Given the bluster and nonstop chatter of today’s political class, President Calvin Coolidge, or “Silent Cal,” might be viewed as a quaint relic. His ability to pack a lot of rhetorical punch in a few words seems to be lost on our current set of politicos. That’s a shame. 

Just as tragically, Washington has completely forgotten the path to prosperity that Coolidge clearly demonstrated. By signing the Revenue Act of 1924, he significantly improved the nation’s capacity for productivity. The particulars of that legislation could serve as a powerful lesson for how governments can get out of the way, minimize their economic footprint, and unleash untold value creation. 

While economic development is often viewed as complex, the institutional recipe isn’t. It requires sound money, unhampered property rights, and institutional clarity, coupled with a virtuous and vigorous people, deliberately acting to improve their lot in life. Whatever forms of taxation are imposed, they should be simple and light to prevent the stunting of would-be economic growth. When firms and households know they will keep more of what they earn, they create more economic value. That’s a lesson from the Coolidge era that seems to have been lost. 

In our day, the 2017 Trump tax cuts have been hailed as reviving economic growth, but with persistently positive inflation, real GDP growth may be lackluster when all final adjustments are made. Whatever good these tax rate reductions have done, they may eventually raise revenues, but they won’t reduce deficits. Instead, the Congressional Joint Economic Committee reports that for fiscal year (FY) 2025, total tax revenues grew by six percent from the previous year, reaching roughly $5.2 trillion. Spending also rose by four percent, hitting $7.0 trillion. The resulting $1.78 trillion deficit, added to previous debts, brings DC’s total to a staggering $39 trillion. 

When revenues grow, but deficits balloon more quickly, this raises the question: Is it even possible for tax rate cuts to lead to reduced annual deficits? In a word, yes. During Coolidge’s administration, budget years finished with persistent surpluses, including the largest ever recorded in FY 1927: $1.1 billion, in non-inflation-adjusted terms. That would equate to roughly $21.5 billion today. While this wouldn’t put much of a dent in the trillions that remain to be repaid — the interest on our debt consumes that sum every seven days — that sort of outcome would at least be a step in the right direction. 

The Revenue Act of ‘24 also went against today’s political grain by lowering the top marginal income tax rate from 73 percent at the beginning of the 1920s to 25 percent. To compensate, the Act also lowered the threshold for paying that 25 percent from $500,000 to $100,000, broadening the tax base. After enactment in 1925, those earning over this amount began contributing a higher share of overall tax receipts.

In fact, when it comes to the share of taxes collected, Coolidge was more progressive than his predecessors. By 1928, over 60 percent of annual income taxes paid came from those earning over $100,000, up from just under 30 percent in 1920 (Table 1, courtesy of Cato.org). Households earning that much in the 1920s would be earning about $1.8 million today, and are subject to a top marginal tax rate of 37 percent. That top rate now kicks in at $640,600 for single filers ($768,700 for married couples filing jointly).

Counter to the prevailing wisdom of our day, taxing more people at lower rates generated more revenue than taxing fewer people at higher rates. In the early 1920s, the top tax rate was 73 percent, but only for those earning $1 million or more (about $19 million today). Both tax rates and their application, led by determinations of how much each income level should contribute, impact total revenues. Indeed, during the 1920s, taxes paid by the poor were slashed. Taxes collected from the poorest Americans had made up 15 percent of total revenue, but that dropped to just over one percent by 1928. Those with “middle-income” status ($10-25,000 annually in 1928, $188-$818,000 today) saw their tax rates fall by over half over the same period (Table 1).

Income tax rates for the poor declined dramatically in the Coolidge period. But today, the lower half of US taxpayers contribute only about three percent of income tax receipts. By contrast, the top 25 percent of income earners contribute over 87 percent of total federal tax revenues. Those in the lowest 20 percent of income earners receive what economists call a negative income tax (Figure 2, courtesy of Cato.org). These households are net recipients of tax revenue, mostly via the earned income tax credit and the child tax credit. 

Whenever data points of these sorts are presented, questions are inevitably raised around issues of fairness and who is paying their “fair share.” Rather than small reforms around the edges of tax policy, more radical change is necessary in US fiscal matters. Congress has proven either unwilling or unable to get its fiscal house in order. Reducing spending has been made unnecessarily difficult, with automatic spending on entitlements now accounting for roughly two-thirds of the annual budget. So-called “mandatory spending” has come to dominate the federal government’s annual expenditures, growing from about 26 percent of outlays in 1962 to 66 percent by 2023.

