Amid growing calls for the Federal Reserve to begin lowering interest rates, White House officials (and the president himself) have adopted the tactic of pointing to the nominal policy rates of foreign central banks as evidence that the Fed is behind the curve.

At best, it’s a misleading argument; at worst, it’s intellectually lazy. Comparing nominal interest rates across countries without accounting for key differences ignores basic monetary economics. Such claims may be politically expedient, but they risk distorting public understanding of the Fed’s mandate and undermining its independence at a time of heightened macroeconomic complexity. They also invoke the memory of recent attempts to influence opinion by misciting, or oversimplifying, economic fundamentals. 

Policy rates are set in the context of domestic inflation dynamics, output gaps, and labor market conditions. The US currently faces core inflation above target, low unemployment, and elevated nominal wage growth—conditions not mirrored in Japan (which is emerging from decades of deflation), Switzerland (which has had persistently low inflation), or Costa Rica and Trinidad (which may be responding to different structural or commodity-related factors). Monetary policy must reflect local macroeconomic fundamentals, not foreign benchmarks.

Monetary policy cannot be compared across countries without accounting for structural differences in regime and context. Japan’s yield curve control and Switzerland’s experience with negative interest rates stem from persistent disinflationary forces and efforts to manage currency strength, not from recent inflation dynamics. Additionally, the credibility of central banks and the degree to which inflation expectations are anchored vary significantly across jurisdictions. As the steward of the world’s dominant reserve currency, the Federal Reserve faces a distinct obligation to maintain policy clarity and price stability in order to uphold both its institutional credibility and the international standing of the dollar.

Interest rates are also shaped by long-run structural factors: demographic trends, productivity growth, and capital formation. Japan, for example, has an aging population and weak demand for credit, which structurally suppresses neutral interest rates. In contrast, the US has stronger demographic momentum and capital-intensive sectors that support higher natural real rates. Using lower interest rates abroad to argue for US rate cuts ignores divergent long-run neutral rates (“r^*,” “r-star”) across economies.

Many countries with lower interest rates have different exchange rate regimes or weaker currencies and rely more on capital inflows or export competitiveness. For instance, Trinidad and Costa Rica have narrower monetary transmission mechanisms and more fragile current accounts. The US runs persistent deficits and issues the global reserve currency, meaning its rates carry a different weight in global capital flows and must be managed to preserve external stability and dollar demand. Lowering US rates based on foreign benchmarks could destabilize capital flows or re-ignite inflationary pressures.

Cross-country comparisons of policy interest rates may offer superficial appeal, but they are ultimately inadequate—and often misleading—when used to evaluate the stance of Federal Reserve policy. Simply pointing to lower nominal rates in countries like Trinidad and Tobago, Cambodia, or the United Arab Emirates overlooks the profound differences in underlying economic conditions, institutional mandates, and monetary frameworks. Inflation dynamics vary widely, as do levels of debt, productivity growth, and labor market slack. Central banks also differ widely in the degree of independence they enjoy, the tools they deploy, and the inflation expectations they must manage.

This is not a defense of the Federal Reserve, or Fed Chair Jerome Powell, or of central banking as an economic institution. It is a defense of sound economics—of the importance of applying consistent analytical frameworks, respecting empirical nuance, and resisting the temptation to cherry-pick statistics for political expediency. It would be as sensible to compare the shoe sizes of runners to determine who is fastest. 

Analyzing monetary policy requires more than headline comparisons and talking points; it demands an understanding of real versus nominal variables, institutional context, and the global role of the US dollar. Stripping away that rigor weakens public discourse, distorts expectations, and ultimately undermines the very outcomes—price stability, sustainable growth, and economic resilience—that sound policies aim to achieve.

“Europe is a museum, Japan is a nursing home, China is a jail, and bitcoin is an experiment.” These were former Treasury Secretary Lawrence Summers’ now classic words to investors at a 2023 Morningstar Investment Conference. 

Summers was talking about global monetary conditions and the necessity to hold your investments and money in some currency, somewhere. “I would rather be playing America’s hand than any other country in the world… you have to put your money somewhere, and the dollar is a good place to put it.”

The US dollar is the least-dirty shirt.

I can’t verify whether Christine Lagarde, the president of the European Central Bank, or any member of her staff was in the audience, but they certainly didn’t get the memo. European policymakers have a long history of gaslighting their population. With straight faces, they tell untruths and just assume that their subjects will follow along — and to our massive discredit, we mostly do. 

In June, Lagarde was out swinging in the Financial Times. Somehow she, or her advisors, are under the impression that this is Europe’s moment. With President Trump holding the US on the ropes and the dollar in retreat, the excellently planned and flawlessly governed supranational creation, the euro, is the go-to replacement. 

Or not. 

There are some obvious things to invoke here: snake oil salesmen and that Upton Sinclair quote about not understanding something when one’s salary (in the $500,000 range) depends on it… but I digress. 

The op-ed in the Financial Times goes on to explore how “economic strength is the backbone of any international currency.” A dispassionate observer would soon disqualify the eurozone, having flirted with recession and growth around zero percent for years, the world’s worst fertility prospects, record-high electricity prices, no energy sovereignty — and just over a decade ago was on the precipice of falling apart under the heavy weight of government profligacy. Most people don’t realize that the American and euro area economies were roughly about the same size in the 1990s, and again around the global financial crisis, but that the US economy is now some 77 percent larger. By most accounts, economic life — “strength” — is better in America, no matter what strange ideas come over orange men in white houses. 

Even by the old-world standards of low and stable inflation, and deep and reliable capital markets, the eurozone vastly underperforms America. America’s bond market is at least twice the size of Europe’s fragmented and disjointed one, its equity markets some 6-7x larger. David Hebert on these pages asks the correct question: “Why Are There No Trillion-Dollar Companies in Europe?” Financing, entrepreneurship, and regulatory hurdles are some obvious answers, but also that “the US remains a top place for workers and businesses to locate. Our system promotes businesses and the creation of job opportunities in a way that is the envy of the rest of the world.”

For start-ups, too, the grass is much greener in the US: fewer regulatory burdens and much better access to capital. Some of the most successful European tech companies, from Klarna and Spotify to (British!) Wise opted for New York over Stockholm, Frankfurt, or London. One astonishing statistic speaks volumes about Museum Europa’s dynamism, money, and capital markets: “No EU company founded in the past 50 years has a market capitalization exceeding €100 billion, while all six US companies valued above $1 trillion were created during this period.” (We could quibble about the Dutch ASML or Denmark’s Novo Nordisk, but the point stands…)

In a quiet dig at the US, Lagarde tells us that Europe has much better independence for its monetary authority (kind of a low bar…), inclusive decision-making and “checks and balances.” The very next paragraph undermines that commitment: “A single veto must no longer be allowed to stand in the way of the collective interests of the other 26 member states,” and fewer vetoes “would enable Europe to speak with one voice” — i.e., overrule rowdy states. 

The worst bit is when she’s pointing to “strategic industries” like green technology, which are neither strategic nor even “industries” — rather, implementations of dying, subsidized ideological dreams. 

All Europe has to offer the world is professional soccer and nursing homes; centuries-old architecture and over-regulated, tourist-infested beaches. 

To believe that the euro will play a larger role in international monetary affairs is laughable. To the very small extent that asset managers and foreign currency reserves are shifted away from dollars, they’re replaced not by euros (or pounds) but by smaller, non-traditional currencies. Financial institutions skeptical of global monetary hegemony are stacking up on gold (and bitcoin) — not the regional money upstart that Lagarde oversees. 

While the dollar’s dominance has fallen steadily in the aftermath of political turmoil, the runaway fiscal train, and the freezing of Russia’s reserves, it’s still miles ahead of the euro. Some 58 percent of foreign currency reserves are in dollars while the second-best “alternative” sits, unmoving, at below 20 percent — far, far from Lagarde’s ambitions.

What’s worse is that the kind of states, institutions, and individuals in need of de-dollarization would achieve nothing by euro-izing. States and money managers in China, Russia, or India would gain zero political diversification by holding euros instead of dollars; in fact, Russia did, as most of its frozen reserves were custodied at Euroclear and European banks. All a shift from dollars to euros would do is replace governance, inflation, and confiscation risks associated with fickle American leadership with the exact same risks in a European format. Hooray. 

“No matter its other virtues, by aggressively weaponizing the global currency you issue, you make it worse,” I wrote about the dollar last year. Such matters certainly count against Uncle Sam and the dollar as global money…but the Europeans are even worse. 

While Lagarde’s war on cash has been a little overblown, there are invasively constrictive rules capping cash usage at €1,000 ($1,160) in Spain and France, with a €10,000 ($11,160) cash limit applying across the European Union by 2027. 

