GREY CITY

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December 2, 2009

Q&A with John Cochrane

Finding John Cochrane in his office isn’t easy. It takes some wandering around the Harper Center’s meandering fourth floor to reach room 459, the westward-facing office where Cochrane works. Finding the finance professor outside his office is a snap by comparison: Whether he’s in the pages of The Wall Street Journal, on CNBC and Bloomberg TV, or before the House Committee on Financial Services, Cochrane doesn’t keep a low profile, and the financial crisis has only thrust him further into the public view. But as he’ll tell you, it’s the writing and research Cochrane has done at Chicago—whether it makes headlines or not—that gets him most excited. Recently, Cochrane spoke to Grey City about how he came to the Booth School, how he comes by his ideas, and the role economists ought to take in shaping policy and discourse.

Jordan Holliday: When did you realize that you wanted to be a professor of finance?

John Cochrane: Oh boy, how much of my life history do you want? My father was a professor of history here, Eric Cochrane, he taught Renaissance and Reformation for many years. So I grew up in an academic family and I think, like Luke Skywalker, it was my destiny to do something of the sort.

I’m sorry, you’re going to get the longer answer. I started out in college in aeronautical engineering, because I fly gliders and I thought I wanted to design gliders, but I soon kind of realized that I was destined to be an academic. I was studying physics at the time, and then I went to grad school in economics, because although I enjoyed physics, I kind of liked being able to think about social problems in a clear, almost scientific way. And I liked the freedom that economics seemed to give.

Then I came here to the economics department, because if you do economics and you get a call from this department, that’s it! You’re on the road, back to Chicago we come.

So I came here as a professor of economics, and had a wonderful time, and I was doing macroeconomics and finance issues, and I gradually got more interested in the finance aspect, and that’s how I wound up here.

So there wasn’t a moment when someone came to me and said you’re going to be a professor of finance, it’s just been a career of following what was interesting, which wound me up here.

JH: I saw that you majored in physics. Switching from physics to economics, was it a question of practical versus theoretical? Reading over the articles you’ve written, it’s given you a chance to get your hands dirty, get involved in things that affect people’s lives pretty immediately. Was that the appeal?

JC: I hate to say no! [Laughs]

JH: No, that’s fair!

JC: For me, it’s always been an intellectual appeal, an understanding of how the world works. Now I have done some writing lately on policy issues and that sort of thing, but what I’ve always loved about economics—I remember the moment I became an economist, it was a conversion moment—I was in an economics class, and I saw a budget constraint, and then I saw a complicated social problem reduced to something understandable, and it cut through all the junk people were writing about it. And that’s really what made me an economist, rather than getting my hands dirty.

And the difficulties at the time, it’s just a better match. I looked at what physics involved, and I could see that economics was a better match for my skills and abilities. I wasn’t going to be good at running a huge lab, and I wasn’t good at the very abstract math of a physics theorist.

And economics is sort of like physics in 1820, when Joule went down to his basement and discovered the theory of heat. You can still do that in economics, and you have great freedom to think about all sorts of different things. You don’t become a specialist. It attracted me for a lot of reasons.

JH: You mentioned the more popular writing you’ve done recently. I wanted to ask a little about the Paul Krugman piece.

JC: Alright, that’s fun.

JH: It’s titled “How Did Economists Get It So Wrong?” and then pretty much right away, among those economists, it mentions you. And when I read your response, it seemed—and you may have to hold my hand through the more technical parts—but it seemed almost that you were saying economists didn’t get that much wrong. Is that fair?

JC: [Sighs, pauses] That’s fair to say. I think there’s a big misunderstanding about who we are and what we do that Krugman knows but didn’t try to disabuse his readers of.

I do not spend my days trying to forecast where the economy is going to be six months from now, and neither does anybody else around this campus. We spend our days trying to understand cause-and-effect statements—how would this tax policy affect the economy? None of us spends our day reading the fine print of mortgage-backed security issuances and trying to decide if they’re any good. That’s a job for the risk management departments of banks. The idea that this group is at fault because we didn’t forecast the crisis—that’s not what we do, any more than geophysics is a pointless discipline because they can’t forecast earthquakes. Well, that’s not what they do either.

In some sense, that’s what I was getting at. I hope that the sense you got out of the article was that I do think we are something like a science, and what got me most annoyed by Krugman was that he was taking everything to the blogosphere, and to the quick exchange of highly partisan opinions, whereas I regard what we do as a non-partisan thing that should be buttressed by evidence and careful understanding of the machinery of how things work, and intellectual honesty. And it was the intellectual dishonesty and the slinging of insults that really got me going.

JH: Krugman definitely seems to think—and maybe this is just playing to people’s notions, as you said—but definitely seems to suggest that academics could have something to say about what’s going to happen. That’s not the point of the field as it is, but is it something that should be done?

