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Hoisted from the Archives:
To Steal a Line from Leon Trotsky:
“
Every Man Has a Right to Be Stupid,
but John Cochrane Abuses the
Privilege
…”
J. Bradford DeLong
Economics and Blum Center, UC Berkeley; WCEG; and NBER
http://bradford-delong.com
| @delong |
delong@econ.berkeley.edu
June 19, 2019
Hoisted from the Archives
:Stupidity Is a
Willed Choice Files: John Cochrane:
Reading Paul Krugman calls to mind that
I never reacted to John Cochrane's July
2012 failure to mark his beliefs to market
and, instead, doubling down on his claim
that the biggest risk the U.S. economy
faces is that of becoming
“
Argentina
"
“
quickly
”
.
I must say that if I had been opining
stridently about issues of public policy
without doing my homework fi ve years
ago, and if between then and now events
had developed in directions strongly
contrary to my expectations, I would not
J. Bradford DeLong
Right to Be Stupid
double down on what I had thought then
—
I would rather try hard to do my
homework and to mark my beliefs to
market.
And if I were going to criticize people for
not citing my work, I would not claim that
a sentence they wrote which comes
immediately after a four-paragraph quote
from me as an example, and I would have
read their explanation of why they think
expansionary fi scal policy right now does
not raise the risks of
“
fi scal dominance
”
rather than remain in ignorance of it.
But to each his own!
John
Cochrane
:
The Grumpy Economist:
Krugman, Delong and Inflation:
“
Yes, I've
been worried for some time that our
current debt could lead to inflation. And
yes, that inflation has so far not
happened….
“
Well, they made fun of Friedman when
he said in 1968 that inflation was coming.
They made fun of Greenspan when he
said in 1996 that stocks seemed awfully
high, and stocks went up for a few more
years
…”
I gotta interrupt: Friedman in the late
1960s was right. He—correctly—saw
inflation rising because he had theory and
evidence on supply and demand in the
labor market. But Greenspan in 1996 was
wrong: since late 1996 the S&P 500 has
produced a very healthy real return of
5.6
%
/year 6.2
%
/year.
Does Cochrane know this?
Has he looked at the numbers?
Back in 1996 I agreed with Greenspan. I
worried too that the market was
overvalued. We thought this for a bunch
of reasons. We were wrong.
Why does the fact that our worries were
wrong then make Cochrane's worries right
now?
Cochrane continues:
“
They made fun of
Shiller when he said in 2005 that house
prices looked awfully high, and they went
up for a few more years. Greek interest
rates were really low in 2007…
”
I gotta interrupt again: Who are the
“
they
”
who were making fun of Shiller when he
said that house prices looked awfully high
and that expected returns from housing
were negative, as it looked like the
housing bubble would collapse over the
medium term? Was one of them John
Cochrane, denying that expected returns
on a positive-beta asset like housing could
ever be negative?
“
The facts don
’
t support the theory that
prices are high because people always
expect a
‘
greater fool
'
to pay a still higher
price…. The
‘
irrational
’
camp points to
puzzling surveys…. But surveys are easy
to misinterpret:
‘
Expect
’
and
‘
risk
’
in
2
of
6
J. Bradford DeLong
Right to Be Stupid
casual conversation have very different
meanings than
‘
conditional mean and
variance
’
in our models. And economics
was meant to explain behavior, not self-
perception. Rats in mazes do a good job of
obeying the laws of economics, but
they’re not so good at responding to
surveys….
“
Market swings are all about fi nancial
frictions, not mass risk aversion or
psychology…. Variation in price ratios
corresponds to discount-rate variation, not
to changes in expected cash flows or the
ability to fi nd a greater fool. The challenge
is to understand that discount-rate
variation. A focused debate, based on
clear facts and explicit theories, is real
progress
…”
If Cochrane now agrees with Shiller ca.
2005 on the housing bubble, and
repudiates his claim from two years ago
that
“
the facts don’t support the theory
that prices are high because people always
expect a
‘
greater fool
’”
, then he should
say so more clearly.
