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 are you starting right and easy uh 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 uh with no risk uh so you gotta invest in brazil and you've got to take the risks of
investing in brazil which include usually currency risk so real interest rate is is the interest rate you get x when you expect um you you ex after the expected appreciation or depreciation of the currency then there's the legal risk and
that they might expropriate your stuff so uh there's uh 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 uh there's a what looks like a
profitable opportunity there's risk uh are people properly balancing the profitable opportunity and the risk so why is tesla stock so high why are value stocks so low uh you know why does it look there there's opportunities that you and
i as an economist can't quite suss 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 more in 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 uh let's talk about what's documented here there's the uh puzzle of uh 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 uh so that um our friends who have started hedge funds that do this sort of stuff uh make make money for a little while and then they lose it all
so there hasn't been a gold mine 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 let's also say you know cross there is an interesting there's a larger question
uh you know why is china exporting capital not importing capital um cross-border flows and it's one of those things that uh sort of bedevils us free marketers we look at something that ought to happen more of for years people
said why isn't there more cross-border investment then there started being huge cross-border investment which is uh 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 uh there is more and more cross-border investment happening uh now to the extent that many of our
colleagues call it a puzzle and a savings glut and uh sudden stops and so forth i i don't think judging uh 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 uh so let's talk about this there's two there's nominal interest rate forecasts uh where people for example for the last entire 10 years everyone said well we're going to 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 uh trend since 1980 of real rates going down uh and again we're playing the game that hayek told us not to play of uh try to try to say what the f you know sitting around on 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 uh 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 uh low interest rates make sense the first one is uh we are moving to a
lower growth economy uh 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 uh and we're now a low growth economy well a low growth economy has lower rail
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 but it's clear 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 have a hard time figuring out what i think is right let alone why other people get things wrong uh and
looking at people's heads is another bad intellectual habit um there's basic principles that say low interest makes sense low growth and for the moment the low inflation in microchip why we have low inflation but low in anchor inflation means there's
much less inflation risk and furthermore especially for the dollar people bonds are very good uh they're very safe investments because every time there's a recession bonds go up um so there's there's every reason to
hold bonds in particular at it's for those lower than stocks on top of that you can put on your your frictions and your demographics and so forth but um so i think it sort of makes sense uh but i also i don't like aren't you theorizing about things like
this we're in 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 ah so you asked two questions here one is active management and the other is trading um and and i'd like to
distinguish them um 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 uh in a well managed slow index so why do people keep paying for high fee active management and uh
uh you know that chicago free markets aren't 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 one of those things it's slowly active management is slowly falling away uh the move towards passive index
indexed investment is getting stronger and stronger um there is also a there's there's a strong new literature which i'll point to my colleague here jonathan burke has written some good articles on it somebody has to be this is the puzzle
efficient markets uh if if everybody index 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 uh when was the last time you bought or solved a stock you don't do it every 20 milliseconds do you so i'll highlight this uh 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's clearly what's going on there's
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 um but that's that's clearly what's going on but we don't have a good model of it yet you know by the way the only stock i
ever sold was brazil fund now as you well know 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 it would disrupt your habits and in a way this 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 ah 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 uh so much for so long um it doesn't do a great job of that what it does a great job of is capturing
what i think the essence of recessions uh is and that's a time when people get scared it's variation in in risk aversion and when you think about what happens in a recession what happened last march what happened to 2008 uh 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 as consumption goes down relative to what you're used to you people get more risk-averse or 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 uh the economy you know we're back down to the level of 2017. um so why do why do these temporary
fluctuations make asset prices go so crazy i think there's something so i'm still and there's something deep in that and when stocks went down in march i think people were scared as heck uh whether the mechanism is habits or
whether the mechanism is something involving uh leverage and risk bearing capacity in financial markets is less important so i that was the deep point of the paper which i of course i'm going to keep saying i think is is right
and prejudiced in favor of it um 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 two hundred thousand dollars a year and make them earn fifty thousand dollars a year this feels like a disaster to them as opposed to you take an average person a village in india and they get to earn
50 000 a year they feel wonderful so the fact that people's feelings about um 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 uh um depends on their experience of
uh of their recent past so i i still like that idea here's a question from a reader to paraphrase finance was really exciting in the 70s and 80s there was cap-am black shawls 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 ages as the great golden era
uh 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 uh getting all the stuff that got them nobel prizes in chicago they felt awful because all the hot
attention was going to mit at harvard and uh 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 that is a great golden age
and now the 80s oh it's so boring here now of course now we look back at the 80s the 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 it and it fills me both with excitement and
dread that i don't have enough hours in the day uh to work on i mentioned one why is there so much trading here's a fundamental question we don't know about asset markets uh what happened in in the last 10 years has been i think really deep
um asset the field of finance uh turned from what i was doing sort of macro finance versus the behavioralists who want to put psychological imperfections at the heart of everything but kind of the faded and immense amount
