It’s the end of an era. Volkswagen has just announced that it is planning the closure of two of its German auto manufacturing plants for the first time in its corporate history. In the face of rising competitive pressures from China, its leadership made the seemingly prudent decision to shutter unprofitable operations and concentrate resources elsewhere. The forces of global competition have done what even Allied bombing campaigns could not: close Germany’s more venerable manufacturing plants.

The looming closures, however, are not what spells the end of an era. Rather, it is the response to the planned closures that bodes ill, and not just for Volkswagen but Germany, and free-market economies more broadly. A bloc of interventionists, from labor unions to government ministers, has leapt into the breach, proclaiming their intent to “prohibit” Volkswagen’s intended course. They wish, in short, to force the private company to sustain the unsustainable — intending, by using the power of advocacy, to prevent the kind of creative destruction that makes modern economies flourish. 

Daniela Cavallo, a leading representative of Volkswagen’s General Works Council, for instance, says that Volkswagen’s management decision “is not just a disgrace. It’s a declaration of bankruptcy… Closing factories? Terminations for operational reasons? Cutting wages? Such ideas would only be admissible in one scenario! And that is if the entire business model is dead.” Trade union activists like her are insistent that Volkswagen be prohibited from doing what must be done.

She is, of course, exactly wrong. Closing plants and cutting wages cannot remotely be interpreted as signs that an “entire business model is dead.” In fact, such adjustments are absolutely necessary components in maintaining a vigorous and functioning business model which can freely reallocate resources in the face of a constantly shifting landscape. While the comfortably insulated inhabitants of Wolfsburg may not wish to hear it, the world has shifted in substantial ways and there is no inherent right to business-as-usual.

Not surprisingly, politicians have weighed in as well. Lower Saxony Governor Stephan Weil has said the company “needs to address its costs but should avoid plant closings.” While that’s easy for him to say, it’s not clear how VW is going to solve the fundamental mismatch between high operating costs and lowered consumer demand. 

And the problem is deeper than merely the market’s softening for German cars. VW has, among other political intrigues, been asked to help meet government mandates by producing more electric cars to meet state emissions targets. Unfortunately for VW, fewer and fewer buyers seem to be open to the electric revolution, especially with the abrupt end in taxpayer-funded electric car subsidies. State tinkering, in other words, is having its predictable effect: laws to artificially boost demand cannot also artificially boost supply in the long term. Something had to give, and now there is hell to pay.

VW’s problems with government go beyond mere market tampering. Since state government holds 20% of the voting rights at the firm, and employee representatives hold half, VW finds itself in something of a pickle. One might say Wolfburg has VW by the ears — the company can neither continue as it has, nor let its political masters go.

And this may the rub: since VW has so heavily relied on state subsidies, much of the talk about factory closures may in fact be industrial-political theater. With threats to close assembly lines causing such raucous dissent (and international headlines), there is some cynical justification for believing this all may be a ploy to scare politicians into re-introducing EV subsidies, thereby juicing VW’s bottom line. It’s an old gambit, to be sure — keep the gravy flowing or we will have to make some uncomfortable scenes…

Whether or not threats to shutter factories are a sham, the overt market manipulations on display represent a serious blow to the efficient allocation of resources. Left unchecked, Germany’s days as an economic engine will be numbered: as its motor sputters and slows under the increasing drag of bureaucratic strictures, it will inevitably backslide into Soviet-style industrialism in which political clout matters more than efficient production. While German labor activists jostle to “save jobs,” and politicians jockey to coddle a titan of industry, they are unwittingly knocking the supports from under a system that led to Germany’s famous prosperity in the first place. Advocates of “protection” cannot defy the basic laws of economics regardless of how loudly they object. The jobs they wish to save will instead be cruelly wiped away in a global floodtide, its comfortably insulated beneficiaries immiserated under the onslaught of the inevitable.

Dismal as this all sounds, it is not a certain death-knell. Bureaucratic sclerosis, after all, displays its own cycles of creative destruction. Sensible people (and Germany has more than a few) may yet call a halt to these kinds of clumsy and counterproductive market interventions. It is entirely conceivable that freed from the fetters of state and union mandates, VW can find a creative way off of its destructive path. But if it does not, it may well mark the end of a free-market era in Germany, with enormous implications for Europe’s largest economy.

Today in America there are about 93,000 people awaiting kidneys for transplant. If you’re one of these individuals you’ll likely wait about four years before getting a kidney, enduring dialysis in the meantime — unless, of course, you’re among the one in twenty people who die each year for want of a kidney.

Thomas Sowell famously says about economic reality that “there are no solutions, only trade-offs.” He’s correct, mostly. Every now and then we encounter a problem that does have a solution. The kidney shortage is one of these problems. And the solution is to allow kidney donors to be paid for their donations.

The case for freeing the market in transplantable kidneys is strong, both economically and ethically. Thousands of lives would be saved every year and thousands more delivered from the misery and indignity of dialysis. The downside is almost nonexistent.

Nevertheless, most people steadfastly refuse even to consider supporting a policy of allowing any living individual to be paid a market price in exchange for one of his or her kidneys. Many of the arguments against a free market in kidneys spring exclusively from people’s aesthetic revulsion at the thought of commerce in kidneys. This revulsion is curious, given that it’s surely more revolting to allow people to die unnecessarily simply in order to protect other people’s aesthetic sensibilities.

While I would immediately lift the prohibition on kidney sales, there are several intermediate measures that would yield much benefit if a complete lifting of this prohibition is off the table. One of the most promising was proposed by the late George Mason University law professor Lloyd Cohen.

Cohen recommended that all of our body organs be considered to be parts of our estates in the same way that our homes and jewelry are parts of our estates. When someone dies, his or her heirs would own the deceased person’s body organs just as they own that person’s other properties. These heirs could then sell, give away, or ignore these organs.