Whether one favors abolition of the income tax, something that then-candidate Trump touted on the campaign trail in 2024, a flat income tax, or shifting towards nationwide consumption taxes, the deficit issue will persist as long as a profligate Congress continues to outspend revenues. 

To quote another US President, Thomas Jefferson, “I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared.” He wasn’t wrong. So, if our modern-day politicians won’t take on the personal qualities or heed the pithy wisdom of Silent Cal, and if they continue to ignore the earlier exhortations of eloquent Jefferson, it appears that no matter what tax reforms get made, we are a long way from any semblance of fiscal sanity.

Artificial intelligence has become the latest excuse for reviving one of the oldest bad ideas in economic policy: a universal basic income. Recent pieces in Newsweek, the LSE Business Review, and Fortune have all helped push the idea that AI may soon wipe out so many jobs that Washington will need to send everyone a check.

That makes for a catchy headline. It also makes for terrible economics.

The right question is not whether AI will disrupt work. Of course it will. The right question is this: after more than 100 local guaranteed-income experiments, what have we actually learned?

The answer is much less flattering to UBI than its promoters would like.

What 122 UBI-Style Pilots Show

A new AEI working paper by Kevin Corinth and Hannah Mayhew gives the best recent overview of the evidence. Per their study, there were 122 guaranteed basic income pilots across 33 states and the District of Columbia between 2017 and 2025. Those pilots allocated about $481.4 million in transfers to 40,921 recipients, with 61,664 total participants including control groups. The average recipient got about $11,765, the average pilot lasted 18.4 months, and the average monthly payment was $616.

That sounds like a mountain of evidence. It is not.

Of those 122 pilots, only 52 had published outcomes. Only 35 used randomized designs. Only 30 reported employment outcomes. So the case for UBI is not being built on some giant pile of clear, clean evidence. It is being built on a much smaller stack of studies, many of them weak, limited, or badly timed.

And here is the kicker. Among the 30 randomized pilots with published employment results, the average effect was a 0.8 percentage-point increase in employment. UBI fans will rush to wave that around. They should slow down.

AEI shows that the bigger and more credible studies tell a very different story. Among the four pilots with treatment groups of at least 500 participants, which together account for 55 percent of all treatment-group participants, the mean effect on employment was minus 3.2 percentage points. AEI also estimates a mean income elasticity of -0.18, which is consistent with standard labor-supply economics. 

In plain English, when people receive more unearned income, work tends to fall at the margin. Shocking, I know. Economics still works.

Why the Evidence Is Weaker Than the Hype

The AEI paper is useful not just for what it finds, but for how bluntly it describes the weaknesses in the evidence.

The average treatment group among those 30 studies was just 359 people, and the median was only 151. That is not exactly ironclad evidence for redesigning the American welfare state. Among the 26 pilots for which attrition could be measured, the average attrition rate was 37 percent. That is a giant warning sign. If enough people drop out, the reported results can become badly distorted.

The studies also varied widely in payment size, duration, sample composition, and even how outcomes were measured. The mean annualized payment was $7,177, equal to an average income boost of about 39.5 percent relative to baseline household income in the studies. Some pilots relied heavily on self-reported survey data. Some were conducted during or right after the COVID period — when labor markets, safety-net programs, and personal decisions were anything but normal.

AEI’s conclusion is appropriately cautious: these findings may not generalize to a permanent, universal, nationwide UBI under current or future conditions. That alone should cool off a lot of the AI-fueled policy hysteria.

AI Will Displace Jobs. It Will Also Create Them

None of this means AI will be painless. Some jobs will shrink. Some tasks will disappear. Some workers will need to retrain, relocate, or rethink their careers. That is what happens when productivity rises and technology changes how goods and services are produced. It happened with mechanization, with computers, and with the internet. It will happen with AI.

But displacement is not the same thing as permanent mass unemployment. That leap is where the UBI argument falls apart. Economies are not fixed piles of jobs. They are dynamic systems of discovery, adaptation, and exchange. When costs fall and productivity rises, resources move. Businesses reorganize. Consumer demand changes. New occupations emerge. Old ones evolve. Some disappear. That churn is real, but so is the adaptation.

