We sometimes forget that the Constitution of the United States is intended both to direct the nation’s governance and to advance the nation’s economy. But the Supreme Court has not forgotten: Near the end of its yearly term, our nation’s highest court issued several opinions that improve the nation’s regulatory climate — and, indeed, the nation’s economic climate.  

In Loper Bright Enterprises, Inc. v. Raimondo, the Supreme Court discarded a rule of interpretation that had been in effect for several decades. That now-discarded rule addressed this question: when a regulatory agency’s interpretation of a statute is challenged in court, how do we determine whether that interpretation should remain in force? 

Since 1984, the rule had been: If the agency’s interpretation of an ambiguous statute is reasonable, the court must uphold that agency’s interpretation. (This was also known as the Chevron rule or the principle of Chevron deference.) Under Loper Bright, however, there’s a new rule of interpretation: from now on, it will be the role of courts, not agencies, to determine the correct interpretation of a statute — so when an agency’s interpretation of some statute is challenged in court, the court is now the body that decides the best interpretation of that statute. Under Loper Bright, it is now “the responsibility of the court to decide whether the law means what the agency says.”  

This case furthers the constitutional project of creating the conditions for commerce to thrive in America. Hamilton wrote in Federalist No. 11 that “the aggregate balance of the commerce of the United States would bid fair to be much more favourable than that of the thirteen states without union or with partial unions.” The Constitution facilitated commercial activity not just by uniting the states but also by prohibiting states from laying imposts or duties on imports or exports and by giving the power to regulate interstate commerce to Congress.  

Loper Bright’s contribution will be, in a very practical sense, increased certainty and stability in the application of federal regulation of interstate commerce. Agencies can no longer be as creative as they have been in their interpretations of what Congress said. A beneficial consequence of this reduction in bureaucratic creativity should be a corresponding reduction in the way agency interpretations swing back and forth as presidential administrations change. Although some have argued that Loper Bright suggests that the judiciary is assuming control of the administrative state, this view is not correct: a better interpretation is that Loper Bright both requires Congress to take responsibility for the consequences of future legislation and encourages agency regulators to stay in their lane. 

Decisions about resource investment, and the risk-taking that is central to them, will also be better rewarded from the increased fairness in the legal system that will be produced by two other Supreme Court decisions: Securities and Exchange Commission v. Jarkesy and Corner Post, Inc. v. Board of Governors of the Federal Reserve System. In Jarkesy, the Supreme Court held that the right to a jury trial guaranteed by the Seventh Amendment to the Constitution “[i]n Suits at common law” extends to statutory claims for civil penalties brought by the federal government. That means that people who have been victimized by administrative hearings that put them on trial for common law-like offenses — but that seem to lack basic due-process protections — now have a remedy: they can demand trial by jury. Corner Post interpreted a statute of limitations providing that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.” The Court held, as should have been obvious, that a right of action to challenge a regulation accrues when the regulation injures the plaintiff — rather than possibly decades earlier when the regulation was promulgated.  

Jarkesy and Corner Post provide citizens and entrepreneurs with a measure of fairness when dealing with the administrative state. The protections afforded by those two cases to the rights of litigants, and the protections afforded by Loper Bright to the rights of those who are regulated, make for settled expectations that better conform to everyday notions of fairness. Such judicial reforms, both by themselves and in their consequences, create conditions for economic advancement that are significantly more favorable than they were when the Court convened last October. 

Some have argued that the United States has a living Constitution, by which they mean that the essential nature of the Constitution’s functions and operations must change over time. That understanding of the living Constitution is not correct. But what the Court’s newest decisions teach us is that, in a very limited sense, we do have a living Constitution — but only because a central strength of our Constitution’s timeless principles is that they are readily adaptable to new situations. In the Supreme Court’s most recent term, the Justices have demonstrated how several fundamental American institutions that protect both civil society and economic growth — such as trial by jury, statutes of limitations, and politically accountable lawmaking bodies — have a direct connection to the proper functioning of constitutional government. In short, with these decisions the Court has not only supplied a roadmap to fair and sound public administration in the future — it has also provided a kind of civic and economic education. 

For many months economists and market strategists have suggested that a pending Federal Reserve “pivot” from policy stasis to sustained rate cutting will boost equity prices or at least preclude them from declining. Lewis Krauskopf at Reuters last July wrote that “Rate Cut Prospects Could Bolster US Stocks as Investors Await Earnings, Elections.” That same month, more than a third of respondents to Bank of America’s monthly Global Fund Manager Survey agreed that “monetary policy is too restrictive, the most restrictive since November 2008,” yet they also revealed that their investment portfolios remained “overweight in equities and underweight in bonds” (“Investors Remain Bullish Driven by the Expected Fed Rate Cuts,” Funds Society, July 19, 2024). At Morningstar last month, Gordon Gottsegen reported that “Retail Investors are Bullish on Stocks Ahead of the Fed’s Rate Cut Next Month.”

In fact, decades of investment history surrounding Fed policy pivots from rate stasis to rate cutting show that cutting has rarely been bullish for equities if the cuts came in the wake of yield curve inversions (which reliably forecast recessions). This distinction is relevant today because there’s strong and growing evidence that the next US recession has begun already – or will begin soon – because the yield curve has been inverted since late 2022 and remains so. 

Many economists and strategists remain unsure about a pending US recession, having not forecasted it in the first place, or because generally they doubt that something’s real until it already passes them by.  Similarly tardy will be the National Bureau of Economic Research, but that’s by design, because it assigns “official” dates to the start and finish of each recession, so before it makes its public pronouncements it wants to be sure about the final status of oft-revised economic data. Unfortunately, such “back-casting” (and even the New York Fed’s “nowcasting”) doesn’t help those who need foresight and time to adjust ahead of the trouble.