Cries for the dollar’s imminent collapse are always overblown, but the euro as a reasonable replacement is an even more hyperbolically deluded idea.

Lagarde should have been reading the other noteworthy British newspaper, The Economist. The headline from February this year? “Europe Has No Escape From Stagnation.”

Sorry, Christine.

Benefit cliffs occur when earning slightly more — through a raise or extra hours — leaves people worse off because they lose government benefits. Many economists believe these cliffs can be “smoothed out” through better program design. But this view overlooks a critical factor: human psychology. To truly address benefit cliffs, policymakers must move beyond formulas and graphs and consider how people actually think, feel, and behave. In some cases, benefit cliffs may not just be hard to eliminate — they may be impossible to fully remove.

The reason why so many experts and economists worry about benefit cliffs is that we want to have a welfare system that’s not just a safety net, but a springboard. Modern-day welfare in America includes over 80 programs such as Head Start, Medicare, Medicaid, housing vouchers, food stamps, and the like. Ideally, these programs shouldn’t just catch people when they fall — they should help launch them forward. The great tragedy is when they instead work more like quicksand and hold people back. While benefit cliffs are typically analyzed as purely mathematical problems, a full understanding requires recognizing powerful psychological realities.

Benefit Cliffs: A Visual and Emotional Drop

For many people, the term “benefit cliff” sounds abstract or technical — something you’d find in a policy paper or economic model. But the reality it describes is deeply personal and practical. The word “cliff” was chosen for two reasons. First, it captures what happens visually on a graph: the income line suddenly dives downward when a person earns a bit more money but loses more in benefits than they gain in wages. Second, it reflects how that moment feels — like standing on the edge of a steep drop. The fear of falling, of suddenly losing vital support, can drive people to act in ways that may seem irrational but are emotionally understandable: turning down job offers, quitting after a pay raise, or avoiding overtime altogether. These decisions, though rooted in self-preservation, often end up blocking real paths out of poverty. Matt Paprocki, president of the Illinois Policy Institute, puts it bluntly: 70 percent of people who begin receiving welfare benefits stay on them for life — eventually dying while still dependent on the system.

The Mathematical Perspective: Economists’ View

So, if benefit cliffs are real and if they actually trap people, can they be fully eliminated? Many experts believe so, but I wouldn’t be so optimistic. There are two ways to understand benefit cliffs: mathematically and psychologically.

First, let’s have a look at a technical, mathematical definition of benefit cliffs. According to a report by the Institute for Research on Poverty at the University of Wisconsin-Madison, benefit cliffs occur when an income increase triggers a loss of public benefits equal to or greater than the additional earnings. Economists refer to this as a marginal tax rate exceeding 100 percent — earning an extra $100 results in losing more than $100 in benefits.

The Georgia Center for Opportunity created an interactive tool that models how income changes affect eligibility for various state and federal benefits (see www.benefitcliff.org for details). Below you can see a graph from their report, “Disincentives for Work and Marriage in Georgia’s Welfare System.” Every dip you see in this graph is a benefit cliff. This graph models the statewide average scenario of a single mom, age 30, with a 10-year-old girl and a 2-year-old boy. It shows that as her income increases from $20,000 to $30,000, she experiences several abrupt drops in her budget as housing vouchers, subsidized childcare, and medical insurance are reduced or completely taken away.

Psychological Reality: Humans vs. Models

However, I find it striking that experts can pat themselves on the back and celebrate the elimination of benefit cliffs as soon as someone merely breaks even and starts earning just slightly more than they lose. For example, let’s say our single mother works overtime and earns an additional $100. If this causes her to lose $75 in reduced food stamps, many economists would declare that she is now $25 better off, and the benefit cliff successfully eliminated.

That conclusion might make sense to economists, but not to our subject — a 30-year-old single mother of two. From her point of view, she just worked extra hours and lost most of the payoff.

The disconnect between how our subject views the situation, and how economists understand it, can be attributed to Rational Choice Theory, a model through which many economists see the world. Rational Choice Theory assumes that people always make logical, rational choices to maximize their personal gain. But this model fails to incorporate the realities of human behavior.

Consider the well-known Ultimatum Game: one person proposes how to divide $100, and the other person decides whether to accept or reject the offer. Rational Choice Theory predicts that the responder should accept even $1 — after all, $1 is better than nothing. Yet in practice, people often reject offers they consider unfair, even if it means walking away with nothing. Fairness, dignity, and emotion matter. These are powerful factors that classical economic models often ignore.

Yes, our single mom might technically be $25 ahead, but I have never met a mother who works overtime, makes $100, learns she’s lost $75, and feels satisfied. A person who feels like they’ve lost most of their paycheck is not likely to stay motivated, even if they break even or come out a few dollars ahead. Experts who insist that this counts as a win are living in a theoretical world, not the one the rest of us inhabit. They celebrate technical “successes” like smoothing out the benefit cliff, but for the single mom, there’s very little to celebrate.

To see the situation through the eyes of an economist, consider the following quote from Disincentives for Work and Marriage in Georgia’s Welfare System:

One principle that cannot be violated is that a family must always be better off from earning more money. Mathematically, this is easy to explain. The marginal benefit from earnings and subsidies must always be more with increased earnings. Graphically, it is easy to show because the line combining earnings and subsidies must always have a positive slope. If at any time the slope is negative, then there is a welfare cliff.

Notice the technical language and emphasis on graphs. Yes, the slope may be positive. Yes, the math checks out. But while economists see a line bending upward, our single mother still feels like she’s falling. And that feeling matters. As one mother relying on government assistance explained to me, “It feels like no matter how much harder I try, I’m always being pulled backward.”

Loss Aversion and Real-World Choices

Let’s use a different lens and look at benefit cliffs from a psychological point of view. Loss aversion — a well-documented behavioral response — tells us that people feel the pain of loss two to three times more strongly than the pleasure of an equivalent gain.

How would you feel if you found a $100 bill on the ground, and then 15 minutes later got a flat tire that cost exactly $100 to fix? According to Rational Choice Theory, you should feel neutral — the gain and the loss cancel each other out. But in real life, you’d likely feel upset. That nail ruined your tire and whatever fleeting plans you might have had for that extra $100.

This psychological lens helps us better understand benefit cliffs. If people perceive losses two or three times more intensely than gains, even gradual reductions in benefits can feel like real setbacks. Losing benefits doesn’t motivate work — it demoralizes.

And things get even more complicated when you consider that many recipients don’t have PhDs or the skills to build graphs, interpret benefit curves, or navigate a maze of programs. Ordinary people have no idea whether their personal income graph has a slightly positive or slightly negative slope. (Have you ever seen anyone, when offered a raise, say: “Wait a minute! Let me first build my income graph and see how the raise would affect its slope?”)

What people do know — intuitively and from lived experience — is that welfare programs are complex and uncoordinated. Even experts struggle to make sense of them. So it’s no surprise that the mathematical explanations of benefit cliffs we often see in reports and policy papers have little to do with how people actually operate and make decisions — a disconnect that is as striking as it is overlooked.

The Savings Trap: Surveillance and Psychology

Just as benefit cliffs discourage work, the structure of modern welfare programs also discourages saving — creating a parallel psychological and bureaucratic trap. Experts often argue that modern welfare no longer disincentivizes saving because many asset tests that determine benefit eligibility have been relaxed or removed. However, even when not actively penalized for holding assets, applicants are still routinely required to report any change in assets — how many bank accounts they have, how much cash they keep, what kind of car they drive, whether they’ve sold anything, even how much they were paid for donating blood. In Michigan, for example, recipients must report changes in income or assets within 10 days of them occurring through the MI Bridges portal online. These rules create an atmosphere of surveillance. From a psychological perspective, it is clear why many low-income families avoid formal saving — not because they don’t want to build an emergency fund or earn interest, but because they fear losing what little help they have. This locks them out of the banking system, deters wealth-building, and keeps them stuck in financial precarity. In this sense, the system is not just unhelpful — it’s actively disincentivizing the very behaviors that help people climb out of poverty.

Toward a Truly Empowering Welfare System

In the end, as long as benefit cliffs are treated primarily as a math problem, we will continue to miss the mark. Benefit cliffs are not just technical design flaws — they are psychological traps. Once government assistance is extended, the experience of losing it — even gradually — feels like a punishment, not progress. This emotional reality is stubborn, deeply human, and nearly impossible to erase through policy tweaks alone. Yet many experts continue to celebrate easy fixes: a graph with an upward slope, a marginal tax rate below 100 percent, a rule relaxed. But these celebrations ring hollow when they fail to account for how loss aversion distorts perception and demoralizes effort. As long as the system makes people feel like they’re falling — even when the math says they’re rising — the cliff remains. A truly effective welfare system must begin not with a chart, but with a sober recognition of the profound difficulty of the task. Only then can we begin designing programs that truly help the poor — without hurting or trapping them along the way.

