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.
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.
Understanding Stock Market Trends
The high value of certain stocks and the low value of others could be attributed to risks and opportunities that are not fully understood by economists.
This lack of understanding may deter potential investors.
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.
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.
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.
Risk and Real Interest Rates
Investing in countries with high real interest rates is not without risks.
Factors such as currency risk and legal risk can offset the potential for profit, explaining why real interest rates are not equalized across countries.
What happens in every recession is not so much that people want to consume less today and consume more tomorrow savings is people get scared they don’t want to hold risky assets they want to hold safe assets they act as if their risk aversion has gotten higher and that’s what habits captures as consumption goes down relative to what you’re used to you people get more risk-averse or unwilling to take risks on stocks going forward and so the stock market goes down much more than the economy goes down because recessions are kind of mild that’s really puzzling. – John Cochrane
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.
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
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.
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 Competitions
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.
Cross-Border Investment Complexities
The increase in cross-border investment is not as significant as free market advocates might expect.
This could be due to the inherent risks and complexities associated with international trade and investment.
