Wars test nations. They test military readiness, alliance cohesion, and political resolve. But they also test something less visible and just as important: fiscal strength.
Just days before the United States entered war with Iran, President Trump was arguing for a $500 billion defense spending increase. The Washington Post reported that administration officials were struggling to justify such a massive military budget blowout in this year’s executive budget proposal, while warning about what it would mean for an already crisis-level federal deficit.
Although the absurdity of President Trump’s arbitrary defense budget request hasn’t changed, the terms of the debate have. Whether justified or not, war places immediate pressure on defense budgets. The real question is whether the United States has put itself in a position to afford it.
Washington politicians have spent irresponsibly in times of peace and war, during economic expansion and contraction, through pandemics — you name it.
Debt held by the public is already near historic highs as a share of the economy and is surpassing its World War II record high in fewer than four years. According to the Congressional Budget Office (CBO), the federal government is projected to continue running structural deficits indefinitely, with debt rising to fiscally dangerous levels over the next few decades.
This is not the result of war mobilization. It is not the result of an economic collapse. It is the consequence of congressional cowardice paired with fiscal indiscipline.
This deterioration has not been driven primarily by defense spending or even by temporary war outlays. Over the past 35 years, Congress has enacted roughly $15 trillion in emergency spending and associated interest costs, according to research by Cato Institute budget analyst Dominik Lett — responding to wars, recessions, natural disasters, and the pandemic.
But what distinguishes the current moment is not the existence of an emergency spending spike. It is the failure to reverse course afterward. Since the COVID-19 pandemic, crisis-level deficits have become routine, not emergency measures.
Throughout American history, large temporary increases in federal spending — during World War II, the Cold War, the Great Recession, and the COVID-19 pandemic — were possible because bond markets had confidence in the long-term stability of US public finances. Investors were willing to absorb additional Treasury issuance because the underlying fiscal foundation was perceived as sound.
But unlike after World War II, the COVID-19 emergency spending spike was not followed by congressional resolve to reduce deficits. Instead, deficits have stayed elevated as entitlement spending continues climbing on autopilot, with spending on the elderly projected to consume half of the entire federal budget in just a few years. To add insult to injury, Congress further increased Social Security and Medicare benefits to curry favor with voters and cut taxes without cutting spending commensurately.
The United States government is borrowing at crisis levels even in normal times and testing bondholders’ confidence in US fiscal management.
National security leaders across eight Republican and Democratic administrations warned a decade ago: “Long-term debt is the single greatest threat to our national security.”
Excessive debt slows economic growth, reduces income levels, raises interest rates, and constrains funding for core government functions, like national defense.
Ironically, fiscally irresponsible emergency spending in the name of national security can make the country less safe. A fiscal crisis would erode America’s military and economic strength simultaneously. High debt can also magnify the severity of future crises by limiting the government’s capacity to respond.
This is the paradox now confronting Washington. The case for spending more on defense will only grow louder now that the country is at war. But financing a larger military by borrowing yet more, when interest costs on the existing debt already exceed what the nation spends on defense, becomes fiscally untenable.
When politicians spend every year as if we are confronted with an emergency and treat every special interest group’s request as a priority, they diminish the nation’s capacity to respond when a real emergency arrives.
Rising interest costs are consuming a growing share of federal revenues, with the CBO projecting that major entitlement programs, Medicare, Medicaid, Social Security, and interest on the debt will consume all tax revenues by the end of this decade. And this was before the United States decided to get involved in an active battle in the Middle East.
With US debt approaching the size of the economy, even modest increases in interest rates significantly raise borrowing costs. Every dollar devoted to servicing past debt is a dollar unavailable for current government functions, including defense. When bond markets begin to question America’s fiscal trajectory, borrowing costs could rise even higher, and do so quickly.
America’s defense should not depend on the assumption that investors will always finance unlimited deficits at favorable rates. Fiscal security is a prerequisite for military security.
Running sustainable budgets in normal years preserves borrowing capacity for extraordinary circumstances. It ensures that when genuine emergencies arise, the government can respond decisively without risking financial instability.
If Congress decides that military needs require higher spending, legislators should identify offsets elsewhere in the budget. Emergency funding should not become an excuse for permanent fiscal expansion. Congress is already discussing a possible emergency supplemental to finance the war against Iran, while some have suggested doubling down on reconciliation to boost military expenditures without requiring Democrats to support such a package.
If Congress continues current fiscal practices — running multi-trillion-dollar deficits while increasing spending and cutting taxes — the country may soon discover that there is a limit to how much debt US bondholders will tolerate before inflation expectations adjust. Higher interest rates soon follow, potentially triggering a vicious debt doom loop, where higher debt drives up interest rates, which then drives up debt, and so forth. An accommodating Fed would only add to those inflation expectations, should monetary policy surrender to the Treasury’s immediate financing needs. This is not a theoretical concern. It is a strategic vulnerability.
In times of peace, balance sheets matter. In times of war, they matter even more.
The industrial age reshaped production and reorganized work, elevating coordination to a central concern for firms. In response, early approaches to management emphasized structure and control, with performance judged primarily by output levels. Productivity was treated as a technical problem — something to be engineered through better systems, clearer procedures, and tighter oversight — while the role of people as active contributors to performance was largely overlooked.
Business owners, influenced by scientific management in the early twentieth century, assumed workers were primarily motivated by pay and the need for efficiency. Productivity was therefore framed as an engineering problem. If outputs were low, the solution lay in better procedures, better incentives, clearer rules, or tighter supervision. Such a perspective failed to recognize the power of human relations and the role of individual aspirations for sustaining productivity and securing business success. Organizations are not merely processes layered on top of processes; they are social spaces populated by people who interpret, respond, resist, and cooperate in deeply interpersonal ways. And fortunately, the prevailing viewpoints of task-oriented managers were challenged when the Hawthorne Studies, conducted at Western Electric’s Hawthorne Works, emerged in the 1920s and 1930s.
The Hawthorne Studies, closely associated with Elton Mayo, were initially designed to examine how physical conditions — such as lighting and break schedules — affected worker productivity. What researchers found, however, was surprising: productivity often increased regardless of whether conditions improved or worsened.
The explanation was not mechanical. It was social. Workers responded to being observed, consulted, and treated as participants in a process rather than as cogs in a machine. They cared about group norms and social approval, and they valued recognition and the feeling that their work mattered. The insight derived from these studies was simple yet profound: people want to belong and to contribute to something of value.
Task alignment and structure matter, but so too do incentives and relationships. Business performance is shaped not only by strategy, but also by human relations. This insight connects with a broader tradition in economic thought that emphasizes human action rather than abstract systems. Ludwig von Mises famously argued that economics must begin with praxeology — the study of purposeful human action. For Mises, markets, firms, and institutions do not act; only individuals do. Organizations are not entities with minds of their own, but frameworks within which individuals pursue goals, interpret constraints, and adjust to uncertainty.
This perspective is particularly salient for business owners and policymakers amid a steady stream of headlines highlighting large-scale disruptions happening across the globe. Globalization has produced a complex web of interdependent supply chains, integrated capital flows, dynamic ecosystems, and interfering government systems that continuously shape or shift business behavior. Even small domestic firms that aspire to profit from simply serving the local populations around them can be impacted by forces that extend far beyond their control or community. To be sure, macro-level disruptions can easily ripple down to the micro level.
A poor coffee harvest abroad or changes in trade policy that alter import costs can make or break the ability of a café owner to stock up on inventory. A startup founder hoping to bring in top-tier talent may be hampered by the rising costs or restrictions of H-1B visas. A grad student studying in the US and hoping to put their education to use, may discover it is best to leverage their knowledge and know-how elsewhere. Stipulations for regulatory compliance, too burdensome to pursue, may make a budding entrepreneur think twice about establishing a small business venture. And shifting political priorities and subsidy regimes seem to now pose a greater challenge for today’s farmers as compared to trying to predict the weather.
Policy shifts, supply-chain shocks, and institutional barriers are often discussed in aggregate terms, yet they are ultimately borne by specific people making difficult adjustments in real time. Treating such disruptions as mere data points risks overlooking the human cost involved — and it also shields those who are involved in designing, managing, and influencing these systems. The division of labor and an ever evolving marketplace will always mean that systems matter, but we must remember that people empower or impede the efficacy of systems.
Ayn Rand rightly insisted that society does not exist apart from individuals. There is no collective mind that thinks or chooses. Progress begins with the individual’s capacity to reason, create, and act with purpose. And since individual action rarely occurs in a vacuum, individuals are both independent in judgment and deeply interdependent in practice.