Regulations by government agencies may often be well-intended. A few may even be essential for maintaining safety standards, environmental quality, and reducing fraud. But the rapid growth of the administrative state interferes with our liberties and hampers our economy.

Even estimating the cost of complying with extensive regulations is no easy task. A 2023 report from the National Association of Manufacturers estimated that complying with federal regulations costs roughly $3 trillion annually. A 2024 report by the Competitive Enterprise Institute (CEI), Ten Thousand Commandments, estimates the regulatory burden to be at least $2.1 trillion, and likely much more.

From how food is grown and processed, to how clothes are made and buildings constructed, to minute requirements for electronics, plastics, mining, transportation, and insurance, federal regulatory agencies have a say in nearly every facet of life. The Federal Register, listing all federal regulations, is an enormous set of volumes that seems to grow inexorably year by year. Even periods of “deregulation” see growth in the number of rules and pages of federal regulation, just at a slower rate.

The CEI report found there were about 90,000 pages of federal regulations in the Federal Register in 2024. The federal government’s own estimates admit compliance costs in 2022 ate up over ten billion hours—equivalent to nearly 15,000 human lifetimes. Other costs from high levels of federal regulation include the following:

• Slower economic growth
• Lower per capita income
• Higher prices
• Suppressed job and wage growth
• Proportionately higher compliance costs for smaller businesses

Over the past half century, the scope and reach of the administrative state were facilitated by something known as the Chevron Doctrine. This line of Supreme Court thinking gave regulatory agencies the benefit of the doubt when promulgating endless rules, with little regard to the burdens they placed on individuals and on businesses.

In its 2024 ruling Loper Bright Enterprises v. Raimondo, the Supreme Court overturned forty years of “Chevron deference” to administrative agencies. In Loper, the Supreme Court reinstated the responsibility of judges to evaluate whether a given regulation exceeds the power of the agency that issued it. Citizens can now challenge whether certain rules and regulations are constitutional without judges automatically deferring to the relevant administrative agency.

History of Chevron Doctrine

The Chevron doctrine, established in the 1984 Supreme Court case Chevron USA, Inc v. Natural Resources Defense Council, Inc., mandated judicial deference to agency interpretations of ambiguous statutes when those interpretations are “reasonable.” Writing for the majority, Justice Stevens opined:

“[I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”

The intention was to respect agency expertise and to promote consistent application of complex regulations. In practice, that deference severely limited courts’ ability to keep agencies’ rulemaking in check.

The original Chevron decision was decided in a 6-3 split. In the majority were Justices Stevens, Burger, Brennan, White, Blackmun, and Powell. In the dissent were Justices Marshall, Rehnquist, and O’Connor. After Chevron, agencies were able to exercise both executive and quasi-judicial power in enforcing and in interpreting their own rules, often with their own courts.

Administrative courts exist within the executive branch to resolve regulatory disputes. Most federal agencies have their own internal courts, including the:

• Securities and Exchange Commission
• Department of Health and Human Services
• Environmental Protection Agency
• National Labor Relations Board
• Social Security Administration
• Department of Justice

The administrative courts within these departments resolve immigration status, disputes over Medicare and Medicaid, violations of securities laws, environmental rules, and a variety of other issues. Unsurprisingly, these administrative courts tend to go along with their agency’s expansive interpretations of Congressional statutes.

The Loper Decision

Exactly forty years later (June 2024), in another 6-3 decision, the Supreme Court overturned the Chevron doctrine in Loper Bright Enterprises v. Raimondo, with Chief Justice Roberts writing the majority opinion. The balance of power between courts and administrative agencies was restored, with courts being granted greater authority and independence to interpret statutes. The justices’ alignment in this case was: Roberts, Thomas, Gorsuch, Kavanaugh, Barrett, and Alito in the majority, and Kagan, Sotomayor, and Jackson in the dissent.

The main legal question involves the meaning of “ambiguity” in Congressional statutes. Although courts could still defer to executive agencies on occasion, the court system was presumed to have “special competence” interpreting what the law requires when Congressional statutes are ambiguous.

The Loper decision stemmed from a challenge by herring fishermen against a National Marine Fisheries Service (NMFS) rule requiring industry-funded monitoring under the Magnuson-Stevens Act. The fishermen argued that the statute did not explicitly authorize NMFS to impose this specific regulatory burden, estimated at about $700 per day for Loper Bright Enterprises. The Supreme Court’s ruling established that courts can now independently interpret ambiguous statutes, potentially limiting agencies’ ability to impose regulations without clear congressional authorization. Invalidating regulatory overreach and discouraging future tenuous regulations would reduce arbitrary rules and compliance costs, starting with $700 per day, per fishing boat.

Regulatory costs (expenses businesses incur to comply with federal rules) include the following:

• Recordkeeping, monitoring, and reporting systems
• Compliance officers and staff hours to manage reporting obligations
• Audits and inspections
• Equipment and software required to monitor, log, and report regulated activities
• Salaries for lawyers, or retainers and man-hours, to interpret, navigate, or challenge regulations
• Consulting fees for environmental impact studies, tax evaluation, and other mandatory assessments
• Licensing and permit application fees, registration, and certification costs
• Changes to equipment (OSHA, emissions), product design/labeling (FDA, FTC), launch/service delays, recalls, and adjustments due to regulatory review.
• Insurance premiums for regulatory liability coverage and bonds for fines or penalties
• Opportunity costs: forgone growth, expanded overhead costs

The Loper ruling can reduce these costs by challenging more burdensome and intrusive regulations and allowing increased judicial scrutiny. The decision didn’t make existing standards of judicial scrutiny tighter or more lenient, but increased the occasions on which judges can intervene on behalf of regulated parties. Rather than assuming Congress had delegated certain powers to the executive due to ambiguity, as was done under the Chevron Doctrine before the Loper decision, now courts are free to rule on whether agencies can or should act in places where the law is less than clear.

Economic Implications

While precise cost-saving estimates are hard to come by, Loper will lead to increased litigation that will gradually reduce regulatory burdens. Pending cases include Corner Post, Inc. v. United States Postal Service, which concerns time limits on challenging agency actions, and Securities and Exchange Commission v. Jarkesy, which addresses the SEC’s authority to adjudicate cases internally. In its own administrative court, before an administrative law judge, the SEC wins approximately 90 percent of its cases, compared with only about 69 percent in federal court.

Paring back the administrative state will create large benefits for ordinary Americans. A Mercatus study highlights how “between 1949 and 2005 the accumulation of federal regulations slowed US economic growth by an average of 2 percent per year.” Fewer regulations mean greater job opportunities and faster wage growth, as well as lower prices for most goods. Less red tape will encourage greater investment and innovation, which increases productivity and provides us with better goods and services. Greater economic growth also tends to bring greater solidarity and less political partisanship.

Loper may reduce costs for healthcare companies regulated by the FDA or HHS, because rules on laboratory-developed tests or drug exclusivity currently cost companies millions in compliance or litigation costs. Loper challenges against the Internal Revenue Service or Department of Housing and Urban Development regulations could simplify compliance for affordable housing or renewable energy projects, encouraging those to flourish rather than be strangled by legal and administrative red tape.

And, of course, expensive and controversial environmental rules, from permitting restrictions to emissions to air quality standards, will be challenged under the new standard set by Loper. Billions of dollars in questionably effective equipment upgrades, energy offsets, and operational changes will be saved and reinvested.

Conclusion

Deregulation has been an important pillar of pro-growth economic agendas. But there are limits to how much a presidential administration can deregulate from inside the executive branch. The end of Chevron opened a whole new front in the fight against administrative overreach. Regulated businesses and advocacy groups can now challenge regulations that overstep Congress’s initial intent, even for small issues like herring boat inspection, which may never be on the administration’s radar.

The growth of the administrative state gave ever more power to the executive branch to interfere with ordinary people’s lives. The CEI report highlights just how much recent administrations have used federal agencies to impose their vision or goals on the rest of society: “Biden’s three years have averaged 870 rules annually in the Federal Register affecting small business, compared with 694 and 701 for Obama and Trump, respectively.” The same report found that in 2023, “agencies issued 3,018 rules, whereas Congress enacted 68 laws. Thus, agencies issued 44 rules for every law enacted by Congress.”

One can hope that Loper will return more power to the people, who can then hold their elected representatives accountable for the content — and the clarity — of the laws they pass.

