Sluggish Expectations and the Policy View of Inflation

 Based on the source provided, the following is the full text of the article "Sluggish Expectations" by John H. Cochrane.

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Sluggish expectations

JOHN H. COCHRANE JUN 30, 2026

As part of a big revision of “Inflation”, a short book resulting from last year’s Brunner lecture, I wrote the following short section. I try to capture how central bankers talk about interest rates and inflation in a few simple equations. Previously, I discussed the venerable adaptive expectations model. There, expected inflation in the model is just last period’s inflation. That makes an interest rate peg unstable, and higher interest rates lower inflation going forward. I also discussed rational expectations. There expected inflation in the model is the expected inflation of the model, and forward looking. That makes an interest rate peg stable, but leaves multiple equilibria. Fiscal theory fixes those. It also means that higher interest rates eventually raise inflation, though it can go the other way in the short run.

It’s not really fair to say that central banks are stuck in adaptive expectations. They have heard about expectations since 1980, and they do think about expectations. They don’t, however, think that expectations react quickly to news, even though expected inflation in the model does react quickly to news. They then preserve the traditional property of the model, that higher interest rates lower inflation going forward, and avoid rational expectations indeterminacies.

Here is my effort to describe how central bankers view the world. This is section 4.10 of the new draft, and an invitation to send me comments about anything in the draft. Usually my job here is to write words about equations. Today the point is to write some simple equations about words.

Today’s policy world has a more nuanced view than the 1970s adaptive expectations I described above. A distillation of the current policy view might be called “sluggish expectations.”

This view acknowledges that expectations are important, but does not tie them rigidly to past experience (adaptive) or to the model’s predictions of the future (rational). In this philosophy, expectations vary through time and in response to various forces, many external to central bank actions. Expectations eventually respond to experience of inflation, though not in a predictable way. Faith that the central bank will eventually do something can “anchor” expectations through a period of inflation. But that faith and “anchoring” can evaporate, at which point a spiral breaks out. Expectations can also move in response to news about the future such as fiscal matters and other shocks, thus accommodating some of the many historical episodes adduced by forward-looking rational expectations. But this happens rarely, and usually only in large tumultuous episodes.

Central banks also measure expectations in surveys and bond markets. They treat these measures as somewhat exogenous disturbances that they should react to, as well as measures of people’s faith in central banks’ future actions that central banks should try to control by actions and statements.

Most of all, expectations do not react quickly to interest rates, even when the model predicts that actual inflation will react to interest rates. The expectations of the model are still different from the expectations in the model. Economists armed with the model could make a lot of money. That sluggish property preserves most of the traditional doctrines I captured above with adaptive expectations, but with nuance.

(Doctrines: Under adaptive expectations 1) Inflation is unstable under an interest rate peg. 2) Higher interest rates lower inflation, going forward. 3) By following the Taylor rule, central banks stabilize an economy which is naturally unstable. Under rational expectations 1) Inflation is stable under an interest rate peg. 2) Higher interest rates, on their own, raise expected inflation going forward. 3) Inflation is neutral in the long run. 4) Inflation is indeterminate under an interest rate peg. 5) By following a Taylor rule, central banks destabilize the economy and select a single equilibrium.)

To describe this view, I write out a little model:

$$x_t = -\sigma(i_t - \pi^e_t) + u_{x,t}$$ $$\pi_t = \pi^e_t + \kappa x_t + u_{\pi,t}.$$ $$\pi_t = (1 + \sigma\kappa)\pi^e_t - \sigma\kappa i_t + (u_{\pi,t} + \kappa u_{x,t}).$$

Here $x$ is output, $i$ is the nominal interest rate, $\pi$ is inflation, $\pi^e$ is expected inflation, $\sigma$ and $\kappa$ are parameters, and the $u$ are disturbances. The first equation is the “IS” equation. It says that higher real interest rates depress output. The second equation is the Phillips curve. It says that higher expected inflation or higher output push inflation up. Those are core central bank beliefs.

Eliminating output $x_t$, inflation is related to interest rates by [the third equation above]. The IS curve gives output directly. I add “demand” and “supply” disturbances, which move inflation and output around and to which the central bank responds. (With adaptive expectations $\pi^e_t = \pi_{t-1}$ and this is an unstable equation. With rational expectations $\pi^e_t = E_t \pi_{t+1}$ it’s stable. That’s the basis for the above doctrines.) The same equation holds at time $t+1$, and you can verify that the expectations in the model are not the expectations of the model.

Higher inflation expectations $\pi^e_t$ raise inflation and output right away. So worrying about survey and market expectations is important. But, to our central doctrines, there is no unstable spiral under an interest rate peg so long as expectations do not move, so long as they stay “anchored.” Inflation and deflation starts to spiral when current inflation or deflation starts to feed in to expected inflation. Then an initially slow inflation or deflation can suddenly pick up speed.

That’s why central banks “look through” inflation surges, so long as they believe expectations remain “anchored.” A spurt of inflation coming from shocks to the disturbances $u$ will go away on its own. That inflation may lead to a permanently higher price level, but central banks, having interpreted their mandate as a forward-looking inflation target with bygones bygone, do not care about that.

In 2021, for example, the Fed saw inflation surge. But as its forecasts, survey forecasts, and bond market expectations projected a return to 2% inflation, the Fed saw no urgency to move. The Fed only moved when it saw measures of inflation expectations start to creep up. It then interpreted the swift decline of inflation not as a real interest rate effect—since real interest rates were still sharply negative, and no recession followed—but as a sign that expectations had been re-anchored by the mere threat of action. Similarly, in discussing how to adapt to tariffs, a “temporary” inflation shock and a one-time price level increase, Waller (2025) argued that the Fed should again “look through” the shock and not respond.

This view also lacks an economic nominal anchor—nothing like the $M$ in $MV=PY$ or $B/P = EPV(s)$ to tie down the price level. The closest it comes is to view anchored expectations as the anchor for actual inflation, with no anchor for the price level. And at best that anchor comes from faith that the Fed would if necessary repeat 1980 in the event that inflation got out of control. Yet the Fed is curiously silent about such energetic measures. Are we at anchor or just floating in a calm sea?

