AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Mon, 26 Jan 2015 22:10:54 +0000 en-US hourly 1 Tech policy 2015: The year ahead Wed, 21 Jan 2015 17:14:27 +0000 If you have trouble registering for this event, please contact

Please join AEI’s Center for Internet, Communications, and Technology Policy for a look ahead at the top tech policy issues of 2015. Senator John Thune (R-SD) will present a keynote address, and panels of AEI scholars and outside experts will discuss issues including net neutrality, the Communications Act, and municipal broadband, cybersecurity, Internet governance, and incentive auctions.

As tech policy issues move to the fore in the national debate, this conference will offer unique insights into the year ahead.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.

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The school choice journey: A conversation featuring US Senator Tim Scott Tue, 06 Jan 2015 22:15:02 +0000 The impact of school choice in America is about more than improved student test scores. School choice has the potential to inspire political activism among low- and moderate-income parents and families. In their thought-provoking new book, “The School Choice Journey: School Vouchers and the Empowerment of Urban Families” (Palgrave Macmillan, 2014), researchers Thomas Stewart and Patrick Wolf track the experiences of families participating in the DC Opportunity Scholarship Program, the first federally funded school voucher program based in the District of Columbia. They find that parents look to several factors when choosing a school for their child, and the impacts of school choice on parents and families go far beyond anything that can be measured by a standardized test.

We welcome you to join us at AEI during School Choice Week as US Senator Tim Scott (R-SC), Stewart, and Wolf discuss “The School Choice Journey” and why promoting school choice is important to expanding the range of education opportunities for every student in the United States, regardless of zip code.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.

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Did cutting unemployment benefits create jobs? Mon, 26 Jan 2015 21:08:10 +0000 In a new NBER working paper, Marcus Hagedorn of the University of the University of Oslo, Iourii Manovskii of Stockholm University and Kurt Mitman of the University of Pennsylvania – Tea Party extremists to a man, I am sure – conclude that 2014’s high job growth and decline in unemployment came not despite Congress’s December 2013 failure to renew extended unemployment benefits, but because of it. At the time, the usual suspects mocked the idea: “the G.O.P. answer to the problem of long-term unemployment is to increase the pain of the long-term unemployed: Cut off their benefits, and they’ll go out and find jobs. How, exactly, will they find jobs when there are three times as many job-seekers as job vacancies? Details, details.”

Apparently actual individuals looking for work may be more inventive than Prof. Krugman. Since that’s pretty much what appears to have happened.

Hagedon, Manovskii and Mitman take advantage of the fact that, prior to the failure to extend benefits, different states offered different durations of unemployment benefits. Some had the basic federal level of 26 weeks of benefits, while others were allowed to offer up to 47 weeks more. This produced a natural experiment in which unemployment benefits were cut much more in some state than others. What did the authors find?

A simple descriptive analysis shows a much faster employment growth in 2014 in high benefit states prior to the reform relative to their low benefit counterparts. The same finding holds if we compare the employment growth in counties that belong to high benefit states relative to their neighboring counties that belong to states with lower benefit durations prior to the reform.

Overall, they find that 61% of the growth of employment in 2014 can be attributable to the reduced duration of benefits available to the unemployed.

Does this mean that we should cut unemployment benefits to zero, or reduce all other benefits to the needy? No. But as I argued in a 2012 National Review article, using a very different example, incentives matter: whether it’s using carrots or sticks, the unemployed and those out of the labor force entirely need to want to get back in.

Follow AEIdeas on Twitter at @AEIdeas.

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Congressional leadership: thumbs up or down? Mon, 26 Jan 2015 21:00:05 +0000 POLITICO reported Monday that House Democratic Minority Leader Nancy Pelosi faces “unrest” within her party’s ranks as House Democrats head to Philadelphia for their policy retreat this week. House Democrats may be making known their opinion of Pelosi, but the rest of the leadership  team in the 114th Congress doesn’t fare much better.

The Pew Research Center most recently asked Americans about their overall opinions of all four party leaders in the House and the Senate. In December 2014, 47% of Americans had an unfavorable opinion of then-outgoing House Majority Leader Pelosi, down from a high negative of 55% in December 2010. Twenty-seven percent viewed her favorably. Forty-one percent had an unfavorable opinion of outgoing Senate Majority Leader Harry Reid, the highest unfavorable rating for him yet in Pew’s trend, while 20% viewed him favorably.

