Economic Freedom and Economic Opportunity: R. R. Reno Discovers Economic Growth, Blames Capitalism

 
 

Leaders should get the facts straight before they start theorizing.

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R. R. Reno has replied to my Public Discourse essays about regulation and economic freedom (here and here), and his answer is illuminating, although not quite in the way he intends.

Reno concedes that there has been “a vast increase in regulations” in the last forty years, which is a step toward a realistic understanding of the contemporary economy and an unacknowledged if still welcome retraction of his various past statements to the contrary. Reno still thinks, however, that we have more economic freedom than in the past. How is that possible if we have vastly more regulation? Well, Reno says, “technological, cultural, and political developments over the last two generations have greatly expanded the scope for economic activity,” and people who “allocate capital, produce and retail goods, and sell their labor have far more opportunities” than they had in the recent past. “Some new restrictions have been imposed” to control all this new activity, but the net result is “an expansion of economic freedom.”

This finally makes it clear how an intelligent man like Reno could have argued for the obviously false proposition that there has been a substantial decrease in economic regulation: he has confused two meanings of the word freedom.

Reno Confuses Two Meanings of the Word Freedom

Freedom usually means an absence of legal restraint. When we refer to “freedom of religion,” for example, we mean that the law does not control what we believe about God, how we worship, what we teach in religious schools, and so on. This, in my view, is the proper meaning of the word freedom, and it is the meaning that conservatives generally have in mind when they use the word. In this sense, freedom is inversely proportional to regulation—the more regulation, the less freedom, and vice versa. The “vast increase in regulation,” which Reno now concedes is a reality, means that there is less freedom in this sense today than in the past.

But there is another meaning of the word freedom, one often used by political liberals to disguise what they’re really talking about, in which freedom means power and opportunity. In this sense of the word, someone who grows up rich has more “freedom” than someone who grows up poor. Both individuals are subject to the same set of legal restrictions on their actions, but because one of them has money, education, and connections, he has a vastly greater set of opportunities in life than the other. He is “free” to go to graduate school, ski in the Alps, and attend the Metropolitan Opera because he has the means to pay for these things, whereas the other fellow, being poor, cannot afford them. Of course, it would be clearer to say that the one person is much richer than the other, maybe with a pointed reminder that being rich comes with all kinds of advantages, than to say that the one is “freer” than the other. But, since everyone (except maybe Reno nowadays) is in favor of “freedom,” describing a scheme to redistribute wealth as a plan to increase “freedom” often has practical political advantages. Hence this dubious use of the word freedom to mean “having advantageous opportunities in life.”

I never before encountered anyone applying the word “freedom” in this misleading sense to societies as wholes, but Reno proves it’s possible. As he’s using the word, people who live in wealthy, developed societies where they can buy a very wide range of consumer goods, engage in all kinds of business transactions, and invest in a broad variety of investments are “freer” than people who live in poorer, less developed societies with more limited opportunities—all quite apart from the question of the level of economic regulation in such societies.

To see the difference between these two concepts of freedom on a society-wide basis, consider this example. Imagine a primitive society, isolated from the outside world, in which virtually everyone engages in subsistence farming. The society has only a rudimentary legal system and virtually no economic regulation; hence, people in this society would have nearly complete economic freedom in the normal sense of the word. On the other hand, these same people would have extremely limited economic opportunities and so would enjoy very little economic freedom in Reno’s sense. Conversely, we can imagine a wealthy and technologically advanced society in which people have a very broad set of economic opportunities. Over time, government regulation of the economy in this society may increase, thus reducing the amount of freedom people enjoy in the normal sense of the term, even though they continue to enjoy a great deal of opportunity and “freedom” in Reno’s sense. In fact, we don’t need to imagine such a society: it’s the actual society in which we live.