Central banks can always raise interest rates, but they cannot lower rates much below zero. Thus, central banks have greater fear of downward de-anchoring and deflation spirals. Central banks were much more worried about the small deflation in 2008 in the zero bound era than they were about an upward inflation spiral in 2021. (They may also view the costs of deflation as larger than those of inflation.) Likewise, many analysts could attribute the swift inflation decline in 2022 while interest rates stayed well below inflation as a case of re-anchoring expectations, showing what the Fed might do in the future, while worrying earlier that deflationary expectations could become de-anchored and the Fed powerless.

In sum, the contemporary policy view still predicts that inflation and deflation spirals can break out. The absence of a spiral in the zero bound era remains a puzzle. “Expectations did not move” is a little easier epicycle to explain the lack of a spiral, but that ignores the constant contrary worry at the time.

So long as expectations are sluggish, higher nominal interest rates lower inflation. See the coefficient $-\sigma\kappa$ in the last equation. Writing it as

$$\pi_t = \pi^e_t - \sigma\kappa(i_t - \pi^e_t),$$

you can see that if expectations rose one-for-one with the nominal interest rate, inflation would rise and output would not move. That non-reactive quality, rather than the rigid adaptive scheme, is crucial to the Fed’s ability to lower inflation with higher interest rates.

However, higher interest rates only move inflation immediately in this little model. As long as inflation does not feed in to expectations, today’s interest rate only affects today’s inflation. There are, so far, no “long and variable lags.” In the adaptive expectations model a small initial inflation gets an expectational snowball going to create more future inflation.

I think the current policy view squares that circle in three ways. First, one can sprinkle lags into these equations to produce some dynamics. For example, people reason that higher interest rates take time to lower demand, via some unspecified friction. Second, lowering future inflation with sluggish expectations requires persistently high interest rates. High interest rates today lower today’s inflation, then high interest rates in the future lower future inflation. This may be a reason that central banks tighten and loosen in long waves. Third and most of all, the time and contingency it takes for inflation to feed in to expectations explains why the lags are both long and variable. A one-period adaptive expectations model produces too fast and too reliable a mechanism. Here, after a period of persistently high interest rates, resulting in a period of persistently low inflation, inflation breaks through people’s attention span. Only then, which may be a year or more later, do people wake up, change expectations, and monetary policy really has its effect.

In this view, expectations are also amenable to suasion by central banker speeches, policy frameworks, and “forward guidance.” If central bankers can talk down expectations, that improves the inflation-output tradeoff of the Phillips curve. The central bank can then lower nominal rates and enjoy lower inflation with no output cost. At the zero bound, central banks try to talk up expectations, such as by announcing a higher target or forward guidance. Indeed, since the Phillips curve in the 2010s seemed flat, with $\kappa$ near 0, much of the central bank view focuses on expectations alone as the determinant of inflation. Most of the art of central banking amounts now to expectations management. (Or at least it did through the end of the Powell era. Kevin Warsh has written about scaling back such efforts.) Alas, speaking loudly without a stick has often failed in the past to contain or boost inflation. Eventually if inflation does not do what central bankers want, they need something more than additional speeches.

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Note: Repetitive Substack subscription text and headers appearing in the original source have been removed for clarity.

Trump's Monetary Policy Desires: An Economic Examination

 President Trump's monetary policy analysis is characterized by three broad policy desires which, according to the sources, are not as unconventional as conventional wisdom often suggests. The analysis accompanying these desires delves into the complexity of monetary theory, the role of the Federal Reserve, and the economic impact of reserve currency status.

The three broad desires are:

1. Lower Interest Rates

Trump desires lower interest rates, partly with the objective of reducing interest costs on the national debt.

Analysis of Low Interest Rates and Inflation:

The standard counter-argument is that lower interest rates inevitably lead to immediate inflation. However, the sources present a mixed and complex analysis regarding this link:

• Empirical Estimates: The best empirical estimates suggest that lower interest rates result in either no or slightly lower inflation for about a year, followed by slightly higher inflation after two or three years. Crucially, this response is described as "barely significant statistically". Since the unexpected rate hikes studied in these estimates typically fade within a year, they offer limited insight into the effect of persistently lower interest rates.
• Theoretical Models: Mainstream, or "new Keynesian," economic theory suggests that a permanently lower interest rate will eventually lower inflation, provided that fiscal policy remains constant, although inflation may rise temporarily. The source notes that this is an unsettling implication for the theory's generally center-left practitioners.
• Historical Record: The historical record is mixed. Inflation remained absent during a decade of near-zero interest rates in the U.S., and for three decades in Japan, which seems to confirm the theoretical stability of inflation with a fixed interest rate. However, low interest rates that financed large government deficits have contributed to inflation in many countries. Low interest rates that occurred in response to "supply" shocks (such as in the 1970s and 2020s) coincided with inflation, but the exact effect remains murky.
• The source concludes that economists do not know with certainty just if, how, under what circumstances, or how quickly low interest rates lead to inflation.

2. Reduced Federal Reserve Independence and Increased Accountability

The second desire is for the Federal Reserve to be less independent and subject to greater democratic accountability.

Context and Analysis of Independence:

The argument for reducing independence stems from the observation that the Fed has vastly expanded its scope of operations. The Fed's actions are described as political, crossing over into fiscal policy and credit allocation, including propping up asset prices, monetizing debt, channeling credit, directing banks, and straying into areas like climate and inequality. Furthermore, the Fed has not had a reckoning with its institutional failures, such as 10% inflation and repeated bailouts.

The source argues that independence is not an absolute virtue. Since the U.S. constitutional order does not include completely independent officials who can print money and regulate banks as they wish, discussion of reform is reasonable. Two pathways are presented:

1. Making the Fed more "democratically accountable" (which is seen as "politically influenced" when the opposing party is in power).
2. Reforming the Fed to have a narrow, enforced, and accountable mandate, allowing it to remain independent (favored by small-government advocates).

Commentary on Accountability:

The discussion section notes that the demand for political accountability, when coming from the Trump administration, is viewed by some as a 'ruse de guerre'. Successive legislative acts since the Truman administration have repeatedly restated and even increased the degree of the Fed's independence. Some commentary suggests that the main problem with reducing the Fed's independence currently is Trump himself, citing his changing opinions, aversion to the truth, and self-dealing.

