Even a cursory knowledge about modern China reveals the contradictory conditions of increased economic freedoms with continued repression of civil and political liberty. For example, forming political parties is viewed as an unacceptable challenge to the inviolable “dictatorship of the proletariat” overseen by China’s Communist Party.

However, Beijing uses heavy-handed methods to suppress non-political groups, including an “iron fist” approach to Falun Gong, a sect known for breathing exercises. It has also halted prayer meetings and closed Christian churches, while administering some “rough handling” of the Uighur minority.

As it is, China’s communist leaders have proven themselves to be adept masters of diplomatic maneuvering. They deflect external criticisms against internal repression of dissent or religious freedom by asserting sovereign rights to conduct domestic affairs and that foreigners have no right to comment or pass judgments.

Meanwhile, Beijing raises warning flags or sends diplomatic missiles to countries even if there are only rumors of a visit or interactions with politicians from Taiwan. Despite its persistent and harsh interference with religious and cultural freedoms against Tibetan Buddhists, after Taiwan, complaints or comments about this will invite very prickly responses from the Communist leadership.

As the 14th Dalai Lama celebrates the ninth decade of his mortal life, he and other Tibetan Buddhists worry about the identification of his reincarnate and that of the Panchen Lama, the top figures in Tibetan Buddhism. For its part, China’s State Administration for Religious Affairs (SARA) declared that all reincarnations of living Buddhas of Tibetan Buddhism will be considered “illegal or invalid” unless they have government approval.

Dalai Lamas, acting as spiritual and administrative leaders of Tibet since 1391, are considered manifestations of Avalokiteshvara, the patron saint of Tibet. When Lhamo Dhondup was two years old, (born as Tenzin Gyatso in 1935), he was recognized as the reincarnation of the preceding Lama.

A Living Buddha, known as tülku, is a reincarnated Tibetan Buddhist lama that consciously decides to be reborn many times to continue his religious pursuits. Among the most powerful tülku lineages are the Dalai Lamas and Panchen Lamas.

Regardless of Beijing’s preferences, the Dalai Lama is the undisputed spiritual leader of millions of Tibetans, including those forced into exile or living under the shadow of the People’s Liberation Army. In considering whether to accede to China’s demands, it might be useful to consider the basis of its claims over Tibet.

Considering history and communist ideology, one of the persistent demands and great triumphs of the twentieth century was ending imperial dominance of unwilling populations. It has become fatuous and disingenuous to make territorial claims and insist upon adherence to treaties imposed by defunct imperialists.

It is remarkable for an atheistic regime with ideological disdain of imperialism to pass judgment on religious affairs in a territory that it claims to rule based on an imperial past. As it is, Chinese law and political claims for “unity” are being allowed to trump Tibetan autonomy in pursuing a unique religious culture and heritage.

China’s insistence on sovereignty over Tibet or other areas of previous control is dubious on numerous grounds since this logic renders moot all its territorial disputes with India that was unified long before China in 321 BCE. While India’s centrally-controlled State included Afghanistan and controlled the entire Indian Subcontinent, it refrains from asserting claims on this line of historical reasoning.

China’s claims over Tibet are based upon imperial treaties or conquests, including the marriage of Tang Princess Wencheng to Tibetan king Songtsen Gambo in the seventh century. Chinese scholars ignore the fact that the Chinese emperor initially rebuffed Songtsen Gambo who then used military prowess to force his will in the matter.

While no indigenous Chinese force was able to subdue Tibet in ancient times, the great Mongol chieftains did conquer Tibet. A claim to Tibet based upon treaties with Genghis Khan and his great-grandson Kublai Khan, founder of the Yuan dynasty, involved agreements that included anyone of Han-Chinese origin.

In all events, political allegiance and religious blessings were exchanged for protection by the Mongols. Later, it was an administrative region under the Yuan Empire (1279 -1368), and then the Qing Dynasty (1644-1911) recognized the Dalai Lama and the Panchen Lama.

Eventually, Lhasa broke away from the Yuan emperor and regained independence from the Mongols. While the Han-Chinese Ming dynasty ruled China from I368 to I644, it had few ties to and no authority over Tibet, and then Tibet was largely free from foreign influences until the eighteenth century.

Interaction with the Manchus and the Qing dynasty began in the seventeenth century with its tight embrace of Tibetan Buddhism. But imperial troops sent to Tibet were for the protection of the Dalai Lama from foreign invasion or internal unrest rather than making it part of the Manchu empire or incorporating it into the territory of China.

Several pacts during the twentieth century relating to Tibet and European imperial powers were overseen by the Chinese imperial court. While Great Britain acknowledged Chinese suzerainty in Tibet with the 1904 Lhasa Treaty (Anglo-Tibetan Convention), it exacted financial indemnity and trade concessions in Tibet and Sikkim, but such a treaty has no moral authority. 

In 1906, an Anglo-Chinese Convention signed in Beijing reversed the right of Britain and Tibet to conduct direct negotiations as conducted earlier in Lhasa. But again, it was a matter between two outside imperial powers that decided that the Chinese government was the administrative master of Tibet.

Later, the imperial powers of Britain and Russia signed the Anglo-Russian Convention (1907) agreeing that future negotiations over Tibet would be conducted through the Chinese government. During the times of imperial domination, Tibetans were not consulted about the resulting conventions as most such treaties ignored local interests.

Apologists for Beijing’s dominance often suggest that the Chinese have helped preserve Tibetan ways. While it is claimed that China has more practitioners of Tibetan Buddhism, most are in a former Tibetan province (Amdo) that was incorporated into the Middle Kingdom and renamed Qinghai province in the 18th century.

It is also pointed out that the YongHe Gong Lamasery in Beijing has been the site of worship for nearly almost three centuries. Even so, Chinese forces have razed many of Tibet’s monasteries and temples, either as retaliation against resistance to Beijing’s rule or to dilute their influence.

In all events, Chinese physical presence or cultural influences in modern Tibet were negligible until after the Cultural Revolution. Indeed, it was only in the past 25 years or so that significant numbers of Han Chinese were resettled in Tibet.

Beijing has applied several new tactics to secure its control over Tibet. One of these was its “Go West” campaign that involved enlisting the support of businesses to develop the western region of China, including the so-called Tibet Autonomous Region and Qinghai province.

There was also an attempt to bring in the World Bank to extend a loan for $160 million to resettle about 60,000 farmers in traditional Tibetan lands as part of the China Western Poverty Reduction Project. This resettlement of farmers would involve several ethnic groups, notably the majority Han Chinese. Groups supporting preservation of Tibetan culture have denounced the moves by China to be tantamount to “cultural genocide”.

If according to legal custom, possession is nine-tenths of the law, China can use such logic to rationalize its continued occupation of Tibet. Whatever merit this dictum might reflect, judicial procedure and reasoning are normally applied to determine whether the basis for possession was reasonable or just. A dispassionate view of the matter indicates that China’s assertions for suzerainty over Tibet teeter on a weak and unconvincing foundation.

Considerable evidence indicates many Tibetans feel they would be better off without Beijing’s choking embrace, as there have been periodic uprisings during the five decades under Communist Party rule. Their expressions of discord were met with harsh retaliation by Chinese soldiers and police, leading to the death of thousands of Tibetans.

After the Dalai Lama fled Tibet for India in 1959 after a failed uprising against the Chinese invasion, authorities in Beijing have persistently demonized him. Even so, Tibetan Buddhists remain strongly loyal to him as their spiritual leader.

Of course, such meddling in religious affairs is not confined to Tibetan Buddhists. Uighur Muslims, Daoists, Falun Gong, “unregistered” Protestants and Vatican-loyal Catholics must bend their faith to fit the Procrustean demands of China’s secular law.