Now, although different, these two senses of the word freedom are related to each other, for government regulation, in prohibiting or limiting certain kinds of economic activity, reduces the range of economic opportunities available to individuals and businesses. But regulation is only one factor among many affecting the range of economic opportunities available. Maybe the most important factor is the simple accumulation of capital assets over time, both public (roads, airports, infrastructure generally) and private (telecommunication networks, factories, equipment, and so on). The existence of capital assets makes all kinds of employment involving them more productive and so more remunerative to the people engaged in such employment. A guy who digs ditches with a backhoe accomplishes a lot more a lot faster (and so earns more money) than a guy who digs ditches with a shovel. The same goes for an equity analyst with access to a Bloomberg machine and the internet compared to one who does his research in print newspapers and book-and-magazine libraries. Producing capital assets is closely related to another important driver of increasing economic opportunity: technological innovation. Think of all the new forms of economic opportunity that the internet has made possible in the last twenty years. Since the range of economic opportunity depends on many such variables, over time it can happen that increasing regulation is reducing the range of economic opportunity while changes in other factors are simultaneously increasing it. The net effect may be that the second greatly outweighs the first, and so while economic freedom in the normal sense decreases, economic freedom in Reno’s sense, the sense of activity and opportunity, may increase.

Of course, this is exactly what has happened in the United States from the time of the New Deal. We have seen ever-increasing levels of economic regulation, but an expanding economy, largely driven by technological innovation, has produced ever greater levels of economic activity and opportunity. Reno has seen the great increase in economic activity (who could have missed it?), conceived of it as economic “freedom” (a bit of fuzzy thinking), and then concluded (fallaciously) that there must have been a vast decrease in economic regulation.

Reno Discovers Economic Growth

This leads us to a very big point: Reno thinks that there has been some unusual expansion of economic activity and opportunity in the last forty years, but in fact all he is seeing the normal effects of sustained economic growth. From 1970 to 2016, there was indeed a great increase in the United States of economic activity: gross domestic product (GDP) per capita grew from $23,024 to $51,690, an increase of 125%. This has tremendous effects: on the demand side, it means that people in the United States enjoy a much greater amount and variety of goods and services; on the supply side, it ensures that these same people have a much wider set of opportunities to work, earn money, and invest.

But Reno is quite wrong if he thinks there is anything extraordinary about the change from 1970 to 2016. As I explained in my previous essay, GDP growth has been abnormally slow in recent years, not abnormally fast. If we look not at the last two generations, as Reno always does, but the two generations before those, we find that from 1925 to 1970, GDP per capita in the United States increased from $7,899 to $23,024, an increase of 191 percent, a much more dramatic increase than the 125 percent from 1970 to 2016. Reno’s right that we live in a time characterized by economic opportunities that people two generations ago could not have imagined, but what he misses is that the same could have been said (and in fact, was said) in 1970, in 1925, and even in 1850. Before the midpoint of the nineteenth century, both a plain person like the young Ulysses S. Grant and (looking back later) a scholar like Henry Adams were flabbergasted by rail transportation and the opportunities that traveling at breakneck speeds of twenty miles per hour could create.

Reno thinks that the period since the end of the Cold War has been economically extraordinary because of globalization and the reduction of trade barriers. Wrong again. According to data from the World Bank, the foreign trade of the United States (the value of all imports and exports) amounted to about 19.8 percent of GDP at the end of the Cold War in 1990. In 2011, the figure reached a high of 30.8 percent of GDP, but by 2016 it had fallen back to 26.6 percent. Therefore, from 1990 to 2016, a period during which GDP increased by over 84 percent, the increase in foreign trade amounted to about 6.8 percent of GDP. This is a non-trivial amount, to be sure, but it is hardly an epoch-making change. But we already knew that something like this had to be the case: since GDP did not increase at an extraordinary rate from 1990 to 2016, it’s quite impossible that globalization was driving an extraordinary change that never occurred.

In short, Reno’s great “expansion of economic freedom” is nothing more than normal economic growth over an extended period of time. It is thus highly ironic that Reno thinks he has discovered something sinister about capitalism; he has really just noticed capitalism’s greatest virtue—something even capitalism’s severest critics generally concede: when operating normally, a capitalist economy produces ever greater quantities of goods and services, and because of the compounding effect, over a significant period of time (the two generations Reno usually mentions), the increase is very dramatic.

Reno Tries Again on Regulation

What about the rest of Reno’s story? Because he fails to recognize that increased economic activity and opportunity are just the normal effects of economic growth and not the special effects of globalization, Reno persists in thinking that the increase in economic regulation is a response to globalization. But, as we saw, globalization is not driving the increase in economic activity, and so this is surely not right. A quick look at some of the biggest regulatory initiatives since 1970—e.g., consumer protection regulations in finance, environmental regulations for businesses operating in the United States—confirms that they have nothing to do with international trade.