At the Fed’s Jackson Hole conference last month officials signaled a series of rate cuts to begin soon at FOMC meetings. It would be the first rate cutting since March 2020. Figure One plots the Fed funds rate versus the 10-year T-Bond yield over the past six years and includes a year-ahead forecast of the Fed rate derived from futures contracts. The projection is for cuts leading to a rate of 2.75 percent a year from now. Today’s rate is 5.25 percent, so moves to 2.75 percent would equal total cuts of 250 basis points.  Bond yields typically decline amid rate cutting, so the yield curve might remain inverted at least through next March.

If this is the Fed’s coming move – cutting its policy rate substantially and quickly – it suggests a panicky policy; it betrays both a fearfulness and an eagerness to fight a recession which the Fed itself helped instigate by its previous, excessive, curve-inverting rate hikes.

Rate cutting typically recognizes the problem (recession) after the fact but doesn’t prevent the problem. Nor does rate cutting necessarily boost equities. It’s true that lower interest rates (long and short) tend to be bullish for equities “all else equal” (a lower discount factor applied to corporate earnings), but “all else” is not equal now; a recession means economic growth contracts and earnings decline, both of which undermine equity prices. Significant, rapid rate-cutting usually coincides not with an economic “soft landing” but incoming recession data. Rate cuts based on hindsight instead of foresight can confirm a recession but can’t prevent it.

Important relationships among Fed policy, the yield curve spread, recessions, and equity performance since 1968 are illustrated in Figure Two. All eight recessions have been reliably preceded (roughly 12-18 months in advance) by Fed rate hiking that caused an inverted yield curve (depicted here as a negative yield curve spread, when short term interest rates lie above long-term bond yields). In all these years, we find no case of a recession occurring after no prior curve inversion and no case of a recession failing to occur despite a prior inversion.

I count eleven episodes of persistent and material Fed rate cutting since 1968 (Figure Two). Eight cases came on the heels of curve inversion and three occurred after no prior inversion. Only in the three other cases did Fed rate cutting not coincide with recession and plunging equity prices. The three cases are 1971-72, 1984-86, and 1995-98. They’re worth summarizing.

Case #1 – In September 1971 the Fed began to cut its policy rate, then at 5.75 percent, to a low of 3.50 percent in January 1972. When the rate-cutting began, the yield curve was upward sloping (not inverted). The long-short rate spread was positive (62 basis points). There had been a prior recession (from December 1969 to November of 1970) but amid the rate cutting of 1971-72, economic growth persisted, and the S&P 500 gained 8 percent. The next recession would occur in 1973-75.
 

Case #2 – In July 1984 the Fed initiated another benign episode of rate cutting. Over a two-year period, it reduced its policy rate dramatically, from 11.63 percent to 5.88 percent (by August 1986). When the cuts began, the yield curve again was upward sloping; the curve spread was positive (106 basis points). There was a prior recession (July 1981 to November 1982), but during this rate cutting period economic growth again held up, while the S&P 500 boomed by 44 percent. The next recession wouldn’t take hold until July 1990 (and last briefly, through March 1991).  Case #3 – In April 1995 the Fed began to cut its then peak rate of 6.00 percent until by November 1998 it was down to 4.75 percent. The slow and steady policy was dubbed “gradualism.” Ten separate cuts totaled only 1.25 percentage points over three-and-a-half years. The yield curve was upward sloping when cutting began (a positive spread of 103 basis points). During this period the US economy was robust: real GDP growth was fast to begin with (+4.4 percent in 1996) and then accelerated to 4.5 percent in 1997 and 4.9 percent in 1998. During this episode the S&P 500 skyrocketed by 125 percent (37 percent annualized).

The impression held by today’s economists and strategists that Fed rate cutting is bullish for both output and equities might be skewed by these three cases – these few outliers. But digging more deeply and carefully into the data, we discover this fascinating phenomenon: that unlike the other eight cases, the three rate-cutting episodes of 1971-72, 1984-86, and 1995-98 (when the S&P 500 gained 8 percent, 44 percent, and 125 percent, respectively) were not preceded by a recession-signaling inverted yield curve.

Now consider depictions (in Figures Three, Four and Five) of three major US recessions that occurred alongside severe Fed rate cutting.  In these cases, US equity prices plunged “despite” Fed rate cutting.  These are three of the eight typical cases of bearishness amid rate cutting witnessed since 1968 (when rate cutting arrived in the wake of an inverted yield curve). That’s precisely our current situation. It’s an ominous pattern — for those still bullish on equities. 

For the entire period in Figure Three (August 2007 to June 2009), the S&P 500 declined by 36 percent (20 percent annualized), but the index was down by an astounding 51 percent from peak (October 2007) to trough (March 2009).   

For the whole period in Figure Four the S&P 500 declined by 38 percent (25 percent annualized), but the index dropped 41 percent from peak (December 1999) to trough (February 2003).   

In Figure Four, the S&P 500 declined by 36 percent (24 percent annualized), but the index fell farther (-44 percent) from peak (October 1973) to trough (October 1974).   

Considering all relevant data and pertinent causal aspects surrounding Fed rate cutting in recent decades, it seems more likely than not that the next episode will neither prevent a US recession nor preclude a material decline in US equity prices. Of greatest relevance is the prior inversion of the yield curve and the more recent indication that recession may be here already or else imminent (due to the uptick in the jobless rate, per the “Sahm Rule Recession Indicator”). The fact that only three of the past eleven episodes of Fed cutting coincided with a growing US economy and rising US stock prices should be of little comfort today, when it’s realized that those cases weren’t preceded by an inverted yield curve or ominous Sahm signal.    

Maybe it’s a law of history: every innovation faces opposition. The early nineteenth-century Luddites wrecked textile machinery because it took their jobs. Our innate suspicion extends to trade, too, which is, after all, just another technology for turning one thing into another. Apartheid-era white South Africans opposed efforts to modify the Colour Bar because they feared that African workers would take their jobs and reduce them to “uncivilized” standards of living. Protectionists want to shield their fellow Americans from foreign competition.