In 1982, the CCP Central Committee issued, “Concerning Our Country’s Basic Standpoint and Policy on Religious Questions During the Socialist Period” imposed “proper control” over religious affairs. As such, “patriotic” religious associations were to sacrifice the interests of their religious communities to promote the objectives of the Communist state.

Only a Beijing bureaucrat could see no humor in the requirements that reincarnation applications must be submitted in quadruplicate forms to secular authorities. Among the bodies tasked to “institutionalize management on reincarnation of living Buddhas” are the religious affairs department of the provincial-level government, the provincial-level government, SARA, and the State Council with approval granted according to the fame and influence of the living Buddhas.

SARA officials insist that selection of reincarnates must preserve national unity and solidarity of all ethnic groups. And they insist that this precludes the influence in the selection process by any group or individual from outside the country.

As it is, administrating religious affairs based on interests of the Chinese state or “public interest” interferes with Tibet’s internal religious affairs.  While regulations guarantee “normal religious activities” of Tibetan Buddhism and protect the religious belief of Tibetan Buddhism, temples that recognized reincarnation of a living Buddha must be legally registered.

It is easy to see why Beijing considers it necessary to keep them under tight control. Reincarnated lamas have considerable influence over life of native Tibetans since they lead religious communities and oversee training of monks.

And so it was that the eleventh incarnation of the Panchen Lama, identified as a six-year-old Tibetan Buddhist Gedhun Choekyi Nyima in 1995, was spirited away to Beijing. In turn, he was replaced with Gyaltsen Norbu by religious affairs officials in Beijing.

As it is, most Tibetans never felt the need to be “liberated” by an alien, outside power. For their part, they wish to preserve the dignity of indigenous people that wish to be free to choose their own destiny within their own culture.

But Chinese policy ignores the reality that Tibetans care more about their own distinctive culture, history, and identity than they care about expressing loyalty to Beijing. Perhaps this is what is most galling to China’s leaders.

Beijing’s insistence upon its beneficence in dealing with the local people is no more convincing than Japan’s rationale for “liberating” the rest of Asia from European domination during the 1930s and 1940s under the guise of a “Greater East Asia Co-prosperity Sphere.” Although the scale may be less, the degree of brutality used has not been much different than the Japanese during the Rape of Nanking.

In all events, the issue for Tibetans is more about preserving cultural and religious identity rather than geography or borders. While geographic territory is an important element of sovereignty for modern nation-states, it should not be used as an unconditional reason to overwhelm the aspiration of humans that engage in conflict with their governments.

For their part, political systems that aspire to peace should provide methods to resolve tensions relating to rights of self-determination so individual citizens or groups can undertake continuous expressions of their will. As the motivating force behind anti-colonial movements, collective self-determination allows diverse groups and individuals within political borders to act to shape their cultural and value systems.

But Chinese law and Beijing’s political claims for geographic “unity” are seen to override Tibetan’s desire for self-determination and to maintain their unique religious culture and heritage. While control of Tibet’s religious heritage has been usurped by an atheistic regime with ideological contempt for imperialism, it insists on controlling religious affairs based on territorial claims based on imperial treaties.

One cannot ignore the irony and hypocrisy behind Beijing’s insistence for recovering Hong Kong was the rejection of the legality of titles based on force and unequal treaties. Since neither military invasion nor continuing occupation change the legal basis of Tibetan sovereignty, it must be viewed to be an independent state under illegal occupation.

The publishing world is awash in books about how government has failed the people by shrinking. Ruchir Sharma has given us the rare book about how government failed by growing too large and doing too much. His proposed fix is compelling and persuasive, but his book’s most valuable contribution may be simply causing readers to rethink what has become a bafflingly popular narrative about neoliberalism, austerity, and the supposed triumph of free-market ideology. One of the most common theories about the last half-century of political and economic history rests on the weakest possible foundation.  

The argument Sharma takes on in What Went Wrong with Capitalism will be familiar to anyone who has read any current writing on political economy. Since the New Deal, enlightened government tax-and-spend priorities protected the poor and provided for economic mobility. The US economic expansion after World War II continued this virtuous, shared prosperity. Then, starting in the 1980s under Ronald Reagan (with parallel changes under Margaret Thatcher in the UK), market fundamentalism took hold, with government budgets for social services slashed, essential services privatized, and corporate greed turbo-charged. The result, critics charge, has been an increasingly unfair society. Income inequality has exploded and only the very rich have benefitted. 

This just-so story has become received wisdom among left-leaning academics. Entire shelves of books from economics, history, and political science professors in the past couple of decades have made this case, often locating its origin in the conservative legal movement. A long list of authors has pinned the germ of this supposed revolution on pre-1980 theorizing like the legendary (or infamous) policy memo written by prominent Republican attorney (and later Supreme Court Justice) Lewis Powell in 1971. Others look to associations like the Mont Pelerin Society (co-founded by Friedrich Hayek) or think tanks like the Heritage Foundation or Cato Institute as the locus of this supposedly antisocial ideology of greed. 

Journalist and Yale professor Steven Brill argues that the US has been in a “tailspin” for several decades because of these negative changes. Thomas O. McGarity of the University of Texas at Austin claims that this all has comprised a “laissez-faire revival” that has created a “freedom to harm” for corporations.     

There is a lot of mutually reinforcing theory from dozens of tenured experts and their downstream fans in the pundit-industrial complex. Yet evidence that governments of the developed world, led by the United States, have withered away in the interest of allowing corporate avarice to run amok is amazingly thin. 

One need only look at the budgets — and budget deficits — of the last 40-plus years. Even before the stunning explosion of deficit spending that occurred during the COVID-19 pandemic, Congress had hardly put itself on a diet. Federal outlays as a percentage of GDP were 15.9 percent in the supposed glory year of 1965, while they were 24.3 percent during the Great Recession year of 2009, before skyrocketing to almost 31 percent of the entire economy in 2020. Does that sound like miserly austerity? 

The size and scope of government aren’t entirely measured by dollars spent. There is also the degree to which it regulates the conduct of private parties. This is possibly the more compelling aspect of the thesis advanced by the critics of neoliberalism: that the US government and its peers around the world have given up on attempting to police corporate behavior and tame the beast of acquisitiveness. But that angle too falls resoundingly flat. Sharma cites my own Competitive Enterprise Institute colleague Wayne Crews on this, showing that, under just the first two years of Joe Biden’s presidency, the executive branch added an annual average of $160 billion in economic costs and 110 million hours of paperwork. 

Note that the Biden White House was just an acceleration of the dramatic increase in new rules and regulatory burdens that have occurred under every modern administration. Government, as Sharma writes, “has grown bigger under every president.”  

So, what is actually happening? The answer is bracingly simple and in direct contrast to the academic consensus: since the 1980s — but especially in the 21st century — the federal government has spent and intervened in the economy far too much, causing a long list of distortions and problems along the way. 

The technocratic meddling and stimulating and easing and soft-landing-ing has long gone unrecognized for what it is, because it has been labeled as an effort to protect the economy writ large from damage and dislocations, and thus a way to safeguard jobs and the savings of middle- and working-class households. But flooding financial markets with cheap debt has actually empowered the rich to get richer at near-zero risk while causing significant damage to the economy’s capacity for growth and innovation — the only route to actual shared prosperity.   

Sharma spends a lot of time castigating the Federal Reserve for keeping interest rates artificially low for such a long period of time, from roughly the Great Recession until long-term inflation fears inspired a significant rise in the Fed funds rate starting in Spring 2022. This easy money has led to the softening of capitalism’s most important process, the cycle of underperforming companies going out of business and better competitors rising from their ashes that economist Joseph Schumpeter famously called creative destruction.  

