The Federal Reserve held its target range for the federal funds rate constant in January 2026 at 3.5–3.75 percent. This decision was consistent with market expectations for the path of the federal funds rate, which for weeks had indicated that the Fed would hold rates steady at its January meeting. It is also consistent with rates prescribed by leading monetary policy rules. Notably, Governors Stephen Miran and Christopher Waller dissented from the decision, with both favoring a 25-basis-point cut.
At the post-meeting press conference, Powell pointed to elevated inflation and a stabilizing labor market to explain the Fed’s decision to hold rates steady. He said Fed officials now “see the current stance of monetary policy as appropriate to promote progress” toward both sides of the dual mandate. Previously, Fed officials had expressed concern about the tensions facing the Fed’s dual mandate amid a softening labor market. Powell said that available data show “economic activity has been expanding at a solid pace,” driven primarily by consumer spending and business fixed investment. He acknowledged the lingering effects of last fall’s prolonged government shutdown, but suggested that any drag on activity in the third and fourth quarters of last year will likely be reversed in the first quarter of 2026.
After softening for much of last year, labor market conditions now appear to be stabilizing, Powell explained. He pointed to relatively low and stable unemployment in recent months as evidence that the labor market may be at or near maximum employment. Echoing past statements, Powell acknowledged that the slowing pace of job growth likely reflects changes in both labor supply and labor demand. He said other indicators — such as job openings, layoffs, hiring, and nominal wage growth — “show little change in recent months.”
Powell acknowledged that inflation has remained stubbornly above the Fed’s two-percent target, with PCE inflation likely coming in at 2.9 percent over the 12 months from December 2024 to December 2025. Elevated inflation, he contended, “largely reflects inflation in the goods sector, which has been boosted by the effects of tariffs.” At the same time, Powell emphasized that longer-run inflation expectations remain aligned with the Fed’s two-percent target. Taken together, these claims suggest that inflation remains a concern for Fed officials, but one that is driven primarily by temporary, non-monetary forces.
According to Powell, the current target range for the federal funds rate is “within a range of plausible estimates of neutral” — that is, consistent with neither an overly accommodative nor restrictive stance of monetary policy. Holding rates steady, Powell argued, should help stabilize the labor market while allowing inflation to return to target “once the effects of tariff increases have passed through” to the price level.
By attributing elevated inflation primarily to tariff-driven increases in goods prices, the Fed is implicitly treating today’s inflation as a transitory relative-price adjustment rather than a broader monetary phenomenon. If that diagnosis is correct, a wait-and-see approach may be appropriate. There are, however, reasons to be skeptical.
Total dollar spending in the economy rose sharply relative to expectations in the third quarter of 2025, a pattern that is difficult to reconcile with a genuinely neutral stance of monetary policy. When nominal spending accelerates at this pace, it suggests that monetary conditions remain accommodative, regardless of how inflation is distributed across sectors.
More troubling is the fact that, despite the surge in dollar spending last year, financial markets are currently projecting two additional 25-basis-point cuts to the federal funds rate over the coming year. Given that inflation is still running above target, it is difficult to see which economic conditions would warrant further monetary easing. Absent a clear deterioration in real activity or a decisive return of inflation to target, additional rate cuts risk reinforcing the very spending pressures the Fed is attempting to contain.
Ultimately, the Fed’s current posture reflects a high degree of confidence that inflationary pressures will fade without further policy restraint. That confidence rests on the view that inflation is largely the result of temporary, tariff-driven distortions rather than excess nominal demand. But if that view proves mistaken, the cost of waiting — and especially of easing further — could be a renewed loss of progress toward price stability. For a central bank whose credibility depends on keeping expectations firmly anchored, misdiagnosing the source of inflation is not a neutral error. It is an error that compounds over time.
If economic freedom were a stock, analysts would call it boring — and then quietly recommend buying it anyway.
For decades, states that limit government growth, keep taxes low and predictable, and allow labor markets to adjust have outperformed their peers on jobs, incomes, and growth. This is not fashionable economics. It doesn’t promise quick fixes or dramatic announcements. It just works. And the latest Economic Freedom of North America (EFNA) data published by the Fraser Institute show that it still does.
The EFNA index evaluates states using the latest data (2023) across three simple but powerful dimensions: how much the government spends relative to income, how heavy and complex taxes are, and how flexible labor markets remain. Nothing exotic. No ideological scoring. Just the institutional rules under which people live. Those rules matter because they shape incentives.
When government grows faster than the economy, something else must shrink. When taxes are steep or complex, labor and capital shift from production to avoidance. When labor rules make it harder for employers and employees to contract, hiring slows and labor markets soften.
None of this shows up overnight. But it shows up reliably. You can see it in how states behave — and how people respond.
One limitation is worth acknowledging. The EFNA index measures how heavy taxes are, but not yet how complex they are. Complexity matters because it raises compliance costs, increases uncertainty, and gives large firms an advantage over workers and small businesses.
The EFNA authors are considering ways to add complexity to the index. When added, complexity would likely reinforce the existing findings rather than overturn them.
The incentives measured by the EFNA index are clearly reflected in state outcomes. Take Vance’s home state of Texas, which ranks fourth nationally.
Texas didn’t become an economic magnet by offering clever incentives or chasing headlines. It did it by staying boring. No personal income tax. Relatively flexible labor markets. A business climate that allowed firms to expand without asking permission.
The result? More than two million net jobs added since 2019, and real output growth that has consistently beaten the national average.
But here’s the plot twist: Texas has stopped climbing in the rankings. Why?
Because state and local spending started growing faster than population growth and inflation, and property taxes quietly did the rest. The Texas model still works — but the state has begun to retreat from it.
Political economy matters here: it’s easy to defend low taxes while letting spending rise one budget at a time. The index catches that drift even when politics doesn’t.
Florida, ranked sixth, tells a similar story (with better weather and beaches).
No personal income tax and flexible labor markets have fueled population inflows, job creation, and strong GDP growth. People vote with their feet, and many are voting for Florida.