The enduring value of the Hawthorne Studies is that it reminds us that even within complex global systems, the social nature of human beings remains central. Any serious understanding of markets, organizations, or societies must begin there — with purposeful individuals embedded in social relationships. Social order is not centrally designed but emerges spontaneously as individuals respond to dispersed knowledge, incentives, and expectations. Accounts of markets and organizations must therefore examine not only how systems function, but how their breakdowns reshape the aspirations and opportunities — not merely the output — of individuals.
What is President Javier Milei, really: a savior, or a bankruptcy trustee? An anarchist, a populist, or a classical-liberal reformer? Is he dismantling the casta — the entrenched political establishment — or is the casta undermining his reform agenda? In the end, will freedom prevail, or will the corrupt system reassert itself and absorb the would-be reformer?
I recently formed my own impressions in Buenos Aires. What I saw is a fascinating country that, after decades of decline, is regaining its footing, pushing back widespread poverty, and rediscovering confidence. Some key indicators have already attracted international attention: sharply falling inflation, a visibly declining poverty rate, unemployment that is easing despite massive and long-overdue layoffs in the public sector, the first balanced federal budget in years, and a recovery in economic growth.
Other developments receive less attention. On the newly liberalized housing market, the supply of apartments has increased almost overnight. Mobile coverage is expanding rapidly thanks to Starlink. Following deregulation of air transport, investment in aircraft is picking up again. And even without subsidized credit rates, Argentines are once again purchasing durable consumer goods — washing machines rather than just a block of cheese here or a drinking glass there. Until recently, even such small items were often bought on installment plans, a symptom of distorted incentives under chronic inflation and massive subsidies.
Market activity is also increasing as import barriers and protective tariffs are dismantled. Yet branded foreign goods remain unaffordable for many Argentines. In an upscale shopping mall, a simple Samsung USB adapter can cost around $75, while an equivalent product from a small neighborhood shop sells for about one dollar.
Some reforms that Milei managed to push through quickly — despite initially weak congressional backing — are only now beginning to take effect. Through a more open trade stance toward the United States and the European Union, a pragmatic approach toward China, and a new investment framework (the “RIGI regime”), Argentina is opening itself to foreign direct investment in energy, natural resources, and data-intensive industries. Greater investment, planning, and legal certainty for large-scale projects are beginning to bear fruit.
Equally striking is the work of Federico Sturzenegger. The classical liberal economist and minister for deregulation and state transformation, together with his team, is dismantling or simplifying regulations, price controls, taxes, and administrative burdens at a remarkable pace. Still, supply chains must first adjust to new incentives, and investors need time to rebuild trust in Argentina’s institutional foundations.
Whether this succeeds will matter far more for Argentina’s future than debates about Milei’s personal eccentricities or his use of provocative political symbolism. Those elements appear to matter little to most Argentines. In conversations with Uber drivers, economics students, and service workers, I encounter predominantly positive — often enthusiastic — assessments of the president; only a determined minority remains clearly opposed.
Classical-liberal economists in Buenos Aires tend to be more cautious. They are skeptical of any cult of personality and acutely aware of the scale of the task facing Milei — and any future government. The catastrophic situation he inherited was the result of a state that had grown bloated and overstretched over decades, dominated by organized interests — the casta — and embedded in a political culture where personal connections and forceful rhetoric mattered more than expertise and adherence to general rules.
Previous presidents also promised to confront corruption and clientelism — most notably Carlos Menem in the 1990s, often described as a “neoliberal populist.” His mixed legacy reflects the fact that he was primarily a populist and Peronist who employed (neo-)liberal instruments selectively. With Milei, the order appears reversed. He is, first and foremost and by conviction, a libertarian who pragmatically uses populist rhetoric and style to advance a reform agenda.
This increases the likelihood that Milei’s reforms could have lasting effects. Yet the reform path remains narrow, risky, and long before reaching the institutional core. Above that core lies a dense thicket of cronyism and mismanagement. Provinces such as Tierra del Fuego cling to special privileges, while the federal system creates weak incentives for provinces to govern efficiently and spend public funds responsibly. Well-organized labor unions can be expected to resist long-overdue reforms. The judiciary remains only formally independent. Despite improvements, the tax system still discourages investment. Rigid pre-reform labor regulations leave roughly four in ten workers outside formal employment. And the casta — which successfully advanced its interests under successive governments — has not simply disappeared under Milei. On the contrary, Milei relies on experienced political operators, many of whom already served under former President Macri and are now tightly coordinated and disciplined by his sister, Karina Milei.
Most Argentines, however, appear willing to overlook questionable connections as well as Milei’s personal idiosyncrasies. Nearly everyone who knows him personally — even critics who disagree with him substantively — agrees that Milei is genuinely committed to libertarian reform and to improving the country’s prospects. There is still much to do in this regard. Major reforms of social security, labor markets, the monetary regime, taxation, the rule of law, and federal relations remain pending. Without them, recent successes will remain fragile.
The chances of success vary across policy areas. For a radical monetary shift such as dollarization, Milei likely still lacks sufficient political and financial capital. Political capital is also required for reforms of the justice system, where the path toward a truly independent judiciary appears even steeper than the path toward monetary stability. Yet judicial independence is essential for further reforms — such as credible fiscal rules that could anchor balanced budgets over time or a restructuring of Argentina’s federal system.
The most concrete hopes rest on the recently adopted labor-market reform and a more investment-friendly tax code, areas where the government can capitalize on having more seats after mid-term elections. The new legislature convened in December with an ambitious reform agenda framed by Milei in an optimistic “Make Argentina Great Again” message.
For this agenda to succeed durably, however, it will take more than Milei alone. A broad share of Argentines must support the transformation — and many appear ready to do so. After repeated crises, Argentines possess remarkable economic literacy. Especially younger Argentines understand inflation, financial markets, and the relative stability of different assets all too well — knowledge that has long been essential for everyday survival.
Less developed, however, is a shared understanding of how robust rules and institutional checks and balances can constrain political discretion and limit abuses of power. Too often in the past, rules were ignored and safeguards circumvented.
Argentina’s current reform experiment takes this reality into account. It does not follow classical-liberal textbook advice, but rather reflects the political constraints of a deeply cronyist state — constraints that Milei seeks to navigate in order to pursue a libertarian reform agenda. In this sense, he attempts to use the logic of the existing system against itself. It is a genuine experiment, one whose results are likely to matter well beyond Argentina.
Every time conflict erupts in the Middle East and oil prices jump, the same anxiety follows: will central banks respond with tighter money?
It’s an understandable fear. Households dislike inflation, and policymakers are tasked with maintaining price stability. But when inflation is driven by geopolitical crises — such as war in Iran or disruptions to global shipping lanes — the source is not excessive demand. It is a supply shock. And monetary policy is impotent before such disruptions.
When oil supply tightens or transport costs surge, the economy becomes poorer. Energy becomes more expensive to extract and move. No interest rate decision in Washington, Frankfurt, or London can produce more oil from the Persian Gulf or reopen a blocked trade route.
In these moments, central banks face a difficult but crucial choice. They can tighten monetary policy in an attempt to suppress inflation by weakening demand, slowing hiring, curbing investment, and cooling total dollar spending. Or they can allow a temporary period of elevated prices to absorb part of the shock while keeping the broader economy intact.
The instinct to “do something” about supply-side price hikes is powerful. But tightening monetary conditions to combat a supply shock risks compounding the damage. Slower money growth and higher rate targets do not solve the underlying scarcity. They merely redistribute the burden — often toward workers.
If energy prices spike because of war, households will pay more at the pump and businesses will face higher costs. That pain is unavoidable. But if central banks respond aggressively by tightening policy, they risk turning an external supply shock into a domestic demand slump. Unemployment rises, investment stalls, and wage growth falters. For the vast majority of workers, having a job amidst 4 percent price growth is preferable to unemployment amidst 2 percent price growth.
There is a long tradition in macroeconomics of distinguishing between demand-driven and supply-driven inflation. When inflation stems from overheated demand (too much spending chasing too few goods), central banks are right to step in. Tightening policy can ease the frenzy without causing long-term economic damage.
But war-induced oil shocks are different. They make the economy less productive. Attempting to fully offset that reality with tighter monetary policy can produce a worse outcome: lower output and higher unemployment layered on top of higher prices.
The least harmful strategy in such circumstances is often to “look through” the initial inflation impulse — provided inflation expectations remain anchored. That means tolerating temporarily higher headline inflation while emphasizing the external and temporary nature of the shock.