With cheap debt able to prop up failing companies indefinitely, we have experienced a scenario familiar to horror movie fans — the zombie invasion. Once considered a problem of mostly Japanese economic malaise, Sharma points out that the zombie firm — one that is not generating enough revenue to cover its own debt servicing costs — has become a shambling, lurching menace across the economic landscape. If these zombies had gotten the clean shotgun blast to the head from financial reality that they deserved, their human and financial capital could have been more productively re-deployed. But instead, they hang on from year to year, lowering productivity growth and limiting credible competitive threats to the most entrenched incumbents.  

On top of suppressing interest rates for extended periods of times to goose stock values and asset appreciation in general, economic policy in the US has defaulted to something like a permanent bailout mindset. If it were possible, Congress would ensure sure no major employer or lender would ever have to shut down, no matter what its balance sheet looked like. 

That seems great when you, as a member of Congress or the Fed Board of Governors, assume you’re saving some specific number of jobs from vanishing in the next quarter. But it creates an obvious set of perverse incentives which simply stimulate more risk-taking by corporate management and investment firms in the future, resulting in even bigger future bailouts down the road. At a certain point this strategy of holding the wolf by the ear will become untenable. Every group of national policymakers, however, assumes that will only happen after they’ve handed the situation off to the next generation of business-cycle micromanagers.  

As Sharma explains, none of this is a battle between center-left interventionists and some imaginary laissez-faire libertarians lurking in the shadows. Both major parties and politicians across the political spectrum, with a few notable exceptions, have been culpable in the process of subsidizing debt and investment risk in hopes that major stock indices will rise forever, and thus not leave anyone in power with the blame for “ruining” the economy when the music finally stops. 

Back in the real world, recessions happen, and asset values sometimes fall. No economy based on reality can rise forever with zero declines along the way. Perpetual central government stimulation, even when it’s pitched as “protecting jobs,” is like a 19th century dentist giving laudanum to a patient with a toothache. The painkiller only puts off the moment of reckoning — at which time, the problem will likely be dramatically worse.     

While his basic message that endless deficits and bailouts are bad policy is not novel, Sharma’s resetting of the narrative on enfeebled government is a much-needed slap in the face to mainstream conventional wisdom on economic affairs. The neoliberal conspiracy narrative has even oozed into additional crevices in recent years. It wasn’t surprising when left-leaning professor Lawrence Glickman wrote a version of this thesis up in 2019’s Free Enterprise: An American History. Now that even ostensible conservatives like Sohrab Ahmari are repeating it — in 2023’s Tyranny, Inc. — an antidote like What Went Wrong with Capitalism is sorely needed.  

Many argue that we need to get serious about reforming Social Security and Medicare because both trust funds will run dry. The implication is that this will be catastrophic, but this is not true. In reality, the entitlement problem may prove to be much worse.  

Both trust funds are filled with special issue bonds that are liabilities to the Treasury. Since the Treasury has no surplus upon which to draw, when these bonds are presented for redemption, Treasury must issue additional debt to retire them. But this is what would have happened if program benefit payouts exceeded tax collections in a system with no trust fund, so the trust fund might as well not even exist. The trust fund is filled with worthless paper, so emptying it out will have no effect.  

The true problem is the accumulation of ever more federal debt to provide revenue to allow the trust fund to redeem its claims on the Treasury. As total baby boomer benefits payments mount, the Treasury has had to issue bonds at an accelerating rate. This is why it only took 260 days to go from a national debt of $34 to $35 trillion a few weeks ago.  

In the absence of significant reform, growing shortfalls will have to be covered by evermore newly issued debt or monetized debt. In either case, the effect on long term interest rates will be the same: they will rise from either increased demand in the credit market arising from additional federal borrowing or, if the Fed decides to monetize these new debt instruments, decreased supply in the credit market arising from creditors requiring a premium for expected inflation. 

This latter effect arises because creditors will only buy a bond if its price is low enough to ensure a return that is high enough to protect the real purchasing power of their investment. This phenomenon is what economists call the Fisher effect.  

Many firms have taken on high levels of debt because very low interest rates made the cost of carrying debt artificially low. This allowed many firms to spend money on dubious things like DEI training for employees and initiatives aimed at drawing approval from ideologically driven investors. As can be seen in the chart below, the nonfinancial corporate debt-to-GDP ratio is now near all-time highs. 

With such high levels of debt, many firms are vulnerable to bankruptcy at even modest interest rates. The FED funds rate increase from .33 percent in April of 2022 to 5.33 percent in August of 2023 — where it remains today — is now hurting job growth and increasing the unemployment rate as corporate debt matures and must be financed at a higher rate of interest. 

Since firms are understandably reluctant to borrow more money with so much debt already on their books, banks have had to earn what they can from holding more securities like federal debt instruments than normal. This will compound the problem of entitlement generated increases to the deficit. Not only will higher interest rates imperil corporate firms through the increased cost of carrying debt, it will also produce a capital loss for banks, thereby putting them at risk of insolvency and therefore, in some cases, at risk for inducing a run on deposits not unlike what happened with SVB in March of 2023.  

As has been the case for Japan for over three decades, after a long period of very low interest rates the effect of even a modest increase will be exaggerated and will likely cause a recession. But unlike Japan in 1991 or the US in 2008, the underlying problem won’t be a specific bubble burst with a new start for economic growth. It will be an ongoing and growing unfunded liability problem.  

Although everyone is now obsessed with how much the Fed will reduce rates in September, the real story is this: no matter what the Fed does, without substantial entitlement program reform both nominal and real interest rates will inevitably rise in the future. The Fed can force rates down in the short-run, but over time the increase in inflation resulting from the actions taken to reduce real interest rates will cause the Fisher effect to increase nominal interest rates  

What voters should be worried about is that failure to address the entitlement problem might work the Fed into the kind of untenable debt situation that Japan had (and has), which in turn may induce the Fed to take drastic action to keep the economy out of a deep and prolonged recession.  

In the event of a recession triggered by increasing interest rates from continued deficit spending, the Fed may ask for Congressional approval to purchase private equities in an effort to avert the collapse of an entire generation’s 401Ks from widespread firm bankruptcies due to their inability to cover debt payments. This is hardly unprecedented. The Bank of Japan began purchasing stocks in 2010 and is now the largest owner of Japanese stocks in the world. This undoubtedly contributed to Japan’s stock-market plunge a few weeks ago since the bank is now trying to sell those assets.  

Voters need to understand that by not pressuring politicians to deal with entitlements now, we might end up with a substantial amount of the means of American production being owned by the government. This will harm our free-market society incalculably because, slowly but surely over time, it will rob the economy of its entrepreneurial zeal and strong property rights. It will make ESG and woke capitalism look like child’s play, delivering to central planners what they were unable to achieve in America on the battlefield or at the ballot box.  

Sen. Sherrod Brown (D-OH) and many other legislators are attempting to impose a big tax increase on low-income families by ending the “de minimis” exemption (from the Latin for “pertaining to tiny or trivial things”) in tariff law that spares goods valued under $800 originating from non-market economies like China. Senate Finance Chairman Ron Wyden has introduced separate legislation that would impose an average 14.7 percent tax on all low-priced clothing imports.  

A recent National Bureau of Economic Research working paper concludes that entirely eliminating the de minimis exemption for imports from all countries would reduce net US welfare by $11.8–$14.3 billion while disproportionately harming lower-income and minority consumers. Economists Pablo D. Fajgelbaum and Amit Khandelwal calculated that, if the de minimis exemption were eliminated, people living in the poorest zip codes would face average tariffs of 12.1 percent versus an average tariff of just 6.7 percent for the richest zip codes. In addition, many small and medium sized enterprises rely heavily on the de minimis exemption.  