On the other side of the aisle, then-incoming House Speaker John Boehner and Senate Majority Leader Mitch McConnell fared about the same. Forty-six percent of Americans said they have an unfavorable opinion of the then-incoming Speaker, and 24% had a favorable opinion of him. As for McConnell, 37% reported an unfavorable opinion of him, while 21% expressed a favorable one.

Over the past few years, Pelosi’s ratings have been the weakest. According to the CNN/Opinion Research Corporation trend, a majority of Americans had an unfavorable opinion of her from January 2010 through September 2013. Boehner’s unfavorability breached the 50% mark in October 2013 (55%) in the midst of the government shutdown.

Pelosi’s support within her party caucus may be a bit shaken, but one thing is certain. Although they sit atop Capitol Hill, all four party leaders face an uphill climb to increase their standing among Americans.

Follow AEIdeas on Twitter at @AEIdeas.

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CBO: This is pretty much as good as America gets Mon, 26 Jan 2015 20:16:01 +0000 The Congressional Budget Office just released its 10-year budget and economic forecast. Let me boil it down for you: These are the good times. Enjoy them because things are unlikely to get much better. In fact, they are likely to get worse. For instance: CBO expects the US economy to grow at 3% this year and next, and at 2.5% in 2017. That’s a definite upturn in post-recession performance, though still below the postwar average of 3.4%.

But then deceleration: “For 2020 through 2025, CBO projects that real GDP will grow by an average of 2.2 percent per year—a rate that matches the agency’s estimate of the potential growth of the economy in those years.”

Or how about the budget deficit? At 2.6% of GDP, according to CBO, this year’s fiscal shortfall is projected to be the smallest since 2007 and a smidgen below the 2.7% that deficits have averaged over the past 50 years.

But then:

Although the deficits in CBO’s baseline projections remain roughly stable as a percentage of GDP through 2018, they rise after that. The deficit in 2025 is projected to be $1.1 trillion, or 4.0 percent of GDP, and cumulative deficits over the 2016–2025 period are projected to total $7.6 trillion. CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950 (see figure below). By 2025, in CBO’s baseline projections, federal debt rises to nearly 79 percent of GDP.

So this is America’s 21st century Golden Age … unless of course we do something about it. The CBO forecast is only a prediction of what may be, what we are on course to be — not what has to be. Let’s assume the worst and work that much harder to avoid that future and instead create one of prosperity and expanded opportunity.

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Maybe it really is this simple: Gasoline prices go down, Obama’s approval goes up Mon, 26 Jan 2015 19:50:00 +0000 Americans, we are so easy. A drop in gasoline prices and the folks in Washington start looking better and better. Particularly the president. Gasoline prices are down by a buck since last summer as global oil prices have collapsed. Also since last summer, President Obama’s approval ratings have surged. Gallup puts him back at 50% vs. 38% as September started. Now the correlation isn’t perfect and I am sure the causality is complicated, but this historical chart shows how tightly tightly prices and popularity have been connected:





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The New York Times just conceded something amazing about free-market capitalism Mon, 26 Jan 2015 19:19:56 +0000 The modern Democratic message seems to be that all those economic gains in the 1980s and 1990s that (easily) led to two-terms each for Ronald Reagan and Bill Clinton were illusory. Didn’t happen, at least not for middle-class America. As President Obama said back in 2013, ” …  over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”

But what do I see in the New York Times today? Well, the Paper of Record tells me that since the 1960s, the middle class – defined as households earning between $35,000 and $100,000 — has been shrinking. Guess, the Obamacrats are right. Wait … the nature of that decline has changed of late, however:

Few people noticed or cared as the size of that group began to fall, because the shift was primarily caused by more Americans climbing the economic ladder into upper-income brackets. But since 2000, the middle-class share of households has continued to narrow, the main reason being that more people have fallen to the bottom. At the same time, fewer of those in this group fit the traditional image of a married couple with children at home, a gap increasingly filled by the elderly.

Listen, I am pretty sure this is not the message — that the middle-class has been disappearing because it has been getting richer — I have been hearing from the mainstream media or Democrats for the past 30 years. I thought all that deregulation and deunionization and free trading and tax cutting had hollowed out the middle-class since the mid-1970s? Weird. Anyway, the middle-class stagnation and struggle of today is serious and worth noting, as I have written. And here is AEI’s Mike Strain in that Times piece:

“In the Great Recession, we lost a lot of middle-income jobs and we gained a lot of low-paying jobs,” said Michael R. Strain, resident scholar at the right-of-center American Enterprise Institute. “That’s a slower-burning thing, but it increased in ferocity during the recession, and people are feeling it.”