Artificial intelligence is the most recent worry and was the big technology story of 2023. Should we curse these intelligent machines? After all, once machines can solve problems, they will take all our jobs and cause mass unemployment. Peggy Noonan sounded the alarm about Artificial Intelligence in the pages of the Wall Street Journal. OpenAI’s executives appeared before Congress to ask (perhaps predictably) for licensing and regulation, and some wonder if the robot apocalypse is finally upon us.

We have heard this story before. It’s still wrong.

The “creative” part of creative destruction is harder to see than the “destruction” part. Of course, I can make life a bit more convenient with new apps and subscription services. But it’s not as dramatic as a plant closure, and there’s no despairing laid off laborer to interview.

But what happens when people innovate and increase others’ productivity? They make some resources redundant and free them up for other, more productive uses. Innovation and institutional change run into distributional problems because some people might be made worse off — absolutely and permanently. Sometimes those who take losses from a changing status quo can veto the change. Government social insurance or trade adjustment assistance, for example, might make it easier for people to swallow the bitter pills of losing their livelihoods. Civil institutions like houses of worship, civic organizations, and other groups help people having hard times. Whether people deserve help might be irrelevant to the political reality. When people put themselves in positions to extract rents, they will do so. In the very long run, weathering periodic injustice might be a small price to pay for big increases in standards of living.

I run the risk of writing my epitaph here, but the threat of artificial intelligence is, most likely, overstated. Learning loss during the COVID-19 pandemic underscored that: online schooling is a poor substitute for in-person schooling. Yes, many meetings could have been emails, but we also feed on contact and conversation. These needs require a lot of human nuances that artificial intelligence is not likely to understand for quite some time.

Releasing labor from areas where machines have taken over has created many new possibilities. Artificial intelligence cannot yet aggregate and deploy knowledge about the particular circumstances of time and place as efficiently and effectively as someone with human intuition. We appreciate aggregations and recommendations, but Facebook’s algorithm doesn’t understand how you do your job quite as well as you do. FA Hayek pointed out a lot of knowledge of “the particular circumstances of time and place” is not properly “scientific.” It is generally of a kind that is difficult (if not impossible) to articulate, much less automate.

The economic historians Joel Mokyr, Chris Vickers, and Nicholas Ziebarth have argued that artificial intelligence might be the world’s best research assistant, but it is unlikely ever to be the world’s best researcher. Every technological change creates a lot of new possibilities. Artificial intelligence — even if not truly “intelligent” — is a monumental achievement of creative cooperation, and it frees up time and energy for even more creative endeavors. As Frederic Bastiat puts it, “to curse machines is to curse the human mind.” To hate a technology is denigrate the most human undertaking, namely, thinking. 

The Federal Reserve’s Federal Open Market Committee (FOMC) announced a 50 basis point cut in its federal funds rate target on Wednesday. The move marks a reversal at the Fed, which had held its target rate range at 5.25 to 5.5 percent since July 2023. FOMC members previously worried high inflation might become entrenched. They now believe inflation is on a path back to 2 percent, thereby warranting a gradual transition from tight to neutral monetary policy.

At the post-meeting press conference, Fed Chair Jerome Powell described the decision as “a process of recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low to a place that’s more appropriate given where we are now and where we expect to be.”

Market participants were grappling with two big questions heading into Wednesday’s meeting. The immediate question was whether the Fed would cut its federal funds rate target range by 25 or 50 basis points. Just prior to Wednesday’s announcement, the CME Group reported that the federal funds futures market was pricing in a slight edge (55 percent) for the larger cut.

The longer term question concerned the pace of rate cuts. Prior to the meeting, futures market traders were convinced the Fed would move quickly. The CME Group reported a 12.8 percent chance that the federal funds rate target range would be 150 basis points lower by the end of the year; a 51.0 percent chance it would be at least 125 basis points lower; and an 88.2 percent chance it would be at least 100 basis points lower.

The Fed’s decision to cut by 50 basis points on Wednesday and the projections for the federal funds rate submitted by FOMC members largely confirmed market expectations. The median FOMC member projected the midpoint of the federal funds rate target range would fall to 4.4 percent this year, which is consistent with a 4.25 to 4.5 percent target rate range. One FOMC member projected the federal funds rate would fall by an additional 75 basis points this year; nine members projected it would fall by an additional 50 basis points; seven projected it would fall by an additional 25 basis points; and two projected it would remain unchanged.

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate.

Given FOMC members’ projections for near-term rate cuts, Wednesday’s decision might be seen as an implicit acknowledgement that the Fed had gotten behind the curve. Inflation was 2.5 percent over the last twelve months, which is slightly above target. But it has averaged just 1.5 percent over the last three months and 0.9 percent in the most recent month.

Moreover, since our estimates of housing services prices adjust with a considerable lag, actual inflation—if it were possible to accurately measure it—is probably even lower. This lag caused conventional measures to underestimate inflation in 2021, when prices began rising rapidly. It has likely caused them to overestimate inflation in late 2023 and 2024, as prices began to grow more slowly.

Powell denied that the Fed was playing catch-up with its 50 basis point rate cut. “We don’t think we’re behind. We think this is timely. But I think you can take this as a sign of our commitment not to get behind.” Nonetheless, Powell acknowledged that the Fed might have cut in July had the data come in before that meeting rather than just after.

By conventional measures, monetary policy remains tight and will likely continue to remain tight over the near term if the Fed cuts rates in line with the median FOMC member’s projections. Indeed, Powell said “there’s no sense that the committee feels it’s in a rush” to return policy to neutral.

