Fresh Thinking

Chicago economist John Cochrane criticizes recent solutions to financial crises. Excerpts from an interview:

Dodd-Frank: Dodd-Frank....is a long and vague law that spawns a mountain of vague rules, which give regulators huge discretion to tell banks what to do. It’s a recipe for cronyism and for banks to game the system to limit competition.

Ending "too-big-to-fail" bailouts: the only way to precommit to not conducting bailouts is to remove the legal authority to bail out. Ex post, policymakers will always want to clean up the damage from crises and worry about moral hazard another day. Ulysses understood he had to be tied to the mast if he was going to ignore the sirens. You also have to let people know, loudly. The worst possible system is one in which everyone thinks bailouts are coming, but the government in fact does not have the legal authority to bail out.

Inflation: We no longer have to hold an inventory of some special asset — money — to make transactions. I use credit cards. We pretty much live in an electronic barter economy, exchanging interest-paying book entries, held in quantities that are trillions of dollars greater than needed to make transactions....I've been looking for a new theory: What is the basic theory of inflation? Where do we start before we add frictions and complications?

Growth and economic recovery: Long-term growth is like a garden. You have to weed a garden; you don't just pile on fertilizer — stimulus — when it's full of weeds. So let's count up the weeds. A vast federal bureaucracy is going to be running health care and has cartelized the market. Dodd-Frank is another vast federal bureaucracy, directing the financial brains in the country to compliance or lobbying. The alphabet soup of regulatory agencies is out there gumming up the works. Then there are social programs. The marginal tax rates that low-income people face, along with other disincentives to move or work, mean that many of them are never going to work again.

When the economy was steaming ahead, this didn’t really cause much trouble, but now many recovery mechanisms have been turned off. If a Martian economist parachuted down, would he not be struck by the vast number of disincentives and wedges the government places between willing employer and employee? Would he or she really say "the one big wedge between you hiring someone to make something and sell it is the zero bound on nominal Treasury rates"? Finally, uncertainty is surely a part of it. Investing and hiring has some fixed, irreversible costs, and the chance that policy could be even worse gives people an incentive to delay.

Health insurance: Health insurance should be there to protect your wealth against large, unanticipated shocks. There is no more reason it should pay for routine expenses than your car insurance should pay for oil changes. Insurance should be individual, not tied to your job, guaranteed-renewable (meaning, once you buy it, you keep it, without premium increases, when you get sick), portable across jobs, marriages, and states, transferable to other insurance companies, and accompanied with large deductibles.

Inequality: I do not see evidence that societies whose inequality comes, like ours, primarily from the economic returns to skill, can add high taxes and large transfers mediated by central government, and the result will be for them to grow faster, become more homogenous and peaceful, or provide better long-run outcomes for the people whom advocates of such schemes say they wish to help.

Interesting throughout.