Will Western governments soon hit their debt limits? Prof. John Cochrane
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Western governments are approaching debt sustainability limits not because they have borrowed too much in absolute terms, but because aging populations and unfunded entitlements make credible repayment implausible, and inflation ultimately stems from loss of faith in government debt repayment rather than from central bank policy or supply shocks alone.
- Government debt is sustainable only if markets believe in future primary surpluses; the problem is entitlement spending driven by aging populations that doesn't add up
- Inflation fundamentally results from excessive government debt relative to expected future repayment capacity, not from interest rates or supply shocks
- The fiscal theory of the price level explains historical hyperinflations and current inflation better than Phillips curve or monetary policy frameworks
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Debt crises are inherently difficult to forecast because if anyone could predict with certainty that a debt crisis would occur at a specific time, rational actors would preemptively move to cash, causing the crisis to occur earlier.
“A debt crisis is very hard to forecast because if you and I could know with any certainty that there'll be a debt crisis tomorrow, we would run to cash out today, and there would be a debt crisis today. So, it has a run-like, confidence-like element to it.”
A relative price change (like energy prices rising) does not by itself determine the overall price level; the overall price level depends only on monetary and fiscal policy, regardless of which relative prices are changing.
“That is that's a relative price. That's one thing more than others. There's less energy to go around, the price of energy has to go up relative to the price of restaurants or relative to your wages, right? But why is it that the price of energy goes up rather than the price of restaurants goes down or or the wages goes down, right? The relative price has to change, but that doesn't tell you anything about the overall price level.”
The fundamental relationship between government debt and inflation is that inflation stems from loss of faith in government debt repayment, not from central bank policy or interest rates alone.
“And fundamentally, where inflation comes from in a deep sense is do people have faith in government debt? When inflation what happens when people lose faith in government debt in in our governments, especially in the US?”
Confusing relative prices (individual goods becoming more or less expensive than others) with the overall price level is a fundamental and ancient economic fallacy, exemplified by Emperor Diocletian blaming hoarders and speculators for inflation at 300 AD when he had actually devalued coins.
“for centuries this fallacy has been around. The Emperor Diocletian had an inflation at 300 AD. And what did he do? Oh, it's the hoarders and the speculators driving prices up. No, it was cuz he he devalued the coins and no wonder you got inflation.”
Big inflations have always come from governments printing up money to pay off debts that they can't handle; historically this includes the hyperinflations after World War I, big inflations after World War II, and Argentina and Latin America which are full of classic large examples.
“If you look in in the sort of broader scheme of history, big inflations have always come from governments printing up money to pay off debts that they can't handle. They you know, most notorious is the hyperinflations after World War I and the big inflations after World War II. Everybody knows where those came from. It wasn't technocratic central banks who, you know, followed the wrong interest rate rule. No, it's you know, the governments didn't couldn't handle their debts and and you know, you got inflation. Argentina, Latin America is full of classic large examples.”
The United Kingdom in the 19th century started with a 140% debt-to-GDP ratio and paid it off through a combination of the Industrial Revolution driving economic growth and credible fiscal policy committing to gradually run small surpluses for decades.
“The United Kingdom under in the 19th century they started that century with 140% debt to GDP ratio and paid it off. How? Well, the Industrial Revolution helped, but having a sober fiscal policy that everybody understood would slowly, gradually over decades just make back a little money and pay off the debt. That's how they did it.”
Western governments are starting to hit the limits of what people believe they will be able to repay, not necessarily the limits of total debt that could theoretically be borrowed if confidence in repayment existed.
“we're starting to hit the limits of what people believe our governments will be able to repay. Our governments could borrow extraordinary amounts of money if people had confidence that after borrowing it, they would run small primary surpluses, taxes a little bit greater than spending, for a couple of decades to pay the debt back.”
Inflation can be viewed as a once-in-a-generation implicit state-contingent default on government debt: bondholders effectively pay a wealth tax through inflation rather than through explicit tax increases, which occurs regularly after wars.