I guess the facts have finally caught up to the left’s insight.

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AEI kicks off school choice week Mon, 26 Jan 2015 18:54:49 +0000 School choice is a promising tool for education reform, allowing families to determine which school is best for their child and their child’s individual needs. To kick off National School Choice Week, here is a preview of AEI work on the issue, as well as an upcoming event:

Michael McShane on the economic argument for school choice:

“Given the trillions of dollars that have been spent and the countless attempts to reform the American education system, it is hard not to ask the question (as many have): what if the system itself is the problem? Enter school choice.

Rather than attempt to right the ship that is the $600-billion-per-year American education system, school choice policy attempts to create a system to replace it. This system, driven by the choices of parents and funding mechanisms that allow the money apportioned for the education of a child to follow her into the school of her choosing bypasses much of the existing bureaucracy, and empowers entrepreneurial school leaders to create new learning environments to meet the needs of students.”

New and Better Schools: The Supply Side of School Choice

Rick Hess on how to expand the appeal of school choice:

“The truth is that today’s school-choice programs are an enormous boon for low-income families trapped in lousy schools but of less interest to other families. After all, about two-thirds of families already “choose” their schools when they buy their residences, select private schools, or use public school-choice options…To broaden the relevance and appeal of school choice for middle-class families, conservatives must ensure that choice is not only a way for families to escape awful schools but also a way for more families to find schools that meet the needs of their children.”

“K-12 education reform to give the next generation a chance to thrive”

Join us for an AEI event, tomorrow January 27th, focused on the possibilities of school choice featuring Senator Tim Scott and researchers Thomas Stewart (Patten University) and Patrick Wolf (University of Arkansas). Register here.

Follow AEI on all things school choice on Twitter at #AEIschoolchoice.To arrange an interview with an AEI education scholar, please contact an AEI Media Services team member or email (202.862.5829).

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‘The Forgotten Depression,’ by James Grant Mon, 26 Jan 2015 18:50:58 +0000 When the next big economic disaster hits, Washington will almost certainly choose to do something: cut taxes, increase spending, lower interest rates. There is another option, of course: do nothing. No fiscal or monetary stimulus. Let the fire burn the rot of excess from the system. From the ashes, goes this theory, a healthier, more balanced economy will emerge.

So opponents of government action — Tea Party Republicans, libertarians, devotees of Austrian economics — do have a plan of sorts. What they don’t have is a compelling story to persuade policy makers or the public. The high school history book lesson of the Great Depression — government inaction in the face of economic upheaval courts collapse — dominates. Much like the Tin Woodman in that Depression-era classic movie, “The Wizard of Oz,” austerians and liquidationists require a testimonial. And it is the need for a success story that drives “The Forgotten Depression,” by the financial journalist James Grant, the founder of Grant’s Interest Rate Observer. Subtitled “1921: The Crash That Cured Itself,” the book tells the tale of the other great slump of the early 20th century.

Pre-World War II economic data can be dodgy, but by the measures Grant prefers, the 1920-21 downturn saw output fall by nearly 10 percent, stock prices cut almost in half and unemployment surge to about a fifth of the labor force. The contraction’s severity can be seen in words as well as numbers. Grant points out the “bitterly sardonic” lyrics of the 1921 hit “Ain’t We Got Fun,” a song often associated with Roaring Twenties ebullience but one that he says was inspired by the decade’s depressionary start: “In the winter, in the summer / Don’t we have fun? / Times are bum and getting bummer / Still we have fun.”

But music failed to soften hearts in Washington. Instead of splurging on shovel-ready jobs to stimulate growth, the budget was balanced. And rather than cut interest rates to boost borrowing, the new Federal Reserve tightened the money supply. As Grant writes: “The successive administrations of Woodrow Wilson and Warren G. Harding met the downturn by seeming to ignore it — or by implementing policies that an average 21st-century economist would judge disastrous. . . . Yet by late 1921, a powerful, job-filled recovery was underway. This is the story of America’s last governmentally unmedicated depression.”

For Grant’s flavor of austere, micro-government conservatism to expand its appeal, this is a story that must be told. The Great Depression narrative not only informs modern policy responses during crises, it’s also the ur-justification for big government. But the present Not-So-Great Recovery — despite an $800 billion fiscal stimulus and inventive Fed monetary policy — has perhaps cracked open the window for a different story, one of “instructive inaction.” And if the better way to deal with a downturn is for government to do nothing, then maybe government should do a whole lot less in other areas of life as well. Grant’s forgotten depression is considered a natural economic experiment in economic freedom by those who think the American project went horribly off track with Franklin Roosevelt’s election in 1932.