The answer to technological change is not to pay people for economic resignation. The answer is to make adaptation easier.

UBI Fails the Economics Test

There is a reason Ryan Bourne at Cato has argued that UBI is not the answer if AI comes for your job. It confuses a transition problem with a permanent income problem. Worse, it assumes that writing checks can substitute for the incentives, signals, and institutional conditions that actually create opportunity.

UBI also crashes into the budget constraint. As Max Gulker at The Daily Economy has noted, UBI is often sold through small pilots and vague moral language, but the national arithmetic is ugly. And as Robert Wright in another AIER piece points out, “universal” quickly means sending money to many people who are not poor while piling enormous costs onto taxpayers. (Bear in mind, the national debt is already rapidly approaching $40 trillion.) 

That is before getting to the public-choice problem. In theory, UBI supporters sometimes imagine replacing the welfare state with one simple cash transfer. In reality, government programs rarely disappear. Bureaucracies defend themselves. Interest groups protect carveouts. Politicians promise more, not less. So a UBI would likely be stacked on top of much of the current welfare state, not substituted for it. That is not reform. That is fiscal delusion with better branding.

A Better Answer: Remove Barriers to Work

If AI means more labor-market churn, then policy should focus on mobility, flexibility, and self-sufficiency. That means less occupational licensing, lower taxes, lighter regulation, fewer benefit cliffs, less wasteful spending, and more room for entrepreneurship and job creation. The government should stop making it harder for people to pivot.

It also means reforming welfare the right way. My proposal for empowerment accounts is not a UBI. It would be targeted to people already eligible for welfare, not universal. It would include a work requirement for work-capable adults, not detach income from effort. And it would consolidate fragmented programs into a more flexible account that families control directly, reducing bureaucracy and lowering spending over time as more recipients move toward self-sufficiency.

That puts it much closer to the classical liberal insight behind replacing bureaucratic control with direct support, while avoiding the fatal error of turning the entire country into a permanent transfer state. As Art Carden reminds us at The Daily Economy, there is a long intellectual history behind cash-based assistance. But today’s UBI politics are not really about shrinking the state. They are mostly about expanding it because elites fear AI.

Don’t Make Bad Policy Out of Fear

The UBI revival tells us less about AI than it does about politics. New technology arrives, uncertainty rises, and too many policymakers reach for the federal checkbook as if it were a magic wand. It is not.

After 122 local experiments, the case for UBI is still weak. The best evidence does not show a jobs renaissance. The larger studies show employment declines. The broader evidence base is riddled with small sample sizes, high attrition, and limited generalizability. That is a flimsy foundation for a permanent national entitlement.

AI will change work. It will not repeal economics. The best response is not fear-driven universal dependency. It is a freer economy with stronger incentives to work, save, invest, adapt, and prosper.

President Trump’s conflicts with Chairman Powell and with Governor Cook have obscured real shortcomings at the Federal Reserve and brought little useful change. These conflicts tend to focus on whether the Fed’s target interest rate is too high or too low. Meanwhile, institutional problems at the Fed have been largely overlooked.

But there is an opportunity here with Trump’s nominee for Fed chair, Kevin Warsh. His first task will be navigating a hostile Senate. But should he be confirmed, Warsh’s time would be best spent cleaning up the Federal Reserve system: its personnel, spending, and data.

The Federal Reserve System employs 24,000 people. The Board of Governors has about 3,000 employees, while the 12 district banks employ the remaining 21,000. That figure includes 800–1,000 professional economists. While the Fed has recently announced plans to reduce its workforce by 10 percent, that would still leave it with over 21,000 employees. But why shouldn’t the Fed cut headcount by 20–30 percent, or even more?

Does the Fed really need that many employees? After all, this isn’t the 1960s or 1970s when many things had to be done by hand. Not only have there been significant technological improvements and greater automation over the past fifty years, the development of AI will also accelerate this trend. As such, the new Fed chair should reevaluate whether the Fed needs so many employees.

Besides being wasteful, the high number of economists employed by the Fed has likely influenced the profession to unduly favor the status quo. Those who criticize the Fed or question whether it should even exist find themselves in the wilderness of monetary economics. Employing fewer economists will reduce the Federal Reserve’s gravitational pull on the economics profession.

