Friday morning I had the pleasure of participating in a session at the OECD, as part of their program on Confronting Planetary Emergencies - Solving Human Problems. I had the tough job of following brilliant remarks by Acting CEA chair Tyler Goodspeed and Ken Rogoff, and discussing great questions all starting at 5 AM. FYI here ...
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Friday morning I had the pleasure of participating in a session at the OECD, as part of their program on Confronting Planetary Emergencies - Solving Human Problems. I had the tough job of following brilliant remarks by Acting CEA chair Tyler Goodspeed and Ken Rogoff, and discussing great questions all starting at 5 AM.
FYI here is the text of my prepared remarks. My focus is how to rebuild the competence of our institutions, which failed dismally in this crisis.
Covid and Beyond
John H. Cochrane
Remarks at the OECD, October 9, 2020
I very much appreciate the opportunity to speak today. Looking at some of the background documents, and listening to Tyler, I recognize that our panel is decidedly contrarian to the main views the OECD is pursuing, and those of the stars that you invited for previous panels. It says good things about the OECD that you want to listen to and understand heretical views.
I will try to answer to your question — what lessons should we take from Covid going forward? Many people say that “Covid changes everything.” I do not think the lesson is so radical. But the Covid experience does, I think, bring to the fore and make urgent underlying problems that we need to address sooner rather than later. My “we” is global, and international institutions such as the OECD have a key role to play in this institutional regeneration.
My theme is that we witnessed an outcome of grand institutional failure. We must reform our institutions, restore their basic competence, and thereby trust in that competence. We must de-politicize our institutions and insist that they return to the narrow focus of their competence. Trust must be earned.
This erosion of our institutions has been going on for a long time now. in my view, the populist eruption, as well perhaps as much of the left-wing authoritarian woke eruption, stems from the view that elites don’t know why they are doing. That was laid bare in financial crisis, in many foreign policy misadventures, and laid bare by covid once again.
The disease will pass, likely sooner rather than later due to the extraordinary inventiveness of our pharmaceutical and scientific institutions. The heroic efforts of doctors, and the speed with which they have learned to treat covid is remarkable. Diseases always have passed. And economies and societies returned to normal.
Covid -19 is, however, a fire drill, a wakeup call, a warning sign. It is almost perfectly designed to that purpose. It is just serious enough to get our attention, in a way that H1N1, SARS, and Ebola, were not. But compared to plague, smallpox, typhus, cholera, 1918 influenza, the death rate is tiny.
There is a virus out there, natural or engineered, that spreads like this one and kills 20% or more of the population. It will come sooner than we think. And we are wildly unprepared. Ken Rogoff rightly points to a range of other tail events that we are wildly unprepared for. Antibiotic resistant bacteria. Massive computer failure. Even a small nuclear war.
Let us look somewhat chronologically at the list of failures in the last year.
Pandemics are supposed to be stopped by public health. Monitoring, testing, tracing, quarantining, making sure sick people don’t get on planes and perhaps most of all providing real time unbiased information so people, businesses, and schools can make informed decisions. The public health bureaucracy has previously done amazing work, perhaps lulling us into somnolence, for example wiping out smallpox.
Public health institutions failed, and demonstrated massive incompetence, at all levels: The WHO, national organizations such as the US CDC and FDA, state and local public health. The CDC delayed tests for a monty. We never got N95 mask production up, banning sales and importation. It never occurred to US authorities to take temperatures of people who get on planes. The WHO notoriously covered up for China. The dysfunction continues to this day, for example with the CDC only last week admitting that aerosol transmission is possible, the FDA still banning tests outside of hospital settings.
Part of the failure comes from mission creep. The CDC had moved far beyond its basic mission to control infectious disease, and spent most of its money on lifestyle, mental health, and addiction. And when the CDC proclaimed that Americans do not need to pay rent, just what biological science backs that up? How will we trust the next CDC statement?
