Lee Ohanian, Arnold Kling, and John Cochrane on the Future of Freedom, Democracy, and Prosperity
What this covers
Russ Roberts hosts three economists—Lee Ohanian, Arnold Kling, and John Cochrane—in a panel recorded at Stanford's Hoover Institution to examine threats to American economic growth and political liberty. The three present separate arguments before opening to moderated discussion, building a case that the regulatory state's expansion poses the primary threat to both prosperity and freedom. The conversation draws on economic history, political theory, and recent US policy to argue that discretionary regulation not only depresses total factor productivity and startup formation but creates conditions for political coercion of businesses and individuals.
The panel spans several overlapping concerns. Ohanian emphasizes the collapse in new-business formation—down roughly 20 percent since 2009—and notes that historically, young firms drive job creation and innovation; without them, large incumbents like GM and IBM shrink on average, leaving net job loss even in non-recession years. Cochrane focuses on the mechanics of regulatory power: rules versus discretion matter deeply, since vague, ex-post-enforced rules give regulators leverage to demand political compliance, creating what he calls "two-way capture," where businesses face criminal prosecution and multibillion-dollar settlements if they resist. Kling introduces the Open Access Order Framework to distinguish societies where anyone can form organizations to compete from those where a ruling coalition monopolizes opportunity. The three also address human capital constraints, the damage Dodd-Frank has inflicted on small-business lending, subsidy flows to politically connected sectors, and whether rule of law itself is eroding. Discussion turns contentious on whether innovation can outpace regulatory obstacles, whether the productivity slowdown reflects temporary shock or permanent decline, and whether the real threats stem more from regulation or from demographic and educational gaps in human capital that technology may worsen rather than repair.
The panel argues that the chief threat to American prosperity and freedom is the expanding, discretionary regulatory state, which both depresses productivity and innovation (especially via collapsing new-business formation) and creates a corporatist system of 'two-way capture' that can erode political freedom itself.
- US economic freedom rankings have fallen from ~3rd to ~13th-14th due to growth of government, regulation, and subsidies to incumbents.
- Productivity growth has collapsed to ~0.7%/year vs a 2.5% historical average, and startup formation has dropped ~20% since 2009.
- Discretionary, vague, ex-post-enforced regulation gives regulators power to demand political support, threatening rule of law.
Open access orders remain stable but are vulnerable to collapse through sovereign debt crisis, frayed legitimacy, and public turn to dictatorship.
- Following North, Wallis, and Weingast, societies are either limited access orders—where a ruling coalition holds all political rights and economic opportunity, stays stable by collecting monopoly rents while everyone else is powerless—or open access orders, where everyone has some access to economic opportunity and political rights; a key test is whether anyone can form an organization to compete against incumbent political or economic interests, which is forbidden in limited access orders and open to all in 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”
- Open access orders tend to remain stable and are hard to destabilize because, by definition, everyone has a stake in the system, and reaching such an order requires building up layers of individual norms, cultural beliefs, and formal institutions—where documents like Magna Carta matter not for what they did in 1200 but for the cultural reverence they generate centuries later—so one must be brave to forecast that such an order will degenerate.
“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.”
- A pessimistic scenario for losing the open access order: chronic deficit spending and unfunded liabilities create an inevitable conflict between promised benefits and promised bond repayments; the US, being too big to find enough other people's money (unlike Greece), could suffer a sudden sovereign debt crisis amid frayed politics where people no longer see legislators or executives as legitimate, leading to street violence and a public willing to turn to a dictator to resolve it.
“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”
Human capital, not regulation, is the primary headwind to economic growth, and education interventions cannot fix it.
- The biggest headwinds to economic growth probably stem from human capital, not regulation: per Charles Murray on the right and Robert Putnam on the left, a substantial portion of the population is not ready to function in the modern economy and may never get there, education interventions show no provable long-term outcome differences in controlled experiments, and the only hope may be future bioengineering or implants that make currently unproductive people productive.
“the big headwinds that we face in terms of economic growth probably have to do with human capital”
- Because manufacturing is now a very small share of the economy—roughly 5% of the labor force are production workers in manufacturing—growth increasingly depends on industries like education and health care where productivity is hard to measure and arguably hard to create, complicating both diagnosis and remedy of the productivity slowdown.
“something like 5% of the labor force is production workers in manufacturing now”
Freedom erodes when politicians exploit public fear of others' liberty, creating a self-reinforcing regulatory state rulers may now be too powerful to challenge.
- Freedom may decline because people fear other people's liberty ('fear of others' liberty'), and if politicians can manufacture enough public fear of others' liberty they can sustain a regulatory state and a vicious cycle in which regulators become so powerful that no one dares challenge them; the open question is whether political and economic entrepreneurs can still overcome this manipulation, or whether the rulers have become too smart for the ruled.
“people, I think, fear other people's liberty--I call it, fear of others' liberty”
- Contrary to locating the cultural threat to freedom in poor people, the threat comes from the intellectual class: just as the intellectual class 'rotted' in 1930s Great Britain with serious consequences, the US sometimes feels to be in a comparable period, with no obvious force to pull it out.
“I think that the threat in our culture doesn't come from poor people. It comes from the intellectual class.”
Bipartisan deregulation in the 1970s–1980s reflected broad decentralization sentiment that no longer dominates political economy.
- The deregulatory wave commonly attributed to Reagan—trucking, airline, telecommunications, and oil deregulation—actually started before Reagan, reflecting a broad bipartisan shift toward decentralization in the 1970s–1980s (e.g., Carter favoring decontrol of oil over Ted Kennedy's nationalization stance), a sentiment that may no longer be dominant today.
“trucking deregulation, airline deregulation, telecommunication deregulation, oil deregulation--a lot of that started before Reagan”