Courts now have the opportunity to evaluate whether agency rules align with their Congressional mandates. Given that there are tens of thousands of regulations on the books, the process of reevaluating regulations will take a long time. Just a year after the Chevron doctrine was overturned, it is still unclear how much the regulatory landscape will shift. But now that courts can revisit and strike down the most abusive and costly regulations promulgated by the administrative state, the economic outlook in the US looks more favorable towards growth, productivity, and wealth creation.

Earlier this month, in her first public speech as the Federal Reserve’s Vice Chair for Supervision, Michelle Bowman laid out her vision for how the central bank should oversee and regulate US banks. At the heart of her approach is pragmatism: identifying problems, crafting efficient solutions, analyzing both intended and unintended consequences, and considering alternative approaches that might produce better results at lower cost.

Bowman outlined how her pragmatic approach can improve the Fed’s oversight of the banking system. She focused on four key areas: 

• Enhanced Supervision: Enhancing supervision to better achieve the Fed’s safety and soundness goals; 
• Bank Capital: Reforming the capital framework to ensure it aligns with the structure of the US banking system; 
• Regulatory Review: Reviewing existing regulations to ensure the framework remains viable; and 
• Bank Applications: Making the application process more transparent, predictable, and fair.

Enhancing Supervision

Bowman identified five changes the Fed could adopt to better focus supervision on material financial risks that threaten the stability of the banking system—and to ensure those risks are addressed promptly. 

The first change she proposed was applying a more tailored regulatory and supervisory approach. As she explained, the Fed has historically “‘pushed down’ requirements developed for the largest firms to smaller banks, often including regional and community banks,” which has led to “the gradual erosion of distinct regulatory and supervisory standards among firms with very different characteristics.” As a result, smaller, community-focused banks are increasingly subject to rules designed for the largest and most complex institutions that are often ill-suited to their specific circumstances.

The second change Bowman proposed was reforming the supervisory ratings system. This reform would be aimed at addressing “the gap between assessed ratings and material financial risk.” For example, recent data showed that two-thirds of the nation’s largest banks were rated unsatisfactory, even though most met the Fed’s capital and liquidity expectations. In short, she argued, the current system fails to accurately reflect the financial condition of the institutions the Fed supervises.

Third, Bowman raised concerns about examiner priorities. She argued that “supervisory focus has shifted away from core financial risks (credit risk, interest rate risk, and liquidity risk, for example), to process-related concerns. She called for a shift in focus back to these substantive areas. Bowman also criticized the tendency among examiners to assume that more complex practices are inherently superior and to hold all banks to those standards—even when simpler approaches may be more appropriate for a bank’s size, scope, or risk profile. Echoing her earlier support for regulatory tailoring, she stressed the need for greater transparency in examination outcomes and emphasized that banks should be evaluated based on their individual circumstances.

The fourth change Bowman addressed was the role of guidance in the supervisory process. She emphasized that guidance should clarify supervisory expectations, offer direction on the permissibility and risks of new activities, and help institutions comply with applicable laws and regulations. However, she noted, “[w]here guidance does not further these objectives, it is worth revisiting.” At its best, guidance promotes transparency and provides firms with a clear understanding of what regulators expect—thereby enabling responsible innovation. Bowman noted that uncertainty around supervisory expectations has long been a barrier to innovation. Regulators, she concluded, must foster an environment where financial institutions can innovate without compromising safety and soundness.

The fifth change Bowman proposed was improving examiner training. Although becoming a commissioned examiner requires rigorous study and testing, the Fed does not currently require all staff involved in supervision to have earned this credential—or even to be working toward it. Bowman argued that “[r]egulated entities should be able to expect that all of our examination and supervisory teams have achieved or are working to achieve this level of professional expertise.” She committed to prioritizing examiner training and credentialing going forward to help maintain a safe and sound banking system.

Bank Capital

Bowman then turned to capital requirements. While acknowledging their central role in promoting financial stability, she cautioned that reforms often “take a piecemeal approach to capital requirements […] without considering whether proposed changes are sensible in the aggregate.” In her view, a piecemeal approach risks producing a capital framework that is poorly calibrated and internally inconsistent. Instead, she argued for a more holistic evaluation to ensure that all elements of the framework work in concert to capture risk appropriately.

By focusing narrowly on capital requirements, Bowman warned, the Fed can inadvertently create market distortions—encouraging certain activities while discouraging others in ways that may conflict with the goal of maintaining a safe and sound financial system and broader economic stability. For instance, she noted that under the current approach to leverage ratios, “banks are less inclined to engage in low-risk activities like Treasury market intermediation and revise their business activities in a way that is neither justified nor responsive to their customer needs.” 

Consistent with her earlier call for a more tailored regulatory approach, Bowman emphasized that while the capital framework for smaller banks is simpler, it must still be carefully calibrated to ensure it supports both the institutions themselves and the communities they serve. To that end, she said the Fed will take a closer look at capital requirements for small banks, including whether adjustments are needed to better support their role in the broader financial system.

Regulatory Review

Some of Bowman’s most substantive remarks addressed the sharp increase in bank regulation since the passage of the Dodd-Frank Act. While she acknowledged that many post-crisis reforms were warranted, she argued that many of them “were backward looking—responding only to that mortgage crisis—not fully considering the potential future unintended consequences or future states of the world.” In her view, it is time to reexamine whether these regulations still make sense—particularly given the tradeoffs they entail.

Bowman emphasized that the purpose of regulation is not to eliminate all risk from the banking system. Attempting to do so, she argued, “is at odds with the fundamental nature of the business of banking.” Instead, regulators should foster an environment in which banks can “earn a profit and grow while managing their risks.” The role of the regulator, in her view, is to ensure that banks take prudent risks—not to prevent risk-taking altogether. Nor should the goal be to “prevent banks from failing or even eliminate the risk that they will.” Rather, the regulatory framework should “make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”

Bank Applications

Bowman concluded with a discussion of the regulatory application processes governing the chartering of new banks, bank mergers, and other actions requiring regulatory approval. She argued that the process “should reflect both (1) transparency as to the information required in the application itself, and the standards of approval being applied, and (2) clear timelines for action.” In her view, streamlining the process in this way could encourage the formation of new banks and reduce unnecessary delays.

Taken together, Bowman’s remarks offer a clear vision for a more focused, flexible, and transparent regulatory regime—one that emphasizes core financial risks, respects institutional diversity, and avoids the unintended consequences of one-size-fits-all policymaking. Her agenda suggests a shift away from expansive, process-driven oversight toward a more disciplined, risk-based approach that supports innovation and allows the banking system to evolve without compromising its resilience. Whether and how this vision shapes actual regulatory practice remains to be seen, but it marks a notable effort to recalibrate the Fed’s supervisory framework.

In the main office building of the American Institute for Economic Research, three heroes of liberty look down upon our work.  John Locke, FA Hayek, and Frédéric Bastiat continue to inspire the classical liberal tradition they helped build.

Amidst the trade wars and troubled economic understanding, it is tempting for economists to seek the counsel of despair.  Indeed, the fallacies in popular economic reasoning are not the stuff of minute mathematical modeling, profound methodological disagreement, or advanced debate on controversial models.  Rather, the sophistry on trade and tariffs is the stuff of the first or second week of economics 101.  How could we have gone so wrong? 

In this time of economic illiteracy, it is worth returning to one of the masters of our tradition.  Bastiat (1801-1850) was a brilliant economic mind, but he also remains an unmatched and witty expositor of simple truths.  And he can be a lesson of hope. Indeed, Bastiat scored many victories for liberty – including his work against tariffs with Richard Cobden and the British Anti-Corn Law League, and a corpus of writing that still inspires beginning and seasoned economists almost 200 years later.  But he also lived to see the ill-fated socialist French Second Republic (1848-1851), complete with worker cooperatives and unsustainable economic redistribution. 

I remember discovering Bastiat when, as an intellectual refugee from US Foreign Service, I discovered the philosophy of liberty.  Then, about ten years ago, I was honored to be a reviewer of a new translation of Bastiat’s collected works, published by Liberty Fund.

What can we learn from Frédéric Bastiat in these confusing times?  Here are five lessons.

1. What is seen and what is not seen

This is the simplest lesson from Bastiat, and one that is likely familiar to readers.  In his series of essays, What is Seen and What is Not Seen:  Or, Political Economy in One Lesson, Bastiat shares the basic lesson of economics: 

In the sphere of economics an action, a habit, an institution or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause, it is seen. The others merely occur successively, they are not seen; we are lucky if we foresee them.”

The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee.

However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately.

Bastiat illustrates the principle with a dozen examples.  The broken window is the most famous, of course.  In this piece, I will focus on his writings on trade; but Bastiat’s short essays on public works, taxes, and more, are well worth revisiting, as they are sadly relevant to contemporary policy.

