Russ Roberts

Lee Ohanian, Arnold Kling, and John Cochrane on the Future of Freedom, Democracy, and Prosperity

EconTalk Episode with Lee Ohanian, Arnold Kling, and John Cochrane
Hosted by Russ Roberts
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Continuing Education... Alvin ... Continuing Education... Ohania...

Lee Ohanian, Arnold Kling, and John Cochrane talk with EconTalk host Russ Roberts about the future of freedom, democracy, and prosperity. Recorded in front of a live audience at Stanford University's Hoover Institution as part of a conference on Magna Carta, the three guests give their perspective on the future of the American economy and the interaction between politics and economics. Each guest makes a brief presentation at the start followed by a moderated conversation.

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0:33Intro. [Recording date: June 29, 2015.] Russ: Gentlemen, welcome back to EconTalk. This is part of a Hoover Institution conference on the 800th birthday of Magna Carta. Our topic for today is the next 800 years--or maybe a little less. And I would remind listeners who are interested, go back to the Nicholas Vincent episode of a little while back--we'll put a link up to it--where you can get some background on the Magna Carta and the last 800 years. We're going to try to look forward today, in this session. We're going to talk about the future of freedom, democracy, and prosperity. Certainly the spread of freedom and the restraints on political power that have emerged over the last 800 years since Magna Carta have something to do with the prosperity and freedom we've enjoyed over that time period. What this session is about is what might be the future of prosperity and the political constraints in that time, particularly in the United States. I've asked each of the three participants to make a brief set of observations to get us started; then I will moderate a conversation between them.
1:45Russ: We're going to start with Lee Ohanian. Ohanian: Thanks, Russ. So, in terms of thinking about economic freedom and prosperity I'm going to begin by noting that a number of economists of the last 30 years, including Gary Becker and Milton Friedman, who were Hoover Fellows, worked on trying to quantify what economic freedom is and trying to connect that with prosperity. And, Becker and Friedman's work has been updated and continued over time: there's a number of economists who continue to measure economic freedom and quantify that. And the purpose of this is to try to track how economic freedom changes over countries and over time. These measures are typically based on the size of government, regulatory burdens, the opportunity to trade with other countries, protection of property rights, and the conduct of monetary policy. Now, most economists who try to measure economic freedom have the United States typically among the top three countries or regions as recently as 2000. So, both Cato and Heritage rank the United States third behind Hong Kong and Singapore. Today, both Cato and Heritage rank the United States around 13th or 14th, in the category of countries that's no longer free but is considered mostly free. And this decline in the United States's ranking is really the result of the expansion of government's role in the economy, which includes higher spending and more regulation, and subsidies for large enterprises. Now, what I'm going to focus my talk on is that a lot of this expansion of government was advertised by policymakers as being necessary to restore economic growth and the economy back to trend. But these changes have coincided with the worsening of the U.S. economy. So, today real GDP (Gross Domestic Product) per capita is about 12% below trend--that's about $2 trillion. Part of this shortfall is because unemployment is about 5 and a half million jobs below the level that would prevail if employment as a share of the population returned to its pre-recession level. Now this large a [?] in jobs has been discussed by a lot of people but what's perhaps more troublesome in my mind is that productivity, which is the other part of economic growth, is way below trade. So, let's treat that business sector, labor productivity as growing in the average rate of about 0.7% a year in the last 5 years, compared to a long-run average of 2.5% per year. Total factor productivity growth in the business sector is also growing about 0.7% per year. And this, what I'll call a deficiency of productivity growth, is really unprecedented in the history of the United States, and it's occurred during a period during which the rate of business startups has dropped considerably. The startup rate of new businesses has declined about 20% since 2009, and I'm going to make a series of observations that suggest to me that the slow rate of new business formation is a major negative factor for productivity growth and economic growth. And there are really two points I'm going to make here. One is about the life cycle of businesses and organizations, and the other is about who does innovation. So, a lot of important innovations historically have come from startups and very young businesses, which ranges from the telegraph and telephone, railroad, airplanes, autos, air conditioning, many applications of the Internet, wireless communication; and maybe not surprisingly new business formation is critical for job creation. If one takes away, just mechanically takes away the job creation done by startups, then in an average year--not during recession, just an average year--the U.S. economy typically experiences net job loss. So another way of saying that is large incumbents such as GM (General Motors), IBM (International Business Machines), AT&T (American Telephone and Telegraph), they employ a lot of people, but on average those organizations shrink over time. This is the only country that's had persistent economic growth for 2 centuries, and the reason is because new businesses ultimately add jobs [?] old businesses. Now, this decline in the start rate has occurred during a time in which economic policy has fostered promoting and protecting large incumbent enterprises. And it's coincided with regulations that in my mind have more broadly raised the cost of starting and growing businesses. So, since 2008, policies have been increasingly focusing on propping up large, old establishments that are deemed too fail. This includes [?] bailouts of autos and financial intermediaries. But this also concludes the continuation of subsidies that benefit politically connected groups. There's about $20 billion each year in agricultural subsidies. Many of these date back to the New Deal in the 1930s. These were originally intended for small farmers, though today most agricultural subsidies are paid out to large corporations that bear little resemblance to the family farmers of yesteryear. We have about $30 billion in energy subsidies. My favorite one is subsidies to wind power. Subsidies to wind power can be sufficiently large that on some occasions, when there is a lot of wind, wind farms actually can make money by paying electricity producers to take their wind power. Now, typically about half of business subsidies are paid out to [?] industries, which are finance, utilities, communications, and energy. And not surprisingly these industries are among the biggest government lobbyists. Now, lobbying and subsidies I think in my mind highlights attention of a free society we're here talking about today. Free societies create prosperity, which creates wealth. And this in turn creates incentives for groups to try to appropriate that wealth. Now, lobbying has been interpreted in various court rulings as constitutionally protected free speech, and as a method of addressing government for the redress of grievances. So, ironically, the foundations of freedom that have created a favorable environment for individuals and organizations to invest and produce, provide opportunities for others to extract returns from those investments and outputs. Now, some of the regulations we see today, in my view, are perhaps even more inefficient than ones we've seen in previous years. There's Dodd-Frank in the financial sector, which is unique piece of legislation. It doesn't provide rules directed at individual's organizations which is the intent of the legislation. Rather it is a directive for bureaucrats to create more bureaucracies without particularly specific limits. Take, for example, the Consumer Protection Bureau, within Dodd-Frank. The Consumer Protection Bureau gives regulators the right to punish financial firms who engage in "abusive practices." But my understanding is that abusive practice has no legal definition. Which means the term 'abusive' is whatever regulators want it to mean. Consumer Protection Bureau also gives which financial products can be offered and to whom, and at what price. Now you might think that Dodd-Frank only pertains to financial issues. That's certainly what I thought when I read about Dodd-Frank. But Dodd-Frank also has a provision that requires manufacturers who use minerals from in and around the Congo to provide SEC (Securities and Exchange Commission) regulators with information on the acquisition of these minerals and in fact on their entire supply chain. The U.S. Chamber of Commerce estimates that this will affect over 100,000 businesses, and the National Association of Manufacturers estimates compliance will cost $9 billion to $16 billion. Now, certainly no one knew what Dodd-Frank would be when it was passed. Three years after it was passed, we still didn't know what Dodd-Frank would be because more than half of Dodd-Frank remained unwritten. Today after nearly 5 years there's still more to know about Dodd-Frank that remains unfinished. What impact is Dodd-Frank having? I'm going to cite two studies, one done by survey data from the New York Fed that's showing a significant impact on small businesses. This includes [?] lending restrictions, less competition among lenders and a decline in the number of community banks which are banks with less than $10 billion in assets--and these are the banks that disproportionately lend to small business. Another recent study found that the decline in community banking accelerated considerably in the last few years, reflecting economies of scale in managing new regulation associated with Dodd-Frank. Small Business Administration says that lending to small businesses has declined by about 20% since 2008, which was of course the year of the Great Recession. And in 2013 only 1 new bank entered the banking industry. So you look at the outcome of Dodd-Frank--declining competition, fewer banks, lack of entry, higher costs, regulators with broad mandates who make vague and far-reaching rules--this represents a sharp departure from the clear and specific limits on government. Another area that I'm going to talk about just briefly is labor market restrictions. So, recently private sector unionization has declined over time. Several states, including Michigan, Wisconsin, and Indiana have become right-to-work states. I'm going to call this 'individuals wanting more choice in labor markets.' But some governments are fighting back. So, we see minimum wage targets of $15 an hour in LA (Los Angeles), Seattle, and other cities. And these are defined as living wage laws. And living wage laws often subsidize unions, as union shops are often exempt from living wage regulations. Union exemption are rarely discussed when living wage legislation is presented. This includes National Labor Relations Board that attempted to block Boeing's attempt to expand production in South Carolina. It includes California's decision last week to define Uber drivers as employees rather than as independent contractors. It includes New York's decision of taxi enforcement agents seizing nearly 500 Uber cars over a 6 week period for what they termed 'illegal street pickups.' It includes a growing number of occupational licensing restrictions that impact nearly 30% of all occupations, including ones that I'm sure you are worried about, such as hair braiders, tour guides, horse massagers, interior decorators, and fortune tellers. I'd like to see the fortune teller licensing exam. All the themes that I've discussed here are in Milton Friedman's wonderful 1962 book, Capitalism and Freedom. Friedman argued that freedom and prosperity go hand in hand, and that society must constantly limit government's natural inclination to grow, expand, and overreach. This suggests that the future course of economic freedom, democracy, and economic growth depends on whether we continue with current policies or whether we choose to expand freedom, which is what we did as a country beginning in the late 1970s. I remain optimistic if for no other reason than the United States has always found a way to do this. But I think what this suggests is understanding the political forces that lead to whether coalitions can be formed that prefer this outcome becomes the most important issue regarding future U.S. economic growth and economic freedom.