“the inflation meant we paid for a lot of the COVID spending by essentially a wealth tax on bondholders, which there's an economic argument that once a generation you tax the bondholders and say, "You basically default on the bonds so that you can meet an emergency without raising taxes." It's called a state contingent default to you economic nerds out there. And notice that after every war, there's a big inflation.”
Argentina previously ran into a debt crisis at only 40% debt-to-GDP because markets would not trust that the government would pay the debt back, showing that absolute debt levels matter less than credibility.
“Argentina previously ran into debt crisis at 40% debt to GDP. Well, nobody would trust that they would pay them back.”
The euro faces deeper debt sustainability problems than the US because it has one ECB and multiple governments that spend money; it remains unresolved whether the ECB will print money to bail out governments or allow bondholders to take losses.
“you have one ECB and and multiple different governments spending the money, and an unresolved question about when what happens when those governments can't pay it back. Is the ECB going to print up money to bail them out, or are their bond holders going to take a loss?”
Fiscal reforms that appear politically difficult now could and should be implemented before the next crisis rather than in emergency conditions during crisis.
“Your your you know, reforms the again, a sequence of obvious reforms that anybody who's thought about it would put in hopefully before the next crisis.”
Economic growth is the most important tool for paying off national debt, especially for Europe, and achieving growth requires looking at incentives and removing regulatory barriers.
“getting back to solid economic growth is is the most important thing, especially for Europe. And there, I think you you just got to look at the incentives and and the regulatory barriers that are stopping it uh from happening.”
The 1980s US tax reform lowered the top marginal income tax rate from 70% to 28% while cutting loopholes so extensively that the reform actually increased total tax revenue.
“In the US, we lowered the top marginal rate from 70 to 28%, and cut so many loopholes that they made money on the deal.”
Germany has fairly sober fiscal plans but has undermined its ability to pay back debt by achieving poor economic growth, since government tax revenue is determined by the tax rate times the size of the economy.
“Germany has pretty good fiscal plans. Now, Germany isn't growing, so that they shot themselves in the foot for economic growth, which is an important part of the of the ingredient. You know, the tax revenue the government get is tax rate times the level of the economy. So, one of the best ways to pay back your debt over decades and decades is for the economy to grow.”
Successful inflation control requires both monetary policy tightening and fiscal policy reforms; the 1980s required not just interest rate increases but also social security reform, massive tax reform, and economic growth.
“1980s were a a fiscal microeconomic reform as well as a tight monetary policy. So, in the US in the 1980s we had a social security reform. Hey, we fixed those those retirement benefits. Okay, for only 30 years, but 30 years is good enough. There was a massive tax reform. In the US, we lowered the top marginal rate from 70 to 28%, and cut so many loopholes that they made money on the deal.”
During the 2010s after the financial crisis, interest rates were low for a full decade, making any level of debt sustainable because governments were paying negative real returns on borrowing, a condition that masked underlying structural problems.
“And and as you mentioned maybe where I think we really got lucky there is that interest rates were low for the decade after the financial crisis because any debt is sustainable when you're paying negative 2% interest rates on that debt. You know, if if we go down to the bank and say, "Hey, let's borrow some money for a new podcast." and the bank says, "Sure, we'll lend that to you at negative 2%." Well, we're going to be borrowing a lot of money, right?”
Japan has notoriously high debt but can sustain it because most of the debt is owed to its own population at long-term rates and the country has substantial assets, but this model cannot be replicated by other nations.
“Japan notoriously has lots of debt, but it's mostly lent it to its own population at uh and long-term rates, and it has a lot of assets. So, it may look different, but that doesn't mean we can do what Japan did. Everybody else who tries it runs into problems soon.”
America has a European welfare state but does not tax the middle class to pay for it, instead pretending only the rich will pay; to sustain a European welfare state requires European-level taxation.
“We have a European welfare state, but we don't tax the middle class. We we pretend that only the rich are going to pay for it. Well, you want a European welfare state, you're going to pay European taxes.”