The New York Fed estimates the real (i.e., inflation-adjusted) neutral rate of interest at 0.74 to 1.22 percent. With the Fed’s 2-percent inflation target, that would imply a long run nominal neutral rate of interest of 2.74 to 3.22 percent. Correspondingly, the median FOMC member currently projects the midpoint of the longer run federal funds rate target range at 2.9 percent, which is consistent with a 2.75 to 3.0 percent target rate range. If the federal funds rate target range is 4.25 to 4.5 percent following the December meeting, as the median FOMC member currently projects, it will remain more than 100 basis points above the long run neutral federal funds rate.

Of course, we do not directly observe the neutral federal funds rate. But, as Chair Powell noted in the post-meeting press conference, “we know it by its works.” If incoming data suggests that monetary policy remains too tight, the Fed might respond by cutting its federal funds rate target faster than the median FOMC member currently projects.

“We are not on any preset course,” Powell said. “We will continue to make our decisions meeting by meeting.” The risk is that, given the long and variable lags of monetary policy, it will be too late to avoid a recession once the signs of a recession appear.

Few deny the importance of human capital (economists’ fancy word for education and skills) for economic development. This importance is obvious: better-educated workers are more productive and can be more effectively combined with physical capital, thereby increasing the productivity of the former (and wages as a byproduct).

Well-protected property rights, low taxation, and minimal regulation increase the returns on human capital acquisition — all the things that speak to economic freedom. For example, if the government imposes strict regulations, the ability of individuals to respond is diminished. For example, if the state requires a special license to practice a profession (as is the case in the United States, where about 20 percent of jobs are regulated by professional orders or licensing systems, it becomes difficult to benefit from the accumulation of human capital. Since all these conditions are synonymous with economic freedom, it is clear that the latter is crucial for motivating human capital acquisition.

However, some argue that the state encourages education through subsidies, especially post-secondary education. By taxing the rich to help the less fortunate acquire human capital, the state not only supports the less well-off but also stimulates economic growth. However, these taxes reduce economic freedom.

This tension implies that economic freedom is a double-edged sword. On the one hand, it encourages the accumulation of human capital. But if the state taxes the wealthy to redistribute to the less fortunate, this reduction in economic freedom can paradoxically lead to an increase in human capital.

Which effect dominates? There are good reasons to believe that the theoretical case for the state promoting human capital accumulation through redistribution is exaggerated. First, a highly interventionist state that taxes heavily and intervenes extensively in credit markets can stifle the supply of credit from financial institutions or businesses to students. This supply — dollar for dollar — is often more effective than that of the state. Why? Because these institutions want to be repaid and will therefore offer loans to those who are likely to be able to repay the amounts borrowed. The state does not have the same incentives. After all, the politician who promises subsidies for university attendance does not need to be financially reimbursed; instead, he expects to win the vote of the subsidy recipient.

Moreover, many types of human capital investments (professional, university, technical, college degrees) involve a degree of uncertainty. Why? Because generally, the time spent learning has no value unless the degree is obtained. A person who needs to take ten courses to obtain a certification but only completes nine will not receive nine-tenths of the diploma’s return — they will likely receive close to zero. The risk of non-completion is a form of uncertainty and represents a cost. Income tax increases the weight of this risk by making risk-taking less profitable. If people are risk-averse, the negative effect of one dollar of tax is greater than the positive effect of one dollar of subsidy.

This is why, when examining the existing empirical literature on economic freedom and human capital, particularly the work of economist Horst Feldmann, we find that more economic freedom leads (on net) to an increase in human capital. Using the Fraser Institute’s Economic Freedom Index, Feldmann found that an additional point of economic freedom increased high school enrollment rates by 33.48 to 37.98 percentage points. Another group of researchers, using data from 86 countries, confirmed that finding when they found that an additional point of economic freedom increased the rate of return on education by 0.45 percentage points. This means that freer economies were able to make human capital (and self-improvement) more enticing for workers.

In forthcoming work with Alicia Plemmons and Justin Callais, I test whether economic freedom favored intergenerational educational mobility — whether children’s educational status in adulthood is determined by their parents. The idea is that, if economic freedom is net beneficial, we should see the children of poor parents be able to acquire more human capital. We found exactly that — economic freedom is potently associated with greater educational mobility.

In conclusion, the argument in favor of state intervention in education — without which there would not be enough investment in human capital — is not particularly convincing. The case for more economic freedom, for its part, is far stronger. 

A reader recently reminded me that North Korea’s official name is the Democratic People’s Republic of Korea. North Korea’s bitterly ironic naming convention has been used by other totalitarian states. The German Democratic Republic was the official name for East Germany. The genocidal government of Pol Pot in Cambodia was known as Democratic Kampuchea. South Yemen’s breakaway communist regime was known as the People’s Democratic Republic of Yemen.

We know from those who have escaped from North Korea that despite their extreme suffering, people there are told they are living in the greatest country in the world. As FA Hayek explained in The Road to Serfdom, “If the feeling of oppression in totalitarian countries is in general much less acute than most people in liberal countries imagine, this is because the totalitarian governments succeed to a high degree in making people think as they want them to.”

The American identity revolves around freedom. In one survey, 91 percent of Americans shared that freedom is their most important value. In another survey, 91 percent of Americans said, “the right to vote is either extremely or very important to the nation’s identity.” As for preserving freedom, 94 percent say “the US Constitution is ‘important’ to protect their liberty and freedom.”

Reasonable people might be concerned about whether most Americans grasp the true meaning of freedom. Collectivists have successfully led people to believe that democracy is synonymous with freedom. Some individuals genuinely believe that by defending our democracy, they are safeguarding freedom. They have confused the classical liberal ideal of freedom with what FA Hayek called political freedom, “the participation of men in the choice of their government, in the process of legislation, and in the control of administration.”

Voting doesn’t guarantee a society will move toward minimizing “coercion or its harmful effects.” Hayek calls us to remember, “we have seen millions voting themselves into complete dependence on a tyrant [and] has made our generation understand that to choose one’s government is not necessarily to secure freedom.”