12:59Russ: Arnold Kling. After that cheerful--there was a note of optimism in there at the end. Lee, I appreciate that. Albeit a brief one. Arnold? Kling: Okay. Well, thanks, Hoover Institution, for inviting me to speak. The topic is the future of freedom, democracy, and prosperity. And we're just talking about the license required for a fortune teller; I wish I had one. But this topic was so imposing that I decided it was beyond me and I decided to re-read North, Wallis, and Weingast and try to adapt that framework as best I can. And I'm not even the most qualified person in this room to adapt that framework. I think of it as there are limited access orders and open access orders. A limited access order, you have a ruling coalition that has all the political rights and economic opportunity in the state. And it's stable because the people in the ruling coalition are collecting the rents from having the monopoly of economic opportunity and political rights; and everyone else is powerless to do anything about it. In an open access order, everyone has some access to economic opportunity and political rights. And one test of that is, you can ask, who can form an organization where the purpose of the organization is to compete against incumbent interests? Political interests or economic interests. And in the limited access order, that's almost no one. You are not allowed to compete in an organized way against incumbent interests. And in an open access order, it's [?] to everyone. So, that's kind of my take. And the transition from a limited access order to an open access order is quite difficult, as we found in Iraq or in Egypt. And part of the reason for that is that to get to an open access order you need to build up a lot of layers of individual beliefs, cultural norms, as well as formal institutions--some of the things that I think Jim Caesar[?] was kind of referring to, the kind of cultural support. And the way I think of Magna Carta is a sort of part of that layer of cultural support. So it isn't so much what the document does in 1200 but what the cultural sort of reverence if you will of that document does 500 years later and beyond that helps underlie the open access order. So, I'm going to be the relative optimist in this session, because I think that, as I read North, Wallis, and Weingast I couldn't come up with good ways to destabilize or easy ways to destabilize an open access order. First of all, you have, kind of by definition, everyone having a stake in the system. And secondly, just to get to an open access order you have all these layers of cultural support--individual norms, cultural beliefs, and formal institutions. And those provide for stability. So I think you have to be pretty brave to forecast that an open access order is going to sort of degenerate. And I think the history is that open access orders have remained quite stable. But let me just throw out one scenario, just a possible pessimistic scenario; and that's based on the chronic deficit spending and unfunded liabilities. At some point, when you've promised to pay people benefits and at the same time you've promised your bond holders that they are going to be repaid, and you are not going to have enough money to pay them, there's going to be a conflict. Now, we see that conflict in Greece. And Greece can still find more other-people's money. But the United States is too big to find enough other people's money. So, one sort of maybe fictional type scenario would be that you would get a sudden sovereign debt crisis in the United States that would take place in an environment where the political feelings are frayed--there's a lot of controversy; people no longer see the legislators and the executive as having legitimacy for solving their problems. They take to the streets. There's fighting; there's violence. And at that point the people are ready to turn to some kind of dictator to resolve the violence. So that's kind of a fictional scenario. There's certainly you can see either economic or political ways to avoid it. But that would be sort of my one pessimistic scenario relative to maintaining our open access order. Which, if we do maintain our open access order, I think eventually we do recover prosperity and we sort of maintain freedom.
18:46Russ: John Cochrane. Cochrane: Thank you. So, we're gathered to celebrate the Magna Carta as the beginning of that tumultuous 800 years towards the rule of law. We haven't really said why we like rule of law so much, which I thought I would start with reflection on. The rule of law of course is there to protect your wealth. And your prosperity. But I think even more importantly it's there to protect your political freedom. Fundamentally rule of law means that the law will not be used for political advantage: that you can speak out and support the wrong candidate; you can hold unpopular opinions. Yet you can still run your business; you won't be sent to jail. The power of the legal system won't be used against you to coerce your political support for people in power. Now, as Richard[?] said briefly on the way out, God's in the details, or maybe the devil's in the details. Russia says they have the rule of law. They have courts; when they take a dissident or a rock group and throw them in jail, they have a trial, and they are found guilty of hooliganism. What do you mean, no rule of law? Well, the rule of law is in the details. It's not in the appearances. It's in the details of how the laws are made and the elaborate rights--the rights to appeal, to see the evidence against you, to confront your accusers, and so on and so forth. Which began in the Magna Carta, and of course took hundreds of years to develop. As I look out now, the threat that I see to the rule of law and to our consequent political as well as economic freedom, comes from the regulatory state. And by that I mean, mostly regulation; some law; but the vast attempt of our government to control economics from the big Dodd-Frank and Obamacare down to the small regulations against Uber and occupational licensing for hairdressers, and so forth. This enterprise has vast power. It's increasingly politicized. And right now it's used already to silence opposition to the regulatory fiefdoms. What bank dares to speak out against the Dodd-Frank Act? What health insurer dares to speak out against Obamacare? Or the Health and Human Services Department and increasingly against the administrations that support them. These are the barons of our era. And clearly already using their power for their political support. But now, I think we see a trend that the larger political system has realized the great power of this regulation to enforce its political goals. Lois Lerner of the IRS (Internal Revenue Service) is only the beginning. The system that seems to be emerging, that I fear is emerging, is a system of two-way capture. Businesses get carved up into cartels of large businesses, protected from competition, yes, but not a cozy capture. They had better do what the administration and the regulators want, or else criminal prosecutions and multi-billion dollar settlements await those who step out of line. We're not there yet; but this regulatory state has expanded dramatically, and as I look at the structure and the trend, it seems to me more and more ripe for that kind of corporatist system and for the loss of our political freedoms in the regulatory state. Now, let me try to be a little specific. Because as we think about regulation, what are some of its features that lead to this potential loss of political freedom, to the ability of the regulators to demand our political support? Rules versus discretion: Does the regulator apply some rule or does the regulator have sort of the right to do whatever they think like? Rules or laws like no unreasonable stuff are very different from laws like your house has to be back 6 feet from the property line. The latter may be silly but at least you know what it is. Discretion is arbitrary and gives the regulator more power to demand your political support in return. Is the regulation simple and precise or vague and enormously complex? See Dodd-Frank Act or Obamacare. Complexity of course gives more power to the regulator to do what they want with you, if you step out of line. Is the rule knowable? Written down somewhere? Is it knowable in plain English? Or is it something both complex, requiring fixers, requiring friends--usually people who just left the revolving door from the agency? Or does its application involve ex-post prosecutions rather than ex-ante knowable rules? If so, of course, much better to just stay on the good terms with the regulators rather than read the rule book and know that you're okay. Are rules enforced commonly? I think all of us have a driver's license; that's a commonly enforced rule. Or arbitrarily? Are they regulations that just about everybody's violated and then every now and then somebody gets the Department of Justice on them about it? Obviously arbitrariness gives the regulator much more power to demand your political support. Do you have the right of discovery--to see evidence calculations? Or is the regulatory thing done with the equivalent of secret evidence? Many of our regulations now--if you ask the EPA (Environmental Protection Agency) for approval they do their thing and you basically don't have the right to see how they did it. In fact, is it a rule book or a request for permission? Is there a rule book you read and say, 'Okay, this is what you do,' or do I have to submit my plan and the regulator blesses it, as the EPA has to bless. Obviously, the EPA, the FDA (Food and Drug Administration), the Consumer Financial Protection Bureau, giving their blessing to their product, the requirement to get blessing ex ante makes it much more amenable to a political [?]. Do you have the right to appeal? Or is the regulator legislator, judge, jury, and executioner all in one, as is the case in most of our regulations? How are regulations made? There are of course structures to keep the political administration away from the regulatory writing and decisions, but those political, those structures are weak to start with and falling apart in many ways. Even the weak legislative restrictions on what the regulations can do are increasingly ignored by our regulators as they write them. Speed versus delay: One of the increasing tricks of our regulations is simply to take years and years to make up their minds. That alone will ruin a project from someone. And of course you dare not speak out, because they can just delay your other applications waiting for you. Essential element to a new Magna Carta ought to be a right to a speedy decision. If the decision isn't rendered in x time, you have the right to proceed. And of course how is the law, regulation made? Has the consent of the governed, the representation of the governed in the creating of laws? The way regulatory agencies write laws, they have the right to just do whatever they want. Now, many of them have processes, there's [?] and so forth. But in the end they are just asking for your opinions, which they can ignore if they feel like it. Law of course is in its problems [?] in these areas as well, but in the 800 years of people wary of tyrannies since the Magna Carta there were many procedures to stop these problems. Regulation at last has exploded since the New Deal. In a cultural environment wish people trusting in arbitrary power and has much fewer of these constraints and rights that gave us the rule of law, and therefore the protection for that law to be used for political reasons. Now, those are sort of general thoughts. Without spending the whole afternoon on how terrible regulation is [?], I thank Lee for providing half of that for me. Let's just take a couple of examples. Financial regulation isn't much in the papers but that's where the money is, as a famous bank robber once said--a good place to look for