Welfare recipients rationally decline job offers when taking a job would reduce their food stamps, housing vouchers, and health insurance, and potentially cause them to lose affordable housing they waited years to access.
“People have thought, you know, where people are really smart. Um if I take that job, they're going to cut my food stamps by 30%. They're going to cut my housing voucher by 30%. If I have to cross town, I lose the apartment that I spent 5 years waiting in line to get the affordable apartment for. Uh I might lose my health insurance. Overall, why should I take that job?”
The real problem underlying government debt crises is not the debt itself but unfunded entitlements and spending plans driven by aging populations that don't add up mathematically.
“the real problem is not the debt itself, it is those uh that those spending plans, primarily driven by entitlements to an aging population, that don't add up. And so, markets are starting to say, not so much you've borrowed too much, but we're not so sure we trust you to pay it back.”
Expectations are anchored by fundamental faith in institutions—both central banks and fiscal authorities—to solve problems when needed; the key question is not whether expectations are anchored but what anchors them.
“that's the key question, and that's, you know, where central bankers think is key. But then anchored by what is the central part, and uh we should talk about not just are expectations anchored, but anchored by what? And I think, you know, a fundamental faith in the institutions. That somehow or other both central banks and our fiscal authorities will do what it takes.”
New Keynesian equations suggest an absurd result: central banks cannot bring inflation down, but must increase inflation to hyperinflation so private sector jumps to an alternative equilibrium with low inflation—showing the model needs fundamental revision or replacement.
“There's this fundamental view is that central banks do not bring inflation back down again. The point of a central bank is if there's inflation, the central bank commits to all to increase inflation, to bring us the hyperinflation, so that you will all jump to one of multiple equilibria where there isn't inflation in the first place.”
Debt crises require a spark—some adverse external shock or policy surprise—to trigger the loss of confidence that converts an unsustainable debt situation into an acute crisis.
“I also think it it needs a spark. We saw a little bit of that in the COVID era, but I think the real fear is not sort of that we run The economy moves along quietly, nothing bad ever happens again, and the bond vigilantes wake up someday. I think that the thing that keeps me up at night is is the the next crisis when our governments all of a sudden want to borrow another 5 trillion euros, 5 trillion dollars, and then the bond market say, "No, no, you've you've reached your limit.”
Policymakers face a choice when supply shocks occur: allow prices of scarce goods (like energy) to rise while wages stay the same, or accommodate with monetary/fiscal stimulus so prices stay the same but wages fall, or allow inflation so neither prices nor wages fall.
“there's a feeling afoot that prices and especially wages going down is more economically damaging than uh the prices of something's going up, that somehow people have to be have to afford less energy cuz there's less energy to go around. So somehow it's more painful for that to happen by wages going down and the price of energy staying the same as opposed to the price of energy going up and wages staying the same. Okay. So that they make this choice that we will meet the supply shock with overall inflation so that individual prices and wages don't have to go down.”
There is a common element across Western countries: very expensive pay-as-you-go social welfare programs that are not funded by adequate taxes, with everyone counting on future generations to have babies to pay for current retirees, but birth rates are collapsing.
“there is a big common element. There are very expensive pay-as-you-go social welfare programs that are not funded by adequate taxes, and everybody's counting on someone else to have babies to pay off their retirements, and nobody's having babies. Uh so, that adds up to a problem that's common around the world.”
If governments use the 'state-contingent default' inflation strategy more often than once per generation (every 5 years), then bondholders will refuse to lend in the first place, so this can only work as a truly once-in-a-generation measure.
“Now, you don't You can't If you do this every 5 years, the bond holders say, "Wait, we're not lending you money in the first place." You have This is a once-in-a-generation thing.”
Private banks create money (inside money), but inside money is not inherently inflationary because when a bank makes a loan, the borrower gains an asset and a liability, with no net wealth creation.
“When a bank creates money it it makes you a loan but that is simultaneously an asset and a liability to the private sector. So the private sector is not at all wealthier by when an extra piece of money with an extra liability. Whereas if the government gives you money that is something net to the private sector.”
