate feature contemporary economics. It's increasing career reason Um people don't Go to a university when I first got my job and the dean started telling me about the retirement program I was just glazing over. What are you talking about? I'm not going to be here then And now people seem to regard their progression in a company sort of the way the labor market's working in italy That's that's an unfortunate feature of ours Women are there's there's not that many of them in economics and what's driving the wokie leften is in economics is the the millennials The american born millennials who've been through our school systems and our colleges which which teach this kind of stuff Um, if there's anything different about the demographic composition It's that people like me can't be in economics anymore and people like gene pharma can't be in economics anymore gene pharma He did his internship when he was an undergrad was he worked in the steel mills Uh, I applied to be an economics graduate student on a lark one month before classes start You can't do that anymore. You have to be deeply Engrained in the system starting as an undergraduate So maybe there's a self-perpetuation in that sense that it wasn't there in the much more freewheeling earlier era How would you reform the economics profession to make it better along these dimensions? You're in charge You pick the reforms as if you would run the whole gliding committee. What would you do? Well, that's a hard question for a libertarian because it's a voluntary voluntary rules But you said that people can secede if they don't like it Uh You can make the tenure clock 10 years everywhere. You could make it two years. You could abolish tenure A lot of different things you could do Yeah, but I have to obey some much harder rules here that I'm not allowed to you know, put myself in charge We have to somehow obey competition. I mean there's a remarkable lack of competition among universities. So I'll be Let's get rid of the entire Legal structure of the nonprofit organization to start with I think that'll lead to getting rid of tenure. I mean tenure is useful for one thing. It uh, it forces people to make a decision Ten years is not about the permanent employment. It's about when do you get to have a vote on who else gets to Be in this place And it forces people to sit down and read the damn papers and say should we keep tyler on or not That's kind of a useful thing, but you can have those Without tenure. So I I have to go back to my Libertarian instincts and say what we need is a healthy dose of competition in this business And uh, why is for-profit education done so poorly? We've had a lot of it and it's we've had it in other countries like philippines turkey in earlier decades had a lot of for-profits They seem to disappear Largely for market-based reasons I don't know that they're in a competition with a heavenly government subsidized sector Some of the for-profit charter schools I gather are doing a bang-up job The big problem with being a nonprofit so a nonprofit is protected from the market for corporate control If stanford is screwing up, uh, you can't just buy up all the shares kick out the management and improve it Uh, so I That's also part of the secret of why hospitals are so screwed up because they are also Protected from that market the whole nonprofit business. This is a side issue which we should talk about sometime Um, non the nonprofit status in the u.s. Has been like like everything else horribly misused now It's it's you know a cover It's a lot of it is a cover for getting out of these state tax and for subsidizing political activity At tax payer expense So I was trying to think of Things that open it up to competition better And and that that you know, I have if we have to think about Roots ways to change things, uh, I think that'd be you know, you make me But now i'm a dictator. Yeah, I think there's a lot of different ways we could run We could we could run journals, uh, I think putting things to the market test of ideas would be a lot more helpful Uh, but we got to face the fact that a lot of the market, uh, a lot of our market is Who wants economists the federal reserve wants economists to justify what the federal reserve is doing The regulatory agencies want economists to justify what the regulators are doing a lot of the market for economists is government intervention So they're going to turn out a product that justifies government intervention when faced with the market How did you become a libertarian? Uh Long period of reflection and it was you know, I went to uh, I grew up in kind of a liberal community and was unthinkingly that and you just start reading, you know, and you read classic things and and I told you my habit of mind is to put things in in Logical structure and if you start thinking cause and effect on logical structure And not just my feelings about things and the government has to jump Uh, then you are drawn to so, you know, there's that classic reading list. I had as well as you had I had some conversion moments. Um, so this is how I became an economist really is the same thing Which is uh understanding social problems as dispassionate cause and effect things and recognizing how, um They didn't work otherwise. I'll tell you too. One was a kid reading the newspaper. Uh, actually in in Italy about them There was a plan the government of tuskeny. There's a problem with vipers These are little poisonous snakes and the government says he said we'll get rid of the vipers We'll uh, we'll give a bounty of a thousand lira per viper and