Along with reducing headcount through reorganization and consolidation, the Federal Reserve is ripe for an audit of its spending. Ron Paul popularized the idea of auditing the Fed in 2008. The Federal Reserve is unique in that it can literally create money and in that it sets its budget independent of Congress. What would you expect the budget trend to be for a fully self-funding organization that can print money? If you said up and to the right, collect your prize.

The budget of the Board of Governors of the Fed has grown more consistently than the Federal budget for decades. In fact, why would any office or department at the Fed ever voluntarily reduce its spending? As such, we don’t see examples of significant retrenchment or budget cuts across the Board of Governors. District banks, on the other hand, operate with private-sector participation through their member-bank stockholders, yet they still suffer from bureaucratic bloat due to limited market competition.

By restructuring staff, streamlining operations, and auditing its spending, the new Fed chair can couch all of this change in terms of modernizing the institution. The Fed has largely failed to keep abreast of technological change when it comes to data, metrics, and execution. It still relies heavily on surveys and anecdotal conversations when it has access to millions of data points, nearly in real-time.

Consider the following key indicators that the Fed officials rely on:

They measure their key inflation target using the Personal Consumption Expenditures (PCE) price index, as well as the Consumer Price Index (CPI) and the Producer Price Index (PPI). Yet these numbers only come out once a month. Rather than calling on business leaders to get a read on economic conditions, they could use real-time measures from sources like the Adobe Digital Price Index or Truflation that use millions of transactions to assess economic activity.

Similarly, most of the key indicators the Fed uses for assessing the strength of the labor market (the unemployment rate, nonfarm payrolls, labor force participation rate, and various measures of underemployment) tend to be released monthly as well.

The important measure of economic growth, the Gross Domestic Product (GDP), only comes out quarterly—though there are frequent estimates. Furthermore, the measures of GDP tend to be revised often, too. The Atlanta Fed produces a “GDPNow” number—but it also relies primarily on estimates rather than real-time data. Indicators like industrial production, retail sales, and business investment are not much better.

One area the Fed does make use of real-time data is in financial market conditions. Interest rates (e.g., federal funds rate, Treasury yields), credit spreads, and asset prices change in real-time and can be used to assess financial stability and the effectiveness of monetary policy.

In addition to the delays, most of these core metrics, particularly GDP and the unemployment rate, are lagging indicators. They reflect past economic performance rather than providing real-time insights into current or future trends. In a rapidly evolving global economy, relying heavily on backward-looking data can lead to policy decisions that address emerging challenges too slowly or exacerbate existing ones.

The FOMC’s framework often emphasizes aggregate demand management, assuming that inflation is primarily a demand-side phenomenon. But recent economic shocks (supply chain disruptions, energy price spikes) highlight the critical role of supply-side factors. Over-reliance on demand-side metrics can lead to inappropriate policy responses. 

In fact, many economists argue that the Fed should be less reactive in general. Friedman noted that there were “long and variable lags” between the implementation of monetary policy and its effects. Following predictable monetary rules will likely generate more stability and more growth in the long run.

Monetary policy (in terms of target interest rates) matters, but so does operational efficiency, utilization of technology, and access to good information. Institutional reform may also help the Fed rebuild public trust by reassuring people that its decisions reflect reality today rather than reality months ago – or not at all. Cleaning up the Federal Reserve will be a monumental task, but it will also be a legacy. Let’s hope Mr. Warsh is up for the challenge.

At a recent Senate hearing on the fiscal outlook, legislators and budget experts said the quiet part out loud: the United States is running historically large deficits in non-crisis times, and we need to stop pretending that we can grow our way out of it.

Washington’s problem isn’t ignorance. It’s that the only politically safe position is to acknowledge the debt crisis — and then do nothing to fix it. Congress lacks an effective mechanism to make politically difficult decisions possible.

The message from the hearing was stark: this is not a crisis caused by recession or war. It is the result of policy choices lawmakers refuse to confront.

The federal budget is increasingly tilted toward unsustainable promises made to older Americans, financed by borrowing that imposes the costs on younger Americans. Earlier CBO projections show that by 2029, the federal government will spend roughly 50 cents of every budget dollar on benefits for Americans 65 and older.

