Institutions and experience

These are remarks I prepared for a symposium at Hoover in honor of George Shultz on his 95th birthday. Willie Brown was the star of the symposium, I think, preceded by a provocative and thoughtful speech by Bill Bradley.

Institutions and Experience

Our theme is “learning from experience.” I want to reflect on how we as a society learn from experience, with special focus on economic affairs. Most of these thoughts reflect things I learned from George, directly or indirectly, but in the interest of time I won’t bore you with the stories.

An English baron in 1342 tramples his farmers’ lands while hunting. The farmers starve. Then, insecure in their land, they don’t keep it up, they move away, and soon both baron and farmers are poor.

How does our society remember thousands of years of lessons like these? When, say, the EPA decides the puddle in your backyard is a wetland, or — I choose a tiny example just to emphasize how pervasive the issues are — when the City of Palo Alto wants to grab a trailer park, how does our society remember the hunter baron’s experience?

The answer: Experience is encoded in our institutions. We live on a thousand years of slow development of the rule of law, rights of individuals, property rights, contracts, limited government, checks and balances. By operating within this great institutional machinery, these “structures” as senator Bradley called them last night, these “guardrails” as Kim Strassel called them in this morning’s Wall Street Journal, our society remembers Baron hunter’s experience in 1342, though each individual has forgotten it.


In particular, self-appointed technocrats — us economists — do not offer “advice” to benevolent “policymakers” to implement, though we often so flatter ourselves. Strong institutions of limited government defend against bad and transitory ideas.

Hayek told us how prices transmit information through an economy, information that no individual knows. In a similar manner, these institutions encode memories and wisdom that no individual remembers.

These great institutions do not operate of their own. They need maintenance, repair, continual improvement, and the incorporation of new experience. I am not arguing for mindless conservatism. Many of our legal structures have been, and continue to be, in need of fundamental changes.

But the mechanics who fix them, their operators, and us, their beneficiaries, need to be vaguely aware of how the machine works and why it is built the way it is. When institutions, structures, long standing traditions, rights, separations of power and so forth are abandoned or broken, when guardrails are smashed, the treasure trove of experience involved in their construction can be lost.

The Era of Forgetting

In this regard, I fear we live in an era of great forgetting.

Foreign policy increasingly seems unhinged from simplest lessons of history as well as from the carefully built institutions of the postwar order. Eisenhower and Roosevelt did not call a press conference, announce the US putting 5000 soldiers on Omaha beach, and promise the soldiers would be out by July. They set a goal, and promised to unleash whatever resources are needed for that goal. As senator Bradley reminded us, they knew that managing the peace is just as important as winning the war.

As John Taylor reminds us in his remarks today, monetary and financial policy has veered away from its traditional base in both domestic and international institutions and institutional limitations.

In economic and domestic affairs, the administration and its regulatory agencies are more and more telling people and businesses what to do, unconstrained by conventional rule-of-law restrictions and protections.

But what will happen on a change of administration? Will a new administration retreat, say we must restore rights and rule of law? Or will a new administration — once again — admire an expanded set of tools for ramming through its agenda, punishing political enemies, demanding cooperation of people and business, and set to work institutionally grabbing power for itself?

The temptation will be strong: To direct Lois Lerner’s successor to blackball different applications; to use campaign laws to persecute a different set of officials; to have its environmental, health care, and financial regulators demand the same tribute and that a different set of doors revolve; to wipe out its predecessors executive orders and issue new ones.

Or will it say, no, we eschew these methods, we will go back to respect and rebuild institutional limits, though it will take a long time and reduce our hold on power? Once the traditional restraints are broken, it’s awfully hard to go back.

The leading candidates have already promised which way they’re going. For example, Ms. Clinton, quoted by Kim Strassel, promises to use Treasury regulation to punish companies that legally reduce taxes by moving abroad. And Mr. Trump outrages the law and constitution daily.

Every society needs institutions to pass on its structures and traditions to the next generation. Grade for yourselves how well our schools and universities, even Stanford, are doing to pass on the lessons of limited government, rule of law, individual rights; the institutional wisdom of western democracy.

Our society’s premier institution for collecting, vetting, and passing on experience, science itself, is in trouble. The politicization of climate research is only the latest example.

Our policy debates are taking on a magical tone. Simple lessons of hundreds of years of experience, simple logic of cause and effect, and basic quantification, are disappearing.

Long experience tells us simple steps that encourage economic activity: Low, stable and simple taxes, good public infrastructure, an efficient legal system, predictable simple and uncorrupt regulations, and largely stay out of the way.

Long experience also teaches us many mistakes. For example, price and quantity controls induce scarcity, illegality, sclerosis and poverty. It also teaches that grand plan after grand plan for government directed growth or development has fallen apart.

But our policy debates chase ghosts instead. Rather than fix these humble and broken institutions, we are consumed whether Ms. Yellen might pay banks a quarter of a percentage more on their reserves. Action is regularly demanded over “bubbles,” “imbalances,” “reach for yield” “risk premiums” and so forth, as if anyone had any idea what these meant let alone scientific understanding of what one should do about them.

Serious people and international institutions advocate that the road to prosperity is for the government to borrow money and deliberately waste it; to confiscate wealth by extortionate taxation; to welcome natural disasters for their stimulative rebuilding opportunities; to deliberately throw sand in the gears of productivity; almost magic recommendations that ignore centuries of experience.