this. And that of course embodies most of these problems. Just one example is the stress tests, that for the moment very honest people at the Fed are doing. But look at the structure. This isn't something I'm complaining is now already being used, but it's just a structure ripe for the picking. The regulators at the Fed just make up whatever they want the banks to do; they don't tell the bank what it's going to be; and then they just, you know, make up the rules differently. Billions of dollars are on the line. How long will that last honestly? There's a hundred--as far as discretion--hundreds of regulators are in each large bank and need to approve each deal as it comes. And of course a good place to go after a regulator is to the bank to help them to persuade the regulator to sign off. It is discretion at its utmost. You've seen the big suits with billion dollar settlements. And most of them on unknowables. An example is the recent statistical discrimination suits, where several financial companies were accused of statistical discrimination based on the last names of people to whom people they lent money to had lent more money. Essentially enshrining ethnic jokes into law. Ask yourself: Did the Department of Justice give the statistical discrimination program to the companies ahead of time so they could check if they are in compliance with the law? Obviously not. This is as much as a bill of attainder as you could ask for, invented after the fact. And of course anybody is open to that sort of thing. They know the message: Don't anger the people in charge. The ACA (Affordable Care Act)--Obamacare--you know, any regulation where we need a 1327 waivers is obviously ripe for, you better go along to get along. The FDA approval for drug devices--certainly, if you want approval, you better not talk too loud. The EPA--where to start? You have to ask permission for all of your projects. It takes forever. And you're not allowed to challenge the findings. The Internets: Title II, Rate Regulation: 'reasonable rates will be applied. Get along with them. The [?], the EEOC (Equal Employment Opportunity Commission) waiting to take you to court. The last and most dangerous: E-Verify, part of most of the immigration deals. The United States federal government is going to have to give it's prior approval for every person in this country to have a job. [?] go wrong with that. Again, this is just structure ripe for the picking. A trend. I'm not accusing us of being there. But you can see that the structures that gave us rule of law and law are much weaker and in great danger in the regulatory state. The answer of course is a new Magna Carta, a new Bill of Rights, for the regulatory state as it has evolved and remains in danger for the legal state.
31:02Russ: Thank you, John. When we talked about this session beforehand, prior to the conference, I summarized John's position, being a New England Patriots fan, as: 'We're all Tom Brady now.' So, we're at the mercy of powerful administrators who, when we appeal, they are the judge and jury and we have little recourse. Arnold-- No one laughed at that really much. It was supposed to be humor. Cochrane: The danger being: That's bad enough, but then the danger being and the person deciding you better get along with the person deciding. You better not speak out against the system. You better vote for the party in power. Russ: Well, the commissioner can put you in jail, in addition. And take your wages, garnish your wages. Arnold, are you as worried as Lee and John are about the regulatory state, either politically or economically? Kling: I share their concerns about the practices and industries that they are talking about. I will once again refer to North, Wallis, and Weingast; and they have, I think it's [?] most intriguing idea, and I'm not sure I agree with it, which is that part of the characteristic of an open access order is that you get political and economic entrepreneurs that deal with problems. So, you think of Alfred Kahn as sort of an entrepreneur in deregulation in the 1970s and 1980s. You can think of Ronald Reagan as a political entrepreneur. And, what I find a bit challenging about believing that is that the conventional view is that concentrated interests trump the general interest. That's the public choice [?] Russ: Problem. Kling: Yeah. Classic public choice problem. And in effect, North, Wallis, and Weingast are saying some political entrepreneur can come along and overcome that. And I guess--so I'm not sure about that. I just wonder if our political environment has come to the point where the rulers are just too smart for the ruled, in the sense that people--why does freedom decline? It's because people, I think, fear other people's liberty--I call it, fear of others' liberty or [?]. And if the politicians can create enough fear in the public of other people's liberty then they can get support for this regulatory state; and then you'd have this vicious cycle that John brings up: that is, the regulators become so powerful that no one wants to challenge them. Because if you challenge them, they'll punish your business, or whatever. So, have we reached a point where a political entrepreneur trying to change this system really couldn't succeed? That there's sufficient ability to manipulate people's fears to maintain a regulatory state, and a political entrepreneur, economic entrepreneur can't overcome it? That's my concern.
34:41Russ: I'm going to push back against Lee and John and let them defend themselves, with a different approach, which is: If you look at GDP over the last 75 years or so, it's pretty steady growth. It's steady growth--this is Ed Leamer's observation, not mine, previous guest on the program. We have steady growth in high tax rate regimes, low tax rate regimes. During this time period we've had a steady growth of government which depresses growth greatly but it doesn't seem to have slowed down the economic engine. We have a growth in the regulatory state that you're talking about: doesn't seem to have slowed down the economic engine. You have to be arguing that there's some tipping point that we've now crossed or that we are about to cross, that we are going to get to. Do you want to defend your views. Guest: I think he's just wrong on the facts. Russ: I'm wrong on the facts? Sorry. Guest: Growth has been slowing down steadily. Russ: Well, it's slowing down since--we've had a mediocre recovery from the Great Recession. The question is, is that due to the increase in regulation or is it something special? Guest: No, 1973, the Great Productivity Slowdown; a little bit of a rebound in the late 1980s, thanks to-- Russ: Massive demographic changes over that time period may explain that. It's hard to know. Greatest explosion of technology innovation coming out of this part of the country. Lots of good things. Guest: It could be a lot better. Guest: What I would say is, I think the key statistic is that productivity growth is--I mean, it's at .7% per year. The historical average is 2.5% per year. So, if we have productivity growth that is a percentage point higher than that, I wouldn't be nearly as concerned as I am. But, I mean, what distinguishes, as we all know here, what distinguishes the United States from basically every other country is we're the only society that's had 2 centuries of almost constant productivity growth. And now we have 6 years of where we are having productivity growth in which, instead of business output per worker doubling every 28 years, it would double roughly every 100 years. So I think that's the most depressing and important statistic that we're looking at right now. Guest: I want to tie this in with what Arnold says, as well. Our long-term budget outlook depends vitally on growth. The fact that we seem to be heading into a 1.5-2% new normal growth forever, versus, say, 4%, that's it. You want to pay back the debt, pay out Social Security, avoid a Greek crisis--that's the only thing that matters. So, it's the emergence of slow growth new normal, is, I'd say the greatest economic threat we face. Not just the political things that I was worried about. Russ: The tough question is to know whether this is, again, a temporary response to a really unpleasant change or whether it's part of the new normal. I think it's--may extend[?] with the challenge of measurement. Right? Guest: Absolutely. Russ: Where you have some innovations that are not being monetized, that most of us value tremendously. Which may be causing us to underestimate the real prosperity that's going on. Arnold? Kling: Well, I certainly think it's very hard to draw inferences. I think Alan Blinder once wrote a book where he said it takes a long time to figure out a long term trend. I think it's about--I think the title of the book was Growing Together--I think it was his audition to be the Chief Economist for Clinton, which I guess he failed. But was championing economic growth for the reasons we were talking about, saying that it takes a long time to figure out what is happening. I think--so the big headwinds that we face in terms of economic growth probably have to do with human capital--that if you read Charles Murray on the right or Robert Putnam on the left, you learn that there's a substantial portion of our population that just really isn't ready to function in our modern economy. And may not get there. And the thing that we all beat up on in education has no provable long term indifferences in outcomes when you sort of do controlled experiment type things. So, my only hope on that front really is something that might alarm some Hoover people, which is sort of more, that there was a cover story in the MIT Technology Review that said: We can now engineer the human race. And so it may be that what emerges over the next 15 or 20 years is the ability to either medically or genetically or by implants make it possible for people who are now not great contributors to the economy to be very productive citizens. So those are the kind of scenarios that-- Russ: Cheerful thought. Kling: Yeah. Russ: I'd get to play for the Celtics, though. So that'll be good. Russ: My genetic handicaps will be overcome. Does anyone else want to react to that? Guest: I think we lost track of your question, which was regulation growth. Russ: Yeah. Guest: We don't just need to look at the times in the United States. Look across the world. Go to Europe, where growth is much slower than the United States; regulation is a lot more. Let's move on to Middle East; Africa. Most parts of the world have highly regulated, where regulation is political states and they grow miserably. Your tipping point is right, too. You can have a lot of sclerotic, over regulated sectors as long as there is somewhere a sector of innovation. But, you know, recently--finance is now a slow[?] over-regulated sector. Health care just became a slow[?] over-regulated sector. Russ: Education. Guest: Energy was. Education obviously was. The Internet is heading in that direction. You know, now that it's Title III Regulation, and all of the tech companies are sending their lobbyists to Washington, how long will that be? So you've got to keep that engine of innovation in there somewhere. And, there, that's the tipping point. Guest: Can I just touch base? Russ: Go ahead. Lee, and then Arnold. Go ahead. Ohanian: Just to touch based on the earlier discussion about human capital, and schooling and regulation. Schooling. So, there's a lawsuit in the State of California, which 9 middle-school kids brought. It was basically about teacher tenure and teacher dismissal. And the judge who heard the case--I don't have the quote but it was something along the lines of 'The evidence is overwhelming and alarming on how bad some teachers are in terms of preparing children.' And when you look at--so, the OECD (Organisation for Economic Co-operation and Development) conducts a cross-country test of mathematical proficiency. And the United States is I think 37th out of 46 countries. And, I mean, within California, 1 out of 4 kids can't understand in a 4-part multiple choice test, they can't understand that 2 over 4 and 4 over 8 are the same number. So, 25% of the population right there is possibly then to be underclass. And you look at the top performer in those tests in Shanghai, China, and Shanghai, China is two full grade levels ahead of Massachusetts, which is the highest-performing U.S. state. So, when you think about future issues regarding prosperity and freedom and human capital accumulation and how regulation of the education industry may be a very important impediment in this process. Russ: Arnold, you want to react to that? Kling: I was going to react to what John said. And I'm just not sure. It could be that I'm not sure that the regulatory or deregulatory lever will be the main driver of growth. I just think that the headwinds are stronger than that. Just things like the fact that manufacturing is such a small share of the economy right now. Russ: Or unemployment. Guest: Yeah. Fewer than 6%-- Russ: Output[?] as much[?] Guest: Well, even for output. It's education, health care taking off. But employment, absolutely: you've got something like 5% of the labor force is production workers in manufacturing now. I mean, there's just-- Guest: Why do we care? [?] Agriculture has gone? Guest: I don't have a problem with that. But I think when you are trying to measure productivity changes, you are now turning to industries where we don't know how to measure productivity. And if we did, I'm not sure we know how to create it.
