“Should auld acquaintance be forgot and never brought to mind?” Many in DC seem to think so, especially when it comes to taxpayers. The federal government rang in Fiscal Year 2025 on October 1 like many fiscal years with a last-minute continuing resolution to prevent a government shutdown. To make matters worse, the national debt and fiscal instability seem to be topics both presidential candidates seem to be avoiding. 

Many lawmakers in DC make resolutions to be more fiscally responsible, but much like our New Year’s resolutions, they rarely follow through. When it comes to resolutions, one must be willing to achieve small, actionable goals on the path to larger change.  

Some Resolutions for the Federal Government 

Taxes 

The focus of tax policy should be to allow Americans to keep as much of their hard-earned money as possible. This will come from a combination of taxes and spending (discussed next) reforms. 

A more manageable first-step should be to not further complicate the tax code. Last month, the Biden-Harris Administration published a 603-Page Rulebook for the new 15 percent corporate alternative minimum tax. The time, talent, and resources business deploy to comply with these Byzantine rules comes at the cost of putting those things toward research and development, hiring new employees, and increasing employee compensation, known as a deadweight loss. Stopping these rules from taking effect will save American businesses from the headache of compliance costs. 

Stopping the expiration of the Tax Cuts and Jobs Act (TCJA) would also help Americans keep more of what they earn. The TCJA simplified individual income taxes and reduced tax rates across the board. While research shows that the TCJA will not pay for itself without serious spending cuts, it generated a significant amount of economic activity due to behavioral changes from Americans being able to keep more of their own money. 

While eliminating taxes on income is a laudable goal, it’s just about as feasible as becoming an award-winning bodybuilder after spending only a week in an exercise routine. 

Spending and Debt 

A good start is for the federal government to stick to the Fiscal Responsibility Act of 2023, where the federal government will be penalized for using a continuing resolution in FY 2025 by reducing both defense and nondefense funding levels by 1 percent if appropriations bills are not enacted by April 30, 2025. 

However, this does not solve the problem. Policymakers need to seriously consider fiscal review commissions. These review commissions may start small, but they must eventually work up to what Economist Romina Boccia calls “a BRAC-Like Fiscal Commission to Stabilize the Debt.” The key benefit of a BRAC commission (whether for spending on military bases or managing the national debt) is that it mitigates the incentive problems facing politicians and bureaucrats by requiring “silent approval.” Instead of a politician going on record in support of spending cuts (which will hurt reelection prospects), the spending cuts are enacted so long as the member of congress does nothing. Instead, they must voice their disapproval to prevent spending cuts. 

Amending the constitution to include spending limits is another admirable goal but would require significant effort to get there. Further reforms show constitutional spending limits can help constrain the growth of spending, and, ultimately, the national debt. As Vance Ginn and I wrote, a proper constitutional spending limit (such as tying taxes and expenditures to the sum of population and inflation growth) can nudge even the worst in DC to make fiscally responsible choices. 

Entitlements 

The largest drivers of spending and debt are entitlement programs. A recent WSJ article reports that 53 percent of all US counties draw at least a quarter of their income from government aid. However, recent Congressional Budget Office estimates show that 53 cents of every dollar the federal government spends goes toward entitlement programs. 

There are several actionable steps in the process of entitlement reform. For instance, state governments that administer many welfare programs can do eligibility checks and frequently update rolls so that those who are ineligible for income security programs are not receiving it. The same goes at the federal level for Social Security’s Old Age and Disability Insurance programs. Research also finds that overpayments are a key source of Medicare spending growth. To reduce costs, policymakers can reduce government subsidies for wealthier beneficiaries. This can be achieved by adjusting income thresholds at which means-testing applies, expand definitions of wealth for means-testing, and use alternative mechanisms of means-testing (such as using Medicare Part A premiums based on income). 

After adjusting, these programs, a larger goal would be to reform entitlements altogether. Replace all entitlements with a “universal savings account (USA)”. Economist Adam Michel describes a USA as an account, “that would function similarly to retirement accounts—income saved in the account would only be taxed once—but without restrictions on who can contribute, on what the funds can be used for, or when they can be spent.” Michel and others note that current tax and fiscal policy punishes savings through income and payroll taxes and then again through corporate income taxes, taxes on investment income, or taxes transfers (i.e. taxes on gifts and inheritance). 

Sound Money 

Economist Judy Shelton notes, “Just as government should function as a servant to the people, not vice versa, money should provide a dependable unit of account for free people engaged in free enterprise.” Ending political meddling in monetary policy is a difficult, but necessary resolution to keep. 

Policymakers can start by changing the Fed’s dual mandate (maintain stable prices and full employment) to a single mandate of stable prices. “If the Fed is doing its job,” Economist Alex Salter comments, “keeping inflation under control will foster robust labor markets.” By keeping the Fed bound to this rule, it can help keep the Fed out of other areas (such as racial equity, climate change, and other social issues beyond that narrow mandate). 

From there, enacting a monetary rule would help further separate fiscal and monetary policy. The stronger the rule, such as a constitutional monetary rule, the better able to keep fiscal influence out of monetary policy. 

Ultimately though, the best check on fiscal and monetary policy is returning to the gold standard. A gold standard provides a check on fiscal policy by limiting the amount of paper money that can be issued by a bank to the supply of its gold reserves. In principle, this means government budget deficits must be covered by tax increases, spending cuts, and/or issuing debt instead of money printing. 

Returning to the gold standard, however, is probably the most difficult resolution to keep. Economist Bryan Custinger comments, bringing back the gold standard would “deprive government of this revenue source,” and would require a cost-benefit analysis of decreased spending and/or higher taxes. 

DC: New Year, New You? 

Just like our own New Year’s resolutions, there’s no shortage of guides and programs to help the federal government improve its fiscal health. Without the willingness to take political risk, the advice is not worth the paper it’s printed on. Sadly, given the eagerness to talk about anything but the national debt in DC, it seems that these fiscal year resolutions may end up abandoned faster than a gym in mid-January. 

