The Federal Open Market Committee is widely expected to leave its federal funds rate target unchanged at 3.5 to 3.75 percent when it meets on March 17–18. While investors eagerly await lower interest rates, the leading monetary policy rules suggest holding steady is the right approach. Despite increasingly uncertain headlines, there is nothing in the current economic data to justify further easing.

The latest Monetary Rules Report from AIER’s Sound Money Project shows that the current policy rate is already slightly below the range implied by several well-known rules. Those rules point to an appropriate federal funds rate close to 4 percent. In other words, the debate heading into this meeting should not be about whether the Fed ought to cut again. It should be about what evidence would justify another cut. At present, that evidence is lacking.

Increasing Uncertainty

Holding steady may feel unsatisfying in light of recent developments. 

The February jobs report was weak, with payroll employment falling by 92,000 and unemployment ticking up. At the same time, energy markets have become more volatile as the conflict with Iran has pushed oil and gasoline prices higher. The legal environment has also become less predictable after the Supreme Court ruled that the Trump administration could not rely on the International Emergency Economic Powers Act to impose tariffs. Meanwhile, President Trump has nominated Kevin Warsh to replace Jerome Powell as Fed chair when Powell’s term ends in May, adding yet another layer of uncertainty to the policy environment.

All of that uncertainty is real. But it does not justify cutting interest rates.

What the Rules Say

In uncertain times, monetary policy rules offer a useful guide. A monetary rule, like the Taylor rule and nominal GDP targeting rules, provides a disciplined way to think about the appropriate level of interest rates given inflation, employment, and spending data. They do not eliminate judgment. Rather, they help prevent policymakers from overreacting to every headline, market swing, or political development.

The Taylor rule remains the most familiar example of a monetary policy rule. It says that the Fed should set interest rates higher when inflation is above target and lower when the unemployment rate is above a level consistent with maximum employment. Using current data, the original Taylor rule recommends setting the policy rate at 4.45 percent at present, whereas a modified Taylor rule incorporates forward-looking data and interest-rate smoothing recommends 4.03 percent. Those estimates are above the Fed’s current target range of 3.5 to 3.75 percent.

Rules based on nominal GDP, or total dollar spending in the economy, point in the same direction. A nominal GDP level rule recommends setting the policy rate at 4.01 percent at present, whereas a nominal GDP growth rule recommends 3.74 percent. Nominal spending is often a cleaner way to think about the overall stance of monetary policy, especially when supply shocks—like a sudden spike in energy prices—complicate the inflation picture. 

Despite their different constructions, both nominal GDP rules and Taylor rules caution against cutting rates at the March 2026 meeting. Indeed, the leading monetary rules suggest Fed officials should consider raising their federal funds rate target. 

What Would Justify Further Cuts?

It’s useful to consider how the data would have to evolve for additional easing to be justified. 

If unemployment stays around its current level, inflation would need to fall below the Fed’s 2 percent target for the Taylor rule to prescribe another interest rate cut. If inflation remains closer to 3 percent, the unemployment rate would have to rise by a full percentage point, to around 5.5 percent, for the Taylor rule to support an additional cut. 

Nominal GDP rules would also require a large swing in the data to justify a rate cut. Nominal spending growth would need to fall by at least half a percentage point, to around 4 percent, before the nominal GDP growth rule will recommend another cut. In other words, the bar for further easing is fairly high.

Looking Ahead

The Fed has spent the past year moving its policy rate back toward the range recommended by the leading monetary policy rules. Cutting rates again without clearer evidence of lower inflation, weaker employment, or slower nominal spending would risk undoing that progress. Instead, the Fed should demonstrate patience at its March meeting. 

The Fed should acknowledge the growing uncertainty around jobs, energy, and trade. But uncertainty on its own does not justify additional rate cuts. To justify additional rate cuts, the Fed would need convincing evidence that inflation has returned to target or labor markets have deteriorated considerably. The leading monetary policy rules suggest that holding steady remains the better choice for now.