Yet Florida slipped slightly after years near the top. Not because it raised taxes, but because spending expanded rapidly during the boom. Growth makes this temptation worse. When revenues pour in, restraint feels unnecessary. The index is less forgiving. Growth can hide fiscal excess for a while. It cannot neutralize it.
Kansas, ranked fourteenth, illustrates another lesson: stability is not acceleration.
Kansas cleaned up its act a bit after years of fiscal whiplash and restored some predictability. Unemployment stayed relatively low. But job growth mostly tracked population growth. Why? One answer is that spending growth during surplus years offset gains from tax reform. Kansas fixed some leaks, but never fully opened the throttle.
South Carolina, ranked twenty-first, shows how local policy quietly shapes outcomes.
At the state level, labor markets are flexible and fiscal policy is moderate. But in many counties, local spending and property taxes rose faster than population and inflation, creating pockets of drag. The result is uneven growth — strong in some regions, sluggish in others. The entrepreneurs who direct capital notice these differences even when statewide averages look fine.
Then there are Louisiana and Michigan, ranked thirty-first and thirty-second, respectively. Their stories differ, but the outcomes rhyme.
Louisiana’s right-to-work status hasn’t overcome large government and high taxes. Michigan’s earlier reforms helped — until policy reversed. In both states, private-sector job growth lagged and output underperformed. When rules become less predictable, capital doesn’t protest. It leaves.
Importantly, the story is not uniformly negative. States such as Idaho, North Dakota, and North Carolina have combined spending restraint with durable tax and labor reforms and improved their rankings meaningfully over time. These states focused on consistency rather than one-time fixes. The payoff has been stronger job growth, rising incomes, and sustained in-migration.
Now contrast these with California, New York, and Matt’s home state of New Mexico, which sit at the bottom of the rankings. High spending. Steep and complex taxes. Rigid labor rules. The predictable response? Net domestic out-migration, slower private-sector growth, and weaker income gains — even as budgets swell.
These data reinforce the intuition that people move away from high costs and low flexibility. A common objection is that these rankings are backward-looking. That’s true — and that’s the point. Institutions don’t change outcomes instantly. The index reflects what policies actually produced, not what politicians promise next. Using 2023 data filters out press releases and captures lived reality.
Over time, the pattern is unmistakable. States that protect economic freedom experience higher incomes, stronger employment, greater mobility, and more resilience. Those states that erode it experience the opposite — usually with a lag that makes denial tempting.
From a classical-liberal perspective, none of this should be surprising. Economic freedom respects individual choice, local knowledge, and voluntary exchange. The fact that it also delivers better outcomes is not an accident. It is the market mechanism at work.
The political economy lesson is simple but uncomfortable: prosperity doesn’t come from doing more. It comes from consistently getting out of the way. Spending restraint, simple taxes, and flexible labor markets are not exciting. But they are effective.
The data keep saying the same thing. The states keep proving it. Economic freedom still wins — even when politics pretends otherwise.
(For comparison with and complement to the Fraser data, AIER’s Jason Sorens and Will Ruger compile the Freedom in the 50 States Index of Personal and Economic Freedoms.)
Landlords are amazing.
That’s perhaps a perverse, controversial statement in these Mamdani-ish times, where “free” socialist housing is all the rage. In popular imagination, landlords are rent-seeking middlemen, extracting value from shelter they did not “create,” skimming from tenants who have no alternative, riding the fiat money printer and dysfunctional zoning regulations all the way to the bank (read: overvalued housing market).
It is a tidy morality tale. It is also mostly wrong.
Since most of us regular consumers have to live somewhere, we’re sooner or later asking ourselves whether we should own or rent our dwellings. And at dining tables with friends and extended family, the owning-vs-renting conversation often comes up.
Most people think of paying rent as “wasted” money. It’s money straight into a landlord’s pocket that you’ll never recoup, and it’s a pure expense. At least paying down a mortgage gets you (partial, gradual) ownership of your home, a real asset. Since the (often tax-deductible) interest you’re charged is lower than the rent you’d otherwise have paid, mortgaging one’s finances to the hilt is a good idea, right?
First of all, renting vs owning is a silly dichotomy: it’s all renting. The only question is whether you’re renting money from a bank or the actual apartment from a landlord. Essentially, it’s all just a balance sheet question in your own personal finances.
You either rent the dwelling, or you rent the out-of-thin-air money that the bank created to buy the house on your behalf. You’re either on the hook for paying rent to a landlord or on the hook for paying a bank money rent, i.e., “interest.” (With the 50-year mortgages that President Trump recently floated, there’s some sense in which you’re renting from the government, too.)
The question isn’t to rent or not to rent, but how much financial leverage you’re hungry for or willing to stomach, and how tied down you want or need to be. In a healthy housing market, it’s about specifying the exact properties (pun intended) of your living arrangements.
Dead Money and Offloaded Financial Responsibility
When you’re “buying a home,” you aren’t just forking over dough for a dwelling like any other market transaction. You are underwriting a leveraged real estate business on your own personal balance sheet! You have suppliers of physical material (builders, plumbers, maintenance, electricians) as well as financial capital (banks). You’ve got to appease the government via (often hefty) taxes, and usually a mandatory insurance company with regular premiums. In most Western housing markets, too, the money-banks-regulation-real estate industrial complex is so dysfunctional that the very expensive and tedious transaction itself might take months or years. If the market tanks, or there’s some “unpredictable” event like COVID or the 2008 Financial Crisis, you’re stuck rolling payments for years.
From the renter’s perspective, the pesky funds I hand over every month are far from “dead”; they are premiums paid to avoid large, lumpy expenses and risks to my balance sheet. I’m buying options, geographic mobility, freedom from regulatory and tax uncertainty. When the roof leaks or the boiler fails, it is not my bank balances that take a hit. When interest rates rise or property values fall, it is not my equity on the line.
The landlord is the residual claimant: He takes all the financial risks involved in the arrangement. And while many economic risks remain hidden and invisible to a consumer unless they happen, like an insurance company, the service they provide is valuable. (Nobody would say that car insurance premiums were “wasted” just because you didn’t crash your car.)