Recently on Facebook, an attractive young woman – or so I judge from the picture accompanying her message – asked me to accept her as a Facebook friend. She assures me that she’s positively enthralled with the messages that I regularly post at that social-media site. And so she really, really wants to get to know me better. (Hint! Hint!) How lucky I am, a man in his mid-60s, to catch the eye and spark the interest of a beautiful young woman! Who knows what delights await me if I befriend her?!

This “friend request” reminded me of the many e-mails that I (like many others) have received over the years promising me instant riches in exchange for helping some third-world-country innocent person escape injustice. For kicks, I saved one of these e-mails that dates back to November of 2011. Marked “URGENT,” it’s from one Mitchell Joy. Although I’d never before heard of Mr. Joy, he wrote to me from his home in Ghana with assurances that he knows me to be a man of impeccable character. Mr. Joy, unfortunately, was in desperate need of my help. But he would make it worth my while. He assured me that together we could both be of great benefit to each other.

Mr. Joy, you see, very tragically had recently lost his saintly father, Coleman, who was a successful and upstanding businessman worth tens of millions of US dollars. But Ghana’s nefarious government threatened to block Mr. Joy’s access to Papa Coleman’s money. Mr. Joy was of course desperate to get these funds out of Ghana ASAP before they would be confiscated from him and his family and lost to them forever.

That’s where I was to come in. Having been assured by certain nameless worthies of my integrity, Mr. Joy wanted to use my US bank account as the escape vehicle for his $25 million. All I had to do was to send to Mr. Joy my bank’s name and routing number, and my checking-account number. Within days $25 million would have been deposited therein, half of which I was to transfer to Mr. Joy when he arrived in the US sometime in the next year. I was to keep the remaining $12.5 million, as just payment for my goodness and willingness to trust and assist Mr. Joy.

What a deal! I’d become rich as I promoted justice by keeping the Ghanaian government’s greedy paws off of assets that rightfully belonged to Mitchell Joy and his kin.

I would have used my $12.5 million to buy the Brooklyn Bridge. It was, I was assured, for sale.

Although the frequency of receipt of such e-mails has trailed off in recent years, they still arrive from time to time. And while the details of the schemes to separate me from my money differ from e-mail to e-mail, the writers of each of these messages claim to be champions of righteousness who, if I join their cause, will materially enrich me.

Obviously, it doesn’t remotely dawn on me that “Mr. Joy” is anything other than a vile scam artist. Ditto the lovely young female stranger on Facebook. Who trusts such strangers? What kind of credulity must someone possess to think, upon reading messages such as the one from “Mr. Joy,” “Oh wow! This perfect stranger wants access to my bank account so that he can fill it with plenty of money! How lucky I am!” How imbecilic would I have to be to believe that a fetching young lady is so desperate for physical companionship that she must pursue that companionship by befriending on Facebook a man whom she’s never met and who’s old enough to be her grandfather?

Fortunately, good ol’ American horse sense ensures that almost all Americans immediately recognize the “Mr. Joys” of the world to be con artists. Messages from “Mr. Joy” and his legions of fellow rip-off artists are immediately deleted. The same is true, I’m sure, for nearly all such Facebook messages from beautiful young women professing their sincere desire to become intimate with older men.

But where is this horse sense at election time? With the November election fast approaching, websites, television, radio, newspapers, and local streets are bursting with pleas from perfect strangers asking me to trust them with my wealth and liberties.

“Vote for me and I’ll make your life better by building more roads for your use – and at no expense to you! Under my plan, only people richer than you, who now don’t pay their fair share in taxes, will pay for the roads!”

“Elect me and I’ll improve your well-being by reducing the cost of medical care and improving its quality!”

“Once in Congress, I’ll work tirelessly for you and all Virginians!”

These television and website ads are also filled with clips – obviously staged – of the candidates talking with school children, shaking hands with senior citizens, listening earnestly (usually while wearing hard hats) to factory workers, commiserating with ordinary townsfolk at the local diner, and playing touch football at community picnics. We’re supposed to believe that these office-seekers are singularly special and caring servants of others. We’re supposed to feel confident that we can trust these individuals with power as well as with access to our purses.

Perhaps some politicians are indeed especially caring and trustworthy servants of the public. But surely we shouldn’t presume these people to be such rare saints merely because they tell us that they are such rare saints. We don’t believe the Mitchell Joys of the world when they boast to us of their sincerity and trustworthiness. Nor do we feel proud of ourselves when the Mitchell Joys stroke our egos by telling us that they know us to be unusually laudable and worthy. We know that the Mitchell Joys are lying through their teeth as they attempt to lure us into a trap. And we know the same about the fresh-faced blonde young lady who insists that she’s oh-so-charmed by some older-man’s Facebook posts.

Strangers asking for bank-account numbers do differ in some ways from strangers asking for votes. But I’m struck by the similarities. In both cases, individuals who we don’t know and who don’t know us seek to gain our trust so that they can then gain open-ended access to our wealth. In both cases, the strangers seeking our trust proclaim there to be a special, personal connection between them and us. And in both cases there is every reason to distrust these proclamations.

It’s too bad that the same horse sense that stoutly and successfully counsels us to dismiss the “Mr. Joys” of the world, and the eager young ladies on Facebook, abandons so very many of us at election time.

Millions of American homeowners would love to move — if they could pack up the mortgage interest rate they locked in at under four percent.

“We hate the area we moved to but cannot justify moving again due to mortgage rates,” says Ben Young, who bought in 2021 at a 2.25 mortgage interest rate. 

The post-COVID rate crater saw millions of mortgages written or refinanced at historically low interest rates. Homeowners holding onto that 2.8 percent interest rate will be hard to dislodge from their current digs. Staying put often makes sense for individual families, at least financially, but both housing markets and labor allocation are suffering as a result.