43:52Russ: So, let me play optimist here for a minute. Marc Andreessen--who, if he's in town, is within a short radius of this session; a former guest on EconTalk--wrote a provocative paper, essay, called "Software is Eating the World" or is going to eat the world. And one argument says, for these concerns we are talking about--we're going to end-run all these problems. Technology is--a common Silicon Valley view, I think, is that technology can fix this. We've got a lousy education system. Right now I have two sons teaching themselves Python. One is taking a Coursera course and one is taking an edX class. We're going to solve the--true, Uber is under a lot of stress, but people like it; they'll beat the regulators; it's just a question of time; Uber is going to have to gear up their lobbying effort but they'll eventually learn how to play the game, will overcome it. So that's the positive view. My view on the negative side--you may have more negatives; you may not agree with my positive side--is this issue of how many people are going to be part of this revolution, that Arnold, that you are talking about. So, you do an end around the education system: Not every kid is capable of being a part of that, using the Internet in a way that will be effective. Entrenched interests: we're going to stop Uber from innovating in other ways. What do you think of the possibilities for technology to trump some of these concerns? Another example I think about all the time is health care--[?] industry. You point out, John, we have somebody like Elizabeth Holmes, around the corner from here with a company called Theranos, who has invented a much cheaper way to test blood and a much more pleasant way to test blood. Should be a no-brainer in a free market system, I think she'd, and her company would triumph very quickly, and instead it's a long slog. I think that she'll win, contrary to some of the public choice interests, because historically we have done very well. We haven't stopped innovation in America in general. Do you think we are getting to that point? Do you think these kind of solutions are not going to be able to triumph? Cochrane: There's a [?] Russ: John Cochrane. Cochrane: There's a race between the technological entrepreneurs, which is great hope here for just doing an end run. Uber was a technology and political innovation. And, people have been trying to undo the taxi monopoly for years and years. But you can't do it bit by bit. You get all of a sudden 10,000 voting millennials happy with your service, and you have a political constitution that may be able to get around the taxi lobby people see. But there's a race. The race is on between the technical entrepreneurs; the political entrepreneurs on the side of freedom; but there's also political entrepreneurs on the other side. Who, right now, have a wonderful opportunity ahead of them. There's the regulatory state. We can use that regulatory state to make sure that all the big businesses are supporting our campaign, at the national artisan level. There's an opportunity for entrepreneurship right there, and that's going to be the race between the opportunity in the freedom direction. Guest: So, I would say that there's been a shift--maybe at the country level--a shift toward centralization recently. As opposed to maybe in the 1970s. So, in the 1970s and the 1980s people often talk about Reagan being elected and then good things happening. But trucking deregulation, airline deregulation, telecommunication deregulation, oil deregulation--a lot of that started before Reagan. Russ: Yup. Alfred Kahn, the entrepreneur. [?] Guest: Yeah. So I talked about political entrepreneurs, economic entrepreneurs. And that seemed to be a time when there was a shift towards de-centralization. At that time. And I just wonder whether, both political parties, whether the sentiment at that time was to say, 'Okay, we're going to deregulate oil.' You have Reagan, who wanted to do it; maybe George can weigh in on this; he was probably involved with it. Reagan probably wanted to do it right away. Ted Kennedy, who was running against Carter, wanted to nationalize oil. Carter was closer to Reagan. Carter said, 'Okay, we're going to decontrol it but we'll take some modest plausible reasonable steps.' I don't know if those sentiments were, the Carter, Reagan sentiments were the dominant ones at that time. I don't know if they would be dominant today. Russ: Well, I just want to mention--2006, when I interviewed Milton Friedman, I cheered the fact that no one was pushing for price controls at a time when the price of gasoline was going up. And I viewed that as a triumph of economic education. And his answer was: 'No, it's because people are still alive who remember the 1970s. When they die off, we'll be back in trouble again.' So it's a slightly more pessimistic view. Guest: I just wanted to throw in a quote from Ray Kurzweil, another optimistic entrepreneur, who says, Kurzweil--yeah, I describe him as a headcase to my students, but I talk about his stuff. But he says that regulations are like stones in a river; they don't stop the river. That's his claim. Now, he can say that. He can do whatever he wants working for Google as trying to do artificial intelligence or whatever he's doing for them. Guest: He has tried to start a business in India, Pakistan, Indonesia, or Russia, where regulation has become extremely politicized. However, I want to pick up on centralization as well. Because this is something that went back to our discussions all day long. We were comparing, earlier in the day, a Western system in the 1400s and 1500s different kings fighting it out. And competing with each other. As opposed to the centralized monarchies of China and the various empires. And notice that, you know, where did freedom and entrepreneurship and growth finally come from? You know, the famous story of the Chinese emperor who had ocean-going ships in the 1450s and said, 'We're decided we are not doing this.' And then one central mistake then means Portugal gets it and then they don't. The trend toward centralization of economic policy, however, it's a natural one in our political, so we'll have one system for everything. One set of national school standards, one set of regulations for this, that, and the other thing. But that is, that of course is one of the things that makes it harder for entrepreneurs to come and try competitive political or economic ideas.
50:38Russ: We talked earlier today in an earlier session about the binding effect of constitutions--the binding effect of rules. And Richard Epstein, who is here, long time EconTalk guest, made the point that when you have people who are eager to thwart those rules, the rules don't get in the way. Bad people are not always stopped by good rules. And, I think about that sometimes; and I think about how the American culture used to be, I think, more favorable to free enterprise. Our culture, thinking about movies, television, our school system--I see a lot of trends away from meritocracy, away from free enterprise, away from competition, away from the profit and loss system--tragically we are heading toward just the profit system, because the losses are socialized. But I see a lot of what made America tolerant of keeping the rules slipping away. So we could talk all we want about a new Magna Carta or adding economic provisions to the Constitution. If the body politic doesn't want them and the people in power aren't going to enforce them, they are a waste of time. Do you think this cultural trend that I'm worried about is real and is as important as I think it is? John? Cochrane: Yes, though if you look around the world America is one of the few reservoirs of--trying to find a good word--thought that values freedom, both economic and political. You know, Europe makes fun of us. They think of libertarian as sort of a strange religion that only the United States has. But you are exactly right. It has to be cultural. And I think as Richard would say, it has to be deep in the bones. When the city of Menlo Park--I was following this recently--thinks about why in a big real estate boom they have empty shops all along the main street, the idea that it's simply not the city's job to regulate what people do with their property never occurred to anybody. And you know, you can write all the rules you want. The idea that you have freedom to do with your private property what you want has to come to the surface, culturally as well. Russ: Lee? Ohanian: So, I would agree with your concerns. I might cast it slightly differently. Not that culture may not be important. But economically, of a growing number of individuals who just face the dismal fact that the market price of their human capital is low, and it's probably not going to be getting any higher. And earlier you talked about technology and can technology do an end run about some of these issues. Technology may actually work against some of these people, at the very, very low human capital levels. As that becomes a larger group of people, they are going to be looking for answers that are not necessarily going to be associated with the free market economy. Russ: That's a good point. Arnold? Kling: I think I share your concern. I would say, a little contrary to Lee that I think that the threat in our culture doesn't come from poor people. It comes from the intellectual class. In the 1930s the intellectual class really rotted in Great Britain and we saw the consequences of that. And sometimes it feels to me like we're going through a period like that in this country. And I don't know what's going to pull us out of it. Guest: I want to go on because this is an extraordinarily important point. If you meet poor people in the United States they tend to be extraordinarily entrepreneur, especially immigrants to the United States. Russ: That's a great point. Guest: They come; they love this country, and they see things. You're exactly right. But there is progress. I do think we need to be optimistic. On the national political stage in the 1970s to say free market or libertarian was [?] was a joke. And even 10 years ago--most people would think those words would mean you are some sort of lunatic living on a compound with your guns in Texas or something of some sort. But these ideas are--there's actually Presidential candidates that call themselves Libertarian. They may not win, but at least it's a respected--the defense of freedom in the United States, economic freedom, is respected, once you get outside of the Ivy Leagues. Russ: Yeah. I would quote James Buchanan, who I heard say when asked whether he was an optimist or a pessimist--he said, 'When I look to the future I'm a pessimist because there's all these trends that make me nervous. But when I look to the past, I'm an optimist because I think about what it must have been like to be alive in 1937, 1938, and thinking: What's the future of the United States?' We've got a world war about to explode; everybody was aware of; we've got the government intervening in an unprecedented way. And yet somehow, that open access order that Arnold's referring to came. Something happened. There was something of a swing back. But it's the most optimistic I can be. My guests today have been Arnold Kling, Lee Ohanian, John Cochrane. I want to thank the Hoover Institution for hosting us. And I look forward to a very, very prosperous 800 years of the future despite the seeming pessimism of this conversation.