Speaking of insurance, the landlord likely has some insurance arrangement that goes well above yours — more expensive, more coverage, more widely ranging.
Next, taxes. Most jurisdictions impose a property tax for the privilege of owning a home. While economists find them efficient (in the sense, “nondistortionary”), most people hate them. Fine, economically speaking, property taxes translate into the rent I’m paying, but a property tax is yet another thing you’d be on the hook for if you owned the home instead of just renting it.
Last, and this is the biggest one: opportunity cost. If you own your home, you can’t really leave — unless the market, a suitable buyer, five sets of bureaucrats, a few realtors and financing requirements happen to align. I can cancel my lease with a few months’ notice, and I’m out, no questions asked.
Financial opportunity cost is a real thing as well. You’re stuck paying into a financial product that returns you approximately the low-ish single-digit interest on your mortgage. That’s not a great savings vehicle; I’d much rather keep my surplus funds regularly dollar-cost-averaging into the stock market’s long-run return of 9.7 percent, the fantastic decade the S&P 500 just had (15 percent), gold’s steady 9 percent, or bitcoin’s 25-90 percent (adjust depending on timeframe and repeat-probability going forward).
For thirty (or fifty) years, you’ve committed yourself to saving in a financial product that returns you only about the interest you’ve already paid on your mortgage, plus whatever few percentage points your house may appreciate going forward. True, you get the ability to cheaply go 7x long on a hard asset, but there’s hidden risk in there: everything from interest-rate sensitivity to housing market collapse. And to be frank, I’d much rather watch my unencumbered bitcoin fall 30 percent in value — which it has done many times in the past, and recovered — than try to fall asleep in my overleveraged house, suddenly underwater because the housing market fell.
Historically, house price appreciation was quite respectable, depending on the monetary regime and timeframe, somewhere between six and eight percent, which reimburses you somewhat for your maintenance troubles. With demographic declines, uncertain economic outlooks, and plenty of threats to real estate’s outsized monetary premium on the horizon, there’s no guarantee you’ll see that sort of return again. Whereas when I’m renting a home, I can invest in whatever I please — and much more easily achieve a decent diversification should I wish to do so. (Most American households’ net wealth is locked up in illiquid housing assets.)
Importantly, I offload all of these practical and financial troubles to someone else. They are on the financial hook for hijacking their personal balance sheet to a physical domain, nestled between a profit-hungry bank and a rapacious government. They are financially liable for maintenance, for repairs, for keeping the house in working order.
The upside is that the owner gets to decide what, like, the bathroom redecoration looks like. Maybe build a new porch.
From the consumer’s point of view, landlords exist to absorb risks that households should be wary of carrying themselves. They borrow so I don’t have to; they lever themselves up so I can stay liquid; they hold the legacy asset while I keep the options.
Landlords of the world, I salute you for your service!
While most of my fellow Michiganders like to think of Detroit as the birthplace of the automobile, we have to remember, the Germans have us beat.
German inventor and entrepreneur, Carl Benz submitted his patent application on January 29, 1886, and as car buffs know, this represented the advent of the world’s first production automobile, the Motorwagen. The story goes that its maiden roadtrip was taken by Benz’s wife, Bertha and their two sons, Eugen and Richard, supposedly without letting the inventor know! That Model #3 topped out at two-horsepower and a blistering 10 miles per hour. Despite its humble specs, Bertha took it out on an arduous 121-mile route now named in her honor, running from Mannheim to Pforzheim and back.
The lore surrounding the Motorwagen’s origins have become settled auto history. Less clear, strangely, is the original sales price. Reported estimates put the price tag at anywhere from $150 (600 German marks) to $1,000. As one would imagine, even the lower price point would have been a hefty purchase for the average German at that time, with an estimated annual income per person between 400 to 500 marks. For some years, the purchase of an automobile would remain a luxury, reserved for the upper crust of society in both Europe and the US. That is, until the rise of the Ford Motor Company’s Model T in 1908.
While there were other innovators in the automotive industry, Henry Ford’s vision transformed the car from a luxury to a possibility to a necessity in the US. His stated aim was to:
“build a motor car for the great multitude…constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise…so low in price that no man making a good salary will be unable to own one – and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.”
All Michigan youth are infused with great pride for the state’s auto industry, steeped in its shared history and folklore. We were all told the story that Ford would famously sell the Model T in any color the customer wanted, “as long as it’s black.” During that age of simple efficiency, Ford produced over 260,000 of them in 1914, with many more to come. In the same year, the sticker price, according to the Model T aficionados, was $500 for the Roadster, and $750 for the Towncar. These prices would continue to decline (post-WWI inflation aside) to a 1925 low of $260 for the Roadster and $660 for the souped-up “Fordor” model.
To provide further perspective, the per capita personal income of Michigan residents (when first measured just four years later) was $792 per year. Approximately 650 hours of labor were traded to purchase the base Model T. How does that stack up against today’s labor cost for a base model vehicle?
For the sake of comparison, let’s take the Ford Maverick, which in many ways is a modern analog to the Model T. Both are capable of mild off-roading and are marketed to the “everyman,” with reasonable hauling capacity and sufficient comfort for an extended road trip. The Maverick’s MSRP of $29,840 for the base model (the SuperCrew XL) takes significantly more labor hours than its predecessor in the 1920s. With an estimated per capita personal income for 2025 of $63,620 (an average wage around $31.80 per hour), the Maverick would require nearly 940 hours to purchase. After financing the purchase (as most Americans do) the final price could be over $39,000, the equivalent of 1,235 labor hours.
Setting aside the simpler, utilitarian Maverick, it’s been widely reported that the average price of a new vehicle in the US has crept north of $50,300. For residents of the Great Lakes State, that equates to 1,581 labor hours. Financed under average terms ($10,000 down, seven percent interest for 60 months), the total cost is nearly $64,500, or 2,028 labor hours, the equivalent of an entire year’s work. Of course, in an economy that is relatively freer than many others, even the cheapest new car available in America right now, the Kia K4, would chew up 740 labor hours at a $23,535 sticker price. That’s still 90 hours more for the average worker for the absolute cheapest model than it was in Ford’s day. Midwestern work ethic aside, this is a tough row to hoe.