The advantages of Cohen’s proposal over the current blanket prohibition on sales are clear. Each year, tens of thousands of healthy transplantable body organs are buried or cremated, needlessly destroyed despite their ability to extend and improve the lives of thousands of people. By treating all transplantable organs as property of each deceased person’s estate, this wholesale destruction of lifesaving body parts would be significantly reduced.

It’s easy to bury a loved one with his or her healthy kidneys or heart if agreeing to have those organs harvested for transplant brings nothing more than a sense of satisfaction from helping a stranger live longer or better. But if the sale of the loved one’s organs will bring thousands of additional dollars to the estate, I’ll bet my pension that the number of kidneys — as well as hearts, lungs, and other body organs — harvested for transplant from newly deceased persons will skyrocket. As a result, thousands of living people will enjoy longer, healthier, and more productive lives.

Of course, as with all properties destined to become part of a person’s estate, that person would, while still alive, have great leeway to determine the disposition of his organs. If someone objects religiously to his organs being harvested, that person must merely specify in his will that no such harvesting is to take place. That man’s family and the courts will be bound to honor this demand.

Or if someone specifies in her will that she wants only her daughter Ann or her nephew Bob to receive her kidney (or heart, or lungs, or liver, or …) for transplant, that provision, too, would be honored.

Cohen’s proposal avoids a major objection to a free market in kidney sales — namely, that too many living persons will impair their health by selling their kidneys to make a quick buck. Cohen’s proposal can be adopted without permitting living persons to sell their organs.

Still, objections are raised, most notably, that potential heirs will skimp on the quality of a sick loved one’s medical care.

No one knows what the prices of transplantable cadaveric organs would be if these were salable on the market. But it’s implausible that adding the value of these organs to our estates will endanger our lives given that our homes, automobiles, and many other assets are already part of our estates. It makes no sense to dismiss Cohen’s proposal on such flimsy speculations.

Another intermediate measure, proposed several years ago by Adam Pritchard and me, is even more modest than the one proposed by Cohen. Pritchard and I propose allowing living people to sell rights to harvest their organs upon their deaths. That is, while I’m still prohibited from selling my kidney when I’m alive, I would be permitted to sell to you — or to a hospital, to a medical insurer, to anyone — the right to harvest my kidneys (and other organs) upon my death.

Today we are all encouraged to become organ donors. But moral encouragement is all we get. How many more of us would sign up to become donors if we received some payment for our agreement while still alive?

Because no one knows what condition my body organs will be in when I die — and because I likely will not die until around 2040 — the prices that I would be able to fetch in 2024 for the rights to harvest my organs upon my death would be modest. My guess is that the right to harvest my kidneys and other organs in the future would fetch a total price today of no more than $250. Still, for $250 I’m more likely to take the necessary steps to agree to become an organ donor than I am when the price I earn from taking such steps is $0.

Is there any good reason to exclude the market value of deceased person’s body organs from being reckoned as part of the deceased’s estate? Is there any good reason for preventing still-living people from selling the rights to harvest their organs in the future, after they die? I can think of no such reason that begins to stand up to the enormous good that such measures would unquestionably produce in the form of more live-improving and life-saving transplant surgeries.

The July US Bureau of Labor Statistics’ employment report reinforces the conclusion that the economy is slowing, as the number of new jobs slowed sharply and the unemployment rate rose to 4.3 percent, up from 4.1 percent in June, and from 3.8 as recently as March. Assessing the Administration’s exaggerated claims for success is essential before what success there has been fades from attention. 

To give the Biden Administration’s credit for any success in increasing jobs requires proponents to blatantly misrepresent facts. Most notably, they claim to have added nearly 16 million jobs to the economy, more than any earlier president in one term. It’s true, but it takes credit for the return of about 9.4 million jobs for people who lost their jobs due to COVID-19 precautions and had not yet returned to work at the time Biden took office. Taking credit for the recovery of a large part of the COVID-related, record loss of 21.9 million jobs, far overstates Biden’s contribution and the effectiveness of his policy efforts. In fact, since the COVID recovery ended in June 2022, the Biden Administration witnessed the creation of 6.3 million new jobs, only about 40 percent of the Administration’s claim. In contrast, the previous administration oversaw growth of 6.7 million jobs before COVID hit. 

The Biden Administration can proudly point to a long period of relatively low unemployment. The unemployment rate for the civilian labor force was 4 percent or less for the 29 months from January 2022 to May 2024. But the Trump Administration also had a relatively long period of such success. The unemployment rate was 4 percent or lower for 26 months from January 2018 to February 2020, up until forced business closures at the onset of COVID. Both episodes are significant accomplishments, with Biden’s slightly better result assisted by an early return to low pre-COVID unemployment levels a year into his administration, despite the lingering lag in the number of jobs.    

A more significant exaggerated claim came in May 2024: “Under President Biden’s Investing in America agenda, nearly 800,000 manufacturing jobs have been created . . .” This claim is more significant because it is tied to the Administration’s new industrial policy to subsidize and protect strategically important domestic industries, most clearly reflected in the CHIPS and Science Act and the Inflation Reduction Act that both took effect in August 2022. Manufacturing jobs fell from about 12.8 million at the beginning of COVID to 11.4 million jobs in April 2020. The recovery of manufacturing jobs, when jobs reached 12.8 million again, came in May 2022. The number of jobs added from then until July 2024 is only 166,000, about 21 percent of Biden-Harris’s claimed achievements. 

Most of the Biden manufacturing job gains occurred earlier, from May 2022 to October 2022, ending within 2 months of the effective date of the two Acts. Subsequently, manufacturing jobs flatlined at about 12.9 million for the next 22 months, right up to the present. Biden’s new industrial policy has produced essentially no new jobs over the nearly two years since passage. 

No review of labor market performance would be complete without addressing real wage developments. The Biden claims discussed so far ignore real wages, and for good reason. In the nonfarm business sector, real hourly compensation rose in the pre-COVID Trump period at a 1.5 percent annual rate. Under Biden, real wages fell at a 1.4 percent annual rate from the first quarter of 2021 to the second quarter of 2024. 