Ending the exemption just for products from China and other non-market economies would also be costly. According to federal statistics, from 2018 to 2021 China accounted for 64 percent of US de minimis imports.  

The federal government created a de minimis exemption for low-value imports in 1938 “to avoid expense and inconvenience to the Government disproportionate to the amount of revenue that would otherwise be collected.” Most of these low-value de minimis imports are exempt from duties, other taxes, the requirement to use a customs broker, and processing fees.  

Congress increased the exemption threshold several times over the years, most recently raising it to $800 in the Trade Facilitation and Trade Enforcement Act of 2015. That increase was designed to benefit businesses and consumers in the United States by reducing costs and allowing US Customs and Border Protection (CBP) to focus its limited resources on higher-value imports.  

Critics of the de minimis exemption repeatedly suggest it is a loophole that allows China to evade US laws and tariffs. But from 2018 to 2021, CBP seized more than 400,000 de minimis packages. Last year, the government collected $44 billion in duties from China, more than triple the amount collected in 2015 before the de minimis threshold was increased to $800. Tariffs on imports from China accounted for 61 percent of total duties collected by the United States last year, up from 42 percent before the de minimis threshold was raised.  

Moreover, while low-value imports are not subject to duties, they face heavy security and review like other forms of entry. All imports regardless of value are subject to US narcotics laws, anti-forced labor laws, including the Uyghur Forced Labor Prevention Act, intellectual property laws, and other measures. 

Critics have also falsely implied that the de minimis exemption is a primary source of the fentanyl epidemic. But that ignores the primary problem. According to the Drug Enforcement Agency (DEA), the fentanyl epidemic is mainly driven by Mexican cartels using Chinese chemical supplies and smuggling drugs through the southern border.  

Eliminating the de minimis exemption for imports from China or for all clothing imports would do nothing to change any of this, but it would impose a big regressive tax increase on American households.  

Congress should consider alternative approaches, such as eliminating tariffs on the 79 percent of clothing Americans import from countries other than China. Tariffs on those imports currently average 12.7 percent, providing an incentive for consumers to buy low-value clothing from China.  

Cutting tariffs to reduce clothing prices and to encourage families to purchase from sources other than China is a no-brainer.  

The school choice revolution shines a bright light on an otherwise dire situation caused by COVID and draconian government efforts, including shutting down schools with little to no sound reason. But it woke up a sleeping giant in parents across the country with what little their kids were learning at public schools and how it was time for them to stand up. Since then, parents have spoken loudly and clearly, with more than 30 states now having a school choice program, including 12 states with a universal or near-universal education savings account (ESA) program.

But Texas is not yet on that list.

Texas is the largest red state and has more than 6 million school-age kids but has yet to follow the lead of other states with school choice, even when there is overwhelming support for it. Given the recent primary election victories for school choice proponents against incumbents, which rarely happens, there is an opportunity for a big win in the Lone Star State for students, parents, teachers, and taxpayers.

According to the NAEP test, only 24 percent of eighth graders are proficient in math and 23 percent in reading. Texas’s public education system is failing kids. The time for bold action is now: Texas must embrace universal education savings accounts (ESAs) to reclaim its position as a leader in educational excellence.

As states like Arizona, Florida, and ten other states with universal or near-universal ESAs demonstrate the transformative power of school choice, Texas’s delay in adopting ESAs is becoming increasingly urgent. Amid the heated debate over school choice legislation in Texas, the stark reality is that while these states are witnessing improved student outcomes and a more competitive educational landscape, Texas continues to lag despite pouring billions into public education. 

Despite a $20.3 billion increase in the latest two-year state budget for public education — a 33.3 percent boost — student performance in Texas has stagnated. Less than 20 percent of classroom expenditures reach teachers, with much of the budget consumed by bloated administrative costs. The average classroom receives about $340,000 annually, yet teachers, the backbone of our education system, see only a fraction of this amount in their paychecks. 

This inefficiency is a clear sign that the current system is broken.

Economist Milton Friedman’s vision of school choice as a means to dismantle the government’s monopoly on education is more relevant than ever. States that have implemented ESAs are seeing better student outcomes and improvements in public schools due to the competitive pressure of school choice. 

In contrast, Texas remains stuck in a system that fails to deliver its promises, leaving students underperforming, teachers underpaid, and taxpayers questioning where their money is going. As I recently highlighted in my testimony before the Texas House Committee, this stagnation is untenable.

The economic case for universal ESAs in Texas is equally compelling. 

By moving to an ESA model, Texas could reduce its per-student spending from $17,000 for 5.5 million students at public schools to $12,000 for all 6.3 million school-age kids, potentially saving taxpayers $18 billion annually. These substantial savings could then be returned to Texans through lower property taxes, providing much-needed relief as the cost of living rises. 

Moreover, a competitive education system would compel schools to pay quality teachers more, with estimates suggesting salary increases of up to $28,000 annually. The benefits of ESAs extend beyond education; they represent a broader commitment to economic freedom and efficient use of taxpayer dollars.

Recent primary election results show that public support for school choice is overwhelming. 

Yet, despite this mandate, Texas lawmakers have not acted. The path forward is for Texas to pass a universal ESA bill that gives every parent the freedom to choose the best educational environment for their children. This is about more than just improving education — it’s about empowering parents, raising teacher salaries, and ensuring that our taxpayer dollars are spent wisely.

Beyond education, the benefits of ESAs would reverberate throughout the Texas economy. 

A well-educated, adaptable workforce is essential for maintaining Texas’s competitive edge in attracting businesses and fostering innovation. By providing students with the education that best suits their needs, ESAs prepare them for success in a rapidly changing job market, support higher property values, and spur job creation.

Having grown up in a low-income, single-mother household in South Houston, attending private, public, and home schools, I understand firsthand the transformative power of educational choice. Texas has always been a leader, but the state is falling behind in education. 

Texas must stop following and join the school choice journey across the country to ensure every child has access to a high-quality education tailored to their unique needs. The future of our children, teachers, and economy depends on it. It’s time for state lawmakers to act in every state so universal ESAs become not just a revolution but the norm, empowering Americans for generations to come.

With each passing antitrust case, the monopolization of power from the public sector over the management of business matters is growing stronger. The way in which companies compete, scale in size and scope, manage operations, and market their services and product offerings, is now largely dependent on the good graces of government agencies. If a business is too big, too profitable, too entrenched — basically, too ambitious or autonomous — then it is likely to face the scorn of the Federal Trade Commission and the Department of Justice. And given the popularity of some of America’s largest firms, media coverage and political posturing for egging on antitrust cases has become a common occurrence.

The supposed monopoly status of successful businesses in the private sector, however, distracts from the dangers of a growing bureaucratic state. In truth, fears over marketplace dominance should pale in comparison to concerns over political interference. So, with this in mind, let’s first start with why monopolies should be viewed as a non-issue in market-based societies, elucidate the matter with an example, and then shift gears as to why government meddling in business affairs is the real problem at hand.

Monopolies Serve Markets and Grow Economies

A monopoly occurs when there is a single seller or when a firm has a dominant stance in the marketplace devoid of competition. Such an occurrence should not automatically be assumed as negative, especially when it is derived from consumer preference. For instance, there may be times when demand for a certain product or service is being sufficiently met and, as such, one provider is all that is necessary. There may also be times when it is inefficient or wasteful to have more than one seller. It could even be the case that consumers have little interest in trying the products or services of a competing brand if needs and wants are being fully met. A single firm may simply be the best at what it does and, therefore, that firm reigns supreme (think LEGO, Crayola, and dare I say Google search).