Communication is essential. Central bankers should say plainly that surging prices are the result of geopolitical events beyond their control. The Fed cannot drill for oil or end wars. What it can do is ensure that the financial system remains stable and that panic does not spill over into credit markets.
That role — safeguarding the demand side — is where monetary authorities are most effective during geopolitical crises. They can provide liquidity to prevent financial stress from amplifying the shock, if financial stress indicators suggest it is necessary. They can also reassure markets that banks and capital markets will function smoothly by guaranteeing adequate liquidity. And they can prevent a broader collapse in investment and hiring with standard open-market purchases.
In other words, central banks should focus on preventing second-order effects on the demand side. The danger is not the first jump in energy prices; it is the risk that frightened investors, tightening credit conditions, or collapsing confidence trigger a self-reinforcing downturn.
Critics will argue that tolerating higher inflation, even temporarily, risks unanchoring expectations. That risk is real. But credibility is not built by mechanically reacting to every price increase. It is built by responding appropriately to the source of inflation. If the public understands that central bankers are distinguishing between supply shocks and demand shocks, credibility can be preserved.
The worst outcome would be a policy mistake born of impatience: tightening aggressively in response to war-driven inflation, deepening the economic slowdown, and discovering months later that the original price pressures were fading on their own.
Wars make societies poorer. There’s no getting around the fact that destruction and turmoil are bad for business. Monetary policy will its best work if it avoids making the adjustment more costly than necessary. When public events exceed the scope of monetary policy, restraint is the least bad option.
Daily headlines formulate new variations on the theme: artificial intelligence is too powerful to be left unregulated. Lawmakers, guardedly seconded by big tech CEOs, warn of catastrophe. Agencies draft frameworks. Editorial boards demand ethical guardrails. We are told that only government can ensure that AI is “safe,” “aligned,” and deployed responsibly. Yet, in the same week, the Pentagon reportedly moved to blacklist one of the country’s most prominent AI firms for refusing to remove certain ethical constraints from its flagship system. The contradiction is not subtle. It is fundamental.
Anthropic, the San Francisco–based AI company founded by Dario and Daniela Amodei, has built its reputation on what it calls “AI safety” and “constitutional AI.” Its Claude line of large language models competes at the frontier of capability with systems from OpenAI and Google DeepMind. But Anthropic has distinguished itself by emphasizing that its models are not merely powerful; their architecture incorporates embedded guardrails. The company has publicly stated that it has declined to grant the Department of Defense unrestricted use of its models for certain applications, specifically mass domestic surveillance and fully autonomous weapons. In response, Secretary of Defense Pete Hegseth declared the company a “supply chain risk” and signaled that it could be excluded from defense procurement ecosystems unless it complied with the government’s terms.
The Pentagon’s position, as reported, is that it must have access to AI tools for “any lawful use.” From the government’s perspective, the stakes are obvious. AI is now integral to logistics, intelligence analysis, battlefield planning… and potentially autonomous systems. The United States faces strategic competition with China and other adversaries investing heavily in military AI. Should a private vendor’s internal ethical policies veto what defense officials consider lawful and necessary uses of a technology purchased with public funds?
Legal scholars in this field like Tess Bridgeman immediately pointed out contradictions, dubious legal assumptions, and barriers to implementing the position Hegseth seemed to take — and even questioned his intention to carry out his threat.
Alongside domestic surveillance, major powers are also racing to integrate AI into military systems, including autonomous weapons and autonomous operational capabilities. China, for example, has been reported to develop AI-enhanced unmanned vehicles and AI-powered “swarm” technologies capable of cooperative action among large numbers of drones or robotic units without continuous human control.⁷ That trend reflects a broader global pattern in which artificial intelligence is moving out of analytics and into direct force application, raising deep questions about how ethical limits are set and enforced — questions that are precisely the ones at stake in the dispute over who controls AI ethics in the first place.
That argument has force. The Constitution charges the federal government with providing for the common defense. National defense is not a hobby; it is one of the state’s core responsibilities. In wartime and even in tense peacetime, the government must be able to procure the tools it deems essential. Historically, America’s economic strength has been decisive in war precisely because private industry could be mobilized to produce ships, planes, steel, and munitions at scale. The phrase “arsenal of democracy” was not rhetorical flourish. It described a system in which private enterprise — operating for profit — supplied the matériel that preserved political freedom.
But what is happening in this dispute is not merely procurement. It is not a disagreement over price, performance, or delivery schedules. It is a dispute over who controls the ethical architecture of a technology. Anthropic is not refusing to sell computers. It is refusing to strip out guardrails that it believes are integral to the responsible design of its product. The Pentagon is not demanding a faster processor. It is demanding that the company relinquish the authority to restrict how its system is used.
The contradiction becomes acute. For the past several years, government officials have insisted that AI companies must internalize ethical responsibility. They must prevent misuse. They must anticipate harms. They must build systems that refuse dangerous or unlawful requests. Regulators argue that without such constraints, AI systems could be used for surveillance abuses, disinformation campaigns, or autonomous violence. Ethics, we are told, cannot be left to the market alone.
Across the globe, governments are already pushing the boundaries of what AI can do in practice. Most starkly, China’s government has built what may be the largest AI-supported surveillance apparatus in human history, deploying hundreds of millions of public-facing cameras linked to facial-recognition and data-fusion systems that can identify and track individuals in real time. As of recent years, analysts estimate that China operates well over half of the world’s surveillance cameras — many of them capable of identifying people and tracing movements across cities, social venues, and even everyday public spaces — creating an infrastructure that can monitor citizens at an unprecedented scale.⁶
Yet when a company attempts to operationally implement those very ethical constraints in its design, and applies them even to its most powerful potential customer, it is threatened with economic exclusion. The message is unmistakable: ethics are mandatory — except when the sovereign decides otherwise.
The mechanism of pressure is also revealing. By designating Anthropic a “supply chain risk,” the Defense Department reportedly signaled not only that it would decline to contract with the company but that other firms in the defense industrial base might be discouraged — or effectively barred — from doing business with it. In modern administrative practice, such a designation can function as a form of industrial excommunication — the Pope excommunicating the stubborn Jewish heretic Baruch Spinoza. The company is not nationalized; it is isolated. The pressure is not a knock at the factory gate; it is a warning to partners and customers that continued association carries risk.
There are historical precedents for government commandeering or directing private industry in times of emergency. The Defense Production Act of 1950 grants broad authority to prioritize contracts and allocate materials deemed necessary for national defense. Presidents of both parties have invoked it in wartime and in domestic emergencies. Yet even at the height of the Korean War, the Supreme Court in Youngstown Sheet & Tube Co. v. Sawyer rejected President Truman’s attempt to seize steel mills absent explicit congressional authorization. The Court’s decision stands as a reminder that “necessity” does not erase constitutional structure. Emergency powers have limits.
What is novel here is that the object of contention is not physical production but moral design. AI systems like Claude are unique tools; they are decision-support systems that can be configured to refuse certain tasks. Anthropic has said that it drew two bright lines: no mass domestic surveillance of Americans and no fully autonomous weapons. Whether one agrees with those lines is not the immediate question. Can a private company in a constitutional republic adopt such lines and adhere to them — even when the government disapproves?
As I argue in my forthcoming book, A Serious Chat with Artificial Intelligence, the defining feature of contemporary AI is not merely its intelligence but its embedded moral design, the guardrails that translate power into socially tolerable use. What is at stake in the present controversy is not a contract term but control of that moral design.
Critics of capitalism often describe corporations as purely profit-driven entities, indifferent to moral considerations so long as consumers are served and shareholder returns are maximized. Some defenders of capitalism have encouraged that caricature, arguing that business should concern itself solely with serving consumers within the bounds of law. But the real world is more complicated. Companies are run by individuals — owners, directors, executives — who have moral convictions, reputational concerns, religious beliefs, and political commitments. These shape corporate policies in ways that go beyond immediate profit calculation.
In a free society, the liberty and diversity of judgment is foundational, even metaphysical. If there is an implicit “social contract” — a rational incentive for instituting government — it is to gain the benefits of its defense of our rights without relinquishing our fundamental means of survival — the freedom to act on our judgment. Firms choose to avoid certain markets, to refuse certain clients, or to embed certain principles in their products. A newspaper may decline to publish particular advertisements. A technology company may refuse to build backdoors into its encryption. A pharmaceutical company may set conditions on distribution. The principle underlying these choices is freedom of conscience exercised through private property and voluntary exchange.