Yet whatever the broader merits of Grant’s minimalist philosophy, the supposed hands-off approach to the 1920-21 depression provides a poor argument for it. Grant’s laissez-faire depression was actually an economic episode in which government — via its new central bank — played an active and critical role throughout. Grant himself concedes that “easier money” helped account “for the power of the 1922 rebound.” A better natural experiment for Grant’s depression-fighting formula is what’s happening in the eurozone right now. With a jobless rate over 11 percent, a combination of fiscal austerity and tight money is on the verge of sending the region into its third recession since 2007. But who knows, maybe it will generate a catchy tune or two.

Grant’s book is a lively exercise in economic nostalgia, a game effort to build a bridge to the pre-New Deal era when the tax burden was tiny, the dollar defined by gold and government let business do as it would. But as an economic guide for 21st-century policy makers in a crisis, the forgotten depression is best forgotten.

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Yes, it’s constitutional for Congress to pass abortion laws Mon, 26 Jan 2015 18:03:46 +0000 A number of correspondents, and Jonathan Adler and Charles Cooke online, question the constitutional justification for federal abortion legislation, including a ban on most late-term abortions. (See NR’s editorial today, by the way, about how House Republicans have mishandled that issue in recent days.)

I believe such legislation complies with the Constitution, and indeed that more extensive legislation would comply with it. The case that such legislation is constitutionally authorized need not rely on a commerce-clause jurisprudence that most conservatives consider much too expansive in its view of the legitimate role of the federal government. Instead the case rests on the Fourteenth Amendment.

That amendment requires states to give “all persons” the equal protection of the law, and empowers Congress to “enforce” that guarantee. The protection against being deliberately killed is the most basic legal protection a person can have, and it is not being provided to all persons. If a state does not offer that protection to persons, Congress may intervene either by forcing states to perform this duty or by stepping in itself.

Nothing in the preceding paragraph is controversial when we are thinking about cases other than abortion. Nobody thinks that it would be constitutionally permissible for Alabama to announce that it will no longer enforce homicide laws to protect the odd Belgian tourist inside its borders, or the state’s adolescents, or that Congress would be exceeding its powers to intervene in these situations. (There might be arguments about how Congress should respond, but nobody would deny in principle that it has constitutional authority to intervene.)

Yet it is not just controversial to apply this same logic to legal protections for unborn children, it is a distinctly minority position. No justice of the Supreme Court has held that unborn children count as “persons” for the purposes of the Fourteenth Amendment. One of the few justices to consider the question — Antonin Scalia — has denied it emphatically: “I think when the Constitution says that persons are entitled to equal protection of the laws, I think it clearly means walking-around persons.”

Scalia is one of the best justices in American history, and I hesitate to disagree with him — not to mention with the late Robert Bork, who took the same view. Three considerations defeat that hesitation. First, none of the conservative justices has considered the precise question of whether Congress may legitimately act on the understanding that unborn children are persons within the meaning of the amendment; they have not even, so far as I know, considered it in speech. (Proponents of partial-birth abortion, for example, never really pressed the argument that a ban on it exceeded the commerce clause or Fourteenth Amendment authority of Congress.) Second, Bork, Scalia, and other conservative jurists have typically taken up the issue of personhood in the context of whether the federal courts should prevent states from allowing abortion or should somehow force them to forbid it. Third, the argument that these men have adduced against personhood for unborn children is weak.

That argument is one that Justice Harry Blackmun made in Roe v. Wade, where it makes its first appearance in constitutional law. It is that most references to persons in the Constitution have no possible prenatal application, and therefore when it refers to persons it cannot be including unborn children. Blackmun notes, for example, that the Constitution commands states to extradite any “Person charged in any [other] State with Treason, Felony, or other Crime, who shall flee from Justice.” That’s probably not going to be a fetus. Another constitutional provision Blackmun mentions: “No Person shall be a Representative who shall not have attained to the Age of twenty five Years . . . ”

That provision, though, also excludes 23-year-olds. Are they not “persons” within the meaning of the equal-protection clause? Newborns aren’t likely to flee from the criminal-justice system either. Are they not persons? (The problem with this argument attaches as well to Scalia’s offhand remark about “walking-around persons.” Surely he does not mean to exclude those in wheelchairs, or toddlers, from equal protection where an application would be appropriate.) There is no reason to assume that all references to “person” in the Constitution will apply to the same people.