I recently used economist Albert Hirschman’s Exit, Voice, and Loyalty to explain why Jacinda Ardern, the former prime minister of New Zealand, quietly relocated her family to Sydney. When 43,000 mid-career Kiwis choose exit over voice, and a co-architect of the system joins them, something structural is broken.  

This framework is also visible in the United States. 

Hours after the Washington state House passed SB 6346 last week, a 9.9 percent income tax on earnings above one million dollars, “Coffee King” Howard Schultz announced on LinkedIn that he and his wife Sheri were moving to Miami. Schultz is 72. He bought Starbucks in 1987 and built it from a handful of Seattle coffee shops into one of the most recognized brands on earth. He is a lifelong liberal. He considered running for president as an independent. He is not fleeing blue-state politics out of ideological spite. He is making a calculation. 

That calculation is Hirschman’s, and in the American context it is sharper than the New Zealand version, because America has something New Zealand does not: competitive federalism. Fifty states, fifty tax codes, fifty regulatory environments, all competing for the same residents, the same businesses, the same tax base. When Ardern’s New Zealanders chose exit, they had to cross an ocean. When Schultz chose exit, he only had to book a flight to Florida. 

To Hirschman, himself an impassioned social observer who fled Hitler’s Germany and found a career at Columbia and Harvard, exit and voice exist always in tension. The easier it is to leave, the less likely people are to stay and fight for change. In America’s federal system, exit between states is extraordinarily easy. No passport required. No work visa. No language barrier. No loss of citizenship. You hire a moving company, update your address, and you are done. This is the purest laboratory for Hirschman’s theory anywhere in the world. 

And the results are running exactly as he predicted. 

Washington’s new tax is framed as a modest correction. The governor calls it “rebalancing.” The sponsors say it affects only the wealthiest half of one percent of households. The projected revenue is $3.7 billion per year, earmarked for schools, healthcare, and a working families tax credit. It sounds reasonable. It always sounds reasonable. 

But Hirschman would not have looked at the revenue projections. He would have looked at the moving trucks. Schultz’s net worth is estimated at $4.3 billion. His annual tax liability under SB 6346 would dwarf the average millionaire’s. And he is gone. Not to negotiate, not to lobby, not to fund an opposition campaign. Gone. To a state with no income tax, warmer weather, and proximity to his grandchildren on the East Coast. He wrapped the exit in family language. They always do. The LinkedIn post mentioned sunshine and adventure. It did not mention 9.9 percent. 

It did not need to. Everyone can do arithmetic. 

Starbucks headquarters will remain in Seattle, for now. But the company announced this month that it is expanding its corporate footprint in Nashville, Tennessee. Like Florida, Tennessee has no state income tax. The pattern is not subtle. 

California wrote the playbook. In 2022, the state claimed a $97.5 billion surplus. By 2024, that surplus had inverted into a $55 billion deficit. What happened? The state’s revenue model depends heavily on income taxes from high earners and capital gains. When those earners leave, the model breaks. And they have been leaving. California posted net emigration of over 200,000 people in 2024 and 2025. The Tax Foundation ranks it 49th in business tax climate. Tesla moved to Austin. SpaceX moved to Starbase, Texas. Chevron, after 145 years in California, moved to Houston. Oracle went first to Austin, then Nashville. Palantir moved to Denver, then Miami. Hewlett Packard Enterprise moved to Houston. In-N-Out Burger, born in Los Angeles, moved to Tennessee. The list is long enough to fill a column by itself. 

And California is not done. A proposed 2026 Billionaire Tax Act would impose a “one-time” five-percent levy on the assets of residents worth more than a billion dollars. Congressman Ro Khanna, who represents Silicon Valley, endorsed it. When Peter Thiel and Google co-founder Larry Page began making arrangements to leave the state, Khanna channeled Franklin Roosevelt’s 1936 quip about wealthy friends threatening to move abroad: “I shall miss them very much.” But Khanna borrowed the sarcasm without the substance. Roosevelt’s argument depended on a premise: there was no viable exit. In 1936, no other country offered comparable institutions at lower tax rates, so the threat to leave the United States was empty. In 2026, zero-income-tax Florida is just a three-hour flight away, and Nashville is recruiting your corporate headquarters. The premise has collapsed. The threat is not empty. The moving trucks are real. 