In his 1960 work The Constitution of Liberty, Hayek described how the “partial realization” of “the ideal of freedom” is what “made possible the achievements of [Western] civilization.” He continued with this warning: “We must hope that here there still exists wide consent on certain fundamental values. But this agreement is no longer explicit; and if these values are to regain power, a comprehensive restatement and revindication are urgently needed.” 

In 2024, we can say that widespread “agreement” on the ideal of freedom is gone. 

In The Constitution of Liberty, Hayek explained that he used the words freedom and liberty interchangeably. With clarity, Hayek distinguished two forms of freedom: the classical liberal ideal of freedom from coercion and the collectivist ideal of freedom from necessity. He explains that these two ideals cannot coexist logically or morally. Once freedom from necessity becomes a widespread goal, demands for the redistribution of wealth become the norm.

The classical liberal ideal of freedom from coercion means private individuals have the autonomy to make choices and carry out personal plans instead of being forced by another’s arbitrary decisions. In The Road to Serfdom, Hayek explained that a free society depends on the virtues of “independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntarily cooperation with one’s neighbor.”

The collectivist ideal of freedom from necessity erodes these virtues. In Hayek’s words, freedom from necessity means “release from the compulsion of the circumstances which inevitably limit the range of choice of all of us.”  

As Hayek wrote in The Constitution of Liberty, the ideal of freedom from necessity means politicians claim to do the impossible — “to satisfy our wishes.” Hayek explains how freedom from necessity requires authorities to exercise the power of coercion to limit personal freedom. Individuals tend to comply when their environment or circumstances are controlled by someone else, compelling them to act in ways that serve someone else’s goals.

Hayek sounded this alarm in The Road to Serfdom: “There can be no doubt that the promise of greater freedom has become one of the most effective weapons of socialist propaganda and that the belief that socialism would bring freedom is genuine and sincere.”

Doubting politicians’ good intentions is wise, but doubting those of our neighbors, colleagues, and family members is counterproductive. Let’s imagine a future where the classical liberal ideas of freedom from coercion become mainstream once more. If that happens, it will be because our “neighbors” have had a change of heart. As Hayek pointed out in The Road to Serfdom, many we know “would recoil if they became convinced that the realization of their program would mean the destruction of freedom.” 

The recoil might start when our good-natured neighbors grasp the evil of coercion. Hayek wrote in The Constitution of Liberty, “Coercion is evil precisely because it thus eliminates an individual as a thinking and valuing person and makes him a bare tool in the achievement of the ends of another.” The range of personal choices erodes in fundamental ways—what university will admit you, what occupations are open to you, what car you can drive, how you heat your home, etc. Coercing an individual so that someone else can be free from the necessity of choice never produces freedom. 

Hayek’s warning is a powerful reminder of the outcome of our confusion.

Once this identification of freedom with power is admitted, there is no limit to the sophisms by which the attractions of the word ‘liberty’ can be used to support measures which destroy individual liberty, no end to the tricks by which people can be exhorted in the name of liberty to give up their liberty.

Let’s not just point the finger at politicians. Some need little persuasion to abandon their freedom. Hayek explains, “there are people who do not value the liberty with which we are concerned, who cannot see that they derive great benefits from it, and who will be ready to give it up to gain other advantages.” To these people, “the necessity to act according to one’s own plans and decisions may be felt by them to be more of a burden than an advantage.”

Authoritarians do not impose socialism from the top down; it is welcomed by many from the bottom up. 

If we are puzzled by why our neighbors believe what we think is crude propaganda, we shouldn’t be. In her novel Seduction of the Minotaur, Anaïs Nin wrote, “We do not see things as they are, we see them as we are.” In this case, if freedom seems burdensome to some, they will be convinced by sophistry that supports their view. 

These people are easily convinced that wealth redistribution — especially if it benefits them and is approved by elected officials — equals greater freedom. They will then perversely hail as beneficial to society every proposal that reduces the freedom of private individuals to order their own conduct. Constitutional guarantees limiting the power of government will then be defined as obstacles to freedom and democracy.  

Hayek wrote, “The task of a policy of freedom must…be to minimize coercion or its harmful effects, even if it cannot eliminate it completely.” When the ideal of true freedom from coercion is no longer a shared societal goal, history teaches that unimaginable horrors can be just around the corner.   

Although I’ve taught Principles of Microeconomics  (“ECON 101”) nearly every year now for the past 42 years, I never tire of this course. I deeply love walking into the classroom each and every day to do my best to share with my (mostly freshmen) students the economic way of thinking. I am just as eager and excited to teach my Fall 2024 course as I was to teach my Fall 1982 course – and, indeed, as I was to teach every one of the countless Intro to Econ courses that I’ve taught in between.

I teach this course as if it’s the only formal exposure my students will ever have to economics. This approach is realistic, because most of the students in my course will take at most one other economics course during their collegiate careers. I see as my principal responsibility to instill in my students enough knowledge of basic economics so that they, when fully into adulthood, will take an adult stance when encountering economic arguments presented by politicians and pundits.

If I do my job well, each of my students will leave my course at the semester’s end with an understanding of the following ten lessons.

1. Poverty has no causes; wealth has causes. No effort, sacrifice, risk-taking, or creativity is required to be mired in poverty. Following the reverse of Nike’s famous mantra suffices to ensure poverty: Just don’t do it. Poverty is simply the condition that humanity finds itself in if too little wealth is created.

Unlike poverty, wealth doesn’t just happen. To escape poverty requires the creation of wealth. Effort must be put forward, sacrifices must be made, risks must be taken, and creativity must be unleashed – all by us humans – if we are to transform any of the atomic and molecular mash-ups given to us by nature into outputs that improve our lives. Adam Smith signaled this reality in the full title of his magnificent 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations.

