On February 11, the Congressional Budget Office (CBO) published its annual Budget and Economic Outlook report, covering 2026 to 2036. Among the projections, the report found that Social Security’s Old-Age and Survivors Insurance will be unable to pay full benefits in 2032 (a year earlier than projected in last year’s report). This is due to the higher projected cost-of-living adjustments and lower projected revenues. To put that in perspective, Social Security will be unable to pay full benefits before the program turns 100.
Social Security is in desperate need of reform, but doing so is easier said than done. Perhaps the worst cultural consequence of Social Security is that this unsustainable program is pitting generations of Americans against one another. The young support benefit cuts while the old support higher payroll taxes. Successful reform means balancing the interests between these generational divides to prevent political backlashes, which may jeopardize future reforms.
What Social Security Is and Is Not
In 2007, AIER published “What You Need to Know About Social Security.” This Economic Education Bulletin outlines Social Security’s history, some myths and realities about the program, as well as options for reform and what individuals planning for retirement could do in the meantime. Many of the bulletin’s lessons are still applicable.
Chief among them is the nature of the program. Social Security is not a system of individual retirement accounts. Nor is it a defined benefit pension program. It is a pay-as-you-go structure, where payroll taxes collected from working Americans go to fund benefit payments for the elderly. Despite being sold to Americans as an earned benefit, the true nature of the program is much closer to a Ponzi scheme than many care to admit.
This means that the program relies upon working Americans to pay into the system outnumbering retirees. That number has dwindled, and it currently sits at 2.7 workers per Social Security recipient, an unsustainable ratio. Minor adjustments are not a feasible solution. The program needs structural reform.
Possible Reforms
Properly reforming Social Security requires a structural transition to a system based on ownership, savings, and investment. Universal Savings Accounts (USAs) can help anchor the transition if they are paired with policies that address the generational divide over the program.
One such proposal made by the AIER Bulletin, as well as others, is a transition to a flat benefit. While this would drastically improve the program’s solvency, it risks immense political backlash. Current retirees and those near-retirement are planning on specific levels of benefits. Changing those overnight will likely result in voters 50 and over (one of the largest and fastest-growing voting blocs) punishing politicians who supported reforms by supporting challengers in primary and general elections. Furthermore, that punishment at the polls will make incumbents reluctant to offer other reforms in the future.
To mitigate this political risk, policymakers can consider cohort differentiation. This would mean that current retirees and near-retirees receive all accrued benefits, financed transparently through general revenues, while the youngest cohorts transition out of the traditional program entirely and have access to USAs, which provide them with control over their finances and the portability to take those savings with them regardless of career or location changes.
Additionally, Social Security’s Old Age Insurance could be separate from Disability Insurance and Survivors’ Insurance. The combined OASDI framework encourages benefit creep, especially as old-age insurance costs increase. Stand-alone programs can help prevent the re-expansion of the old-age system through cross-subsidization.
The AIER Bulletin also notes that, while total privatization of retirement savings would be ideal, offering a smaller, flat benefit could encourage people to save more. Furthermore, the bulletin recommends encouraging saving through tax policies that incentivize savings over consumption (such as a decrease in reliance on income taxes). Additionally, policymakers can make it easier for Americans to save by replacing the myriad savings vehicles in the tax code with a broader universal savings account system without restrictions on how that money is used.
There is also the possibility of devolving the program to state governments and having states manage these funds like defined benefit pensions. This would enable benefits to be connected to earnings. One such drawback, however, is state management of defined benefit pension plans is mixed at best. A defined benefit system at the federal level may exacerbate the knowledge and incentive problems that occur at the state level.
Finally, long-term success will be determined by the institutional constraints in place. These include hard cohort cutoffs and a supermajority requirement for benefit expansions. Without such constraints, we will likely see a reversion to what we have now, with the same empty promises that the system would be fully self-funded, only to saddle Americans with massive tax obligations.
Institutional Reform — or Generational Reckoning
Social Security reform is no longer a choice; it is the only way to avoid a very unfortunate future. Ignoring that reality will mean higher taxes on working Americans and benefit cuts to retirees. Enacting sustainable policy solutions can help avoid disaster without leaving Americans, young and old, destitute. The best hedge against the failures of the status quo, however, is to take control of one’s plans for the future instead of expecting the government to manage the future for us.
What US industry is the most subsidized and regulated by the federal government? If you answered nuclear power, you are correct.
As a result, the 70-year “Atoms for Peace” program represents the most expensive failure (malinvestment) in US business with a history of uncompleted projects and massive cost overruns, as well as future decommissioning liabilities.
Still, President Trump is all-in with nuclear, setting a goal of ten new reactors in construction by 2030 and a quadrupling of total US capacity by 2050. Biden was bullish too, and George W. Bush had his turn at a “nuclear renaissance.” Each failed, but in the nuclear space, hope springs eternal.
Commercial fission began in the 1950s amid government and scientific fanfare. The promise was virtually limitless, emission-free, affordable electricity compared to coal-fired generation. But the technology was experimental and encumbered by a fear of radioactive contamination. Electric utilities and municipalities resisted. It would take open-ended (federal) research and development, insurance subsidies, and free enriched uranium, and rate-base returns under state regulation, to birth nuclear power.
Scale economies and learning-by-doing were expected by vendors General Electric, Westinghouse, and others. Their turnkey projects guaranteeing cost and delivery, which produced a “bandwagon effect” of new orders in the 1960s, backfired. Almost half of the plant cost had to be absorbed by vendor stockholders. Cost-plus contracts would ensue with captive ratepayers in tow.
In the 1970s, cost overruns, completion delays, and cancellations marked the end of the nuclear boom. With the Three Mile Island accident in 1979, a regulatory ratchet accelerated. “Federal regulations used to take up two volumes on our shelves,” one participant told Congress. “We now have 20 volumes to explain how to use the first two volumes.” Legalistic, overly prescriptive, retroactive rules now came from adversarial hearings and “the way of the institutions of government.”
At the same time, turbine engines fueled by oil and natural gas took off. Cogeneration and combined cycle plants set a new competitive standard for nuclear, not only coal. Such technology used far fewer parts and was much more serviceable than a fission plant.
Today, 94 active reactors produce dependable power to reinforce a grid weakened by intermittent wind and solar. With high up-front capital expense sunk, marginal-cost economics supports their continued operation. But for new capacity, large necessary government subsidies confirm an enduring reality: nuclear fission is the most complicated, fraught, expensive way to boil water to produce steam to drive electrical turbines.
Hyperbole abounds about new reactor design. Small Modular Reactors (SMRs) are newsworthy, but is a turnkey project being offered to ensure timeliness and performance? Or does the fine print of the contracts offer the buyer “outs”? This question should be asked of those promising to buy or develop gigawatts of new nuclear capacity in the next decade.