As Paul Romer has been advocating for months, we can stop this disease cold with widespread testing, at a cost (say, $100 billion ) of at least an order of magnitude less than the budgetary and economic costs of the pandemic. It’s not happening. The OECD could be championing it. Stopping the winter wave via testing, as we will not have a vaccine in time, would be more valuable than any economic intervention on the table.
The politicians who sit atop did not distinguish themselves either, but as the wisest politician cannot substitute for a well trained military if you are invaded, cannot tell each soldier how to shoot, nor can he or she substitute for a well-run public health bureaucracy when a pandemic breaks out. And in fact there was not much difference in how politicians behaved, across the world and across political orientation. The places that did well, like South Korea, had a good bureaucracy in place.
Bureaucracy is not a bad word. We need effective bureaucracy. That’s what public health, and so much more, is made of. The OECD is a bureaucracy. Our job is to make bureaucracy more effective.
So, the first thing we need is a thorough investigation of how things went so wrong, a bottom to top reform of our public health bureaucracy, and steps to keep it functional through the years before the next pandemic. After 9/11, there were investigations and a commission in the US, and much global cooperation to improve terrorism response. After the financial crisis there was a wave of investigation and reform. It wasn’t perfect, but at least we tried.
We need to acknowledge and investigate the abject failure of our public health bureaucracy and institute similar reforms. We don’t just need another commission to produce a pretty report power point slides. The US had about a dozen pandemic plans. None cited the others. None were even pulled off the shelves.
We need implementation, and constant practice, to guard against complacency during the quiet years until the next pandemic. After H1N1, California put in an excellent mobile hospital system. A few years later our governor canceled $5 million a year it took to keep it up, in order to contribute to his $80 billion high speed train. When we needed it it wasn’t there.
I don’t see now acknowledgement of this massive failure, or interest or the will to do this reform. The agencies themselves will not do it — they are busy defending their past actions and their future budgets. Politicians who lived through the crisis are mostly interested in writing first drafts of history in which they are glorious saviors.
International institutions could be on the vanguard of demanding this reform. There is a good job for the OECD.
Next, our politicians, in desperation, locked down economies. We tend to rationalize that whatever we did last time must be the right thing, so confronted with new outbreaks I am afraid that all they can think to do is lock down again.
Economic lockdowns are what you do in an absolute panic, when a virus is totally out of control and any attempt at rational policy has totally failed. The cost has been tremendous. And let us remember, it is mostly borne by hard working lower income people, not by comfortable academics and policy analysts like us who can just zoom all day and order from Amazon.
We must not enshrine economic lockdown as the default answer. There is no reason an auto body paint shop needs to be closed because of covid. There is no reason Italians can’t take their dogs for walks.
We need to build the capacity to flexibly regulate dangerous behavior not just business per se, to achieve a reproduction rate below one without killing the economy. That too cannot be done on the fly. It is a institutional capacity that needs investment, and the OECD can help to spread best practices.
Central banks and financial policy
Next, our central banks stepped in. In 2008, we had a financial crisis,. Central banks broke all the rules, with creditor bailouts, propping up asset prices to keep investors from losing money, buying unprecedented assets. Well, you can’t worry about moral hazard in a crisis they said, but we’ll fix this, so it won’t happen again.
Again. 10 years later the bailouts are about 5 times bigger than last time. The US Fed bought a trillion of treasurys to keep their prices up, after dealers ran out of money due to perfectly understood failures of their regulations. The Fed went on to prop up the prices of corporate bonds, and municipal bonds. We bailed out airlines, or rather airline bondholders.
Once again, a huge vat of debt had built up; once again nobody kept any cash around for bad times, once again the government stepped in and offered an enormous put option, just as, arguably everyone expected.
This time, however, I don’t even hear the promise to clean up the moral hazard. We are, apparently permanently in a financial system in which people should load up on debt and risky assets in good times, and the government will buy them up should prices ever waver. Private gain, public loss.
