When Smart Economists Make Bad Arguments

The Danger of Giving Intellectual Cover to Authoritarianism

John Cochrane’s October 2025 Wall Street Journal piece, “Trump’s Monetary Policy Desires Aren’t Crazy,” represents a troubling trend: sophisticated economists providing intellectual respectability to fundamentally dangerous proposals.

The policy world is aghast, but President Trump’s desires for monetary affairs aren’t as crazy as conventional wisdom portrays.

I see three broad desires: Interest rates should be lower, in part to lower interest costs on the debt. The Federal Reserve should be less independent, subject to more democratic accountability. And “exorbitant privilege” or “reserve currency status”—that the world wants to hold our money and buy our debt, sending us goods in return—damages the U.S.

While Cochrane is correct that some theoretical questions about monetary policy deserve nuanced discussion, his op-ed conflates legitimate academic debates with Trump’s crude power grabs, lending unwarranted credibility to positions that threaten central bank independence and economic stability.

The opinion´s central flaw is treating Trump’s “desires” as coherent policy positions worthy of serious economic analysis, when they are transparently self-serving political demands designed to serve presidential interests rather than national welfare. Below the fold I discuss Cochrane´s claims.

Interest Rates: Theoretical Ambiguity Meets Political Reality

Cochrane’s most academically defensible point concerns the relationship between interest rates and inflation. He correctly notes that New Keynesian models can produce counterintuitive results—that permanently lower interest rates might eventually lower inflation if fiscal policy remains unchanged.

He also accurately observes that the empirical relationship between interest rates and inflation is less clear-cut than conventional wisdom suggests.

But this theoretical nuance is utterly irrelevant to Trump’s actual proposal.

Trump doesn’t want lower interest rates because he’s carefully studied New Keynesian DSGE models and concluded that the neo-Fisherian channel might dominate. He wants lower interest rates because:

1. He believes it makes him look good economically

2. It reduces interest costs on the national debt he’s exploding

3. It potentially inflates asset prices

4. It serves his immediate political interests

Cochrane’s sophisticated theoretical discussion provides intellectual cover for what is fundamentally a demand that monetary policy serve the president’s political needs.

Moreover, Cochrane’s claim that “if a government doesn’t expand fiscal policy, the record is less clear” about low rates causing inflation conveniently ignores that Trump is simultaneously pushing for lower rates while increasing the deficit.

The administration isn’t proposing the carefully controlled thought experiment Cochrane describes—fixed fiscal policy with lower rates to test neo-Fisherian theory. It’s proposing fiscal profligacy combined with monetary accommodation, precisely the combination that does produce inflation.

Fed Independence: False Equivalence and Institutional Blindness

Cochrane’s discussion of Fed independence commits the cardinal sin of false equivalence. He writes: “’democratically accountable’ is the same thing as ‘politically influenced’ when the other party is in power”—as if these are morally equivalent concerns rather than fundamentally different threats.

There is a massive difference between:

• The Fed maintaining independence from political pressure to pursue its dual mandate

• A president demanding the Fed lower rates to help his reelection and reduce costs on his debt

Cochrane acknowledges this implicitly by noting the Fed has “strayed into climate and inequality” and engaged in “political” actions. His solution? Either make the Fed “democratically accountable” (Trump’s preference) or reform it to a “narrow, enforced and accountable mandate” (Cochrane’s preference).

But this presents a false choice. The real question isn’t whether the Fed should be reformed—reasonable people can debate its scope. The question is whether the president should be able to pressure the Fed to set interest rates based on political considerations. The answer to that question should be an unequivocal “no” from any economist who values macroeconomic stability.

Cochrane’s suggestion that “pulling up the drawbridge, hoisting the ‘independence’ flag, and pouring boiling scorn on the barbarians at the gate isn’t a viable response” is deeply mistaken.