The government’s legitimate role is to protect the rights of individuals against force and fraud, including aggression by foreign powers. That role necessarily includes maintaining an adequate defense. It may purchase weapons, hire troops, build infrastructure, and contract with private suppliers. But the claim implicit in the Pentagon’s reported demand is more expansive: that when national security is invoked, the state’s judgment supersedes the moral constraints of the supplier. The company may sell — but only on terms that dissolve its own ethical boundaries.
Is that claim unique to this administration? Hardly. Governments of all stripes tend to assert broad discretion in matters of defense and intelligence. The difference here is that the technology in question is widely used in civilian contexts and subject to intense debate about ethical design. If AI companies are to be treated as quasi-public utilities whose internal policies must conform to federal guidance, then the principle should be stated plainly. If, instead, they are private actors responsible for their own moral choices within the law, then those choices cannot be overridden by administrative pressure alone.
There is also the matter of competition. Reporting indicates that Claude has been used, via partnerships with firms such as Palantir, in significant U.S. operations abroad. Whether one applauds or criticizes those operations, they demonstrate how quickly frontier AI has become operationally consequential. If Anthropic steps back from certain uses, other firms — OpenAI, Google DeepMind, or new entrants — may be willing to step forward. The economic incentives are enormous. Defense contracts are lucrative. Refusal by one vendor creates opportunity for another.
That dynamic helps explain the relative silence of other major AI firms. A united industry front insisting on the legitimacy of private ethical limits would force the government into negotiation. A fragmented industry competing for favor shifts leverage to the state. In the absence of solidarity, “AI ethics” risks becoming whatever the most powerful customer demands.
None of this is to deny the seriousness of national security. If adversaries develop and deploy autonomous weapons or pervasive AI-driven surveillance, American officials cannot simply abstain on moral grounds. The world is not a seminar room. But the constitutional design of the United States presumes that power is divided and limited precisely because the concentration of unchecked authority is dangerous — even when exercised with good intentions.
The deeper issue raised by the Anthropic–Pentagon dispute is not whether a particular application of Claude should be permitted. It is whether the state may simultaneously demand that private innovators internalize ethical responsibility and then exempt itself from those same constraints. If ethics are indispensable to safe AI, they are most indispensable where power is greatest and secrecy deepest. If, on the other hand, ethical guardrails must yield whenever national security is invoked, then regulators should be candid that “ethical AI” is conditional, not foundational.
In early December 2025, a cascading series of flight cancellations at IndiGo, India’s largest airline, brought one of the world’s fastest-growing aviation markets to a grinding halt, stranding tens of thousands of passengers during the peak of winter travel season. On December 5 alone, over 1,000 flights were canceled nationwide, including all departures from the national capital, New Delhi’s Indira Gandhi International Airport, as the airline struggled to comply with new pilot fatigue regulations it had been given months to prepare for. By mid-December, upwards of 4,500 flights had been axed or delayed, prompting government interventions, regulatory examinations, and frontline outrage.
For US and international readers unfamiliar with Indian skies, the scale of this disruption was unprecedented: a carrier that handles nearly two-thirds of India’s domestic traffic saw its network unravel in a matter of days, leaving packed terminals, long queues, lost luggage, and frustrated travelers in its wake. Such chaos is rare even in the world’s largest aviation markets, where diversified competition and regulatory frameworks tend to contain operational breakdowns before they become systemic — a contrast that highlights deeper tensions between regulation, competition, and resilience in India’s aviation sector.
At the root of the crisis were updated Flight Duty Time Limitation (FDTL) rules issued by India’s aviation regulator, the Directorate General of Civil Aviation (DGCA), to strengthen pilot fatigue safeguards. Among other changes, the new rules increased mandatory weekly rest from 36 to 48 hours, sharply limited night landings per pilot, and tightened duty-hour caps — measures intended to reduce cumulative fatigue and align India with global safety practices.
Research and regulatory studies indicate that fatigue impairs alertness, attention, and decision-making ability, increasing the risk of errors in aviation operations — which is why agencies such as EASA and others require flight time limitations and rest requirements to mitigate fatigue risks for pilots. However, the timing and implementation of these rules collided disastrously with IndiGo’s tightly optimized, lean operational model. The rules took full effect on November 1, 2025, immediately before the winter schedule ramp-up, and the airline’s rosters, crew hiring, and scheduling buffers proved insufficient to absorb the added constraints.
“Given the size, scale and complexity of our operation, it will take some time to return to a full, normal situation,” said IndiGo’s Chief Executive Pieter Elbers in a video message during the crisis, acknowledging both the disruption and the airline’s planning shortfalls. He said the carrier expected cancelations to fall below 1,000 and hoped operations would stabilize between December 10 and 15 before returning to full normalcy by mid-February 2026.
The airline’s reputation for punctuality and efficiency, a hallmark of its rapid ascent as India’s dominant carrier, was severely dented. Over several days, airports nationwide saw terminals overflow with passengers scrambling for information, staff overwhelmed by inquiries, and strike-like levels of cancelations and delays that are more common after major weather events than in well-regulated commercial environments.
Adding to the industry upheaval, the Competition Commission of India (CCI) and the DGCA moved to investigate whether IndiGo’s market dominance had been exploited during the chaos. Regulators sought fare data from leading carriers after reports emerged that ticket prices on alternative airlines surged significantly once IndiGo’s capacity shrank, sparking concerns about exploitative pricing and potential antitrust violations.
It was not only market watchers who were alarmed. An international pilots’ advocacy group, the International Federation of Air Line Pilots’ Associations (IFALPA), publicly warned that India’s temporary exemption of some night-duty rules for IndiGo was concerning because “fatigue clearly affects safety” and said the move was not grounded in scientific evidence. IFALPA’s president, Captain Ron Hay, stressed that regulatory exemptions to core fatigue protections risk undercutting broader safety goals and could exacerbate pilot attrition if working conditions worsen.
The crisis raises an obvious question: How does a safety-driven rule lead to system-wide operational collapse? The answer lies in the interlocking dynamics of regulation and market structure. In many major aviation markets, safety regulation and commercial competition are designed to operate in a complementary, not contradictory, fashion. For example, in the United States, the Airline Deregulation Act of 1978 removed federal control over fares, routes, and market entry yet preserved robust safety oversight. The result has been decades of competitive pressure that encourages airlines to maintain operational buffers and redundancy — not just for profit, but to avoid losing market share to rivals.
In Europe, liberalization in the 1990s enabled the rise of low-cost carriers that expanded capacity and required others to evolve service models. Singapore and the United Arab Emirates, too, have developed highly competitive hubs with minimal micro-management of airline operations beyond safety compliance.
India’s system has been more hybrid: rapid growth and liberal market entry coexisted with a regulator that, in practice, has exercised broad operational influence. The DGCA oversees not only safety certification but also staffing approvals, scheduling compliance, and enforcement of duty rules that directly shape airline operations — a role that can blur lines between safety oversight and commercial intervention.
While the intent behind the FDTL updates was to improve safety, critics argue that too little attention was paid to transition planning, industry capacity, and incentives for airlines to build redundancy. IndiGo had years to prepare for the new norms, yet recruitment lagged and roster reforms were implemented too late and too thinly to meet the demands of India’s busiest travel season. Other carriers, with smaller networks and different staffing strategies, weathered the changes with fewer cancelations. This suggested that operational choices, not just regulation, mattered in how airlines adapted.
The DGCA’s response illustrated this tension. In the face of chaos, authorities temporarily suspended the most restrictive duty limits for IndiGo — including night landing caps — and directed the carrier to adjust its schedules and submit revised planning roadmaps. The civil aviation ministry also instituted a fare cap on competing airlines to prevent opportunistic pricing spikes while IndiGo’s network recovered. An inquiry panel was ordered to examine what went wrong and recommend changes to prevent similar future breakdowns.
To an American or European audience, where regulatory functions are generally more clearly delineated and competition is vigorous across multiple carriers, the Indian episode highlights a set of broader governance challenges: the difficulty of balancing safety regulation with market incentives, the risks of high market concentration, and the need for effective transitional planning when policy changes affect deeply interdependent systems.
First, regulatory changes in safety-critical industries should be introduced with robust transitional frameworks that align industry capacities with compliance timelines. In the United States and the EU, fatigue management standards are phased in over long periods with consultations, transitional staffing analysis, and often incremental enforcement, minimizing sudden shocks to networks.
Second, market structure matters for systemic resilience. Markets dominated by a single carrier — particularly one with more than 60% market share — lack the redundancy that competition naturally creates. When that carrier falters, competitors cannot easily absorb displaced passengers or capacity, and prices can spike, reducing consumer welfare.