Obviously, this can’t last. We need a financial regulatory regime in which people can and do bear risk, and have incentive to be there to buy at the bottom. Many of us have written how to do this: reduce debt and especially short term debt, encourage equity financing. Simple streamlined financial regulation is economically simple, it takes only will to take on the hubris of regulators who enjoy an ever-expanding mandate. The inevitable alternative is an entirely government run financial system.
The OECD could champion this path.
Debt and deficits
The fiscal response in the US is nearly 5 times larger than it was in the financial crisis. Now, this was and is the time to borrow or print money and spend it — but spend it wisely. Protect the most vulnerable, invest heavily in testing and public health, yes. But shoveling money out the window in the name of stimulus does no good. You can give people as much money as you like, they are not going to bars, restaurants and traveling by air — even if those have not been shut down by government. Stimulus is like a capuccino. It doesn’t do much good if you have a virus.
Here too, nobody seems to be talking about consequences. At least the Obama administration nodded that they planed a return to fiscal probity when the crisis is over. MMT seems to have infected Washington. In Washington, nobody even bothers to worry about who will pay for spending, or what the spending is for. Our politicians are like drunks making trillion dollar bets in a bar — $2 trillion! No, I bet $3 trillion! And they talk about amounts, not what they want to spend it on, and why that will do any good, other than to "help" various constituencies.
The United States used to borrow in bad times, recessions and wars, and slowly pay it back or grow out of it in good times, with steady small primary surpluses. Now we run $1 trillion dollar deficits in good times, and $5 trillion in bad times. We economists spend a lot of time on r vs. g sustainability arguments. They are irrelevant here. Nobody — nobody — thinks we can double the debt/GDP ratio every 10 years, when each crisis comes, especially with, in the US unreformed entitlement promises and a tax system that cannot pay for them. (Europe is much better on this score, both handling its debt since the crisis and funding its entitlement promises.)
At this rate, sooner or later, a sovereign wealth crisis will hit the dollar, and any other country that behaves similarly. It must result in default, sharp inflation, economy-ruining taxation, and a catastrophic crisis of the financial system that relies on the sanctity of US debt.
You may think a global sovereign debt crisis is unthinkable, or so unlikely as not to worry about. Well, last year you probably thought a global pandemic was so unlikely as not to worry about. Covid should teach us to pay more attention to the unlikely but disastrous tail events that we know are out there waiting to happen, and to the little trembles (H1N1, SARS, Greece) that warn of earthquake faults below.
The OECD can help. Sound the alarm worldwide — spend only wisely, reform tax systems to simple, transparent, growth-oriented, and provide adequate revenues. Encourage governments and central banks to lengthen the maturity structures of debt to avoid crisis dynamics.
Above, all, we need to return to solid, long-run growth. That comes from only one place, productivity led by innovation and ruthless competition. Low and predictable marginal tax rates, especially on capital, stable institutions and property rights, pervasive reform of regulatory barriers and government barriers to competition. The last 4 years in the US saw growth several percentage points above all forecasts, from relatively small cuts in marginal rates and a valiant but slow deregulation effort, even in the face of anti-growth immigration and trade policies. And we saw the greatest decline in inequality, rises in wages and decline in unemployment among low income, low skill and majorities in decades One can do much more.
Yeah, I know. Old hat neoliberalism. So out of fashion. Nobody gets to be the toast of Davos cocktail parties for saying that. Lord give us structural reform, but not quite yet. Well, our need right now is institutional repair, fostering resilience, avoiding the next, inevitably larger, crisis, not grand schemes that make you the toast of Davos.
We need, crucially, narrow-focus institutions. All of our institutions have expanded their mandates, tried to do too much, and ended up deep in politics and incompetent at their basic jobs.
Central banks are prime examples. Once they were in charge of inflation, with concern over unemployment, and they manipulated only short term interest rates. They could be quite independent and technocratic in these limited tasks.