of effort went into the plumbing of finance they call it institutional finance which is up the plumbing failed in 2008 and so we learned a tremendous amount about the plumbing and about liquidity and about all the ways in which uh 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 look into now is well who's
active in currency markets and uh you know how are banks are active and how do their balance sheets look and the facts are just astounding uh it does look like when people put it when there's a lot of demand prices go up that shouldn't be
that in financial markets people putting in a bunch of orders shouldn't drive the prices up well price there's these facts about trading and volume and prices and flows so the institutional finance 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 field feels kind of uh 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 questions uh i'm glad that so um i wish i could say the manuscripts forthcoming it uh it's turning into the key to all mythologies uh 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 our uh section last week i knew this was coming um 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 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 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 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 it's 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 pricing of goods and services so that's your
quick background what is the fiscal theory of the price level now our our 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 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 question is why is that not the case and when you look at the strategy that's just not about so i'm going to root that back to the answer in your question
in today's fiscal today's fiscal question has really nothing to do with the r grader or less than g even though it's been 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 interesting models about it 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 u.s 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 debt 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 but theories make predictions ah theories don't make uncond theories make conditional predictions theories make uh if x happens and you hold everything else constant then y
ought to happen uh but economics is awfully bad at making unconditional predictions um 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 what fiscal theory says is uh in part
uh you know i've been worried about inflation for 10 years and critics say look it still hasn't happened so 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 uh 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 and you know that's ken rogoff is out there he's even
more of a hawk than i am on these issues 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 bond markets look at 25 trillion of u.s debt and then in the next crisis we want to borrow another tincture and they say sorry guys we're done and
now everything that looks sustainable is all of a sudden not sustainable and the r's that were less than g are 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 fiscal interest rate futures are inefficient in this explanation right not inefficient now because volatility of interest it's inherently
unpredictable i'm not efficient they're inefficient we're never down to arguing about information versus risk premiums which 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 at the bank run the black swan the and and that's the mechanism uh 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 uh
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 uh they meet another way of saying there's
money to be made by buying uh buying when prices are low and selling when prices are high if you can wait a long time so it said 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 a 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 uh will die um 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
uh 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 [Music] but you can create substitutes uh so it's classic i'm very interested to watch the crypto
community relearn uh centuries of monetary economics it's classic mv equals py fiat money it has value because it has a liquidity use uh it's useful for anonymous transactions to put it politely uh and it's in limited supply because 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 uh trade just like bitcoin uh so if there's nothing uh 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 mark to market losses on the way that price can be out along very far online so one percent in efficiency and rate of return can be a factor of two or three in efficiency 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 potinkin 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 milton friedman irving fischer 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
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 uh liquid treasuries trade it
uh there's an on the run off the spread that liquid treasuries have slightly different interest rates than on liquid 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 um do they determine the price level now if you hold the you know the dog and the tail don't have to be in exactly the same place
the question is if you hold the tail as 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 its 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 uh desire for uh for various liquidity um anything 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 premium 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 has 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 uh which insurance company this is deep in
uh so a good uh a better word for it that mike cannon cato came up with is health status insurance uh that you can insure your gas self 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 private insurance was working its way
in this direction 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 uh takes a long time and then it was made illegal under obamacare which why
isn't happening you know it's taking uh united airlines 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 would 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 so a 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 uh you got to take a longer run view 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 as the original sin of markets whereby the government must completely screw up your and my health care that is not true 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 when you're young and healthy you get to keep that insurance no matter how sick you get as time goes on so 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 are we we've worth five percent we figure out that markets can handle 95 and then you're gonna focus on the last five percent and tell me you know the
government's got to run everything it does so like any insurance uh health status insurance you have to buy it before uh 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 health status insurance before i conceive a child for that child and then if there's a genetic problem that's knowable then then the kid uh then the kid is covered the other answer so i i will have uh you
know it's perfectly reasonable for everybody network 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 a 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 uh to be exposed insurance
uh mediated by the government um 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 wrote quote it has made me a tentative supporter of medicare for any
