America Needs a Return to First Principles
How to revive U.S. vitality and confidence? Economists John Cogan and Kevin Warsh offer a way to think about what made the country prosperous. Pay attention to the ‘three I’s’—ideas, individuals and institutions.
The 21st century so far hasn’t been the best of times for America. First 9/11, then a financial crisis and deep recession, then a global pandemic without recent precedent. The economy has suffered, and politics has been upended. American self-confidence has been badly bruised, and public trust in institutions has plummeted. What can we do about it?
That’s the question that John Cogan and Kevin Warsh, both policy veterans and Journal contributors, asked themselves in September 2020 when prompted by former secretary of state Condoleezza Rice. She had just taken over as director of Stanford University’s Hoover Institution, where both men are affiliated, and she made a pained but probing observation.
As Mr. Warsh tells it, Ms. Rice said that while “people know what we conservatives believe about economic policy, it doesn’t seem like we’re winning. It doesn’t seem like we’re persuading people.” American policy makers and businesspeople, and leaders around the world, “are less sure why we believe what we believe, and they’re less sure why they should believe it, too.”
The two men treated Ms. Rice’s lament as a challenge and set out to write what Mr. Cogan describes as “a call to action.” Titled “Reinvigorating Economic Governance” and just released, it outlines a policy framework based “on our nation’s foundational principle of natural liberty.” Governments at all levels, Mr. Cogan says, aren’t dealing effectively with America’s challenges: “It’s because economic policy has strayed from what I think of as the first principles.”
The two are well suited for the role. Mr. Cogan, 75, is an economist at Hoover who served in Ronald Reagan’s budget office and is the author of an encyclopedic book on the history of U.S. entitlement programs. Mr. Warsh, 52, worked in the George W. Bush White House and was a governor at the Federal Reserve during the financial crisis.
Their paper is optimistic, almost revivalist, in tone, even as it highlights the many faults with American policy. The U.S. economy, it states, “is among the most powerful forces for good in the history of humankind.” The authors credit the “micro-foundations of the economy” for having driven living standards “to heights unimaginable at the nation’s founding.”
Those foundations—Mr. Cogan’s first principles—are private property rights, the rule of law, free and competitive markets, and limited government. The last includes “subsidiarity,” meaning that no central authority should do what can be done by a more local body, and no public institution should do what can be left to private enterprise.
“When you think about what drives America’s GDP,” Mr. Cogan says, “it’s millions of individuals working, investing, saving and making allocative decisions with these microfoundations in place.”
The pair aim to stir debate and perhaps shape policy platforms before the next presidential campaign: “We are far enough from campaigning,” Mr. Warsh says, “for it to be an incubator, a laboratory, of the next ideas that can motivate a series of candidates.” He insists it isn’t merely a “messaging exercise” but an attempt to “make relevant and resonant the lessons of history and apply them to the challenges of today.”
Mr. Cogan says the paper is aimed at “one, the general American public; two, informed citizens; and three, policy makers. I guess I’d put them in that order.” Mr. Warsh adds that they’re “trying to distill a whole lot of intellectual history and make it accessible. If we can’t convince the man on the street, then good luck convincing the man in Washington.”
The authors identify as the “sine qua non” of American prosperity the “three I’s”—ideas, individuals and institutions—as they put it in our conversation by Zoom. (Mr. Cogan speaks from his house in Portola Valley, Calif., Mr. Warsh from his apartment in Manhattan.) Their paper states that “a sound economic governance framework liberates the individual, encourages the promulgation of new ideas, and ensures the proper functioning of institutions.” A policy that offends any of these elements—by restricting the individual, stifling ideas or letting institutions stray beyond their proper limits—is likely to harm the economy.
“This isn’t a model-centric view of how to maximize prosperity,” Mr. Warsh says, “but one based on experience, history and intuition.” Individuals who enjoy the fruits of their talents, ideas that enhance human welfare, and accountable institutions that don’t get in the way have “motivated this incredibly successful experiment in prosperity over 150 years. We’re trying to connect economic results to culture, to the Founding Fathers, so that we enact policies that ensure that the 21st century is as good for American prosperity as the 20th century was.”
In their paper, Mr. Cogan and Mr. Warsh write that “America’s constitutional design and civil order were designed to incline the individual toward good.” The nation’s commitment to its foundational principles, they say, “has yielded unrivaled economic gains.”
A major challenge to this worldview comes from China, which has achieved growth despite Communist Party control of much of the economy and the lack of political freedom. The Chinese model may look less attractive in light of Xi Jinping’s heavy-handed rule and his brutal and economically repressive zero-Covid policy, yet Mr. Warsh says there’s still a tendency in the U.S. to “want to adopt a set of industrial policies, to ensure that certain institutions are too big to fail, to make some private institutions quasi-public so that they’ll take their orders from central command.”
He elaborates by pointing to “this newfound trend to ensure that private companies now have a multitude of interests,” a reference to the “stakeholder capitalism” movement that purports to subordinate profit to “environmental, social and governance” objectives. The effort to hold large businesses to standards of “public responsibility,” Mr. Cogan adds, “is a way that government is trying to get corporations to carry out its public-policy preferences.”