2. Wealth is created, not “distributed”; therefore, in a market economy the “distribution” of income and of wealth has no policy relevance. To understand that wealth must be created is to understand the indispensable roles of individual human effort, sacrifice, risk-taking, and creativity. Wealth, being a human creation – rather than being goodies created by nature and dispensed like manna from heaven – emerges only from the minds and hands of its creators. It belongs to them. And so in a market economy those individuals who create more wealth have more wealth.

I’m tempted to say that the “distribution” of wealth in such an economy thus has no more policy relevance than does the distribution of “A” grades in a fairly taught-and-tested college classroom. Just as those students who are smartest and who study hardest tend to get the highest grades are entitled to keep their high grades – just as those high grades are not extracted from the grades or brains of students who are less smart or who study less diligently – the wealth earned in markets by high-income earners is not extracted from those people who earn lower incomes. But this formulation doesn’t do the market justice. While in a classroom, “A” students don’t seize their high marks from students who earn lower marks, nor do these “A” students do much to help their less-talented or less-diligent classmates. But in a market economy, individuals who earn high incomes do so only by increasing the economic well-being of other human beings. In a market economy, the higher is Smith’s income relative to that of Jones, the more Smith has done, compared to Jones, to enrich his or her fellow human beings.

3. The economy is impersonal – implying, importantly, that prices and wages are not arbitrary. Nearly all economic phenomena are, as F.A. Hayek was fond of saying, “the results of human action but not of human design.” As Arnold Kling puts it:

Economic outcomes are determined by general forces, like supply and demand, as opposed to the intentions — good or bad — of individuals.

Inflation does not rise because of a surge in greed. And it does not fall because greed recedes.

The grocery store owner does not control the price of eggs. That price is determined by supply and demand.

Market outcomes aren’t intended by anyone – not by God, government, or corporations.

4. It’s good that the economy is impersonal. In an impersonal, market economy you are treated like an adult. What you earn is due, above all, to your efforts and not to your personal connections (or lack thereof), or to the caprice of individuals who might hate you just as easily as might love you.

5. Tradeoffs are inescapable. Save for breathable air on the earth’s surface, every resource, good, or service is scarce – meaning, there isn’t enough of it naturally to satisfy every conceivable human desire that it might be used to satisfy. From this fact follows another – namely, to use a scarce good to satisfy one particular desire necessarily requires that some other desire or desires that could have been satisfied remain unsatisfied. That the market (or any other human institution) fails to satisfy some human desires is true, and will always be true. Good economists understand that this reality is no mark against the market.

6. There’s no objectively ‘best’ pattern of tradeoffs. You are likely to choose differently than I would choose exactly how many bottles of beer are best to sacrifice to acquire a pair of jeans. Your particular tradeoff is right for you, as mine is for me. And being liberal adults, neither of us wishes to coerce the other into trading-off differently.

7. Exchange is mutually beneficial. The power to say ‘no’ to an offer means that any and all exchanges that do occur are mutually beneficial. This reality holds even if one party to an exchange is a pauper and the other a multi-billionaire.

8. The economic benefits and costs of economic exchange are unaffected by political borders. Traders’ political citizenships are no more economically relevant than are traders’ eye colors, their fondness for tattoos, or the first letters of their last names. Trades that occur across political borders have precisely the same economic consequences as do trades that occur within political borders.

9. Jobs are costs, not benefits. Because costs are the flip-side of choice, someone who chooses to hold a job obviously believes that holding the job is worthwhile. But the job is worthwhile not in and of itself but, rather, because it’s a means of acquiring spending power. The chief value of any job, therefore, is found in the amount and quality of goods and services that job enables the jobholder to acquire. If you think me here to be unduly ‘economistic,’ ask yourself if you can think of any job that anyone who isn’t independently wealthy will hold for any length of time if that person were paid no income to perform that job. Unless you can think of such a job, my point stands.

10. The government is human, not divine. Governments are chosen by humans and operated by humans. And humans do not obtain god-like knowledge, wisdom, or goodness by acting politically. This point, as stated, seems to be trivially true. But trivial it, in fact, is not. Sample the many political programs and policy proposals routinely described in newspapers, in magazines, and on television and websites. You’ll discover that a great majority of them will work as their proponents promise only if government officials somehow come to possess the knowledge, wisdom, and goodness that we associate with divine creatures. These programs can’t possibly work as promised if carried out by mere mortals.

Every student who, at each semester’s end, leaves an economic classroom having internalized at least some of the above propositions is a student who has learned an unfortunately rare, yet extremely valuable, lesson.

In 2018, 1,200 Yale undergraduates crowded into one of the University’s largest venues, Battell Chapel, ready to listen and learn. But the students sitting in the glow of the chapel’s stained-glass windows, who comprised almost a quarter of Yale’s undergraduate population, were not there for a church service. They were there for the most popular class in Yale’s 316-year history: Psychology and the Good Life – or, as it was more colloquially known, “the happiness class.”

Undergraduates attending Yale that year would have been born between 1996 and 2000, among the first Generation Z students to darken the doors of an Ivy League university older than the United States itself. By 2018, according to Professor Laurie Santos, those students faced a “mental health crisis” at Yale and on campuses across the United States. To combat it, Santos created the course advocating for positive psychology and behavioral change. And clearly, there was an appetite for it.

According to Abigail Shrier, who herself spent time as a student at Yale (and Columbia and Oxford, a veritable bouquet of prestigious universities), Generation Z is “the loneliest, most anxious, depressed, pessimistic, helpless, and fearful generation on record.” And she’s not the only one to say so. Jonathan Haidt, Jean Twenge, and others studying Generation Z have said much the same. But Shrier’s new book, Bad Therapy: Why The Kids Aren’t Growing Up, proffers a different theory than the others (one much less focused on the impact of the smartphone and social media): that happiness-centered parenting and copious amounts of therapy have rendered Gen Z the most dysfunctional generation on record. Shrier would likely consider the 1,200 Yale students looking for happiness in a psychology class exhibit A (or Z, if you will).