What now for nuclear policy to enable affordability and reliability? In a nutshell, the twin evils of overregulation and oversubsidization should give way to a real free market. The Nuclear Regulatory Commission should yield its civilian responsibilities to the best practices established by the Institute for Nuclear Power Operations, an industry collaborative created after Three Mile Island. Federal insurance via the Price-Anderson Act of 1957 (extended seven times to date) should be replaced by private insurance per each “safe” reactor.
Federal grants, loans, and tax preferences for nuclear should end. Antitrust constraints on industry collaboration should cease, and waste storage and decommissioning should be the responsibility of owners.
Nuclear fission today is an essential component of a reliable electric grid. But economics and incentives matter, and U.S. taxpayers and ratepayers should not bear the costs of an uncompetitive technology. Neutral government is best for all competing energy sources, after all, in contrast to the energy designs of both Republicans and Democrats.
Read more from this author:Nuclear Power: A Free Market Approach
January saw Americans grow markedly more pessimistic about the economy. The Conference Board reported that its Consumer Confidence Index fell almost ten points in one month, reaching its lowest level since 2014. Consumers reported worsening views of current market conditions, as well as a sharp reduction in expectations regarding job prospects and income for the upcoming months.
Upon initial review, this pessimism appears hard to square with recent headlines. Employers seem to be adding jobs; measured output has not fallen; consumers in the aggregate are still spending more in nominal terms than they were last year. This has led commentators to label this drop in confidence merely a perception problem.
Market participants, however, do not react to abstract aggregates. They are responding to what they are directly experiencing: rising prices, tighter budgets, and uncertainty about future opportunities and job prospects. This is not the result of some vague uneasiness. Rather, it captures concrete concerns that broad economic averages often smooth over.
Yes, the index regarding current conditions fell, and fell sharply. According to the Conference Board, the share of respondents who said jobs are “plentiful” fell to 23.9 percent, while the share saying jobs are “hard to get” rose to 20.8 percent. These data do not come from individuals attempting to judge macroeconomic trends. Rather, they were evaluations of lived labor-market constraints. Even if employment totals remain positive in the aggregate, such a tallying cannot capture changes in perceived difficulty in finding or changing jobs. People do not consult nationwide aggregates when considering whether it is easy or difficult to find jobs. Almost no one searches for “a US job,” but for specific jobs in specific locations requiring specific skill sets.
A teacher searches for openings in a particular district. A laid-off marketing analyst seeks firms hiring in his specialty. The welder wants fabrication work within driving distance. No individual experiences the labor market in aggregates, but through concrete localized opportunities. An economy can add jobs on paper while many struggle to find positions suited to their skills and geography. This reality does not make their pessimism purely emotional.
Perhaps the more striking deterioration was in expectations. Consumers’ outlook for income, business conditions, and employment over the coming six months deteriorated to levels typically associated with an impending recession. More specifically, the Expectations Index dropped to 65.1, well below the 80 that often signals an upcoming downturn. Only about 15 percent of respondents expect business conditions to improve. These expectations will obviously shape household decisions about major purchases, savings, and career moves.
Moreover, the decline was not contained to certain socio-economic demographics. Reuters reports that sentiments fell across income and age groups, including higher-income households that typically are a little more optimistic than other groups during moderate economic stress. This hints that the collapse is not merely the result of lower-income hardship but a more generalized perception that economic conditions are less favorable.
This is further illustrated by the qualitative responses in the survey. Consumers cited high prices — namely, necessities like groceries and gasoline — as persistent concerns. As noted by Peter Earle, consumer goods like coffee, eggs, and chicken are still priced well above pre-COVID levels. Even a three-percent reduction in gasoline prices in the last year is outweighed by the 21 percent increase since 2019.
Mentions in survey responses of trade policy, tariffs, and political uncertainty rose as well, as did labor-market insecurity and health-related costs. Manufacturing employment continues to fall in this tariff era, shedding roughly 70,000 jobs after tariffs were raised from about 2.4 percent to around 10 percent. Even if these jobs are offset by job gains in some other sector elsewhere, displaced workers still have reason to be less confident about their own prospects.
These concerns reflect specific and notable pressures on households’ budgets and long-term planning.
Here enters one of the major issues of the aggregates. Measures like GDP, average wages, and employment totals merely summarize overall activity, obviously. What they fail to capture are economic realities like distribution and sustainability — and whether growth positively impacts a household’s ability to plan for the future. Nominal consumption can rise as real purchasing power stagnates; employment can grow as job mobility declines. Aggregate output can increase while economic freedom and flexibility decrease. When we understand this, then divergences between consumer confidence and aggregate economic indicators become more intelligible.
Even assuming aggregate statistics are well-suited to measure motion in an economy (a point not necessarily granted, but simply set aside for the sake of this article), they cannot measure coordination or economic viability. They tell us how much supposed economic activity is occurring, but not whether such activity reflects consumer preferences, actual economic realities, or even economic resilience. Consumer confidence, while also an aggregate of sorts, seeks to provide a general judgment about opportunity, security, and constraint. When assessments of conditions and expectations simultaneously deteriorate, that hints at a more fundamental issue than mood swings by consumers.
To be clear, consumer confidence is not a comprehensive measure of economic health. Survey responses reflect personal experience and expectations, which can be incomplete or mistaken, but still have relevant impact because individuals act upon those attitudes. But the primary trap here is the treatment of low confidence as simply irrational pessimism. When consumers consistently report anxiety about the job market, income, and future conditions, they are not necessarily misunderstanding the economy. Instead, they may be pointing to specific structural pressures aggregates cannot detect. Rising costs, reduced labor mobility, and policy uncertainty all weigh heavily on confidence while remaining somewhat invisible to headline economic data.
So, we return to the central question: when consumer confidence collapses amid positive economic aggregates, which one is lying? Perhaps neither, but they are both needed if we wish to understand the state of the economy. Aggregate statistics are intended to measure total activity. So be it. But total activity is not the end-all, be-all of economic health. Consumer confidence seeks to reveal whether such activity is translating into security, flexibility, and confidence about the future.
If economic growth increasingly takes the form of superficial statistical expansion rather than authentic improvements in economic coordination, then falling confidence is not a puzzle, nor something to ignore. It is, instead, a warning that the economy is possibly wasting resources in the name of increasing numbers. This, of course, completely inverts the entire purpose of the economy — the proper coordination of scarce resources in accordance with people’s needs.
Free-market capitalism still delivers the goods. But its political coalition is fracturing — and that should worry anyone who cares about prosperity and freedom.
Recent Gallup polling on Americans’ views of capitalism and socialism shows that just 54 percent now view capitalism favorably, the lowest Gallup has recorded. Views of socialism remain much lower at 39 percent, but the direction matters. Support for capitalism has fallen notably over time, especially among independents and younger Americans.