The response from Khanna’s own donors was immediate. Martin Casado, a partner at venture capital firm Andreessen Horowitz who had supported Khanna financially, wrote that he had “done a speed run alienating every moderate” who backed him. Palmer Luckey, the Anduril industrial co-founder, warned that the tax would force founders to sell large pieces of their companies. Khanna now faces a primary challenge from a tech entrepreneur. The congressman who represents the most productive square miles on Earth told the people who made those miles productive that their departure was a joke. Hirschman could not have designed a cleaner experiment. When voice is mocked, exit accelerates. 

The seen, as Bastiat would put it, is the revenue projection: $3.7 billion a year for Washington, earmarked for schools and working families. The unseen is the tax base walking out the door, one founder at a time. California’s Legislative Analyst’s Office now projects structural deficits of $20 to $30 billion annually through the end of the decade. The surplus is gone because the people who generated the surplus are gone. 

The pattern is not merely American. Sweden ran a wealth tax for decades. Revenue never exceeded 0.4 percent of GDP. Meanwhile, the Swedish Tax Authority estimated that over 500 billion kronor in assets were transferred offshore, and Swedish billionaires accumulated fortunes of at least that size abroad. Sweden abolished the tax in 2007. France ran its Solidarity Tax on Wealth from 1988 to 2017. In that time, an estimated 60,000 millionaires left the country and roughly 200 billion euros in capital fled. Macron repealed the tax in 2018. Nine of the twelve European countries that tried wealth taxes eventually abandoned them. The irony is not lost on anyone paying attention. American progressives routinely point to Europe as a model for enlightened policy. On wealth taxes, Europe tried it, measured the damage, and walked away. Washington state is now adopting the policy that Stockholm repealed. The lesson is always the same: the projected revenue assumes the tax base will sit still. It never does. 

This is where competitive federalism turns Hirschman’s framework into something close to an iron law. In a single-country system like New Zealand, exit is expensive. You leave your networks, your family, your culture, your professional credentials. Loyalty holds. People stay and use voice far longer than the economics would suggest is wise. But in a federal system with fifty jurisdictions and no barriers to movement, the cost of exit drops to nearly zero for anyone with capital. Voice becomes irrational. Why spend years lobbying your state legislature when you can spend an afternoon on Zillow? 

The politicians know this. That is why SB 6346 does not take effect until 2028, with first payments in 2029. The delay is not administrative. It is strategic. It gives legislators two election cycles before the bill comes due. By the time the revenue shortfall becomes visible, the people who voted for the tax will be running for reelection on other issues. This is the political version of what Hirschman described: exit and voice operate on different timelines. The vote happens today. The moving truck arrives next quarter. 

Schultz, to his credit, said the quiet part almost out loud. In his LinkedIn post, he expressed his hope that Washington would “remain a place for business and entrepreneurship to thrive.” That is voice. It is also, recognizably, the last voice of a man who has already chosen exit. He is speaking from the departure lounge. 

What makes the American case so instructive is the receiving states. Florida, Texas, and Tennessee are not just benefiting passively from other states’ policy mistakes. They are actively competing. No income tax. Lower regulation. Recruiting campaigns aimed at exactly the professionals and entrepreneurs that California and Washington are taxing away. This is competitive federalism working as designed: not as a theoretical abstraction, but as a sorting mechanism. States that tax heavily lose their most mobile residents to states that do not. The mobile residents bring their businesses, their employees, their spending, and their philanthropy to places where capital is productive and property rights are respected. 

Hirschman understood that this dynamic has a ceiling. At some point, the people left behind, the ones who cannot afford to move or whose lives are too rooted to relocate, comprise the entire constituency. They have no exit option. They can only use voice. But their voice is directed at a government that has already lost the tax base it needs to deliver what they are demanding. The result is a fiscal spiral: higher taxes on a shrinking base, which accelerates exit, which shrinks the base further. California is deep into this spiral. Washington just entered it. 