Bond markets trust that Western democracies are the best economic systems with wonderful growth, and they believe these governments will get their acts together before they provoke a French Revolution-style debt crisis, so confidence in the robustness of institutions weighs in over the day-to-day chaos, but that confidence can evaporate.
“Bond markets say, "Come on. You Western democracies are the best thing we've ever seen. Economic growth is wonderful. Surely, you know, these jokers will get their acts together before they provoke a a you know, French Revolution style debt crisis." So, you know, that that confidence in the ultimate robustness of the institutions I think weighs in over the day-to-day chaos that you see. But, be careful because that confidence can evaporate.”
In America, for people earning zero to $60,000, taking an additional job and earning extra income causes them to lose a dollar of government benefits for each dollar earned, creating a 100% marginal tax rate on labor supply.
“In America, pretty much from zero to $60,000, if you earn an extra dollar of income, they take away a dollar of benefits.”
During the 1990s, US economists were writing papers about what the country would do when it had paid off all government debt, reflecting the success of 1980s reforms in creating fiscal sustainability.
“the economic boom that started in the 1980s, uh there was a moment in the 1990s when the US were economists were writing papers, what do we do when they've paid off all the government debt? Wouldn't be lovely to have that paper again.”
Europe in the 1980s experienced an economic revival through regulatory reform and structural reforms, with countries like Sweden abandoning socialism during this period.
“Europe Europe is the same way, you know, the 1980s were an economic revival, the regulatory revival, Uh Sweden abandoned socialism somewhere in there. Lots of common sense reforms happened.”
Western tax codes are designed to raise as little revenue as possible while creating the highest possible economic distortion, particularly the American tax code which functions like Swiss cheese of ineffective and distortionary provisions.
“On the tax side, our tax codes are They seem designed to raise as little revenue as possible at the highest possible economic distortion. Um the American tax code is particularly a Swiss cheese uh of um ineffective distortion.”
There was an era of confidence in government bonds driven by what economists called a 'savings glut' and theories suggesting fiscal policy is inconsequential, during which people were happy to hold government debt with expectations it would 'work out.'
“there was an era people being very happy to buy government bonds. I think on the confidence that they would figure it out sooner or later. And and I do let's be a little bit optimistic. If this falls apart in Europe and in the US, that will be entirely a self-inflicted wound.”
If Europe controls for purchasing power parity and accounts for demographic aging, European growth performance looks less bad than raw GDP comparisons suggest, though this does not change the importance of per-capita labor supply for debt repayment.
“when you look at it compared on purchasing power parity and you take into account that Europe's population is aging quite a bit faster than in in the US. I don't I don't know I wasn't convinced that that the European growth then still looks so bad”
Modern central bankers have given up on the Phillips curve as a causal mechanism for controlling inflation and instead focus on expected inflation; they believe that by giving speeches about future low inflation, they can anchor expectations and prevent inflation without raising rates.
“I think what central bankers have done is focus on that expected inflation term. So, the way they look at the world more and more is particularly the evidence that interest rates have much effect on inflation is pretty darn weak. So, I think they're sort of giving up on this whole the employment part being important and focusing on the expectations part. So, the way we control inflation is we give speeches about how inflation in the future is going to be low and then you all believe that inflation in the future will be low and then you don't raise your prices today. So, you know, the cure for inflation is speeches.”
European regulatory burdens and restrictions have eliminated European AI and tech companies, suggesting that Europe's future growth potential is threatened by continued regulatory approaches.
“where are the European AI companies? Where are the European tech companies? Well, they they they got regulated away in Brussels.”
During COVID, European and US governments borrowed approximately 5 trillion euros and 5 trillion dollars respectively with no announced plans for repayment, and this spending caused inflation rather than negative interest rates being the cause.
“The European Euro area governments borrowed about 5 trillion euros, uh US about 5 trillion dollars with not really any announced plans on how we're going to pay it back. It wasn't cuz central banks lowered interest rates to negative 30%. Uh it was just, you know, that huge amount of debt that people went out and spent and boom, you got inflation.”