Quality improvements are important to consider — there’s no knowing what even an entry-level modern car would’ve sold for in 1925. But over the same period, competitive forces and global efficiencies have brought down the cost of many car components. The cost of financing is another reasonable objection to this comparison — the average annual budget burden isn’t so bad, even though the total paid is higher. Installment and credit purchase plans, which Henry Ford personally regarded as morally repugnant, were already available in the 1920s. In fact, the company resisted, but lost significant market share during the roaring ‘20s when competitors like General Motors deployed credit purchasing. As a result, in 1918 roughly half of the cars on US roads were Fords, but by 1930, 75 percent of US-owned vehicles were purchased on credit — from other manufacturers. Ford relented, opening its own financing arm.
These early outcomes portended the use of expansionary credit creation by commercial banks (under the permissive interventions of the Federal Reserve) have boosted demand beyond what it would otherwise be. Because of the availability and widespread use of debt to obtain new vehicles, overall demand, and inflation-adjusted prices have risen significantly. At the advent of debt-based car financing, they could be bought with fewer than one-third of the average worker’s time on the job. Over the twentieth century, and because of the ongoing growth of the credit market for car purchases, they’ve been subjected to a long, slow-burning price inflation. An increased share of US workers’ paychecks and hours are spent on both new and used vehicles.
The most recent data on the relationship between credit expansion for new vehicles and their prices show that increases in credit offered on new cars lept by 30 percent from 2016 through Q2 of 2020, while the CPI for new vehicles hadn’t budged. It wasn’t until Q2 of 2021 that prices began to rise, reaching a 20 percent increase vs 2016 prices in Q1 of 2023. What explains this outcome?
A brief statistical analysis of the data displayed below, shows that a 10 percent increase in the average total financed for cars since 2016 is associated with a 7 percent increase in prices one year later. If this story sounds familiar, it’s the same pattern that emerged in higher education markets. In the early 1990s, an expanded student loan program contributed to tuition price surges, and many of those loans are being paid off until this very day. Of course, credit expansion isn’t the only thing that drives prices higher in later stages, but it does appear to play a role alongside other factors.
While credit expansion impacts demand and drives prices higher with a delayed transmission, what else has contributed to the affordability problem? To be sure, the administrative state and its massive burdens bear significant responsibility for diminished affordability. Regulatory requirements, including safety, emissions, and fuel economy standards, are estimated to account for roughly one-eighth to one-fifth (about 12.5 percent to 20 percent) of the total price of a new vehicle. That’s not to mention mandated backup cams, kill switches, emissions converters, and others, all driving up the price of a minimum model.
There is some positive momentum in addressing vehicle affordability, but remains a hot topic in our current political and economic discourse. Recently, headway has been made in the deregulation of the auto industry. Revisions to Corporate Average Fuel Economy (CAFE) standards were touted by Secretary Duffy at the Detroit Auto Show. He praised the changes as a pathway to increased American automotive productivity and lower costs for buyers.
Whatever regulatory burdens are lifted, change won’t happen overnight. The auto industry must retool, re-engineer, and bring to market the next models. Further, a return to sound monetary policy and competition in money production, with less reckless lending practices are needed for an easing of the price pressure in the car and light truck market. Only coming years will tell whether car affordability will return to what it was under Henry Ford.
In Bill Cotter’s beloved children’s book series, Don’t Push the Button! a mischievous monster named Larry presents young readers with a tantalizing big red button, sternly warning them not to press it. Of course, the allure proves too strong for toddlers, who gleefully ignore the advice, unleashing a cascade of silly chaos – turning Larry into a polka-dotted elephant or summoning a horde of dancing bananas. The books’ humor lies in the predictable disobedience, but the underlying lesson is clear: some temptations are simply too powerful to resist.
This whimsical analogy holds a sobering truth for the world of economics. Far too many economists, in their policy recommendations, unwittingly craft similar “big red buttons” for policymakers. They design sophisticated interventions intended to fix specific market imperfections with the caveat that these tools should be used judiciously – only when necessary, and with precision. Yet, politicians, driven by electoral pressures, find these buttons irresistible in off-label uses and abuses. The result? Not playful pandemonium, but real-world economic distortions such as deficits, inflation, and moral hazard that often exacerbate the very problems the policy was prescribed to solve.
Economists often position themselves as impartial social scientists, perched in ivory towers far removed from the messy arena of politics. They deploy intricate models to pinpoint “optimal” policy response. For instance, during a recession, they might calculate the exact multiplier effect of a fiscal stimulus package, advocating for targeted government spending to boost aggregate demand. Or they may recommend an “optimal” tax rate or an exactly tailored tariff that can generate slight efficiency gains under rare conditions. In monetary policy, they endorse tools like quantitative easing or financial bailouts to stabilize banking systems. These recommendations stem from a genuine desire to mitigate harm and promote efficiency, rooted in the observation that markets aren’t perfect: externalities, information asymmetries, and behavioral biases can lead to suboptimal outcomes.
However, by blessing these expansive toolkits, economists inadvertently empower policymakers with levers that beg to be pulled in ways and contexts well beyond what the economists intended. Even if the advice comes with implicit disclaimers, such as “use sparingly,” “monitor side effects,” or “phase out promptly,” these are as effective as Larry’s warnings to a curious child. Policymakers operate in a high-stakes environment where incentives skew toward action over restraint. Re-election hinges on visible results: cutting ribbons on pork-barrel infrastructure projects funded by stimulus or touting low unemployment figures propped up by easy money. Long-term consequences, like mounting public debt, systemic financial risk, or bubbles, are conveniently deferred to future administrations.
This oversight isn’t just a minor flaw; it’s a fundamental methodological error. As Nobel laureate James Buchanan, a pioneer of public choice theory, demonstrated, economists cannot claim scientific neutrality while ignoring the incentives of those who wield power. Public choice theory applies economic reasoning to politics, revealing that policymakers are not benevolent philosopher-kings but rational actors pursuing their own interests – votes, campaign contributions, and bureaucratic expansion. Buchanan critiqued the “romantic” view of government prevalent in much of mainstream economics, where market participants are assumed to be self-serving and prone to failure, while public officials, and the voters who elect them, are idealized as altruistic guardians of the public good.
