Dr. John Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution of Stanford University. He was previously a professor of business and of economics at the University of Chicago Booth School of Business and is a senior fellow of the Stanford Institute for Economic Policy Research, professor of finance and economics (by Courtesy) at Stanford GSB, a research associate of the National Bureau of Economic Research, and an adjunct scholar of the Cato Institute. He has written articles on macroeconomics, health insurance, time-series econometrics, financial regulation, and many other topics. His most recent book, The Fiscal Theory of the Price Level, was released in January 2023.
An excerpt of Professor Cochrane's speech is below. Watch the video of his complete remarks or read the transcript here.
Remarks from the 2023 Bradley Prizes shared with permission of The Lynde and Harry Bradley Foundation.
Creeping stagnation ought to be recognized as the central economic issue of our time. Economic growth since 2000 has fallen almost by half compared with the last half of the twentieth century. The average American’s income is already a quarter less than under the previous trend. If this trend continues, lost growth in fifty years will total three times today’s economy. No economic issue — inflation, recession, trade, climate, income diversity — comes close to such numbers.
Growth is not just more stuff, it’s vastly better goods and services; it’s health, environment, education, and culture; it’s defense, social programs, and repaying government debt.
Why are we stagnating? In my view, the answer is simple: America has the people, the ideas, and the investment capital to grow. We just can’t get the permits. We are a great Gulliver, tied down by miles of Lilliputian red tape.
How much more can the US grow? Looking around the world, we see that even slightly better institutions produce large improvements in living standards. US taxes and regulations are only a bit less onerous than those in Canada and the UK, but US per capita income is forty percent greater. Bigger improvements have enormous effects. US per capita income is 350% greater than Mexico’s and 950% greater than India’s. Unless you think the US is already perfect, there is a lot we can do.
How can we improve the US economy?
I don’t need to tell you how dysfunctional health care and insurance are. Just look at your latest, absurd bill.
There is no reason that health care cannot be provided in the same way as lawyering, accounting, architecture, construction, airplane travel, car repair, or any complex personal service. Let a brutally competitive market offer us better service at lower prices. There is no reason that health insurance cannot function at least as well as life, car, property, or other insurance. It’s easy to address standard objections, such as preexisting conditions, asymmetric information, and so on.
How did we get in this mess? There are two original sins. First, in order to get around wage controls during WWII, the government allowed a tax deduction for employer-based group plans, but not for portable insurance. Thus, preexisting conditions were born: if you lose your job, you lose health insurance. Patch after patch then led to the current mess.
Second, the government wants to provide health care to poor people, but without visibly taxing and spending a lot. So, the government forces hospitals to treat poor people below cost and recoup the money by overcharging everyone else. But an overcharge cannot stand competition, so the government protects hospitals and insurers from competition. You’ll know health care is competitive when, rather than hide prices, hospitals spam us with offers as airlines and cell phone companies do.
There is no reason why everyone’s health care and insurance must be so screwed up to help the poor. A bit of taxing and spending instead—budgeted, appropriated, visible—would not stymie competition and innovation.
Banking offers plenty of room for improvement. In 1933, the US suffered a great bank run. Our government responded with deposit insurance. Guaranteeing deposits stops runs, but it’s like sending your brother-in-law to Las Vegas with your credit card, what we economists call an “incentive for risk taking.” The government piled on regulations to try to stop banks from taking risks. The banks got around the regulations, new crises erupted, new guarantees and regulations followed. This spring, the regulatory juggernaut failed to detect simple interest rate risk, and Silicon Valley Bank had a run, followed by others. The Fed and FDIC bailed out depositors and promised more rules.
This system is fundamentally broken. The answer: Deposits should flow to accounts backed by reserves at the Fed, or short-term treasuries. Banks should get money for risky loans by issuing stock or long- term debt that can’t run. We can end private-sector financial crises forever, with next to no regulation.
There is a lesson in these stories. If we want to improve regulations, we can’t just bemoan them. We must understand how they emerged.
As in health and banking, a regulatory mess often emerges from a continual patchwork, in which each step is a roughly sensible repair of the previous regulation’s dysfunction. The little old lady swallowed a fly, a spider to catch the fly, and so on. Now horse is on the menu. Only a start-from-scratch reform will work.
Much regulation protects politically influential businesses, workers, and other constituencies from the disruptions of growth. Responsive democracies give people what they want, good and hard. And in return, regulation extorts political support from those beneficiaries. We have to fix the regulatory structure, to give growth a seat at the table.
Economists are somewhat at fault, too. They are taught to look at every problem, diagnose “market failure,” and advocate new rules to be implemented by an omniscient, benevolent planner. But we do not live in a free market. When you see a problem, look first for the regulation that caused it.