JC: I think we have plenty to say about what’s going on. Lots to say about how to structure policies to keep us out of future financial crises, [to] understand what’s happening, what the right policy response ought to be. We’re just not particularly good at forecasting what’s going to happen tomorrow, because first of all that’s almost impossible to do, and second, that’s not what we’re trying to do. [laughs]

JH: When there are people like Paul Krugman writing articles like this, and you’ve got an alternate view, how can you inject that into the public discourse, or into the discourse among experts who are taking care of this crisis?

JC: You write, in all the various forms in which you can write. We live in a wonderful world where I can put something on my Web page like this, and it instantly gets picked up if it’s any good. As well as the more formal places we write, academic journals, the journals that try to take academic ideas and make them more legible, like the Journal of Economic Perspectives. There’s plenty of forums in which to write things and communicate, and get policy to think about how the world should be better.

Now, part of the problem is the political process just isn’t interested. Ninety percent of the economic problems this country faces are just easy to solve, if you want to do it! You wanna reduce carbon emissions? Great, carbon tax, done, see you tomorrow. This does not take a 1,000-page bill—that’s it, and if you want to try anything else, you’re kidding yourself. In some sense, economics is the easy answers, politics just isn’t particularly interested in listening.

JH: What’s been the general response among people you know, people you meet, to you, as an economist, during this time? There’s definitely been backlash against Wall Street folks; does that spill over on to you at all as a professor at the Booth School?

JC: It may reflect the circles I hang out in. I hang out in fairly free market circles [laughs], so they’re happy. And even my non-economics colleagues don’t think of free market economists as the evil people who brought down the world.

JH: Do you ever get a next-door neighbor coming over to say, “Professor Cochrane, what’s going to happen next?”

JC: Sure. And a lot of what I tell them is, what being an economist means is, I don’t know what happens next, and I know with great detail that nobody else knows what’s going to happen next, and I know why nobody else knows what’s going to happen next.

I have a very articulate set of bullshit detectors. Sorry. We don’t really do forecasts. I have a pretty good idea of what it takes to reduce carbon emissions—prices have got to go up. That I understand. Who’s going to go bankrupt next week? Sorry, that I’m not very good at.

JH: I saw you’ve made some appearances on CNBC and written an op-ed in The Wall Street Journal. Coming from a place like Chicago, where people are into the big, beautiful ideas, and you can write for pages and pages, is it frustrating to have to go onto CNBC and, as you put it, “explain it all in 20 seconds”? Or explain it all in 700 words?

JC: Yes, it’s difficult. I have written some op-eds this year, and done some media stuff, and I find it a very difficult art form. It has to be so short, and I’m used to documenting every sentence. My preferred form of writing is statement, lots of documentation. Statement, lots of documentation. And in an op-ed, you just have to blatantly say your opinion.

Well, that’s what it is. So when you read op-eds, that’s what they are, and that’s why I don’t think it’s the place where our entire national discussion should take place. Certainly it’s a place to quickly get an idea of what’s going on in more serious discussions, where people document both the theory and the facts behind what they’re claiming to be true.

JH: What about for us non-economists watching CNBC, or reading The Wall Street Journal. What would you say has been the quality of the analysis of this stretch?

JC: Some good, some bad. But what we all should do, as good Chicago people—in the political world and the op-ed world, arguments are won by authority. You have a Nobel Prize, so you must be right. You were the ex-chairman of X, so you must be right. And our ethic around here is, I don’t care who you are, I care that your logic is tight and that your facts are there.

And I think we should, as educated readers, we should demand that everywhere. Evaluate people by whether or not their arguments make any sense, not by the length of their title.

JH: Do you watch many of the popular shows? Ever watch Jim Cramer?

JC: No, I don’t. I find talking heads screaming at each other very unpleasant. And I find this argument from authority very unpleasant. I like to understand why things work.

JH: I think it was Krugman that quoted you as calling Obama’s economic plan a “fairy tale.”

JC: Let me be very strict about that, because I like Obama. He’s a very talented politician, which is what he’s supposed to be. What I called a “fairy tale” was Keynesian economics in general, and the proposition that last February, the key thing our government should do is borrow $800 billion and spend it, and that this would be the cure to our economic troubles. It would create a lot of jobs.

The proposition was that that would raise output by one-and-a-half times that…. And so that I referred to as a fairy tale, because as I’ve read 40 years of economic analysis, it just doesn’t hang together. I was referring to the marketing of the stimulus plan, which was undertaken for lots of other reasons. The proposition we spend $800 billion, that gets us $1.2 trillion output, and God knows how many jobs were claimed, that proposition was what I was calling a fairy tale, and I’ll stand by that [laughs].

JH: You talked about the selling of the economic plan, and call Obama a “good politician.” That sounds a little bit skeptical.

JC: People keep saying “Obama’s economic policy”" like Obama knows what a credit default swap is. He’s not supposed to know what a credit default swap is. Don’t expect the guy to have read all 2,000 pages of the health bill, right? That’s not what he does. He hires great people, and then goes and sells it.

I think the line Krugman crossed, that I do not want to cross, is when you have professional qualifications as an economist, and you start talking about the personalities and skills of elected leaders. We don’t know anything about that, we shouldn’t even be talking about that. Let’s get back to talking about economics.

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