COMMENTS (24 to date)
Nathan Hill writes:

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JLV writes:

An interesting discussion, as far as these things go, but if you wanted a succinct illustration of the concept of an echo chamber, this episode serves that role nicely.

EconTalk episodes where Russ has a conversation with someone who he is fundamentally at odds with on some dimension are almost always the best episodes (or the best non-Munger episodes anyway). I'm a bit disappointed that there were apparently no left of center economists in the Bay area to join this discussion.

Cochrane made a number of good points, in particular, but all three made sloppy or factually shaky arguments that would have been picked up on by someone coming from a different perspective.

Greg G writes:

I thought this was an interesting and worthwhile discussion but one that invites a number of fairly obvious criticisms.

First of all, Lee attempted to frame the discussion in a way that simply assumed his conclusions. We are informed that Cato and Heritage have succeeded in an attempt to "quantify" "economic freedom" and that the result has shown a recent alarming drop in such freedom. This was a bit jarring in an a podcast that is constantly urging us to be skeptical of anyone's ability to quantify macroeconomic data - especially when it is of the subjective type. If some left wing think tank announced they had succeeded in quantifying social justice I doubt I would need to explain here why we should be skeptical of such a quantifying project.

Lee also seems to assume that pre-recession trend lines in economic growth are what we should be entitled to expect from proper economic policy. I would be more inclined to expect that it might get harder to get the same percentage growth each year as the base number you are growing from gets larger. And why should we assume that a stock market bubble and a real estate bubble provided the right trend lines?

Arnold commented that "concentrated interests trump the general interest" and that is the classic public choice problem. Well, maybe so but aren't public choice enthusiasts the very same people who are always warning us off the concept of "the general interest"?

Much was made in this discussion about how the power of regulators makes those regulated afraid to criticize the regulatory scheme. Well I am an outside director at a small community bank. I can verify that there the regulatory burden on community banks has increased in ways that are unwise and were unintended. But the idea that this has made bankers afraid to criticize the regulatory regime made me laugh out loud.

Many bank conventions consist of little else other than complaining about the regulatory regime. While many of these complaints are justified, I have yet to see a failed banker who blamed himself for the failures of his bank. They always blame government. Technology and economies of scale are bigger reasons for the decline of community banks.

When Russ said "We're all Tom Brady now" in the sense of being at the mercy of powerful regulators he framed it as a failed joke he had tried. Well, I laughed for several reasons. One is that Brady might yet win his appeal. Another is that he might really be guilty. And the biggest one is that being Tom Brady still doesn't seem too bad to me.

Finally, I loved the way Russ put it all into perspective at the end by pointing out that, now matter how dire things look to us now, there have been many points in our history when things must have looked much worse.

Ajax4Hire writes:

Wow, just wow.
I now have my vote for best EconTalk this year.

Matt Ridley on Climate Change was great and would have been my choice until "Lee Ohanian, Arnold Kling, and John Cochrane on the Future of Freedom, Democracy, and Prosperity" came out.

Let me repeat,
Wow, just wow!

Jerm writes:

I agree with JLV. And I've heard these guests before (including on EconTalk), and they've had much clearer and precise thoughts. Just not in this talk.

I have trouble understanding the mindset behind some of these arguments, especially as voiced by these guests. For example, one of them named off the regions of the world and compared their growth to their level of regulations: America (slow/lots of regulations)! Europe (even slower/more regulations)! Middle East! Africa! Then no mention of any of the other global regions, which just happen to be the ones that don't conform to this narrative.

Do they genuinely believe that they are describing some sort of higher truth? Do they realize that they are cherry-picking data points? Are they truly worried about math scores, or is it a persona (that conveniently neglects that American math scores have been a reason for alarm for over twenty years) they use to play to the crowd?

This episode had a lot of empty calories for me.

======
I think that the word he's saying is "sclerotic"? I agree that it sounds like slow-rotic.

Also, "fishbait" is a real quick "CanIJustTouchBase".

[Big thanks for the corrections. I've fixed them now. Though I have to say that "fishbait" was pretty funny and brought a bit of humor to this episode. --Econlib Ed.]

Allen Hutson writes:

This econtalk episode was unique for a number of reasons. First I think a lot of very complex and deep ideas where discussed generally, but very few were discussed in depth. The one that sticks in my mind is the reference to "North, Wallis, and Weingast." Mr. Kling does a nice job introducing their thesis, but the idea of "open orders" being stable is obviously one could use more explanation and discussion.

My point is simple - while it may appear that the panel failed to overcome an echo chamber effect - I think a lot of very deep, useful, and interesting ideas where discussed. Moreover the sheer breadth of the conversation - while at times disorienting - speaks to the insight that the panel brings.


After listening to this conversation I was struck by a point that wasn't touched on - what most would call social liberty. While I am certain that the panel will disagree with me ("Allen, didn't you hear the portion on how regulation impacts the ability of private actors to speak freely?"), a few - I think really tough ideas for libertarians/classical liberals - weren't touched on. Specifically in the context of when this episode was published - less than a month after SCOTUS ruled on (for the sake of everyone involved I'm going to use quotes) "marriage equality."

Regardless of what you think of the ruling or the issue generally, attitudes on personal freedom in the U.S. have obviously changed over the past fifty years.

The government's role in limiting and regulating personal conduct and affairs is highly connected with Friedman's famous chapter connecting political and economic freedom. Frankly think it is more closely aligned with economic affairs even though my guess is that most would connect it with the political.