The partisan breakdown is even more revealing. Republicans remain strongly pro-capitalist, though support has softened slightly. Independents now only narrowly favor capitalism. And among Democrats, fewer than half view capitalism positively, while nearly two-thirds view socialism favorably. As earlier Gallup polling on capitalism and socialism shows, this pattern has been developing for years.
Here’s the hard truth: those of us who defend free-market capitalism are unlikely to persuade most Democrats anytime soon. The data confirm it. Democrats often like the outcomes of capitalism — jobs, innovation, higher living standards — but reject the label, associating it with inequality or corporate power.
That alone wouldn’t be alarming. Political disagreement is normal. What is alarming is where capitalism is losing ground next.
A System of Liberty, Not Privilege
True capitalism is grounded in private property, competitive markets, voluntary exchange, and the rule of law. It treats individuals as decision-makers in their own lives — not subjects of top-down control. It decentralizes power, rewards value creation, and invites experimentation, allowing people to say “yes” to opportunity without asking permission from bureaucrats or politicians.
This idea is old — and proven. Adam Smith’s explanation of voluntary exchange captured it 250 years ago in The Wealth of Nations: “it is not from the benevolence of the butcher, brewer, or baker that we get our dinner, but from their regard to their own interest.” In a system of voluntary exchange, people seeking to serve themselves must first serve others. Prices convey information, profits signal value creation, and losses expose waste — the core of the price mechanism in a free-market economy.
The process isn’t perfect, but it’s far superior to the alternatives. As Milton Friedman argued in his critique of big government, markets work because they respect people’s ability to decide, adapt, and improve through cooperation — not central command.
The Real Warning in the Gallup Data
The most troubling signal in the Gallup polling isn’t Democratic skepticism. It’s the erosion among independents and younger Americans — groups that historically decide elections and shape long-term political trends.
Independents still lean pro-capitalist, but their support has fallen. Younger Americans overwhelmingly support small business and free enterprise, yet are increasingly ambivalent toward “capitalism” as a system. That suggests confusion, not rejection.
Even more concerning is what’s happening on the right.
A growing faction of Republicans — often labeled “national conservatives” or “populists” — is openly abandoning free-market principles in favor of state-directed outcomes. They argue for industrial policy, trade protectionism, expanded subsidies, and heavier regulation, all justified as necessary to achieve cultural, national, or political goals.
This matters because it breaks the traditional coalition that defended markets across parties.
When Both Sides Drift Toward Bigger Government
Gallup’s data show Americans are overwhelmingly positive toward small business (95 percent) and free enterprise (81 percent), while holding deeply negative views of big business. That gap tells us people still believe in markets — but not in a system that feels rigged and political.
The left responds by calling for more government control. Some on the right now respond by calling for different forms of government control. The mechanism is the same.
Whether it’s progressive redistribution or nationalist industrial policy, the solution offered is top-down power — politicians picking outcomes, overriding prices, and directing capital. History shows this doesn’t fix capitalism’s problems; it replaces markets with politics.
As the fallacy of corporate subsidies makes clear, once the government starts steering the economy, competition weakens, insiders win, and ordinary people lose. Bigger government doesn’t become more precise — it becomes more entrenched — regardless of which party is in charge.
Capitalism’s Problem Is Not About Performance
The Gallup results don’t show a rejection of capitalism’s benefits. They show a rejection of cronyism mislabeled as capitalism. Americans like choice, competition, small businesses, innovation, and opportunity — all products of free-market capitalism.
What they don’t like are bailouts, favoritism, barriers to entry, and rules that protect the powerful — outcomes caused by policy distortions, not markets. Policies such as occupational licensing that create barriers to opportunity or housing restrictions raise costs and block entry, especially for younger Americans. When those failures are blamed on “capitalism,” skepticism grows.
This is why the fight matters most outside the Democratic base. If independents, young people, and market-friendly conservatives drift toward bigger government — just with different slogans — the long-run prospects for freedom dim.
The Moral Case — and the Evidence
Beyond efficiency, capitalism rests on a moral foundation. Markets respect individuals’ dignity to pursue their own conception of the good life. They reward service, not status. They generate progress through experimentation and feedback. And they decentralize power, protecting against tyranny.
The evidence is overwhelming. In 1820, more than 90 percent of the world lived in extreme poverty. Today, that figure is under 10 percent, as shown by data on extreme poverty over time. Life expectancy has doubled. Child mortality has collapsed. Access to goods and services, once considered luxuries, has become common.
What drove this transformation? Not redistribution or industrial planning. It was the spread of market institutions: open trade, secure property rights, sound money, and the freedom to invest and innovate. The comparisons are instructive — East v. West Germany, North v. South Korea, Venezuela v. Chile. Where markets are embraced, prosperity follows. Where they’re suppressed, poverty and repression prevail.
Reclaiming Capitalism
The polling tells us the challenge ahead is not convincing Democrats who already favor more government. It is rebuilding confidence among the persuadable middle and preventing the right from abandoning markets in favor of control.
The path forward isn’t to redefine capitalism, but to reclaim it: restore sound money, limit government favoritism, secure property rights, open competition, and remove barriers that trap workers and families. And we must explain — not just defend — why free-market capitalism remains the best path to prosperity.
Public skepticism is rising, yet the moral and empirical case for capitalism has never been stronger.
Note: As of January 31, 2025, data for four of the 24 components of the Business Conditions Monthly indicators have not yet been published. While the remaining suspended economic data are expected to be released prior to the next Business Conditions Monthly report, the resulting estimates should be regarded as preliminary. Interpretations will remain tentative until several months of subsequent releases and revisions have accumulated, allowing for a more stable and reliable assessment of both data quality and overarching trends.
The two most recent inflation data releases offer a mixed but gradually improving signal, with broad disinflationary trends emerging alongside persistent pockets of price strength. January’s Consumer Price Index (CPI) report from the US Bureau of Labor Statistics came in notably cooler than a typical start to the year, when firms often reset prices. Headline inflation rose a mere 0.17 percent month-over-month and the year-over-year rate eased to 2.4 percent, supported by softer energy and food prices, flat core goods, and modest slowing in rents. At the same time, discretionary services such as airfares, recreation, and transportation remained firm, and the share of categories posting faster price increases broadened, underscoring that progress toward lower inflation remains uneven. The Fed’s preferred core Personal Consumption Expenditure (PCE) gauge told a somewhat firmer late-year story, rising 0.36 percent in December and 3.0 percent year-over-year, driven largely by recreation services, financial services, and tariff-sensitive goods, while consumers continued rotating spending away from goods toward services even as income growth lagged and the saving rate slipped to a three-year low. Together the CPI and PCE data suggest inflation is gradually stabilizing but still shaped by sector-specific pressures and evolving consumer behavior, leaving the outlook balanced between continued disinflation and lingering strains on household budgets.