Consider two historical examples. In Lombard Street, Walter Bagehot famously laid out the rules for central bankers to follow during a financial panic, necessary to prevent policymakers from pressing the monetary button inappropriate and generating moral hazard or disequilibrium. But, even after a century of model calibration and data refinement, even academic economists when serving as monetary authorities could not resist pushing the button. Politic incentives made actions that economists held to be inadvisable prior to their policy roles irresistible after they assumed their roles. With bailouts of the commercial paper, bond, main street lending markets, not to mention state and municipal governments, the Fed’s response to Financial Crisis and COVID-19 have demonstrated how incentive-incompatible these policy recommendations are in practice.
Countercyclical stimulus recommended by John Maynard Keynes to combat a recession has suffered a similar fate. While Keynes questioned the legitimacy of government spending more than 25% of national income, he nevertheless gave policymakers an excuse to disregard what James Buchanan and Richard Wagner called the “old-time fiscal religion” of balanced budgets. Politicians hit the button and now budget deficits are the norm.
To break this cycle, economists must integrate an analysis of incentives into their core framework. This means adopting a “constitutional economics” approach, as Buchanan advocated – one that designs institutions and policies with built-in safeguards against abuse. For instance, instead of open-ended stimulus authority, recommend automatic stabilizers like unemployment insurance tied to verifiable economic triggers, with sunset clauses to prevent mission creep. In monetary policy, advocate for rules-based frameworks, such as NGDP targeting with strict accountability, over discretionary interventions that invite political meddling. The tradeoff is less discretion and precision, but it is necessary to create institutions robust to real-world deviations away from idealized policymakers.
Moreover, economists should explicitly acknowledge the principal-agent problem in government: oftentimes uniformed and biased voters (principals) struggle to monitor policymakers (agents), leading to agency capture by special interests. By assuming away these dynamics, traditional policy advice becomes not just naive but unscientific, as Buchanan noted. True rigor demands modeling both market and government failures symmetrically. This means questioning not only why markets falter but why government interventions might amplify those failures through perverse incentives.In the end, the lesson from Don’t Push the Button! is timeless: if you don’t want chaos, don’t create the button in the first place. Economists would do well to heed it, crafting advice that anticipates real-world incentives rather than ideal scenarios. By doing so, they can foster more resilient economies, where markets handle what they do best, and government intervenes only when truly essential – and with safeguards on the buttons to keep them from being mashed indiscriminately.
For decades, US dollar dominance rested on a simple but profound foundation. Predictable institutions made the dollar stable, on the belief — sometimes overstated — that the United States would not deliberately undermine its own currency. That belief is now visibly eroding.
The dollar has fallen to its weakest level in nearly four years, not because of a recession or crisis at home, but because investors are increasingly uneasy about the direction of American policy. Against a basket of other currencies, the US dollar is approaching the lows seen during the COVID pandemic as markets are beginning to price in something more corrosive than cyclical weakness. Political and institutional risk is emanating from Washington itself.
Bloomberg Dollar Index, 2020 – present
The immediate catalysts are not difficult to identify. A barrage of radical policy proposals — universal tariffs, explicit talk of engineering a weaker dollar to boost exports , revived speculation around a so-called Mar-a-Lago Accord, and even loose discussion of restructuring Treasury obligations — has injected deep uncertainty into currency markets. Add to that overt efforts to pressure the Federal Reserve toward lower interest rates, including attempts to shape the future composition of the FOMC, and the result is a growing conviction that the dollar is less insulated from political whim than at any point in recent history. Currency traders are responding accordingly. Options markets now show the most expensive hedges against dollar weakness since records began in 2011, while positioning across major currencies reflects a decisive shift away from the greenback.
What distinguishes this episode from earlier periods of dollar weakness is not simply the magnitude of the decline, but its character. Historically, the dollar tended to soften when global growth strengthened or when US monetary policy eased relative to its peers. Today, the US economy continues to perform reasonably well by conventional measures, yet the dollar is underperforming nearly every major peer currency. That disconnect is telling. Investors are no longer reacting solely to interest rate differentials or growth forecasts; they are embedding a political risk premium into the currency itself. Unpredictable Washington policymaking, threats against allies, widening fiscal deficits, and open speculation about currency coordination have transformed what was once a safe-haven asset into a policy-contingent one.
The renewed debate over coordinated foreign exchange intervention underscores that shift. Reports that US authorities have been checking dollar-yen levels, a step often associated with preparatory intervention, have revived memories of the 1985 Plaza Accord era, when the dollar was deliberately driven lower through multinational agreement. Whether or not any formal coordination ultimately emerges, the signal matters more than the mechanics. Markets interpret these gestures as tacit approval of dollar depreciation, particularly when paired with rhetoric favoring export competitiveness over currency stability. Once traders suspect policymakers are tolerant of a weaker currency, or actively seeking one, the long dollar trade becomes structurally fragile.
US Dollar Index versus gold price per ounce, Jan 2025 – present
This erosion of confidence is unfolding alongside a powerful and sustained rise in gold. Prices have surged above $5,000 an ounce after climbing roughly 85 percent over the past year. Silver, while more volatile and less purely monetary, has followed in its wake. These are not speculative curiosities; they are signals. Gold has long served as a barometer of trust in paper claims, especially when fiscal discipline and monetary independence come into question. That institutional investors, central banks, and sovereign wealth funds are among the largest buyers reinforces the point. This is not retail exuberance, but strategic reallocation.
The motivations behind this shift are straightforward. Large deficits, rising debt burdens, and persistent questions about the future independence of the Federal Reserve all raise doubts about the long-term purchasing power of dollar-denominated assets. When political actors treat interest rates, exchange rates, and even sovereign debt structure as tools to be manipulated for short-term advantage, investors naturally seek refuge in assets that lie outside the policy sphere altogether. Gold does not rely on promises, committees, or continuity of leadership. Its appeal rises precisely when those things appear uncertain.