The juxtaposition of the "marriage equality" debate and the panel's focus on regulation (EPA, SEC, CFTC, FDA, etc) is stark. We've all heard about how a majority of Americans (according to polling data) are in favor of "marriage equality." The public outcry when two adults have difficulty planning a life together without a marriage license should seem odd when viewed in the context of the disregard people have on the subject of economic freedom. Why do so few people respect the autonomy of land owners (a reference made in the discussion regarding an "underutilized" downtown) yet have a feverish concern about a couple's marital status?

Of course some people will claim that their concern is because "they are liberals" or because of "political correctness gone awry." I hope you can resist that urge.

In the interest of attempting to break up a perceived echo chamber, let me break from my typical reverence of private property rights and political freedom.

Do people care less because Coase's islands of command and control have become so large and disconnected with their owners that they no longer appear (or actually) represent the views of a person, but instead a set of interests?

In my experience comments from companies to regulatory agencies (on NOPRs) are two things. First they are much more well informed and accurate in their identification and explanation of issues than private comments, and second they views expressed are not the view of any single living person. Every member of every committee has something else they actually believe with regard to appropriate actions. In much the same way that the constitution or a piece of legislation represents the agreement among the parties, but not their individual views, corporate speech and action is rarely an endorsement of any of the individuals in the corporation.

I know that a corporation is legally a person, but it has no flesh of its own. Maybe people care less about the excessive regulation in the U.S. because the "people" it directly affects aren't people only in name and not in flesh.

How does Magna Carta and liberty in the future deal with this issue (if it is an issue at all)?

dan writes:

It was a good discussion, but each of the guests could have filled one hour. In addition, a bit more disagreement can tease out the best arguments. At the same time, it's sad that you don't hear these comments in the "mainstream" media. That's where your guest should try to push their ideas.

SaveyourSelf writes:

F.O.O.L. is now a legitimate economic expression. HA!

["Fear of Others' Liberty" (~34:00)]

Todd Kreider writes:

Ohanian said:

So, let's treat that business sector, labor productivity as growing in the average rate of about 0.7% a year in the last 5 years, compared to a long-run average of 2.5% per year.So, if we have productivity growth that is a percentage point higher than that, I wouldn't be nearly as concerned as I am.

First, the long run avearge has not been as high as 2.5%.

Second, the above statement looks like cherry picking since the last 5 years includes last year's 0% productivity growth but leaves off 2009 productivity growth of 5.5%. Take just a 6 year average and labor productivity is at 1.3%, lower than 2.0% for 2003 to 2008 and lower than 2.5% for 1996 to 2002. But the 0.7% is in no way a trend.

JLV writes:

After thinking about this podcast, I've got a better idea of the blindspots that seems to be pervasive on this podcast. Specifically: a) there is a failure to admit that there is a left-wing party in the US that has policy goals and b) The size of government does not have a clear relationship with freedom.

On point a), none of the panel acknowledged that liberals exist and have policy goals. But they do! And if compromise is possible, liberals are happy to accomplish these goals in a pro-market way (see: EITC). But if there is asymmetric polarization that cuts off this avenue, liberals will not just throw up their hands and go home; rather, they will try to accomplish their goals in whatever way possible - and these will not be market-friendly (e.g. minimum wage laws, unionization, etc.) So in a two party system, if the right wing party moves right, this can in fact decrease freedom. Economists are usually good about identifying unintended consequences, but apparently not these four.

In re: b) there was a lot of talk about arbitrary enforcement, potentially increasing in recent years. But no one mentioned why enforcement might be arbitrary. One possibility (which seems to be true) is that for a fixed set of regulations, arbitrariness of enforcement is decreasing in the budget allocation going to enforcement. This, again, means that there can be an unintended consequence of seemingly "pro-freedom" policy - reducing the budget of enforcement agencies without changing regulations reduces the size of government but actually make enforcement more arbitrary.

R Richard Schweitzer writes:

Having studied and followed the North, Walls, Weingast thesis (Conceptual Framework)from the December 2006 NBER Working Paper (12795) and its other iterations, into the text book disquisition, it would seem Arnold's "optimism" about Open Access as a "positive" for the future
prospects of liberty (here) may be justified, if not confirmed.

Also, Arnold's observations elsewhere that the thesis does not seem to acknowledge the existence or possibility of any intermediate status between Open and Limited Access for a society. It is either Limited or Open, nothing in between.

And yet, many of the developments (particularly in our Federal Administrative State) impacting individuals' relations with coercive "group" powers recited in the seminar describe constraints (increasing in kinds and extents)on Access. Licensure laws are a simple example. More complex examples are in the interpositions of unconnected third parties in the Access necessary to Open Access Associations. Are these not elements of "Open Access with Constrictions," analogous to "Friends with Benefits?"

Perhaps we might look more closely at the point Arnold made that once established Open Access does not get closed down. We might look at whether it can be, or does get, or is - diminished.

If so, what of that future?

Michael Byrnes writes:

I'm not down with all the pessimism.

I think the issue that Russ raised - how much of recent slow growth is cyclical rather than being a "new normal" of slow growth - was an important one and was not adequately addressed by any of the guests. What did productivity growth look like in the 1930s - was there anything about productivity the 1930s that foreshadowed great prosperity during the latter half of the 20th century?

We have lots of problems, for sure, some of which were raised by the guests. But all in all life is pretty good, no? Knowing that our own future is uncertain, who would rather be living in 1950 right now with a more or less guaranteed half century of prosperity ahead? Not me. You can pry my iPhone out of my cold, dead hands.

Mark Crankshaw writes:

Michael Byrnes,

What did productivity growth look like in the 1930s - was there anything about productivity the 1930s that foreshadowed great prosperity during the latter half of the 20th century?

That's funny, I recall the 20th century somewhat differently. Hundreds of millions of people in this world in the 1930's got butchered in World War II, the Cold War and the countless proxy wars fought during that period. Hundreds of millions spent considerable time in Gulags, concentration camps, and labor camps. Billions of people in the 1930's could look forward to languishing in oppressive socialist and fascist regimes until they died, saw their savings and property confiscated in its entirety, and faced tremendous, constant and crippling political and economic uncertainty. A process still underway (see: Greece, Ukraine, or Venezuela, to name just a few).

And all the while, there were technological improvements made in industrial production.

There was stability and prosperity in Western Europe, parts of North America, and parts of Asia. That was the exception rather than the rule. The question for the US: is that country going to remain an exception, or is it open to the same kind of violent political and economic instability that the rest of the world suffered through as the State unprecedentedly grew in its size, scope, and ability to crush its opponents and subjects? No one in Germany on the eve of WW I (about 100 years ago) would have envisioned what lay ahead, politically and economically, for the leading cultural, industrial, social, and scientific country of the world at that time.

I am proudly a pessimist. If it's gone wrong before, it may very well do so again. Better safe than sorry. Oh, it can happen to me. Considering the unsoundness of the world economy, the ever increasing levels of unsustainable debt and its political, economic, and military reprecussions, the increasing military destructiveness of governments (and other ne'er-do-wells like ISIS), the continued existence (as JLV pointed out) of anti-free market, pro-political-manipulation-of- the-marketplace thought, thinkers, and doers in this country and around the world, all is not well. Mistakes get repeated when lessons are not learned and the continued existence of stale failure-ridden leftist thought indicates they have learned little to nothing. The continued existence of far right war-is-the-answer thought indicates some have learned absolutely nothing.

On the eve of the 20th century there arose a commonly held belief in the West, that the world was on the cusp of peace and prosperity. Just put your faith in science, democracy, and socialist planning and all will be well. We got ever increasing amounts of science--particularly of the militarily-related type, democracy, and socialist planning over the next 115 years. World War I shattered the promised peace and the Great Depression and World War II did away with the promised prosperity for a sizable portion of the worlds' population. The peace and prosperity were, and largely remain, only for "the few"...

I see a bunch of careless smokers working in a munitions depot. What could possibly go wrong?

Mark Crankshaw writes:

@JLV

And if compromise is possible, liberals are happy to accomplish these goals in a pro-market way (see: EITC).

Maybe. But the problem with American liberals is that one of their foremost goals is the elimination of the free market and the replacement of free competition with government direction of the economy.

The metaphor I think applies would be the running of the 100 meter dash. Such a race does requires some rules (no physical interference with runners in the other lanes), but not that many. The rules for winning are largely fixed and change little over time. Get across the finish line first without interfering with other runners and you win. Has changed little in a century. The athletic, speedy types who train for the competition and regularly compete will dominate. The unfit, overweight slow types will struggle.