3. Critique of "Exorbitant Privilege"

The third desire focuses on challenging the premise of "exorbitant privilege" or "reserve currency status," arguing that the fact that the world wants to hold U.S. money and debt—thereby sending us goods in return—is damaging to the U.S..

Analysis of Reserve Currency Status:

While the consensus view suggests that receiving this bounty merits a "nice thank-you note," the source argues this strategy carries significant downsides.

• The Resource Curse Analogy: The situation is compared to the "resource curse" that affects producers of vital commodities. Historically, Spain and Portugal received a similar bounty when they acquired gold and silver from the Americas, using it to buy consumer goods, which ultimately caused their domestic industries to languish and resulted in poverty. The implication is that Switzerland, by contrast, has remained productive by refusing the world's financial offer.
• Consumption vs. Investment: The basic point that saving and investing is preferable to borrowing and consuming applies to both a family and an economy. In the U.S. case, the core issue is that the bounty derived from the reserve currency status was consumed rather than invested. This choice is driven by government deficits financing consumption, combined with legal, tax, and regulatory barriers that limit the profitability of private investment.
• The source notes that while "neomercantilists have a little point buried in a heap of fallacies," there is some merit to the basic idea worthy of examination. However, the sources suggest that policies like tariffs, capital controls, securities taxes, and industrial policy would ultimately worsen matters.

In sum, the sources analyze these three policy desires—for lower rates, political accountability, and a shift away from consumption financed by reserve currency status—by presenting evidence and theories suggesting that the traditional consensus view opposing these desires may be overly simplified or uncertain.

The discussion regarding lower interest rates and inflation is central to President Trump's monetary policy analysis, which is one of his three broad policy desires. The stated goal for desiring lower interest rates is partly to reduce interest costs on the national debt.

The sources argue that Trump's desires for monetary affairs aren’t as crazy as conventional wisdom portrays, particularly concerning the complex relationship between interest rates and inflation.

The Standard Response vs. Economic Uncertainty

The conventional or "standard response" to the desire for lower interest rates is that they will quickly lead to more inflation. However, the sources emphasize that the economic consensus regarding this relationship is uncertain, stating that economists do not know with certainty just if, how, under what circumstances or how quickly low interest rates lead to inflation.

The analysis provided to challenge the standard response draws on empirical estimates, theoretical models, and the historical record:

1. Empirical Estimates

The best empirical estimates concerning interest rate changes and inflation show a complex, staggered, and statistically weak response:

• Lower interest rates are found to lead to no or slightly lower inflation for about a year or so.
• This is followed by slightly higher inflation after two or three years.
• Crucially, this measured response is described as "barely significant statistically".
• Since the unexpected interest rate hikes studied in these estimates typically fade within a year or so, the findings say little about persistently lower interest rates.

2. Theoretical Models

Mainstream, or "new Keynesian," economic theory surprisingly suggests that a permanently lower interest rate will eventually lower inflation, provided that fiscal policy (government spending and taxation) is held constant.

• Although inflation may temporarily rise, the permanent result is lower inflation according to the models.
• The source notes that this is an "unsettling implication" for the theory's largely center-left practitioners.
• The proposition, despite potentially contradicting decades of consensus theory, bears consideration if it is reflected in the equations of the models themselves.

3. Historical Record

The historical record concerning low rates and inflation is described as mixed:

• The fact that inflation went nowhere over a decade of near-zero interest rates in the U.S. and for three decades in Japan seems to confirm the theoretical view that inflation is stable with a fixed interest rate.
• However, low interest rates that financed large deficits contributed to inflation in many countries. The record is less clear if a government does not expand fiscal policy.
• Low interest rates that occurred in response to “supply” shocks (such as during the 1970s and 2020s) coincided with inflation, but the exact effect of the low rates and other responses is murky.

Context within Trump’s Broader Desires

The desire for lower interest rates is the first of the three policy desires identified in the sources. The overall assessment is that there is some merit to the basic point regarding low rates that is worthy of examination and not immediate disdain.

The other two broad desires that frame this discussion include:

1. The Federal Reserve should be less independent and subject to more democratic accountability.
2. The "exorbitant privilege" or "reserve currency status" damages the U.S. by incentivizing consumption over investment.

The sources present the analysis of low rates and inflation as part of a broader critique suggesting that conventional views on monetary policy and central bank independence may be oversimplified or scientifically unsupported.

The issue of Federal Reserve Independence and Accountability is the second of President Trump's three broad policy desires regarding monetary affairs. While many in the policy world are "aghast," the sources suggest that these desires for monetary affairs aren’t as crazy as conventional wisdom portrays.

Trump's desire is for the Federal Reserve to be less independent and subject to more democratic accountability.

The Rationale for Challenging Independence

The fundamental argument supporting this desire stems from the perceived expansion of the Federal Reserve’s role and its institutional failures:

1. Expanded Scope and Political Actions: The Fed is described as having vastly expanded its scope of operations. These actions are inherently political and cross over into fiscal policy and credit allocation. Examples include:

   • Propping up asset prices.
   • Monetizing debt.
   • Channeling credit and directing banks on how to invest.
   • Straying into areas such as climate and inequality.
   • Denying whole business models, such as narrow banks and segregated accounts.

2. Institutional Failures: The Fed has had no reckoning with its great institutional failures, including the instance of 10% inflation and repeated bailouts.

The Debate on Reform and Accountability

The sources affirm that independence isn’t an absolute virtue. Since the U.S. constitutional order does not include completely independent officials who can print money and regulate banks as they wish, it is reasonable to discuss reform.

The discussion outlines two potential pathways for reforming the Fed in light of its expanded power:

1. Democratic Accountability: Making the Fed more “democratically accountable,” though the sources note that this is the same thing as being “politically influenced” when the opposing party is in power.
2. Narrow Mandate: Reforming the Fed to have a narrow, enforced, and accountable mandate so that it can remain independent. A small-government advocate favors this latter option.

The sources conclude that simply ignoring the demands for change by "pulling up the drawbridge, hoisting the 'independence' flag, and pouring boiling scorn on the barbarians at the gate" isn’t a viable response.