The long-term picture is even worse. According to the government’s Financial Report, more than 100 percent of long-term unfunded obligations stem from just two programs: Medicare and Social Security (their combined shortfalls reflect the difference between their dedicated taxes and projected spending, which exceed the total because the rest of the budget shows a small projected surplus over the same period).

Hosted by the Senate Subcommittee on Fiscal Responsibility and Economic Growth, the hearing featured Congressional Budget Office (CBO) Director Phillip Swagel, Committee for a Responsible Federal Budget (CRFB) President Maya MacGuineas, and Yale Budget Lab founder Martha Gimbel.

Sen. Ron Johnson (R-WI) offered a blunt assessment of the political stalemate during opening remarks. Democrats “insist the solution is simply making the rich pay their fair share,” he said, but then don’t follow through on meaningful tax increases. Republicans argue there’s a spending problem, yet “when they had the power to return spending to a reasonable pre-pandemic level, the One Big Beautiful Bill simply did not meet the moment.”

In other words, Washington’s fiscal debate is a performance: each side criticizes the other for choices it is unwilling to reverse when it has the opportunity.

The day of reckoning is no longer far off. Social Security faces financing constraints in just six years, triggering automatic benefit cuts of roughly 25 percent. Medicare’s hospital trust fund is not far behind. Whether Congress chooses slower benefit growth, means-testing, eligibility changes, higher taxes, or some blend, delay only increases the eventual scale of the adjustment.

One illusion common to both sides of the political aisle is the idea that tough choices can be avoided with faster economic growth. As CBO Director Phillip Swagel noted, stronger growth raises revenues but also increases interest costs on a truly massive debt. Interest costs are already higher than defense spending and rising quickly.

As debt rises to excessive levels, even good economic news can come with a fiscal price tag.

The hearing also highlighted a generational injustice that Washington tiptoes around: the budget increasingly redistributes from younger, poorer Americans to older, wealthier ones. Swagel (CBO) noted that children ultimately bear the cost of borrowing that today’s voters authorize. MacGuineas (CRFB) and Gimbel (Yale) underscored how the federal government spends far more on seniors than on children. What’s more, today’s elderly, as a cohort, are not the economically precarious group they once were: senior poverty has declined below that of the general population.

That’s because the budget doesn’t redistribute based on need. Spending favors the most politically organized constituency, while deficit financing shifts costs to those with the least political power.

And acting to fix the fiscal imbalance requires something that Congress would rather avoid: imposing concentrated political pain today to prevent much larger, but more dispersed economic pain tomorrow.

Every fix to the US debt path has identifiable losers — industries that benefit from tax preferences, higher-income retirees facing slower benefit growth, and special interests whose gravy train of federal taxpayers’ money might get cut off. Those groups show up, mobilize, and threaten to punish politicians at the ballot box. Beneficiaries of reform, however, including younger taxpayers, busy working families, and even future Congresses, rarely advocate on their own behalf.

As economist James Buchanan observed in Democracy in Deficit, fiscal restraint rarely produces political rewards. Voters immediately feel spending cuts or tax increases, but they never see the crises that responsible policy prevents — the inflation that never erupts, the interest rates that never spike, the austerity that never becomes necessary.

That is why the most valuable conclusion one can draw from this hearing is that the United States needs a process that can make economically necessary (but politically difficult) tradeoffs possible.

I have argued for exactly that: an independent fiscal commission, modeled on the Base Realignment and Closure process. BRAC allowed Congress to close military bases it knew were unnecessary but couldn’t politically touch, and succeeded because it created political cover for difficult decisions Congress knew needed to be made.

A fiscal BRAC would apply the same logic to the budget’s third rails and sacred cows. Congress would establish the commission, set specific guidelines and targets for what commissioners must accomplish, and reverse the status quo’s default of inaction. The commission’s recommendations could take effect automatically, with presidential approval, unless Congress voted to reject them. That shift — from requiring affirmative action to requiring affirmative obstruction — changes the political calculus.

Critics object that commissions are a way to dodge accountability. This commission would do the opposite: return spending accountability to a system built to evade it. Congress abdicated control when it put the largest entitlement programs on autopilot. An effective commission is our best shot at correcting these programs’ unsustainable and unaccountable growth.

