## How Economics Must Change — John H. Cochrane

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### Inflation and supply constraints
- Inflation results when aggregate demand exceeds aggregate supply.
- The US government sent about $5 trillion in checks to people and businesses in response to the pandemic, $3 trillion of it newly printed money, with no plans for repayment.
- Many countries enacted similar fiscal expansions and “reaped inflation in proportion.”
- Supply shrank during the pandemic, but inflation spiked after the pandemic was largely over; many “supply shock” industries were producing as much as before but could not keep up with demand.
- The mantras of the 2010s—“secular stagnation,” “modern monetary theory,” “stimulus”—which “preached that prosperity needed only for the government to borrow or print a huge amount of money and hand it out, are in the dustbin.”

### Policy implications: supply-oriented focus
- A supply-limited economy requires supply-oriented policy, not stimulus.
- “Jobs” are now framed as a cost, not a benefit; with 3.7 percent US unemployment, every worker employed on a make-work project is one not doing something more important.
- Policy priorities identified:
  - Reduce regulations that make housing far too costly and time-consuming to build.
  - Create a coherent immigration system to bring in people who work, produce, and pay taxes.
  - Invest in public infrastructure but avoid “obscene excess cost” that is unaffordable.
  - Remove tariffs that force overpayment for imports and act as a drain on the economy.
- Policy focused on distribution (“who gets what”) must emphasize incentives, which are “the key to growth.”

### The cancer of stagnation and long-term growth
- US growth fell by half after 2000.
- Europe and the UK are stagnating even more.
- Italy has not grown in per capita terms since 2007.
- Reviving long-term growth requires focus on supply, efficiency, productivity, and incentive-oriented policy.

### Debt limits and fiscal realism
- The view of unlimited demand for government debt (e.g., “savings glut,” “safe asset shortage”) has proved false.
- The US, UK, and Europe seem able to borrow about 100 percent of GDP.
- More debt leads to higher interest rates, trouble borrowing, and inflation as people try to spend the extra debt rather than hold it as an investment.
- Governments must spend as if they have to raise taxes to pay for it, “now or later.”
- Projections that debt will serenely grow to 200 percent of GDP under primary deficits that are eternally 5–10 percent of GDP will simply not happen.
- The $5 trillion pandemic response may have been more debt than people will hold and caused inflation; a $10 trillion response to the next crisis “will face even more trouble.”

### Conflicting policy agendas and constrained fiscal space
- Criticisms of proposed large spending programs:
  - Left-wing proposals: trillions on cost-ineffective climate subsidies (example cited: “massively oversize electric cars built in the US, by union labor, with US parts”).
  - Right-wing proposals: trillions on protection and industrial subsidies attempting to restore 1950s-style manufacturing.
- Industrial policy risks inefficiencies analogous to the Jones Act’s effect on shipping.
- With fiscal space reduced, only spending that “actually works” can be afforded.

### Monetary and financial policy lessons
- Two deep lessons for monetary and financial policy:
  1. Central banks do not entirely control inflation; inflation control needs fiscal probity as well.
  2. The fiscal blowout included a partial financial bailout (support for Treasury, municipal, and corporate debt; money market funds; airlines; and others).
- The central “no more bailouts” promise of Dodd-Frank failed in practice.
- The author favors “the simple classic vision of equity-financed banking” over additional layers of regulation; “another 100,000 regulations will fail again.”

### On economic progress and policy formation
- Progress in economics comes from empirically verified, simplifying answers that deliver actionable cause-and-effect statements; reliance on “half-baked” novel ideas or calls for spending without tested foundations leads to bad economics and bad politics.
- Longstanding ideas (e.g., Adam Smith’s) remain relevant and often appear novel to policymakers.

*Source: John H. Cochrane, “Rethinking Economics,” F&D, March 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-cochrane.pdf_