John Cochrane on Economic Puzzles and Habits of Mind | Conversations with Tyler
John Cochrane, a finance economist and policy blogger, shares his unique perspective on various economic puzzles, the concept of health status insurance, and his passion for gliding.
He simplifies complex concepts and provides insights into the current state of economics, the healthcare system, and the impact of government regulations on various industries.
Declining Real Interest Rates
The trend of decreasing real interest rates since 1980 could be attributed to a shift towards a lower growth economy, which naturally has lower interest rates.
Other contributing factors could include low inflation and the perceived safety of bonds.
Questioning Active Funds Management
Despite evidence suggesting that high fee active management does not yield higher returns than passive index investment, people continue to pay for it.
This could be due to a lack of understanding or a slow shift towards passive investment.
High Volume of Stock Market Trading
The high volume of trading in the stock market could be due to the need for information to be incorporated into asset prices.
However, this is a puzzle that has yet to be fully understood.
Habit Formation and Equity Returns
During recessions, people tend to become more risk-averse and less willing to hold risky assets.
This leads to a greater drop in the stock market than in the economy as a whole.
Health Status Insurance
Health status insurance allows individuals to insure themselves against the risk of getting sick in the future.
This concept was not dominant in the past due to market inefficiency and the time it takes for technical innovation to spread, especially in a heavily regulated industry.
Addressing Pre-existing Conditions
Free markets can handle the issue of pre-existing conditions.
Individuals should be able to buy health status insurance before information is revealed that they’re sick.
There’s every reason to hold bonds in particular at it’s for those lower than stocks on top of that you can put on your your frictions and your demographics and so forth but um so I think it sort of makes sense uh but I also I don’t like aren’t you theorizing about things like this we’re in armchairs yes well that’s our job. – John Cochrane
Cross Subsidies in Healthcare
The current healthcare system’s cross subsidies, where the government forces hospitals to treat everyone who walks into the emergency room but doesn’t provide the funds to do so, are criticized.
The government should raise taxes to pay for health insurance for poor people and then allow the rest of the healthcare and insurance industry to operate in a free market.
Gliding is a serious sport about speed, where pilots try to find rising currents of air called thermals and glide to the next one.
However, the government’s regulation of gliding has negatively impacted the domestic industry that makes gliders and their standards for pilots licenses are too high.
Continuous Borrowing Dangers
The continuous borrowing of money by the U.S. is potentially dangerous.
If the interest rate is one percent less than the growth rate, it gives the U.S. one percent of GDP for free.
However, the U.S. is borrowing five percent of GDP indefinitely, which is unsustainable.
Anything over one percent of GDP must be repaid by taxes, and if it isn’t, it could lead to inflation.