Washington knows it has a spending problem. This Senate hearing made that clear. What it lacks is the will, and an effective mechanism, to do something about it. A BRAC-like fiscal commission won’t make tough choices easy. But it could finally make them possible.

Discipline will come eventually. The question is whether Congress chooses it or waits for a crisis to impose it.

Compare this argument from President Trump on Truth Social, in January 2026, to another (perhaps the same?) made by Pierre Joseph Proudhon in 1849.

I protest against your credit at five per cent, because society is able and ought to give it to me at zero per cent; and, if it refuses to do so, I accuse it, as well as you, of robbery…
– Pierre Joseph Proudhon, Bastiat-Proudhon Letter #5, 1849.

Some arguments, we think, have been won decisively. Logic has forever buried their adversaries. And yet, friends of freedom find themselves defending free speech and the Enlightenment itself (in an age of old socialism and new post-liberalism). I never thought I would have to rediscover the nineteenth-century arguments of Frédéric Bastiat in favor of free trade. But here we are, in an age of tariff wars.

I thought Bastiat would remain a wise portrait looking down on interns and scholars in AIER’s library, or perhaps a gem to be shared with my undergraduates as a witty illustration of basic economics. But the politicians are back to their economic sophistry, so I find myself re-reading Bastiat.

On January 10 of this year, President Trump posted a call for credit card interest rate caps of 10 percent, effective January 20. His announcement was not followed by an executive order, so the cap hasn’t been implemented (it would have been interesting to see what presidential authority he claimed, but that’s a different story). 

Last year, Representative Ocasio-Cortez and Senator Bernie Sanders introduced bills proposing 10-percent caps on credit card interest rates. The bills are stalled in their respective chambers, but President Trump’s announcement has revived lobbyist interest in moving the bills forward.

This year, there’s another twist. Instead of a national 10 percent interest rate cap, the Empowering States’ Rights to Protect Consumers Act would allow each state to cap interest rates within its borders. 

Interest rate caps are a bad idea (as are any price controls). My purpose here is not to explain why (John Phelan does so nicely in his recent column in these pages). Nor is it to explain the difficulties, economic and constitutional, with a hodgepodge of conflicting state-level regulations. Nor is my intention to worry about the effects of such short-sighted interventionism on the most vulnerable Americans. 

Instead, I propose to take a walk down memory lane, by returning to the Bastiat-Proudhon debate on interest of 1849-1850. 

The Bastiat-Proudhon Debate on Interest

The debate took place in the pages of La Voix du Peuple (“The People’s Voice”) between October 1849 and March 1850. It comprises a total of 14 letters.

Pierre Joseph Proudhon (1809-1865) was a French journalist, philosopher, and socialist. Proudhon favored peaceful social revolution, and called for a national bank to extend “free” credit. He is most remembered for coining the phrase “property is theft”.

Frédéric Bastiat (1801-1850) was a French lawyer, journalist, and economist. He is most remembered for his series of essays on “what is seen and what is not seen,” and his defense of free trade and limited government. A clever writer, Bastiat often used humor, as well as reductio ad absurdum, such as when he proposed banning sunlight (through mandatory curtains) to protect the candlemakers, and reducing the trade deficit by sinking ships returning with gold from export sales. He is most remembered for the broken window fallacy. Along with John Locke and FA Hayek, he presides over the learning in AIER’s library.

Bastiat argues that interest is compensation – both just and economically sound – for the forgone use of capital, but also for the service rendered by the loan of capital. Proudhon disagrees: capital is returned after the loan period, so any interest is mere exploitation. What is more, interest might once have been necessary to attract capital, but the economy is now sufficiently advanced that it can pool funds in a national bank and provide interest-free loans.

The Argument

Bastiat explains that a loan involves two parts (Letter 2): “1. the restoration, intact, at the expiration of the loan, of the object lent; 2. a service to be rendered the lender by the borrower as compensation for the service which the latter has received.”

Capital increases productivity, thus benefiting both the borrower and the economy as a whole. Bastiat argues that tools and capital can’t exploit workers, because by the borrowing of tools, the worker can produce much more than he could alone. So even if the lender of the tools claims some share of the greatly increased production, the worker is left better off than he would’ve been working only with his hands. “And because he surrenders to me, freely and voluntarily, one-twentieth of this surplus, you represent me as a tyrant and a robber,” Bastiat asks. “The workingman shall see his labor increase in productivity, humanity shall see the sphere of its opportunities enlarge, and I alone, the producer of these results, must be prohibited from participating in them, even by universal consent!” 