Rates for 30-year mortgages remain well below historic averages, but they’ve almost doubled in the past three years, right alongside the Federal Reserve’s interest rates. The psychological impact of that sticker shock is significant. After underestimating the inflationary damage its post-pandemic loose money would generate, the Fed overcorrected with historically quick monetary tightening, raising rates 11 times since spring 2022. The average interest rate on a 30-year fixed mortgage inched above six percent in September 2022 and has stayed there. Anyone who locked in a low rate then is thinking twice about giving it up now.

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States, Federal Reserve Bank of St. Louis.

Insurance, property taxes, and cost of living all impact monthly expenses for homeowners, and in some cases dwarf the interest rate differential. But for many, and certainly psychologically, giving up a guaranteed low mortgage payment is difficult.

David and Sarah Veksler welcomed a third child this year, but upgrading their home in Denver feels daunting. “Definitely feeling stuck here,” he told me. “We have a new baby boy and he’s waiting for rates to go down before he can get his own room. He’ll have to share with his sisters until then.” 

Individually rational choices, in aggregate, are causing a huge problem. Even if they didn’t buy, millions of homeowners refinanced during the low-rate years. By spring of 2022, 92.8 percent of homeowners had a mortgage rate under six percent. Six in ten homeowners still have a mortgage below four percent.

Fixed-rate mortgages are actually adjustable, thanks to the ready availability of refinancing options, but only in one direction. Borrowers refinance to lower their payments, so rate adjustments are almost exclusively downward. When a buyer refinances, generally speaking, the new bank issues a new mortgage and pays off the original mortgage. The original lender receives back the principal to lend at 7 percent, instead of waiting for a 30-year mortgage to trickle in at the now-paltry 2.8 percent. As with other voluntary transactions, all parties benefit. 

A low mortgage rate is highly desirable, and non-transferable. Once “locked in,” a comparatively low mortgage rate functions as an emotional and economic anchor. Homeowners are less likely to step up the property ladder (vacating their starter home for a larger one, or a more desirable school district), and also less likely to downsize and move on when their needs change. Both the supply (existing homes entering the market) and the demand (people searching for a new one) are suppressed by mortgage rate lock-in. The property market stagnates.

This helps explain why, as of August 2024, the inventory of homes for sale in the US remains 38 percent off its July 2016 peak and 26 percent below where it was in August 2019.

How high are the costs of mortgage lock-in? According to research by economists Jack Liebersohn and Jesse Rothstein, a 2.7-percentage-point rate gap between locked in and prevailing interest rates raises the average mortgage balance – the ‘price’ of moving – by $49,400. Na Zhao, economist with the National Association of Home Builders, found that a rise in prevailing mortgage rates of 100 basis points increases the annual income required to qualify for a loan by $10,000. Each such bump (from a 4.0 interest rate to 5.0, or 5.5 to 6.5) “prices approximately five million additional households out of the market for a home at the same or similar price level.” Just one in five American families earns enough to qualify for median-priced homes at seven-percent interest. 

In a turbulent economic time, moving presents a major cost that can be avoided entirely by riding out at least another few years at a locked-in pandemic fire-sale rate. Homeowners facing those incentives are more likely to stay put.

Data confirm mobility declines as mortgage rates rise. Liebersohn and Rothstein calculated that rate lock discouraged 660,000 moves in 2023, a deadweight loss to the economy of $17 billion that year. 

Mortgage Lock-In Reduces Labor Mobility

As the property market locks up, labor mobility does, too. Someone who bought a typical home  at a typical rate in 2016 (3.5 percent) would pay almost 40 percent more each month, if they were to take out a fresh mortgage on an identical home at the now-common rate of around 7 percent. One study placed the annual increase in mortgage payments at $5,000 when moving to a roughly equivalent new home, but given the rising price of homes and property taxes, that’s likely conservative.

Researchers Julia Fonseca and Lu Liu report, “mortgage lock-in modulates the geographical allocation of labor and leads to a mismatch between workers and jobs, as some households forego higher-paid employment opportunities due to the financial cost imposed by mortgage lock-in.” Locked-in households were half as likely to move in response to potential wage growth.

The favorable difference in pay or cost of living must be commensurately larger to entice someone to seize her potential by moving to a new city, or even across town. Another finger on the scales: locked-in mortgage rates are less likely to transfer into or out of self-employment, and the availability of work-from-home jobs may also make people less likely to move. 

International Alternatives

Other countries have experimented with ways to alleviate lock-in. In the United Kingdom and Canada, many mortgages are portable, meaning you can essentially transfer your mortgage terms from an existing property to a new one. Americans, in general, secure a mortgage for a particular property and must start over, with a new interest rate and repayment terms, to purchase a subsequent one. Other international mortgages are assumable, meaning you can sell your mortgage, with its favorable low rates, to a buyer along with the property. Individual owner-occupants must qualify under the original lending terms. Where do we find assumable mortgages in the United States? Among those issued by the Federal Housing Administration (FHA), the Department of Veterans’ Affairs (VA) and some Department of Agriculture (USDA) loans. 

The complex web of regulation surrounding home-lending put these options off limits for most Americans, or at least those buying without the help of the federal government. The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, told The New York Times and American Banker earlier this year that portable mortgage options “are not under consideration” for the general public. The Times concluded, “Right now by law there’s no way to detach that loan from the property that serves as its collateral and reattach it to a new property.”

Rapid changes in mortgage rates cause homeowners to stay put, and the housing and labor markets suffer the consequences. People are less likely to move, either to bigger homes or to better jobs, stagnating economic mobility. While other countries have found creative, free-market solutions to reduce the impact of mortgage lock-in, America’s complex regulatory environment keeps these options out of reach for most buyers. 

Portability has its own peculiarities, like shorter lending terms and high qualification criteria. Portability and assumability also post major risks for investors who buy securitized mortgages. Powerful interest groups, including financial institutions who currently impose their own terms and mortgage brokers who profit from underwriting and replacing each reissued mortgage, also play a role in maintaining the status quo. Giving Americans a freer mortgage market with more choices might benefit the economy, but would take a major lobbying push. 