US labor market conditions reflect a delicate transition from prolonged cooling toward a tentative, uneven recovery, with recent benchmark revisions reshaping the underlying narrative. Annual revisions to the January jobs report reduced the level of end-2025 payrolls by roughly one million jobs and showed that hiring momentum had been far weaker than previously understood, with average monthly job growth revised down to just 15,000 last year and several months of outright contraction. Despite this backward-looking downgrade, January’s headline payroll gain of 130,000 and a drop in the unemployment rate to 4.28 percent, alongside rising labor force participation and a modest increase in weekly earnings, suggest the labor market may be stabilizing after nearly two years of stall-speed hiring that began in mid-2024 and intensified during 2025. Job creation remains highly concentrated, however, in government-proximate fields, with health care and social assistance accounting for the majority of gains, while federal employment and financial activities continue to contract and manufacturing only recently returned to modest growth. Forward-looking indicators reinforce the picture of a labor market that is no longer tightening but not collapsing either: ADP data showed private payrolls rising just 22,000 in January, reflecting stagnant hiring at both large firms and small businesses even as layoffs remain relatively contained, and wage growth for job changers slowed to about 6.4 percent, signaling cooling bargaining power. Meanwhile, the Job Openings and Labor Turnover Survey (JOLTS) report points to weakening labor demand, with job openings falling to 6.54 million and the openings-to-unemployed ratio dropping to 0.87: the lowest since early 2021, while quits and layoffs hold at subdued levels, indicating low churn rather than widespread job losses. Taken together, revisions, payroll gains, and vacancy data suggest the labor market has shifted from tight to balanced, with employment growth hovering near breakeven and inflation pressures from wages easing, leaving a recovery path that appears real but still sensitive to broader economic and policy conditions.
Activity across the goods-producing side of the economy presents a mixed but strategically driven expansion, with traditional consumer-oriented manufacturing still lagging while investment-heavy sectors show clearer momentum. The ISM manufacturing new-orders index surged into expansionary territory in January — its strongest reading in nearly four years — signaling a pickup in factory demand, supported by depleted inventories and increased capital spending in areas such as aircraft, electronics, primary metals, and energy products. Domestic durable goods production has risen about 1.5 percent since last spring, led by gains of roughly 6.8 percent in aircraft and 5.4 percent in electronics, while output tied more closely to consumer demand (vehicles, furniture, and textiles) remains subdued or declining. Inventory dynamics are playing a key role: retail inventories relative to sales remain about 12 percent below pre-pandemic norms, wholesale and manufacturer stocks have been drawn down, and imports of real consumer goods have fallen roughly 14 percent compared with 2024 averages, implying future production must rise or supply gaps widen. At the same time, forward-looking surveys show growth losing some momentum — the S&P Global manufacturing PMI eased to 51.2 in February, output slipped, and employment fell close to neutral — suggesting that while strategic capital investment and factory construction in semiconductors, chemicals, and transportation equipment point to stronger capacity ahead, the near-term manufacturing rebound remains uneven and concentrated in policy-favored or high-value sectors rather than broad-based consumer goods.
The services economy continues to expand but is showing signs of cooling demand, softer hiring, and renewed cost pressures that could complicate the inflation outlook. The ISM Services PMI held steady at 53.8 in January, indicating ongoing growth, yet underlying components weakened: new orders slowed to 53.1, export demand faded, and the employment subindex slipped toward neutral at 50.3, all pointing to a slower pace of hiring even as production accelerated temporarily. Survey respondents increasingly view inventories as excessive and expect activity to soften in coming months, a view reinforced by S&P Global’s flash services PMI easing to 52.3 in February (its lowest level since April 2025) alongside declines in new orders and employment. Despite cooling demand, price pressures remain a concern, with input costs rising more broadly in January and prices charged jumping to 58.3 in February, the highest since mid-2025, highlighting ongoing cost pass-through in discretionary areas such as travel, recreation, and transportation. The broader composite PMI has also drifted lower to 52.3, signaling slower overall growth and subdued hiring momentum across the economy. The service sector appears to be transitioning from strong post-pandemic expansion toward a slower, more cost-sensitive phase, where demand growth is moderating, employment gains are flattening, and price dynamics, rather than output, are becoming the central issue for policymakers.
Recent readings on consumer and business sentiment suggest stabilization rather than a full rebound, with confidence improving modestly even as uncertainty and labor-market concerns linger beneath the surface. The Conference Board’s consumer confidence index rose to 91.2 in February, supported by a notable improvement in forward-looking expectations around income, employment, and business conditions, while the University of Michigan’s sentiment gauge climbed to a six-month high of 57.3 as short-term inflation fears eased and year-ahead inflation expectations fell to 3.5 percent. American households appear more willing to plan big-ticket purchases and maintain spending on services, yet the picture remains cautious: assessments of current conditions weakened slightly, job security concerns remain elevated, and the perceived probability of losing one’s job is still near post-pandemic highs. Small business sentiment tells a similar story of guarded resilience: the National Federation of Independent Business optimism index slipped marginally to 99.3 as rising uncertainty and softer hiring plans weighed on confidence, even as expected real sales improved, credit conditions eased, and capital spending stayed firm, with 60 percent of owners reporting recent outlays. Hiring intentions have cooled and fewer firms report difficulty finding workers, reflecting a labor market that is no longer overheated, while price-setting behavior shows mixed signals, with fewer businesses raising prices currently but more planning increases ahead. Combined, the sentiment data across households and firms point to an economy that is steady but cautious: inflation fears are easing and spending expectations remain intact, yet persistent uncertainty about growth and employment continues to limit enthusiasm and keep confidence fragile rather than robust.
Recent consumption data point to a resilient but uneven consumer environment, where underlying demand remains intact despite softer headline readings and short-term volatility. December retail sales were flat month over month, likely reflecting a pull-forward of holiday spending into November promotions rather than a collapse in demand, with year-over-year growth easing to 2.4 percent but discretionary services — such as food service and drinking places – still expanding at a solid 4.7 percent pace, signaling continued willingness to spend on experiences. Monthly gains were limited to five of thirteen retail categories, led by building materials and sporting goods, while traditional holiday segments like apparel and electronics declined, suggesting the effect of discount-driven demand shifts rather than broad retrenchment.