Damage to real wages began with Biden’s “Day One” energy and regulatory Executive Orders, which reduced productivity and real GDP. This loss in productivity reduced real wages for six quarters and, despite a modest recovery since, kept real earnings and the standard of living lower than when Biden’s term began. It also accounted for much of the early inflation surge.  Viewed from this perspective, the current Administration’s performance has been no better than under the Trump Administration, and the latter outperformed in terms of the speed and extent of the COVID recovery and gains in real wages. For most of the Biden-Harris term, real wages have been below their level when the term began.  Relatively high levels of employment have been achieved, as under Trump, pre-COVID, but the new industrial policy appears to have failed, at least for manufacturing jobs. This should not surprise students of history. The US never made rapid advances in economic growth by massive subsidies and trade protection for selected industries.

Angry headlines have recently proclaimed “Kroger Executive Admits Company Gouged Prices Above Inflation,” and “Corporate greed exposed: Kroger admits to price gouging on milk and eggs amid antitrust trial.”

There are several problems with this account. The first is that recent price increases are caused by “corporate greed.” But there is never any explanation for why greed has somehow increased, and then decreased when price increases have subsided. Sharp increases in greed, shared across all corporate sectors at the same time — which is what “greedflation” would require — seem  implausible.

Second, “price-gouging” is defined as excessive price increases during a declared state of emergency, not price increases in normal times. There are problems with even the standard definition of price-gouging, of course, but charging an extra dime for eggs in ordinary business doesn’t come close to fitting the definition in the law.

The most fundamental problem, though, is the naïve equating of price changes with cost changes. The logic seems to be that the only legitimate change in prices must come from and be proportional to, changes in cost.

There is no economic basis for such a rule. Cost and price may move together over longer periods of time, but in any period of a few months the price is mostly determined by consumers. This conclusion is not ideological, it’s not controversial, and it dates to one of the giants of economic theory:  Alfred Marshall.

In his landmark monograph, Principles of Economics (first published in 1890), Marshall defined, and limited, the role of costs in determining final price (Book V, Chapter 3, Section 7): 

[I am] chiefly occupied with interpreting and limiting this doctrine that the value of a thing tends in the long run to correspond to its cost of production…

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production…[W]hen a thing already made has to be sold, the price which people will be willing to pay for it will be governed by their desire to have it, together with the amount they can afford to spend on it. Their desire to have it depends partly on the chance that, if they do not buy it, they will be able to get another thing like it at as low a price.

The “scissors” analogy is quite clear, since the classic “supply and demand” graph in introductory economics even looks like two scissors blades. If you know only “supply” (the schedule of amounts offered for sale at different prices) or only “demand” (the quantities purchased by consumers at different prices), you have no way of predicting the price at any point in time. Marshall’s insight is timeless: in the short run, consumers are generally buying from other consumers, not from producers.

A New York Times story on the accusations against Kroger quotes Joshua Hendrickson, an economist at the University of Mississippi:

If prices are rising on average over time and profit margins expand, that might look like price gouging, but it’s actually indicative of a broad increase in demand…Such broad increases tend to be the result of expansionary monetary or fiscal policy — or both.

The disconnect between cost and price may be clearest when you are buying, or selling, a house. The amount paid for a house has almost nothing to do with the price it commands now; instead, if you want to buy a house you have to make a better offer than the other buyers interested in the house. In many cases, the final price is more, possibly much more, than the price the owner paid. But it can be less, and in some cases much less. The price of a house that sells depends on what buyers want, not on what sellers want.

Buyers also often dictate a price well below the cost the seller paid, in the case of perishable items such as flowers or food products. The seller is forced to mark the produce down to the highest price that buyers are willing to pay, even if that price is half, or less, than the purchase price. The alternative is that the seller will get nothing, and be forced to dispose of the produce as trash.

Yet no one accuses consumers of “price-gouging,” even though they are paying a price far below the seller’s cost. If that is the definition of price-gouging, then I am an avid price gouger myself. I was recently traveling to give a talk in Nashville, at AIER’s Bastiat Society chapter there, and needed a hotel. Having waited until the last minute to secure a hotel reservation, I went onto one of the web sites that find low prices. There was quite a nice hotel near the venue, for a price of $78, so I reserved it.

The room came with a nice “free breakfast” in the morning, and of course my room had to be cleaned. I’m confident that the cost to the hotel just of paying the costs of giving me a key were $50 or more; their long-run “break even” price had to be $150 or more. Yet I was able to get a room for $78; how come?

The answer is that that is how Marshall showed that pricing works. There is simply no necessary relationship between cost and price. By renting out the room at a price below their cost, the hotel was able to get some revenue. Like wilting flowers and food close to its “sell by” date, hotel rooms are either rented out or wasted; the price is determined by demand.

Grocery stores are brokers; they find the lowest cost sources for produce, meat, dairy, and other things consumers want. Then, the grocery offers those things for sale. It is a highly competitive business, one that often has extremely thin profit margins. Many of the things that groceries do, even those that seem exploitative, have reasonable explanations as sound business practice. All the examples of attempts to regulate pricing practices of groceries have resulted in higher prices, or empty shelves. Anyone who wants to understand how the grocery business actually works should pick up Alfred Marshall’s “scissors,” and run with them. 

In August, Ford announced it was spiking its plan to roll out an all-electric three-row SUV, citing low consumer demand and a crowded market. 

“We’re seeing a tremendous amount of competition,” John Lawler, Ford vice chair and CFO, told journalists in a conference call. “In fact, S&P Global … said that there’s about 143 EVs in the pipeline right now for North America — and most of those are two-row and three-row SUVs.”

The news that Ford was scrapping its SUV EV came just a month after the company announced a manufacturing pivot at its plant in Oakville, Ontario. The plant, which had been earmarked for EV production, was shifting production to Ford’s F-series pickups, its flagship gas-powered trucks.