It is almost unkind to consider Reno’s arguments in detail, but since in his latest article he says that he is trying to lead the conservative movement, it is probably good that his potential followers understand the quality of his analysis before putting their faith in it. Thus, at one point Reno says, “our regime of intellectual property protection—a complex regulatory scheme our government works hard to internationalize—allows companies like Apple to separate product design, production, and sales from their identities as tax-paying entities,” and so “Apple and other companies enjoy the freedom to domicile themselves in low-tax countries,” which was “an impossible dream for American companies until only recently, and it contributes to their extraordinary profits.”

Reno has surpassed himself here. First, is it true that “until only recently” American companies could not domicile themselves in low-tax countries to beat high US corporate tax rates? No, actually, it’s exactly the opposite. So-called tax-inversion mergers were permissible under the Internal Revenue Code at least since the early 1980s, but few companies engaged in them because until very recently the added tax burden of remaining domiciled in the United States was not great enough to make moving ex-US profitable. When, in recent years, companies started doing tax-inversion mergers in significant numbers, the Obama Administration promulgated new regulations to prohibit such transactions. Reno should talk to Ian Read, the CEO of Pfizer, whose $160 billion tax-inversion merger with Allergan had to be called off because of the new regulations.

Is it true that Apple is domiciled in a low-tax country? This is a very simple factual question that can be settled by looking at Apple’s filings with the Securities and Exchange Commission, all of which are publicly available on the internet. Surely Reno got this right? Nope, Apple is domiciled in the United States. Does intellectual property law allow Apple to separate product design and sales from its identity as a tax-paying entity? I don’t even know what that means, but I have a guess what Reno is trying to say. Apple has a subsidiary that is domiciled in Ireland and holds many of Apple’s patents. Apple’s other subsidiaries pay royalties to this one when they sell products embodying these patents, and this allowed Apple to run a good fraction of its revenue through low-tax Ireland. I say allowed in the past tense because in 2016 the European Commission determined that this arrangement violated EU economic regulations and ordered Ireland to recalculate Apple’s taxes in a manner that would require Apple to pay an additional €14 billion (about $17 billion) in taxes and interest (see page twenty-eight in Apple’s 10-K). Apple and Ireland are both appealing this decision, but Brussels is likely to get its way.

In short, Reno tries to find an example of new regulations allowing companies to do what they could not do in the past, and he actually produces two examples of new regulations prohibiting companies from doing what was previously permitted. If I were feeding Reno fake examples to make him look foolish, I don’t think I could have done better than this.

To return to the main point, however, Reno cares about expanding economic activity and opportunity because, on his view, it is the cause of major social pathologies—disintegrating families, declining participation in civic organizations, collapsing church attendance. Now that it’s clear that the big changes in circumstances that Reno perceives are merely the normal effects of economic growth, it turns out that all he is saying is that economic growth—increasing levels of material prosperity—destroys the moral fiber of society.

As I noted in one of my prior essays, if increased economic opportunity destroys family life, civic involvement, and churchgoing, you would expect wealthy people with the best economic opportunities to be the most adversely affected. But, as Charles Murray shows in his book Coming Apart, this is not so. Rather, the economic elites (the people who live in “Belmont”) have very high rates of marriage and household formation, very low rates of divorce and out-of-wedlock births, and very high rights of participation in civic organizations and church attendance. It’s people whose economic opportunities are limited (poor people who live in “Fishtown”), who never marry (or get divorced if they do), have children out of wedlock, don’t participate in civic organizations, and stop going to church.

Finally, Reno concludes that my “penchant for responding to new ideas attuned to new circumstances with denunciations” makes him doubt my “ability to lead.” I might object that an explanation of how someone gets all his facts wrong isn’t really a denunciation, but I’ll let that pass. I am happy to find common ground with Reno where I can. In fact, I agree with him that I am not—nor have I ever tried to be—a leader of the conservative movement. I’m just a guy who tries to get the facts straight before I start theorizing. I think leaders should do that too, but I suppose that’s something else Reno and I disagree about.

Robert T. Miller is a professor of law and the F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law, and a fellow and program affiliated scholar at the Classical Liberal Institute at the New York University School of Law.

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