(To clarify: yes, we should keep our minds open new ideas. Quantum mechanics sounded like magic when introduced. I play with radical ideas too, such as the idea that higher interest rates lead to more, rather than less, inflation. The issue is, how quickly should new, revolutionary, everything you thought you knew is wrong ideas make their way to public policy? Too much economic policy jumps from "here's a cool idea I thought up on the plane" to "the US should spend a trillion bucks."  I do not advocate that the Fed should act on my latest paper!)

Our regulatory policy seems a parody of making the same mistakes over and over and refusing to learn the lessons.  The Dodd-Frank act is not a new idea. It simply tries again and bigger the same set of ideas that failed in crisis after crisis — guarantee debts, bail out banks, and add more regulators in the vain hope to stop increasingly large, politicized, too big to fail and hugely over leveraged banks from ever losing money again. The ACA/Obamacare is not a new idea. It just adds layer after layer of the same health insurance and care regulations that failed before. This time price controls will surely work to lower costs without cutting supply or innovation — let’s forget the thousands of times they have failed.

And economics is relatively sensible. Magical beliefs pervade our political system’s discussion about terrorism, migration, or the environment. No, a high speed train will not fill California’s reservoirs, or stop terrorism or refugee migration.

There is a late Roman empire feeling in the air. Conventional limitations on action are ignored. People distrust the great institutions of their society, have neglected them, and now they have forgotten how those institutions work. People follow inspirational leaders, who use any tools at their disposal to crush enemies — only to be crushed in turn. New magical faiths sweep through. I fear that our grandchildren will walk among wondrous ruins like medieval villagers, having forgotten how to make concrete.

Optimism

But I learned an important lesson from George Shultz: Any time I start down this sort of line of thought, he says, "Stop being so grumpy!"  As Ronald Reagan famously put it, there must be a pony in here somewhere.  There is.

Our society also has self-correcting institutions. You’re sitting in one, and you’re part of that process today. We’re here. The ideas that define a free — and prosperous — society are alive. The memory of a rule of law structure is alive.

We still have a free press, for now relatively free speech and most people still understand how important that is. The full potential of the regulatory and surveillance state to silence dissent has not yet been used. And in that press, and Internet, horror stories are adding up. People are getting sick of it.

Congress has noticed. There are good people who want to pass simple clear laws and bring back its rule.

For example, In November the House Judiciary Committee passed (WSJ commentary) a package of regulatory reforms. One is, to be guilty of a crime, you must have some intent to violate the law. They can’t charge you after the fact with unknowable laws or regulations, evidence such as statistical discrimination programs that you cannot see or challenge, and fine you millions or put you in jail without even claiming you intended any harm.

This principle of intent, “mens rea”, is a centuries-old bedrock of common law. It encodes a thousand years of experience. It is sad that Federal regulations forgot and trampled it. But it is great news that an effort to fix it is under way. A wider set of rights against regulators, a magna carta for the regulatory state, reestablishing the rights to know the rules ahead of time, to see and challenge evidence, to appeal, and to speedy judgment could well follow.

Financial regulators are seeing daily how ineffective the Dodd-Frank apparatus is. Slowly but surely, the realization that very simple capital standards can obviate this mess is making way. You heard it from Senator Bradley last night.

I see hope on climate. There is a small but increasing alliance between environmentalists and free-marketers. The environmentalists think carbon is such a big problem, that they want policies that will actually do something about it. Free marketers are aghast at the waste and cronyism of energy policy. They are coming together on a deal: A simple straightforward carbon tax in place of wasting money and economic capacity on tax dodges, crony subsidies and ineffective regulations. Sure, there will be a big discussion on the rate, but any conceivable rate will be a big improvement for both environment and economy.

Similar grand bargains on taxes and entitlements are sitting before us, needing only a small amount of leadership and public pressure. The experience of 1982 and 1986 is not forgotten.

A hunger for monetary policy anchored in rules or at least strong institutional traditions and constraints is palpable, even producing bills in Congress. Those may not be perfectly crafted, and may not pass. But the force for rebuilding an institutional structure for monetary policy is there.

Collegiate humanities and social science education has passed the point of the fashionable to the ridiculous, so that study of the successes of western civilization, and not just its many sins, is returning.

I don’t yet hear “it’s your property, do what you want with it” from the Palo Alto zoning board, or the citizens who elect them, but who knows, that too is possible someday.

Even the widely reported disgust with government has a silver lining. People who distrust the government are less likely to vote for the next big personality promising big new programs. Instead, they might be more attracted to candidates who promise restraint and rule of law; to administer competently and to repair broken institutions.

Our society codes its experience into its institutions; in a grand edifice we call limited government and rule of law. The old boat is rusty, but she’s not beyond hope. The bilge pumps are working. And we face no real external pressures. ISIS is the JV; compared to the Visigoths, or to Germany, Japan and the Soviet Union. A rich China should be a godsend, posing no more threat than a rich Europe and Canada. Silicon valley is full of ideas and entrepreneurs waiting to unleash prosperity on the country. If only they can get the permits. If we fail, and the grand forgetting takes over instead, the fault will only be our own.