“The move,” the New York Times reported, “is the latest example of how automakers are pulling back on aggressive investment plans in response to the slowing growth of electric vehicle sales.”

The Cost Problem

Ford’s latest pullback from EVs is no surprise to people who’ve been paying attention to the EV market. 

More than a year ago I pointed out that news outlets were reporting of EVs “piling up” at dealership lots because of low consumer demand, which ultimately prompted Ford to halve production of its popular F-150 Lightning, reducing output to about 1,600 vehicles per week. 

The reality is both lawmakers and Washington and auto companies severely misjudged consumer demand for EVs, which has proven far lower than estimates had projected. There are many reasons for the low demand, but the primary reasons are concerns consumers have with EVs. 

Price is one factor. Research in recent years has indicated that despite government subsidies, EVs typically cost on average between $5,000 and $10,000 more than a similar gas-powered vehicle. That EVs are more expensive than gas-powered cars may surprise few readers, but what’s less known is that the price gap is widening.  

“EV prices aren’t just going up; they are rising faster than inflation…faster than [internal combustion engine] vehicle prices” Ashley Nunes, a senior research associate at Harvard Law School, testified before Congress in 2023, noting that the inflation-adjusted average price of a new EV had risen to over $66,000 in 2022, compared to $44,000 in 2011.

The Charging Problem

Cost, however, isn’t the only concern of consumers. 

An overwhelming percentage of Americans—77 percent, according to a 2023 survey led by the Associated Press-NORC Center for Public Affairs Research and the Energy Policy Institute at the University of Chicago—have concerns about how they would charge an EV if they bought one. 

These concerns are not baseless. In February, the New York Times profiled a man Michael Puglia who had recently bought a Ford F-150 Lightning and said it was the “coolest” vehicle he’d ever owned. 

“It’s unbelievably fast and responsive,” the Ann Arbor, Mich., anesthesiologist told reporter Neal E. Boudette. “The technology is amazing.”

The problem was the vehicle’s range. When the weather grew colder, Puglia found that the distance his vehicle could travel fell dramatically. His faith in the $79,000 truck dampened, and he found himself wondering if he should sell it. 

“People say ‘range anxiety’ — it’s like it’s the driver’s fault,” Puglia told the Times. “But it’s not our fault. It’s actually they’re not telling us what the real range is. The truck says it’s 300 miles. I don’t think I’ve ever gotten that.”

The range problem of electric vehicles is exacerbated by another challenge facing EVs: a lack of charging stations. Nationwide, there was 68,475 private and public charging stations at the beginning of the year, according to the Department of Energy. That’s more than twice the number in 2020, but it’s still just a third of the number of gas stations and far below projections.

One reason charging infrastructure has lagged is due to the federal government’s incompetence. Nearly three years ago, the U.S. Departments of Transportation and Energy announced a $5 billion spending effort to build fleets of charging stations to lead “an electric vehicle revolution.” As of the summer of 2024, just seven charging stations had been built.

“That is pathetic,” said US Sen. Jeff Merkley, a Democrat from Oregon. “We’re now three years into this … That is a vast administrative failure.”

Of Profits, and Losses

The decision of automakers to bet big on EV adoption was in some ways rational, in that they were responding to powers in Washington that were pressuring them and incentivizing them to expand electrical vehicle production. But the costs of listening to industry experts and politicians in Washington instead of consumers—and profits—has been severe.

In August 2023, NPR reported that Ford CEO Jim Farley was charging ahead with its ambitious EV expansion even though the company was “losing money on each EV it sells” and consumer demand for EVs was plummeting. Farley’s reasoning was that Ford was attracting new customers, but it was a costly endeavor. Ford reported a loss of $4.7 billion on EV sales in 2023, roughly $40,525 per vehicle sold. 

“If the great mass of consumers dislike purple cars with green polka dots, then a society based on private property will not waste resources in the production of such odd cars,” wrote economist Robert Murphy. “Any eccentric producer who flouted the wishes of his customers and churned out vehicles to suit his idiosyncratic tastes, would soon go out of business.”

Murphy wrote these words more than twenty years ago, but in a sense they describe Ford’s business strategy. By producing mass amounts of pricey EVs that consumers didn’t want and selling them at a loss, Ford was in a sense cranking out green polka dotted cars. It was a losing strategy and path to going out of business. 

Ford’s massive pullback from EVs is part of a broader return to economic reality. Companies flourish in a free market economy not by serving bureaucrats but consumers, the true “bosses.”

“They, by their buying and by their abstention from buying, decide who should own the capital and run the plants,” Mises wrote. “They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser.”

Automakers bear responsibility for their decision, and paid the price in the form of losses. But this misallocation of resources likely could have been avoided if not for the federal government’s hamfisted attempts to coerce Americans into EVs, which included not just taxpayer-funded subsidies, but overt pressure from Washington and federal regulations designed to phase-out gas-powered cars.

Fortunately, the centrally planned EV revolution now appears dead in the water, or at least in full retreat. A spokesman for Kamala Harris recently told Axios the presidential candidate “does not support an electric vehicle mandate.”

Forcing Americans into EVs was always a bad idea economically, but it now appears to be a bad idea politically, too.

That’s good news for Ford and American consumers.

Up until the DNC anointed Kamala Harris as their standard bearer, they were pushing their devotion to saving democracy. Then Democrats became all about joy at their convention, in large part by ignoring the massive costs of what they so joyously promised. Afterward, the Harris campaign first posted Biden policy positions as their own. But then those were deleted, so Harris could pretend to be a “change” candidate despite being Biden’s VP for almost four years. Harris then said almost nothing informative about her new policies, but proxies offered often anonymous claims to different beliefs than she had previously espoused, whose details were far too skimpy for credibility, much less evaluation, even though that undermines effective democracy they so recently claimed to be ardent defenders of. And Matt Vespa has reported, the source code for Harris’ “new” just-in-time for the debate policy section showed it was “a copy-and-paste job from the Biden 2024 website.”