Accordingly, any effort towards generating competition for the above situations would be a poor allocation of resources. A smart business move, however, would be to invest in adjacent or complimentary products for the market that the monopoly is successfully serving.

Let’s illustrate this point.

It would not make sense for a small town to have multiple yoga studios taking up store space on every block. And, if consumers were happy with their existing yoga instructor and are satisfied with the studio hours being offered, it is unlikely that any would opt to try an alternate studio if one were to open — especially if there is no additional value being offered for making the switch.

Patrons of the existing yoga studio, however, would likely have an interest in purchasing new yoga apparel and accessories, as well as shopping at a local health store in town. And this is an important point — consumers like to have a diversity of options, not necessarily more of the same. Consumers also tend to be attracted to local trends and so as interest in yoga grows, so too does patronage not only for the studio but for affiliated stores.

Over time, the growing yoga studio proves to be of benefit to the town in that those who provide maintenance and plumbing or electrical services have been called upon when needed. Job opportunities have expanded as the studio is now in need of bookkeeping support, front desk personnel, cleaning services, etc. The studio also pays taxes and takes part in helping to sponsor and support community events from time to time.

As the popularity of the yoga studio takes off, the owner explores options for expansion to better meet demand needs and so more of the above spillover effects can occur. Turns out, big benefits can be derived from big business. Larger firms can employ more people who can consume more goods and services from other businesses. Larger firms also require more resources and strong supply chain networks and, as such, will be more likely to invest in resource development and infrastructure. Similarly, larger firms have the capacity to dedicate efforts toward research and development, which can lead to new innovations that can then be leveraged by other businesses and individuals.

You get the idea.

Market Dominance Doesn’t Negate Consumer Choice or Business Interests

Now, let’s say demand for the yoga studio skyrocketed but the owner didn’t have a desire to expand the studio size or sessions offered. The owner could curb demand by limiting access to pre-existing members or by raising prices to be in line with demand levels (much like Taylor Swift tickets). If to start raising prices, patrons could either opt to pay the higher price or opt out altogether. Consumers always have a choice even when there is just one seller since consumers can always opt out when price hikes occur. But let’s imagine that enough patrons were upset about the new studio prices and too many opted out — the studio would then be forced to readjust to a more affordable rate. Or, alternatively, if the studio kept prices high and demand were to remain high, an entrepreneur eager to seize the opportunity could open up a studio of their own.

Price hikes can be disconcerting for consumers in the interim, but pricing overall is not a major problem when monopoly power is concerned. Entry barriers, however, are.

When entry barriers are low and demand is high, incentives are strong for entrepreneurs to take a shot at unseating incumbent firms — and this has occurred time and time again. And, fortunately for yoga instructors, there is no certification required for opening up a studio for business within the United States. For other sectors, though, the entry barriers can be steep either due to startup costs or pre-established standards. Oddly enough, you are required to have a cosmetology license if you want to open a hair care studio. Guess yoga is a safer bet.

Alright, back to our fictitious scenario.

Let’s say the yoga studio owner does decide to expand due to high demand. The owner grows the size of the studio as well as product offerings and there is now a section near the front of the building that features yoga apparel, health supplements, along with a smoothie station. Some in town may feel that this is unfortunate for the small shops on their street, while others view it to be a growing competitive environment. Those who prefer the town’s health store will continue to patronize it, as long as it continues to be of value to them, and those who buy their supplements from the studio will appreciate the convenience.

At the end of the day, both the yoga studio owner and the small street shops are dependent on the interests and transactions of the town’s people, and both must adjust their offerings accordingly. As Thomas Sowell rightly points out: 

What is called “capitalism” might more accurately be called consumerism. It is the consumers who call the tune, and the capitalists who want to remain capitalists have to learn to dance to it.

Now, let’s add a twist to this story and say that someone decides to bring the yoga studio’s expansion to the town council for review.

External Dictates Distort Market Mechanisms

Concerns about the studio’s growth and market power are raised during a town hall session and political officials decide to intervene. Rather than letting price signals, consumer interests, and business owners determine what will be offered in the marketplace, the fate of existing and future businesses will now be determined by an elected few who may or may not even engage with the products or services in question.

Time, effort, campaigns, and meetings occur for dealing with the yoga studio debacle; and some in the community could care less while others are consumed by it. The yoga studio owner begins to feel shunned by the town that made the business a success and the small store owners start embracing their new role as victims of big business. Eventually the studio owner concedes and reverts to only offering yoga sessions and shuts down its in-house product offerings. Patronage, however, doesn’t seem to improve for the local health store. As it turns out, the yoga studio and health store owners were so concerned with council disputes that they didn’t notice a change occurring in consumer interests, nor did they concern themselves with maintaining a competitive edge in a changing environment. As fate would have it, a new sports center featuring rock walls and strength training sessions opened on the outskirts of town and patrons now frequent a Whole Foods market that is not far off from the new facility.

Nevertheless, those sitting on the town council, unaware of their actual impact, feel empowered having passed a new rule that limits business expansion within the municipality and have dedicated tax dollars towards promotions that celebrate small businesses. In the short term, public officials have proved themselves as champions for the people, having stood up against big business taking over their town.

In the long term, the town’s dynamism as well as the dollars spent in the local community dwindles as small businesses continue to seek out support from the council and shirk from any growth prospects for fear of being reprimanded. Moreover, investment properties within the town lose their appeal due to the new restrictions and a shrinking consumer base. Those who previously provided services for or were employed by the yoga studio now travel outside of town for work and tend to also do their shopping along their new commuter route.

The yoga studio owner feels jaded and no longer partakes in or contributes to community events, and the health store owner feels shame more than vindication as other small stores clamor for favors and support from the municipality. By blocking business growth, council members actually entrenched and entrapped small shops. As for the customers who were previously happy with the yoga studio and health store, they now find both to be somewhat tainted and their discomfort causes them to look elsewhere.

The Moral of the Story and the Beauty of the Market Process

Had the focus stayed on consumer preferences, not council member positions, the health store would have likely diversified its offerings and the studio would have reallocated its resources in accordance with rising competitive pressures from the installation of the new sports complex outside of town.

Just as Blockbuster’s monopolistic status was taken down by tech innovation, so too is the potential for any big business to lose its market dominance over time. And, while Blockbuster’s nemesis, Netflix was bashed for its monopolistic status about a decade ago, we now see it has quite a cadre of competitors.

Carl Menger explains the market process and monopoly status best in Principles of Economics:

Every artisan who establishes himself in a locality in which there is no other person of his particular occupation, and every merchant, physician, or attorney, who settles in a locality where no one previously exercised his trade or calling, is a monopolist in a certain sense, since the goods he offers to society in trade can, at least in numerous instances, be had only from him.

Menger goes on to assert that as a market increases and demand rises, competition will naturally emerge if entrepreneurs are left unencumbered.

The monopolist cannot always comply with the growing requirements of society for his commodities (or labor services) . . . the need for competition itself calls forth competition, provided there are no social and other barriers in the way.

Thus, the monopoly status of a firm is not a problem if consumers are happy and entrepreneurs aren’t hampered. Moreover, competition is of no use if greater value can’t be attained or cost savings can’t be accrued. And when interests and situations change, so too will be what is demanded by the market regardless of which firm has market dominance. Throughout 2020, I was so thankful for Cosmic Kids Yoga on YouTube which kept my kids entertained and exercising during lockdowns — and enticed me to join in despite my disinterest in doing yoga. Another fitness trend that boomed over the past few years is Pickleball. No one could have guessed that a game invented in 1965 would now be one of the top health-oriented hobbies of Americans.