However, one could decide the winner of a 100 yard dash in other ways. The winner could be decided much like beauty pageants, gymnastic meets, or like interpretive dance "competitions". Get a panel of judges, each with their own non-fixed criteria, and choose a "winner" based on the subjective evaluation of the judges. The rules are completely unfixed, can be very arbitrary, and there are much, much more criterion (many of which are completely unrelated to the actual events in the competition). Who wins? Depends on who is judging.

This metaphor is how I see the difference between free markets and the politically manipulated markets liberals prefer. Liberals are correct that certain individuals (and firms) will dominate and others will usually lose. The same holds true for the "mate" market. Physically attractive and economically successful people dominate the mate market, physically unattractive and/or economically challenged types do not.

But unlike the mate market (at least for now), liberals favor political action that suppresses "free competition" and "free markets" economically and they stridently favor political manipulation of the marketplace because free markets do disadvantage some (primarily liberals and their political allies) and free markets do give advantages to others (not liberals and their political allies). What the left doesn't realize (or, more likely, won't admit) is that their preferred alternative acts much in the same way (and most often, worse). A beauty pageant is, in my opinion, far more open to unfair treatment of contestants by judges than is a running of the 100 meter dash.

The liberal predisposition to "regulate", "control" and manipulate markets can only be viewed as sound, fair, and equitable only as much as one trusts the regulators, controllers, and manipulators of markets to be sound, fair or equitable. This is "faith" based economics. I simply do not share this faith.

Free markets are not fair or equitable. True. Markets, free or not, are only as sound or ethical as the people which interact in it (which, as a self-identified pessimist, I rate as "not very"). Not a problem to me, that's life. The liberals, however, do not offer an alternative free of the flaws found in a "free" competitive market. They never have, and they likely never will. Their preferred system, perversely, retains all of the flaws of the free market and simply adds a host of others.

Cowboy Prof writes:

Empty calories?! Not so!

This discussion helped to clarify some of my own thoughts on a logical problem that I've been working on. While perhaps a refresher on things that have been said by each of the guests before, sometimes refreshers are needed. A second baseman needs to continually practice fielding groundballs, and it doesn't hurt to review and review and review intellectual arguments either.

My only concern about the episode was that it was set up as a discussion about liberty in the light of the 800th anniversary of Magna Carta AND looking forward to the next 800 years, yet we devolved into contemporary details much too quickly and I didn't get the long-term historical overview I was expecting.

Jerm writes:

The reason that I mark it as empty calories is because this episode seems to require a complete repression of critical thought just to choke down the concepts.

Maybe it's the audience (the live audience...in the auditorium or conference room or whatever). But they completely swallowed all of these sloppy thoughts, several of which are at odds with themselves.

For example, the "regulations" boogeyman (and the evil taxi lobby) is railed against, but those regulations are painted as the creation of "big government". At the same time, Uber is lionized as some sort of market-based solution (I hope for the sake of posterity that Uber turns out to be a great company...otherwise, a lot of these love letters to them will color the whole episode. Like reading old interviews of show business people who idolize Bill Cosby). And it's eventual success is dependent on...them building up their own lobbying efforts.

The process of businesses creating the regulations that discourage market competition is completely described in this discussion, but the speakers (and the commenters here) seem oblivious to it. Much easier to blame the political party you don't like, I guess.

Oddly, in a discussion about the relevance of the Magna Carta in the future, these speakers provide some great arguments that the influence of the Magna Carta is greatly diminished in a society where economic wealth drives the law. But maybe that doesn't align with the goals of the Hoover Institute.

Mark Crankshaw writes:

@ Jerm

The process of businesses creating the regulations that discourage market competition is completely described in this discussion, but the speakers (and the commenters here) seem oblivious to it. Much easier to blame the political party you don't like, I guess.

This process is completely consistent with everything I have written and I am a commentator here. I have railed (a time or two) about regulatory capture. I like to rail about such things...

The more complex and technical an industry is the more likely that only insiders have the knowledge, expertise and access to the details necessary to even begin the regulatory process. Consequently, it is industry insiders who invariably write the regulations. (In many cases, the government bureaucrats merely remove the corporate masthead off corporate memos or directives and insert the text of the body into a bill verbatim). As it is industry insiders who write the regulations, these insiders naturally have an interest to further themselves and (perhaps) fellow industry insiders, and this is often to the explicit detriment to outsiders (be they consumers or competitors). This is standard regulatory practice. Great for industry insiders, influential politicians and technocrats (who can milk industry insider infighting for financial gain). Not so great for everyone else.

However, to suggest that this standard practice flourishes in all regulatory environments is ludicrous. Just as plant species flourish is some environments rather than others, regulatory capture flourishes better in an expansive regulatory regime much better than in a narrow regulatory regime.

And, what do you know, some political ideologies favor expansive regulatory regimes and the big government that necessarily comes with it (ahem, those on the left). If you yearn to politically regulate every financial entity, transaction, and interaction you need a massive state and you create the ideal environment for unseemly regulatory capture. The two go together like old age and death. Regulatory bills of 25,000 pages with legalese in 6pt font are akin to a greenhouse for regulatory capture (ahem, Obamacare, Dodd-Frank).

Gee, there might actually be some blame to go around (and the Democrats--true believers in state "magic"-- barely nip the Republicans-- rank frauds who have never practiced what they occasionally preach-- by a nose in this particular type of malevolence and malfeasance).

Some of us pessimist types might like to see less regulation, less government, less military, because of all the rotten things (like regulatory capture) that foul brew equates to. My interests may just be better served, protected, and advanced with a tightly constrained government, with an extremely narrow scope, that doesn't carry on endless military misadventures, that doesn't serve the powerful at the expense of everyone else, that doesn't pathetically attempt to do everything for everyone (and, in doing so, does everything badly in those few cases where it is not completely incompetent or impotent). I beg to differ with those (ahem, liberals) who believe otherwise. As a libertarian, I believe liberals should be free to believe in the government "fairy" all they want as long as they do no harm to me. Unfortunately, they are extremely harmful. I resent very much how much damage their childish beliefs inflict on the rest of us...

Jerm writes:

Mark, this is exactly what I was talking about.

1) You describe a process (regulatory capture), which has no political party attached to it.

It's a tactic that any business - at any point in time in American history - can use to beat their rivals and increase their profits. We see it in practice today, and we can see records of it happening going as far back as the railroads and earlier. Nothing to do with political party.

2) But it gets painted as the actions of "liberals" anyway.

And I think that turning this topic into a "political sports rally" is cheap and ultimately dishonest, because it encourages commenters (like you) to imagine that there would somehow be less regulatory capture once their team is "winning."

I've read your posts. And even though you give a sentence of lip service about how Democrats and Republicans are almost equally to blame, it's obvious that you think this is a partisan issue. And that's really too bad, because I think it keeps the discussion from moving forward.


3) Then come the examples. The terribly inappropriate examples.

I've already said why I think Uber was a terrible example. So let's go with Obamacare this time.

In the talk, one of the speakers refers to health care as JUST becoming highly regulated. Just recently? For my entire life, health care has been highly regulated. Licensing boards, regulatory capture, and increasing complexity...none of it politically partisan. That the speaker thinks that healthcare (and finance, because of Dodd-Frank) is just recently subject to high regulations is laughable, and I don't know if it's ignorance or just playing to the crowd (like a professional wrestler).

As for your argument, I think that Obamacare and Dodd-Frank are terrible examples of regulatory capture. The examples should be simple: Iowa corn farmers lobby for ethanol requirements. People who braid hair for a living set up licensing requirements to limit the number of firms in the industry. If an example of regulatory capture relies on technocrats (like the Hoover Institute, I assume) enriching themselves over debate, then that's really far out in left field.

Also funny is that you rail against 6pt fonts. I'm pretty sure there are rules about font size in government regulations. The only people who use small type to confuse you are businesses. Increasingly, they aren't allowed to do that, though. Thanks to...government regulations.

Irony!

I think that this was a missed opportunity to talk about something real and interesting. Is there a point where the economic power of large businesses trumps the Magna Carta (and have we reached it)? Can a very rich/powerful company like Apple (or Exxon or Google or Wal-Mart) exist in a world with a low level of regulations/regulatorycapture? If there's a tradeoff between "economic wealth" and "economic freedom", how much of one are we willing to sacrifice to get more of the other? If we have reached a point where regulatory environment is restricting productivity/growth, how can we possibly de-incentivize businesses from lobbying/writing more regulations?

Small threads of these issues can be found in the talk, but it devolved into red-blue rah rah rah. Too bad.

Mark Crankshaw writes:

@ Jerm

I've read your posts. And even though you give a sentence of lip service about how Democrats and Republicans are almost equally to blame, it's obvious that you think this is a partisan issue. And that's really too bad, because I think it keeps the discussion from moving forward.