Ardern left New Zealand for Sydney. Schultz left Seattle for Miami. The frameworks are different. The calculus is identical. When the cost of staying exceeds the cost of leaving, people leave. The question is never whether they will. The question is how long loyalty delays the inevitable. 

For Schultz, it took until the House vote. 

In the technology arms race between the United States and China for dominance in artificial intelligence (AI), we are often told that the decisive factor will be computational power: who can build more data centers, secure more advanced chips, and train larger models more cheaply. Those are not irrelevant, but nor are they the crux of the competition. The true contest is one of political culture.

China is scrambling, by state initiative in a command economy, to close the remaining gap with the West in generative AI and foundational tech research. Yet it does so under a one-party Leninist dictatorship whose defining feature is the suppression of free inquiry. That fact raises a paradox at the heart of the AI race: artificial intelligence, the most daring attempts ever made to replicate human cognition, seems to require precisely the qualities that authoritarianism must crush — independence of mind, criticism of orthodoxy, and the freedom to dissent.

To borrow Czesław Miłosz’s phrase, how can the captive mind create a technology characterized by relentless innovation and the overthrow of orthodoxies? How can conceptual daring flourish in an environment where thought is ruthlessly policed?

For decades, those who understood communism predicted that the Soviet economy must fail not only for want of market economic calculation but for want of intellectual freedom — and fall behind the West in advanced technology. 

Fail it did, partly in the effort to save the system by loosening the totalitarian grip. China is different, we are told. Yet China’s selective experiments with markets have been accompanied, now, by even tighter enforcement of ideological conformity, with Xi Jinping repeatedly warning against a Soviet-type “disaster” (i.e., perestroika and glasnost).

Can the answer to this paradox be found in the story of how China rose from the ideological ruins of the Cultural Revolution to become a world force in AI — and how that rise illuminates both the power and the limits of innovation under constraint? The history is essential, but so too is the psychology: wounded national pride, collective ambition, and disciplined technical aspiration. Above all, perhaps, it is the story of a Chinese Communist Party that — driven by political necessity — risked infection by American freedom in order to claim the indispensable fruits of the free mind.

The Reopening of the Chinese Mind

When Mao Zedong died in 1976, China was devastated in every way — including intellectually. During his 27 years as China’s unchallenged ruler, Mao presided over catastrophes on a scale difficult to comprehend. The Great Leap Forward (1958–1962), with its forced collectivization and fantasy quotas, produced the worst famine in human history. The Cultural Revolution (1966–1976) followed, a decade of political hysteria in which universities were closed, professors humiliated and beaten, libraries destroyed, and the educated class scattered to labor camps or remote villages.

The combined human toll of starvation, political executions, purges, and abuse under Mao’s rule is routinely estimated by historians at 50–70 million deaths — devastation without precedent in peacetime. During the Cultural Revolution, the university system had been shuttered for ten years; professors and students alike had been sent to labor in the countryside; libraries had been pillaged; and ideological hysteria had replaced scholarship. China was, by the measure of intellectual infrastructure, one of the least prepared countries on earth to enter the information age.

Deng Xiaoping, often called “the architect of Reform and Opening Up,” reversed Mao’s autarkic doctrines. Deng famously declared, “It doesn’t matter whether a cat is black or white, as long as it catches mice,” a slogan that became the ideological warrant for pragmatism over dogma.

Deng’s reforms opened China to global markets with breathtaking speed. Foreign investment surged into the coastal provinces; Chinese students began studying abroad by the tens of thousands; and export-led manufacturing initiated what would become the fastest sustained economic expansion in human history. Between 1980 and 2010 China’s GDP grew at an average annual rate of 10 percent, lifting more than 700 million people out of extreme poverty. The opening to the world was not ideological; it was utilitarian — China would learn from the West whatever it needed in order to regain strength, wealth, and international status.

The Returnees and the Importation of Freedom

China’s true ascent in AI began not at home but abroad. In the 1980s and 1990s, waves of Chinese students were sent to study at Western universities — especially in the United States. Tens of thousands entered programs in electrical engineering, computer science, applied mathematics, robotics, and cognitive science. This cohort would become the seedbed of China’s scientific and technological elite.