Clearly, what people buy or partake in today will vary from tomorrow and so it would be best for paternalistic agencies to let consumers determine who dominates the market in accordance to the products and services demanded. Empowering and informing consumers along with enabling and incentivizing entrepreneurs bodes for a better economy as compared to having nanny state officials bully supposedly big bad businesses.

With the help of Judge Glock of the Manhattan Institute, AIER has submitted amicus curiae briefs in the New Hampshire Supreme Court cases Rand v. State and ConVal v. State, dealing with school finance equalization. 

Why did we do this?

Economic evidence and logic show why the push to “equalize” school finance, which has touched every state in the US, is based on misconceptions and creates perverse consequences for students and taxpayers. It’s important to bring economics into the judicial conversation, since courts have been the primary avenue for forcing legislatures to centralize and equalize the funding of public schools.

Here’s the misconception: that it is “inequitable” or “disproportionate” for some towns to be able to tax at a low mill rate because they have higher property valuations per student, while other towns have to tax at a much higher mill rate because they have lower property valuations per student. This claim sounds intuitively right, which explains why so many presumably intelligent state judges have fallen for it.

Here’s what’s wrong with it: local governments compete for residents on the basis of tax rates and quality of services, so systematic differences in property valuations are as much or more the result of differing tax rates and differing school qualities as the cause of them. Some towns developed excellence in their public schools while keeping taxes low, and got high valuations that way. Others allowed more commercial, industrial, or apartment development in their zoning codes, which increased their tax base without bringing many kids into the schools, again allowing tax rates to be low. Towns were either inefficient, managing their schools poorly while wasting tax dollars, or chose to keep out development with restrictive zoning codes. As a result, their valuations are low.

When a family moves to a town with low mill rates or good-quality schools, they’re going to pay for that privilege with a higher house price or rent. In fact, house value encapsulates the entire net present value of the future stream of tax and quality benefits from living in that town. So adding even more taxes on top of that expense doesn’t somehow make things more fair; if anything, it’s unfair.

By the same token, some people prefer to move to towns with high mill rates or poor schools, but low housing costs. Those people have already reaped the reward of living in such a town, so to subsidize that choice further by redistributing property tax dollars to them doesn’t look like fairness.

We found that these theoretical ideas are the reality in New Hampshire. New Hampshire is the most fiscally decentralized state in the country, with about two-thirds of the total tax burden being decided at the municipal level rather than the state or county level. So households have a lot of choice about where to live, and they exercise it.

As a result, towns offer different packages to residents. Some towns offer a mix of low mill rates and exceptionally well-funded public schools at a cost of high housing costs and high taxes actually paid (e.g., Hollis, a suburb of Nashua). Even though the mill rates are low, the actual taxes paid are high because home valuations are so high. Hollis has a lot of successful agribusiness, so its valuations are higher than its neighbor to the west, Brookline. Brookline is also wealthy, and housing costs and taxes are high there, but because they have zoned out commercial development their valuations are low and taxes have to be even higher than Hollis’. Hollis would be a “donor” town under the redistributive scheme ordered by the trial court, while Brookline would be a “recipient” town, even though both are similarly wealthy.

Other towns offer low housing costs and low taxes actually paid at a cost of less well funded public schools, and they tend to have high mill rates (e.g., Allenstown, a working-class suburb of Concord). Lower-income households tend to be attracted to the low rents and affordable costs of ownership.

Yet other towns combine low taxes with high valuations because they have a lot of industrial development (e.g., Lebanon, a small city near Dartmouth College). Lebanon attracts a lot of younger healthcare and IT workers, but it also has a lot of poverty by New Hampshire standards. 

These different combinations afford households a good amount of choice to find a situation that fits them. But if the trial court ruling stands, Lebanon would be a donor town and Allenstown would be a recipient town, even though their poverty rates are hardly different.

Requiring property-wealthy communities to redistribute to the rest of the state will perversely give towns an incentive to avoid becoming property-wealthy. They can indulge any tastes for blocking growth through zoning ordinances. They can shirk on monitoring local officials to make sure they are efficiently using taxpayer dollars. Moreover, it will redistribute money from poor people in places like Lebanon to rich people in places like Brookline. It will also raise property values in places like Allenstown, making housing less affordable for the poor families of the future.

Our research shows that nationwide, school finance centralization and equalization programs correlate strongly positively with strict zoning regulations on housing, even when controlling for a variety of other factors. And research by other economists shows that equalization schemes that rely on redistribution of property tax revenues destroy a lot of property wealth. So these concerns are not merely theoretical.

Instead of equalizing school finance with a Rube Goldberg redistribution scheme, the state could ensure students’ access to high-quality education by expanding its Education Freedom Account program, currently available to families making up to 400 percent of the federal poverty level. They could expand charter schools and enact an open-enrollment law, allowing students to attend public schools out of district, with money flowing from the “sending” town to the “receiving” town for each student who exercises that choice. These solutions would retain all the advantages of New Hampshire’s uniquely decentralized school finance system while also creating educational opportunity for all families.

I first came to economics out of a concern for poverty. I had been attracted to classical liberalism for its uncompromising defense of the rights and dignity of individuals, along with a healthy skepticism about power. Everything made sense to me: constitutional constraints, limited government, rule of law, political and economic freedom. One thing held me back: what about the poor? Could civil society provide sufficient relief? Might welfare be an exception, a collective action failure to be remedied by a limited state? 

I still remember discovering a quotation, drawn from a 1988 paper by economist Robert Lucas. It was one of a half dozen or so quotations that seems to define one’s own life better than one could ever do oneself: “Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think about anything else.”

It turns out that the story is as simple as it is beautiful; it is the story that Angus Deaton has dubbed “the great escape” from poverty. It is a story of ideas unleashing markets and technology (what Deirdre McCloskey has dubbed “the bourgeois virtues“). Poverty was the natural condition of humanity for 99.9 percent of its 200,000-year existence. Sometime around 200 years ago, some people in some countries started to escape. Gradually, more people in those countries, and people in more countries, escaped too. The late Hans Rosling offers an enthusiastic, almost giddy, visualization of the story.

When faced with bunk whining that capitalism is evil, because it didn’t include everybody immediately, I share Martin Luther King’s 1963 “I Have a Dream” speech:

In a sense we have come to our nation’s capital to cash a check.

When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men — yes, Black men as well as white men — would be guaranteed the unalienable rights of life, liberty and the pursuit of happiness.

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check which has come back marked insufficient funds.

But we refuse to believe that the bank of justice is bankrupt.

We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. And so we’ve come to cash this check — a check that will give us upon demand the riches of freedom and the security of justice.

After 199,800 years of poverty, capitalism — free markets, classical liberalism, the Enlightenment project, call it what you will — started lifting people out of poverty. It has not fully succeeded. Not yet. After all, it has not been given much time. And it faces skeptics and enemies everywhere. Freedom House reports that we are in the 18th year of democratic decline around the world. A decade of growth in economic freedom was erased in 2020, as governments around the world addressed the pandemic with spending and regulation (which were supposed to be temporary). Anti-globalization forces on the left and right are threatening to push back 70 years of progress since World War II, the increasing “extent of the market” that lifted billions out of poverty. In 1820, almost 100 percent of the world’s one billion people were living in extreme poverty. In 1950, it was about 75 percent of the world’s two billion people. Today, it’s less than 10 percent of the world’s seven billion. Three cheers for markets! 

The Poor with Us Always

Despite this stunning progress, poverty remains. Why? Matthew Desmond, a sociologist at Princeton University, thoroughly examines the question. The book has serious flaws, but it offers a wake-up call.