Counterarguments and Commentary

Commentary within the sources provides historical context and critiques the motivation behind the demand for greater accountability:

• Historical Legislation: Contrary to the perception that the Fed expanded its powers unilaterally, some observers note that the regulatory expansion (accretions) post-WWII resulted from Congressional acts passed due to earlier financial crises. Furthermore, successive acts of legislation since the Truman administration have without variation restated the independence of the FRB and increased the degree of its independence. This suggests that political accountability is traditionally addressed through Congress.
• Critique of Motives: The demand for political accountability, specifically coming from the Trump administration, is viewed by some as merely a 'ruse de guerre'.
• Critique of Character: A key problem with reducing the Fed's independence at this point in time is Trump himself, citing his tendency for opinions that change on a daily basis, his aversion to the truth, and his self-dealing. The Fed Board of Governors, by contrast, is described as having honest debate, making informed decisions, and being patriotic.

In the larger context of Trump's monetary desires, the call for reduced independence serves to scrutinize the Fed's role alongside the desire for lower interest rates and the critical perspective on the "exorbitant privilege" of reserve currency status.

President Trump's critique of the "Exorbitant Privilege" or "reserve currency status" represents the third of his three broad policy desires concerning monetary affairs. This desire argues that the fact that the world wants to hold U.S. money and buy U.S. debt, thereby sending the U.S. goods in return, is actually damaging to the country. The sources suggest that this desire, like his others, isn’t as crazy as conventional wisdom portrays.

The Core Critique and Historical Analogy

In the consensus view, if the world offers the U.S. money and debt in exchange for consumer goods (the "bounty"), the appropriate response is simply a "nice thank-you note". However, the critique asserts that this strategy carries significant downsides.

The sources draw a powerful historical analogy, comparing the reserve currency status to the "resource curse" that affects producers of oil and other vital commodities.

• Spain and Portugal: These nations received a similar financial bounty when they found gold and silver in the Americas. They used this wealth to buy consumer goods, which caused their domestic industries to languish and eventually end up poor.
• Switzerland: In contrast, the sources point to Switzerland, which refuses the world’s offer and remains productive.

The Central Problem: Consumption vs. Investment

The basic economic premise supporting the critique is that saving and investing is preferable to borrowing and consuming for both an economy and a family.

The core issue regarding the U.S. reserve currency status is that the resulting bounty was consumed rather than invested. This choice is not necessarily inherent to the reserve currency status itself but is driven by internal policy flaws:

• Government deficits that are used to finance consumption.
• Legal, tax, and regulatory barriers that make private investment less profitable.

While the sources acknowledge that "neomercantilists have a little point buried in a heap of fallacies," there is some merit to the basic idea that warrants examination and not immediate disdain.

Policy Implications

The sources warn against common policy interventions often associated with neomercantilist or protectionist views, arguing that policies such as tariffs, capital controls, securities taxes, and industrial policy will all make matters worse. Instead, the solution should be to "Get out of the way" and remove the barriers hindering productive investment.

Context within Trump’s Broader Monetary Analysis

The critique of exorbitant privilege is intertwined with Trump's other policy desires:

1. Lower Interest Rates: Desired partly to lower interest costs on the national debt.
2. Reduced Federal Reserve Independence: Seeking greater democratic accountability for the Fed's expanded scope of operations.

In all three cases, the sources conclude that the basic points raised are worthy of examination and should not be met with immediate disdain.

Covid Incompetence

Blog post by John H Cochrane in The Grumpy Economist

WWII started badly for the United States. Our tanks blew up. Our torpedoes were duds. Our airplanes were outclassed. Many commanders were incompetent, soldiers green, supplies chaotic. We lost a lot of battles. But we learned. The lessons of each mistake were incorporated, incompetent commanders sacked, soldiers learned their terrible craft.

Delta is the fourth wave of covid, and amazingly the US policy response is even more irresolute than the first time around. Our government is like a child, sent next door to get a cup of sugar, who gets as far as the front stoop and then wanders off following a puppy.

The policy response is now focused on the most medically ineffective but most politically symbolic step, mask mandates. All all-night disco in Provincetown turns in to a superspreader event so... we make school kids wear masks in outdoor summer camps? Masks are several decimal places less effective than vaccines, and less effective than "social distance" in the first place.* Go to that all night disco, unvaccinated, but wear a mask? Please.

If we're going to do NPI (non pharmaceutical interventions), policy other than vaccines, the level of policy and public discussion has tragically regressed since last summer. Last summer, remember, we were all talking about testing. Alex Tabarrok and Paul Romer were superb on how fast tests can reduce the reproduction rate, even with just voluntary isolation following tests. Other countries had competent test and tracing regimes. Have we built that in a year? No. (Are we ready to test and trace the next bug? Double no.)

What happened to the paper-strip tests you could buy for $2.00 at Walgreen's, get instant results, and maybe decide it's a bad idea to go to the all night dance party? Interest faded in November. (Last I looked, the sellers and FDA were still insisting on prescriptions and an app sign up, so it cost $50 and insurance "paid for" it.) What happened to detailed local data? Did anyone ever get it through the FDA's and CDCs thick skulls that even imperfect but cheap and fast tests can be used to slow spread of disease?

Last summer, we were talking about super-spreader events, and the idea that you don't have to have disastrous lockdowns of everything but maybe packed all-night disco parties are a bad idea? (Reopen smart, I wrote at the time, for example here) Today, silence. Masks. Nice big symbolic masks. Period.

And then we indulge another round of America's favorite pastime, answers in search of a question. Delta is spreading, so... extend the renter eviction moratorium. People who haven't paid rent in a year can stay, landlords be damned. Usually our government mandates A shall give to B because it isn't willing to spend the money directly. Hilariously in this case it's because the government is simply unable to shovel rent money out the door, even to the scammers who have gotten so much unemployment money. Somehow throwing people who don't pay rent into "the street" is our major source of covid spread, but releasing a wave of illegal undocumented migrants into "the community" in the next story does not, and the same people free to go to all night disco parties is not a danger. (Disclaimer: I'm all for immigration, but not for hypocrisy.) By and large the Administration and commenters can't even bother to pretend that stopping evictions has anything to do with stopping the spread of covid, the only source of government's authority. (One example I just happened to hear as I was writing this, PBS' interview of Secretary Fudge.) The rent is too damn high is all you need to know.

