16 thoughts on “John Cochrane Surveys the World Economy”

  1. Fascinating. He can’t possibly find any reason why the US economy would be stagnating.

    “Why are we stagnating? I don’t know. I don’t think anyone knows, really. That’s why we’re here at this fascinating conference.”

    Perhaps he and the other conferees could look somewhere besides their belly buttons for an answer?

    1. Chris, I’ve been asking that, myself. My only explanations are: (a) Mark was in a hippie-punching mood, or (b) UCLA regulations require some right-wing intellectual faker on all UCLA-related websites, organizations, departments and units.

  3. Cochrane:

    I posed this question to a somewhat dovish Federal Reserve bank president recently. He answered succinctly, “Aggregate demand is inadequate. We fill it. ” Really? That’s at least coherent. I read the same model as an undergraduate. But as a diagnosis, it seems an awfully simplistic uni-causal, uni-dimensional view of prosperity. Medieval doctors had three humors, not just one.

    You say that smoking causes lung cancer, the HIV virus causes AIDS, and penicillin cures the pox? Terribly one-dimensional.

    The guarantee/regulate/bailout regime ends eventually, when the needed bailouts exceed governments’ fiscal resources. That’s where Europe is now.

    When Germany´s debt-to-GDP ratio is 200% (well within British historical experience after two wars), and the tax take exceeds Sweden´s 50%, he might have a point. I agree with Cochrane that the German/ECB pro-rentier policy of making banks and bondholders good at the expense of the taxpayer is misguided, but it´s quite sustainable fiscally. What may cause the project to come unstuck is popular backlash in Southern Europe aqainst endless austerity.

    But now, you could pay for coffee with an electronic transfer of mutual fund shares. The fund could hold stocks, or mortgage backed securities.

    Huh? In emergencies, people will use cigarettes as money (concentration camps) or cheques issued by pubs (Irish bank strikes). But given the chance they use deposits in commercial banks. There is probably a good reason for this. Even OWS doesn´t propose to abolish banks, attractive as the project may seem.

    Short-term debt is the key to government crises. Greece is not in trouble because it can’t borrow one year’s deficits. It’s in trouble because it can’t roll over existing debt. Governments can be financed by coupon-only bonds with no principal repayment, thereby eliminating rollover risk and crises.

    Hah! I wish somebody less wild-eyed than Professor Cochrane agreed with me on this one.

    1. Good fisking, but more could be done, even with the parts you savage.

      The medieval doctors had four humors, not three. Blood, phlegm, black bile (melancholy), and yellow bile. And this dates back to Galen, or more likely Hippocrates. Does Cochrane even know how to use Wikipedia? Does he care?

      Why don’t we use securities as money? There are at least two answers. One is that different issues of securities are non-commensurable, much like dollars, yen and Euro. This is true even for govvies, which have different tenors and due dates and the like. No one issue of govvies is enough for the payment system. Then, who will value them against each other? The bank, that’s who. And in whose favor will they be valued? Uh, look at the current foreign exchange litigation . . .

      The second is the problem of interbank payments, where the banks are going to care very very much about specific issues of securities. Where will the banks get the securities? Well, they may have to borrow them. The logistical problems of just-in-timing all of them are scary-and expensive. Borrowing creates something called “liquid credit”, which is what Cochrane seemed to want to avoid.

      So Professor Cochrane doesn’t know how to use Wikipedia and doesn’t understand banking. What does he Profess, exactly?

  5. I hate to judge a talk by the cover it’s given, but Hoover?! Not a good start. Once past the intro into the meat, there are enough dog-whistles and standard ideological phraseology that you know where this is going. Therefore I was justified in stopping just a few paras into the exposition.

  6. Speaking as an economist, Cochrane’s reputation within the profession is not exactly that of an impartial, objective analyst…

  7. This,

    “And the US is not immune. Sooner or later markets will question the tens of trillions of our government’s guarantees, on top of already unsustainable deficits.”

    ..is where I stopped reading. This assertion is flatly untrue. If such an eventuality comes to pass, it will be due to the politics, not the pure economics.

  8. The reference to the theory of humours — which was not abandoned until well into the 19th century, lest anyone think the adjective, medieval, puts its demise much earlier — may be a telling projection. Humoralism, like astrology before astronomy or alcemy before chemistry, made abundant use of moral narrative in place of measurement or functional analysis. Cochrane, apparently, wants to do the same. And, he has plenty of company, among “economists”.

  9. This lecture is a travesty wrapped in a distortion inside a sham. It’s hard to go for a paragraph without finding some misstatement or bogus explanation. Among other things, he repeats Mankiw’s discredited “90% marginal tax rate”, only repeating it as “93%” and claiming that it excludes corporate and other non-individual taxes, which Mankiw explicitly included. (For those who don’t care to dig through the record: Mankiw combined his current marginal tax rate with a contribution for future taxes on the corporate income on his investments, then projected out to 30 years of the ratio of his investment value with & without any taxes. That’s how he got to 90%. If he had simply run the projection out to 100 years instead, he could have gotten to an even more impressive 99% “marginal tax rate”, so I don’t know why he stopped at a mere 30.)

  10. Some comments:

    His comment here: “…Medieval doctors had three humors, not just one.” is dishonest; Chicago economists making simple recommendations (for an example, see this talk), and (guessing here), they will use ‘ceteris paribus’ as much as other economists.

    Adding onto Foster’s comment, Cochrane is repeating Mankiw’s erroneous 93% marginal tax rate BS. An elite economist should not fall for clearly ridiculous numbers without thinking about them.

    Adding onto Ebenezzer’s argument - securities as money? Is the Cochrane that stunningly ignorant of the basic idea and history of money? While being a finance professor in a business school? “So Professor Cochrane doesn’t know how to use Wikipedia and doesn’t understand banking. What does he Profess, exactly?” Clearly, whatever right-wing BS propaganda is needed.

    Karl Smith of Modeled Behavior has a very applicable post
    about what the blogsphere has taught him (http://modeledbehavior.com/2011/12/23/the-blogosphere-at-christmas/#comment-21956):

    “One thing that can easily pass you by is the dearth of analytical ability in the world. When you talk to experts you can be confused into thinking that they are sharper than they are because they have been thinking and talking about the same things for a long time.

    However, in the fast and furious world of the blogosphere it quickly becomes apparent how shallow much of that understanding is and how widespread the inability to transfer insights between domains is as well.”

  12. Speaking of comment award season, we should thank our commenters above for reading the essay so the rest of us don’t have to.

  13. In fantasy writing, the key to believability isn’t plausibility, it’s internal consistency. In his comment, bobbyp correctly notes that this is nonsense:

    Sooner or later markets will question the tens of trillions of our government’s guarantees, on top of already unsustainable deficits.

    But it also doesn’t work as a fantasy, because Cochrane is one of the noisiest proponents of efficient markets theory, under which it’s impossible for assets to be misvalued in the manner he asserts here.

    I think Prof. Coffin, commenting above, chooses to emphasize an irrelevant point. He says that Cochrane isn’t regarded as an “impartial, objective analyst” among economists. That’s like saying he isn’t regarded by economists as a particularly strong swimmer. It’s just not germane to the discussion.

    Impartiality and objectivity, whatever their value to Prof. Coffin and the Reality-Based Community, aren’t taken particularly seriously by economists. Would Prof. Coffin care to argue that Cochrane isn’t widely respected within his profession? Heck, Cochrane is even linked uncritically by an economist here at the RBC.

    1. “Heck, Cochrane is even linked uncritically by an economist here at the RBC.”

      Yes, by a hack. Who, of course, is respected enough to get posting privileges.

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