The core control group of retail sales slipped 0.1 percent, and overall real consumption growth appears to have moderated to roughly 2.8 percent in the fourth quarter, a slower but still positive pace supported by wealth effects and expectations for larger tax refunds early in 2026. Meanwhile, the auto sector illustrates the tension between steady demand and mounting affordability pressures: January light-vehicle sales dropped to a 14.85 million annualized rate following strong year-end incentives, with car sales down 3.6 percent year over year even as light-truck purchases held up modestly. Elevated auto-loan delinquencies and extended financing terms of up to seven years highlight the strain high rates are placing on household budgets, yet total vehicle sales in 2025 reached their strongest level since 2019, underscoring that consumption remains active but increasingly sensitive to pricing, financing conditions, and seasonal factors such as unusually cold weather.
Industrial production data point to a solid start for the goods-producing side of the economy in 2026, with January output rising 0.7 percent — the strongest monthly gain in nearly a year — driven largely by manufacturing and a weather-related surge in utility production. Factory output increased 0.6 percent, supported by gains in machinery, computers and electronics, motor vehicles, and construction-related materials such as concrete, suggesting capital expenditures and onshoring-related investment are becoming key drivers of growth. Durable goods production climbed 0.8 percent, and business equipment output rose 0.9 percent, reinforcing signs that firms are advancing capex plans as trade policy uncertainty eases and tax incentives encourage domestic investment. Capacity utilization moved higher into the mid-76 percent range, while stronger orders for core capital goods late in 2025 signal continued momentum ahead. Although some of the upside reflects downward revisions to prior months, the breadth of gains across strategic industries and business equipment indicates manufacturing may be entering a modest recovery phase after a prolonged period of softness.
The monetary policy backdrop reflects a Federal Reserve that is increasingly cautious about easing, even as growth moderates and labor-market risks linger. Minutes from the January FOMC meeting show broad agreement to hold rates steady, with only a small minority favoring cuts and a growing share of policymakers emphasizing both credibility and the possibility of keeping policy restrictive for longer — or even tightening again, if disinflation stalls. This more balanced, “two-sided” policy framing comes as economic growth slowed to a 1.4 percent annualized pace in the fourth quarter, partly due to a prolonged government shutdown that reduced federal services and weighed on consumption and trade. While business investment — particularly in information processing equipment tied to artificial-intelligence spending — remains a bright spot, softer consumer momentum and persistent core PCE inflation near three percent leave the Fed navigating a delicate trade-off between supporting a fragile expansion and ensuring inflation expectations remain anchored.
Fiscal and trade policy, meanwhile, are introducing significant uncertainty that interacts directly with monetary conditions. The Supreme Court’s invalidation of key tariffs imposed under the International Emergency Economic Powers Act on February 20 has complicated the administration’s fiscal arithmetic by threatening hundreds of billions in expected revenue and raising the prospect of large refunds, potentially widening already substantial budget deficits tied to recent tax legislation. At the same time, the administration’s attempt to replace those tariffs with new global levies has unsettled trading partners and could strain existing agreements with the EU, India, China, and key Asian allies, increasing the risk of renewed trade frictions even as most countries are likely to maintain negotiated frameworks for now. Together, those developments suggest a policy mix in which tighter fiscal constraints, evolving trade rules, and a more cautious Federal Reserve are interacting in ways that could dampen near-term growth volatility while keeping inflation, investment decisions, and global supply chains highly sensitive to political and legal developments.
The US economy continues to push forward, though increasingly under the influence of policy stimulus, financial conditions, and structural shifts rather than broad-based organic momentum. Consumer spending and services activity remain relatively firm (supported by tax relief, easing credit conditions, and gradually-moderating inflation) even as goods production, hiring, and capital investment advance more unevenly. Price pressures are cooling but remain sectorally uneven, leaving elevated living costs and tariff pass-through weighing on real purchasing power and business margins. Labor markets appear balanced yet fragile following sizable downward revisions to prior hiring data, while growth is increasingly driven by investment-heavy manufacturing and resilient experience-based consumption rather than widespread wage gains or strong employment expansion.
At the same time, monetary policy remains cautious amid credibility concerns, fiscal arithmetic has grown more uncertain after tariff-related legal challenges, and evolving trade policies continue to inject volatility into supply chains and corporate planning. Overlaying that backdrop is the accelerating influence of artificial intelligence: rising expectations of productivity gains and capital deepening coexist with anxieties that automation may expand opportunities for highly skilled workers while compressing prospects for marginal or routine labor, complicating wage dynamics and longer-term consumption trends. Market behavior, including strong rallies in gold and silver (both of which have fallen from their highs, but remain highly elevated) reflects the broader unease, signaling skepticism not about imminent recession, but about the durability and tradeoffs embedded in the current policy mix. Taken together, the economy appears to be navigating a late-cycle phase marked by slower but still positive growth, easing inflation, and technological transition, leaving the near-term outlook cautiously constructive but highly sensitive to policy decisions and structural changes in productivity.
The Atlantic recently ran a story headlined “He Was Homeschooled for Years, and Fell So Far Behind.” It profiles Stefan Merrill Block, who was homeschooled in his early years and later struggled to catch up once he entered traditional schooling. But one rough experience doesn’t invalidate an entire movement that is delivering superior results for millions of families across the country.
Homeschool students are outperforming kids in government schools by a wide margin. Brian Ray’s peer-reviewed systematic review in the Journal of School Choice examined dozens of studies on the topic. Seventy-eight percent of those studies found homeschoolers scoring significantly higher academically than their public school peers. They beat traditional school kids by 15 to 25 percentile points on standardized tests. These solid results hold up regardless of family background, income level, and whether the parents ever held a teaching certificate.
Image Credit: Meta-analysis by National Home Education Research Institute
Government schools deliver exactly the opposite outcome. In Chicago alone, there are 55 public schools where not a single kid tests proficient in math. They spend about $30,000 per student each year and still fail to produce basic proficiency. The Nation’s Report Card shows nearly 80 percent of US kids aren’t proficient in math. That’s the real crisis staring us in the face, and it demands accountability from the system that claims to serve our children.
The critics who demand tighter rules on homeschooling never mention these disasters in public education. They won’t even consider shutting down the failing public schools that waste billions of taxpayer dollars and fail thousands of kids every year. But when families opt out and choose something better for their kids? Suddenly it’s time for government oversight and heavy-handed regulations. This double standard exposes the true agenda at play.
Teachers’ unions watch the collapse of academic achievement and never push for less funding. Every bad score just becomes another excuse for more cash grabs from the public. If they really thought homeschool was underperforming, they’d be calling for gobs of taxpayer money to fix it.
This logical inconsistency gives away the game: these groups are laser-focused on defending the government school monopoly at all costs. They want to keep other people’s kids locked in their failure factories so they can siphon as much money as possible away from families and into the system.
Census Bureau numbers confirm just how much the tide is turning. Homeschooling enrollment has at least doubled since 2019, and the growth shows no signs of slowing. COVID laid bare the dysfunction in government schools, from useless remote learning to radical ideologies in the classroom, and parents decided they had seen enough.