Third, coordination between regulators and industry is essential. Safety mandates that lack clear pathways for adaptation can backfire, not because the goal is misguided, but because execution does not account for operational realities. Planning frameworks that integrate regulatory foresight with industry hiring, training, and technology investments reduce the risk of rule implementation triggering wider system breakdowns.
IndiGo’s winter meltdown was not just a corporate planning failure or an administrative misstep; it was a public demonstration of how tightly coupled operational, regulatory, and competitive dynamics can lead to cascading failure when incentives are misaligned and buffers are thin. For Indian travelers, the immediate fallout was stranded families, disrupted plans, and a deep erosion in trust. For policymakers and global aviation observers, it is a case study in the complex trade-offs between safety regulation and system resilience.
Ultimately, resilient aviation markets embrace clear safety oversight and vigorous competition without allowing either to overwhelm the other. The US model of deregulated commercial competition and focused safety supervision, for all its imperfections, offers an example of how incentives and regulatory clarity can coexist. India’s aviation system, and others with similar structural traits, may yet find pathways to balance these dynamics — but the December 2025 upheaval will remain a stark reminder that turbulence often comes not from the skies, but from the regulatory and market architecture beneath them.
California is embedding age verification directly into digital devices. For those of us concerned with personal liberties, this is an emergency. We are creating online infrastructure that could reshape how internet access is controlled nationwide.
Starting January 1, 2027, new iPhones, Android devices, and tablets sold in California will have to classify users by age range during initial setup. The system will automatically share this ‘age signal’ with apps, creating age-classification infrastructure at the operating system level. Lawmakers say this will protect minors online by allowing apps to adjust content and features based on the user’s age.
The legislation, AB 1043, which Gov. Gavin Newsom signed into law in October 2025, requires device manufacturers like Apple and Google to collect the user’s age or date of birth during device setup. The system generates an encrypted ‘signal’ that places the user into one of four age categories. Apps can request this signal and adjust functionality accordingly. California’s Attorney General enforces compliance and can bring civil action against companies that violate the law, with penalties reaching $7,500 per intentional violation.
California has around 40 million residents. Roughly 32.5 million of them use smartphones. If companies fail to comply with this new law, the fines would quickly spiral into the billions of dollars, unaffordable even for large technology companies.
American tech firms already face absurdly large fines under European laws like the Digital Markets Act and the Digital Services Act, where fines seem to be more about revenue-raising than law enforcement. As President Trump has pointed out, the European Union makes more money from fining US tech companies than taxing them.
As aggressive regulations pile up, the financial risk from these fines becomes significant. This creates strong incentives for companies to act with excessive caution, preemptively restricting content and features for adults as well as minors, in an effort to dodge liability.
Compared with federal proposals such as the Kids Online Safety Act (KOSA) or laws already passed in Texas and Utah, California’s approach is arguably less intrusive because it does not require document uploads or biometric verification. But it still creates a permanent age-classification layer built directly into the device, which is a disaster for civil liberties.
More importantly, the law will not protect minors the way it promises. Determined minors can bypass technical restrictions by using VPNs, lying about their age, or using family members’ devices, as has already happened with similar laws in other states and countries. In the United Kingdom, for example, the Online Safety Act led to a 1,400 percent surge in VPN use shortly after implementation.
To make matters worse, devices do not belong to one user. Families share tablets. Households share computers. Even smartphones pass between users. A single age classification cannot reflect this reality. Errors are inevitable. Children will continue to access restricted content, one way or another. In some cases, they may be pushed toward less safe and harder-to-supervise digital environments in the darker corners of the internet, thanks to well-intentioned but poorly written laws like AB 1043. Meanwhile, adults may face unnecessary limitations due to incorrect classifications.
Voluntary tools like Apple’s Screen Time and Google’s Family Link already allow parents to supervise their children’s access without mandatory age classification at the device level. Government regulation cannot and should not replace parental oversight. The tools already exist. It is families, not operating systems, which must teach young people how to navigate the internet in a healthy and responsible way.
By mandating age classification at the operating system level, AB 1043 does not replace parental responsibility. It adds a new regulatory layer, with costs and consequences for companies and users. And this infrastructure will not necessarily stay confined to California.
This law could spread beyond California due to the so-called “California effect,” under which rules adopted in the largest technology market in the United States often become national standards. This happened with privacy laws like the California Consumer Privacy Act, which reshaped practices across the country. Companies adopted its requirements nationwide rather than operate separate systems.
California is not fixing a sudden market failure. It is pursuing a policy goal — protecting minors — by embedding age classification into operating systems. In doing so, it transforms age verification from a voluntary feature into a permanent digital infrastructure. Once embedded into the operating system, this infrastructure will be easy to expand and difficult to remove.
The near-collapse of London-based Market Financial Solutions (MFS) highlights structural vulnerabilities embedded in today’s private credit ecosystem. Founded in 2006, MFS specialized in complex, property-backed bridging loans — short-duration financing secured by transitional or hard-to-value real estate assets. At its reported peak, the firm’s loan book reached roughly $3.2 billion. In 2024, it added about $1.7 billion in new institutional funding and expanded or renegotiated roughly $1.4 billion in additional credit lines.
On Monday, a Blackstone private credit fund had to raise its repurchase cap to meet nearly $2 billion in redemptions, highlighting how quickly panic can spread. Major financial institutions were intertwined in the structure: Barclays reportedly had about $800 million in exposure, Apollo’s Atlas SP Partners around $500 million, and Jefferies roughly $130 million.
The firm also had ties to Santander and Wells Fargo. When stress emerged, and parts of MFS entered a UK insolvency process, confidence eroded quickly — underscoring the risks that arise when complex collateral, layered leverage, and short-term funding intersect.
This pattern is not accidental. Private credit expanded rapidly after 2008, when tighter capital rules and supervisory pressure pushed large banks away from asset-based lending, real estate bridge loans, and middle-market financing. Nonbank lenders stepped in to fill the void, often relying on funding lines from the very global banks that had reduced direct exposure to those risks.
When liquidity is abundant and asset values rising, the structure appears efficient and resilient. But when funding tightens or underwriting assumptions prove too optimistic, opacity, maturity mismatches, and embedded leverage can surface quickly. Risk may migrate outside the traditional banking perimeter, but it does not disappear.
When parts of MFS entered a UK insolvency process, court filings cited “serious irregularities,” a significant collateral shortfall, alleged diversion of income streams, and possible double pledging of assets. Authorities have not accused anyone of wrongdoing, and the firm maintained the issue stemmed from a procedural banking dispute. Markets — in particular, credit spreads — are reacting sharply, and lenders have moved to reassess exposures.
As early as October 2025, faint indications of duress were seen in funding markets. It is reminiscent of borrowing at the discount window several months before a handful of regional banks, most notably Silicon Valley Bank, became distressed.
The pattern is no longer theoretical. Thrasio’s bankruptcy (Feb 2024) exposed the fragility of acquisition-heavy, private-credit-funded roll-up models. Tricolor’s funding strains followed (Nov–Dec 2024), then First Brands’ alleged collateral double-pledging surfaced (late Jan 2025). More recently, Blue Owl gated withdrawals from a retail credit vehicle (early Feb 2026), and an Apollo-managed BDC (business development company) cut its payout and marked down assets (mid-Feb 2026). None were systemic events, but together they form a cadence.
The private credit markets are not large in relation to other financial markets — estimated at $2 trillion globally — but contagion is the prevalent concern, especially with markets already spooked about the radically transformative possibilities of artificial intelligence. Credit spreads have widened toward levels seen during prior recession scares. Shares of business development companies — a liquid window into private credit — have been volatile amid redemption pressures and portfolio markdowns. Default rates remain contained. The tension lies not in realized losses but in fragility: when underwriting standards loosen during a boom, even a few surprises can alter perception quickly. As Jamie Dimon has warned, markets tend to rediscover risk in clusters. And while not conclusive, recent spikes in overnight repo usage and in discount window borrowing (primary credit) suggest that liquidity is being tapped more aggressively at the margin — not yet a crisis, but the kind of funding stress tremor that can signal trains beginning to move in the distance.
Overnight repo agreements accepted by the Federal Reserve (USD, 2023 – present)
(Source: Bloomberg Finance, LP)
In this environment, calls for tighter regulation are inevitable. History suggests that losses in nonbank finance will be followed by demands for expanded oversight, framed in the language of consumer protection and systemic stability. Yet regulation in finance has always had a dual character. It can restrain excess; it can also entrench incumbents. Large, highly regulated banks often benefit when compliance burdens rise, as smaller competitors and independent credit funds struggle to absorb new capital, reporting, and governance requirements. Consolidation can follow under the banner of safety.
