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  From Torsten Slok at Apollo. Torsten explains Current pricing for caps and floors shows that the market sees a 30% probability that inflation will be above 3% for the next five years, and a 5% probability that inflation will be below 1%, see chart below. A similar worry about high inflation can be seen in 5-year breakevens, currently trading at 2.5%, the highest level since 2008. A perpetual inflation worrier, I habitually confront the fact that bond prices don't signal inflation. I am forced to point out that they never do -- interest rates did not forecast the inflations of the 1970s, nor the disinflation of the 1980s. And I say inflation is unforecastable, a risk like a California Earthquake.  But for once there does seem some inflation risk in asset prices.   These are option prices. The main forecast remains subdued inflation. But these option prices are pointing to a larger chance that inflation does break out. More risk, not so much a sure thing. Also, it's not r...

In one of their series of excellent WSJ essays, Phil Gramm and John Early notice  that conventional income inequality numbers report the distribution of income before taxes and transfers.  After taxes and transfers, income inequality is flat or decreasing, depending on your starting point.  Source: Phil Gramm and John Early in the Wall Street Journal If your game is to argue for more taxes and transfers to fix income inequality, that is a dandy subterfuge as no amount of taxing and transferring can ever improve the measured problem!  Now facts are facts, and this one has a good progressive interpretation: But for our sharply progressive tax system and  benefits, untrammeled capitalism would have led to sharply increased inequality. The numbers don't argue for more redistribution, but they are consistent with a narrative that only our current large redistribution saved us from the top two lines.  Gramm and Early offer a sentence on this worth pausing to th...

Update : An expanded and improved version of this post is at city journal , or here (pdf on my webpage )  I had the honor of testifying at the Senate Committee on Banking, Housing and Urban Affairs, on Protecting the Financial System from Risks Associated with Climate Change  Full video at the link, I start at 48:30 with slightly abridged version of these remarks.  Testimony of John H. Cochrane to US Senate Committee on Banking, Housing, and Urban Affairs  Chairman Brown, Ranking Member Toomey and Members of the Committee: Thank you for the opportunity to testify today.  I am John Cochrane. I am an economist, specializing in finance and monetary policy. My comments do not reflect the views of my employer or any institution with which I am affiliated.  Climate change is an important challenge. But climate change poses no measurable risk to the financial system. This emperor has no  clothes. “Risk” means unforeseen events. We know exactly where the clima...

Marginal revolution links to a great read on contemporary macroeconomics from J.W. Mason . It's mostly wrong, I think, but very thoughtfully puts together the wrong ideas behind contemporary policy macroeconomics.   Briefly, debt doesn't matter and there are no effective supply constraints. Borrow, spend without limit is the key to prosperity.  The fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift. The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates. It really does seem that on the big macroeco...

The Hoover Economic Policy working group seminars are now online for anyone who is interested. Follow the link and click "news and events." These happen on Wednesdays at noon, and are put up soon after. Interesting speakers, interesting discussion. Here's what's available so far: Michael Bordo and Mickey Levy Wednesday, March 10, 2021 “Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record.” Chad Jones Wednesday, March 3, 2021 “The End of Economic Growth? Unintended Consequences of a Declining Population.”  Eleni Kounalakis And Lee Ohanian “The Exodus of Firms from California: Facts, Reasons, Solutions.”  A Special Event in Honor of Secretary George Shultz Wednesday, February 17, 2021

A history of paper money and inflation in China, from Edward Chancellor's Wall Street Journal review of Jin Xu's Empire of Silver.   In these sparse paragraphs is most of monetary (and fiscal!) theory, along with a history I was not aware of. Paper money, Ms. Xu tells us, dates back to the Tang dynasty in the ninth century, when the authorities allowed merchants to exchange bronze coins for promissory notes, known as “flying cash.” Two centuries later, in the time of the Song dynasty, merchants in Sichuan were using private exchange notes in place of the cumbersome iron coinage. The Song emperor issued his own paper money against deposits of coin. The jiaozi, as these notes were called, proved so popular that they traded at a premium to cash. The convenience of paper money proved its undoing, however. The first temptation was for the Song authorities to make the jiaozi inconvertible, severing the connection with metal reserves. The next step was to increase the issue of paper...

R.A. Fisher, famous statistician,  is canceled  by Cambridge University, along with a pretty nice stained glass window Bari Weiss has  a tremendous essay by  on the state of affairs in elite secondary schools, but including the first inklings of secret resistance. Coverage below.  The New York Times allows Brett Stephens to be  critical of California's Ethnic Studies Follies . A short excerpt below. Others have slammed the curriculum more effectively, but the source makes this notable.  A group of courageous University of Chicago students sets up " The Chicago Thinker " a well-produced news website devoted to "defend conservative and libertarian perspectives in a community that is increasingly intolerant of such voices."  The Academic Freedom Alliance  is launched, not just to talk and expose censorship but also to offer concrete and even legal help to those targeted. Spend some time browsing the website. We need not just voices, but institu...

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here   and embed below  Update: My comments on efficient markets and active management provoked a lot of email.  I mentioned Jonathan Berk, and should have mentioned his coauthors Rick Green and Jules Van Binsbergen, on how active management can persist even though investors don't make any money on it. The basic idea is really clever:  A manager has 5% alpha skill on $10 milllion, i.e. he can earn $500k, but the skill does not scale. So he earns 5%, charges 1% fee, investors get 4%.  Investors see his great performance and rush in.  Now he has $50 million assets under management. He still earns $500k. He charges 1% fee, and investors get zero alpha. It’s equilibrium – if investors leave,  alpha to investors goes up again, and they return. Investors are earning the same zero alpha they get on the index so why not. And that’s ab...