Mortgage lock-in is just one more example of the inevitable, if unintended, consequences of asking the Federal Reserve (or any other group of mortals) to exercise discretion in these macroeconomic matters. The Federal Reserve has just cut the rate by 50 basis points and is expected to make another cut before December, but homeowners will continue to feel locked into their mortgages — and the broader economy will continue to feel the strain created by recent, artificially low rates. Until then, we can expect fewer “For Sale” signs and more “Stay Put” decisions, as financial incentives restrict economic mobility.

The Biden administration’s National Security Strategy frames the current international order as one in which the democracies of the world are locked into a Manichean, dualist struggle with autocracies: “Democracies and autocracies are engaged in a contest to show which system of governance can best deliver for their people and the world.” It pledges to strengthen democracy at home and defend democracy abroad but offers no real specifics on what such a strategy means or how it might foster democracy outside US borders. Will it use US military force to protect every democracy in the world, including the many quasi-democracies that do not necessarily share American political traditions or cultural values? How strongly will it encourage other countries to become democracies, or improve their systems of government along democratic lines? What if countries resist becoming more democratic? Will the United States use military force to impose democracy on countries that don’t want it? And what, actually, is democracy? Most countries, including the most autocratic, claim to be democracies. Even one of the world’s most totalitarian states calls itself the Democratic People’s Republic of Korea.

This is a facile view of the world that presupposes that all democracies share national interests and that democracies and non-democracies must inevitably be opposed to each other. Neither is the case.

Such a democracy promotion strategy is at odds with actual American foreign policy and self-interest. US foreign policy must be in accord with its own national interests, not the interests of other countries. It may sometimes be in the US interest to partner with a democracy, just as it may sometimes be in the national interest to partner with a non-democracy. So be it. What the United States must not do is to automatically assume that every autocracy is an enemy and that every democracy is a friend. Nor should it go out of its way to forcibly install new “democratic” governments elsewhere in the hope that they will share our interests.

In the past two decades the United States has attempted to impose American-style democracy on Iraq and Afghanistan, failing in both instances and leaving the US worse off in terms of money spent. It should learn the right lessons from those failures and, rather than trying to do it again in the future (only better this time) learn that democracy cannot be imposed from without. It must be built and fought for by those who will live within that system, not the United States. Pretending otherwise can only lead to tragedy and waste for all concerned.

Likewise, we must acknowledge that the United States has many close partnerships with non-democracies; for better or worse, Saudi Arabia, an actively anti-democratic and repressive state, is a close partner. Current US major allies also include Pakistan and Qatar, not exactly exemplars of liberal democracy. The United States has close ties with many other semi-democratic states that have some trappings of democracy without free and fair elections, protections of civil liberties, and other core components of democracy. It would be better if these countries shared American values, but they do not, and likely will never.

The idea that the United States does, can, or should, only have positive relationships with democracies is also ahistorical. Since the dawn of the Cold War, the United States has interfered in democratic elections to overthrow duly-elected socialist governments and partnered with dictators who were otherwise pro-United States. (One of the first covert actions undertaken by the CIA after its founding in 1947 was to interfere in the 1948 democratic election in Italy because it feared that a leftist coalition of political parties would win.) This is not to suggest that those interventions were necessarily positive or advisable, but they are deeply embedded in American political history and, sadly, are likely to remain as potential policy options by future administrations. The United States has never behaved in a purely idealistic way toward other countries, and it is disingenuous to suggest that it does or will behave in such a way now.

The idea that the United States should spread democracy around the world is predicated on two deeply flawed premises: first, the apparent success of regime change and democracy promotion cases in West Germany and Japan after World War II, and second, the controversial “democratic peace theory” of international relations.

The United States has a dismal track record of imposing democracy. Two cases in particular — West Germany and Japan — are usually held up as successes, the exemplars of what can be achieved by forcibly transforming autocracies into democracies. Unique factors present in both those societies are present in few others since World War II. Both were orderly, disciplined, homogeneous societies already interested in liberalization, reform, and embracing Western values and institutions. Contrast those cases with the two most recent ones attempted by the United States: Afghanistan and Iraq. Both efforts failed catastrophically and have not resulted in the creation of Western-style liberal democracies. The key problem is that many states and societies don’t currently want to be democratic. To impose democracy on these countries would be an unwanted imposition, and one likely to require the use of US military force.

In democratic peace theory, the idea is that democracies don’t go to war with each other, and so the more democracies there are, the more peaceful the world would be. If every country in the world were democratic, there would be no more war. Unfortunately, democratic peace theory is fatally flawed. There are dozens of cases in which democracies have gone to war with each other. Additionally, democratic peace theory does not claim that democracies don’t go to war with non-democracies. They often do, as American history attests. Newly emerging democracies are especially prone to going to war with other states, a track record that suggests that fledgling democracies are far more dangerous and aggressive toward their neighbors than stable non-democracies.

What then, should the United States do instead? Clearly democracy and the establishment and maintenance of a free society has enormous value and should be encouraged. It should not, however, be encouraged at the point of a bayonet because not only is such a forced democratization likely to fail, but the very idea runs counter to a free, open, democratic society. Other countries should be encouraged to become democratic if they choose. Rather than looking outward for opportunities to impose democracy, the United States should look inward and focus on improving democracy at home, serving as a model for others. As one example, the United States could focus on developing a world-class set of election security infrastructure, practices, and standards to ensure absolute voting integrity that could be emulated by non-Americans. It could also focus significant additional law enforcement resources on rooting out corruption of elected officials and civil servants (regardless of political party) to detect, punish, and deter political malfeasance.

Such an approach will pay dividends in the competition in which the United States finds itself in with alternative governance models. The United States of America must demonstrate that its values and system are superior to authoritarian and illiberal systems, must strive to become closer to that allegorical City on a Hill, a beacon of not just strong democratic tradition, but a just and limited government that exists to safeguard the liberty of its citizens.

A day prior to the presidential debate between Vice President Kamala Harris and former President Donald Trump, CNN reported a scoop: in 2019, presidential candidate Kamala Harris told the American Civil Liberties Union (ACLU) that she supported “taxpayer-funded gender transition surgeries for detained immigrants and federal prisoners.” 