From a public choice perspective, this dynamic is unsurprising. Regulators operate within political and bureaucratic incentives; rulemaking is shaped by concentrated interests more effectively than by dispersed borrowers. Regulation can as easily serve as a barrier to entry that protects established institutions as a safeguard for the public (consumers). Austrian economics adds a deeper analytical layer: cycles of credit expansion and malinvestment reflect distorted price signals — in particular, prolonged periods of artificially low interest rates and abundant liquidity — not merely supervisory gaps.
An alternative approach would focus less on expanding prescriptive rules and more on restoring the chastising force of market discipline. Funding structures that promise periodic liquidity while holding illiquid loans should carry explicit gating provisions and buffers that investors clearly understand. Collateral transparency could be improved through independent third-party registries — or tokenization — to reduce the scope for double pledging without micromanaging lending decisions.
Federal Reserve Discount Window, primary credit activity (millions of USD, 2025 – present)
(Source: Bloomberg Finance, LP)
Most importantly, losses must remain losses. When investors in private credit funds, BDCs, or warehouse facilities bear the consequences of underwriting errors, pricing adjusts and standards tighten organically. Attempts to soften or socialize those losses, whether through forbearance or implicit guarantees, delay adjustment and encourage the next cycle of excess. Market signals, though painful, are information-rich.
Private credit serves a legitimate economic role. It finances projects and borrowers traditional banks may not serve, which in turn supports development, expansion, and entrepreneurial risk-taking. It should be lost on no one that post-2008 regulatory shifts, including rescuing banks from their own mistakes, paved the way for the rise of private credit. The goal should not be suppression but transparency and aligned risk-sharing rather than regulatory arbitrage. If policymakers respond by expanding complex rulebooks that advantage the largest institutions, they will reduce competition while doing little to prevent future misallocations. A system grounded in transparency, capital at risk, and the discipline of profit and loss offers a more durable path than yet another gormless twist of the regulatory ratchet.
Millions of Americans are channeling the classic Eagles tune Hotel California in their experience with student loan debt: “you can check out any time you like, but you can never leave.”
Two emergent trends encapsulate the inescapable trap of student debt repayment. First, the rate of serious delinquencies on student loans is approaching an all-time high. Second, student loan debts are intentionally made nearly impossible to discharge, even in bankruptcy.
The Federal Reserve’s Quarterly Report on Household Debt and Credit has just been released, and it’s not a pretty picture. Alongside debt on student loans spiking, seriously delinquent (90+ days late) credit cards have reached levels not seen since the financial crisis. About one in eight credit card accounts is now three months behind. This trend has been rising since 2022, and seems to indicate that households were already beginning to fall behind on their debts, setting the stage for serious delinquencies.
Not to be outdone, auto loan serious delinquencies have also been on the rise since the beginning of 2023. Put these factors together, and it seems that the temporary COVID-era relief on student loan repayment didn’t make it any easier for borrowers to pay down their credit cards or car loans. In the meantime, serious delinquencies for mortgages are very low, but this is easily explained. With the ultra-low interest rates that many homeowners have on their mortgages, they stay put longer, overall saleable inventory declines, and home prices remain high despite the relative increase in interest rates since their pandemic-era nadir.
Combine all those factors, higher home and rent prices, greater reliance on credit cards, and increased reliance on longer term car loans (over 20 percent are now of the 84-month variety), and you wind up with a perfect storm to place additional pressure on student loan repayments. The backlash was waiting to be unleashed after a long period of genuine forbearance, along with an administrative shell-game that hid the seriousness of the fragility of the student loan market.
With the passage of the CARES Act in March of 2020, most federal student loan repayment was suspended, with no additional interest paid. Further, collections on defaulted loans were halted. These were supposed to have been temporary measures. Instead, they lasted until October of 2023. And even then, policymakers created a so-called “on-ramp”.
Amazingly, during that timeframe, missed payments were simply not reported. So, by the end of Q4 in 2024, only a paltry 0.7 percent of student loans (both federal and private) were sliding into serious delinquency. A year later, the real state of affairs became evident. The share of student loan balances that moved into serious delinquency shot up to 16.19 percent.
(Source: newyorkfed.org)
Of course, no trend lasts forever nor maintains the same pace, but new serious delinquencies in student loans have surged to levels not seen since the Fed began tracking this category in the early 2000s. With both credit card and car loan serious delinquencies on the rise at the same time, increased bankruptcy filings might be anticipated in the months ahead.
In fact, we don’t have to prognosticate on the future regarding bankruptcy filings. The American Bankruptcy Institute tracks all filing types, and every month of 2025 saw higher numbers of bankruptcies when compared with 2024. Last year saw a 12 percent increase in individual filing, coming in at 533,949 compared to 478,752 in 2024. And even within that window, each month of 2025 saw more bankruptcies than the year before.
If the same trend unfolds for 2026, it’s clear that the surging student loan crisis will have something to do with it. But here’s the problem for these borrowers: unlike many other forms of debt, student loans are the financial equivalent of Hotel California. Once you’re in, you can (almost) never get out.
Those inclined to look deeper can consult US Bankruptcy Code (Section 523(a)(8)) and the special privileges it gives to the student loan industry. In brief, this provision says that “student loans are not dischargeable unless it would impose ‘Undue hardship’ on the debtor.” How does one prove that they’re under undue hardship? In most US Circuit Courts, debtors have to prove to the court that their situation meets the infamous “Brunner Test”.
According to this legal standard, the debtor has to prove that:
Repayment creates a hardship that would prevent a minimal standard of living
The hardship is likely to continue
The borrower has acted in “good faith” to try to repay
It doesn’t take a legal eagle to understand that each of these proof points relies on the subjective decision of a judge. Out of the 13 federal circuit courts, only two (the first and eighth) use what is called the “totality of the circumstances” standard, giving the court much greater latitude to discharge student loan debt. A year after those two courts adopted that standard, nearly every case went in favor of the borrower with some or all of their student loans being wiped away. But those wins were a tiny fraction of the nearly 43 million student loan debtors, who now owe a collective $1.66 trillion.
What may come as a great surprise to some is the age of borrowers falling farthest behind. For student loans (unlike car or credit cards), older borrowers led the surge in new serious delinquencies. More than 21 percent of borrowers over age 50 had their loans go 90+ days late at the end of 2025.
After all, it’s mainly Gen Xers — who could sing every lyric of Hotel California by heart — now discovering that, despite their best efforts, government intervention has made student loans nearly impossible to escape.
What are zoning laws, how do they work, and what are their economic effects?
This explainer is intended to be a guide to the purposes and mechanics of local land-use regulations, including zoning, as well as the economic debates over their effects, especially on the housing market, and how to reform them.
1. What Zoning Is
Zoning is a set of laws that regulate how property owners may use their land, in particular by drawing zones where certain uses are and are not permitted. Most zoning laws are local ordinances adopted by county or municipal governments, but some are state laws adopted by legislatures or executive agencies.
While zoning regulates building, “zoning codes” are different from “building codes.” Building codes are standards for construction meant to address life safety issues, such as fire safety and energy efficiency.
Planners and local governments often treat “zoning” separately from other land-use or development regulations. Regulations affecting the subdivision of land, the layout of site plans, and environmental standards like those having to do with development activities near wetlands or above aquifers are all closely related to zoning. Sometimes these laws are found in zoning ordinances and sometimes in separate ordinances. “Master plans” are typically advisory documents meant to inform zoning changes, but in practice, they often diverge sharply from what zoning ordinances actually allow.
Zoning is a relatively recent phenomenon in the United States. New York City adopted the first comprehensive zoning ordinance in 1916, but cities had implemented piecemeal land-use regulations before this date.[1]
Zoning quickly spread nationwide. Under Secretary of Commerce Herbert Hoover, the federal government adopted a draft “zoning enabling act” in 1924 and promoted its enactment by state legislatures. Most states quickly adopted zoning enabling acts in the 1920s. Excluding the then-territories of Alaska and Hawaii, the last state to adopt a zoning enabling act was Washington (1935).
Before zoning, land use was regulated through private covenants: contracts that limited how landowners could use their property, and that “ran with the land,” meaning they passed to future buyers and renters. Private covenants are still important in the US, but they are now used mainly for two purposes: creating conservation easements that limit development on agricultural land or wilderness, and establishing homeowners’ associations that manage common facilities and regulate development in a single neighborhood.
Why did zoning start in the 1910s and 1920s? One reason may be the rise of the automobile, which allowed workers for the first time to live far from their jobs. As suburban neighborhoods grew, residents sought to keep urban uses at a distance. Zoning was a tool for that separation.
