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John Cochrane on the Helicopter Drop, 3/7
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John Cochrane on the Helicopter Drop, 3/7

Arnold Kling
Mar 7
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John Cochrane on the Helicopter Drop, 3/7
arnoldkling.substack.com

The WSJ’s Tunku Varadarajan interviews John Cochrane.

The Covid checks, Mr. Cochrane says, were “an immense fiscal helicopter drop. People are spending the money, driving prices up.”

Last May, when inflation was “transitory,” I wrote The Helicopter Drop.

Cochrane and I agree on many things:

  • the government could not solve the economic problems caused by COVID by writing checks

  • the Trump Administration’s fiscal incontinence set the stage for the inflation that erupted this year

  • The Biden Administration added bad supply-side policies to continued fiscal incontinence

  • With Congress unwilling to rein in budget deficits, the Fed is not in a position to do much about inflation

We disagree a bit on the mechanism by which large deficits cause inflation. I think that people perceive government bonds as if they were wealth. The government borrows $1 from me and spends it on you. You have a new dollar. And I think I still have a dollar, because the government owes me a dollar. Neither of us thinks that we will have our taxes raised next year, when the government has to pay me the dollar.

John says that most of the time, you and I look ahead and do see taxes going up. So we save up to pay for those future taxes. It is only when we think that the government is not going to raise taxes, and will resort instead to printing money, that we decide not to save and instead to spend in order to get ahead of the money-printing.

John assumes that people are looking forward and trying to anticipate government spending and tax policy. I assume that people are myopic and just look around and say “I got paid $x by the government” or “I lent $y to the government and got a $y bond in return” without thinking about what comes next.

For both of us, the root of inflation is large government deficits. If we are right, then this “transitory” inflation will get worse until Congress has the will to significantly reduce spending and/or raise taxes.

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John Cochrane on the Helicopter Drop, 3/7
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MikeW
Mar 7Liked by Arnold Kling

FYI, you misspelled Varadarajan.

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MikeDC
Writes MikeDC’s Newsletter ·Mar 7

> I think that people perceive government bonds as if they were wealth.

Aren't they? They might not be an ideal form of wealth, but they clearly are. Wealth is simply stored value. And all wealth is based on perception of the future. We're holding something. If we expect the supply of that thing to increase or the demand for it fall, the value of the current supply must fall.

Isn't this sufficient explain inflation? I guess I think the talk of myopia and distinctions between real and paper wealth confuse the issue.

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