Such slippery vagueness makes an informed electorate, able to evaluate specific policy positions, beyond reach. And voting dominated by uninformed participants adds nothing to our wisdom, yet can dramatically change the outcome, because absent detailed information, no one can adequately judge how a proposal would fare or falter in the real world.  

Why is there such a gap between private market behavior and such political competition? After all, like private sector salespeople, politicians strive to present their wares as attractively as possible. But unlike private sector salespeople, much of a politician’s product line consists of self-proclaimed responsibility or “co-traveler” status for everything good, but sufficient distance or innocence in everything bad, and claimed consequences of proposals not yet enacted. And seldom are the benefits “all they are cracked up to be” but the supposed costs a low-ball fantasy. Further, politicians are unconstrained by truth-in-advertising laws, which would require that claims be more than misleading half-truths; they have fewer competitors (and journalists, judging from the recent debate) keeping them honest; and they face “customers” far more ignorant about the merchandise involved than those spending their own money.

These differences from the private sector explain why politicians’ “sales pitches” for their proposals are so much vaguer. The downside is that if vague or vaporous proposals are the best politicians can put forward, their wares are certain to be logically or empirically inadequate. 

If campaign rhetoric is unmatched by specific program details, where the devil lurks, there is no reason to believe such proposals will be effective, much less efficient, uses of funds, because no reliable way exists to determine whether a policy will actually accomplish what is promised so easily on the campaign trail. The details will determine the incentives facing decision-makers, and goals, however laudable, that are inconsistent with the incentives created will go unmet.  

Sometimes, politicians know too little of their “solutions” to provide specifics of a workable plan. That is, the vagueness is in their minds.  If so, they know too little to deliver on fine-sounding campaign commitments. Achieving intended goals then primarily depends on trust that some future bureaucrats or legislators will somehow both know precisely what to do and do it right — a prospect that inspires few beyond the “public servants” in question.

Politicians may in other cases know the details of intended programs, but fail to provide them. That is, the vagueness is in what they tell the public. Unfortunately, if it is necessary to conceal the details of a proposal to put the best possible public face on a proposal, those details must be adverse. When those details make a more-persuasive sales pitch, politicians would not withhold them. Concealing rather than revealing pays off politically only when better informed voters would be more inclined to reject a proposal.   

Examples of government policies that fall far short due to vaguely articulated or poorly designed campaign promises are not hard to find. Those who seriously study government can provide many such. Here are just a couple of my “favorite” failures.

As Mark J.  Perry described in 1991, a 10-percent luxury yacht tax leading democrats “crowed publicly about how the rich would finally be paying their fair share and privately about convincing President George H.W. Bush to renounce his ‘no new taxes’ pledge.” But “they’d badly missed their mark.” It never even raised enough money to cover the cost of running the program, but managed to kill 25,000 boating industry jobs for far-from-rich workers and wipe out millions of dollars of tax revenue in the process. But at least the government learned a lesson and killed that program. But we keep creating more such promises that will be unkept. More recently, President Biden’s infrastructure plan (mainly throwing money at ill-conceived projects) was going to produce half a million new EV charging stations by 2030, but only managed to build seven stations in the first two years. 

Sometimes the vagueness has enabled massive frauds, including over $1 trillion in the Obamacare program. Jonathan Gruber, its architect, admitted that “The bill was written in a tortured way to make sure the CBO did not score the mandate as taxes” (even though it was found constitutional only because Chief Justice Roberts held that the insurance mandate was a penalty rather than a tax). That made those costs disappear from the scoring. In addition, since the CBO only projected 10 years into the future, they slow-rolled implementation the first four years, to make it look far cheaper than it would actually be ($848 billion) when it was evaluated. But when the CBO later looked at the costs of 10 full years of the program, it found the tab to actually be over $2 trillion.

Claiming adherence to more elevated principles, but stalling in presenting detailed proposals also has strategic advantages. It defuses critics by allowing criticism to be parried by saying “that was not in my proposal” or “I have no plans to do that” or “I said something different since then” (but don’t expect a clear, defensible reason for why, or ask whether I can be trusted to not go back to my earlier positions),” or other rhetorical dodges. It forces opponents to “go first” with specific proposals, which puts the political heat on opponents and provides their camp something to criticize, without allowing similar return fire. It also allows a candidate to incorporate alternatives proposed by others as part of their “evolving” reforms, while claiming to maintain their same principles.

Regardless of the strategic political advantages of such vagueness in misleading or misdirecting voters, adequate analyses of public policies cannot be built upon such proposals and pronouncements. That requires the nuts-and-bolts policy details that have been so glaringly absent in 2024. And when a candidate combines so much “guess what I will actually do because I have given you no real idea” with desires to increase by trillions of dollars what they will transfer from citizens’ hands to their own, that is a valid reason for not being a cheerleader on their behalf.  

In the private sector, few Americans would spend their own money based on such vague promises of an unseen product. They would be foolhardy to act any differently when a political salesperson is marketing their wares, because such vagueness virtually ensures bad policies, if advancing Americans’ well-being —rather than party power — is the criterion.

We sometimes forget that the Constitution of the United States is intended both to direct the nation’s governance and to advance the nation’s economy. But the Supreme Court has not forgotten: Near the end of its yearly term, our nation’s highest court issued several opinions that improve the nation’s regulatory climate — and, indeed, the nation’s economic climate.  

In Loper Bright Enterprises, Inc. v. Raimondo, the Supreme Court discarded a rule of interpretation that had been in effect for several decades. That now-discarded rule addressed this question: when a regulatory agency’s interpretation of a statute is challenged in court, how do we determine whether that interpretation should remain in force? 