The US could maintain current welfare state dysfunction and simply add a 3-4% value-added tax, which would solve the fiscal problem without requiring austerity or drastic measures.
“In the US you could keep the current dysfunction and add like a three or four percent value-added tax. Bingo, problem done.”
If governments bail out banks during crises, bank-created money effectively becomes government money, because it then represents a claim on government surpluses, making it inflationary.
“Now that only holds so long as the government isn't going to bail out the banks. So if the banks are all too big to fail then when a bank creates money it's essentially creating government money. It's creating another government bond which chases after the same surpluses.”
If debt crises in Europe and the US occur, they will be entirely self-inflicted wounds caused by governments making over-ambitious promises, and bipartisan fiscal reform could solve the problem easily in 10 minutes.
“if this falls apart in Europe and in the US, that will be entirely a self-inflicted wound. There is not an external problem here. Our governments have simply made over ambitious promises. These are things that would be easy to solve. Anybody's bipartisan commission can solve this in 10 minutes at least in a way that puts off the debt crisis.”
A careful examination of COVID spending effectiveness and public health bureaucracy behavior during lockdowns is necessary to evaluate whether government spending choices were justified, but this scrutiny is politically avoided.
“That would focus attention on was this spending justified? So, um now, did our governments in COVID spend wisely and minimally to affect the economic shocks of COVID or did they pour money down immense rat holes? And And I think, uh you know, a careful look at how effective was this spending along with how did our public health bureaucracies behave in the pandemic is one that nobody wants to ask. But, I think it'd be a lot healthier.”
High marginal European tax rates (70-80% all-in including corporate, income, and VAT) explain why Europeans take 6-8 week vacations, since marginal incentive to work is reduced.
“your marginal tax rates are in the 70 80% uh all in in Europe. And, you know, no wonder that you guys take 6 to 8 week vacations cuz why why bother working?”
Addressing phenomenal waste and perverse disincentives in social programs could solve fiscal problems by improving both spending efficiency and labor supply incentives.
“addressing the phenomenal waste and the disincentives in the social programs. I think that kind of cuts it both ways.”
The Phillips curve as a causal mechanism linking unemployment or output to inflation is unstable and unreliable; it shows the relationship between output and inflation was very tight before 2008, then disappeared during 2008-2020 period.
“the problem is this is a terrible relationship. So, the relationship between output and inflation is very unstable as as you noticed uh you know, in in two just before in the late 2000, we had low inflation and very low unemployment. And then we had COVID and we had massive unemployment and and deflation.”
Birth rate collapse in the last 5 years has been much swifter than economists previously imagined, making demographic forecasts less reliable than they appeared.
“The demographics actually have come in quite a surprise. Demographics has moved faster than than we we might have imagined. The collapse in birth rates in the last 5 years, in particular, has been a much swifter than people thought.”
France's pension system is generically unsustainable, allowing people to retire at 62 or in their 50s in many places, with the state providing salaries better than what was earned during working years for the next 30+ years.
“France, you get to what is it? You get to retire at at 62 and in many places in your 50s and then the state keeps you on a salary better than what you earned for the next 30 years so that that you know, that is a and it's not just uh spending too much.”
Europe has suffered economically since 2010 from combined high taxes (marginal rates 70-80% including corporate tax, income tax, and VAT) and regulatory burden that have stifled growth, while America has grown 40% better than most of Europe.
“the cost to Europe uh of uh taxes and regulation has been the end of growth. Europe stopped growing in 2010. The America America's 40% better off than most of Europe. 40%. This this is, you know, eight climate changes right there on the difference between Europe and the US.”
In Europe, governments spend roughly half of GDP, primarily on social programs (military is only 2-3% of GDP), and this level of spending is excessive and suggests significant room for cuts.
“in Europe governments are spending roughly half of GDP, half. Come on, do we really need half? You know, we we we talk a lot about military 2 to 3% GDP. You're spending half on social programs. That's a little bit outrageous.”