The text of the amendment says “all persons,” does not define persons, and commits enforcement to Congress. If members of Congress have used their reason to determine that unborn children are, in truth, persons, the text seems to open the door for them to treat them as such for equal-protection purposes.

Of course this does not mean that the people who ratified the amendment had the specific intent of authorizing federal anti-abortion laws — or of producing other effects that the Fourteenth Amendment could correctly be read to require. But no sensible interpretive methodology insists on such specific intent. Occasionally you come across conservatives who believe that the equal-protection clause applies only to racial discrimination because that was the kind of discrimination that occasioned it. But that argument is rarely taken seriously because the decision was clearly made to frame and ratify the amendment at a higher level of generality than that. States can’t withdraw the protection of the homicide laws from gays, either, even though nobody in 1868 was thinking about them.

And as it happens, we do have evidence that lawmakers in that era considered unborn children to be persons who deserved legal protection, even if they were not thinking of that question specifically when debating the Fourteenth Amendment. The states were tightening anti-abortion laws in that period, laws that were plainly premised on a belief in the personhood of unborn children. (Blackmun attempts to rebut this point in Roe, but unsuccessfully.) Indeed, that is the chief way that law can recognize their personhood.

All of which suggests that constitutionally conscientious federal legislators can, and should, do what they can to provide legal protection to human fetuses past the age of 20 weeks, and for that matter before it.

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How many families would be left out of Obama’s tax plan? Mon, 26 Jan 2015 16:58:03 +0000 ...]]]> President Obama took flack from me and others last week for floating a middle-class tax plan that left families with a stay-at-home parent out of the picture. His plan—which would offer dual-earner families with an income of less than $120,000 up to $3,000 per child in a childcare tax credit and a $500 credit for having a second earner—was designed to offset the costs associated with having a second worker in the labor force. But in targeting dual-earner couples, the president offered nothing to middle-class families with a stay-at-home parent. How many families are we talking about?

More than 6 million, according to current trends. Those are all the married families with a single earner, at least one child under 18, and an income of less than $120,000; they account for 36 percent of all middle-class married families. These 6 million families would be ineligible for one or both of Obama’s proposed benefits. A greater share of middle- and lower-income married families with children under five have a single earner and would therefore be ineligible for both of these tax benefits.

Source: American Community Survey. Notes: This data includes all married couples with at least one child under age 18 in the household using the ACS. (Married teen-parent subfamilies, of whom there were nine, were dropped from the sample.) Family income is the sum of wage/salary incomes of the household head and his or her spouse.

Source: American Community Survey. Notes: This data includes all married couples with at least one child under age 18 in the household using the ACS. (Married teen-parent subfamilies, of whom there were nine, were dropped from the sample.) Family income is the sum of wage/salary incomes of the household head and his or her spouse.

What gives here? Why did the president overlook or deliberately exclude families with stay-at-home parents—usually moms? The White House plan was designed both to make it easier for double-earner families to make ends meet and to draw more women into the labor force. The former concern is especially important, since a fair number of mothers would like to be in the labor force but cannot afford to work given the costs of quality childcare. This is particularly an issue for lower-income families who often would have to spend more on childcare, commuting costs, and other work-related expenses than a second earner would get in wages. So mom often stays home in these situations, as economists Melissa Kearney and Lesley Turner have noted. This is one reason why stay-at-home parents are much more common among lower-income married families (see figure below).

Source: American Community Survey. Notes: This data includes all married couples with at least one child under age 18 in the household using the ACS. (Married teen-parent subfamilies, of whom there were nine, were dropped from the sample.) Family income is the sum of wage/salary incomes of the household head and his or her spouse.

Source: American Community Survey. Notes: This data includes all married couples with at least one child under age 18 in the household using the ACS. (Married teen-parent subfamilies, of whom there were nine, were dropped from the sample.) Family income is the sum of wage/salary incomes of the household head and his or her spouse.

So, is the solution to just support families with two earners in the labor force, or those who would like to have both parents in the labor force but feel like they cannot afford to do so? No. The problem with Obama’s plan is that it overlooks not only families who currently have a stay-at-home parent and would like to keep it that way but also the substantial share of dual-earner families who would like to have a parent at home but feel they cannot afford to do so. In addition, it discounts the important caregiving, domestic work, and civic contributions that these stay-at-home parents make, benefitting the economy as well as the commonweal. The Obama plan would be particularly unfair to parents who are staying home to give children with physical or emotional problems the extra parental care they need.