The story gained traction on X prior to the debate, and it’s not difficult to see why. Compelling Americans to pay for the sex changes of federal inmates and jailed immigrants is not a policy supported by a majority of Americans, which is probably why then-candidate Joe Biden declined to answer the question, as did other candidates.

The unpopularity of Harris’s stance is also likely why her political opponent brought it up during the debate. What’s notable is that the policy, which sounds like a Babylon Bee headline, was strange enough to fool members of the media who couldn’t fathom that Harris would support it. Susan Glasser of The New Yorker accused Trump of lying and creating the story out of thin air.

“[Trump’s] line about how the Vice-President ‘wants to do transgender operations on illegal aliens that are in prison’ was pretty memorable,” Glasser wrote. “What the hell was he talking about? No one knows…”

To anyone who saw CNN’s story, it was clear what Trump was referring to. Just as it would be to any journalist or fact-checker who had access to Google and did his due diligence. 

People make mistakes, of course, but one week after the debate, The New Yorker still hadn’t corrected Glasser’s article, and many on X had made note of the error. 

Putting the credulity of reporters and the credibility of editorial standards aside, the flap over taxpayer-funded gender transition surgeries for inmates is a policy worth examining. It might seem like a fringe issue, but it can illuminate interesting economic ideas.

For starters, Harris’s support of the policy can be understood through the lens of public choice theory, a branch of economics that suggests public officials arrive at decisions much like everyone else: through self interest. While it’s doubtful Harris would today vocalize her support for such a policy, her incentives were different in 2019 when, as CNN’s Andrew Kaczynski observed, Harris was “trying to get to the left of Bernie Sanders.”

To call her positions self-interested does not condemn Harris in particular: public choice theory would suggest that few politicians reach decisions purely on principle

And then there’s the matter of costs, which would be relatively small and highly dispersed, so much so that they could seem entirely free. Many might argue, Why shouldn’t we provide these surgeries?

It’s a more difficult question to answer than many might think. I’m reminded of the Seinfeld episode “The Airport” where Jerry is flying first class. He is sitting next to a beautiful swimsuit model and they are enjoying warm towels, champagne, and ice cream sundaes.

“More anything,” the flight attendant asks, as she takes away their ice cream dishes. 

“More everything!” Jerry responds.

Many of us accept “free” things all the time when they are offered to us. But we live in a world of scarcity, and there are no free lunches. Whether it’s champagne on a flight or a prison sex-change operation, someone is paying. 

In Jerry’s case, he paid for the ice cream and champagne himself, which was included when he bought his ticket. The resources for taxpayer-funded sex changes for federal inmates aren’t coming from an individual voluntarily paying. Those dollars will come from taxpayers, who are being ordered to pay. 

Americans have different ideas on taxation, of course. Some, like myself, view it as a kind of legalized plunder, to borrow a description from the 19th century economist Frédéric Bastiat, who explained how it can be identified. 

“See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong,” Bastiat wrote in The Law. “See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

Some people believe taxation is appropriate, if spent on a “public good.” This squishy phrase is prone to problems, and it still ignores the scarcity problem. There’s only so much stuff to go around, and resources spent on one thing cannot be spent on another..

In other words, federally funded sex change operations have an opportunity cost. 

Dollars allocated for gender reassignment surgeries cannot be spent on fighter jets, classroom projects, employee salaries, highways, food stamps, worker pensions, cancer research, border security, cruise missiles, or anything else. 

Some people will say this is good. Many of the things on that list are bad, they reason, or perhaps that gender reassignment operations are more important than everything else.
 
But few people will take that view. So few, in fact, that The New Yorker believed the whole story was made up.

When the Federal Reserve’s Federal Open Market Committee (FOMC) voted to lower its federal funds rate target last week and thereby begin the process of un-tightening monetary policy, it said FOMC members had “gained greater confidence that inflation is moving sustainably toward 2 percent.” In fact, inflation appears to have already moved to 2 percent. If anything, inflation appears to be somewhat below target today. 

The Bureau of Economic Analysis (BEA) reports that the Personal Consumption Expenditures Price Index (PCEPI), which is the Fed’s preferred measure of inflation, grew at a continuously compounding annual rate of 2.2 percent over the last year. However, it has slowed considerably in recent months. PCEPI inflation has averaged 1.9 percent over the last six months and 1.4 percent over the last three months. In August 2024, it was just 1.1 percent.

Core inflation, which excludes volatile food and energy prices and is therefore thought to be a better predictor of future inflation, has also declined. Core PCEPI grew at a continuously compounding annual rate of 1.6 percent in August 2024. It has averaged 2.4 percent over the last six months and 2.0 percent over the last three months.

Figure 1. Headline and Core Personal Consumption Expenditures Price Index Inflation, January 2020 – August 2024

Although the Fed has successfully reduced inflation over the last two years, it seems reluctant to declare victory. Monetary policy is still tight today and is projected to remain tight through 2025. At the post-meeting press conference last week, Fed Chair Jerome Powell said “there’s no sense that the committee feels it’s in a rush” to return policy to neutral.

Economists say that monetary policy is neutral—that is, neither tight nor loose—when the Fed’s federal funds rate target is equal to the real Wicksellian natural rate of interest plus the Fed’s inflation target. We do not observe the natural rate, but estimates from the New York Fed range from 0.74 to 1.22 percent. Those estimates would put the neutral federal funds rate between 2.74 and 3.22 percent.

FOMC members’ estimates of the neutral federal funds rate are generally consistent with this range. Earlier this month, the median FOMC member projected the midpoint of the longer run federal funds rate target range at 2.9 percent. Twelve of the nineteen projections are between 2.74 and 3.22 percent.

At 4.75 to 5.0 percent, the current federal funds rate target range is more than 150 basis points above conventional estimates of the neutral rate. In other words, monetary policy remains tight.