For Shrier, “bad therapy” hinges upon iatrogenesis, the idea that a treatment intended to cure could be inflicting harm. As she notes at the outset, some people (children included) have legitimate mental health disorders and need professional help. But others — who more often are the focus of discussions surrounding the “youth mental health crisis” — are merely “worrie[d], fearful, lonely, lost, and sad.” In other words, they are unhappy young people, and they’re looking to mental health professionals to help them find happiness or “diagnose” why they can’t.

Shrier interviews one expert who observes, “happiness is actually a very rare emotion, statistically speaking”; the more you hunt for it, “the more likely you are to be disappointed.”           It’s also difficult to achieve when focusing on yourself. And yet that’s precisely what therapy has you do. “Attending to our feelings often causes them to intensify” — if you are not already happy, focusing on your unhappiness is an unlikely path to becoming so.

The meat of Shrier’s argument rests upon the claim that such iatrogenic therapy has become commonplace in schools and parenting manuals across the United States. What once was a school counselor or two is now an expanded team of psychology staff that inculcates “trauma-informed education.” Two years ago, California “announced a plan to hire an additional ten thousand counselors to address young people’s poor mental health.” 

Mental health surveys, often written by the Centers for Disease Control and Prevention (CDC), according to Shrier, are designed merely to keep school psychologists in business, ask leading questions of students at the height of pubescent, hormonal impressionability: “During the past year, did you do something to purposely hurt yourself without wanting to die, such as cutting or burning yourself on purpose?”; “Have you ever participated in a game or challenge, by yourself or with others, that involved getting dizzy or passing out on purpose for the feeling it caused? (This game or challenge is also called the Choking Game, the Fainting Game, Pass Out, Knock Out, Tap Out, or Black Out.)”?; Have you ever tried to lose weight by “fasting or abusing laxatives?” This specificity, even though suicide and self-harm are extremely contagious behaviors that – when it comes to other forms of reporting, such as journalism – are subject to guidelines to minimize the possibility of copycat behavior.

At home, Shrier paints a parallel picture. Parents have adopted “gentle parenting” strategies to keep their children emotionally attuned and happy, thinking they need “sophisticated knowledge of the human brain and its infinitely complex systems to discover what’s troubling [their] own kids.” Parents live in fear of unintentionally inflicting “childhood trauma” or “adverse childhood experiences” (ACEs) on their kids, which are said to negatively impact a child for life. But in attempting to avoid such experiences, Shrier says that parents swing too far in the other direction, effectively handicapping their kids. “Kids arrive at school having never heard the word ‘no’,” a recipe for disaster in a class with twenty other kindergarteners who have also never heard the word. Pair this with the statistic that “teachers were the most likely to be the first to suggest an ADHD diagnosis in children,” and children are on a trajectory for psychotropic drugs and therapy from the time they enter kindergarten at age five.

While the educational and parenting trends Shrier linked were eye-opening, perhaps the keenest insight Shrier makes is one she doesn’t spill much ink expounding:  when it comes to raising and shaping our kids, moral language has been replaced by that of the therapeutic. But what happens when, as Jessica Grose writes for Slate, “childhood misbehavior is much more likely to be described in terms of therapeutic symptoms than character flaws”? When one’s inability to overcome his or her vices is reframed not as a moral failing, but as “mental illness”? When any whiff of negativity is labeled as “trauma,” and those who inflict it are “toxic,” to be shunned? Well, as Shrier writes: “agency [slinks] out the back door.” 

One question prompted by Shrier’s book is what happens to the moral formation of children when religion and religious institutions, which have historically provided many of the benefits that therapy purports to achieve without some of its more obvious drawbacks, erode over time, as they have in recent decades in America. Shrier’s book displays some of the effects of this replacement in Generation Z, which is the least religious generation recorded in the United States. Therapy has become the secular replacement for religion in the public sphere, and the Diagnostic and Statistical Manual of Mental Disorders (DSM) is its sacred text.

The philosopher Alasdair MacIntyre saw this coming decades ago. His seminal 1981 work, After Virtue, decried the ills of  “emotivism,” or “the doctrine that all evaluative judgments and more specifically all moral judgments are nothing but expressions of preference, expressions of attitude or feeling.” He identifies that the Enlightenment West has no way of measuring rival theories of morality against one another. MacIntyre highlights three main characters on the cultural stage that embody “emotivist modes of manipulative behavior”: one of which just so happens to be “the therapist.” According to MacIntyre, therapists cannot engage in moral debate, but “purport to restrict themselves to the realms in which rational agreement is possible — that is, … to the realm of fact, the realm of means, the realm of measurable effectiveness.”

But in a confused society, which cannot coalesce upon what a “fact” even is, much less a common vision of the good (or a shared law reinforcing it), the primary character-shaping individuals in kids’ lives (parents and educators) struggle to decide upon which normative values to instill and pass on. Values that, in decades past, have always been supplied in America by a moral realism, that is, a combination of religion and virtues like honesty, courage, wisdom, and accountability, among others. America has, for the most part, combined the West’s biblical heritage and commercial virtues, an approach that many of our founders understood well. Failure to do so leads in many directions, one of which is a least-common-denominator catch-all: therapy – a cheap, emotivist substitute for virtue and an objective sense of right and wrong.           

To recover what Shrier presents as lost in Bad Therapy, we need not only a stronger sense of resilience, as Shrier proposes, but something more akin to moral realism as a remedy to our therapeutic age: a return to virtue, and the institutions that promote and spread it. 