Capital, writes Bastiat, “in the form of wheel, gear, rail, waterfall, weight, sail, oar, plough, performs so large a part of the work,” that it should be considered “the friend and benefactor of all, and especially of the suffering classes.” Laborers should celebrate capital, “desire its accumulation, its multiplication, its unlimited diffusion,” because it multiplies the efforts of “nerves and muscles” and increases the value of workers’ productive contributions. 

Proudhon disagrees. He starts by claiming that the owner of capital wouldn’t lend it if he were using it, “does not deprive himself,” but “he lends it because he has no use for it himself.” Capital, by this argument, requires labor, and otherwise “this capital, sterile by nature, would remain sterile, whereas, by its loan and the resulting interest, it yields a profit which enables the Capitalist to live without working… a contradictory proposition.”

Bastiat counters that there is, in fact, an opportunity cost to lending, so the lender can command “a compensation for delay,” where the lender has forgone consumption. Interest on capital lent is, he says, “the price of time.” Real-world lending must also be priced to account for the risk of lost principal. 

Proudhon then calls for a national bank, which could lend at zero interest. He proposes to finance this bank through a wealth tax. He continues: 

a single tax should be established, not on production, circulation, consumption, habitation, etc., but, in accordance with the demands of Justice and the dictates of Economic Science, on the net capital falling to each individual. The Capitalist, losing by taxation as much as or more than he gains by Rent and Interest, would be obliged either to use his property himself or to sell it; economic equilibrium again would be established by this simple and moreover inevitable intervention of the treasury department.

To Proudhon, any interest is usury, because society owes him access to capital: “I protest against your credit at five percent, because society is able and ought to give it to me at zero percent; and, if it refuses to do so, I accuse it, as well as you, of robbery; I say that it is an accomplice, an abettor, an organizer of robbery.”

Bastiat counters with simple economic logic. Incentives matter. Without interest, there will be no capital to be lent: “in order that it may exist, it must have an incentive to birth in the prospect of reward offered to the virtues which create it.” Unless, he writes, “the time has come when houses, tools, and provisions spring into existence spontaneously,” then the capitalist is indeed laboring, and to continue to lend, will have to be compensated. If no one lends capital, productivity goes down, and prices go up. Indeed, by forgoing interest, we risk a “return to barbarism, to the time when a thousand days’ labor would not have procured a pair of stockings.” 

Pretending that lending isn’t a necessary and productive activity is “to say that capital ought to vanish from the face of the earth, is to say that Peter, John, and James ought to procure their transportation, their wheat, and their books by the performance of as much labor as would be necessary to produce these things directly, and with no other resource than their hands.” Our escape from subsistence living owes much to what we might today call the Austrian structure of production: “All Capital… is the result of prior Labor, and increases the power of subsequent Labor. Inasmuch as it is the result of prior Labor, he who lends it receives a reward. Inasmuch as it increases the power of subsequent Labor, he who borrows it owes a reward.” 

Interest Rate Caps Fail Every Time

Proudhon, in his debate with Bastiat, committed all the sins shared by socialists, from Marx to Zucman. His “economic theory” relies on wishful thinking, attempting to replace laws of economics with lofty sentiments and shoddy logic that falls apart under the simplest scrutiny.

Proudhon hoped his national bank would erase class conflict, despite its being funded by a tax on capital. Markets create spontaneous connections — economic harmonies — while nationalized capital lending would replace those natural balances of capital and labor with political agendas backed by force. 

Bastiat’s theoretical foreshadowing is astonishing, but we also have concrete examples of his prescience. The Durbin Amendment to the Dodd-Frank Act of 2010 capped debit card fees. Banks responded by ending free checking account programs and raising account minimums and maintenance fees. The effect, far from increasing affordability, was to push a whopping one million Americans out of the banking system.

Almost two centuries after Bastiat made his case, the principle (and the principal!) remain the same. Interest rate caps were a bad idea then, and they’re a bad idea now, because they ignore the value that lenders contribute economically and make it less attractive to lend. That punishes those who need to borrow, and whose labor would be made wildly more valuable through alliance with capital.