Immigration, trade, and child care

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?


I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.  As the WSJ points out in a recent editorial,

... regulation drives up the cost of care. States set minimums on square feet per child; licensing requirements; ratios for staff-to-children; group sizes. Zoning laws prevent care centers in convenient places such as residential neighborhoods. Regulation also limits options like informal care at grandma’s house or families who share nannies.

On the latter, zoning, for example, forbids commercial activity in residential-zoned areas, like the ones where people live. And WSJ left out the full weight of American labor law and taxation. Anyone who has tried to legally hire a nanny has a good sense of that. (See also Ivanka Trump's oped  describing the plan.)

Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)

A lot of economics comes down to: Supply competition is the best answer to just about every economic problem. 

This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.

The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!

This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.

(If you can't see the supply and demand graph, try here.)  Demand slopes down. The less child care costs, the more of it people buy.  Supply curve slopes up. If child care workers can charge more, more people take those jobs or set up child care businesses.

The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.

There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.

This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.

The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.

Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers. 

The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.

With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry. 

The journal gets this

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The graph offers a little more precision. Subsidies only raise college expenses because of restricted supply. The Administration's war on for profit colleges unambiguously pushes the supply curve to the left.

On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.

The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.

(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)

Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books.  This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...

Testimony

I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary, but a chance to put my thoughts together on how to get growth going again, and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony, with lots of explanation and footnotes, is here. (pdf) (Getting footnotes in html is a pain.)

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.

Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.

How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.

Regulation:


Let’s get past “too much” or “too little” regulation, and fix regulation instead.

Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.

Congress can fix this.

Social programs

Let’s get past spending “more” or “less” on social programs, and fix them instead.

Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.

Spend more to spend less.

Spending is a serious problem. But moving spending off the books does not help.

For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.

Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.

The budget would look bigger. But we would really spend less -- and grow more.

Taxes

Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.

First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.

A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.

Debt and deficits

Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.

First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem.  Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.

The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.

Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.

Above all, undertake this simple, pro-growth economic policy, and grow out of debt.

Concluding comments

You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.

Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.

Settlement skulduggery

Andy Koenig had a WSJ oped on a subject getting far too little attention. When the government goes after big companies such as banks, and obtains huge out of court settlements, just where does the money go?

...In conjunction with the Justice Department, the RMBS Working Group ["a coalition of federal and state regulators and prosecutors"] has reached multibillion-dollar settlements with essentially every major bank in America.

...in April ... the Justice Department announced a $5.1 billion settlement with Goldman Sachs. In February Morgan Stanley agreed to a $3.2 billion settlement. Previous targets were Citigroup ($7 billion), J.P. Morgan Chase ($13 billion), and Bank of America,... $16.65 billion...

The money does not go to any individual who demonstrably lost money as a result of the banks' actions. Instead,

... a substantial portion is allocated to private, nonprofit organizations drawn from a federally approved list. Some groups on the list—Catholic Charities, for instance—are relatively nonpolitical. Others—La Raza, the National Urban League, the National Community Reinvestment Coalition and more—are anything but.

...Many of these groups engage in voter registration, community organizing and lobbying on liberal policy priorities at every level of government. They also provide grants to other liberal groups not eligible for payouts under the settlements...

...Most of the deals give double credit or more against the settlement amount for every dollar in “donations.” Bank of America’s donation list—the only bank to disclose exactly where it sends its money—shows how this benefits liberal groups. The bank has so far given at least $1.15 million to the National Urban League, which counts as if it were $2.6 million against the bank’s settlement. Similarly, $1.5 million to La Raza takes $3.5 million off the total amount of “consumer relief” owed by the bank...

As part of their “consumer relief” penalties, Bank of America and J.P. Morgan Chase must also pay a minimum $75 million to Community Development Financial Institutions—taxpayer-funded groups propped up by the Obama administration as an alternative to payday lenders. “Housing Counseling Agencies” also get at least $30 million. This essentially circumvents Congress’s recent decision to cut $43 million in federal funds routed to these groups through the Department of Housing and Urban Development.