And do note that, from my perspective at
least, Cochrane is simply incoherent: what
Cochrane calls
"
discount-rate variation
”
is
not an alternative to expecting
ex ante
to
fi nd a greater fool and failing
ex post
,
rather, what Cochrane calls
"
discount-rate
variation
”
is a subclass of when people ex
ante expect to fi nd a greater fool and fail
ex post.
Cochrane continues:
“
The Federal Government has about 15
trillion of formal Federal debt
outstanding. It has uncountable trillions
more unfunded promises and credit
guarantees. Right now it takes in about 1.5
trillion and spends about 3 trillion a year.
We must, by arithmetic, either pay off this
debt, default on it, or inflate it away….
“
The only hope for paying it off is to
return promptly to strong long-run
growth, and to reform entitlements.
Doubling Federal revenues by raising
income tax rates on
‘
the rich
'
, or by
cutting discretionary spending by more
than 1.5 trillion per year, forever, seem
unlikely. That's arithmetic too
…
But Cochrane's arithmetic is fake.
As he was writing, the nominal debt was
growing not by 1.5 trillion/year but by 1.0
trillion/year. The amount of excess debt
being issued over what was sustainable at
a constant debt-to-annual GDP ratio was
500 billion/year. Of that, 300 billion/year
was a transitory cyclical component
caused by the depressed economy.
The numbers he was putting out were
more than seven times the size of the real
numbers
—
that
’
s the real arithmetic. And
forecasts then were for a debt-to-annual-
GDP ratio stabilizing for the rest of the
2010s even without large additional policy
change. That was the real arithmetic. Not
3
of
6
J. Bradford DeLong
Right to Be Stupid
a 1.5 trillion/year gap, but a $200 billion/
year gap, or less.
But Cochrane, apparently, did not look at
the numbers.
He did not know the real arithmetic of the
debt and the defi cit.
And so he wrote:
“
I
’
m not optimistic.
Growth economics is unanimous: You get
such growth only from higher
productivity, and from letting new
innovative competitors dethrone
established interests. That's not where our
economy is going. Keynesian stimulus
doesn't give 10 or 20 years of sustained
growth, even in Krugman's
‘
model.
’
… I
happen to dislike inflation. Krugman and
DeLong are all for it…
”
I am? I note no citations from Cochrane to
anything I have ever said or written here.
Cochrane continues:
“
They must have
been smoking better weed in the 1970s.
But I notice that lots of people seem to
agree with them. So, it seems to me that
inflate it away, and print money to pay the
bills, remains a decent possibility. That's
arithmetic. I wonder which part of
arithmetic Krugman would have me
abandon.
“
What Chicago does
‘
know
’
is
scholarship. DeLong cites a transcription
from discussion at a long ago
conference…. At Chicago, we take a little
time to research what people actually have
to say before calling them… less than
‘
half-intelligent
’
(DeLong). You know
what I think of that. Why you continue to
read these guys is a mystery to me…
”
Let's roll the videotape, from March 2009:
John Cochrane:
“
The danger now is
inflation. And I would say it's a greater
danger than most of the other people have
said. Our danger now is a run on Treasury
debt. It's not just can the Fed soak this
stuff back up again, but can it soak this
enormous amount of debt back up again
when people don't want either money or
Treasury bills or anything labeled
‘
U.S.
Government
’.
“
The danger is not 1932; the danger is
Argentina, a massive run from Treasury
debt. And then monetary policy will not
be able to do anything. You can fool
around with interest rates all you
want. When people don't want Treasury
bills or money you're stuck….
“
The system is much more resilient than it
was because of deregulation. Back in the
Great Depression… if the Bailey Savings
and Loan goes under, there is no way that
JP Morgan, fi nanced by an equity infusion
from the sovereign wealth fund of Kuwait
can come in and take over and start
lending. You're just stuck. Well, we're not
in that situation anymore….
