Great Cowen Interview of John Cochrane
By David Henderson
Some fun highlights follow.
If You’re So Smart, Why Aren’t You Rich(er)?
COWEN: Brazil has very high real interest rates for decades, right? Arbitrage doesn’t seem to work.
COCHRANE: Well, that’s not an arbitrage. An arbitrage is the opportunity to make a sure profit, no risk. You got to invest in Brazil, and you got to take the risks of investing in Brazil, which include, usually, currency risk. The real interest rate is the interest that you get after the expected appreciation or depreciation of the currency. Then there’s the legal risk that they might expropriate your stuff.
It looks like there’s a profitable opportunity to invest in Brazil. Put that way, now it starts to look like everything else in finance. There’s what looks like a profitable opportunity. There’s risk. Are people properly balancing the profitable opportunity and the risks? Why is Tesla stock so high? Why are value stocks so low? There’re opportunities that you and I, as an economist, can’t quite suss out what the risks are, keeping other people from investing in. But if you’d like to buy a Brazilian gold mine, I can arrange it for you, Tyler.
COWEN: Well, but look, we know currencies are very close to a random walk, correct? You’ve seen the countries that have higher real rates of return, higher discount rates. They should have higher expected returns on their market. Brazil is small relative to the world as a whole. There’s a lot of capital that could invest more in Brazil without being systemically much riskier. You would think that simply pursuing higher expected returns — that ought to go away, and real interest rates across the world should equalize, but they don’t seem to.
COCHRANE: Well, all sorts of apparent opportunities should equalize. I urge you to start a hedge fund. [laughs]
COWEN: By the way, the only stock I ever sold was Brazil Fund.
COCHRANE: You sold it, and you’re telling me what a great opportunity Brazil is.
How Health Insurance Was Making Its Way to Something Sensible Before ObamaCare
COWEN: Healthcare — I’m a big fan of your proposals for what I think you called time-consistent health insurance. You buy health insurance and you buy insurance against your premium going up. If later on, you develop a serious condition, you’re insured against the fact that your insurance costs more, right? Now, why has no one done this? Because it does make sense.
COCHRANE: People did it [laughs] until it was made illegal.
COWEN: Who did it? When? Where?
COCHRANE: God, it was in the 1990s. Which insurance company? A better word for it that Mike Cannon at Cato came up with is health-status insurance, that you can insure yourself against the risk of getting sick in the future. One insurance company started offering the right to buy health insurance in the future if you’re sick now, which essentially, that’s the beginning of the idea.
Also, the good old-fashioned health insurance, starting in the 1990s, was guaranteed renewable, meaning if you bought the health insurance now, you had the right to continue buying that health insurance without your premiums going up if you got sick. That’s essentially the same thing as health-status insurance. So private insurance was working its way in this direction.
COWEN: But why did it take so long? It wasn’t dominant back then, right? This is another example of market inefficiency?
COCHRANE: Come on.
Technical innovation takes a remarkably long time to spread, and this is a technical innovation. One thing is, it takes time for institutional — especially an incredibly regulated industry where you have 50 state regulators who have to bless every single contract — it takes a long time. Then it was made illegal under Obamacare, which is why it wasn’t happening. United Airlines still hasn’t figured out that Southwest knows how to get people on planes faster. [laughs] That service stuff takes time.
Why wasn’t this in health insurance to start with? When health insurance first started up, there wasn’t this thing of a pre-existing condition, of something that we get news that’s going to make you really expensive. You either died or you didn’t die, and that was the end of that. A very expensive health that is very persistent, and where you need insurance against ongoing future expenses — that can’t be done in a one-year contract. That’s also something that we didn’t have until the 1960s or ’70s.
Institutions take a while to adapt. You got to take a longer-run view here, Tyler. But I do want to advertise it for listeners who haven’t heard about it. We’re still in the pre-existing conditions as the original sin of markets, whereby the government must completely screw up your and my healthcare. That is not true. Free markets can handle the question of pre-existing conditions, your need for long-term insurance.
Term life insurance has had it forever. If you buy term life insurance when you’re young and healthy, you get to keep that insurance, no matter how sick you get as time goes on. There’s no failure of insurance markets that means we can’t have it.
On Regulation of Hang Gliding
COWEN: How good or bad is the government’s regulation of gliding?
COCHRANE: [laughs] An uneasy truce. Pretty bad, but just enough to let it survive. The government regulates —
COWEN: What’s the main inefficiency?
COCHRANE: The FAA.
COWEN: What should they do that they don’t? What should they allow?
COCHRANE: They have killed the domestic industry that makes gliders. There’re only a couple left in Europe. Certification of aircraft under the FAA is a disaster. This is more visible in general aviation power. Go down to your local airport, and you will see what looks like a Cuban car lot full of designs from the 1950s.
It’s just incredibly difficult to certify a general aviation airplane. Their standards for pilots’ licenses are ridiculously too high. America is one of the best places in the world. When you go around the world, you will notice — if you’re a pilot — how empty the skies are because everywhere else has regulated general aviation completely to death.
I love the Cuban car lot metaphor. That’s what I’ve noticed among flying friends: small planes made in 1958 (just before the Cuban revolution) or in the 1960s that are still used today and sell for high five figures.
Personal note: I remember John’s hang gliding well. In academic year 1982-83, John was a junior economist at the Council of Economic Advisers when I was a senior economist. (Marty Feldstein made me an offer to stay an extra year, 1983-84, and I accepted.) We were decompressing from the process of drafting, rewriting, rewriting, rewriting again, and checking for typos in the 1983 Economic Report of the President. That’s the one that Paul Krugman claims to have written most of, a claim that would surprise a number of his fellow chapter writers. John asked me if I would be willing to drive out to a corner of Pennsylvania one weekday with his friends. We would drive to the top of the mountain and he and his friends would hang glide down, catching thermals along the way, while I would drive down the mountain to the rendezvous point. It was fun, except that one of his friends stayed up way longer than agreed and my wife-to-be was pretty upset at how late I was getting back to Arlington, VA. (Good outcome, though: I was never that late again.)