Randi Weingarten, the president of the American Federation of Teachers, even wants to take things a step further by officially partnering her union with the World Economic Forum to shape a national curriculum. That’s the future they envision — handing control of education to elites in Davos instead of trusting parents.
Even if the evidence showed homeschooling only matching the factory-model school system on average, the state would still have no legitimate authority to interfere. Kids don’t belong to the government. The Supreme Court made that crystal clear back in 1925 with Pierce v. Society of Sisters, ruling that “the child is not the mere creature of the State.” Oregon had tried to force every child into public schools, but the justices struck it down and affirmed parents’ fundamental right to direct their children’s education.
The Court reinforced this principle in Meyer v. Nebraska in 1923, protecting parents’ liberty to direct their children’s education, including striking down laws that banned foreign language instruction in private schools. Then, in Wisconsin v. Yoder in 1972, the justices sided with Amish parents who wanted to pull their children from high school to preserve their faith and community way of life. These landmark decisions enshrine parental rights as bedrock constitutional protections that no bureaucrat can simply override.
The state has the burden of proof when it comes to intervening in family life. Parents shouldn’t be forced to prove their innocence upfront just to educate their own children at home. Government should only step in with clear evidence of real abuse, and even then, the intervention must be narrow and targeted.
Envision government officials sitting at every family’s dinner table each week, inspecting meals “just in case” some parents aren’t feeding their kids right. That scenario would represent an obvious violation of our Fourth Amendment rights against unreasonable searches, and no one would stand for it. Yet that’s the invasive logic behind calls to regulate homeschooling as if every parent is a suspect.
History shows exactly where this path of centralized control leads. The Nazi regime banned homeschooling in 1938 with criminal penalties attached, all to create a monopoly on thought and ensure their authoritarian ideology took root in every young mind. America’s own compulsory government school system didn’t emerge from some noble tradition of freedom — it was imported from Prussia, modern-day Germany, and aggressively promoted here in Massachusetts by Horace Mann. The whole model was engineered to produce obedient soldiers and compliant factory workers, not independent thinkers who question authority.
Homeschoolers sidestep the school system’s ugliest realities altogether. They avoid the gangs, the drugs, the mindless conformity, the left-wing indoctrination, the social promotion, and the constant threat of violence that plague too many government institutions. An FBI report from 2025 documented 1.3 million crimes committed in schools over just a few recent years.
And let’s not forget the subject of The Atlantic’s own story. They concede that Stefan Merrill Block grew up to become a successful and educated author, complete with New York Times bestsellers to his name. Their highlighted “failure” case actually produced someone thriving in the real world. That undercuts the panic they’re trying to stoke.
Regulations have failed to fix the problems in public schools — they have often entrenched mediocrity and waste. Importing the same model into homeschooling would risk spreading those shortcomings rather than solving them. Many on the left are uncomfortable with the fact that they lack the same direct control over parents that they exercise over most school districts. That gap in authority has led some to push for sidelining families in favor of greater state oversight.
Parents know their children better than any distant bureaucrat ever could. Homeschooling delivers measurable results, saves taxpayers money, and upholds the core American value of freedom.
The Atlantic can publish as many cautionary stories as it likes, but the data, the Supreme Court precedents, and basic common sense remain firmly on the side of parental authority. It’s time to end the double standards and attack narratives and let families lead the way in educating the next generation.
It used to be said that the sun never set on the British Empire, so far-flung were its possessions. Britain has long since retreated from most of those territories, most recently, and controversially, in its attempt to relinquish control of the Chagos Islands. Yet even as it sheds physical dominion, Britain appears increasingly eager to export something else: its laws and regulations.
In that project, it is joined enthusiastically by its former partners in the European Union. If the Old World has one major export left, it is bureaucracy.
The most obvious current target is X, Elon Musk’s platform, and its Grok AI tool. Some users of questionable taste quickly discovered that Grok could be used to generate deepfake images of celebrities in revealing attire. More seriously, it was alleged that the technology had been used to generate sexualized images of children. In response, last month the UK’s communications regulator, Ofcom, opened a formal investigation under the Online Safety Act, citing potential failures to prevent illegal content. The possible penalties are severe, ranging from multi-million-pound fines, based on the company’s global revenue, to a complete ban on the platform in the UK.
Senior British officials were quick to escalate the rhetoric. Prime Minister Keir Starmer and Technology Secretary Liz Kendall publicly condemned X and emphasized that all options, including nationwide blocking, were on the table. The message was unmistakable; compliance would be enforced, one way or another.
Two days later, X announced new restrictions to prevent Grok from editing images of real people into revealing scenarios and to introduce geoblocking in jurisdictions where such content is illegal. Ofcom described these changes as “welcome” but insufficient, insisting its investigation would continue. Meanwhile, pressure spread outward. Other governments announced restrictions, and the European Commission expanded its own probes under the Digital Services Act. What began as a British enforcement action quickly morphed into coordinated global pressure, effectively pushing X toward worldwide policy changes.
This is the crucial point. British regulators were not merely seeking compliance for British users. They were pressing for changes to X’s global policies and technical architecture to govern speech and expression far beyond the UK’s borders. What might initially have been framed as a failure to impose sensible safeguards on a powerful new tool has become a test case for whether regulators in one jurisdiction can dictate technological limits everywhere else.
This pattern is not new. Ofcom has already attempted to extend its reach directly into the United States, brushing aside the constitutional protections afforded to Americans. Since the Online Safety Act came into force in 2025, Ofcom has adopted an aggressively expansive interpretation of its authority, asserting that any online service “with links to the UK,” meaning merely accessible to UK users and deemed to pose “risks” to them, must comply with detailed duties to assess, mitigate, and report on illegal harms. Services provided entirely from abroad are explicitly deemed “in scope” if they meet these criteria.
The flashpoints have been 4chan and Kiwi Farms, two US-based forums notorious for unmoderated speech and even harassment campaigns. In mid-2025, Ofcom initiated investigations into both for failing to respond to statutory information requests and for failing to complete the required risk assessments. It ultimately issued a confirmation decision against 4chan, imposing a £20,000 fine plus daily penalties for continued non-compliance, despite the site having no physical presence, staff, or infrastructure in the UK.
Rather than comply, the operators of both sites filed suit in US federal court, arguing that Ofcom’s actions violate the First Amendment and that the regulator lacks jurisdiction to enforce British law against American companies. The litigation frames the dispute starkly: whether a foreign regulator may, through regulatory pressure, compel changes to lawful American speech.
That question has now spilled into US politics. Senior American officials have criticized Ofcom’s posture as an extraterritorial threat to free speech, and at least one member of Congress has threatened retaliatory legislation. What Britain views as online safety increasingly appears, from across the Atlantic, to be regulatory imperialism.