that'll clean up the viper problem Well, the sturdy farmers of the cousin Tino found out that they could raise vipers At a thousand a thousand lira per viper They could raise a lot of vipers fast and and the supply overwhelmed the demand Uh, you know stories of well-intentioned ideas that have unintended consequences That that ranked this there's cause and effect That that fits in lovely. The other one's my big conversion moment. I remember it It's the 1970s. I was taking a class in microeconomics And this was a time when welfare was a big problem Moynihan and the destruction of the black family was was in the air and you could see the dysfunction on the south side of Chicago where I live and lots of moralizing about it And I saw the budget constraint facing a you know a teenage Teenage woman of not many means that said if you have a kid and don't work We'll give you an apartment and some money and and then there's that kink in the budget constraint What I saw was eyeopening to someone Attuned to many different cultures. It was there but for the grace of god go I we are all the same We just face different budget constraints. Here's an analysis of a social problem a deep social problem There's just completely cause and effect and and we know how to fix this and you don't have to get into Morals and psychology and religion and all the rest of it Uh, so that that was my conversion point of that as an economist and you know Once you start thinking that way you end up as a a libertarian now. I'm a libertarian with many adjectives in front of it Um, uh conservative rule of law Pax Americana There's there's a lot. Uh, there's many different brands of libertarian Should more economists blog Uh You're doing it right We were all surprised when we saw you doing it. Well, I don't like the competition. So no stay out of it guys Everybody else in any business. Uh, you know the first thing any Any businessman does is try to get rid of the competition Uh, the blog is an interesting art form. I don't know how long it will last. It allows me to write Uh short essays, uh quickly that seem to have some following even though I should edit each of them for a week and make them better um So I've I've found that a useful way to get ideas out and to, uh Uh Get and to hear from other people I think that form is is good. So our academic journal is speaking of you know, our academic journals are a disaster and uh See blogs seem to be an interesting way to get ideas back and forth in economics They merge economics and politics. Um, I don't know if that's a good or a bad idea but um The problem with all of us doing it is you know I think what we're seeing in the market is less blog Which is a personal branding and more of The box collette and so forth curated Things that are not publications. Um, so that's really a question about how do you what's the right format for getting? essay length things into the debate More quickly both on actual economics and economics and and politics And the last question after you finish your 600 page book on the fiscal theory of the price level. What is it? You think you will do next My problem in life is that my list of great, uh projects that I Earthshaking projects is growing as I get older and and try to bite them off. So I have to pick One or the other. Um, so which one do I want to do? Of course one should finish what one has started The fiscal theory of the price level is going to be something that included The theory and how it explains all of historical experience with inflation money and so forth I'm at 600 pages. I haven't finished the theory part. So one one should do that The One needs to understand. I still don't know that I have a good story for the inflation of 70s and 80s Which is a gaping home. So I shouldn't finish that but I probably won't I want to go back to I did mention. I think that uh, um Why they take so much trading to get information into prices that's kind of like the That's a big unknown thing about asset markets. So I'm tempted to go back to that And I'm tempted to also, uh, part of me wants to go into political philosophy. Um You you and I the danger of libertarians is oh, well just the question you asked me make me king for a day Well, make us king for a day and we could solve Most of the problems of the american economy in about 10 minutes flat Yet our congress doesn't do it so, um Why what is there about our political system that is unable to Uh come to these sensible cause and effect obvious solutions to obvious, uh problems Um, it's kind of interesting. We were at america Had this amazing flowering of political Engineering in 1790 and and we seem to have just lived in the building ever since and and not really done a great job of thinking about it So I think that's that's What needs in any scientific pursuit you need to start with answers not with questions if you start with big questions You're never going to get anywhere. Uh, I think I have some answers But that certainly strikes me as as a the question. How can we better engineer? our political Uh organization kind of constitutional moment to produce the better economic outcomes that you and I know are there and just Uh sitting, you know, wait, you and I are techno techno optimists How we're I think we think that the u.s The world could be vastly wealthier healthier and cleaner if just the regulatory state would get out of the way And that's a political question Uh, a political economy a political structure a constitutional question, I think so I'm tempted to turn my attention to that John Cochran. Thank you very much. Thank you