The politicians who negotiate the settlements as part of the RMBS Working Group have also directed money to their supporters and states. Illinois’s Democratic attorney general Lisa Madigan announced she had secured $22.5 million from February’s Morgan Stanley deal for her state’s debt-ridden pension funds—a blatant payout to public unions. The deals with J.P. Morgan Chase, Bank of America and Citigroup yielded a further $344 million for both “consumer relief” and direct payments to pension funds.

New York hit the jackpot too. Attorney General Eric Schneiderman, also a Democrat and chairman of the RMBS Working Group, arranged for Morgan Stanley to fork over $400 million to New York nonprofits and $150 million to the state.

I wrote about this quite a while ago, when I was astonished to find the Federal Reserve going along with the DOJ and attorneys general, using its "safety and soundness" regulatory power to force banks to give money to activist groups.

This story rings a few bells.

1) Regulation. What's wrong with regulation and economic law is not really "too much" or "too little" -- the standard old argument --but how it works -- the steady politicization of economic law and regulation, the decline in rule-of-law protections, the increasing use of the Administrative state to force political compliance.

Why didn't the banks fight? Why didn't they object to where their money was going? Why do they (except B of A) not even disclose their "charitable" contributions under the settlement? The government, now with the Fed along for the ride, can really make their lives difficult, of course! Hefty speaking fees to likely political officials, a strong revolving door to Washington, and keeping the payments secret are cheap investments to keep this sort of thing at bay.

2) Nonprofits. The public image of nonprofits are Red Cross, or Stanford. As you can see, many "nonprofits" have become a way to funnel money to politics.  I'd like to get rid of "nonprofits," or to the corporate tax and estate tax which creates nonprofits.  I think the good ones will survive. The substitution effect should outweigh the income effect.

3) Spending. Another tired argument is too much vs. too little spending. But look how our government manages to direct A to give to B, all the while keeping the tax and spending off the books.


What to do? Koenig suggests

... Rep. Bob Goodlatte (R., Va.) introduced a bill in April that would prevent government officials from enforcing settlements that funnel money to third parties, and it needs to gain wider traction with his colleagues. The political shakedowns disguised as public service must end.

This does seem like a practice that Congress could end, this way or others. Any money paid in a legal settlement must go to people actually hurt by the illegal action, or to the US Treasury.

There isn't a magic bullet. The dissolution of rule of law has to be met by, well, laws with rules in them.

Blueprint for America

"Blueprint for America" is a collection of essays, organized, edited and inspired by George P. Shultz. You can get an overview and chapter by chapter pdfs here. The hardcover will be available from Amazon or Hoover Press October 1.

Some of the inspiration for this project came from the remarkable 1980 memo (here) to President-elect Ronald Reagan from his Coordinating Committee on Economic Policy.

Like that memo, this is a book about governance, not politics.  It's not partisan -- copies are being sent to both campaigns. It's not about choosing or spinning policies to attract voters or win elections.

The book is about long-term policies and policy frameworks -- how policy is made, return to rule of law, is as important as what the policy is --  that can fix America's problems. It focuses on what we think are the important issues as well as policies to address those issues -- it does not address every passion of the latest two-week news cycle.

The book comprises the answers we would give to an incoming Administration of any party, or incoming Congress, if they asked us for a policy package that is best for the long-term welfare of the country.

The chapters, to whet your appetite:

INTRODUCTION
CHAPTER 1: The Domestic Landscape by Michael J. Boskin
IN BRIEF: Spending by George P. Shultz
CHAPTER 2: Entitlements and the Budget by John F. Cogan
CHAPTER 3: A Blueprint for Tax Reform by Michael J. Boskin
CHAPTER 4: Transformational Health Care Reform by Scott W. Atlas
CHAPTER 5: Reforming Regulation by Michael J. Boskin
CHAPTER 6: National and International Monetary Reform by John B. Taylor
CHAPTER 7: A Blueprint for Effective Financial Reform by John H. Cochrane
IN BRIEF: National Human Resources by George P. Shultz
CHAPTER 8: Education and the Nation’s Future by Eric A. Hanushek
CHAPTER 9: Trade and Immigration by John H. Cochrane
IN BRIEF: A World Awash in Change
CHAPTER 10: Restoring Our National Security by James O. Ellis Jr., James N. Mattis, and Kori Schake
CHAPTER 11: Redefining Energy Security by James O. Ellis Jr.
CHAPTER 12: Diplomacy in a Time of Transition by James E. Goodby
CLOSING NOTE: The Art and Practice of Governance by George P. Shultz