Central bank credibility requires following up speeches with actions (the 'stick'), but central bankers are not clearly committing to the dramatic rate increases needed in 1982-style policies if inflation breaks out again.
“You know, our president Teddy Roosevelt famously said uh speak softly and carry a big stick. Well, we we sort of speak loudly and where's the stick? Uh it has to be a view that if inflation were really to get out of hand that our central bankers would repeat like 1982 and and you know, really dramatically raise rates and so what if it causes a recession? I I don't hear them talking about that very loudly.”
The current situation looks a lot like 1979 right now, referencing the last time we saw conditions similar to today.
“you know, you should look at these, cuz the the last time we saw this was in the 1970s, and it looks a lot like 1979 right now.”
Central banks' actual behavior during 2020-2021 was to sit on their hands and wait for inflation to resolve on its own, rather than immediately raising rates, which contrasts with commitment to 1982-style policy.
“What they did in 2020 2021 was sit on their hands and wait for it to go away on their on its own and then, you know, gently start raising rates and went away on its own once the fiscal stimulus had passed.”
The US welfare state is in absolute terms more generous than the French welfare state because America generates more GDP to spend, even though it is smaller as a percentage of GDP.
“the US welfare state is more generous than the French welfare state. We Now, not as a percentage of GDP, but in absolute terms, we give out more money than the French do. Why? Cuz we got more money to give out.”
MMT's theoretical foundation—that governments can spend freely until inflation hits, then raise taxes to soak up excess money—is actually description of debt repayment: borrowing, spending, then taxing to pay back debt.
“if there's inflation, you can always just soak up the extra taxes. But wait a minute, that is paying back your debts. If you borrow money and and you know, spend it on all sorts of things and then you get inflation, we raise taxes to soak up the money. Hello, that's borrowing money and paying it back with with taxes.”
New Keynesian economists have focused on inside money (bank credit) as the transmission mechanism for monetary policy, but this omits government money's role in determining the price level.
“New Keynesian models basically don't have banks in there at all. They don't have money at all. They they think of it in terms of You know, banks are very important in terms of providing credit. And you know, the economy runs on credit, but that isn't really central to the inflation process other than sort of Phillips curvy things”
The 2007-2008 financial crisis deficits were substantially smaller than COVID and post-COVID deficits, and the overall debt level then was half of what it is now, meaning the economy was much farther from fiscal crisis.
“Back then actually the deficits of the financial crisis were a great deal smaller than the COVID and post-COVID ones. The overall level of debt was half of what it is now.”
Modern Monetary Theory proponents correctly identified that the limit to government spending is inflation, and that inflation signals when the government should stop spending, but they contradicted this when COVID inflation appeared.
“when I was looking at MMT, I actually found some similarities, or it looked like there were some similarities with your theory in the sense that they also emphasize, I think, mostly government spending, but then they say, but look, inflation is the limit to government spending.”
Turkey's inflation may result from implicit government backstopping of bank lending rather than explicit government deficits, so if one believed Turkish inflation unwarranted, one should be willing to buy Turkish bonds—the absence of willing buyers suggests markets themselves don't trust Turkey, not that the analysis is wrong.
“Turkey's always a puzzle for it for a number of reasons um and if you think that Turkey's inflation is unwarranted well how many Turkish bonds are you buying? So it's sure I think that you know that sense of it's not I should say this in fiscal theory it's not really about the current government deficit. It's not really about the IMF's projections. It's about do people have faith that you know eventually it's going to get paid back. And if you think the Turkish government's a great place to invent in lira denominated bonds you know go for it. If you don't well now you're on my side about maybe this isn't such a puzzle.”
The philosophical problem of causation is that the ultimate cause and the proximate mechanism are different: a lab leak from a lab leak shock is the ultimate cause of inflation, but this doesn't mean the solution is abandoning central banks and focusing only on lab safety.