This environment also helps explain the renewed seriousness of discussions around dedollarization. Contrary to some caricatures, dedollarization does not require the sudden collapse of the dollar or the emergence of a single rival currency. It is a gradual process of diversification: more trade invoiced in non-dollar currencies, more reserves held in gold or alternative assets, and more systematic hedging against dollar exposure. Recent strength in the euro, renewed interest in Asian currencies, and record highs in emerging market currency indices all point in this direction. When even long-standing US partners begin to question the durability of American policy commitments, diversification becomes a rational response rather than an ideological statement.
The rise in the dollar’s share of SWIFT transactions from roughly 38 percent five years ago to a little over 50 percent today does not, by itself, imply that the dollar is being adopted by more participants or that it has become structurally “stronger.” The SWIFT metric captures the share of transaction value denominated in a currency, not the number of users or the depth of confidence behind it, and that distinction is crucial. Over the past five years, higher US inflation has mechanically lifted nominal dollar transaction values even where real trade volumes have not increased, inflating the dollar’s apparent share without signaling greater monetary centrality.
At the same time, repeated episodes of geopolitical stress and financial volatility have driven derisking behavior, in which assets are liquidated, and capital is repatriated through dollar channels, temporarily boosting dollar settlement activity even as the longer-term appetite for dollar assets weakens. Legacy invoicing conventions in commodities, shipping, and trade finance also change slowly, meaning dollar usage can remain dominant or even rise in aggregate while marginal flows quietly diversify elsewhere. Taken together, the increase in SWIFT share over this period is better understood as a reflection of inflation, crisis-driven liquidity demand, and institutional inertia than as evidence of renewed confidence in the dollar’s long-run strength.
Real Trade-Weighted US Dollar and USD percent in SWIFT, Jan 2021 – present
Ironically, many of the policies intended to bolster US competitiveness may be accelerating this very shift. Tariffs invite retaliation and fragment trade relationships. Efforts to weaken the dollar to support exporters risk undermining confidence in US financial markets, which have long been among the country’s greatest competitive advantages. Pressure on the Federal Reserve blurs the line between monetary policy and politics, weakening the institutional credibility that supports low borrowing costs, and anchors inflation expectations.
Markets, however, are rarely sentimental. They respond to incentives, signals, and risks as they appear, not as policymakers wish them to be interpreted. The dollar’s slide, the surge in gold, and the growing urgency of dedollarization discussions are all manifestations of the same underlying judgment: that the rules governing US economic policy are becoming less stable, less predictable, and more politicized.
Until that perception changes, skepticism toward the dollar and demand for monetary hedges are unlikely to fade.
In January of 2026, just like every January since 1986, a basketball Brigadoon will rise on Duke’s campus. This village, locally known as “Krzyzewskiville,” exists for just a few short weeks every year, and then disappears. But while it lives, it is a beehive of activity, with surprisingly specific and aggressively enforced rules. K-Ville is not just a place, but a student-organized system of governance with its own rules, enforcement, and dispute resolution mechanisms. Elinor Ostrom herself couldn’t have come up with a better example of an emergent institution to create and enforce property rights to a common pool resource.
K-Ville was created as an orderly way to ration access to “free” student basketball tickets to “The UNC Game.” This Manichean struggle of “good” (Duke) versus the “living embodiment of evil on earth” (UNC) is the hottest ticket on campus most years. (The game is always scheduled for late February or early March, and so the January tradition works backward from the game date.) The StubHub price of the non-student tickets is a good measure of the value of what is being given away: buying tickets costs at least $2,000, and can cost $5,000 each or more, depending on the teams’ records and the quality of the seats.
Of course, the student seats are directly courtside, so what economists call the “shadow price” — the cost of the ticket if it could be sold — is at least several thousand dollars. Yet Duke gives these tickets to students on a first-come, first-served basis, for free. Why?
Duke (though nominally a “non-profit”) makes every effort to maximize revenue. Students are required to buy the meal plan, and to pay for a dorm room, at least for the first three years. So why would Duke turn generous and pass up well over two million dollars in revenue — 1,200 student seats in the prime “Student Section” (Section 17), at $2,000 each, conservatively — just to give the seats away?
The answer is interesting. But to get to the answer, we’ll need to review some history.
Origins
Duke basketball tickets are free to enrolled students with current, valid IDs who line up. But the number of seats is limited, so the line can get long. In 1986, a Duke senior and fourteen friends extended the usual “line up overnight” ritual by showing up two nights in advance.
According to The Duke Chronicle:
‘It was common for people to line up hours before a game,’ said Kimberly Reed, Trinity ’86, who was one of the first tenters. ‘We were playing quarters one night at Mirecourt and joking about how early we were going to line up for the ’86 [University of North Carolina at Chapel Hill] game. Finally, someone said, ‘Why don’t we just pitch a tent?’ After a few rounds of quarters, it began to sound like a good idea.’
Reed and about 15 of her friends, many of whom were members of the Air Force ROTC, rented a tent from U-Haul and set up camp in front of Cameron in March 1986.
‘We were going to ask permission…, but then we just decided to ask forgiveness later,’ she said. The adventurous fans set up four tents in front of Cameron on Thursday for the Saturday game against UNC, and word began to spread around campus. By Friday, other tents began to pop up.
‘Someone took a cardboard box and wrote Krzyzewskiville on it,’ Reed said. And so the tent city was named.
The timing was no accident: Between 1986 and 1994, Duke made seven Final Fours in nine years. More students wanted tickets than there were tickets available, by quite a bit, at least at a zero price. Of course, Duke could have charged for tickets, or used a lottery, but queuing was already the custom, and it stuck. But after 1986 the swelling demand to see the UNC game meant that kids had to line up for days, and (before long) weeks.
January in North Carolina’s Piedmont is not polar, but daytime highs average in the 40°s F, nighttime lows can dip well below freezing, and it rains a lot. Still, Cameron Indoor Stadium — roughly 9,300 seats, with about 2,500 reserved for students overall (with most of those in the more uncool, sedate Sections 18, and 19 not the most desirable Section 17) — was small enough to create a predictable, iterated problem that had to be solved every year: far more students wanted seats in Section 17 than were available. Early attempts at informal queuing were chaotic. Students camped without rules, disputes broke out about order, and many felt that the system rewarded only those who were willing to engage in opportunism or outright disruption.