2.  The problem with trade restrictions

Bastiat was an advocate for trade.  Throughout his writings, he explains through campy examples and reductio ad absurdum why trade restrictions are problematic.  He compares trade to a Negative Railroad – if indeed the stops on a railroad create commerce for the city that hosts the station, why not stop the railroad every mile?  Of course, this defeats the whole purpose of the railroad.  “Whatever the protectionists may say, it is no less certain that the basic principle of restriction is the same as the basic principle of breaks in the tracks: the sacrifice of the consumer to the producer, of the end to the means.”  Alternatively, he compares trade restrictions to complaints about improvements to a navigable river, which lower the cost of transportation:

In his essay on Reciprocity (from Sophisms) he expands the concept of tariffs as artificial barriers – which are ultimately the same as natural barriers: 

We have just seen that everything that makes transport expensive during a journey acts to encourage protection or, if you prefer, that protection acts to encourage everything that makes transport expensive.

It is therefore true to say that a tariff is a marsh, a rut or gap in the road, or a steep slope, in a word, an obstacle whose effect results in increasing the difference between the prices of consumption and production. Similarly, it is incontrovertible that marshes or bogs are genuine protective tariffs.

Bastiat explains the loss from protectionism in his essay on Differential Duties (from Sophisms)

A poor farmer in the Gironde had lovingly cultivated a vine. After a lot of tiring work, he finally had the joy of producing a cask of wine, and he forgot that each drop of this precious nectar had cost his forehead one drop of sweat. “I will sell it,” he told his wife, “and with the money I will buy some yarn with which you will make our daughter’s [dowry chest].” The honest farmer went to town and met a Belgian and an Englishman. The Belgian said to him, “Give me your cask of wine and in exchange I will give you fifteen reels of yarn.” The Englishman said, “Give me your wine and I will give you twenty reels of yarn for we English spin more cheaply than the Belgians.”

However, a customs officer who happened to be there said, “My good man, trade with the Belgian if you like, but my job is to prevent you from trading with the Englishman.” What!” said the farmer, “you want me to be content with fifteen reels of yarn from Brussels when I can have twenty from Manchester?” “Certainly, do you not see that France would be the loser if you received twenty reels instead of fifteen?” “I find it difficult to understand this,” said the wine producer. [The] customs officer [answered]: “this is a fact, for all the deputies, ministers, and journalists agree on this point, that the more a people receive in exchange for a given quantity of their products, the poorer they become.” He had to conclude the bargain with the Belgian. The farmer’s daughter had only three-quarters of her [dowry chest], and these honest people still ask themselves how it can be that you are ruined by receiving four instead of three and why you are richer with three dozen napkins than with four dozen.

Trade restrictions cause a net loss, once we account for all that is not seen, as Bastiat explains in his essay on Trade Restrictions: 

Yes, the [dollar] thus diverted by law to the coffers of [the protected industrialist] constitutes a benefit for him and for those whose work he is bound to stimulate. And if the decree had caused this [dollar] to come down from the moon, these beneficial effects would not be counterbalanced by any compensating bad effects. Unfortunately, it is not from the moon that the mysterious [dollar] comes, but rather from the pockets of a blacksmith, nail-maker, wheelwright, farrier, ploughman or builder, in short from the pocket of [the average consumer], who will now pay it without receiving one milligram more of iron than he did [before the tariff].  

He concludes:  “The use of violence is not to produce but to destroy. Oh! If the use of violence was to produce, our France would be much richer than she is.”

3.  Trade deficits… and why they don’t matter

Many people are instinctively worried about trade deficits – somehow, it seems problematic that trade partners might buy more from us than they sell to us.  But, first, the US is richer than almost every other country in the world, so it makes sense that the US would buy more.  Second, the US has deeper capital markets with greater legal protections than almost any country in the world, so it makes sense that foreigners would invest more in the US than the US invests abroad; this capital account surplus is merely the flip side of a current account deficit.  Third, all of us run trade deficits with the grocery store, the doctor, and the restaurant, who brazenly refuse to buy from us; yet we are all better off.  In his Economic Sophisms, Bastiat debunks the idea that The Balance of Trade is problematic.  Indeed, he playfully shows that the trade deficit could be erased if the ships carrying payments to foreigners were to sink… or be scuttled: 

according to the theory of the balance of trade, France has a very simple way of doubling its capital at every moment. To do this, once it has passed it through the customs, it just has to throw it into the sea. In this case, exports will be equal to the amount of its capital; imports will be nil and even impossible, and we will gain everything that the ocean has swallowed up.

 In an essay on More Reciprocity, he asks rhetorically:  

In practice, is there one trading operation in a hundred, a thousand, or perhaps even ten thousand that is a direct exchange of one product for another? Since money first came into the world, has any farmer ever said to himself: “I want to buy shoes, hats, advice, and lessons only from a shoemaker, milliner, lawyer, or teacher who will buy wheat from me for exactly the equivalent value”? And why would nations impose this obstacle on themselves?

Returning to the Sophisms, he asks, once again rhetorically, why The Balance of Trade matters:

Assume, if that amuses you, that foreigners swamp us with all sorts of useful goods without asking us for anything; if our imports are infinite and our exports nil, I challenge you to prove to me that we would be the poorer for this.

4.  Retaliatory tariffs

Retaliatory tariffs are the economic equivalent of cutting off one’s nose to spite one’s face:  just because other countries are putting up barriers – thus impoverishing themselves and us – doesn’t mean we should put up trade barriers to… impoverish ourselves further.  To be sure, even Adam Smith suggested that tariffs might be used as a strategic tool to force others to lower theirs.  But the gamble is tricky, as Bastiat explains in his essay on Reciprocity (from his Sophisms): 

There are people (a few, it is true, but there are some) who are beginning to understand that obstacles are no less obstacles because they are artificial and that our well-being has more to gain from freedom than from protection, precisely for the same reason that makes a canal more favorable than a “sandy, steep and difficult track.”

But, they say, this freedom has to be mutual. If we reduced our barriers with Spain without Spain reducing hers with us, we would obviously be stupid. Let us therefore sign commercial treaties on the basis of an equitable reciprocity, let us make concessions in return for concessions, and let us make the sacrifice of buying in order to obtain the benefit of selling.

In his essay on Public Works, Bastiat explained the futility of paying some workers to dig ditches, while paying others to fill them in.  Sure, work is created – but no utility, and the workers’ wages have to come from somewhere (taxes, which reduce economic activity).  We are reminded of Milton Friedman’s (perhaps apocryphal) quip, when he saw workers building roads using shovels, instead of machinery.  The foreman explained that machinery would destroy jobs.  Friedman retorted:  “Oh.  I thought you were building a road.  If it’s jobs you want, why not give your workers spoons instead of shovels?” 

Bastiat points out the conflicting nature of protectionism in his essay on Reciprocity: 

I can take you to certain countries in which you will see with your own eyes the Corps of Road Builders and the Corps of Obstructors working in total harmony, in accordance with a decree issued by the same legislative assembly and at the expense of the same taxpayers, the former to clear the road and the latter to obstruct it.

 5.  Trade and harmony, tariff and discord

Tariffs have seen effects:  protection of the domestic industry, but also increases in prices for American consumers and businesses that use imports as inputs. 

They also have unseen effects:  harm to all American industries (even those that aren’t directly affected by the tariffs), as consumers have less spending power in general…  harm to American exporters (foreigners, who now sell less, have less money to buy American goods)… and a deadweight loss of productivity. 

But one of the pernicious, unseen effects of tariffs is more general:  tariffs encourage businesses to lobby for exemptions and for tariffs on their competitors.  This increases political rewards relative to economic rewards, increases the size of the state, and diminishes rule of law.  With the growth of the federal government over the past 50 years, it is small wonder that five of the richest counties in the US are located near Washington, DC – a city with no native industry, but one big “law factory” (as Bastiat calls Paris).

Bastiat wrote generally about this in his magnum opus, The Law.  The passage is worth quoting here at length: 

… since an individual cannot lawfully use force against the person, liberty, or property of another individual, then the common force — for the same reason — cannot lawfully be used to destroy the person, liberty, or property of individuals or groups.

Such a perversion of force would be, in both cases, contrary to our premise. Force has been given to us to defend our own individual rights. Who will dare to say that force has been given to us to destroy the equal rights of our brothers? Since no individual acting separately can lawfully use force to destroy the rights of others, does it not logically follow that the same principle also applies to the common force that is nothing more than the organized combination of the individual forces?

…

But, unfortunately, law by no means confines itself to its proper functions. And when it has exceeded its proper functions, it has not done so merely in some inconsequential and debatable matters. The law has gone further than this; it has acted in direct opposition to its own purpose. The law has been used to destroy its own objective: It has been applied to annihilating the justice that it was supposed to maintain; to limiting and destroying rights which its real purpose was to respect. The law has placed the collective force at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty, and property of others. It has converted plunder into a right, in order to protect plunder.