My chapter on a Blueprint for Effective Financial Reform is a better version of the talk on Equity Financed banking which I posted here. (The talk was based on the paper. Now you have the paper.)

My chapter on Trade and Immigration is new, and an uncompromising red-meat free-market view. I don't think one should compromise centuries old economic understanding just because it's not politically popular at the moment.
 
If you got this far, you might also be interested in my Economic Growth essay written for a parallel but similar project.

Brexit or Fixit

Many commenters compare Brexit to the American revolution. I think the constitutional convention is a better analogy for the moment and challenge ahead. A first attempt at union resulted in an unworkable Federal structure. Europe needs a constitutional convention to fix its union.

The EU's first attempt was basically aristocratic/technocratic. Brussels tells the peasants what to do. The EU  needs a hardy dose of accountability, representation, checks and balances -- all the beautiful structures of the US Constitution. What little thought the EU put in to these matters is clearly wanting.

America did not wait for a state to leave. But, though even the Pope admits the EU structure wasn't working, the EU needed this wake up call. Bring the UK to the convention, and bring them back. Fixit. (#Fixit?)


Out of control economic regulation, labor laws, mandated social programs and "60% of British laws are made in Brussels" (I don't know the source of the widely quoted number, but the sentiment is as important as the fact)  are the most sensible arguments I heard for Brexit.

Fraser Nelson's WSJ essay expressed this well

The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary... Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.

The important point, I think, is not the outcome -- too much silly regulation, labor laws, and so on. The process is the important point.

America is, in my opinion, also a victim of stifling economic regulation, job-killing labor laws, incentive-destroying social programs. But, we still have a process in place -- in trouble, creaky, under attack by results-at-any-cost progressivisim.  But we have a process. Regulations are supposed to be authorized by Congress; should follow the Administrative Procedures act, with public comment, cost benefit analysis, and so forth; can be challenged administratively and then in court; and Congress itself can pass laws over-ruling regulators (which the President can veto, as he has).  Europe is missing this process; and european law is even worse than economic regulation here.

Last week's immigration ruling is an example of the same forces under strain in the US. I happen to agree with the Administration on policy grounds: People who have been here their whole lives, parents of US citizen children, should not face the constant risk of deportation, and should be allowed to work legally. (I had no idea there was such a thing as a "work permit" in the US, until President Obama mentioned it.) But, Congress passed silly laws mandating the opposite, and the Administration moved beyond its authority. When States are suing the Administration in the Supreme Court over its actions, we are in danger of Texit. But at least Texas can sue. Britain had no similar way to object to EU edicts.

Process matters, because democracy needs to form consensus and acceptance. When you force things down people's throats, they eventually gag.

Again quoting WSJ

Instead of grumbling about the things we can’t change, Mr. Gove said, it was time to follow “the Americans who declared their independence and never looked back” and “become an exemplar of what an inclusive, open and innovative democracy can achieve.” Many of the Brexiteers think that Britain voted this week to follow a template set in 1776 on the other side of the Atlantic. 

The answer for Europe is that it must allow people the option to change things they don't like. And 1787, not 1776 is the inspiration.

On economics, I think it's overblown.

Will this be a disaster for the British economy? Probably not. Norway, Switzerland, and Japan seem to get along.  If the UK decided to be a free economy free trade and open banking center, it could do wonders.

It is nice to see a consensus (though sometimes implicit) on the advantages of free trade. Leave did not argue for the importance of preserving British jobs with trade restrictions.  Alas, "free trade" now means "access to markets" or managed mercantilism.