In the talk "pandemic of the unvaccinated," I hear, basically, resignation. We offered you vaccines. If you won't take them, fine, we're done. We're back really to what quite a few people argued for and were pilloried for in March 2020. Let it sweep through, get to herd immunity, it peters out, bury the dead and go on with life.

The good news. A reproduction rate of 6 means Delta will spread really fast, peak really fast, and decline fast. The bad news: a lot of people will needlessly get sick and quite a few will die. The economy will slow down as people voluntarily pull back. Evolution got one more step ahead of bureaucratic bungling. A variant that transmits even more easily through vaccinated people can't be far behind.

It did not have to happen. The vaccine was in hand, the lines were done, anyone could walk in and get the vaccine. All we had left to do was get pretty much everyone vaccinated before the new variant hit, and it would have been pretty much over. Just walk over the finish line and don't get distracted by that puppy -- or, in the case of our politics, get distracted by whether extending the wonderful job the public schools are doing to free pre-k for every toddler in the country is a good idea and counts as "infrastructure," whether we should refer to global warming as a climate "emergency" or "catastrophe," just how many trillions of dollars the government should print and spread around, and all the other brouhahas that keep Washington busy and distracted from basic governance, like stamping out the embers of a pandemic.

Yes, we are now, in the middle of it, slowly getting serious about vaccination. But, as my best post from last year pointed out, if you react to the level of disease, it's like turning the shower from hot to cold when it gets cold, and vice versa. You end up with waves. We ended up with waves. The fight against a virus has to anticipate the next wave, stamp out the embers during the lull. This is not new knowledge. You don't stop taking antibiotics when you feel better. Serious efforts to stamp out infectious diseases -- small pox, polio -- put huge effort in to the dwindling cases.

Were anyone watching, it was easy to see that getting full vaccination was not going to be a cake-walk. Delta was known by spring, and its high reproduction rate was known. That pushes up the limit for herd immunity. And it was known that after around 60 or 70% of the population vaccinated, it gets really hard. As Stanford's Robert Kaplan reports in WSJ,

A poll completed in August 2020 showed that about 20% of the population reported they were very unlikely to take a vaccine even if the evidence suggested it was safe and effective. Another 15% said they were unlikely to take it.

It's a fun narrative that refusers are all troglodyte Republican anti-vaxxers influenced by crazies spreading "mis-information" on the remaining uncensored bits of the internet. That's not the whole or even major story. Other countries are maxing out at 70% or so too. And here, straight from the CDC, look at the ethnic breakdown.

Not a lot of Hispanic/Latino or Blacks are Trumpers! Last spring the standard narrative went on about the tragic racial injustice in vaccine "access." That narrative is now weirdly silent. Well, it just won't hold when anyone can now drop in and get a vaccine, free, fast. Beating the anti-Trumper narrative is so much more convenient. But, folks, these are the people who are going to die. Interviewed on NPR, many quickly cite Tuskeegee. I guess we reap the reward of CRT taking over public health history in the public schools. Everyone knows about Tuskeegee. Nobody has heard about smallpox, polio, measles, mumps, and just how many people used to die like flies.

The internet is awash with misinformation about the vaccines. But data distortion seems to have little effect on vaccine uptake. Well over a year ago, 35% told us they wouldn’t take the vaccine, and they have kept their word. The recent increase in vaccine uptake appears to be among people who initially said they would “wait and see.”

This isn't "misinformation" cured by even more internet censorship. Indeed, it is the opposite. People know that the internet is censored, that public authorities have been lying to them all along. After mask/no mask, Wuhan lab/no Wuhan lab, FDA explicitly trying to manipulate public psychology in delaying approval and the J&J pause, and so on, people have lost trust. CDC flip flopping on masks clearly under political pressure did not help. And none of them present facts. The cry of wolf falls on deaf ears.

Even the vaccine discussion now hews to the joke that everything must be either mandatory or banned. We jump to vaccine mandates, cops coming to your door to hold you down and jab you. That was not necessary and still is not. But not until this week or so is anyone talking about allowing even minor incentives to get vaccinated. Allow cruise ships to say, you're free not to get vaccinated, but you're not free to step on this private property without a vaccine! That's slowly happening, but way way too late. This needed to happen before the wave.

Of course, only a few weeks ago did the FDA even think that maybe it's time to speed up full approval of the vaccine. The anti-vaxxers have a point. It's mighty hard to talk about vaccine mandates when it only has an emergency use authorization.

What's going on with the Great Forgetting? Well, as with so many other things, it is to nobody's institutional interest to remember just how many mistakes were made the first time, how much better things could have been. To learn from the mistakes, and institutionalize better responses would mean to admit there were mistakes. One would think the grand blame-Trump-for-everything narrative would allow us to do that, but the mistakes are deeply embedded in the bureacracies of the administrative state. Unlike bad admirals in WWII, nobody less than Trump himself has lost their job over incompetent covid response. The institutions have an enormous investment in ratifying that they did the best possible job last time. So, as in so many things (financial bailouts!) we institutionalize last time's mistakes to keep those who made them in power in power -- which means we do not learn from mistakes.

Delta will blow through in a couple of months. It looks like it takes about 6 months for immunity to die out, and the same for a new variant to adapt. See you in February or so, and let's see just how many more basics of public health our government can forget in the meantime. Yeah, Grumpy is grumpy today.

More: A spectacular piece on the FDA by Scott Alexander, which I plan to blog shortly. (HT Russ Roberts) But worth it now. The piece is particularly good for diagnosing the FDAs awful incentives, which is how good people get wrapped up in a dysfunctional institution. Zeynep Tufekci and separately Jeneen Interlandi on the CDC, in the NYT no less (HT marginal revolution). MR on the NIH in the pandemic:

● Of the $42 Billion 2020 NIH annual budget, 5.7% was spent on COVID-19 research

* On masks. Of the many things we don't know, just how much masks help or don't help is one of them. You think with $42 billion dollars one could find out. Of the studies I have read and seen cited, I see a guesstimate of 20% reduction in reproduction rate. So if Delta has R0=6, masks might reduce that to 4.8. Even if a vaccine is only 50% effective in stopping transmission, then R0 among the vaccinated is 0.25.