Since 1984, the rule had been: If the agency’s interpretation of an ambiguous statute is reasonable, the court must uphold that agency’s interpretation. (This was also known as the Chevron rule or the principle of Chevron deference.) Under Loper Bright, however, there’s a new rule of interpretation: from now on, it will be the role of courts, not agencies, to determine the correct interpretation of a statute — so when an agency’s interpretation of some statute is challenged in court, the court is now the body that decides the best interpretation of that statute. Under Loper Bright, it is now “the responsibility of the court to decide whether the law means what the agency says.”  

This case furthers the constitutional project of creating the conditions for commerce to thrive in America. Hamilton wrote in Federalist No. 11 that “the aggregate balance of the commerce of the United States would bid fair to be much more favourable than that of the thirteen states without union or with partial unions.” The Constitution facilitated commercial activity not just by uniting the states but also by prohibiting states from laying imposts or duties on imports or exports and by giving the power to regulate interstate commerce to Congress.  

Loper Bright’s contribution will be, in a very practical sense, increased certainty and stability in the application of federal regulation of interstate commerce. Agencies can no longer be as creative as they have been in their interpretations of what Congress said. A beneficial consequence of this reduction in bureaucratic creativity should be a corresponding reduction in the way agency interpretations swing back and forth as presidential administrations change. Although some have argued that Loper Bright suggests that the judiciary is assuming control of the administrative state, this view is not correct: a better interpretation is that Loper Bright both requires Congress to take responsibility for the consequences of future legislation and encourages agency regulators to stay in their lane. 

Decisions about resource investment, and the risk-taking that is central to them, will also be better rewarded from the increased fairness in the legal system that will be produced by two other Supreme Court decisions: Securities and Exchange Commission v. Jarkesy and Corner Post, Inc. v. Board of Governors of the Federal Reserve System. In Jarkesy, the Supreme Court held that the right to a jury trial guaranteed by the Seventh Amendment to the Constitution “[i]n Suits at common law” extends to statutory claims for civil penalties brought by the federal government. That means that people who have been victimized by administrative hearings that put them on trial for common law-like offenses — but that seem to lack basic due-process protections — now have a remedy: they can demand trial by jury. Corner Post interpreted a statute of limitations providing that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.” The Court held, as should have been obvious, that a right of action to challenge a regulation accrues when the regulation injures the plaintiff — rather than possibly decades earlier when the regulation was promulgated.  

Jarkesy and Corner Post provide citizens and entrepreneurs with a measure of fairness when dealing with the administrative state. The protections afforded by those two cases to the rights of litigants, and the protections afforded by Loper Bright to the rights of those who are regulated, make for settled expectations that better conform to everyday notions of fairness. Such judicial reforms, both by themselves and in their consequences, create conditions for economic advancement that are significantly more favorable than they were when the Court convened last October. 

Some have argued that the United States has a living Constitution, by which they mean that the essential nature of the Constitution’s functions and operations must change over time. That understanding of the living Constitution is not correct. But what the Court’s newest decisions teach us is that, in a very limited sense, we do have a living Constitution — but only because a central strength of our Constitution’s timeless principles is that they are readily adaptable to new situations. In the Supreme Court’s most recent term, the Justices have demonstrated how several fundamental American institutions that protect both civil society and economic growth — such as trial by jury, statutes of limitations, and politically accountable lawmaking bodies — have a direct connection to the proper functioning of constitutional government. In short, with these decisions the Court has not only supplied a roadmap to fair and sound public administration in the future — it has also provided a kind of civic and economic education. 

Maybe it’s a law of history: every innovation faces opposition. The early nineteenth-century Luddites wrecked textile machinery because it took their jobs. Our innate suspicion extends to trade, too, which is, after all, just another technology for turning one thing into another. Apartheid-era white South Africans opposed efforts to modify the Colour Bar because they feared that African workers would take their jobs and reduce them to “uncivilized” standards of living. Protectionists want to shield their fellow Americans from foreign competition.

Artificial intelligence is the most recent worry and was the big technology story of 2023. Should we curse these intelligent machines? After all, once machines can solve problems, they will take all our jobs and cause mass unemployment. Peggy Noonan sounded the alarm about Artificial Intelligence in the pages of the Wall Street Journal. OpenAI’s executives appeared before Congress to ask (perhaps predictably) for licensing and regulation, and some wonder if the robot apocalypse is finally upon us.

We have heard this story before. It’s still wrong.

The “creative” part of creative destruction is harder to see than the “destruction” part. Of course, I can make life a bit more convenient with new apps and subscription services. But it’s not as dramatic as a plant closure, and there’s no despairing laid off laborer to interview.

But what happens when people innovate and increase others’ productivity? They make some resources redundant and free them up for other, more productive uses. Innovation and institutional change run into distributional problems because some people might be made worse off — absolutely and permanently. Sometimes those who take losses from a changing status quo can veto the change. Government social insurance or trade adjustment assistance, for example, might make it easier for people to swallow the bitter pills of losing their livelihoods. Civil institutions like houses of worship, civic organizations, and other groups help people having hard times. Whether people deserve help might be irrelevant to the political reality. When people put themselves in positions to extract rents, they will do so. In the very long run, weathering periodic injustice might be a small price to pay for big increases in standards of living.

I run the risk of writing my epitaph here, but the threat of artificial intelligence is, most likely, overstated. Learning loss during the COVID-19 pandemic underscored that: online schooling is a poor substitute for in-person schooling. Yes, many meetings could have been emails, but we also feed on contact and conversation. These needs require a lot of human nuances that artificial intelligence is not likely to understand for quite some time.

Releasing labor from areas where machines have taken over has created many new possibilities. Artificial intelligence cannot yet aggregate and deploy knowledge about the particular circumstances of time and place as efficiently and effectively as someone with human intuition. We appreciate aggregations and recommendations, but Facebook’s algorithm doesn’t understand how you do your job quite as well as you do. FA Hayek pointed out a lot of knowledge of “the particular circumstances of time and place” is not properly “scientific.” It is generally of a kind that is difficult (if not impossible) to articulate, much less automate.