Desmond reminds us that one in nine Americans is poor. He walks us through poverty and its daily assaults on stability, growth, health, and morale. It is expensive to be poor: fines accumulate on unpaid vehicle registrations; jobs are lost from unaffordable car repairs; mass incarceration kills income; the unbanked are saddled with high-interest payday loans; the poor are excluded from affluent neighborhoods, and stuck in a cycle of eviction and neglected housing; because public schools are financed by local property taxes, the poorest don’t get a good basic education; health insurance is tied to full-time work, so preventive care is often neglected, and medical catastrophe can lead to bankruptcy. 

To be sure, governments at all levels are spending — a lot — on poverty. The US welfare state (as a percentage of GDP) is the second biggest in the world, after France. But the welfare state is a sieve, and welfare programs are poorly designed and cumbersome.

Desmond is probably exaggerating the problem; it’s unclear whether he’s intentionally playing with statistics to bolster his case, or if — as a sociologist — he is more concerned with pathos than logos. For example, he pooh-poohs the drop in the price of almost everything, because “[y]ou can’t eat a cell phone.” Yet food expenditures fell from one third of income to 9 percent in the last century.

Econ 101

Unfortunately, the book suffers from two fatal flaws. First, Desmond does not understand markets, and sees the world as a zero-sum game; second, he does not understand the unintended consequences of intervention.

Desmond asserts that poverty persists because “we” — the middle class and the wealthy — benefit from it. Consumers want cheap stuff and corporations want high profits, so wages are kept low. Unions are repressed by greedy corporations. The gig economy leaves workers unprotected, but it’s convenient and cheap. We don’t want poor people living next to us, so we keep them out with zoning laws. Corporations and “the wealthy” have rigged the system to avoid paying their “fair share” of taxes. The wealth “hoarded” by the wealthiest excludes the poorest and serves as an excuse not to implement real change. Et caetera. In sum, “Defenders of the status quo, this pro-segregationist propertied class, have shown themselves to be willing to do the tedious work of defending the wall.” “Our abundance causes others’ misery.” Well.

The problem is reality: markets are a not a zero-sum game, but a positive-sum game. Jean-Baptiste Say and Henry Ford famously saw the link between worker and consumer. The real problem is that the poor are excluded from markets, mostly by the same well-intentioned government programs that Desmond champions. 

Desmond would solve poverty in America with “ambitious interventions” — “we should go big.” But he ends up proposing more of the same government interventions that cause poverty in the first place (and that he himself admits are inefficiently administered). Lest I appear to be a market radical or a bourgeois apologist for my comfortable life and the taxes I refuse to pay to help the poor, let’s look at some examples.

Unions increase wages for their members — at the expense of non-members. They are a drag on productivity and growth, leading to a less dynamic economy and lower employment. Sustainable wage increases come from productivity gains and human capital accumulation, not legalized bullying. Alas, teachers’ unions have completely deflated high school education; federal intervention is gutting higher education. The poor need fewer unions, more vibrant labor markets, and better education.

Inflation-adjusted prices have dropped significantly over the past fifty years — with the notable exception of three sectors: healthcare, education, and housing. Desmond laments this. But he does not recognize that these are three of the most subsidized and regulated sectors of the economy. Subsidies increase demand, and thus prices. Regulation decreases supply, increasing prices. Clearly, there is a problem. Clearly, even more government isn’t the solution. Consider that — before Obamacare — almost half of healthcare was already paid for by government funds. Consider the higher education bubble, where federal intervention has driven up prices and driven down quality.

Desmond rightly laments the injustice of exclusionary zoning regulations. Unfortunately, he also prescribes inclusionary zoning (forcing builders to include low-income housing in any new project). The unintended consequences should not be hard to predict. And let us not forget that massive government intervention to increase home ownership among the poor has already been tried. Pre-2007 US housing policy — the deadly cocktail of Community Reinvestment Act, lower lending standards and moral hazard through Freddie Mac and Fannie Mae, and federal encouragement of subprime loans – did indeed briefly increase home ownership among the poorest Americans. They were also the ones who suffered the most when the inevitable crash followed the boom.

Payday loans are ugly, but they are often the only available option. Regulating them would make things worse, killing credit or driving the most vulnerable into black markets. Instead of banning them, we should make them irrelevant. Alas, federal and state regulations limit banking competition, driving up prices. The Durbin Amendment to the Dodd-Frank Act of 2010 capped debit card interchange fees. In the spirit of Frédéric Bastiat, what is ‘seen’ is a policy to help the poor. What is not seen is the increase by a whopping million of unbanked Americans, who were forced out when banks recuperated their losses by increasing fees on other services. Banks were able to do so because Dodd-Frank ended up increasing US banking concentration (as I demonstrate in a working paper with my AIER colleague Michael Makovi).

The COVID rescue packages that Desmond would like to make permanent may have worked in the short run. But they cost the federal government $5 trillion it didn’t have. So the Federal Reserve monetized the debt, driving inflation to 40-year highs. While inflation is now tamed, prices remain 20 percent higher than they were four years ago — with disproportionate effects on the poor, of course.

Although he isn’t an economist, Desmond did his homework on minimum wage. He gleefully concludes that George Stigler’s seminal work on the disemployment effects of minimum wages — along with pretty much all of microeconomic theory — was debunked by the famous 1994 Card and Krueger paper. But the arguments in that paper are, at best, “tiny pulls in the intellectual tug-of-war to accurately predict the outcome of a minimum wage policy change. And there are more… and stronger, tugs on the side that says minimum wage increases hurt employment.” Back to Bastiat, minimum wages are good for the workers who can secure them and bad for the workers who are priced out of the labor market — and especially those who are permanently excluded from their first job, with disastrous, lifelong consequences. Witness understaffed European stores and the proliferation of kiosks to replace expensive fast-food workers. As Henry Hazlitt explained, “we cannot make a man worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and opportunities would permit him to earn, while we deprive the community of the moderate services he is capable of rendering.”

The failure of government anti-poverty programs is captured in a single fact that Desmond completely overlooks. The US poverty rate has indeed dropped a bit since 1964, when President Johnson declared a War on Poverty, and started a six-decade spending spree. But the real story happens before 1964. As markets were liberated to work their magic — after the twin assaults of the New Deal and the wartime economy — US poverty dropped dramatically. From a high of almost 35 percent after World War Two, the poverty rate had already fallen to 19 percent in 1964. It continued its downward trend over the next few years, then has stagnated between 10 percent and 15 percent ever since.

Getting in the Way of Growth

Markets are the world’s greatest anti-poverty program. Alas, the government keeps bumbling in the way. Part of this stems from the unintended consequences of good intentions — and part of this stems from cronyism. Desmond rightly points out that the top 20 percent of earners receive $35,000 in annual government benefits, while the bottom 20 percent receive only $26,000. He is playing a bit with the numbers, as he includes not just direct transfers, but also tax deductions, which the middle class is better at capturing. But he has a point; everybody has a snout in the trough of wealth redistribution, as political activity is increasingly rewarded over economic activity. As I have written in this space, it “is no coincidence that three of the five richest counties in the US (and nine of the top 20) are located in the Washington, DC area — an area with little native industry, beyond spewing regulatory externalities.”

The fundamental problem is not a lack of funding to address poverty, as Desmond would have us believe, but government failure. Mass incarceration, qualified immunity of police, and overcriminalization co-exist with failure to provide security and rule of law in poorer neighborhoods. State interventions have rendered high school education largely useless and college too expensive. Labor laws, minimum wages, occupational licensing, and other regulations with regressive effects deny workers the opportunity earn a living and work their way out of poverty. Zoning laws and a thousand subsidies and regulations drive up housing prices, keeping the poor out of thriving neighborhoods, and out of good schools that are linked to real estate. The welfare state has crowded out a once-vibrant and effective civil society (Desmond is surprisingly silent on civil society and private charity, as he is so enamored with state solutions).