When the president openly demands the Fed lower rates to serve his political interests, when he threatens to fire the Fed chair for insufficient loyalty, when he treats monetary policy as a tool of presidential power—yes, the appropriate response is to defend independence vigorously and pour scorn on these demands.

This isn’t academic debate; it’s institutional defense against authoritarian encroachment.

Cochrane’s framing suggests that because the Fed has become too expansive in its operations, we should be open to Trump’s crude political interference. This is like arguing that because the Supreme Court has become too political, we should let the president fire justices who rule against him. The solution to institutional overreach is institutional reform, not abandoning independence entirely.

Reserve Currency Status: Mercantilist Nostalgia Dressed Up

Cochrane’s discussion of “exorbitant privilege” is perhaps the most disappointing because it resurrects long-discredited mercantilist fallacies while claiming to find “some merit” in them.

His argument proceeds through historical analogy: Spain and Portugal squandered their gold and silver by importing consumer goods rather than investing. Therefore, perhaps America’s reserve currency status—which allows us to “print money, send it abroad, and get consumer goods in return”—has similar downsides.

This analysis is economically illiterate at multiple levels.

First, the Spanish and Portuguese experience had nothing to do with “reserve currency status” and everything to do with the resource curse, Dutch disease, and institutional failures in property rights and taxation.

The influx of precious metals caused inflation, made domestic industry uncompetitive, and funded consumption by elites rather than productive investment. This is not analogous to reserve currency status.

Second, reserve currency status doesn’t mean we “print money and send it abroad” to get consumer goods. It means:

• Lower borrowing costs for government and private sector

• Reduced exchange rate risk for international transactions

• Seigniorage revenue from currency held abroad

• Greater policy flexibility in crises

These are unambiguous benefits. The “cost”—that foreigners want to hold dollars and buy Treasury securities—is not actually a cost. It’s like complaining that your neighbors want to lend you money at below-market rates.

Third, the claim that trade deficits financed by borrowing eventually require payback misunderstands both the nature of sovereign debt and the sustainability of trade imbalances.

The United States has run trade deficits for decades while accumulating dollar-denominated liabilities. These liabilities are sustainable precisely because of reserve currency status—we owe debts denominated in currency we control. This certainly can stop being true if the government “messes-up”.

Cochrane acknowledges that “tariffs, capital controls, securities taxes and industrial policy will all make matters worse” and suggests “get out of the way instead.”

But Trump isn’t proposing to “get out of the way”—he’s proposing exactly those counterproductive policies!

Cochrane’s nuanced economic discussion provides cover for mercantilist policies that he himself recognizes are harmful.

The Central Problem: Confusing Academic Debate with Political Reality

Throughout the essay, Cochrane conflates legitimate questions for academic seminars with dangerous proposals for actual policy implementation.

Yes, economists should debate:

• The precise relationship between interest rates and inflation

• The optimal scope of central bank operations

• Whether reserve currency status has underappreciated costs

No, economists should not legitimize:

• Presidential demands that the Fed lower rates for political reasons

• Threats to Fed independence to serve executive branch interests

• Mercantilist policies that reduce American living standards

Cochrane’s error is treating Trump’s crude political demands as if they were sophisticated economic proposals deserving serious engagement. They aren’t.

Trump’s interest rate demands aren’t motivated by careful reading of New Keynesian literature or neo-Fisherian theory. His attacks on Fed independence aren’t sophisticated institutional critiques. His complaints about reserve currency status aren’t based on deep understanding of international monetary economics.

They’re authoritarian impulses dressed up in economic language.

The Broader Danger: Normalizing the Abnormal

The real danger of Cochrane’s essay isn’t its specific economic claims—many of which are defensible in isolation—but its broader effect of normalizing Trump’s attacks on institutional independence.

By treating these demands as worthy of serious consideration rather than immediate rejection, Cochrane provides ammunition to those who would subordinate monetary policy to political control.