The benefits of a continent-wide open labor market are easy to see in my business. As I visit universities around Europe, the typical smart young professor might come from Slovakia, have done an undergraduate degree in Spain, Masters' in the UK, PhD in Italy, is working in Sweden, with spouse working in London. The result is a resurgence of European universities, now dramatically better than they were two decades ago. The irony of Brexit is that English is the common language of Europe, making this integration possible.

So why are markets going so wild? I think political follow-on is very unstable. If Brexit leads to Britain becoming Norway it's not a big deal. If the UK breaks up, and the EU breaks up, we have big trouble ahead. Fixit instead.

Right Wing NPR

I was listening to NPR this morning over coffee, and nearly spilled it. Host Steve Inskeep was interviewing Mark Surman, Mozilla founder, on the topic of Apple refusing to hand over the keys to the Iphone to the Federal Government (and anyone who might be able to hack the Federal Government. Oh, right, that's never happened!)

INSKEEP: One last thing, coming back to this San Bernardino case, we don't know what's in that iPhone. We don't even know if it's important. But let's spin out the worst case scenario as a prosecutor might. Suppose your side wins, that phone is never opened, and as a result, the government misses a chance to find some other suspect and disrupt some attack. The attack goes forward, and people are killed. Will that have been worth it in order to protect encryption?

Surman, probably flabbergasted that anyone should ask such a question, changed the subject

SURMAN: We need to find ways to really be able to seek communications before they're sent or after they're sent and actually work with law enforcement on doing this well. There are alternative ways to get information, getting access to it before or after it's encrypted. What we want to avoid is creating a precedent where encryption can be broken by an arbitrary third party.

But Inskeep kept at it

INSKEEP: So you're saying, in essence, it may well be harder to catch terrorists, but you can still work at it, and the extra difficulty is worth it.

Remember, this is cloyingly liberal NPR, not some foaming at the mouth right wing program!

Like Surman, I often am too polite to give the right answer to such shocking questions in real time. But with the benefit of hindsight, here's a better answer

COCHRANE: Well, come to think of it, you're right there Steve. And while you're at it, let's keep going. These pesky first and fourth amendments sure get in the way of law enforcement, don't they? I mean all this business about going out and getting warrants, and waiting for a judge is so time consuming. If a terrorist gets away while you're busy getting a warrant, and people are killed, will that really have been worth it to protect some sort of centuries old procedures? If someone stirs up trouble on a Jihadi website, why do we have to allow that? And this annoying business about grand juries, and presenting evidence, and discovery, and Miranda warnings, it's so burdensome. What if some terrorist gets away and kills someone?  The police surely should be allowed to just throw anyone suspicious in jail, to make sure they don't do anything bad. Heck, while you're at it, what's with these prohibitions against torture? Bring back the rack, or start chopping people's fingers off until they talk. If you hold back, and some terrorist kills someone, was your little sense of ethics really worth it?  

There is a reason we have all these protections. There is a reason we need to defend them even in times of turmoil.

Perhaps a President Hillary Clinton will bring a sympathetic ear to the right to digital privacy. She undoubtedly wishes her email had been bullet-proof encrypted, not just from the FBI and NSA, but from the Chinese and Russian hackers likely reading every line.

Update: I realize from some of the comments that the point may not have been clear. This isn't about the Apple decision. It's moot, really, anyway, as even Apple can't open the new Iphones. And one can make cost/benefit arguments either way. My point was about the argument: We will hear quite often in coming years and decades, the argument that even one terrorist caught is worth sacrificing privacy and civil liberty. Be prepared to answer, to point out there are costs as well as benefits, and to list what they are. And, finally, I sound more critical of Inskeep than I should. In fairness, he does not offer an opinion. He asks a question, one commonly asked, and may well have been floating a t-ball in the hope Surman would smash it out of the park as I attempted to do.  Many people will ask that question. It's worth asking, over and over, and rehearsing the answer.

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.