Now central banks are buying trillions of assets, and thereby allocating credit — to housing, to green projects, to bankrupt state and local governments, to the peripheral sovereigns and low quality corporate investments in Europe. This is fiscal policy. Central banks are using regulatory power to policy ends ever more strongly. The regulatory powers of the post crisis era morphed to a desire to become “macro-prudential” regulators, to manage all asset prices, to allocate the flow of credit over time and space.
On the eve of covid, central banks and the international institutions that support them started to take on climate change and inequality — and not just these goals, but a particular, politically potent narrow set of policies: climate change via abandoning fossil fuels before alternatives are in and via large subsidized projects, not nuclear, not carbon taxes, not adaptation, not carbon capture; income inequality via taxation and social program spending, not via opportunity and growth. Since the short-term interest rate doesn’t have much to do with carbon, they naturally turn to regulatory pressure — forcing banks to stop financing fossil fuel companies , or in the IMF case conditioning aid on green projects and social spending — or subsidy via asset purchases.
This fall, our Federal Reserve is moving aggressively to broaden its mandate to inequality, and social, gender and racial justice. Since the short term interest rate does not have much to do with these either, one can expect that the actions will come primarily through regulatory power and channeling money to institutions that are perceived to advance the cause.
This will end badly. All of these activities are by their nature political. In a democracy, an institution like a central bank may stay independent and technocratic, free of what some call political meddling and others call political accountability, only if it acts with limited scope and stays out of politics. If central banks wade in these waters, they must lose their autonomy, their independence from electoral politics — and any trust in their technocratic competence.
This observation is doubly true of international institutions. IMF, BIS, World Bank, OECD, are only effective when they have the reputation for impartial, a-political, technocratic competence. If they wade into politics it may feel great at first, but the politicians will demand their due when the winds change, and the institutions will lose their core competence, trust, and authority to actually fix crises.
I do not dispute these goals. But even if one agrees completely with the goals, it does not follow that every institution must focus itself on advancing these goals.
A word to those who set policy in these institutions: You may believe climate change, inequality, and social racial and gender justice are imminent crises. You may believe that every effort of our society should address them right now. Good for you. Work for politically accountable organizations that advance those causes. Become an activist. Run for office. Take orders and preach. But do not run a central bank or other independent, technocratic, a-poltiical institution. We need those to work in the next crisis, and for people to trust them.
In the subsequent discussion, “fake news” and a desire to “control” the internet came up. I added the following point.
Free speech is also a vital piece of systemic resilience in the face of crisis. How many times were our experts wrong? And how many times was it dissent, multiplied and verified on the internet, that set them right? The CDC proclaimed masks did no good. The WHO and CDC denied aerosol transmission. The amazing worldwide communication of trial and error of how to treat the disease happened over the internet. If the internet were censored, we’d be stuck at Feburary levels of understanding. And the internet is censored — twitter and youtube have taken down statements by the US President’s chief Covid adviser, because it disagreed with WHO policy. The best antidote to fake news is its correction, and lots of honest news — something the OECD is well suited to provide.
This is a subject too big to explore now, as there are limits — riots are being organized on facebook too. But censorship, only allowing views consistent with those promulgated by specific organizations, will disastrously impede the resilience we need to address the next crisis.
Tyler Goodspeed was terrific. He did his homework, read the underlying documents such as the “New Approaches to Economic Challenges”— a document whose grand vision is more chilling than anything I accused the OECD of. (Update to a previous post -- one of the jobs of CEA chair is to interface with these kinds of efforts at the alphabet soup of international economic institutions.) I will post his speech as it becomes available. Ken Rogoff’s remarks were also terrific, though I don’t think he wrote them down. Ken agrees, spend now on mitigation but not stimulus, be careful of debt, and he delivered a stirring ovation to the importance of free speech, how it is in danger, and how even the Federal Reserve is bowing to the twitter mob.