The median FOMC member projected an additional 50 basis points worth of cuts would be appropriate this year. However, seven members thought it would be appropriate to cut just 25 basis points more and two members projected no additional cuts this year. Only one member thought it would be appropriate to reduce the federal funds rate target by more than 50 basis points this year.

More cuts are projected for 2025, but not enough to return the stance of monetary policy to neutral. The median FOMC member projects that the federal funds rate target range will be between 3.25 and 3.5 percent by the end of 2025. Hence, most members project the federal funds rate will remain above their own assessment of the neutral federal funds rate through the end of next year.

Given the high inflation realized over the last few years, it is easy to understand the appeal of keeping monetary policy tight: no one wants inflation to resurge. But the risks are two-sided. If the Fed holds its federal funds rate target too tight for too long, it will cause a recession. It must balance these risks.

With inflation now running below target, the risk of resurging inflation is much smaller and the risk of recession is much larger. Now is the time to ease up. If the Fed neutralizes the stance of monetary policy quickly and completely, it may yet avoid a recession. If it delays, as FOMC members project, we may not be so lucky.

The Federal Reserve’s recent decision to cut the federal funds rate by 50 basis points to a range of 4.75 percent to 5 percent, despite inflation still exceeding its 2 percent target, bears alarming similarities to the monetary policy missteps of the late 1970s. Back then, under pressure to stimulate economic activity, the Fed loosened monetary policy too soon. 

What was the result? Inflation soared as high as, if not higher, depending on the inflation measure. This culminated in Fed Chairman Paul Volcker reining in the money supply, which drove interest rates even higher. The result was necessary though painful double-dip recession before inflation persisted at a lower rate and the economy expanded during what’s been called the “Great Moderation.”

The recent Fed decision comes when inflation, though moderating, remains elevated. According to the latest Consumer Price Index (CPI) data, inflation increased by 2.5 percent year-over-year in August, with core inflation (less food and energy) rising by 3.2 percent. The Personal Consumption Expenditures (PCE) price index, the preferred core inflation measure for the Fed, showed a 2.6 percent year-over-year increase in July, further confirming that inflation is well above the 2-percent average inflation rate target (FAIT). 

The risk is clear: repeating the premature rate cuts of the 1970s could ignite inflation once more, forcing even harsher corrective measures later.

The Fed’s Balance Sheet Problem

The Federal Reserve’s balance sheet expanded dramatically during the COVID-19 pandemic, nearly doubling from $4 trillion in February 2020 to nearly $9 trillion in April 2022. While the Fed has made some progress in reducing its balance sheet, which now stands at $7.1 trillion, this figure remains 75 percent higher than its pre-pandemic level, with potentially risky assets. This massive increase in the money supply has distorted the economy, contributing to inflationary pressures by artificially boosting demand as supply hasn’t kept up.

Rather than relying on interest rate cuts, the Fed should be focused on aggressively reducing its balance sheet. Milton Friedman’s insights remain as relevant today as ever: inflation is “always and everywhere a monetary phenomenon.” The rapid expansion of the Fed’s balance sheet and the excessive money printing during the pandemic era are key contributors to the inflation we are battling now. Shrinking the balance sheet would help reduce the excess liquidity in the system, curbing inflation more effectively than rate cuts alone.

Distortive Power of Government Spending and Policy

While monetary policy is one part of the equation, we cannot overlook the role of fiscal policy in the current inflationary environment. Government spending has exploded since 2020 during the pandemic lockdowns, with the gross national debt soaring by nearly $13 trillion since 2019 to $35.3 trillion. The House of Representatives, rather than addressing this spending crisis, is set to pass another spending bill ahead of the September 30 deadline. As currently designed, this bill includes little in the way of meaningful spending restraint. Kicking the can down the road without addressing the structural imbalance in government finances only weakens the economy.

When the government spends recklessly by redistributing productive private resources to fund politically determined provisions, this contracts the potential supply of goods and services. And with the Fed printing so much money over the last few years, we have a clear explanation for the persistent general price inflation that reached a high of 9 percent in June 2022. But the inflationary pressures remain in the economy. This creates a vicious cycle, where excessive government borrowing leads to higher interest payments, necessitating further borrowing and money printing by the Fed to keep interest rates near its target. The only way to break this cycle is through fiscal discipline — capping government spending, reducing the deficit, and removing unnecessary programs — and more economic growth.

The government’s heavy-handed interventions in the form of taxes, regulations, and excessive spending distort market signals, stifle entrepreneurship, and create inefficiencies. These interventions raise business costs, leading to higher consumer prices and reduced economic growth. Rather than focusing on rate cuts and temporary relief, policymakers should aim for long-term solutions addressing inflation’s root cause: excessive money printing.

The Fed’s Mixed Messages

The Federal Open Market Committee’s (FOMC) latest statement signals an optimistic view that inflation is making “further progress” toward the 2 percent target. The Committee also highlights that it has “gained greater confidence that inflation is moving sustainably” toward its goal. However, this confidence is misplaced, given the persistent inflationary pressures evident in the data. The energy index has declined 4 percent over the past 12 months, but core inflation remains stubbornly high, and key services sectors continue to experience rising prices.

Cutting rates under these conditions risks reigniting inflation, just as the Fed’s premature monetary policy, including rate cuts, in the late 1970s exacerbated inflation and led to economic instability. The FOMC’s decision to reduce the target range for the federal funds rate while signaling its commitment to further rate cuts, if “appropriate,” creates uncertainty in the markets. This mixed messaging signals that the Fed is willing to sacrifice long-term price stability for short-term gains, which could lead to more aggressive corrective actions. Given the double-dip recession in the early 1980s, there is reason for concern.

The Path Forward: Fiscal and Monetary Solutions

The Fed’s dual mandate is to ensure price stability and maximum employment. With inflation still above target, its focus should be on controlling inflation–its balance sheet and inflation are the only two things it can control. This highlights the need to make it a single mandate to ensure price stability rather than trying to stimulate economic growth. History teaches us that premature rate cuts — like those in the 1970s — lead to higher inflation, more aggressive rate hikes, and economic contraction.