what did you mean i mean uh the biggest original sin i see now in our health care system is uh cross subsidies the government wants to provide for poor people and other people it doesn't want to make them pay for 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 you can overcharge uh private you know uh 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 going to offer a less price and we won't even have an emergency room
and so you've killed competition and that i think is the the original sin 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 uh you know an airline that tried to not disclose prices to get off the plane would be bankrupt because no one would go there this competition in the airlines uh so
how do we solve this problem um uh you know just forcing hospitals to to post prices they have to cross-subsidize the medicare medicaid that doesn't pay anything like what it costs from something else uh because the government's not paying
so that's why you're in my healthcare you and me don't need health insurance uh we you know 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 form of cancer for that uh you and me could afford to pay for this like we pay for our fed uh bills so why can't we be in the total free market well because there's this cross subsidy rig going on so here's the deal
why don't we i said tentatively let the government just forthrightly raise taxes uh pay for health insurance for poor people indigent people we could do a lot better job for the schizophrenics on the streets uh 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 uh we would get far better care far cheaper
uh 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 and then we can look at the budgets and see what
that is so that is we're at kind of the worst of all systems uh right now in that this system of cross subsidies is just atrociously wasteful uh and and uh and inefficient it does provide reasonably good care but at uh just
hugely more expense than it should um so um that's the second best yeah in the year 2004 you were national gliding champion tell us what you achieved ah and so i fly gliders which are uh beautiful looking airplanes uh without engines
and uh the way they work i was only a champion in one class which wasn't a very high profile class i have to admit uh 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 um this is a serious sport uh what you do is you um 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 uh our typical races around here in california will be
two to three hundred miles uh or more uh i did one at the 90 miles an hour last year i've done them over 100 miles an hour this is average over 300 miles flying without an engine uh altitudes up to 18 000 feet around here
not so high on the east coast and you're racing these guys it's like a sailboat race in three dimensions uh at 100 miles an hour uh flying out over the uh 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 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 uh an uneasy truce um pretty bad but uh just enough to let it survive
the government inefficiency uh the faa but what should they do that they don't what should they allow uh gliding is is er they should the so they have killed the domestic industry that makes gliders there's only a couple left in europe
uh 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 uh their 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 co-seeing 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 uh so it's a it's an interesting um eventually uh reason prevails
uh many of the psychological biases you see in many sports are there 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 oh we can't have helmets we won't be able to see uh glider pilots have the same response to any rules that 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
well 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 if you know we're all bad at reflecting what our own
mental strengths and weaknesses are i tried to reduce things down to a very few fundamental principles and a logical structure that's why when i was in college i was a physics major i was great at physics and i i nearly flunked chemistry because
physics my my peak intellectually was uh 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 damn 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 i i really admire people of different habits of mind my historian friends who
can keep unbelievable numbers of facts and their citations in their head at one time i just can't do that mathematician friends who are great at seeing logical structure of things without the the vision i admire that but that's
that's my one uniting theme 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 cochrane for those of you who don't know
what is it intellectually that you learned from your father oh my god so much and so this tells you something it's a great book by the way everybody else who's ever heard of my father heard of florence in the forgotten centuries which is the one
i'll uh i'll recommend online uh that you've read the historiography book uh 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 um one the historical perspective uh you know i think that a lot he was also um the writing in forgotten centuries was wonderful and 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 uh he's an unusual man he took us to florence 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 a historian who read the minutes of the council of trent in the original latin that was a uh that was a challenge for a young for a 16 year old atheist but 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 rossi especially rossi 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 i'm just amazed at the range of what you know yes my mother um she taught french at the lab schools while i was growing up a 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 translated many many books for the university of chicago press i 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 a uh yeah she was she was the other part of that dinner table where uh uh i i uh both learned a lot and and
learned to think 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 play 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 i said to my dad dad what's the council of trent anyway and he said oh my god i could see his the look in his face oh i haven't told
might get anything but on the other hand my wife uh beth farmer did say do the same thing at age 12 looked up at a 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 she's a really smart she's not only a fiction writer she has a
phd in 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 learned 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 uh pursuit for her and she's really committed to writing great uh young adult literature not just uh not just stuff that sells and so yeah monstrous beauty is
wonderful plus one is a is her book after that which i recommend it's a secretly libertarian uh young adult romance uh 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's cuisine is wonderful what's your favorite in tuscan cuisine ah oh my god how how can where do you start uh you know that the simple there's there's nothing like aribolita on a cold winter day tuscan cuisine is
is supposed to be simple not not fancy conquest's second law sometimes called o'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 a trenchant observation of the current time 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 universities so non-competitive institutions are moving
sharply left the institutions of civil society are moving sharply left but is that [Music] is that that's not always the case there was a reagan thatcher counter revolution in the uh 1970s so uh you know there's the natural
tendency people in a comfortable society start feeling guilty and like telling other people what to do and how the government should spend other people's money um why are your economists right now moving so much to the left what's the