Masks do much more to stop you from giving it to someone else than to protect you. Cloth masks are close to useless. Well-fitting N95 masks work much better in both directions. Neither comes close to vaccination. Wearing cloth masks outdoors, far from other people, in the wind, as is the fashion in Palo Alto, is just part and parcel of the pointless virtue-signaling so prominent here. If you do go to that crowded all-night disco, wearing an N95 mask might be a good idea. Of course if you’re even thinking about wearing a mask, you’re not going in the first place, which is why the whole mask-mandate business is a bit silly.

I welcome comments pointing to good numbers on this question.

Update: Tweeters seem to think I argue here that masks do no good. No. For the record: Masks work a bit. Not getting in contact with other people works better. And vaccines work a lot better.

Meritocracy: John H Cochrane Blog

Adrian Woolridge wrote a thought-provoking essay titled "Meritocracy, Not Democracy, Is the Golden Ticket to Growth," advertising a forthcoming book.

Meritocracy, the secret sauce of growth?

To Woolridge, meritocracy is the secret sauce of prosperity:

The surest sign that a country will be economically successful is not the health of its democracy, as some liberals like to think, or the leanness of its government, as some free-marketers imagine, but its commitment to meritocracy. Singapore is a soft authoritarian power. But it has transformed itself in a few decades from a poverty-stricken swamp into one of the world’s most prosperous countries, with a higher standard of living and a longer life expectancy than its old colonial master, because it is perhaps the world’s leading practitioner of meritocracy. The Scandinavian countries have some of the world’s largest governments and most generous welfare states. But they retain their positions at the top of international league tables of prosperity and productivity in large part because they are committed to high-quality education, good government and, beneath their communitarian veneer, competition; in other words — meritocracy.

By contrast, countries that have resisted meritocracy have either stagnated or hit their growth limits. Greece, a byword for nepotism and “clientelism” (using public-sector jobs to reward partisan cronies), has struggled for decades. Italy, the homeland of nepotismo, enjoyed a postwar boom like France and Germany but has been stagnating since the mid-1990s....

Democracy alone does not lead to growth, and likewise growth does not swiftly lead to democracy. Look at China vs. India, and many democratic, at least in the sense of leaders chosen by fairly free elections, but poor countries around the world.

For a generation, political economists have been looking more deeply at institutions -- rule of law, property rights, etc. -- as a secret sauce. "Meritocracy" is a good buzzword for a different idea of what is centrally important.

...countries that favor recruiting professional managers through open competition have higher growth rates than those that favor recruiting amateur managers through personal connections. America has the highest overall management score, followed by Germany and Japan. Rich-world laggards such as Portugal and Greece, and big emerging-market countries such as India, have a long tail of un-meritocratic and therefore badly managed firms.

The essay goes on, condensing much more evidence.

It is plausible that meritocracy is especially important now, as businesses globalize and incorporate IT. The rising skill premium and larger reach of global corporations means that it is ever more important to match skilled people with the positions that require skill.

His bottom line

... The idea that there is a necessary relationship between democracy and growth rests on a false positive. The really robust relationship is between meritocracy and growth. ..

the evidence of economics is overwhelming: Meritocracy promotes prosperity, and dismantling meritocracy will reduce it. Those who support the current campaign against merit need to admit that they are opting for lower growth. I am not an expert on the huge political/economic literature on the correlates of growth. This sounds reasonable, but the Acemoglus, Barros, etc. of the world may have important things to say on the evidence. Still, it's a novel idea and let's follow it.

We should distinguish "leading country" growth that must come from innovation, and "catchup growth" that simply uses current ideas most efficiently. Woolridge, and the rest of this essay, is, I think, mostly about the latter. For almost all of the world's population, that's what matters. And in my view, the US is a good deal below the efficient frontier as well.

Non-meritocracy

Some evidence on the other side:

Another way to measure the prosperity-producing power of meritocracy is to look at what happens if you remove it. The City College of New York had a well-deserved reputation as the “Harvard of the proletariat,” taking thousands of poor adolescents, many of them the offspring of immigrants, and turning them into the successful citizens of a knowledge society — doctors, lawyers, academics and, in the case of 10 alumni, Nobel Prize winners. Then in 1970 the university introduced an open-access regime, admitting anyone who had graduated from the city’s high schools. The result was a simultaneous boom in student numbers and a collapse in academic standards. By 1978, 2 out of 3 students admitted to the college required remedial teaching in reading, writing and arithmetic. Dropout rates surged. Talented scholars left. A college that had once specialized in producing the rocket fuel of a successful society — talent — became synonymous with protests and sit-ins. In 1999, a task force led by former Yale president Benno Schmidt pronounced the larger City University system to be “in a spiral of decline.” The college only began to recover after it abandoned open admissions as a failed experiment.

This is nice as it illustrates where modern universities are going. It is however not obviously germane to the larger point. Maybe City College moved to an equally important role of providing remedial education to people ill-served by the city's disastrous public high schools. Maybe City College fed meritocratic middle managers, and left to Chicago the business of producing Nobel Prize winners. Really, that City College failed in this new role is the more trenchant criticism. But the decline of meritocracy in favor of other goals is indeed the post 1968 trend of modern universities.

Woolridge offers the story of Venice

...Venice is one of Italy’s least favored cities when it comes to natural resources. Yet in the early Middle Ages it was the richest city in Europe. Venetian sailors — there were some 36,000 of them in the 14th century — popped up as far away as China. Venetian merchants invented the prototype of today’s joint-stock companies, the commenda. The same merchants used the proceeds of ingenuity and dynamism to build some of the world’s most spectacular buildings and patronize some of its most glorious arts.

This Manhattan of the Middle Ages owed its success in large part to its unusual openness to talent: Rather than a hereditary ruler, the standard at the time, Venice had a doge who was selected by the ruling families; rather than a royal court, it had a council of wise men whose job it was to advise — and constrain — the doge. Social mobility was commonplace. Daron Acemoglu of MIT and James Robinson of the University of Chicago Pearson Institute calculate that in government documents in the years 960, 971 and 982, new names made up 69%, 81% and 65%, respectively, of those recorded. Institutions became more inclusive: From the late 12th century onward, a hundred new members were added every year to the Ducal Council, which kept the doge under tight control.