Progressive Era optimism about the ability of experts to use scientific principles to re-engineer daily lives through government also played a role. Within the field of urban planning, the early progressives’ ambitions gave way in the 1940s and 1950s to even grander “high modernist” visions to redesign cities according to abstract principles of beauty and order (Scott 1998). These ideological commitments played a role in the American “urban renewal” projects of the 1950s and 1960s that bulldozed neighborhoods, widened roads, drove highways through the centers of cities, and rezoned land to require large parking lots and front yards.
Some scholars still debate whether racism played a role in the development and spread of zoning. Certainly, some cities tried to use zoning for racial and socioeconomic segregation, even after the Supreme Court struck down explicitly racial zoning in 1917. But there were also prominent black advocates of zoning (Glock 2022). FDR’s Federal Housing Administration (FHA) used redlining — excluding certain neighborhoods from their mortgage guarantee program — to reinforce urban segregation. To this day, many zoning boundaries follow the red lines that the FHA drew suspiciously closely (Rothstein 2017; Trounstine 2020). Urban renewal policies, especially interstate highway construction, damaged urban working-class areas of cities, both predominantly black and ethnic-white (Peterson 2023). Perhaps the most supportable conclusion is that racism sometimes played a role in the purposes to which zoning was put, but the level of racism in society is not a good predictor of the stringency of zoning over time, since especially restrictive forms of zoning first emerged in the 1960s and then spread to fast-growing regions during the period from the 1970s through the 2000s.
In fact, a social trend that tracks better with the rise of especially restrictive zoning is the spread of anti-growth environmental attitudes in the 1960s and 1970s (Fischel 2015). During this era, environmentalism was closely associated with anti-population-growth views, and ultra-low-density zoning seems to have emerged first in places with strong environmental movements. Up to the present day, local Sierra Club chapters have often been key vehicles for anti-housing activism (Elmendorf 2023), despite the fact that low-density zoning in metropolitan areas tends to encourage sprawl.
2. How Zoning Works
The basic role of zoning is to separate potentially annoying or noxious uses from residential neighborhoods. Economist William Fischel calls this “good housekeeping zoning” (Fischel 2015, 325).
Traditional zoning isn’t the only way to regulate nuisances. One former city planner and zoning skeptic notes that, rather than dividing a city into districts with different permitted uses, ordinances could simply specify that obnoxious uses may not locate within a certain distance from an existing home (Gray 2022). Under traditional zoning, a nuisance use can be located close to a home so long as it’s just over the line in a zoning district where that use is allowed.
From early on, zoning went beyond regulating genuine nuisances. The famous Euclid v. Ambler Supreme Court case that upheld the constitutionality of zoning in 1926 was about an ordinance that forbade the building of apartments in one part of the village of Euclid, Ohio. The majority opinion held that restricting apartments was a reasonable use of the government’s police power, since “very often the apartment house is a mere parasite, constructed in order to take advantage of the open spaces and attractive surroundings created by the residential character of the district,” and apartment houses in residential districts “come very near to being nuisances” (272 US 394–95).
Today, almost all zoning ordinances limit residential densities, even in the most densely populated neighborhoods in the country. Setting aside land for detached, single-family housing is also standard. Single-family zoning is virtually unknown outside the US and Canada (Hirt 2014), but limits on residential densities are near universal (Hughes 2025). Limits on densities may, within reason, safeguard the value of residential properties in a neighborhood.
Another application of zoning is to make sure that new development “pays its own way.” If new development requires building roads or expanding schools, zoning regulations can require the development to pay enough in property taxes to cover the marginal cost of providing these services. Requiring that new homes purchase a lot of land with their house, through minimum lot sizes, might be a roundabout way of doing this.
Another, arguably simpler way of ensuring that developments make fiscal sense for the local community is to use narrowly constructed impact fees. Impact fees are payments that property owners have to make in order to build a certain kind of development. These funds can then be used to upgrade infrastructure, hire teachers, or otherwise fulfill the need created by the new development.
Like any other government exaction, impact fees can be — and often have been — abused. They only make sense if they cover the net cost of a development to local property taxpayers. Since development typically raises the value of property substantially, it always pays at least part of its own way. The most credible academic research on this question suggests that multifamily housing and small-lot single-family subdivisions tend to pay their own way fully through their added property tax revenues, at least when it comes to school enrollment impacts (Gallagher 2016; 2019). If that’s true, then it wouldn’t make sense to impose school impact fees on these types of developments.
If a property owner wants to do something that is prohibited under zoning, localities offer processes for various exceptions. It’s impossible for a zoning ordinance and a zoning map to anticipate all possible valuable uses for every specific piece of land for all time. The most typical process is to obtain a “variance,” or a waiver of the zoning regulations in a particular instance.
Alternatively, the map itself can be changed through a rezoning — but this process usually makes sense only for large projects. These processes are at least somewhat discretionary; a property owner is never entitled to a variance or a rezoning.
3. Understanding Your Local Zoning
To see what kinds of regulations your area has, you can look up your local zoning or development ordinances and zoning map. Here’s what to look for.
In larger towns that have the assistance of professional staff in drawing up regulations, ordinances will typically have a table of uses and a table of dimensional regulations. The table of uses will tell you what uses are allowed or prohibited in each district, and the table of dimensional regulations will tell you the minimum and maximum requirements for lots and buildings.
Figure 1 shows a portion of a table of uses from Nashua, New Hampshire’s zoning ordinance. Like the vast majority of other zoning ordinances in the US, the Nashua ordinance considers a use prohibited unless it is expressly permitted. Some uses are only permitted if they are “accessory” to specific other uses, that is, they are not the main use of the land. Some uses are neither permitted nor prohibited outright, but require a special permit from a land-use board. These special permits are typically offered on a partially discretionary basis, such that a landowner has to prove that the new use will meet pre-established criteria.
As you can see from Figure 1, the commercial uses that happen to be listed here — different kinds of lodging establishments — are not a permitted use in any of the residential districts, but they are in the downtown and business districts, and they are allowed by a special permit in some of the urban residential districts. This kind of separation of uses is typical.
Home businesses, however, are treated as an accessory use. Most zoning ordinances will allow home-based businesses in at least some neighborhoods, but they typically impose restrictions such as maximum square footage or maximum number of employees, to limit the size and impact of these businesses.
The zoning districts in the columns of Figure 1 are plotted on a zoning map. Figure 2 displays a portion of the zoning map for Nashua. There are two types of zoning districts on this map: base districts and overlays. Base districts correspond to the regulations that apply outside an overlay. An overlay district modifies the regulations in the base district in certain respects (but not others). These modifications could make the regulations stricter or less strict.
Finally, Figure 3 shows a portion of Nashua’s table of dimensional regulations. These regulations limit how much you can build. Maximum density regulations limit the number of dwelling units you can build per acre. Minimum lot sizes tell you how much land you must have per house. Minimum setbacks tell you how far back the building must sit relative to lot lines. Maximum setbacks are less common but are gaining in popularity as planners lose interest in the high-modernist ideal of low-slung buildings surrounded by seas of grass and asphalt. Floor area ratios limit how much floor space you can build relative to the size of the lot; they’re an especially complex way to limit building space. Finally, minimum open space percentages, sometimes specified as maximum lot coverages, are in theory justified as a flood-prevention measure, making sure there’s enough space for rainwater to permeate the soil. To use them properly for flood prevention, however, they would need to scale with the size of lots and the flood-proneness of the surrounding area. It might be more efficient sometimes just to pay people to keep some land as open space.
Regulating uses and dimensions aren’t all that zoning ordinances do, but they’re among the most consequential. A nationwide project to map and tabulate key zoning ordinances affecting housing development is underway: the National Zoning Atlas. If you’re lucky enough to have your area covered by this atlas, you can dig into the data and see what types of housing are allowed where. The “snapshots” tool lets you compare jurisdictions by the percentage of land area they make available for certain types of housing.
4. The Consequences of Zoning
Economists pay attention to zoning because zoning makes it harder and more costly to build housing. Zoning is also often the only tool residents possess to limit nearby land uses that may lower their own property values without constituting true nuisances.
Everyone agrees zoning raises the cost of housing, but debate continues over whether it does so primarily by restricting supply, or also by increasing demand. If zoning is a wise tool for regulating nuisances and making neighborhoods more pleasant, it should boost housing demand as well as constrain supply.
Zoning limits housing supply in two ways: raising monetary costs and raising time costs. We have already seen the first of these. Zoning often requires more land to be used to build than a property owner might prefer to buy. Zoning can also raise the monetary cost of building by requiring particular building features, such as parking spaces.