The economic historians Joel Mokyr, Chris Vickers, and Nicholas Ziebarth have argued that artificial intelligence might be the world’s best research assistant, but it is unlikely ever to be the world’s best researcher. Every technological change creates a lot of new possibilities. Artificial intelligence — even if not truly “intelligent” — is a monumental achievement of creative cooperation, and it frees up time and energy for even more creative endeavors. As Frederic Bastiat puts it, “to curse machines is to curse the human mind.” To hate a technology is denigrate the most human undertaking, namely, thinking. 

For many months economists and market strategists have suggested that a pending Federal Reserve “pivot” from policy stasis to sustained rate cutting will boost equity prices or at least preclude them from declining. Lewis Krauskopf at Reuters last July wrote that “Rate Cut Prospects Could Bolster US Stocks as Investors Await Earnings, Elections.” That same month, more than a third of respondents to Bank of America’s monthly Global Fund Manager Survey agreed that “monetary policy is too restrictive, the most restrictive since November 2008,” yet they also revealed that their investment portfolios remained “overweight in equities and underweight in bonds” (“Investors Remain Bullish Driven by the Expected Fed Rate Cuts,” Funds Society, July 19, 2024). At Morningstar last month, Gordon Gottsegen reported that “Retail Investors are Bullish on Stocks Ahead of the Fed’s Rate Cut Next Month.”

In fact, decades of investment history surrounding Fed policy pivots from rate stasis to rate cutting show that cutting has rarely been bullish for equities if the cuts came in the wake of yield curve inversions (which reliably forecast recessions). This distinction is relevant today because there’s strong and growing evidence that the next US recession has begun already – or will begin soon – because the yield curve has been inverted since late 2022 and remains so. 

Many economists and strategists remain unsure about a pending US recession, having not forecasted it in the first place, or because generally they doubt that something’s real until it already passes them by.  Similarly tardy will be the National Bureau of Economic Research, but that’s by design, because it assigns “official” dates to the start and finish of each recession, so before it makes its public pronouncements it wants to be sure about the final status of oft-revised economic data. Unfortunately, such “back-casting” (and even the New York Fed’s “nowcasting”) doesn’t help those who need foresight and time to adjust ahead of the trouble.

At the Fed’s Jackson Hole conference last month officials signaled a series of rate cuts to begin soon at FOMC meetings. It would be the first rate cutting since March 2020. Figure One plots the Fed funds rate versus the 10-year T-Bond yield over the past six years and includes a year-ahead forecast of the Fed rate derived from futures contracts. The projection is for cuts leading to a rate of 2.75 percent a year from now. Today’s rate is 5.25 percent, so moves to 2.75 percent would equal total cuts of 250 basis points.  Bond yields typically decline amid rate cutting, so the yield curve might remain inverted at least through next March.

If this is the Fed’s coming move – cutting its policy rate substantially and quickly – it suggests a panicky policy; it betrays both a fearfulness and an eagerness to fight a recession which the Fed itself helped instigate by its previous, excessive, curve-inverting rate hikes.

Rate cutting typically recognizes the problem (recession) after the fact but doesn’t prevent the problem. Nor does rate cutting necessarily boost equities. It’s true that lower interest rates (long and short) tend to be bullish for equities “all else equal” (a lower discount factor applied to corporate earnings), but “all else” is not equal now; a recession means economic growth contracts and earnings decline, both of which undermine equity prices. Significant, rapid rate-cutting usually coincides not with an economic “soft landing” but incoming recession data. Rate cuts based on hindsight instead of foresight can confirm a recession but can’t prevent it.

Important relationships among Fed policy, the yield curve spread, recessions, and equity performance since 1968 are illustrated in Figure Two. All eight recessions have been reliably preceded (roughly 12-18 months in advance) by Fed rate hiking that caused an inverted yield curve (depicted here as a negative yield curve spread, when short term interest rates lie above long-term bond yields). In all these years, we find no case of a recession occurring after no prior curve inversion and no case of a recession failing to occur despite a prior inversion.

I count eleven episodes of persistent and material Fed rate cutting since 1968 (Figure Two). Eight cases came on the heels of curve inversion and three occurred after no prior inversion. Only in the three other cases did Fed rate cutting not coincide with recession and plunging equity prices. The three cases are 1971-72, 1984-86, and 1995-98. They’re worth summarizing.

• Case #1 – In September 1971 the Fed began to cut its policy rate, then at 5.75 percent, to a low of 3.50 percent in January 1972. When the rate-cutting began, the yield curve was upward sloping (not inverted). The long-short rate spread was positive (62 basis points). There had been a prior recession (from December 1969 to November of 1970) but amid the rate cutting of 1971-72, economic growth persisted, and the S&P 500 gained 8 percent. The next recession would occur in 1973-75.
   
• Case #2 – In July 1984 the Fed initiated another benign episode of rate cutting. Over a two-year period, it reduced its policy rate dramatically, from 11.63 percent to 5.88 percent (by August 1986). When the cuts began, the yield curve again was upward sloping; the curve spread was positive (106 basis points). There was a prior recession (July 1981 to November 1982), but during this rate cutting period economic growth again held up, while the S&P 500 boomed by 44 percent. The next recession wouldn’t take hold until July 1990 (and last briefly, through March 1991).  

• Case #3 – In April 1995 the Fed began to cut its then peak rate of 6.00 percent until by November 1998 it was down to 4.75 percent. The slow and steady policy was dubbed “gradualism.” Ten separate cuts totaled only 1.25 percentage points over three-and-a-half years. The yield curve was upward sloping when cutting began (a positive spread of 103 basis points). During this period the US economy was robust: real GDP growth was fast to begin with (+4.4 percent in 1996) and then accelerated to 4.5 percent in 1997 and 4.9 percent in 1998. During this episode the S&P 500 skyrocketed by 125 percent (37 percent annualized).

