David R. Henderson  

John Cochrane's Talk at Hoover

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Today on the Eurozone Crisis... A Cursory Rejection of Anti-Na...

At his Friday talk at Hoover, University of Chicago economist John Cochrane went a mile a minute to try to fit a lot into 10 minutes. He succeeded and the talk was outstanding. But because he went so fast, my notes are less complete than for Greenspan and Shultz. Here are a few highlights from his talk.

. The Europeans have turned a simple sovereign debt crisis into a fiscal crisis, a monetary crisis, and a political crisis.

. Dodd-Frank doubled down our bets on the regime of "guarantee, regulate, and bail out."

. The big question: what financial system will we reconstruct from the ashes?

. Nobody ever ran on a mutual fund. [He didn't say why, but the reason is clear: the prices at which you can take your money out of mutual funds adjust. Of course, there was the whole "break the buck" episode with money market funds in 2008, but I think, and I'm guessing John does too, that some of the money market funds, without the government backing they got, would have broken the buck.]

. Why are we stagnating? I don't know.

. Look at the various "solutions" to the stagnation:
(i) "Jobs" bill. Do we really have 9% unemployment because we stopped building roads and schools?
(ii) Raising the capital gains tax rate. Do we have high unemployment because the marginal tax rates on capital gains are too low?
(iii) Re QE3 or QE5, "I've lost track." Do we really have 3% mortgages because we don't have enough credit. [Hmmm. Here I'm wondering if he has taken account of the difference between nominal and real interest rates.]

. People, including economists, point out that recessions follow financial crises. But why? Could it be because of bad policies that governments adopt during the financial crises?

. "The macroeconomy is a garden, not an army." [Very Hayekian, Pete Boettkian.] You need to weed a garden, making sure property rights are secure, etc.

. Comparing the evidence on the effects of fiscal policy to the evidence on global warming, "Our scientific evidence for fiscal stimulus is on the level of 'Hey, it's hot outside.'"

. Governments should respond by sticking with the easy, simple stuff that works and then get out of the way. [I think he mentioned my two pet solutions: end or reduce the minimum wage and don't extend the unemployment benefits to 99 weeks, but this is my imperfect memory. My notes don't reflect that.]

I'll do one last post today or tomorrow on the Q&A.


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COMMENTS (8 to date)
Bill Woolsey writes:

There were runs on the money market mutual funds.

One did break the buck and that generated the run. I read that others would have broke the buck, but the firm that operated the mutual fund bailed it out.

If your read their material, there are all sorts of claims that they won't break the buck.

Of course, a run won't cause the mutual fund to go bankrupt. But if there are expected losses from the investment fund, abandoning for standard bank account would seem profitable.

Floccina writes:
end or reduce the minimum wage

We will never get that past the democrats, the unions and the rationally ignorant median voter but I do not see why we cannot get a compromise where we lower the minimum wage and make up the difference with a wage subsidy. We could even name it and structure it so it seems like the minimum wage is still in effect.

Perhaps it has not been done because the democrats can spin it to the rationally ignorant median voter as subsidy to Walmart.

happyjuggler0 writes:

The EITC (Earned Income Tax Credit) is very similar to the minimum wage, although it gradually gets smaller as you earn more.

Perhaps it should be relabeled the Minimum Income Credit (be like MIC), while getting rid of the minimum wage, and increasing the EITC (er, the MIC) for wages currently below the minimum wage, and also putting it in each low wage paycheck automatically instead of giving it on tax day in a lump sum.

Also, turn unemployment insurance into a lump sum that you can keep even if you find a job quickly.

happyjuggler0 writes:

By the way, why aren't all such talks (e.g. Cochrane, Greenspan etc. at Hoover and other higher ed institutions) routinely audio/visual recorded, or at least audio?

MIT does it with all their courses and puts them online....

David R. Henderson writes:

@happyjuggler0,
The EITC is not similar to the minimum wage. The minimum wage is a price floor that prices people out of work. The EITC acts like a subsidy.

landivar writes:

'(iii) Re QE3 or QE5, "I've lost track." Do we really have 3% mortgages because we don't have enough credit. [Hmmm. Here I'm wondering if he has taken account of the difference between nominal and real interest rates.]'

Right now CPI growth rate is almost 4% so 3% mortgages are in negative real interest territory.

happyjuggler0 writes:

David Henderson,

Yes, I am all too aware of that. It is precisely that unemployment-causing price floor that makes the EITC superior to the minimum wage, hence my post.

However in terms of effect on wages for the low skill employed, they are similar. Both raise the effective wages above what a free market would pay, resulting in low skill workers being able to be employed and also achieve the paternalistic goal of giving them the ability to earn a "living wage" (if EITC subsidies are high enough) in a single full-time job that underlies the intention of the minimum wage.

Hitchhiker writes:

"The Europeans have turned a simple sovereign debt crisis into a fiscal crisis, a monetary crisis, and a political crisis."

Okay. They spent too much, the cost of debt is increasing because they have approached a rational credit limit. So stop living beyond your means. Simple. The same thing every father should teach their children. But, since currencies and fiscal policies are creations of political institutions, every monetary and/or fiscal problem is inherently political in nature. That makes it not so simple. Coolidge for president!

I believe the macro economy is a garden but, weeds are not the only problem. Too much fertilizer can actually be toxic. Too much or too little water can lead to sub par results.

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