0:33 Intro. [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.

1:45 Russ: 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.

12:59 Russ: 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.

18:46 Russ: 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.

31:02 Russ: 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.

34:41 Russ: 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.

43:52 Russ: 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.