In response, students themselves worked out, through trial and error each year, a more orderly process. They still lined up, but they formalized their place in line and rules of minimum occupancy, all overseen by “Line Monitors.” A tent by itself doesn’t hold your place in line; “tent checks” are performed randomly by Line Monitors. You get one “miss,” but if a student misses a Tent Check twice, they are out. Alternatively, if a tent as a whole has too few occupants present then that tent is removed and its fans disqualified. Students can also be disqualified for “excessive” drinking or obvious drunkenness (passing out, vomiting), but this rule has been enforced selectively.
By the 1990s, the system included tiers of participation — black tenting, blue tenting, and white tenting — each corresponding to different levels of commitment and different rewards in line order. It’s worth looking at the details.
Inside the Queuing System Itself
At its heart, K-Ville is a queuing system built around time and commitment rather than money. Groups of students (twelve per tent, at the start) register to camp out in K-Ville, with place in line determined by performance on a written test, as described below. Once tent order is determined, each tent unit must maintain a certain number of occupants, twenty-four hours a day. Line monitors, drawn from the student body in a “hyper-competitive” process designed by students themselves, enforce compliance by conducting random checks, sometimes in the middle of the night. DSG has legislated an explicit constitution for K-Ville, a set of rules that make the process (mostly) clear.
- Black tenting, the most rigorous, begins in early January and requires nearly continuous presence until the day before the game.
- Blue tenting begins later, with somewhat less stringent occupancy requirements.
- White tenting, beginning still later, requires the least commitment but comes with correspondingly lower priority in line.
On game day, students are admitted in the order and then color of their tents, until the available seats are exhausted. While all the seats in the student section are “good seats,” only the Black Tent denizens will be able to get in the front rows at the center of the court, which are the most desirable seats. This creates a clear correspondence between cost and reward: the more time students are willing to spend in line, the better their seats, fostering a meritocracy of endurance. Again, tickets could be auctioned, but the goal is not to select based on wealth, but on a fierce zealotry for the team. By using time as the currency rather than money, Duke students reinforce the principle that participation in fandom requires actual fanaticism.
The Problem of Fairness
Fairness is central to the design of K-Ville, and the rules are published. Line Monitors ensure compliance, though of course there are some complaints of excessive zeal in enforcement (few Duke students use “fascist” as a political description, but it is a common description of Line Monitors). The tier system allows for self-selection: those who are most dedicated (or most willing to endure discomfort) can camp longest, while others can choose a lighter commitment and still secure some chance of entry. The result is a system perceived as legitimate because it balances effort, transparency, and equal opportunity.
What makes K-Ville interesting is its emergent, student-governed nature: a community facing a scarcity problem managed to develop rules, enforcement mechanisms, and sanctions, all without any plan or formal intention. But there is one formal, designed or “laid on” rule: Place in line among Black Tent residents is determined by an examination. This innovation is quite interesting for two reasons.
First, queuing is economically inefficient. Students “pay” for seats with time and discomfort, which could otherwise be devoted to study, work, or leisure. An auction would be efficient, but such a system privileges the ability to pay over devotion. K-Ville’s governors wanted to limit the inefficiency of an open-ended “rent-seeking” contest, while preserving queuing’s signal about depth of fan loyalty.
Second, many organizations have independently stumbled across the value of initiation and elite membership rights. Creating difficulty of acquisition, even if that difficulty is artificial, can enhance the value of the thing acquired, especially if possession of that thing is highly public.
In light of these two influences, DSG has formally limited the amount of time that someone can wait in line, reducing the inefficiency implied by the first principle. And it has created an initiation right that sorts applicants by informed fanaticism, and by depth of knowledge. They use a lengthy and challenging examination: the Duke Basketball “Black Tenting Entry Test”.
The test differs each year, but it generically tests for whether the student/applicants can write down (from memory!) the names, position, and hometown of the Duke players. They also have to name the opponents played in all the Duke games so far that season, the scores of those games, and Duke’s overall won-lost record. Then the test moves to aggressively specific and truly “trivial” questions. Just one example, from the actual 2023 test:
Which team did Duke play against in a “secret scrimmage” before the season began? In what city did they play? What was the final score? (2 pts each; 6 pts total).
The answers (I had to look it up) were University of Houston, in Houston, and Duke lost 61-50.
These questions are not circulated in advance; they are not multiple choice, and there is no partial credit. The cutoff in recent years has been a score of 75 out of 100 possible points, meaning that at least two thirds of the applicants fail, and are not allowed a Black Tent. There are only 70 Black Tents allowed, and each tent has 12 occupants, though some of those may be disqualified even if the tent itself makes it through to the end. K-Ville starts with 100 tents total, and 12 students in each tent.
That’s 1,200 people who start the “tenting” experience each year, though by the end 300 or more of those folks may have been disqualified or moved to “Flex” or “Waitlist” tents with no guarantee of being seated.
K-Ville as an Emergent Order
F.A. Hayek would have called K-Ville an “emergent order.” Rules are not imposed from the outside; they evolve as individuals interact over time. Participants in a process learn from past successes and failures, and generate working rules that are known, followed, and enforced by participants themselves.
As Elinor Ostrom pointed out, “Working rules are the set of rules to which participants would make reference if asked to explain and justify their actions.” That’s interesting, because it means that the rules evolve from practice and trial and error, but then are written down after newcomers ask for an explanation.
The problem facing Duke students had three aspects: First, more people wanted tickets (after 1986, at least) than could get seats. Queuing for multiple days was chaotic, and there were incidents that led to frustration.
Second, the tribal experience of showing commitment by face-painting, elaborate coordinated chants and signs, and other rituals was collectively more enjoyable if all the participants are “real fans.” This “public good” aspect was intuitively understood by the students, even those who could never have defined a public good in technical economic terms. Using price or auctions would not have resulted in the same fan sorting.