Yet from the late 12th and early 13th centuries, the most powerful families took to rigging the system in favor of their children. In 1315 they succeeded in locking their position at the top of society for good by publishing the “Book of Gold” (Libro D’Oro) — an official list of Venetian noble families that was intended to keep the social order exactly as it was. Venetians called this La Serrata: the closure.

La Serrata spelled the end of Venice as the world’s most successful city-state. A self-satisfied oligarchy used its power to hoard opportunities and strangle innovation...

It's a nice story, but I don't think we need to go back to the Middle Ages to see the pattern over and over. Societies in which people who make important decisions are chosen by skill, not connections, prosper. I hope the book will have a longer list of more recent examples. Military examples seem to me particularly useful. The tension between giving command decisions by political connections vs. meritocracy is always present, and both military disasters and successes often traced to the results.

China

On to the dragon in the room:

The West — and particularly the United States — is turning against the meritocratic idea precisely when the greatest geopolitical rival it has ever faced, China, is embracing meritocracy more tightly.

Though China's government is run by "the insider dealing of this rather grubby elite,"

The Chinese educational system is determinedly meritocratic: Children compete to get into the best nursery schools so that they can get into the best secondary schools and then into the best universities. Examinations — most important, the university entrance examination or gaokao that students take at 18 — regulate the race to get ahead. This examination system, which draws on the tradition of civil service examinations that were administered for more than a thousand years, is now more geared to produce scientists and engineers rather than Confucian officials.

The Chinese Communist Party claims that it is trying to create a system based on “political meritocracy,” ...routinely recruiting the brightest young students into its ranks. The party’s Organization Department acts as a giant human resources department keeping records on high-fliers across the country. Provincial governors and university presidents are evaluated on the basis of their success in hitting a number of targets.... the West should at least prepare itself for the possibility that, albeit messily, China is turning itself into a giant Singapore, determined to use meritocracy as a tool of growth and social progress.

Equity and opportunity

Here is the paradox. The US paternalistic/aristocratic elite is running away from meritocracy under the banner of "social justice" and "racial equity." Yet meritocracy throughout history has been a great equalizer, a great leveler, the main way that excluded out-groups could get ahead. US universities originally adopted standardized tests and dropped racial quotas e.g. against Jews, and discovered a wealth of talent that did not come from "holistic assessment" at the time, i.e. did you go to Andover and Exeter and come from "the right" families. Standardized tests, and the meritocracy they represent was and is one of the great equalizers of opportunity and gates of social and economic mobility, allowing people to prove themselves.

I would argue that the idea of merit is one of humanity’s most successful privilege-busting inventions.

And I would agree.

The abandonment of meritocracy

Woolridge is naturally worried about trends in the US and the West:

Meritocracy is under assault from all directions. For progressives, it is a tool of White male privilege...

... San Francisco’s Lowell School is one of the most successful schools in the country and has given thousands of poor immigrant children (among others) a chance of an elite education. The San Francisco Board of Education has now banned it from using admission tests and introduced a lottery system instead, with the school commissioner, Alison Collins, pronouncing that meritocracy is “racist” and “the antithesis of fair.” Elite schools in New York and Boston are also under threat. Programs for the gifted and talented are being dismantled across the country. Universities have been reducing the importance of standardized admissions tests, with some going so far as to make testing optional, and putting more emphasis on “holistic assessment” instead.

...Companies are introducing formal or informal quotas in the name of “equity” (which is increasingly taking the place of equality of opportunity as a measure of justice).

...Meritocracy is one of the great building blocks of modernity, along with democracy, capitalism and liberalism. ... Is it really the case that meritocracy is a tool of White male privilege? W.E.B. Du Bois and Ruth Bader Ginsburg might have something different to say. Are lotteries or holistic assessments really better ways of distributing educational opportunities than standardized tests? Most of us would hesitate before flying with a pilot who had been chosen by lottery. Do we really want a society in which group identities trump individual abilities? A glance at the history of India or the former Yugoslavia suggests that we should at least pause before taking this leap.

This is a deeper point. Many political systems, both democratic and autocratic, carve up power and benefits based on group markers -- class, ethnicity, religion, race, parentage, caste. Not many who do so are meritocratic, prosperous, or peaceful.

Politics

Woolridge moves on to the political implications. This is interesting, but here I disagree a bit.

As we now know, "Capitalism and Freedom" was not entirely right, that economic growth would quickly lead to political freedom.

In the 1980s and 1990s, Western intellectuals convinced themselves that they had discovered a firm link between economic growth and democracy. ...policy makers welcoming China and Russia into the global order on the grounds that they would inevitably evolve into liberal democracies, and a group of neoconservatives even arguing in favor of “regime change” in the Middle East on the theory that democracy and prosperity would naturally replace the toppled regimes.

Woolridge thinks that meritocratic autocracies (an oxymoron!) pose a threat, given our self-inflicted wounds.

A cohort of rising powers are trying a different approach: linking meritocracy with autocracy of various degrees of hardness. Lee Kuan Yew recognized that the best way to enjoy Western levels of prosperity was not to introduce one-person-one vote but to borrow Western mechanisms such as an elite civil service, recruited through open competition and dedicated to corruption-free government, and graft it onto older Mandarin traditions of the rule of the scholar-bureaucrat. Since then a growing number of countries, led by mighty China, have tried to imitate his model....Countries as diverse as Rwanda and the United Arab Emirates have chosen authoritarian modernization over democracy.

Here I disagree. Yes, meritocratic autocracies can prosper for a while, but not for long. The autocracy part always eventually takes over. The group in power wants to keep power, and wants to keep their children in power (even communism turns to hereditary monarchy, see North Korea). Yes, Singapore. But it's hard to think of a prosperous meritocratic autocracy that has lasted as such for several transitions of power.

And if democracy is not automatically meritocratic, using political power to reward interest groups, autocracy is definitely not automatically meritocratic! Overall, it's hard to make a case that autocracy is more likely to be meritocratic than democracy. Cuba, Venezuela, North Korea, Russia... So Woolridge must have in mind some other secret sauce that produces a stable, long-term meritocratic autocracy, that survives changes of power over generations. I have no idea what that might be.