“So, first on sort of the philosophy of cause and effect. Well, then you might it's not an energy price shock, it's a lab leak shock. Chinese let a virus out of a lab. That caused inflation. No, that That's the ultimate cause of where all this trouble came from. But it doesn't really tell you much to say, "Oh, we should That that does not imply that we should abandon our central banks and our tax policies and simply focus on lab safety as the number one way to cure inflation, right?" We want to think about the mechanism.”
Central bankers and politicians have used blame-shifting language ('it's a cost shock') to avoid accountability for their policy choices; they should instead forthrightly acknowledge that they chose inflation over recession.
“I think we've our central bankers and politicians have used, "Oh, it's a cost shock." Meaning, "It's not my fault. I didn't make any choices here. I would much rather they stood up forthrightly and said, 'Yes, we had this big cost shock and we chose to give you inflation rather than a horrible recession.'"”
The fundamental approach to debt sustainability is one of bipartisan common sense: gradually run fiscal surpluses over decades through sensible reforms that any reasonable person (grandmother) would understand, rather than through austerity, welfare cuts, or economic collapse.
“Anybody's bipartisan commission can solve this in 10 minutes at least in a way that puts off the debt crisis. And if if you let in a few free marketers and give us 20 minutes, we can you know, really solve it and and clean up the the mess quite readily. If you pay just a little attention to sensible reforms that, you know, your grandmother, if she looked at this sort of stuff, would say, "What are you doing?"”
Governments throw money down rat holes through inefficient spending; the Italian government provided 110% reimbursement for energy retrofitting, creating perverse incentives for citizens to gold-plate projects and submit inflated bills.
“the government gave people 100 They gave people 110% reimbursement for energy RETROFITTING THEIR HOUSES. OH! GEE, 110% REIMBURSEMENT. I wonder if you could gold plate those energy efficient windows for me and we can, you know, charge the government another 10%.”
The American welfare system is particularly inefficient at helping people; California alone spends $85,000 per year per homeless person with no improvement in homelessness outcomes, suggesting the problem is not lack of money but inefficient program design.
“California state alone spends $85,000 per year per homeless person and what do we have is more homeless people. You know, if we just gave them the money, they might be better off, but the problem there is not a lack of money.”
America spends $30,000 per student yet students graduate high school with only third-grade level education, showing the problem is not funding but program design and incentives.
“We spend $30,000 per student to give them a third grade education by the time they they graduate high school.”
The eurozone's sustainability issues were discussed extensively a few years ago but are no longer widely discussed despite remaining fundamentally unresolved.
“just a couple of years ago there was this huge discussion on is the Eurozone architecture sustainable? And of course, a couple of things changed, but I think the fundamental issues are still there, and we're not really talking about it anymore.”
Fiscal theory can fix the problems with the New Keynesian model by keeping 90% of it the same but changing how it treats the government's intertemporal budget constraint, though this also inherits 90% of the model's failures.
“In my technical work, I've married that fiscal insight with the new Keynesian model so that 90% of the model stays the same. Now then, so does 90% of the failures of the model, but you can marry it with other views to the economy.”
Cochrane has been warning about an imminent debt crisis for over 25 years and has been wrong repeatedly, as interest rates kept falling instead of rising.
“I've been carrying around this sign saying the end of the world is coming, here comes the debt crisis for 25 years, and been wrong every time. Interest rates keep going down.”
Cochrane's book 'The Fiscal Theory of the Price Level' provides detailed technical explanation of how fiscal policy determines inflation, with equations showing how fiscal theory integrates into New Keynesian models.
“I think the Okay, that that sounds interesting, and I'm I'm going to recommend people to to read your book, where I think they can really go into that.”
Cochrane co-authored a book on the euro titled 'Crisis Cycle' with Luis Garicano and Klaus Masuch that analyzes eurozone sustainability problems in detail.
“I also want to advertise that an issue we didn't get to uh is the euro. And I want to advertise I have a book on the euro called crisis cycle with two wonderful co-authors, Luis Garicano and Klaus Masuch.”