The same regime that had destroyed China’s intellectual class now sought to rebuild it — but to rebuild it inside a cage. Science was to be liberated — up to a point. The mind could be free in the laboratory if it served national rejuvenation, but not in other realms — above all, not political thought.

Thus, was born what might be called the principle of segmented freedom: autonomy in STEM, obedience in everything else.

When many of these students returned to China in the late 1990s and early 2000s, they carried back not only expertise but the habits of scientific liberty. They founded or joined institutions that became pillars of the Chinese AI ecosystem. The most significant was Microsoft Research Asia, established in 1998. Within a decade MSRA was producing world-class research, rivaling major American and European labs. Alumni of MSRA would go on to lead AI efforts at Baidu, Alibaba, Tencent — and at Western labs including Google, DeepMind, and OpenAI.

What made MSRA extraordinary — and emblematic of the Chinese model — was its borrowed freedom. It operated with an autonomy unmatched in other sectors of China’s intellectual life. Political discussion remained off-limits, but scientific inquiry was encouraged, even celebrated. The state tolerated this exceptional zone of independence because it served a higher political objective: national technological power.

The paradox sharpened: China needed the fruits of the Western scientific mindset but not the mindset itself. It sought creativity without dissent, originality without heterodoxy, innovation without liberalism. Could such selective adoption succeed?

National Ambition (and a Useful Substitute for Freedom)

One reason China sustained rapid innovation in an unfree environment is that its scientific elite has been mobilized by a national narrative of grievance and restoration. Since the early twentieth century, Chinese political culture has been organized around the story of the “century of humiliation” — beginning with the Opium Wars and ending with the Communist victory in 1949. In that narrative, China was carved up, exploited, and belittled by Western powers and Japan, and the Communist Party’s historic role is to restore national greatness.

Xi Jinping has framed China’s mission explicitly in these terms. In a 2014 speech, he declared: “Realizing the great rejuvenation of the Chinese nation is the greatest dream of the Chinese people in modern times.” (That “Chinese Dream” theme is now central to Party doctrine.) He has linked national rejuvenation to the “historic task of complete reunification” — a clear reference to retaking Taiwan.

This helps explain why China’s scientific class has generated extraordinary achievements even under constraint. Patriotism, but especially patriotic grievance, can be a powerful intellectual stimulant. It becomes, in certain respects, a substitute for individual freedom: a channeling of ambition into socially sanctioned goals.

Technologies that would have faced legal and ethical hurdles in the West could be deployed overnight in China. Hundreds of millions of Chinese citizens moved their lives onto digital platforms: messaging, shopping, payments, entertainment, banking, mobility, and communication. Every part of daily existence passed through centralized commercial ecosystems. Facial recognition, logistics optimization, financial risk modeling, machine translation, and recommendation systems developed at astonishing speed. The government’s tolerance — indeed, enthusiasm — for surveillance created a sea of harvestable data and a vast market for real-time inference.

Borrowed Freedom — and Its Limits

In 2017, the ceiling of authoritarian innovation began to appear.

Foundational breakthroughs — those requiring leaps of conceptual imagination — continued to come disproportionately from the West. China’s strengths lay overwhelmingly in applied AI. Yet many of the deep architectural revolutions of modern AI — transformers, diffusion models, deep reinforcement learning — were developed elsewhere. When OpenAI, DeepMind, or Google introduced a paradigm shift, Chinese firms adapted and scaled it with astonishing speed, but the original leaps of abstraction were less common.

This imbalance is not accidental. It reflects the constraints of a system that rewards technical prowess but discourages conceptual risk.

The strengths of innovation under authoritarianism are visible: abundant state funding, enormous pools of technical talent, a culture of disciplined study and fierce competition, state-created markets for AI surveillance and infrastructure, and a national mission that acts as a surrogate for individual aspiration.

The limits are less visible but, over time, decisive: fear of political missteps inhibits bold intellectual leaps; censorship creates blind spots and distorted incentives; interdisciplinary fields — such as AI ethics, cognitive science, and philosophy of mind — struggle under ideological control; innovation becomes incremental rather than foundational. Crucially, the most inventive and creative minds prefer to remain abroad.