“
Policy is chaotic. Who would invest in
this climate? It's not about toxic assets; it's
4
of
6
J. Bradford DeLong
Right to Be Stupid
about who wants to go in on a deal with
Darth Vadar [sic], who can change his
mind at any moment? That's the
uncertainty that's keeping things from
getting going and that's what
’s
slowing the
rebuilding of fi nancial markets. We're
facing growth-destroying marginal tax
rates, an excuse for the government
takeover of large and completely
unrelated sectors, class warfare, vindictive
ex post taxations….
“
My great hope is that the bounce-back
will be quick before the quack medicine
can be said to have worked. (Chuckles.)
“
Just as we sort of—as people think that
this insane idea of fi scal stimulus—which
I'll go on with later if I get a chance—
came from Roosevelt's experience with no
reason why it should work, there is a
danger of thinking all of the crazy stuff
they're doing now will have caused the
bounce-back…
”
I quote four paragraphs. I snark. And
Cochrane counter-snarks, complaining
that I did not
“
research what... [he]
actually had to say
”
?
If what Cochrane is saying with his
“
what
Chicago does
‘
know
’
is scholarship…
research what people actually have to say
before calling them… less than
‘
half-
intelligent
’”
is that he repudiates his
March 2009 presentation at the ill-done
Council on Foreign Relations conference,
I would welcome that and agree: It was
very ill-done.
He said an awful lot of things that were
simply wrong, and confused, in a very
short space.
But, if that is indeed what he is doing, he
needs to be more explicit.
Cochrane:
“
I view inflation is a danger,
not a forecast. The popping of
‘
bubbles
’
is
hard to predict. We're sitting on an
earthquake fault. When or if it goes is
anyone's guess. I also pointed out that
inflation can come quickly, as it surprised
the Keyensians [sic] of the 1970s, and as
its quick disappearance surprised them
again in the 1980s when the US returned
to growth-oriented policies
…”
Again: it took 8 years and one huge oil
shock for expected inflation to rise from
1966
’
s 2
%
to 1974
’
s 5
%
, and 14 years and
two huge oil shocks for it to breach 10
%
—if that is what Cochrane means by
“
quickly
”
, that come 2027 we ought to
have done something to get our long-run
fi scal house in order, I would certainly
agree. And I would point out that perhaps
we already have—if the ACA
implementation proceeds as we hope, we
will come 2027 fi nd that we have no long-
run budget problem. If
“
we have until the
mid-2020s
”
is what Cochrane means by
‘
quickly
’
, he needs to say so
—
and I
would agree.
And again: the reduction in expected
5
of
6
J. Bradford DeLong
Right to Be Stupid
inflation from 9
%
in 1981 to 5
%
by 1985
was, given the size of the 1982 recession,
about what the standard forecasting
models of the time were predicting. Who
are the
“
Keynesians
”
who were surprised
by this? Cochrane doesn't say—interesting
citation practices once again…
Cochrane concludes with:
“
You can't
repeal arithmetic. That which is
unsustainable cannot last
…”
I wish I could agree.
It would be very nice of what was
unsustainable could not last.
It would be very nice if false prediction
followed by doubling down and repeating
false predictions led to some kind of
intellectual bankruptcy, followed by some
form of liquidation/takeover process
—
or
at least a rebalancing.
I know that I have been surprised by a
number of things over the past fi ve years
(most notably how very resistant to any
form of downward movement nominal
wages have turned out to be), and I have
tried to mark my beliefs to market:
moving from 5
%
Austrian, 5
%
RBC, 30
%
Keynesian, 60
%
monetarist to 1
%
Austrian, 1
%
RBC, 70
%
Keynesian, 28
%
monetarist.
But I think John Stuart Mill had the
decisive counter:
“
What was affi rmed by
Cicero of all things with which
philosophy is conversant, may be asserted
without scruple of the subject of political
economy
—
that there is no opinion so
absurd as not to have been maintained by
some person of reputation. There even
appears to be on this subject a peculiar
tenacity of error
—
a perpetual principle of
resuscitation in slain absurdity…
”
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