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

Episode Summary

Executive Summary: A Magna Carta anniversary panel used long-run historical perspective to debate the future of freedom, prosperity, and democracy in the U.S. Hanián warned that rising regulation, subsidies, and Dodd-Frank have weakened startup formation and productivity. Cochrane argued the regulatory state threatens rule of law and political liberty through discretion, vagueness, and coercion. Kling was more optimistic about open-access institutions, but worried about deficits, debt, and a growing fear of liberty.

Main Topics: Economic freedom and U.S. decline (Priority: 5/5): Leo Hanian framed the discussion around measures of economic freedom, arguing that the U.S. has fallen from near the top to the low teens because government has expanded via spending, regulation, and subsidies. Productivity slowdown and weak startup formation (Priority: 5/5): Hanian linked low productivity growth and reduced business formation to the weak recovery, arguing that startups are central to innovation, job creation, and long-run growth. Regulatory state as a threat to rule of law (Priority: 5/5): John Cochrane argued that modern regulation increasingly replaces clear legal limits with discretion, secrecy, and ex-post enforcement, creating political leverage over firms and citizens. Open access vs. limited access orders (Priority: 4/5): Arnold Kling used North, Wallis, and Weingast’s framework to contrast stable open access systems with rent-seeking limited access orders, emphasizing the role of cultural and institutional layers. Debt, deficits, and political instability (Priority: 4/5): Kling offered a pessimistic scenario in which unsustainable debt and frayed legitimacy trigger crisis and open the door to authoritarian solutions. Technology as an offset to regulation (Priority: 4/5): The panel debated whether innovations such as Uber, online education, software, and biotech can bypass entrenched interests and revive growth despite regulatory barriers. Culture, human capital, and long-run freedom (Priority: 4/5): The discussion concluded that institutions depend on culture, education, and public attitudes toward free enterprise; concerns were raised about declining meritocracy and human capital.

Key Arguments: Economic freedom is measurable, and the U.S. has slipped from a top-ranked economy to roughly 13th or 14th as government spending, regulation, and subsidies expanded. The U.S. economy is below trend in both output and employment, but the more alarming issue is productivity growth far below historical norms. Startup creation matters disproportionately because young firms create many innovations and most net job growth; policies favoring incumbents can suppress growth. Dodd-Frank exemplifies vague, open-ended regulation that increases compliance costs, reduces competition, and particularly hurts small businesses and community banks. The regulatory state can become a tool of political coercion because firms must seek approval from agencies that can delay, punish, or selectively enforce rules. Rule of law is not just existence of courts; it requires knowable rules, appeal rights, transparency, and limits on discretion, all of which are weakened by modern regulation. Open access orders are stable because many people can form organizations and compete politically/economically, but debt crises or loss of legitimacy could destabilize them. Technological innovation may circumvent some regulation, but the race is between pro-freedom entrepreneurs and political entrepreneurs who use regulation to entrench power. Human capital constraints and poor schooling may limit future prosperity, and technology may not fully help those with low marketable skills. Culture matters: even good rules fail if the body politic and elites no longer value free enterprise, merit, and liberty.

Data Points: U.S. economic freedom ranking: Around 13th or 14th today; previously top 3 around 2000 - Hanian citing Cato and Heritage rankings Real GDP per capita: About 12% below trend - Hanian on post-recession output shortfall Output shortfall: About $2 trillion - Hanian translating GDP gap into dollars Jobs shortfall: About 5.5 million jobs below pre-recession employment share - Hanian on labor market recovery Business-sector labor productivity growth: About 0.7% per year in the last five years vs. 2.5% long-run average - Hanian on productivity slowdown Total factor productivity growth: About 0.7% per year - Hanian on business-sector TFP Startup rate decline: About 20% since 2009 - Hanian on reduced new business formation Agricultural subsidies: About $20 billion each year - Hanian on incumbent-favoring subsidies Energy subsidies: About $30 billion - Hanian on politically connected support Business subsidies concentration: About half paid to four industries - Hanian naming finance, utilities, communications, and energy Dodd-Frank compliance impact: Over 100,000 businesses affected; $9 billion to $16 billion cost estimate - Hanian on minerals/supply-chain reporting rule Community bank threshold: Banks with less than $10 billion in assets - Hanian defining the institutions most exposed to regulation Small business lending: Down about 20% since 2008 - Hanian citing SBA data New bank entry in 2013: Only one new bank - Hanian on banking industry entry barriers Occupational licensing share: Nearly 30% of all occupations - Hanian on labor market restrictions California math proficiency example: One out of four kids cannot recognize 2/4 and 4/8 as equal - Hanian on educational deficits OECD math ranking: U.S. 37th out of 46 countries - Hanian on cross-country student performance Shanghai vs. Massachusetts: Shanghai is two full grade levels ahead - Hanian comparing top performer to best U.S. state Manufacturing employment share: Fewer than 5% of labor force are production workers - Kling on structural headwinds to productivity measurement Historical growth concern: Business output per worker doubling every 100 years instead of every 28 years - Hanian illustrating slow productivity growth

Pivotal Quotes: "The central element of a new Magna Carta ought to be a right to a speedy decision." — John Cochrane: Cochrane arguing that regulatory delay is a major source of coercive power "the rulers are just too smart for the ruled" — Arnold Kling: Kling describing how fear and manipulation can sustain the regulatory state "Freedom and prosperity go hand in hand" — Leo Hanian: Hanian invoking Milton Friedman to summarize the case for limiting government

Implications: The panel sees the future of prosperity as depending on whether the U.S. can restrain regulation, preserve startup dynamism, and defend rule of law. If it cannot, growth may stay weak and liberty more fragile; if it can, open-access institutions may remain durable.