AI poses a special challenge because it is a frontier field that depends on open debate, criticism of existing paradigms, and the willingness to explore controversial ideas. The mind does not easily compartmentalize its freedoms.

Authoritarianism Overshadows Innovation

China’s rise in artificial intelligence is real, not a statistical mirage. It demonstrates that human beings, even under the political constraint of dictatorship, can achieve extraordinary technical accomplishments when education, resources, and national purpose align. The mind seeks expression wherever it can find room to breathe. Even in unfree systems, it carves out local zones of competence, mastery, and ingenuity.

But the ceiling is real as well. Innovation under authoritarianism is conditional: adaptive but ultimately bounded. A society may import techniques created in free cultures, scale them with discipline and data, deploy them by centralized command. It may even tolerate islands of scientific autonomy so long as they serve national power. What it cannot indefinitely command are the wellsprings of innovation: the indivisible freedom of the mind to question all premises, raise all doubts, discard orthodoxies, and pursue truth without a political price tag.

Artificial intelligence arguably exposes the extent of this contradiction as did no prior technology. AI thrives on criticism, openness, conceptual risk, and the cross-pollination of ideas across disciplines — including philosophy, ethics, and cognitive science. A researcher who learns to fear political deviation may still optimize an algorithm, but over time intellectual and creative self-repression becomes automatic and seeps across boundaries. The mind committed to recognizing reality as an absolute does not have “no go” zones. Habits of obedience, once learned, migrate.

The paradox is not that China manages innovation despite repression, but that it does so by borrowing freedom — from foreign training, imported research cultures, and carefully fenced internal exceptions. Such borrowing can persist for years, even decades.

But AI, perhaps more than any previous science, achieves its “big” leaps when men of rare genius, independence, and self-assertion suddenly challenge the status quo. Such minds are not known to keep their genius to themselves when it comes to inquiry into politics, ethics, and history, but to let it soar everywhere — not only in the laboratory.

On February 20, the Supreme Court handed the Trump administration a stinging rebuke. In a 6-3 decision, the justices ruled that the International Emergency Economic Powers Act (IEEPA) “contains no reference to tariffs or duties,” pouring cold water on Trump’s claim that the IEEPA grants him unilateral authority to impose sweeping taxes on all goods entering or leaving the United States.

But where one road closes, Trump’s tariff regime finds alternate routes. Within hours, Trump signed a new proclamation slapping a 10 percent global tariff under Section 122 of the Trade Act of 1974, with promises to ratchet it to 15 percent. While this new round of tariffs will require a higher legal bar to implement, the administration is falling in lockstep with those across the political aisle who are rejecting free trade. Once viewed as the cornerstone of the global trading system, the US is turning its back on the market forces that ushered in Pax Americana — an era defined by rising living standards and unprecedented economic growth.

That chapter has ended.

Let’s be clear about the true costs of tariffs. Rather than being used as revenue generators or geopolitical bargaining chips, as Trump likes to tout, they are heavy taxes imposed on Americans. By 2026, the cumulative effect of Trump’s trade measures amounted to the largest tax increase as a share of GDP since the early 1990s. The average household faced roughly $1,300 more per year in costs. Broader estimates suggest price levels jumped more than two percent in the short run — translating to thousands of dollars in lost purchasing power for a typical family.

American manufacturers, the biggest supposed beneficiaries of America’s protectionist walls, are not exactly celebrating either. These measures cannot revive declining industries from which workers and capital have already moved to more productive sectors. A tax on consumers simply can’t reverse long-run economic forces that have made some industries obsolete. It simply transfers wealth from households to narrow interest groups, while leaving factory floors empty and workers worse off. According to researchers at the Federal Reserve, Trump’s Section 232 tariffs on steel and aluminum resulted in 75,000 manufacturing jobs lost downstream — in auto plants, construction firms, and appliance makers that depend on affordable inputs like steel — while adding only 1,000 jobs in steel production itself.