Speech is merely the most visible example. Europe has long sought to impose its environmental priorities on both developed and developing countries alike, a phenomenon I once labeled “eco-imperialism.” The latest iteration is the EU’s deforestation regulation, scheduled to take effect later this year. Exporters of products such as timber and beef must now prove, to the EU’s satisfaction, that their supply chains have not contributed to deforestation.
For American producers, this is less about forests than paperwork. As the Farm Bureau has noted, the rule functions as a non-tariff barrier, particularly for producers without vertically integrated supply chains. Native American tribes reliant on timber exports have gone further, accusing Brussels of a renewed form of colonialism.
Financial regulation provides another illustration. Through a patchwork of directives and equivalence determinations, the EU increasingly conditions market access on conformity with its regulatory preferences. Non-EU jurisdictions are pressured to align their rules not through treaties, but through the sheer leverage of access to Europe’s markets, the so-called Brussels Effect.
Even Europe’s revived Blocking Statute, originally intended to counter US extraterritorial sanctions, underscores the contradiction. Europe insists on defending its own regulatory autonomy while simultaneously seeking to universalize its rules abroad.
None of this should be surprising. Administrative overreach is not generally a moral failure but an institutional one. Regulators operate under mandates that are deliberately broad, politically insulated, and difficult to measure. Their incentives are asymmetric; visible failure is punished, while over-caution and expansion rarely are (indeed, they are often rewarded). In such an environment, discretion naturally displaces rules. This, in turn, empowers the production of bulletins, circulars, and even blog posts that have the effect of law, something my colleague Wayne Crews calls “regulatory dark matter.”
When regulators move beyond enforcing clear, predictable rules and instead attempt to manage outcomes like “safety,” “harm,” and “fairness,” they substitute their own judgment for dispersed social knowledge. The claim that complex systems can be centrally overseen within a nation, let alone across borders, rests on an exaggerated confidence in regulatory omniscience and a systematic undervaluation of unintended consequences.
As this tendency is reinforced rather than checked, agencies gravitate toward peer approval rather than public accountability, and therefore toward international coordination rather than domestic consent. Jurisdiction follows the reach of the system instead of democratic legitimacy. Borders become inconveniences, and constitutional limits become parochial relics. Trial by jury, the crown jewel of common law? An inconvenience.
These developments also reflect a deeper shift in governance. In Britain, Parliament has not merely delegated power to regulators; it has largely abandoned meaningful oversight of them. Ministers disclaim responsibility in the name of independence, while courts typically review only whether regulators followed proper procedure, not whether their decisions were wise or proportionate. In the EU, this technocratic design was largely intentional from the start, with the Commission enjoying extraordinary agenda-setting power and steadily expanding its reach since Maastricht.
The result is an administrative order increasingly detached from democratic constraint. As Britain and Europe struggle economically, particularly in comparison to the United States, the temptation is not to reform inward, but to regulate outward. If growth cannot be revived at home, regulation can at least be exported abroad.
Yet Europe’s recent clash with America over Greenland has exposed much of the continent’s weakness. While the Commission may seek to demand subservience from American tech companies, those companies have the capability to turn off the lights — literally. The smothering of Europe’s technological innovation under its regulatory blanket means it has nothing with which to replace American know-how. Britain’s failure to break fully from the European regulatory mindset after Brexit means it is stuck in the mid-Atlantic, regulating Americans while still attempting to stay on America’s good side. That game may soon be up.
The British Empire once projected power by force. Today, the Old World tries to extend its reach not with arms, but compliance. But bureaucracy, like the empire, cannot resist the setting sun.
Throughout American history, the federal government has played a role in state and local policy. The Congressional Research Service (CRS) breaks down the history of federal transfers to the states into four distinct time periods: the Antebellum Land Grants period, the Civil War Era, the New Deal Era, and the Great Society.
This explainer will elaborate on that history, examining the complex and often mutually dependent relationship between the federal government and the states.
The Antebellum Land Grants (1776-1860)
Prior to the Civil War, the federal government transferred land grants to the states as new territories were added to the US. Under the Articles of Confederation, states were, according to the CRS, “expected to be the primary instrument of governance in domestic affairs.” The Congress of Confederation was limited mostly to national defense spending, but the Land Ordinance of 1785 enabled the federal government to collect revenue from land sales acquired from Great Britain at the end of the American Revolution.
Even at this early stage, the federal government attached terms and conditions to land sales. The Ordinance required every new township incorporated in these lands to be subdivided into 36 sections (also known as lots), each one square mile. According to the CRS, “Lots 8, 11, 26, and 29 were reserved for the United States. The new townships were required to use Lot 16 ‘for the maintenance of public schools, within the said township.’” These land grants for education were retained under the Northwest Ordinance of 1787.
With the ratification of the Constitution, Congress gained the power to regulate interstate commerce, and the land grant system was maintained to add new states to the Union. However, federal encroachment was mostly kept at bay by the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” One rare exception to this occurred in 1837. The federal government used proceeds from Western land sales to retire the federal debt in 1836, reserved $5 million, and then dispersed the remainder to the states “in proportion to their respective representation in the House and Senate.” The states received $30 million in three quarterly payments in 1837 before the banking crisis of that year, which incentivized the Treasury to cease these payments. This era of American history comes closest to Michael Greve’s description of “competitive, market-preserving federalism.” Yet some state policymakers lobbied for transfer payments, and certain federal officials were equally willing to provide them.
This era of American history comes closest to Michael Greve’s description of “competitive, market-preserving federalism.” Yet some state policymakers lobbied for transfer payments, and certain federal officials were equally willing to provide them.
The Civil War and the Progressive Era Lay the Foundation for Centralization (1860-1932)
The CRS report notes that the “modern Grants-In-Aid System” began with the Civil War. During that time, the federal government began providing “assistance for business, industry, and farming: the protective tariff, homestead, land subsidies for agricultural colleges, transcontinental railroads and other internal improvements, national banks.”
In 1879, the Federal Act to Promote the Education of the Blind—the first ongoing federal grant to states aside from the National Guard—was adopted to “create a perpetual source of income for the purchase of teaching materials for the blind.” This was accomplished through a dedicated federal revenue fund that would be used to purchase interest-bearing bonds, with the interest income used to purchase the teaching materials.
Economist Robert Higgs, in his critical work Crisis and Leviathan, also notes that while the Civil War saw increases in government, these expansions did not take hold because the “ideological conditions that favor [government] growth must also be present” and were not present in the postwar period. He points to the economic crisis of 1893-1896, during which President Grover Cleveland, holding fast against ideological pressure, did not allow the government to grow. Higgs notes that the key moment of ideological and government growth was the Progressive Era.