most structural explanation for the mistake they're making the highest order account of what's going on well except the economists have always been left right the american accent they're much more left than 20 years ago yes and and uh passing that on um
the uh uh i think the single greatest uh uh no no no you're right uh well economists um so 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 interventionist uh 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 and 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 fine but that's a levels explanation right not a change explanation i don't know you got to 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 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 interventionists 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 uh okay so good good now we can have a debate i don't think that's true the foreign many of the foreigners i know come from socialist d or or much more dimensions countries say my god i love this free place talk to
you know an argentinian about uh about government so i know a lot of libertarian foreigners i do think so uh 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 inclinations so you're right some of them tend to be more lefties some of
them tend to look at where they come from you know that the people argue 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 other unfortunate feature of contemporary economics it's increasing careerism 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 markets work in italy that's that's an unfortunate feature for foreigners women are
there's there's not that many of them in economics and what's driving the woke left in in economics is the the millennials um 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 fama can't be in economics anymore gene fama he did his internship when he was an undergrad was he worked on the steel mills i applied to be an economics graduate student on lark one month before classes start you can't do that anymore you have to be deeply ingrained in the system starting as an undergraduate
so maybe there's a self perpetuation in that sense that that 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 no it's voluntary voluntary rules but you said people can succeed if they don't like it you can make a 10-year 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 this it's a remarkable lack of competition among universities so i'll be uh let's get rid of the entire legal structure of the non-profit organization uh to start with uh 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 tenure 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 uh without tenure so i i have to go back to my uh libertarian instincts and say what we need is a healthy dose of
competition in this business and uh but 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 and earlier decades had a lot of for-profits they seemed to disappear largely for
market-based reasons i don't know they're in a competition with a heavily government subsidized uh sector um some of the for-profit charter schools i gather are doing a bang-up job um the big problem with being a non-profit
so a non-profit 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 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 non-profit business this is a side issue which we should talk about sometime not the non-profit status in the us 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 the estate tax and for subsidizing political activity at taxpayer expense so i was trying to think of things that open it up to competition uh better um and and that that you know i have if we have to
think about roots ways to change things i think that'd be you know you make me benevolent dictator yeah i think there's a lot of different ways we could run um we could run journals i think putting things to the market
test of ideas would be a lot more helpful but we got to face the fact that a lot of the market 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 a long period of uh reflection and it was you know i 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 i told you my habit of mind is to put things in in logical structure and if you start thinking cause and effect and 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 a 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 understanding social problems as dispassionate cause and effect uh things and
recognizing how they didn't work otherwise i'll tell you too one was i was a kid reading the newspaper uh actually in italy about them there was a plan the government of tuscany there's a problem with vipers these are little poisonous
snakes and the government assassins said we'll get rid of the vipers we'll uh we'll give a bounty of a thousand lire per viper and that'll clean up the viper problem well the sturdy farmers of the cousantino found out that they could raise vipers at a thousand a thousand lira per viper they could raise a lot of vipers fast and the supply overwhelmed the demand uh you know stories of well-intentioned uh ideas that have unintended consequences
uh that that rank this there's cause and effect uh that that fits in lovely the other one's my main big conversion moment i remember it it's the 1970s i've taken 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 uh 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 some money and then there's that kink in the budget constraint what i saw was um eye-opening 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 is just completely cause and effect and and we know how to fix this and you
don't have to get into morals and psychology in religion and all the rest of it so that that was my conversion point as an economist and it 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 conservative rule of law um pax americana there's there's a lot uh there's many different brands of libertarian should more economists blog ah 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 uh 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 a and to hear from other people uh i think that forum is is good so our academic journey is speaking of you know our academic journals are a disaster uh and uh see blogs seem to be an interesting way to get
ideas back and forth in economics they merge economics and politics uh i don't know if that's a good or a bad idea oh but um the problem with all of us doing it is you know i i think what we're seeing in the market is less blog which is a personal brand
name and more of the vox coilette and so forth curated things that are not publications so that's really a question about how do you what's the right format for getting uh essay things uh into the debate uh
more quickly both on actual economics and economics and and politics and 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
projects that i earth shaking projects is growing as i get older and try to bite them off so i have to pick one or the other so which one do i want to do of course one should finish what one has started the fiscal theory of the price
level was 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 haven't finished the theory part so when 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 hole so i should finish that but i probably won't uh i want to go back to i did mention i think that uh um why that takes so much trading to get
information into prices that's kind of like the i that's a big unknown thing about asset markets so i'm tempted to go back to that uh 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
uh 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 america had this amazing flowering of political
engineering in 1790 and and we seem to have just lived in the building ever since 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 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 sitting you know wait you and i are technic techno optimists uh we're i think we think that the us 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