The impression held by today’s economists and strategists that Fed rate cutting is bullish for both output and equities might be skewed by these three cases – these few outliers. But digging more deeply and carefully into the data, we discover this fascinating phenomenon: that unlike the other eight cases, the three rate-cutting episodes of 1971-72, 1984-86, and 1995-98 (when the S&P 500 gained 8 percent, 44 percent, and 125 percent, respectively) were not preceded by a recession-signaling inverted yield curve.

Now consider depictions (in Figures Three, Four and Five) of three major US recessions that occurred alongside severe Fed rate cutting.  In these cases, US equity prices plunged “despite” Fed rate cutting.  These are three of the eight typical cases of bearishness amid rate cutting witnessed since 1968 (when rate cutting arrived in the wake of an inverted yield curve). That’s precisely our current situation. It’s an ominous pattern — for those still bullish on equities. 

For the entire period in Figure Three (August 2007 to June 2009), the S&P 500 declined by 36 percent (20 percent annualized), but the index was down by an astounding 51 percent from peak (October 2007) to trough (March 2009).   

For the whole period in Figure Four the S&P 500 declined by 38 percent (25 percent annualized), but the index dropped 41 percent from peak (December 1999) to trough (February 2003).   

In Figure Four, the S&P 500 declined by 36 percent (24 percent annualized), but the index fell farther (-44 percent) from peak (October 1973) to trough (October 1974).   

Considering all relevant data and pertinent causal aspects surrounding Fed rate cutting in recent decades, it seems more likely than not that the next episode will neither prevent a US recession nor preclude a material decline in US equity prices. Of greatest relevance is the prior inversion of the yield curve and the more recent indication that recession may be here already or else imminent (due to the uptick in the jobless rate, per the “Sahm Rule Recession Indicator”). The fact that only three of the past eleven episodes of Fed cutting coincided with a growing US economy and rising US stock prices should be of little comfort today, when it’s realized that those cases weren’t preceded by an inverted yield curve or ominous Sahm signal.    

The Federal Reserve’s Federal Open Market Committee (FOMC) announced a 50 basis point cut in its federal funds rate target on Wednesday. The move marks a reversal at the Fed, which had held its target rate range at 5.25 to 5.5 percent since July 2023. FOMC members previously worried high inflation might become entrenched. They now believe inflation is on a path back to 2 percent, thereby warranting a gradual transition from tight to neutral monetary policy.

At the post-meeting press conference, Fed Chair Jerome Powell described the decision as “a process of recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low to a place that’s more appropriate given where we are now and where we expect to be.”

Market participants were grappling with two big questions heading into Wednesday’s meeting. The immediate question was whether the Fed would cut its federal funds rate target range by 25 or 50 basis points. Just prior to Wednesday’s announcement, the CME Group reported that the federal funds futures market was pricing in a slight edge (55 percent) for the larger cut.

The longer term question concerned the pace of rate cuts. Prior to the meeting, futures market traders were convinced the Fed would move quickly. The CME Group reported a 12.8 percent chance that the federal funds rate target range would be 150 basis points lower by the end of the year; a 51.0 percent chance it would be at least 125 basis points lower; and an 88.2 percent chance it would be at least 100 basis points lower.

The Fed’s decision to cut by 50 basis points on Wednesday and the projections for the federal funds rate submitted by FOMC members largely confirmed market expectations. The median FOMC member projected the midpoint of the federal funds rate target range would fall to 4.4 percent this year, which is consistent with a 4.25 to 4.5 percent target rate range. One FOMC member projected the federal funds rate would fall by an additional 75 basis points this year; nine members projected it would fall by an additional 50 basis points; seven projected it would fall by an additional 25 basis points; and two projected it would remain unchanged.

Given FOMC members’ projections for near-term rate cuts, Wednesday’s decision might be seen as an implicit acknowledgement that the Fed had gotten behind the curve. Inflation was 2.5 percent over the last twelve months, which is slightly above target. But it has averaged just 1.5 percent over the last three months and 0.9 percent in the most recent month.

Moreover, since our estimates of housing services prices adjust with a considerable lag, actual inflation—if it were possible to accurately measure it—is probably even lower. This lag caused conventional measures to underestimate inflation in 2021, when prices began rising rapidly. It has likely caused them to overestimate inflation in late 2023 and 2024, as prices began to grow more slowly.

Powell denied that the Fed was playing catch-up with its 50 basis point rate cut. “We don’t think we’re behind. We think this is timely. But I think you can take this as a sign of our commitment not to get behind.” Nonetheless, Powell acknowledged that the Fed might have cut in July had the data come in before that meeting rather than just after.

By conventional measures, monetary policy remains tight and will likely continue to remain tight over the near term if the Fed cuts rates in line with the median FOMC member’s projections. Indeed, Powell said “there’s no sense that the committee feels it’s in a rush” to return policy to neutral.

The New York Fed estimates the real (i.e., inflation-adjusted) neutral rate of interest at 0.74 to 1.22 percent. With the Fed’s 2-percent inflation target, that would imply a long run nominal neutral rate of interest of 2.74 to 3.22 percent. Correspondingly, the median FOMC member currently projects the midpoint of the longer run federal funds rate target range at 2.9 percent, which is consistent with a 2.75 to 3.0 percent target rate range. If the federal funds rate target range is 4.25 to 4.5 percent following the December meeting, as the median FOMC member currently projects, it will remain more than 100 basis points above the long run neutral federal funds rate.

Of course, we do not directly observe the neutral federal funds rate. But, as Chair Powell noted in the post-meeting press conference, “we know it by its works.” If incoming data suggests that monetary policy remains too tight, the Fed might respond by cutting its federal funds rate target faster than the median FOMC member currently projects.

“We are not on any preset course,” Powell said. “We will continue to make our decisions meeting by meeting.” The risk is that, given the long and variable lags of monetary policy, it will be too late to avoid a recession once the signs of a recession appear.