…

Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others…. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.

…

As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder. Political questions will always be prejudicial, dominant, and all-absorbing. There will be fighting at the door of the Legislative Palace, and the struggle within will be no less furious.  

This is exactly what happens with tariffs, as Bastiat explains in his essay on Trade Restrictions: 

The idea came to [an iron manufacturer who lost to foreign trade] to stop this abuse using his own forces. This was certainly the least he could do, since he alone was harmed by the abuse. “I will take my rifle,” he said to himself, “I will put four pistols in my belt, I will fill my cartridge pouch, I will buckle on my sword and, thus equipped, I will go to the border. There, I will kill the first blacksmith, nail-maker, farrier, mechanic or locksmith who comes to do business with them and not with me. That will teach him how to conduct himself properly.”

When he was about to leave, [our industrialist] had second thoughts, which mellowed his bellicose ardor somewhat. He said to himself: “First of all, it is not totally out of the question that my fellow-citizens and enemies, the purchasers of iron, will take this action badly, and instead of letting themselves be killed they will kill me first. Next, even if I marshal all my servants, we cannot guard all the border posts. Finally, this action will cost me a great deal, more than the result is worth.”

He then has “a flash of inspiration” as he realizes he can pervert the law to advance his goals without putting himself in danger: 

He remembered that in Paris there was a great law factory. “What is a law?” he asked himself. “It is a measure to which everyone is required to comply once it has been decreed, whether it is good or bad. To ensure the execution of the aforesaid, a public force is organized, and in order to constitute the said public force, men and money are drawn from the nation.

If, therefore, I succeeded in obtaining from the great law factory a tiny little law that said: “Iron from Belgium is prohibited,” I would achieve the following results: the government would replace the few servants I wanted to send to the border by twenty thousand sons of my recalcitrant blacksmiths, locksmiths, nail-makers, farriers, artisans, mechanics, and ploughmen. Then, in order to keep these twenty thousand customs officers in good heart and health, it would distribute twenty five million francs taken from these same blacksmiths, nail-makers, artisans, and ploughmen. The security would be better done, it would cost me nothing, I would not be exposed to the brutality of the dealers, I would sell iron at my price and I would enjoy the sweet recreation of seeing our great nation shamefully bamboozled. That would teach it to claim incessantly to be the precursor and promoter of all progress in Europe. Oh! That would be a smart move and is worth trying.

Bastiat concludes of this cronyism – the use of public means to advance private goals: 

The violence exercised at the border by [the iron manufacturer] himself or that which he has exercised through the law may be considered to be very different from the moral point of view. Some people think that plunder loses all its immorality when it is legal. For my part, I cannot imagine a circumstance that is worse. Be that as it may, what is certain is that the economic results are the same.

In his letter To The Youth of France, Bastiat explains how markets create harmonies, while intervention creates antagonisms, as the state becomes a vast instrument of favors and redistribution.  American politics would not be so toxic and divisive if the size and scope of the federal government had not increased beyond its constitutional bounds.  But about half of American economic activity is controlled by bureaucrats and politicians, rather than by consumers and entrepreneurs (about 25 percent by the federal government, almost 15 percent by state and local governments, and 10 percent in federal regulatory compliance).  Consider also that more than 70 percent of federal spending is not authorized by the Constitution. 

If you consider individual self-interest as antagonistic to the general interest, where do you propose to establish the acting principle of coercion? Where will you put its fulcrum? Will it be outside of humanity? It would have to be, in order to escape the consequences of your law. For if you entrust men with arbitrary power, you must first prove that these men are molded of a different clay from the rest of us; that they, unlike us, will never be moved by the inevitable principle of self-interest; and that when they are placed in a situation where there can be no possible restraint upon them or any resistance to them, their minds will be exempt from error, their hands from greed, and their hearts from covetousness.

What makes the various socialist schools (I mean here those schools that look to an artificial social order for the solution of the social problem) radically different from the economist school is not some minor detail in viewpoint or in preferred form of government; it is to be found in their respective points of departure, in their answers to this primary and central question: Are men’s interests, when left to themselves, harmonious or antagonistic?

It is evident that the socialists set out in quest of an artificial social order only because they deemed the natural order to be either bad or inadequate; and they deemed it bad or inadequate only because they felt that men’s interests are fundamentally antagonistic, for otherwise they would not have had recourse to coercion. It is not necessary to force into harmony things that are inherently harmonious.

Therefore they have found fundamental antagonisms everywhere:

Between the property owner and the worker.

Between capital and labor.

Between the common people and the bourgeoisie.

Between agriculture and industry.

Between the farmer and the city-dweller.

Between the native-born and the foreigner.

Between the producer and the consumer.

Between civilization and the social order.

And, to sum it all up in a single phrase:

Between personal liberty and a harmonious social order.

Conclusion

Bastiat wrote almost 200 years ago.  But his insight is timeless and his delivery remains unmatched, as he combines campy, folksy stories with reductio ad absurdum, and blinding economic logic.

In this column, I hope to have whetted the reader’s appetite, and hope this will be an invitation to return to Bastiat.  I recommend, in order:

1.     What is Seen and What is Not Seen, or Political Economy in One Lesson, the clearest, most hard-hitting of Bastiat’s insights.

2.     The Law, Bastiat’s overview of political economy and the role of the state.

3.     For those who want deeper deliciousness, The Economic Harmonies (and especially the introduction, To the Youth of France) and his Economic Sophisms.

New data from the Bureau of Economic Analysis confirm that inflation remained low in May. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at an annualized rate of 1.6 percent last month. It has averaged 1.1 percent over the last three months and 2.3 percent over the last year.

Core inflation, which excludes volatile food and energy prices but also places more weight on housing services prices, was a bit higher. According to the BEA, core PCEPI grew 2.2 percent in May. It has averaged 1.7 percent over the last three months and 2.7 percent over the last year.

Inflation is running well below the most recent projections submitted by Fed officials. In June, the median Federal Open Market Committee member projected 3.0 percent PCEPI inflation for 2025, with projections ranging from 2.5 to 3.3 percent. PCEPI inflation has averaged just 2.6 percent year-to-date, which is above the projections submitted by eighteen of nineteen FOMC members.

In fact, inflation has been running much closer to the projections Fed officials submitted back in March. Three months ago, the median FOMC member projected 2.7 percent inflation for 2025. At that time, projections ranged from 2.5 to 3.4 percent, but the central tendency (i.e., excluding the three highest and three lowest projections) was 2.6 to 2.9 percent. In March, only one member projected inflation would exceed 3.0 percent this year. In June, seven members projected inflation above 3.0 percent.

What changed? Soon after submitting their projections in March, Fed officials learned how high and widespread President Trump’s intended tariff rates would be. Ongoing negotiations, court orders, and Congressional push back now suggest those tariff rates will be lower — and, in some cases, much lower — than those announced in April. Nonetheless, the tariff rates appear to remain higher than Fed officials anticipated they would be back in March.

Broadly speaking, there are two ways the inflation data might evolve in the months ahead. In the first scenario, the pass-through from tariffs will cause prices to rise considerably over the back half of this year. Given year-to-date data, inflation would have to average 3.3 percent over the remainder of 2025 to hit the median FOMC member’s projection. That’s more than double the inflation rate realized in May, and seventy basis points above the average inflation rate realized over the last year. In the second scenario, where passthrough from tariffs is much lower than most Fed officials expect, inflation will continue falling, remain steady, or rise slightly.

In theory, the passthrough from tariffs to the price level should have no effect on monetary policy. The tariffs are a negative supply shock, which the Fed is unable to mitigate. The best the Fed can do (with or without the negative supply shock) is stabilize demand — that is, to keep nominal spending on a stable trajectory. 

The most recent projections appear consistent with this look-through-supply-shocks approach. Whereas the median projection for inflation rose considerably from March to June, the implied median projection for nominal spending — which can be constructed by adding the median projections for inflation and real GDP growth — remained unchanged at 4.4 percent.

Monetary policy is more complicated in practice, however. The public might not react to the passthrough from tariffs the way the rational agents in an economic model do. Specifically, the public might mistake the temporary increase in inflation caused by an adverse supply shock as a permanent increase in inflation, and revise their inflation expectations accordingly. Fed officials would then need to meet those higher expectations with faster nominal spending growth, thereby delivering the permanently higher inflation expected; or, leave nominal spending growth unchanged and risk a recession.

At the post-meeting press conference last week, Fed Chair Jerome Powell acknowledged the risk that tariffs will push inflation expectations higher:

The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It’s also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and ultimately on keeping longer term inflation expectations well anchored. Our obligation is to keep longer term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.