A more prudent approach would involve reducing the Fed’s balance sheet more aggressively, which would help soak up the excess liquidity, fueling inflationary pressures. Moreover, Congress must confront the spending crisis head-on. A balanced approach to fiscal policy, with spending limits tied to a maximum rate of population growth and inflation, would help stabilize government finances and reduce the deficit. Even better is Sen. Rand Paul’s Six Penny Plan, a “federal budget resolution that will balance on-budget outlays and revenues within five years by cutting six pennies off every dollar projected to be spent in the next five fiscal years.” Without these structural reforms, inflation will continue to threaten the purchasing power of Americans.

Furthermore, the government should remove barriers to productivity by cutting excessive regulations and taxes that stifle growth. Allowing the free market to operate efficiently without the distortive effects of heavy-handed government policies will promote sustainable, long-term growth.

Conclusion: A Critical Moment for the Economy

The Federal Reserve and Congress are at a critical juncture. The Fed’s decision to cut rates prematurely risks repeating the costly mistakes of the 1970s, where loose monetary policy fueled inflation, leading to severe economic instability. Simultaneously, Congress’s reluctance to tackle deficit spending driving the ballooning national debt only exacerbates the underlying issues plaguing the economy.

Now is not the time for short-term fixes. The Fed should focus on reducing its balance sheet and controlling inflation, while Congress must enact serious spending reforms to prevent further economic deterioration. If we fail to act now, we risk plunging into an inflationary spiral reminiscent of the 1970s — a government-induced failure the American economy cannot afford.

In a recent Atlantic article titled “Sometimes You Just Have to Ignore the Economists,” law professor Zephyr Teachout castigates economists for their nigh-universal denouncing of Vice President and now presidential nominee Kamala Harris’s plan to impose nationwide anti-”price-gouging” laws on groceries.

Teachout’s criticisms of economists and how “regular people seem to understand a few things that economists don’t” stem from her misunderstanding what she calls “abnormal” conditions: that is, “short-term price spikes.”

But the price-gouging, as Teachout and Harris present it, is for items whose prices have skyrocketed due to inflation. This is hardly a short-term phenomenon. Teachout’s critiques of economists’ opposition to price-gouging are thus premised on a basic misreading of the causes of price increases in recent years.

General Trends vs. Specific Trend

When we refer to prices rising due to inflation, we are speaking of a general increase in the overall price level. We can measure this with the consumer price index (CPI). By looking at the Federal Reserve Economic Data (FRED), we see that consumer prices have risen almost 32 percent since January 2016, with a sharp increase once the COVID pandemic began.

To get a sense of how the cost of production can rise over time, we can look at the producer price index (PPI). Again, FRED data are very clear on this: costs to producers have increased by 41 percent since January 2016. Looking specifically at supermarkets and other grocery stores reveals the same increase in producer costs. Taken together, these data paint a completely different picture to that presented by Teachout: consumer prices have risen slower than producer costs. If anything, producers are absorbing more of the cost of production than they used to — not less. This underscores the fallacy of blaming businesses for “greedflation.”

Other data support this analysis of grocery prices. A Food Industry Association report shows that grocery stores around the country did indeed see their profit margins rise in the aftermath of the pandemic. Labor costs fell as consumers shifted to purchasing groceries online and opting for pick-up instead of walking around the store themselves. But the profit margins quickly fell back to their historic averages as the pandemic abated and, more importantly, as COVID policies constricting international shipping sunsetted. Profit margins for food and grocery stores may remain slightly higher than their pre-pandemic levels. But those were historic lows, not the norm.

If Harris was to ban “price-gouging” on groceries purchased by consumers, the result would be disastrous. By preventing prices for groceries sold to consumers from rising in response to inflation, Harris would encourage shrinkflation — the idea that sellers would rather reduce the size or quantity of a product while keeping price constant rather than keep the size or quantity constant and increase price — which President Joe Biden has denounced. Fortunately for us, even Democratic lawmakers are calming constituents and telling industry leaders that Congress would not pass Harris’s proposal.

More Troubling

But back to Teachout’s arguments for anti-price-gouging laws: she claims that “short-term demand cannot be met by short-term supply.” But an economist would point out that producers do not need to “spin up” new factories or increased capacities in the short term. Instead, they need to respond to price-signals. In such cases, resources bound for other parts of the country would be redirected to the area where the price is higher. This is what happened with lumber during Hurricane Katrina and bottled water during Hurricane Sandy. Trucks carrying these precious resources were recalled and rerouted to New Orleans and New York City, respectively. This reduced the supply in the “low-demand” areas of the country and provided the increased quantity-supplied in the area experiencing temporarily high demand.

Lest we think that this phenomenon is isolated to natural disasters, we saw the same happen in Flint, Michigan during its water crisis. Because the price of bottled water rose, more bottled water was sent there to people in desperate need of it rather than other locations where it was less necessary.

It is possible that the idea that “temporarily higher-priced products will find their way to the people who value them the most” might not, as Teachout claims, perfectly hold in the real world. Teachout gives the example of “a working-class cancer patient who desperately needs to buy the last generator in stock to keep his medications refrigerated might not be able to outbid a healthy millionaire who just wants to run their air conditioner” as evidence of this.

However, the relevant insight from economics is not “the glory of prices.” The right answer is to ask “compared to what?” Let’s take Teachout’s example of the cancer patient in need of a generator. Like Teachout, I would rather live in a world where the middle-class cancer patient gets the generator rather than the millionaire who wants to run his air conditioning. But what alternatives do we have to free prices?

Suppose that instead of allowing prices to fully rise, we cap the price increase (as occurs under current price-gouging laws). But when monetary costs are prevented from rising fully, non-monetary costs will rise to fill the gap. One such cost is time. In the months following natural disasters, we typically observe queues outside stores as people desperately try to access the small amount of goods available at artificially low prices. We see people flocking to Red Cross donation trucks, clamoring to get the supplies their families desperately want. We see people driving around town looking for stores that are open, making phone calls to other stores in town and the surrounding area trying to get a hold of someone who has what they want and is willing to hold it for them until they can get there.