Art Thou for Us, or For Our Adversaries?

Given the book’s tragic flaws, Desmond’s emotionalism, accusations of complicity in exploitation of the poor, and with-me-or-against-me fallacy, end up being grating, rather than inspiring. Still, he is describing a real problem, and unintentionally making the case for markets.

It’s not always clear which bad policies come from the unintended consequences of good intentions, and which are naked attempts at rent-seeking. But it doesn’t matter. It’s time to stop rearranging the deck chairs on the Titanic. The poor deserve nothing less than the opportunity to participate in the great escape.

On August 12, we submitted a public regulatory comment to the Consumer Financial Protection Bureau (CFPB) in opposition to a proposed rule that would ban medical bills from credit reports. While this rule aims to increase access to credit, it is likely to do the opposite. When potential lenders know that certain information is not being disclosed, they will be hesitant to lend to potential borrowers, cutting off access to credit. In short: while this rule will reduce the supply of credit, it will not decrease the demand for credit. Low-income Americans, the income group with the most medical debt, will turn toward black-market lenders to make up for the lack of credit available. 

Analogous results can be seen with the CFPB’s regulations on payday lenders. In 2016, the CFPB proposed a rule under the Dodd-Frank Act that would regulate payday lenders in the name of consumer protection (although these lenders were already regulated by state law). Research from economists as well as the CFPB showed that existing state regulations on payday lenders limited low-income Americans’ access to credit, leading the CFPB to delay the rule’s implementation in 2019 and withdraw the rule in 2020. It did, however, issue a rule regulating “junk fees” that will likely result in low-income Americans losing access to credit.  (Other reasons for opposing regulatory action against “junk fees” can be found here.) 

Similar outcomes followed CFPB rulemaking on mortgage servicing. This rule took effect in January 2014 with the aim of protecting homeowners by requiring stricter reporting standards form “initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts.” It had a significant impact on community banks, which focus on providing traditional banking services to local communities. These banks are the primary source of banking for most rural areas, small towns, and urban neighborhoods. While a study from the Government Accountability Office (GAO) characterized the effect of the regulations as modest, the GAO admitted that data quality for assessing how banks offer loans to businesses needs improvement. The GAO did find that the population among community banks declined by 24 percent (due to mergers among community banks and decline in new bank formation rate) and, among the consolidated community banks that remained, lending increased – albeit at a slower rate due to regulatory compliance. Other research determined that merger-induced bank closures significantly decreased access to credit, especially in rural areas. In the end, compliance costs are always and everywhere a stealth barrier to competition, reducing options for consumers while garbed in moral rectitude and properness.   

When these regulations inevitably yield unintended consequences, the CFPB cannot say they were not warned. 

Read our full public comment to the CFPB Below: 

August 12, 2024 

Mr. Rohit Chopra 
Director, Consumer Financial Protection Bureau 
The Federal Reserve System 
VIA Electronic Submission through Regulations.gov 

Re: RIN 3170-AA54 Prohibition on Creditors and Consumer Reporting Agencies Concerning Medical Information (Regulation V); Comments of the American Institute for Economic Research (AIER) in opposition of proposed regulation. 

Dear Mr. Chopra, 

The American Institute for Economic Research (AIER) submits this comment in opposition to proposed changes concerning medical information of Regulation V under the Fair Credit Reporting Act (FCRA). The proposed regulations would create a regulatory environment that would result in potential lenders hesitant to provide loans because of a known lack of information. This would decrease access to capital, particularly among low- and middle-income Americans. 

The proposed regulation would prohibit all “medical debt information” including,   

[I]nformation that pertains to a debt owed by a consumer to a person whose primary business is providing medical services, products, or devices, or to such person’s agent or assignee, for the provision of such medical services, products, or devices. Medical debt information includes but is not limited to medical bills that are not past due or that have been paid.1 

Although the regulation aims to increase access to credit for those with medical debt, as proposed the regulation would have the opposite effect. The outcome of this regulation would be the generation of “information asymmetry,” where potential borrowers would have more information than potential lenders. Potential lenders would know of this information asymmetry and reasonably fear “adverse selection,” where borrowers could take advantage of undisclosed medical information to benefit from an exchange with potential lenders. This adverse selection would mean lenders may be hesitant to lend to some borrowers, impose higher interest rates, or leave the marketplace altogether. The more lenders leave the market, the more competition is reduced, raising borrowing costs and reducing the number and type of market participants – to the detriment of borrowers. 

The effects of information asymmetry and adverse selection would have the harshest effects on low-income Americans. In 2021, the US Census Bureau found that 19.9 million households (15 percent of all American households) had medical debt.2 Of that 19.9 million, 2.9 million households (14.8 percent) had household income below the poverty threshold and 4.2 million (3.2 percent) households were enrolled in one or more social service program.3 With this knowledge, many lenders may assume that low-income Americans looking for a loan are likely to have undisclosed medical debt. This may mean increasing their borrowing rates to compensate for a lack of information, offering lowering borrowing rates if medical debt is disclosed voluntarily, or they may choose to stop lending to low-income Americans altogether. The demand for credit will persist regardless of its falling supply, which will cut off the already-limited access to credit that low-income Americans have. For those citizens the alternative may be illicit sources of income or black-market lending via organized crime to access credit. 

Ultimately, the proposed cure may be worse than the disease. Of the households surveyed, 80.3 million (60.5 percent) had less than $1,000 of medical expenses, 109.6 million (82.6 percent) had no household members staying overnight in a hospital, and 96.8 million (73 percent) reported having no household member with poor or fair health. 4 Meanwhile, 45 million households (34 percent) had a household net worth of under $50,000. While eliminating medical debt from credit reports may help a relatively small portion of households that have medical debt, the damage done by potentially limiting access to credit through these regulations and reducing competition in credit markets would do far greater damage to Americans hoping to access credit. 

Given the available data as discussed in this comment, the Bureau’s proposed regulation regarding medical debt is not a necessary, and proper, interpretation of FCRA, and AIER recommends its rejection. 

Sincerely, 

Thomas Savidge
Research Fellow, AIER 

Peter C. Earle, Ph.D. 
Senior Research Fellow, AIER 

AIER just launched its new Explainer paper series, helping the everyman make sense of complicated economic topics. The first Explainer, Understanding Public Debt by AIER Research Fellow Thomas Savidge and Senior Research Faculty Ryan Yonk  helps readers understand why there are unsustainable levels of government debt at the federal, state, and local levels and how to fix the problem.

The Explainer finds:

Government debt is a burden on future generations. Debt-financed spending provides government spending today but pushes tax increases on future taxpayers.

The National Debt, at an all-time high of $35.18 trillion, is just the tip of the iceberg. Social Security and Medicare have an additional $78.2 trillion in unfunded obligations.

If the federal government defaults on its debts, we could see massive tax increases, weaker economic growth, and rising inflation.

State and local governments owe $4 trillion in debt and another $8 trillion in unfunded liabilities for public pensions and benefits.

If state and local governments default on their debts, we could see fiscal crises reminiscent of the Eurozone Debt Crises of the early 2010’s.

The debt problem is a spending problem, not a revenue problem. Research shows that raising taxes covers barely a fraction of the outstanding debt.

To fix spending, constitutional constraints are needed to limit government spending at all levels and nudge policymakers to make cuts and properly prioritize spending.

Read the full paper here.