And of course, the working-class Americans whom Trump purports to champion are absorbing the biggest economic blows. Tariffs have fallen hardest on low- and middle-income households that spend the greatest share of income on goods like furniture, clothing, and food. Steel and lumber tariffs drive up housing prices. Higher input prices drive down real wages. And deficit spending further erodes purchasing power through inflation, which has only worsened lately thanks to a misguided belief that tariff revenue will offset America’s spending spree.

While Americans suffer from self-inflicted wounds at home, the world moves on.

Across Asia, China’s meteoric rise as an economic alternative to the US could serve as the deathblow to Pax Americana. One survey found 56.4 percent of regional respondents identify China as the dominant economic force — a figure that has only grown as America retreats from the global stage. Nations across the region are deepening ties with Japan, the EU, India, and Australia, rather than gambling on Washington’s trade whims.

In Europe, the picture is even more stark. The EU’s trade commissioner flew to Washington 10 times in four months in 2025, seeking relief from US tariffs. Each time, he returned empty-handed. European capitals are quickly realizing that once-leader of Pax Americana is an unreliable partner, driven by self-defeating populist impulses that will make America and the world a lot poorer.

Accelerated by Trump’s tariffs, the EU has  signed or updated trade deals with  Mercosur, Indonesia, India, and Mexico. Other countries across the Anglosphere like Canada and New Zealand are inking new free trade agreements in an effort to diversify beyond the U.S. In other words, as America raises its trade barriers, the rest of the world is lowering theirs, further undermining its standing as the global economic powerhouse.

Meanwhile, the US dollar — America’s enduring monetary advantage — is losing its luster as the world’s reserve currency. Research from Stanford’s Graduate School of Business finds that after Trump’s “Liberation Day” tariffs took effect, foreign investors sold US debt and dollar-denominated assets en masse, a sharp break from historical norms, when the dollar typically strengthened during global stress. The dollar’s share of central bank reserves has slid to a two-decade low, with foreign nations flocking to gold and other less risky assets.

What does this all mean?

As Johan Norberg lays out in his book, Peak Human, golden eras — from Ancient Rome to the Abbasid Caliphate to Song China — flourished when they embraced the free flow of ideas and people. Today’s post-Pax Americana moment is no exception. We’re not immune to the fate of past golden ages, and the surge of fear-driven economic nationalism will only speed the pace of our decline.

While Pax Americana fades in the rearview mirror, that doesn’t mean the US can’t find its way back to the top of the world’s rules-based economic system. But it will require more than a Supreme Court ruling. It will require Congress to reclaim its constitutional authority over trade policy — and an administration that understands that global free trade is the best recipe for making the country great again.  

The Court may have struck down the IEEPA tariffs. But unless the US reverses its protectionist course, the costs will compound. Starting at home.Other nations are not waiting for America to find its footing. They are building the trading order for this century — and they are building it without us.

For decades, economists have warned about the risk of fiscal dominance. Over the past year, the topic has graduated to news headlines. At first glance, the US’s deteriorating fiscal situation appears to be the culprit.

Kevin Warsh sees it differently: fiscal dominance is an outgrowth of Federal Reserve actions that enabled profligate federal spending, led the Fed to stray from its monetary mission, and ultimately undermined Fed independence.

In other words: the problem of fiscal dominance is actually one of monetary policy run amok. 

The usual fiscal dominance story goes something like this. In normal times, a central bank should adjust its interest rate target as needed to deliver low and stable inflation. Under fiscal dominance, however, a profligate government forces the central bank’s hand. Rather than adjusting its interest rate target to maintain low and stable inflation, the central bank must accommodate government borrowing. Inflation inevitably rises because the central bank is effectively committed to monetizing government debt.

Economists have proposed a host of institutional constraints to guard against fiscal dominance, including central bank independence, conservative central bankers, optimal contracts, and monetary rules. These institutional constraints all function to insulate monetary policy decisions from the influence of short-term politics — that is, to preserve monetary dominance.

That, at least, is the conventional view. But Kevin Warsh, President Trump’s nominee to chair the Federal Reserve, has flipped the script. 