Public institutions have been similarly politicized. “When they wander from their core remit,” Mr. Warsh says, “they create uncertainty that undermines the ability of households and businesses to make decisions.” He points to the Federal Reserve, where at 35 he was the youngest governor in Fed history after 5½ years in markets at Morgan Stanley.
Congress mandates that the Fed control inflation. “Prices are now running four times what the Fed’s definition of price stability is,” Mr. Warsh says. “I don’t think it’s a coincidence that it’s happening at the same time as they’ve wandered into other areas outside their remit—such as ESG and the role that the Federal Reserve should play with respect to racial equality.” The paper is scathing on the subject: “Under Chairman Jerome Powell, newfangled Federal Reserve policy is at odds with the prior forty years of precedent in the conduct of policy.”
Major crises give public institutions an excuse to arrogate ever more power, Mr. Cogan says: “The 9/11 attacks created a national-security fear. The collapse in 2009 of our financial system created a profound fear that our financial institutions weren’t capable of meeting the stresses of markets.” The pandemic caused Americans to fear for their health. These three very different shocks led to a common result.
“What we know about governments,” Mr. Cogan says, “is that they continue to try to expand their roles in society. And what we find is, very often, emergencies allow government to expand its authority.” Mr. Warsh concurs, adding that with the Russian invasion of Ukraine, “a fourth shock in such a short period of time, there’s the risk that we normalize the extraordinary in the conduct of government policy. Therein lies the problem—that we’ll never go back to the equilibrium in the level of government that predated the 21st century.”
Cultural freedom plays a central role in economic growth, the paper argues: “Censoring ideas, whether controversial or unproven, produces stagnation.” They cite Paul Romer, a 2018 Nobel economics laureate, who argues that the search for new ideas is at the core of economic progress. So what does academia’s repressive atmosphere portend?
“When certain ideas are unworthy of debate or discussion,” Mr. Warsh says, “there’s no longer a premium on the pursuit of truth, or on the battle of ideas. It’s antithetical to the idea of a university that certain things be inarguable, or beyond the pale.” Future prosperity “requires people to think differently.”
In the same vein, the authors contend that the “Fed’s continued backstopping of financial markets” has retarded the generation of new ideas in the economy. “When the Fed has signaled to markets that they don’t want to let markets fall too much,” says Mr. Warsh, “that undermines the creative destruction that we think is essential to long-term prosperity.” Such a policy is “pro-incumbent, pro the largest firms in every vertical. It makes it harder for the motivated individual to bring a new idea, a new product or service, to market and disrupt an industry incumbent.”
Related to this is what the authors call “epistemic humility.” “The best institutions know what they know, and they know what they don’t know,” Mr. Warsh says. “They should have a high degree of modesty about what they know of the future. And the best institutions know that bad things can happen.” In the period of prosperity that preceded the pandemic, he says, the Fed should have asked itself what could go wrong, “not what’s likely to go right.”
Instead, it continued its policy of quantitative easing—buying Treasury securities to increase the money supply and encourage investment and lending. The central bank adopted QE in 2008 as “an extraordinary emergency measure,” he says. “But the Fed has chosen to use it as a conventional tool—in all seasons, for all reasons.” As the nation recovered from the Covid-induced recession, the U.S. economy boomed in 2021, with real growth of 5.7%. “Yet the Fed still decided to buy more than half of the debt issued by the Treasury. Accountability is blurred and institutional responsibilities are conflated” in ways that will “erode America’s long-term prosperity.”
Mr. Cogan, who has spent many years writing about healthcare, cites the response of public-health authorities to the pandemic as another example of arrogance. “The damage from this immodesty was enormous for our society, in terms of the economy, harm to children, and poorer health outcomes beyond Covid, such as cancers not diagnosed and treatments not made. It’s a very good example of how immodest institutions can have very grave consequences for society.” Without the lockdowns, he adds, the two enormous—and inflationary—fiscal packages that Congress passed would have been unnecessary.
Although their paper comes out as a midterm election campaign gets under way and expressly aims to influence the next presidential race, the authors avoid the partisan fray. Asked if Democrats or Republicans would be more receptive to their ideas, Mr. Cogan demurs: “We certainly hope that both parties would.” Then he alludes to the obvious answer by noting that he has “concerns about even the Republican Party at this point.” He says the GOP has begun to “stray from these first principles” as many in the party call for “industrial policy, labor-market protections, tax credits that are merely handouts, and protectionist tariff policy.”
But he also suggests that free-market ideas are connected to the cultural concerns of social conservatives: “Under foundational principles that we outline, the individual and the family are paramount while government is limited. This hierarchy allows individuals to freely choose their path in life and to raise their children according to their values, not those of a government agency. This self-determination is what ultimately permits humans to flourish.”
A self-professed optimist, Mr. Cogan hopes that “the experiences that we’ve been through as a country over the last two years might be an awakening of the American public to the dangers of straying from fundamental principles.” Mr. Warsh adds that there’s a danger in understating American power and resilience.
“Over the last 30 years,” he says, “we’ve become less and less confident that our system is the right system. It does seem to me that more emphasis has been placed on the weaknesses of America than upon its strengths.” Yet both men see the country as hungry for a return to its “natural liberty.” The U.S., they write, can again become a “beacon to the world” if its leaders “choose to empower the individual, encourage the development . . . of new ideas, and ensure the fidelity of institutions to their mission.”