This return would bolster a sense of community and belonging, spur character development alongside the teaching that there is much greater than oneself, give an account of human failing and promote responsibility when the failure is your own. This would shape young people to be better participants in the workforce, as they grapple with the challenges of building skills and careers in a dynamic environment. Instead of self-centered self-care, this approach promotes caring for one’s neighbor as oneself. Instead of chasing happiness and avoiding suffering, moral realism teaches the reality that, in an imperfect world, suffering is to be expected – but that what matters most is how one responds to it. Even the best individually tailored therapy and medication cannot do this.

Despite the polarizing tone of her book, Shrier’s broader points are timely and much needed: that therapy doesn’t cure all our ills, and perhaps even makes them worse; that if everything is trauma then nothing is; that humans are resilient and have been for millennia; that we can continue to be so if we choose.

“The happiness class” at Yale moved to the university’s concert venue, Woolsey Hall, to accommodate the great number of students interested in learning the psychology behind being happy. It’s almost as though the class represented a microcosm of Western society, a symbol of the therapeutic approach superseding moral realism in the public square. Shrier uncovers the pathos of the therapeutic, but the next step for young people is to understand and believe that their freedom and virtue are gifts, with which to live a life of excellence.   

Electricity is among the most-regulated sectors of the U.S. economy. A century of public-utility regulation of entry and rates has given way to new suites of government intervention. Wholesale electricity is centrally planned in most states, creating a contrived retail market. At the same time, government policies have increasingly displaced thermal generation (natural gas, oil, coal, and nuclear) with intermittent wind and solar power, requiring costly battery storage.

Today, a growing number of regions are subject to rising power rates, conservation appeals, and service interruptions. The Great Texas Blackout of February 2021 caused hundreds of deaths from a lack of heating and other services, not to mention a hundred billion dollars in damages. California, which in 2000–2001 suffered shortages that closed businesses and schools, endures “green” electricity rates at double the national average. Other states and regions are pursuing policies that portend similar results.

Economic discoordination can inconvenience, disrupt, and even kill. But this threat to reliable, affordable electricity is not the result of market failure but government failure, abetted by expert error from the knowledge problem and by politicization.

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Nearly ten years ago, I wrote what I thought was a provocative essay about polygamy and the state. Specifically, I claimed that the state acts like a polygamist, enforcing a cruel and explicitly patriarchal regime on single mothers. Perversely, the justification for this repressive regime is compassion, even “social justice.”  

One of the most corrosive aspects of patriarchy is that it treats women as objects, rather than active moral agents in their own right. It is certainly true that, given the weak bargaining position women are often placed in, in traditional societies, women appear to accept inferior roles. But as Gerry Mackie famously argued, even the worst institutions — footbinding and infibulation, for example — have a “rational element” from the perspective of women trapped in these systems. Lisa Tessman has a theory of contingency and virtue, about the struggle of women to preserve a space for virtue in lives circumscribed by sexist rules.

In the years since I wrote the first version, the performance and repression of our welfare system has, if anything, gotten worse. The “privilege” of being raised in a two-parent household is being denied to more and more children. We can’t ignore the truth: the state is a small-minded polygamist, outlawing marriage to anyone except the welfare system and — worse — insisting that the women stay at home rather than finding jobs.

About eight million US families are headed by single mothers, and of those nearly three million live below the poverty line defined by the government. Many sustain this tenuous existence with “assistance,” ranging from subsidies on housing and food to childcare and education grants. The state is no Puritan, and does not enforce a rule of exclusivity on the sex lives of these women. But it has an iron-clad rule that if a woman gets married, or gets a job, she loses her benefits. 

This so-called “benefits trap” has been commented on by both the left and right as an odd policy. Brittany Birken, director of community and economic development at the Federal Reserve Bank of Atlanta, testified before a joint oversight committee here in North Carolina about a proposed consolidation of welfare programs known as the “One Door” policy.

Birken used an anecdote to illustrate the problem: she had talked to a single mother in Florida who had been offered a 10-cent per hour raise, and more hours, in her part-time job. The woman said (according to her calculations) if she accepted the promotion she would lose her benefits through the childcare subsidy program.

“We confirmed her math. For that $200 a year increase, she was going to lose access to $9,000 in childcare subsidies,” Birken said. “The real dilemma that families can face is advancing in their career or making financial ends meet.”  Women who find themselves in this no-win situation are not lazy; they are rational, because they have to accept the situation as it is.

Of course, that’s not how the architects of the welfare system think about it. These program heads no doubt see the system protecting women who are otherwise defenseless, with no other means of raising their children. The problem is that these “benefits” are contingent, and the contingencies — no jobs, no marriage — are detrimental to women long term, and disturbingly similar to the restrictions a polygamist would impose.

Some people in the US are poor. They aren’t poor by world standards, perhaps — a minimum wage job in the US puts you in the top 30 percent of the world income distribution — but by US standards, they are poor. Welfare state logic insists that if you are a good person, you care about people who are (especially through no fault of their own) poor. Therefore, we (the state) should do something. 

Passing those programs requires some political compromises, and intentionally creating obstacles to access, or means testing. Contingencies and guard rails are erected to limit fraud, and direct money only to those “who really need it.”  But those conditions trap recipients in a cycle of poverty from which escape is very difficult. Get a job, lose your benefits. Get married, lose your benefits. 

Astonishingly, the effective marginal tax rates for poor people with children can approach, or in some cases exceed, 100 percent. As the Center for Hunger Free Communities put it: “Families that successfully increase their earnings should not find themselves worse off due to the consequent loss of benefits…. While a higher income can be an important step in a family’s progress towards self-sufficiency, the increased child food insecurity in this group suggests they may be experiencing the ‘cliff effect.’ This occurs when an increase in income causes an overall reduction in total resources due to a loss of benefits or increased tax liability.”

Welfare policies are, for the most part, well-intentioned. But their perverse effect is real. Our welfare system traps women in hopeless lives, depending on a state that — like a small-minded polygamist — doesn’t really want them, but is too jealous to let them go.