In other words, the Fed might need to keep policy tighter than would be ideal in order to reassure the public that the supply-driven inflation will be temporary.

If monetary policy were close to neutral today, holding the federal funds rate target slightly above neutral in order to keep inflation expectations well-anchored would have little negative effect on near-term economic activity and a neutral to positive effect on longer term economic activity. If monetary policy is already excessively tight, however, the Fed’s hesitancy to cut the federal funds rate target in response to lower-than-expected nominal spending growth could significantly reduce economic activity in the near term, exacerbating the real effects of higher tariffs. Just as the Fed’s hesitancy to raise rates in 2021 and early 2022 allowed inflation to rise, its hesitancy to cut rates in the months ahead would risk causing a recession.

The tension between former President Donald Trump and Federal Reserve Chair Jerome Powell has reignited, following the Fed’s recent decision to hold interest rates steady. President Trump stated again that he might consider firing Powell, something he had previously ruled out. With unemployment still low and output not yet showing signs of contraction, the Fed has judged that the current policy stance is appropriate. Inflation, while lower than its peak, remains above target, leaving little room for interest rate cuts without risking renewed price pressures. Yet Trump prefers a lower interest rate, a policy that might, in the short run, counteract his policy on tariffs.

Trump’s push for lower interest rates creates economic and institutional problems. The first is macroeconomic. By lowering rates in the face of still-stubborn inflation, the Fed risks undoing the fragile progress made since the post-pandemic surge in prices. While lower rates could offer some short-term relief from the economic drag caused by trade tensions and the recent spike in tariffs — many of Trump’s own making — they would do so at the risk of future inflationary pressure. That’s a dangerous trade-off. Monetary easing in a context of persistent inflation is more likely to produce stagflation than sustainable growth.

The second problem is institutional, which is arguably more damaging in the long run. Political interference in monetary policy compromises the independence and credibility of the central bank. The Fed’s legitimacy rests on its ability to act according to economic data, not political pressure. If monetary policymakers can be cajoled into taking actions that align with electoral timelines or partisan agendas, the public will likely expect higher inflation. That would put the Fed in a difficult position: deliver the higher inflation expected by the public or risk a recession. 

Two historical precedents underscore the importance of central bank independence in very different ways. Fed Chair Arthur Burns gave in to President Nixon’s pressure campaign: he lowered interest rates ahead of the 1972 election, when doing so was unwarranted by the economic data, contributing to the high inflation of the 1970s. Fed Chair Paul Volcker refused to give in to pressure from President Reagan, who wanted the Fed chair to commit to not raise rates ahead of the 1984 election. Volcker was not planning to raise rates any further at the time, but refused to commit nonetheless. Volcker’s approach helped restore price stability and solidified the Fed’s reputation for independence. That legacy is now at risk.

President Trump’s calls for the Fed to cut rates risks undermining the institution, regardless of how the Fed responds. If the Fed were to cut rates today, the public might view the decision as a capitulation to political demands. If the Fed refuses to cut rates, as it has done since December 2024, the public might wonder whether the decision was at least partially driven by Fed officials’ desire to avoid the perception of yielding to political pressure. In either case, therefore, the public might come to believe the Fed is responding to political factors rather than economic data. Hence, the integrity of monetary policy suffers either way.

Credibility is hard earned and easily lost. That credibility is especially important in the international context. As the issuer of the world’s primary reserve currency, the U.S. dollar’s value depends not only on the economic fundamentals in the United States, but also on the belief that the Fed will conduct policy in accordance with the economic fundamentals. Political meddling undermines that belief. A politicized central bank is one that foreign investors and trading partners may learn to doubt. Additionally, it can have a negative impact on the US Treasury’s international market.With signs of disagreement emerging within the Fed’s Board of Governors on whether to pivot toward rate cuts later this year, the institution finds itself in a difficult position. Even if the eventual decision is economically justified, it risks being interpreted through a political lens. It is also likely that the Trump administration will publicly claim a victory over the Fed when cuts eventually begin, encouraging the political interpretation. In sum, the damage is already done: not necessarily to inflation or employment, but to the foundational principle of sound money itself.

On May 1, 2025, President Donald Trump signed an executive order instructing the Corporation for Public Broadcasting (CPB) and all executive departments and agencies to cease federal funding for National Public Radio (NPR) and the Public Broadcasting Service (PBS). (The administration seeks to rescind $1 billion in CPB funding). 

The two broadcasters, said the order, still “receive taxpayer funds,” but the situation has changed drastically. Since 1967, when the CPB was created, the media landscape has become “filled with abundant, diverse, and innovative news options.  Government funding of news media in this environment is not only outdated and unnecessary but corrosive to the appearance of journalistic independence.” 

The order unnecessarily charged both broadcasters with bias: “…Americans have the right to expect that if their tax dollars fund public broadcasting at all, they fund only fair, accurate, unbiased, and nonpartisan news coverage…” And “CPB’s governing statute requires “principles of impartiality.”  The CPB may not “contribute to or otherwise support any political party…. The CPB fails to abide by these principles to the extent it subsidizes NPR and PBS.”  

PBS and NPR reacted with predictable outrage, claiming the action was illegal, and the left-liberal media at large rallied to the icon of “non-commercial” programming in “the public interest” — all hoary premises of a soft socialism deemed inherently superior to the commercial world of profits. 

It is decades overdue. President Trump has not merely shifted a budgetary line item. He has struck a major blow against a deep-rooted violation of America’s constitutional and cultural principles — the idea that the government should “establish” its own television and radio stations not the “captive” of private, commercial interests. 

We scarcely could have hoped for this moment, one that strips away the illusion, cherished since the late 1960s, that in a free country with a free press, government can somehow act as a neutral arbiter of public information. But any claim to act “in the public interest” always means to advance the interests of some against the interests of others. In short: interest-group politics. 

Birth of a Constitutional Contradiction 

In the 1960s, with television still relatively new, with only three major television networks— ABC, CBS, and NBC — advocates claimed that the private, commercial media landscape could not adequately serve the public. News had become commercialized. Educational programming was spotty (the commercial stations had declined the Children’s Television Workshop series, “Sesame Street”). Journalism, they argued, needed a “public” alternative, unsullied by the profit motive. It was pure anti-capitalism. 

One must be a New Yorker of the baby boom generation to fully comprehend the reverence for PBS. We always knew what our kids would be doing when “Mr. Rogers’ Neighborhood” was on, then “Sesame Street”: sitting in front of the TV. Then, “Nature” virtually introduced us and our kids to the nature documentary genre, until it became a routine on TV.  And then, great original drama — not “soaps” but literary — “Masterpiece Theatre” and “Great Performances” — stuff we used to see only on Broadway, at Lincoln Center, or on London’s West End. The generation I am talking about here offered big support to Trump in 2024, but postmortems on the election make it clear this was not the bicoastal, urban intelligentsia who grew up having an affair with “PBS NewsHour” and “NOVA.” 

It is an uphill battle to convince the typical welfare-state liberal that the quality of PBS programming, in a very real sense “highbrow”  — educational, literary, scientific, with no commercials — does not in itself justify a government-subsidized broadcaster. What PBS’s record does show is that such programming does have a lasting audience — as demonstrated by PBS’s fundraising successes.  

But how can the government, forbidden to “establish” a church or to censor speech, presume to establish a taxpayer-supported broadcasting system? This system, unsurprisingly, soon became the voice of the political establishment, offering a consistent narrative in favor of more government action, government programs, and government solutions. 

In his executive order, President Trump weakened his argument from principle, even implying that in some circumstances the government may legitimately control the media. To revert to the passage quoted earlier: Government funding of news media in this environment is …not only outdated and unnecessary…” Then the return to principle: “…but corrosive to the appearance of journalistic independence.” 

The “pragmatic” argument is true but irrelevant. Yes, today there are hundreds of cable channels, thousands of podcasts, streaming platforms, independent radio stations, digital news outlets, and citizen journalism initiatives. The “public interest” is never singular; it is nothing more than the many interests of individuals. But the practical argument invites rejoinders about what is still missing, even today, and the media immediately said, for example, “access to education” would be weakened. It is much harder to argue with the principle that government never had a legitimate role in favoring one news source over another. If anything, federal funding of one set of media institutions in this environment creates the appearance — and often the reality — of favoritism, institutional bias, and dependence. Public broadcasting has, predictably, evolved into a haven of government advocacy, portraying private profit-making enterprises with suspicion while celebrating the expansion of public programs and regulation. 

The issue is freedom: free minds, free judgments, freely expressed opinions, and freedom in interpreting and reporting events. Freedom means no government supervision, no subsidies, and no anointed “public” channels. 