When a respected economist (formerly) from the University of Chicago Booth School of Business and now at the Hoover Institution writes that Trump’s desires “aren’t as crazy as conventional wisdom portrays,” it gives comfort to those dismantling institutional safeguards.

This matters because institutional independence isn’t just some technocratic nicety—it’s essential for macroeconomic stability.

The historical record is unambiguous: countries where central banks are subject to direct political control experience higher inflation, greater macroeconomic volatility, and worse long-run economic performance.

Conclusion: When Theory Enables Bad Practice

John Cochrane is a sophisticated economist who has made important contributions to financial economics and monetary theory. But this essay represents sophisticated economics in service of bad politics.

The piece’s fundamental problem is treating context-free theoretical propositions as if they’re relevant to Trump’s actual proposals. Yes, the relationship between interest rates and inflation is complex. Yes, the Fed’s scope of operations deserves scrutiny. Yes, reserve currency status has some costs alongside its benefits.

None of this justifies or excuses Trump’s demands for political control over monetary policy.

When authoritarian leaders demand institutional subordination, the appropriate response from economists isn’t to stroke their chins and say “well, there are some interesting theoretical questions here.” It’s to defend institutional independence unequivocally and explain why these demands threaten economic stability.

Cochrane’s opinion piece fails this test. By providing sophisticated economic cover for crude political demands, it normalizes attacks on central bank independence that should be vigorously opposed. The opinion piece exemplifies a dangerous trend: smart people making bad arguments by confusing academic nuance with political reality.

In the current environment, where institutional norms face unprecedented pressure, economists have a responsibility to defend those institutions rather than providing ammunition to those who would dismantle them. Cochrane’s essay does the opposite, and that makes it not just wrong but dangerous.

Academic debate about monetary theory is valuable. Providing intellectual cover for authoritarian power grabs is not. Cochrane should know the difference.

PS. After reading Cochrane’s fuller blog post, my critique gets harsher, not softer. The key revelations:

What Makes It Worse:

1. He admits the theory doesn’t apply - Repeatedly emphasizes theory requires constant fiscal policy, then admits Trump is exploding deficits

2. He personally believes the opposite - “I believe the low rates cause inflation, despite the equations of my models” - so he’s defending Trump using theory he thinks is wrong!

3. The evidence he presents undermines his case - The Ramey graphs show essentially no reliable relationship between rates and inflation

4. Every condition is violated:

   • Theory requires permanent rate changes (Trump has less than 4 years)

   • Requires constant fiscal policy (Trump exploding deficits)

   • Requires no supply shocks (Trump doing tariffs/deportations)

   • Requires credibility (Trump is chaos)

5. The historical examples don’t help - Japan/Turkey/Brazil either don’t apply or actually confirm the danger

6. The disclaimers are damning - His final parenthetical trying to separate Trump’s “ideas” from his authoritarian actions is intellectual cowardice:

(I do not discuss here his efforts to fire Lisa Cook and get Jay Powell to resign. And please, just because I’m willing to listen to three Trump propositions does not imply an endorsement of everything he does. “What about when Trump did x?” is not a logical reply. Let’s stick to the point and what I actually say.)

The Core Problem:

Cochrane knows the theory doesn’t apply, knows Trump doesn’t meet the conditions, personally believes Trump is wrong, but provides sophisticated theoretical cover anyway because he wants to position himself as not being a “Trump-hating Democrat.”

My fellow macroeconomists, mostly Trump-hating Democrats or Never-Trump Republicans, are mostly treating this monetary policy news as if it is completely delusional. Unlike the economic effects of tariffs, though, that’s not really honest. We would do better to have a respectful debate.

This is intellectual dishonesty with footnotes.

The blog post reveals this isn’t naive confusion about theory vs. reality—it’s deliberate use of theoretical sophistication to provide political cover while knowing better.

Cochrane isn’t innocently confused; he’s deliberately choosing to blur the line between academic theory and dangerous political reality for the sake of contrarian positioning.

Oh! And please subscribe