In a talk delivered at the International Monetary Fund last year, Warsh said, “monetary dominance — where the central bank becomes the ultimate arbiter of fiscal policy — is the clearer and more present danger.” Rather than restraining fiscal excess, he argues, the modern Fed has enabled it. And, in doing so, it has undermined its own legitimacy.

Warsh on Monetary Dominance

Warsh traced the roots of today’s predicament to the 2008 financial crisis, when the Fed cut rates to zero, engaged in emergency lending, and pioneered large-scale asset purchases. He accepted that the Fed might use these tools to stabilize markets and prevent collapse in exigent circumstances. “But when panics subside,” Warsh said, “the Fed is duty-bound to retrace its steps.”

The problem, in his telling, is that the Fed never fully retreated. “Since the panic of 2008, central bank dominance has become a new feature of American governance,” Warsh observed. Crisis management hardened into a permanent practice, with the Fed maintaining a nearly $7 trillion balance sheet today. Warsh noted it was “nearly an order of magnitude larger” than when he joined the Fed Board back in 2006, and has made the Fed “the most important buyer of US Treasury debt — and other liabilities backed by the US government — since 2008.”

By suppressing borrowing costs, Warsh argued, monetary policy quietly subsidized fiscal expansion. “Fiscal policymakers…found it considerably easier appropriating money knowing that the government’s financing costs would be subsidized by the central bank,” he said. 

The predictable result was more debt.

Independence as Shield and Sword

Warsh also offered an important corrective on central bank independence, which is usually cast as a safeguard against fiscal dominance. “Independence is not a policy goal unto itself,” he said. “It’s a means of achieving certain important and particular policy outcomes.” Its purpose is instrumental: to deliver low and stable inflation.

In practice, however, central bank independence has become a rhetorical sword, enabling the Fed to cut a path well beyond its remit. “‘Independence’ is reflexively declared when any Fed policy is criticized,” Warsh said.

That approach is ultimately self-defeating. When the Fed strays beyond its congressionally assigned mandate — venturing into climate policy or social justice — it weakens its claim to independence in monetary policy. And when it dismisses legitimate oversight as political interference, it further erodes the credibility it depends on.

Perhaps even more damaging to the cause of independence is the Fed’s recent performance on inflation. The “intellectual errors” that contributed to high inflation over the last few years — overconfidence in models, complacency about inflation risks, and downplaying the contributions of monetary and fiscal policy to high inflation — have exposed the limits of technocratic authority. The widespread recognition of those limits, in turn, has left the case for independence on shakier ground.

Warsh said independence is “chiefly up to the Fed.” It must be earned through competence, restraint, and accountability. When outcomes are poor, “serious questioning” and “strong oversight” are not threats to independence. They are prerequisites for its survival.

The Case for a Narrow Central Bank

If monetary dominance and abuse of independence are the disease, Warsh’s prescription is institutional modesty. He called for a narrow central bank focused relentlessly on its core mandate.

The Fed, Warsh argued, has come to resemble “a general-purpose agency of government.” A narrow Fed, in contrast, would eschew fashionable causes, limit discretionary interventions, and operate within well-defined and clearly-articulated frameworks. It would abandon performative transparency — shifting metrics, maintaining data dependence, revising forecasts, and offering forward guidance — in favor of quiet consistency. 

“Our constitutional republic is accepting of an independent central bank, only if it sticks closely to its congressionally-directed duty and successfully performs its tasks,” he said.

A Test of Conviction

Warsh has sketched a high-level vision for reforming the Federal Reserve. Whether his vision can be transformed into a coherent plan that survives contact with power is unclear. 

Congress has learned to rely on accommodative monetary policy. Markets have grown accustomed to a Fed that intervenes early and often. Reversing course will not be painless.

If confirmed, Warsh will face a choice between rhetoric and resolve. He believes the Fed has weaponized the argument for central bank independence and drifted well beyond its mandate, thereby setting the stage for fiscal folly. But restoring genuine accountability and restraining Fed action will require resisting precisely the temptations he thinks led the Fed astray. 

If Warsh is serious about narrowing the Fed, his tenure could mark a genuine turning point. If not, monetary dominance will continue to run amok.