Democracy is not great at producing technocratic efficiency. Democracy is not great at stemming the army of rent-seekers. Indeed, democracy's greater responsiveness to desires of organized groups often means responsiveness to the desires of rent-seeking groups demanding protection. But democracy is good at the main thing it is designed for: stopping tyranny; Kicking the bums out when they get too entrenched.

Autocracy is not automatically meritocracy! It is usually the opposite. Democracy here in the US was invented to resist an exclusionary, anti-meritocratic autocracy, King George's UK. At a minimum, when you get a bad King all you can do is wait 30 years for them to die.

We also forget that autocrats are often a good deal weaker than democracies. A democratic government at least has a measure of legitimacy. Autocrats worry about waking up the next morning, and have to please the interest groups that keep them in power. It is not obvious that autocracy is better at quieting rent-seekers than democracy. Indeed, the opposite seems to be the case. Quieting rent seekers, avoiding tyranny, and avoiding a bloodbath when power must eventually change hands are three main problems of government. It is not obvious that autocracy does better on any of the three, despite democracy's tumult. And despite the occasional benevolent autocrat who produces some meritocracy and prosperity, for as long as one lifetime.

Though our woke elite aristocracy is moving headlong away from meritocracy, it's not obvious the voters are going along with it. The last election was very close, and a surprisingly large number of the supposed beneficiaries of noblesse oblige voted Republican. The meritocratic ideal, equality of opportunity not statistical equity of various groups, runs deep in America and surfaces every four years.

Here also I think Woolridge confuses the argument somewhat. The "-cracy" part of the word means rule, as in aristocracy, bureaucracy, autocracy and so forth. Meritocracy, strictly speaking, is about merit and skill as the selector for positions of power in government. But much of what Woolridge talks about is the looser sense of meritocracy -- whether decision-making positions in private companies are awarded on merit or on family contacts, ethic group, or other trust mechanisms. Meritocracy in universities is not about who controls the government. One can have meritocratic institutions in an autocratic and un-meritocratic government and vice versa.

His real complaint is that institutions -- corporations, universities, etc. -- in the West are moving away from meritocracy. As an economist, that always smells to me of lack of competition. A society can only afford non-meritocratic institutions if those institutions do not have to compete. That is in part political -- politics offers protection from competition, often precisely to allow non-meritocratic private structures. But the surest solution is not to try for a cultural revival of meritocracy in government-protected uncompetitive industries and institutions (universities). The surest solution is more competition, so institutions have no choice but to be meritocratic.

Thus I also disagree with Woolridge's political musings,

The West has thrived materially over the past century or so in large part because it managed to fuse democracy with meritocracy. America’s Founders understood that the reason for embracing democracy was not that it made us rich, but that it gave ordinary people a say in how their country was governed. They also understood that democracy could actually destroy prosperity if it wasn’t diluted with a degree of meritocracy. They built meritocratic restraints into the Constitution by giving senators six-year terms and giving Supreme Court justices jobs for life. They also put limits on the power of the state to interfere in the wider economy. One reason meritocracy flourished was that the U.S. made it easy for companies to claim limited liability without declaring an explicit public purpose. Another was that the U.S.’s lax immigration laws and vast territories attracted tens of millions of ambitious and energetic people from more crowded and tradition-bound societies.

Other Western countries pursued a similar policy of fusing meritocracy with democracy: France and Britain competed to produce the world’s most elite civil services, and the European Union imposed even more restraints on democratic overreach than the United States did. During the golden years of the 1980s and 1990s this formula worked because the democratic part of the formula generated political legitimacy and the meritocratic part generated good government and economic growth.

In part, this depends on what one means by "democracy." I analyze the same facts by noting the US is not a "democracy," in the sense that each issue is decided by 50% + 1 votes. We are a representative democracy, with strong protections for electoral minorities. Or at least we were -- we are trending to much more 50% + 1 and much less protections in the form of limited government and personal rights. But to say these structures are a "fusing of democracy with meritocracy" seems to me profoundly to miss the point of property and other rights, limited government, and structures that requires more than a transient 50%+1 majority to make huge changes, including transferring money and who gets what job responsibility around.

The current attack on meritocracy is not just a threat to the prosperity of particular countries. It is a threat to the prosperity of the whole democratic world. Prosperity will increasingly be identified with top-down authoritarian regimes that make up for their failure to give their people a voice by giving them jobs and improving their welfare.

Here I disagree again. Authoritarian regimes that buy support by "giving" jobs and handing out money -- most of them -- are neither meritocratic nor prosperous. A few countries, South Korea before it became democratic, Singapore, China for a while, combined meritocratic economics institutions and lower-level government, and generated prosperity. For a while. South Korea became democratic, and China is facing the conundrum that meritocracy at the top means loss of power. In any case, these countries allowed their citizens to make themselves jobs and wealth, with a quid pro quo of stay quiet politically. For a while. While the West may be trying to shoot itself in the foot, it is not clear that autocracies will provide a durable attractive alternative -- to anyone but the autocrats!

Democratic countries in turn will be associated with economic stagnation, populist revolts and racial disharmony, as people try to get ahead in a low-growth environment by emphasizing their membership in defined groups rather than their individual merits.

This is indeed our danger. But those pesky peasants with pitchforks are darn meritocratic at bottom.

All in all though, it's a very provocative idea that meritocracy has been a building block of prosperity, one that many countries struggle to achieve, and that we are now deliberately throwing away.

Updates

In response to thoughtful comments below. Yes, meritocracy is about whether people are selected for positions of decision making or power based on skill, talent, and preparation. This is not about redistribution. One can have a very meritocratic society with lots of redistribution. The question is whether a society (and government) redistributes by handing out checks, by giving people high paying jobs of little consequence, or by allocating actual decision making powers based on considerations other than skill. Those who pursue the latter have a point. Social status and power in society are about more than money, and tokenism is pretty repugnant. A meritocratic redistributionist society must face the dilemma of keeping enough incentives for the talented to put in the hard work to acquire skills, and to match their talents with opportunities; and for the talented and skilled to put in the incredible hard work it takes to start, innovate and manage companies. But all that is for another day. This post and essay are not about redistribution.