Essay on monetary policy in National Review Online .  Short version: The Fed's monetary policy has returned to the intellectual framework of the late 1960s. At best "expectations" now float around as an independent force, manipulable by speeches, but not tied to patterns of action by the Fed as analysis since the 1980s would require.  If you follow the conventional reading of how monetary policy works, that observation leads to a natural prediction:  we're on the verge of reliving 1970s inflation. (Fiscal policy, entitlements, regulation and cities seem to be headed also to 1970s policy on steroids.)  True, the Fed says "we have the tools" to stop inflation should it break out. But that tool is to rerun 1980. Does the Fed have the will? Will the Fed really induce a 2 year agonizing recession to bring down inflation, followed by 15 years of historically unprecedented high interest rates? Or will the Fed do what it did three times before that -- half-hearted i...

Ross Douthat in the New York Times doubts that canceling Dr. Seuss is a good idea. That this essay made it in to the Times, of all places, and as of 9 AM Monday he has not yet been fired may give us some hope.  The most daring and revealing bit:  Just a few weeks ago the Amazonian giant decided to simply delete, without real explanation, a 2018 book by Ryan Anderson, a Catholic scholar and the head of the Ethics and Public Policy Center, called “When Harry Became Sally: Responding to the Transgender Moment.” ...I live and work among highly educated liberals, and I know that more than a few of them actually agree with the critiques of current transgender theory Anderson presents. They’re skeptical about the widespread use of puberty blockers for gender dysphoria. They’re wary about the implications for women’s spaces, women’s sports. They don’t share Anderson’s Catholic presuppositions, but they are, at least, J.K. Rowling liberals. In the last stages of the same-sex marriage...

Nicholas Kristof in Sunday's New York Times asks a pressing -- often quite pressing -- question. Why are there no public toilets in America? He is right. He calls for a federal infrastructure plan to fix the problem: "Sure, we need investments to rebuild bridges, highways and, yes, electrical grids, but perhaps America’s most disgraceful infrastructure failing is its lack of public toilets." Now, put on your economist hat. Or even put on your reporter hat. Ask the question why are there no public toilets in America?  ------------------------------- I hope that didn't take too long. Answer: Because it's illegal to charge for toilets. There were once abundant public toilets in America, as there are in many other countries. And you pay a small fee to use them. A small fee that everyone in Nicholas' stories would have been delighted to pay.  This answer is not hard to find, and indicative of the spirit at the New York Times that neither Kristof nor anyone else i...

I learned a lot. The book is very interesting. Direct link in case the following embeds don't work.    

 A young correspondent posed the following question:  I was wanting to know your opinion on the “work or starve” argument often made my leftists. ...they’re essentially saying that the exchange between the [worker] and the employer isn’t truly voluntary since if the worker doesn’t have a source of income, they can’t live. What would be your objection to this..? Essay contest for free-marketers. Here is my shot at it:  First, someone has to work, or we all starve. So, if it is not going to be you work or you starve, it has to be you work or we send you to Siberia. If we are not actors in a market, we must be slaves to the state. Empirically, the incentive that the more you work the more you get has proved much more productive than appeals to patriotism, community sprit, the common good, or force. Second, the best worker protection is competition. Many capitalists vying for your services in a free and open market is the best curb on one employer’s attempt to exploit its wor...

    Source  Stephan Schubert Source: Chad Jones "straight out of the Penn World Tables, and I first learned about it from Lee Ohanian and Jesus Fernandez-Villaverde" In the top graph you get the impression that German and French workers are using up to date technology, including both machines, firm organization,  opportunities to trade in a wide market, etc. but that they simply choose to, are incented to, or forced to work fewer hours than US workers. Italy and UK are still plodding along 20% or so inside the frontier. The bottom graph points a bleaker picture. I'm not an expert, but if labor productivity is high and total productivity is low, that means that the productivity of other inputs must be atrocious.  Chad (amazing expert on all things growth) "It is stunning to me that Spain and Italy have had negative TFP growth for 20 years."  I remember when real business cycles came out, and many were incredulous at the idea of negative productivity shocks. ...

Here are two unsettling slides I made for a talk. Here is GDP per capita in US, UK, France and Italy and China (2020 dollars, source world bank)  To make the comparison easier, here is each country not including China, divided by the US:  Here are the 2019 numbers (in 2019 dollars, again World Bank) US: $65,297. UK $42,330. That's 35% less than the US. Or, the US is  54% better off than the UK.. France: $40,494. Italy: $33,228 That's 50% less than US. Or the US is 96% better off than Italy.  China: $20,261. And it's been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy... Once noticeably better off than the UK, and contending with France, Italy's GDP per capita is now lower than it was in 2000.  GDP per capita is income per capita. The average European is about a third or more worse off than the averag...

With the current focus on "equity" and "disadvantage," even in the midst of a pandemic, one might yearn for the simplicity of a government run system. Surely if health care were free at the point of delivery, paid for by taxes, all the inequities of health care would disappear, no? (Sure we might all get bad health care, but we'd all get the same health care, no?)  No. John Goodman has a nice Forbes article  explaining why and giving the evidence from UK and Canada. Bottom line:  Nothing is free. Everything is rationed. If it is not rationed by price, it is rationed by political access or personal connections. Markets are the great leveler, as anyone can get money but it's hard to get friends and connections.   When Britain founded the National Health Service It was often said "health care is a right." Aneurin Bevan, father of the NHS, declared, “the essence of a satisfactory health service is that rich and poor are treated alike, that poverty is n...