I will now take the words you have inserted into my mouth out and state it again. Regulatory capture is not a partisan issue.

Am I partisan? Well, of course, I am. (As probably are you--after all, putting words in your mouth, you seem to be somewhat slighted that I've slightly denigrated the left more than the right). After living for some time in Ithaca, NY and Washington DC, I have developed a visceral, and deep loathing for liberals and, being a student of history, I find the leftist movement, and the leftist who have pushed it, utterly repellent in just about every way. Familiarity breeds contempt. I'll be blunt, I will kick the left each and every chance I get.

But that doesn't in any way imply that I think this is a partisan issue. Just because one finds Joseph Stalin extremely repellent doesn't have to mean you therefore like Adolf Hitler. Republicans are just as bad as Democrats, I just don't have the visceral contempt for them that I do for Democrats. Sorry.

The primary purpose of a two party system is to mask the fact that there is a political ruling class that controls both parties. Sure, this artifice allows for some limited level of ruling class "infighting". However, the ultimate purpose is to "dupe" the politically ruled class into supporting the one (based on race, religion, region, sexual orientation, cultural affinity, etc., etc.) while holding that the other is the villain. (I'll call this the NFL or, better yet, the World Wide Wrestling model-- extreme partisanship in football/pro wrestling boots TV ratings). Whomever wins, the ruling class, like NFL team owners and wrestling promoters, profits and has their agenda served.

I'll say it again--all political parties will use the government (and its regulations) to advance their own agenda at the expense of others. The more powerful the government, the greater to incentive to do so. This isn't red-blue, rah rah rah. This isn't even a peculiarly American issue, or even a modern political issue, for that matter.

The only people who use small type to confuse you are businesses. Increasingly, they aren't allowed to do that, though. Thanks to...government regulations.

Irony!

Oh dear, the irony seems to be lost on you, I'm afraid. The governments of most western democracies are in bed with big business. They always have been. The business elite dictate what is "allowed" or not. The government serves merely as the "enforcer" of those business interests.

"Increasingly, they aren't allowed to..." What in the name of god are you talking about? The government in the West is like a drug addicted street walker. It's services "the needs" of as many clients as it can and will service the needs of any client willing and able to put forth the appropriate amount of cash (or, in some cases, votes). The government and business, like prostitute and john, are merely two sides of the same transaction. The idea that the Gordian Knot of big business and big government can be disentangled into two discrete boxes whereby one (government) protects "us" from the other (business)is simply unsound.

That said, I think you raise some very interesting issues at the end. All of which underscore my pessimism. There are indeed tradeoffs between wealth and freedom (economic and otherwise). There are terrible incentives at play with respect to regulations and lobbying for them. The incentives are so misaligned that this is perhaps an intractable problem.

However, who is this "we" you refer to? I reject the idea that there is one single answer to that question, and this fact compounds the problem much further. There is no single "we" perspective. To a lot of people (particularly the ones running big businesses, governments and society) there simply is no problem. They are doing quite nicely just as it is, thank you very much. Some "solutions" might be in the interest of a subset of this "we", and be damaging to other subsets.

I haven't kicked the left in a while, so here's my chance. While all political ideologies share equal blame for any number of political problems, what rankles me most is the propensity of the left to think inappropriately in terms of some mythical abstract "we".

Whatever the faults of other ideologies set aside, those that tend to think in terms of "me", "you", "us" but not "them", have at least an explicit framework that accommodates the innumerable inherent conflicts of interests that deeply stains the world around us. I don't have to be on their side (and I am not), but at least these ideologies are honest enough to recognize there is a fight going on.

The ultimate "tradeoff" is that there is no "we" or "us" that includes everyone. If some win, then some must lose. I can only pursue (politically and economically) what's good for "me", I can not pursue what is good for "we" or "us" for such a thing doesn't even exist. Political ideologies that blur, distort or can't even recognize these important distinctions are an anathema to me. There is nothing "rah rah rah" about the fundamental philosophical positions that form the foundation of every political decision...

Jerm writes:

This, I believe, was stated a little too dramatically:

"Increasingly, they aren't allowed to..." What in the name of god are you talking about?

Because if you don't understand something, invoking "the name of god" really just highlights the ignorance. But I'll explain again. In the name of Anne Sullivan.

In your previous post, you ranted about legalese and 6pt font in government documents. And while your words may have sounded lyrical in your head, they also point out that it's a completely imagined fantasy.

Government regulations aren't written in 6 point font. There are strict rules about all aspects of typography in government documents. Type of font. Size of letter. Number of letters in a line of text. (If you can provide a link to a 25,000 page 6pt government document, I'd love to see it. It would be a better argument for your point of view than any of these thousand-word replies. Honestly.)

The only place where regular people face blocks of small type is when interacting with businesses. Like a cell phone bill or a credit card statement.

The irony here is that the government is taking steps to remedy this through regulations. There are rules in an increasing number of industries regarding font size. So your (once again, imaginary) fantasy of tiny government legalese is actually a problem with business. A problem that the government is solving through regulations. If you really have a problem with legalese in 6pt font, the government is actually fixing that for you. That's irony. And since you didn't realize it the first couple times (in the name of god), then it's also dramatic irony. That's two types of irony...what a value!

Mark, I am not the first to try to point out that these superlong-winded posts of yours are more about fighting demons in your head than discussing problems in society. And resorting to such hyperbole reduces the discussion into a sports game. I think the speakers prefer to paint it as a red-blue sports contest, but I think that you prefer to paint it as a "all political parties"-libertarian sports contest. Still, a sports contest. With WWF-styled antics and completely imaginary dragons to slay. Hypothetical battles fought on mountains of assumptions, scored with points assigned arbitrarily. And everyone believes they are a member of Gryffindor.

Truly, a missed opportunity for something interesting or substantial. Empty calories.

Mark Crankshaw writes:

I guess I'm not as hung up on specific font sizes as you are apparently. The phrase "the small print" is commonly understood by most. Troll all you want, but lawmakers are notorious for writing dense legalize in an attempt obfuscate what is being (and by whom) from the general public. The government has never taken any steps whatsoever to help the voting the public understand the avalanche of legislation being issued by the government. On the contrary, the ever-increasing volume and complexity of legislation and regulation makes it increasingly difficult for even the most adept of citizen to be fully informed. The government has never attempted to "fix" anything in that regard. So I don't see the irony primarily because their isn't any.

As to "reducing the discussion into a sports game", are you not doing the same? Life happens to be a contest. And, boy, you really put me in my place for missing that (rather vague) opportunity for "something" interesting or substantial. Opportunity for what, precisely? Move the conversation to where?

I haven't attacked you personally, making allegations about your mental state and your grasp of reality, and I am not going to. You made some good points actually, and while I meant to challenge your position, that was primarily because your position was worthy of challenging. I'm not attacking you personally. Quite frankly, I really could care less what you think about me. I strongly suspect we do have some serious philosophical, economic, social and political conflicts that are unlikely to ever be resolved. (Conflicts of these sorts are extremely common, my "problem" to those with your viewpoint, no doubt, is that I like to bring them up rather than ignoring this obvious fact).

If you do not wish to have your viewpoint challenged, then I will certainly respect that wish...

A.C.H. writes:

I have been listening to EconTalk for several years now and have learned much and changed many of my personal opinions as a result. In my opinion this podcast was by far the most partisan EconTalk I have ever listened to and, as a result, was hard to take seriously.

While there were many good points made, some of the innuendo bordered on insulting. I found the only redeeming feature was that Russ was the voice of reason (not surprisingly) and tried, albeit almost reluctantly, to pull the discussion out of the echo chamber. It would have been better to have a deeper bench for this discussion. Just my humble opinion.

Jerm writes:

[Comment removed for rudeness. --Econlib Ed.]

jw writes:

When I discuss economics with friends, I usually characterize Obama and most Democrats as socialists and have to endure the simplistic counter-arguments that classical socialism requires state ownership of capital.

However, when socialism was conceived, ownership was the only form of control that was considered. It turns out that the state can also control capital via regulation as well. The current level of regulation gives almost total control of capital to the state, which in my view is a very reasonable modern definition of socialism (the Neo-Socialists if you will).

The recent book about "Three Felonies a Day" about personal freedom in a world of regulation would be titled "Thirty Felonies a Day" if applied to a corporation or small business owner (see Gibson and many others).

Given the level of regulation and state surveillance, I am very pessimistic over the short term and do not believe that it is cyclical at all, but closely interrelated.

Long term, I am very optimistic, as I figure that someday we will eventually learn from Greece, Europe, the USSR, China and the infinite number of other failed socialist experiments and figure out that free people and free markets are the best way to raise living standards for everyone.

Hopefully for our children, it won't take 800 years...

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