Third, the first two considerations tended to lead to very inefficient “rent-seeking” contests, where it would be necessary to wait in line for more and more time, making the chances of unpleasantness, line-jumping, and perhaps even violence even greater. So some lottery or contest was necessary to limit the dead-weight losses of queueing (since auctions were off the table).
The solution the students have devised involves explicit and publicly recognized, an enforceable property right to “place in line,” based on tent number. But the extent of rent-seeking to obtain initial tent number is limited by having an “entry test,” an objective measure that is at least correlated with knowledge of the history and folkways of Duke basketball.
There are other benefits, as well. “Tenting” is a rite of passage for Duke students; many do it at least once, just for the experience. There is folk wisdom (though I could find no definitive source) that students who “tent” at least once are more likely later to attend reunions for alumni, and to make large donations to the Duke Endowment or other campus causes. As a whole, then, it is clear why Duke “gives students tickets for free” rather than by auction, even though an auction would generate immediate revenue. The shared identity of “Cameron Crazies”, both while enrolled and later, is an important part of a Duke student’s identity, and their commitment as alumni.
Kville has risen again. Black tenting started January 18; blue tenting starts January 28. The tents are full, and anticipation is growing.
The annual gathering of global elites in Davos, Switzerland, is well underway. Past meetings have not been without their share of controversy and dissension. But this year’s forum may devolve into chaos. Last week, at a dinner of many current and former heads of state as well as top CEOs, Secretary of Commerce Howard Lutnick delivered scathing criticism of European economic and social policy. His remarks were so impolitic that high-profile figures, such as European Central Bank president Christine Laguarde, walked out in protest and the host of the dinner, none other than Larry Fink of Blackrock, ended the dinner before dessert.
Then Trump spoke on Wednesday. And while he assured the Europeans that he would not take Greenland by force, he continued to insist that the US would acquire it. The rest of his speech focused on tariffs and his various “economic achievements.” On tariffs, at least, Trump has been remarkably consistent. He loves them. They are the perfect policy: negotiating tool, revenue generator, a bone to toss to workers and domestic firms, a lever of power, and a leveler of economic fairness.
Lutnick and Trump are not your ordinary Davos attendees. They refuse to play nice or kowtow to globalist sentiment. They are not on the net-zero green energy bandwagon. They believe in national power. They emphasize building and growing rather than regulating. In short, they are anathema to the Davos orthodoxy. So why are they there?
Perhaps they hope to extend US influence. Afterall, why destroy Davos when you can take it over? When you think about it, Lutnick and Trump are part of the global elite – wealthy businessmen looking to cut a deal and line their pockets. This is their crowd and their kind of machine. If they can turn the event to their own purposes, they will certainly try.
A more likely story, though, is that they came to Davos intending to cut the Europeans down to size. They certainly don’t respect the Europeans. And not entirely without reason. What should they respect? Their woke ideology? Their oppressive regulatory regime? Their underwhelming economic growth? Their military prowess? In the President and the Secretary’s eyes, the Europeans warrant little praise and much blame.
Then again, the European elite have brought this upon themselves. They began the Environmental, Social, Governance (ESG) crusade several decades ago. They have aspired, often successfully, to be the puppet masters of the global economy. They have foisted costly, sometimes disastrous, net-zero and clean energy goals. They have also pushed identity politics on the rest of the world through Diversity, Equity, and Inclusion (DEI) initiatives and requirements.
People in western democracies have become restless under the administrative boot of these Davos elites. They are unhappy about uncontrolled immigration and the swift demographic changes in their cities. They don’t want to be censored by politically correct regulators. They don’t want to pay higher prices for food, energy, and transportation. They live in a maze of red tape; and every year is worse than the one before.
As a result, right-wing political parties across Europe have been surging. In Italy, Giorgia Meloni has been the right-of-center Prime Minister for over three years. In France, the right-of-center National Rally party won the largest share of the popular vote in 2024. In Germany, the far-right AfD party won just over 20 percent of the national vote.
And across the Atlantic, this reactionary populism re-elected Trump and his team. The Davos chickens have returned home to roost. Despite their shortcomings, Trump and Lutnick are delivering the discontents’ message loud and clear to the global elite: “We don’t like you. We don’t want you. We don’t need you. As a matter of fact, just leave us alone. And we are not asking.”
Based on the reaction of the past few days, we can assume that the message has been received. But now what? Will the Davos elite simply sail (or fly on their private jets) into the sunset? It’s safe to say that they won’t give up that easily. There is too much at stake – billions and billions of dollars.
Walking away means admitting that their multi-decade project to reshape the global economy has failed. This would mean that hundreds of billions of dollars were wasted on solar panels and wind turbines. It would mean that hundreds of millions of people have been made to pay higher electricity and gas prices, and to accept lower rates of economic growth in pursuit of an elitist pipe dream. As the commander in A Few Good Men might say to them, “You can’t handle the truth!”
But besides the pain of acknowledging failure, there is a far more prosaic reason why the Davos elites will not abandon their global puppet strings. They benefit too much from the current global elite agenda. They have built multi-billion-dollar companies around carbon credits and the net-zero agenda. They lead an extensive NGO network whose existence depends on climate alarmism and social engineering. And they have built careers and political coalitions around the ideas and priorities Trump and Lutnick recently blasted.
It’s especially fitting that Larry Fink – the interim co-chair of WEF and one of the chief architects of the global elitist agenda – should see things spiral into chaos at the private dinner he hosted. As perhaps the most prominent “Davos Man,” this message was for him. Although BlackRock has improved in recent years (under extreme pressure from anti-ESG organizations), it was one of the key architects of spreading ESG and DEI throughout corporate America by voting the proxies of the shares it holds for investors.
Davos may not quite be finished, but it’s hard to imagine it ever regaining the reputation or status it once had. Nor can it go back to business as usual after such a public and vocal rebuke. The net-zero ESG agenda has been weighed and found wanting. Decentralized competitive capitalism remains the best avenue to improving human flourishing.
But were the global elites to accept that, Davos would truly be finished.