Today, we live in a world where no one model of work and family captures the hearts and minds of married men and women trying to do right by their families. Some couples want dad at home, some want mom at home, and some want both parents in the labor force. The most popular work-family ideal for married mothers is somewhere between the extremes of working full-time and staying home: it is working work part-time, as a recent survey from the Pew Research Center indicates. (Working full-time and being at home full-time are the next most popular options for married mothers.)

If the president wishes to deliver tax relief that honors the ideals of all lower- and middle-income couples struggling to raise families today, there are some better policy options out there—from Senators Lee and Rubio’s tax reform plan to Robert VerBruggen’s proposal for a refundable child tax credit, which would “ease some of the financial hardships of parenthood without putting a thumb on the scale for parents facing hard choices about work and child care.” Let’s hope that President Obama and the Republican Congress can find common ground in 2015 to deliver middle-class tax relief that honors the work-and-family choices of all families.

W. Bradford Wilcox is a senior fellow at the Institute for Family Studies and a visiting scholar at the American Enterprise Institute.

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New study: No, free-market capitalism doesn’t make nasty economic shocks more likely Mon, 26 Jan 2015 16:21:02 +0000 As you may have heard, many left-wing liberals blame the Financial Crisis and Great Recession on free-market economics. (Just like they blamed the Great Depression on too much economic freedom. As the Sacred Scrolls foretell: “All this has happened before, and all this will happen again.”) See what happens when there is too little government, too little regulation! Round up the usual blame-capitalism suspects: Paul Krugman, Joseph Stiglitz, Noam Chomnsky. the Democratic Party.

Of course, folks on the right counter by arguing that if you peel back the onion, the destructive hand of government eventually reveals itself. So who’s correct? Well, Milton Friedman would sure like the conclusion of the new paper “Economic Freedom and Economic Crisis” by Christian Bjørnskov of Sweden’s (!) Research Institute of Industrial Economics:

In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crisis. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993-2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.

Bjørnskov measured economic freedom by using the Heritage Foundation’s Index of Economic Freedom. He then analyzed subsequent crisis risks as economic freedom changed, and the duration, depth and recovery time of crises when they occurred. He found that “increased economic freedom is only weakly associated with the probability of observing a crisis” and “not at all with the duration of economic crises.” Shocks also tend to be smaller, and the return to pre-crisis real GDP quicker.

So what exactly is the mechanism here? Why apparently are more economically free nations more resilient? Why do they seem to have — to use a Japanese word —  sokojikara,  or reserve strength? Bjørnskov says it is a story about how a more dynamic economy reallocate’s resources:

An interpretation that therefore offers itself is one of reallocation costs during crisis. As a crisis hits an economy, a substantial share of resources become unemployed, which creates profit opportunities for entrepreneurs to the extent that these resources become cheaper. Yet, whether or not this happens and at which speed existing firms and new entrants can reallocate resources depends on the regulatory framework. Licensing requirements and similar business regulations constitute entry barriers that prevent entrepreneurs from seizing legal opportunities and thereby limiting the economic and social losses during crises. Unstable monetary policies and inflationary interventions prevent the formation of precise price expectations, thereby increasing uncertainty, which would also hold back new investments (Friedman, 1962). Finally, labour market regulations can make it both more expensive and risky to hire new employees, providing a third channel through which deficient or inefficient regulations significantly increase the transaction costs of reallocation. Consistent with the evidence, this does not prevent a crisis from occurring, but limits its extent as more firms in a flexible economy can react faster and in a more economical way to the challenges and opportunities created by the crisis.

So some reasonable advice for policymakers, as I see it: First, do no harm. An economic crisis is probably not the best time to launch major new regulatory initiatives. In fact, it would be a good time to look at dismantling regulations that hinder startups (including new banks during a financial crisis.) As economist Michael Feroli has noted, ” … the decline in start-up activity has been a disconcerting feature of this expansion.” Oops.

Second, keep monetary policy stable, preferable through a steady, predictable rule like nominal NGDP targeting. Indeed, the Great Depression/Recession are both stories of monetary instability. And both also saw a big expansion of government’s regulatory power. As economist Scott Sumner explains about the 1930s, ” … a promising recovery in real GDP was aborted in late 1933 by the ill-advised National Industrial Recovery Act, which sharply raised wage rates.”

Third, help workers get back into the labor force or find better opportunities. So think about worker retraining, relocation vouchers, and the harmful effects of non-compete agreements. Distressed economies need more dynamism, not less.

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