In other words, rather than paying with money for these goods, these people are paying with their time and effort. Such time and effort are resources that could have been directed towards rebuilding. After all, you can’t begin the cleanup and rebuilding effort if you’re standing in line.

Another way to solve the allocation problem would be to use democracy. But consider what we would need to do to accomplish this.

First, we would somehow have to rank the alternative uses of the resources. Should we rebuild the hospital first or the daycare center? Rebuilding the hospital means that people who are sick or injured can be taken care of more quickly. But as anyone with children will tell you, if you want to get something done around the house, the first step is to find a way to get the kids out of the house. Rebuilding the daycare center first might provide more parents with more opportunities to get more facilities rebuilt more quickly.

A second difficulty with a democratic approach to deciding resource-allocation would be finding a time where everyone could come together and voice their concerns. Finding such a time is hard enough in politics. But even if we could find such a time, we would have to assume they would do so honestly, lest we try to make a democratic decision with false information. Do we really think that everyone will tell the truth all the time? And do we really believe that democratic votes will render the most efficient outcome? And by what criteria would people be able to know whether the vote has produced the best outcome for everyone?

These are the types of matters with which college freshmen enrolled in Econ 101 courses are required to grapple. They are also core questions that Teachout’s analysis does not address.

Despite being touted as a responsible and sophisticated framework for business and investment, Environmental, Social, and Governance (ESG) criteria lack logical cohesion and internal consistency. Conceptually, no reason exists for why the fundamental ideas within the ESG label should correlate with one another. For instance, social criteria regarding diversity, equity, and inclusion often undercut environmental criteria and vice versa. And “good” environmental or social scores can be used to paper over significant governance issues. This makes the ESG label a confusing concept and an incoherent umbrella label under which a wide variety of social, political, economic, and environmental interest groups compete to advance their agendas using the label of “responsible” or “sustainable” investment.

Part of the incoherence of ESG stems from mixing sound business and investment practices with ideological priorities. These new ideological priorities have little to do with successful business performance or high financial returns. Nor are they backed by sound research or substantial evidence. Instead, they are a collection of “just-so” stories glommed onto existing business practices and strategies. Even those who embrace ESG should recognize the value of disaggregating it into its three different components. Evaluating disaggregated environmental, social, and governance categories independently of each other will help companies and investors allocate capital more efficiently and effectively while encouraging more transparent engagement of societal problems.

Read the full Paper:

Although the inflation outlook has improved, it is still very much in the news. Although the rate of increase has slowed, prices remain more than 20 percent above what they were four years ago. At the same time, most analysts understand that the slow and at times negative growth of the money supply, which has tamed inflation somewhat for now, cannot be sustained.  

Now that the Fed has announced its 50-basis-point cut in the federal funds rate, it will be opening the money spigot again. To be fair, the increase in the rate of growth of the money supply needed to achieve this reduction in the federal funds rate is modest. But as the Fed continues to reduce rates, the rate of money growth will increase, and so the likelihood of future inflation will rise. Since the Fed has given every indication that many more rate cuts are coming, what either presidential candidate has to say about inflation has never been more important.  

Several weeks ago, Kamala Harris offered us her Greed Theory of Inflation. In short, people are suffering from high prices today because of greedy corporations. That’s it. As the estimable economist and policy analyst, John Goodman, documented recently (The Greed Theory of Inflation), she is rather alone on this one. Even very liberal economists who vociferously support Democrats do not make this argument, and most will refute it if queried.  

Harris either believes what she is saying, or she doesn’t. Having an undergraduate degree in economics and exposure to highly educated people for many years in her various roles in government, truly believing what she is saying should be impossible. 

But if she doesn’t believe what she is saying, then this might go down as one of the most cynical acts of political dishonesty of all time. Even worse than either possibility is that it is a little of both.  

Economists used to enjoy a very good reputation among ordinary citizens and elected officials. In the popular television show The West Wing, for example, President Jed Bartlet was a Nobel Prize-winning economist, to establish from the beginning that there was no question about his intelligence, academic achievement, and intellectual honesty.  

Today, economists no longer receive that kind of automatic respect, and for good reason: too many have traded on the respect normally accorded to their discipline to advance their own political views. But a competent professional economist of integrity cannot possibly believe the Harris Greed Theory of Inflation. Competent economists understand that if greed simply means wanting things badly, then by the very structure of their own paradigm everyone is greedy, so the word is useless.  

In June of 2020, five months into the Biden-Harris Administration, inflation was .6 percent. It then rose to a peak of 9.1 percent in June of 2022. It fell steadily from that peak to 3 percent in June of 2023 and has stayed low ever since (it was 3 percent in June of 2024). By the Harris Greed Theory, corporations became increasingly greedy from June 2020 to June of 2022, and then became less greedy over time.   

A much better, and very well-known, explanation for our recent whipsaw of inflation is money growth. The Fed was worried about disruption during COVID, so it dramatically increased the money supply. Inflation caused by supply disruptions began rising even more rapidly, precisely as monetary theory predicts, so the Fed hit the brakes hard on money growth; so hard, in fact, that the money supply began to contract (see below). Predictably, inflation then began to come down.  

If greed and not monetary policy were the culprit, why did the federal government fail to rein in corporate greed at the beginning of the Biden-Harris administration, but then successfully do so over the last year? Kamala Harris should be asked this question by the media since she proposed the Greed Theory. Even if that never happens, economists with integrity should not wait to be asked that question. They should call out such nonsense unilaterally.  

The Trump-Vance ticket is playing the same kind of game with foreign trade policy. But there has been no shortage of economists from every political persuasion raising great objection to increasing tariffs in service to government led industrial planning.  Economists should not be exacting about things they politically disagree with, but generous with things they do. With respect to economics per se, they should call balls and strikes with the utmost of intellectual neutrality.