Zoning also raises the time cost of building housing. Getting approvals, especially for special permits or variances, takes time — often an uncertain amount of time.
Zoning raises the cost of housing in a way that more closely resembles a fixed, per-unit tax than a tax that scales with the value of the property (“ad valorem”). Developers have an incentive to develop higher-priced properties, so that the fixed “land use tax” represents a smaller proportion of the ultimate sale price. For this reason, we should be cautious about attributing rising housing costs solely to larger and higher-quality homes. Houses are probably inefficiently large and high-quality, especially in more regulated regions. Lots of Americans want starter homes but are unable to find them, because even a small house is costly to build in a manner consistent with zoning.
Some economists have found that zoning can raise the demand for housing and make neighborhoods nicer to live in, compared to the alternative of completely unregulated land use (Speyrer 1989; Lin 2024; Gyourko and McCulloch 2024).
Quite a few studies have found that stricter zoning makes housing development more costly and less efficient, and may even account for the otherwise hard-to-explain decline in construction productivity in the United States (Siegan 1972; Glaeser et al. 2005; Hsieh and Moretti 2019; Molloy 2020; D’Amico et al. 2024).
One of the most startling examples of this phenomenon comes from Palo Alto, California, home to Stanford University and the headquarters of HP and the former headquarters of Tesla. Even at the very center of the global tech economy, most of the housing in Palo Alto is restricted to low-slung, single-family neighborhoods because of zoning laws. The only part of town where housing is legal to build at significant density is far away from corporate headquarters, next to San Francisco Bay and industrial port facilities. Still, it receives all the major residential construction (Ellickson 2022).
On the one hand, it’s understandable that homeowners in Palo Alto are nervous about allowing big apartment buildings down the block. On the other hand, the economic costs of freezing their neighborhoods in amber are gigantic. In principle, you could make Palo Alto homeowners better off by allowing high-density construction in their neighborhoods and giving them a big chunk of the increase in land value that results.[2] But traditional zoning doesn’t have mechanisms to authorize side payments of this kind.
The national evidence that zoning stringency and housing costs correlate is quite strong. For example, Figure 4 shows that in counties with stricter zoning, the ratio of median home value to median household income is higher.
Now, the causality might go both ways. Places that are nicer to live in or boast faster wage growth will have higher housing demand and therefore higher prices and population growth. That population growth might prompt these places to tighten their zoning regulations, yielding a partly spurious correlation between regulatory stringency and housing costs.
But if that alternative causal channel were the main explanation, it would be surprising to see more strictly regulated areas experiencing slower population growth. That argument depends on zoning being the result of rapid growth, rather than the cause of high costs and slow growth. If more strictly regulated places show high costs and slow growth, that should fortify our conclusion that the high costs are a consequence of strict zoning.
And that’s exactly what we do see. Figure 5 shows the relationship between zoning stringency and net migration rates at the state level. States with stricter zoning are losing people to states with looser zoning. This chart likely understates the negative causal effect of zoning on net migration, since states with historically high migration were more likely to tighten zoning in the first place.
These charts are suggestive and easy to understand, but from economists’ perspective, the only gold-standard evidence of causal effects comes from interventions that are more plausibly random. Careful studies of zoning regulations changes generally find that when regulations are loosened, housing production goes up, and housing costs go down, relative to the counterfactual — but the effect on costs depends on the geographic scale of the change (Cheung et al. 2023; Greenaway-McGrevy 2023; Büchler and Lutz 2024). Localized changes have almost no effect on local housing costs, while a regional change has a substantial effect on regional housing costs.
Zoning should also make commercial and industrial development more difficult and costly. In many cases, however, communities are more willing to allow commercial development than residential, since it shifts some of the property tax burden away from residential owners. This remains an area of future research, and state policymakers have been exploring ways to relax zoning rules for home-based commercial uses, such as childcare.
5. Options for Reform
Policymakers have looked to zoning reform in recent years as a way to bring down housing costs. This is a partial list of reforms that states and cities have been trying.
5.1. Institutional and Process Reforms
Process-level zoning reforms currently being tried include:
Providing a quick appeals process or appeals board for zoning denials to reduce the time cost of development.
Tightening who has standing or may challenge housing-friendly rezonings.
Compensating owners for regulatory takings. Under current jurisprudence, the federal Constitution only requires compensation for regulatory takings that eliminate economically viable uses of land, necessitating state-level reforms.[3][4]
Raising voter turnout by aligning local election calendars to state elections, as a motivated minority of anti-building homeowners have outsized pull in off-cycle elections (Einstein et al. 2020).
Using “shot clocks” to limit the time local boards can delay permit applications.
Allowing builders to use certified third-party inspectors and other private agencies.
Centralizing zoning, allowing state government to define all the possible zoning districts that its local governments can use, allowing local governments to then map these districts as they like. This approach raises the risk that anti-housing groups will focus on state-level influence.
Decentralizing zoning by allowing neighborhoods or even single streets to opt out of local zoning, if they recognize the financial benefit in allowing more housing to be built.
Making covenants more attractive, including authorizing city governments to use their own resources to enforce private covenants (Gray 2022).
5.2. Zoning Preemption
State governments could simply preempt local zoning in some areas, giving landowners defined rights to develop certain kinds of housing.
Build starter homes. In 2025, Texas enacted the first limit on minimum lot sizes in cities, making it easier to build subdivisions of small-lot homes.
Promote “missing middle” reforms. Some states have ended single-family zoning in larger cities or in areas that have access to water and sewer infrastructure, allowing developers to build out the “missing middle” typologies: duplexes, triplexes, and fourplexes.
Reduce parking minimums. Parking minimums are one of the most irrational land-use controls, and more than 100 cities have limited or abolished them.
Legalize accessory dwelling units. Quite a few states have now passed laws giving single-family homeowners the right to build a small apartment or tiny home on their lot.
Legalize manufactured housing. States are increasingly requiring local governments to allow manufactured housing wherever they allow single-family housing.
Legalize single-room occupancies, allowing dorm-like arrangements with shared kitchens or bathrooms, which function as the lowest rung on the housing ladder and may do the most to reduce homelessness.
5.3. Financial Incentives
Many states now offer some financial incentives or technical assistance to local governments that want to reform zoning in a housing-friendly direction. Some states now give additional infrastructure dollars to local governments that permit more housing. New Hampshire’s Housing Champions program is an example. The ROAD to Housing Act that recently passed the US Senate would do the same with some federal funds.
Financial incentives work best when localities must demonstrate a real increase in permitting, not just a legal change, as a condition of continuing to receive the incentive. Localities have innumerable ways to block or discourage projects they don’t want, so actual permitting data reveal a community’s regulatory stance more accurately than the text of its zoning ordinances.
6. Advantages and Alternatives to Zoning
Many Americans believe that zoning serves useful functions in protecting their quality of life and property values. In established neighborhoods, private covenants are difficult to create, making zoning the primary way to govern land use. Economics helps clarify the tradeoffs of zoning and how it can be reformed to serve its essential functions at lower cost.
For more on the politics and economics of zoning and how to reform it, see my AIER white paper, “Unbundling Zoning.”
References
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Büchler, Simon, and Elena Lutz. 2024. “Making Housing Affordable? The Local Effects of Relaxing Land-Use Regulation.” Journal of Urban Economics 143: 103689.
Cheung, Ka Shing, Paavo Monkkonen, and Chung Yim Yiu. 2023. “The Heterogeneous Impacts of Widespread Upzoning: Lessons from Auckland, New Zealand.” Urban Studies 61 (5): 943–67.
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Endnotes
[1] For example, in 1915 San Francisco adopted an ordinance forbidding laundries in certain neighborhoods. Because these laundries were overwhelmingly Chinese-owned, this was a way of trying to keep Chinese workers out of wealthier neighborhoods (Bernstein 1999). Between 1911 and 1917, Baltimore, Louisville, and other cities adopted ordinances forbidding blacks and whites from living in neighborhoods majority occupied by members of the other race, ordinances struck down by the US Supreme Court in Buchanan v. Warley (1917) (Power 1983).
[2] This kind of deal is what economists call a “Coasean bargain” (Coase 1960). It makes no sense for regulations to prohibit people from making m utually beneficial exchanges.
[3] Arizona and Florida have laws requiring local governments to compensate landowners if they take away much of the value of their property through new zoning laws. Oregon had such a law, but it was radically scaled back.
[4] Penn Central Transportation Co. v. New York City, 438 US 104 (1978). 3): 454-466.