Media Sacred Cows Are Constitutional 

PBS and NPR are readying lawsuits even as they invoke the public affection for “Big Bird” and Ken Burns documentaries. (In fact, Mr. Burns created a documentary with the catastrophic effect of advancing the “exoneration” of the infamous Central Park 5.)  All right, but, in 2023, the Media Research Center found that while PBS journalists referred to politicians as “far right” 162 times in 18 months, they labeled politicians as “far left” only six times. 

President Trump refuses to allow the federal government to act as the grand editor-in-chief. He has rejected the paternalistic assumption that without federal funding, the American people will be left ignorant, uncultured, or misled. 

Matters of principle aside, being cut off from federal funds will not silence PBS and NPR and their viewpoints or destroy beloved programs. Sesame Street, Ken Burns, and countless others have proven that philanthropic, corporate, and viewer support can and will sustain what the public truly values. (More than 40 million Americans listen to NPR public radio each week, and 36 million watch a local television station from the PBS network each month, according to their estimates.) PBS CEO Paula Berger said government funding of PBS “…amounts to about $1.60 per person a year [half a billion dollars]…When the Public Broadcasting Act was signed back in the late ’60s, it was envisioned that public broadcasting would be a public-private partnership. 

“This is different than many other public broadcasters around the world, which are state-supported. We are not. About 15 percent…of the budget for public broadcasting comes from the federal government. The rest of it comes from contributed money from viewers like you.” 

Oh, But the BBC Works So Well! 

From the start, advocates of the CPB cited the British Broadcasting Corporation (BBC), founded in 1922, as a model. But it is a model of a successful government media “establishment.” It led the way in exemplifying how government-funded media reflects the ideological leanings of the political and cultural class that sponsors them. For decades, British conservatives have accused the BBC of liberal-left bias — reflexive hostility to Brexit, nationalism, and traditional values. In 2020, a report commissioned by the BBC itself, The Future of Public Service Broadcasting, warned that the corporation risked losing public trust because it no longer reflected “a broad spectrum of opinion” and failed to represent “the whole UK.” This is a phony “self-criticism.” No broadcaster can represent the perspective of the whole country; and if it has no perspective, it is dull. The real criticism is that tax-dollars are sponsoring a particular political perspective. 

A year earlier, former BBC journalist Robin Aitken, in The Noble Liar, chronicled the BBC’s systematic marginalizing of conservative perspectives and viewed traditional British institutions — like the monarchy, the Church of England, and capitalism — with reflexive skepticism or disdain. A former BBC director-general, Mark Thompson, conceded that the corporation had suffered from a “liberal bias” in its earlier years. 

The BBC’s dominance is backed by law. Any household or organization watching or recording television transmissions at the same time they are being broadcast is required by law to hold a television license. This applies regardless of the transmission method and is used to raise revenue to fund the BBC’s $8 billion annual budget. This has made it a gatekeeper of British culture and politics, a state-backed media behemoth that as polished and professional though it may be, distorts the marketplace of ideas by crowding out dissent and entrenching a consensus set by cultural elites. For the United States, where the First Amendment forbids government establishment of favored ideas or institutions in public discourse, the BBC is not a model but a cautionary tale. Americans should not aspire to replicate a system where government-backed journalism becomes indistinguishable from official ideology. 

An Assertion of Principle — At Last? 

Of course, the architects of the CPB knew that they must evade the First Amendment. Thus, Congress structured and funded the CPB as a “private nonprofit corporation” wholly independent of the federal government. It forbade “any department, agency, officer, or employee of the United States to exercise any direction, supervision, or control over educational television or radio broadcasting.” 

“Wholly independent”  — except for funding. Government cannot spend tax dollars decade after decade and disclaim responsibility for the quality of what they buy. Or rather, it can disclaim responsibility only as long as criticism remains muted. Executives of public television and radio know that. They know, too, that the government still holds the purse strings and that their future depends upon keeping the politicians happy. 

So, will much change? Can we expect that government returns to a constitutional role well known all along, even by the advocates of public funding  — protecting freedom of speech, not subsidizing one source of speech? No media outlet should be “the elect” of Washington. No broadcaster should be elevated as the official voice of “the public.” In a free country, the people, through millions of choices made freely, determine what interests them, educates them, and inspires them. For a significant segment, it is PBS and NPR. 

That makes Trump’s decision to end taxpayer support for government media far more than a budget cut. It is a philosophical reassertion of freedom. So, relax. PBS and NPR will survive and thrive. This may be the best boost in years to their funding campaigns. The media landscape is vast. The First Amendment is vibrant. And we have a president who seems, at least this time, to have remembered government’s role in the realms of information, ideas, opinions, artistic judgments, and entertainment: Get out of the way.

President Donald Trump’s on-again, off-again feud with Federal Reserve Chairman Jerome Powell has market observers apprehensive. Economists, policymakers, businessmen, and commentators are worried about growing threats to the Fed’s independence. If elected officials unduly influence the Fed, the conventional wisdom goes, rising inflation and financial-sector turbulence will surely follow.

America’s central bank is arguably the government’s most powerful and respected agency. For decades it has been relatively insulated from the rough-and-tumble realities of politics. Trump’s badgering of Powell for interest rate cuts transgresses an informal yet fundamental norm of public life. Fed decisions are supposed to be guided by disinterested experts, not demagogic politicians.

But does central bank independence deserve the near-unanimous respect it currently enjoys? There are reasons to be skeptical. Recent scholarship on central bank independence suggests a more nuanced view than the one adopted by the popular and financial press. And in the United States, central bank independence is legally questionable at best, and unconstitutional at worst. We have good reasons to question the feasibility and desirability of central bank independence.

In my new AIER Explainer on central bank independence, I discuss the theory and history behind this tricky concept. I go over the arguments for and against central bank independence, survey important works of scholarship on the topic, and consider the legal and constitutional standing of the Fed. 

The case for central bank independence seems obvious. Rather than hand the reins of monetary policy to politicians, it is better to entrust them to experts and technocrats, who by design are unanswerable to politics. This is supposed to guarantee monetary policymakers are disinterested.

The vast majority of economists think it is a good thing the Fed has a wide berth to operate. And while they acknowledge the Fed’s legal accountability to Congress, they are pleased Congress has been unwilling to specify narrower and more observable goals than “full” employment, “stable” prices, and “moderate” interest rates. 

There is a plausible link in economic theory between central bank independence and good macroeconomic outcomes, such as low and stable inflation. Come election season, politicians have an incentive to run the printing presses to make themselves look better. Bureaucrats, who aren’t elected, don’t. Hence the public and its representatives might rationally choose to remove this specific power (monetary policy) from elected officials’ hands.

It is a compelling argument. But it has several weak spots. Both scholarly investigations and legal realities complicate the triumphalist narrative of central bank independence.

While classic studies of central bank independence find a strong link between political protections for central bankers and low, predictable inflation, more recent scholarship is mixed. As I detail in the Explainer, many of the desirable economic outcomes we associate with an independent central bank are plausibly attributable to strong background commitments to constitutionalism and the rule of law. Good political institutions and a strong civic culture, rather than tenure for monetary technocrats, is how we get good economic outcomes.

As for the law, the US Constitution (art. I, § 8, cl. 5) is quite clear: Congress controls monetary policy. Whatever authority Congress gives to the Fed is not the Fed’s by right. It is a delegation. As I note in the Explainer, “The Fed’s operational independence de facto depends on Congress’s continued goodwill. Congress controls the Fed de jure and can intervene at any time to restrict goal, instrument, financial, or personnel independence.”

A totally independent central bank would violate our commitments to democratic self-governance. Although Congress has often been reluctant to discipline Fed officials, the fact remains that the legislature has the first and last word. Given the Fed’s rather poor performance since 2008 — a global financial crisis, a laboriously slow recovery, and recent sky-high inflation — it’s past time for Congress to act.

Rather than chase the mirage of independence, we should find ways to make Congressional oversight of the Fed more productive. There are many ways legislators could increase central banker accountability without politicizing the central bank. Congress could specify a more concrete monetary policy target for the Fed, put it on appropriations for non-monetary policy duties, change the conditions of continuing service for premier Fed officers, or make a host of other changes to promote responsible behavior. Let us not forget that a mere three years ago, the Fed allowed inflation to reach 9 percent, in clear violation of its price stability mandate. As of this writing, nobody at the Fed has been subject to any professional consequences for this monumental error.

It’s time to put the myths of central bank independence behind us. That includes the boogeyman of politicized monetary policy. Just because Congress can and should discipline the Fed doesn’t mean we want the House Financial Services Committee making interest rate decisions. That’s a false alternative. Instead, Congress must draw up a better framework for our central bank and make sure those who run it do their jobs.

Download the Explainer: What is Central Bank Independence?