Progressivism, the belief in a positive state, was, in Higgs’ words, “the dominant ideology of the elite on the eve of World War I and…was fundamentally at odds with the dominant ideology of the ruling elites in the late nineteenth century.” In 1902, there were a total of six federal grants to state and local governments: the National Guard as well as “teaching materials for the blind, agricultural experiment stations, the care of disabled veterans, resident instruction in the land grant colleges, and funding to the District of Columbia.” Higgs notes that while businessmen throughout American history sought advantages gained through government (i.e. protective tariffs), what was unique about this period was the “undisguised position” of businessmen who openly advocated perpetual government intervention in the economy and greater centralization. While elite ideology in the late nineteenth century restrained government growth, federal grants to states that began during the Civil War and continued into the following century proved to be the “thin edge of the wedge.” These grants powered ideological shifts and expanded federal influence in domestic affairs throughout the twentieth century.
Higgs notes that while businessmen throughout American history sought advantages gained through government (i.e. protective tariffs), what was unique about this period was the “undisguised position” of businessmen who openly advocated perpetual government intervention in the economy and greater centralization. While elite ideology in the late nineteenth century restrained government growth, federal grants to states that began during the Civil War and continued into the following century proved to be the “thin edge of the wedge.” These grants powered ideological shifts and expanded federal influence in domestic affairs throughout the twentieth century.
The New Deal Expands Federal Control (1932-1960)
Federal grants to the states sharply increased during the New Deal era (1933-1939). This was thanks to what the CRS generously calls “an expanded interpretation of congressional authority…under Article 1, Section 8, clause 1 of the Constitution,” which outlines Congress’s spending power.This “expanded interpretation” was spurred on by the ideological changes Higgs mentioned in Crisis.
Furthermore, changes in the Supreme Court’s ideological makeup enabled the federal government to grow unabated. In the wake of the Depression and World War II, despite some ratcheting back, federal transfers to the states never returned to pre-crisis lows. Additionally, elite opinion accepted federal intervention in economic affairs (whether during a crisis or in normal times). Federal policymakers were also eager to use federal transfers to intervene in state affairs and states could use these transfers for their gain over one another.
One notable example occurred when the state of Arkansas defaulted on its highway bonds in 1933. When the state of Arkansas failed to pay bondholders, it attempted to declare sovereign immunity and shed its losses, leaving bondholders empty-handed. The bondholders, who mainly resided in New York, turned to the federal government to force Arkansas to pay. The federal government then threatened to suspend all federal Public Works Administration loans to Arkansas until its bond refunding issues were resolved. This brought Arkansas back to the negotiating table and the New York bondholders were made “practically whole.” Arkansas agreed to pay back the bondholders by collecting 6.5 cents per gallon in gasoline taxes and ceding control of its highway-related revenues until the debts were paid.
In the period that followed, competitive federalism would be severely diluted, as states grew dependent upon federal transfers and ceded governing powers to the federal government. Greve notes that the Supreme Court of the New Deal era created the conditions “for unchecked cartel federalism of conditional funding programs and federal minimum standards.”
The Great Society (1960-1980)
Federal grants to the states increased again between 1960 and 1980 due to the Great Society programs. The CRS report notes that federal grants to state and local governments tripled between 1960 and 1970, from 132 in 1960 to 387 in 1968. In the 1970s, the federal government shifted from narrowly focused categorical grants to block grants and revenue sharing that allowed state and local governments greater discretion over how the money was spent. During the 1980 s, grants were further consolidated, but federal transfers to state and local governments increased.These programs enabled state governments to raise spending at the cost of federal taxpayers in other states and gave the federal government greater control over state and local affairs.
Figure 1 (below) shows the progression of federal transfers to state and local governments since 1940 (the earliest year of data available). Data prior to 1940 is sparse, but estimates from the Historical Statistics of the United States, 1789-1945 show that federal transfers to state and local governments were estimated at $86.8 million in 1902 and $97.6 million in 1913 (in 2025 dollars). In 1932 (just before FDR took office), federal transfers exceeded $3.5 billion in chained 2017 dollars.
Total spending frequently increases the most following periods of recession. Transfers to state and local governments increase and then slightly decrease but are still higher than pre-recession levels. This is a demonstration of what is known as a “the ratchet effect,” discussed extensively by Higgs in Crisis, where crises are used to expand government size and scope of authority.
One notable exception to the ratchet effect is the period from FY 1982-1990. This is due to the Omnibus Budget Reconciliation Act of 1981, which merged 77 categorical grants and two block grants into 9 block grants. What later became known as the “Devolution Revolution” under President Reagan, however, was short-lived. Federal grants to states continued in 1983, particularly for “payments to individuals” which included welfare programs such as Medicaid, Aid for Families with Dependent Children (which became Temporary Assistance for Needy Families in 1996), as well as job training programs.
Despite a brief pause in the early 1980s, federal grants to states increased steadily into and beyond the turn of the millennium. Each economic downturn brought greater demand from state officials to receive federal grants, which those in DC were more than happy to dole out. State officials received increased spending paid for by federal taxpayers in other states, while federal officials received influence over state and local policy by dictating behavior through compliance with the terms and conditions of receiving these grants.
Figure 1: Federal Grants to State and Local Governments
Source: “Historical Tables: Table 12.1—Summary Comparison of Total Outlays for Grants to State and Local Governments: 1940-2029” in The President’s Budget. White House Office of Management and Budget. Accessed September 5, 2024.
Notes: Years 2024-2029 are projected. Shaded areas indicate periods of recession.
Conclusion
What we’re seeing now in state funding is a slow creep of the influence that has been present since America’s founding. While it was kept at bay for most of the country’s history, federal growth in government rapidly metastasized during the twentieth century.
As America approaches the 250th anniversary of its Founding, federal policymakers can no longer ignore the need for spending cuts. The national debt has reached unsustainable levels. Federal transfers to state and local governments are likely to be among the first targets. State and local policymakers would be wise to make those cuts now, on their own terms.
“Without tariffs,” the President said on his affordability tour in Georgia, “everybody would be bankrupt, the whole country would be bankrupt.” In court, the Trump administration has made similar sweeping claims, arguing that revoking certain tariff authorities would have “catastrophic consequences” and “lead to financial ruin.”
The Supreme Court has now struck down the administration’s “reciprocal tariffs” imposed under the International Emergency Economic Powers Act (IEEPA). This is a major victory for American consumers and businesses who suffered from higher taxes and higher prices that the tariffs imposed.
And contrary to the President’s claims, tariffs were never going to prevent national bankruptcy. America’s debt crisis does not arise from a revenue problem. The federal government has an unsustainable spending problem.
The Congressional Budget Office’s (CBO) latest Budget and Economic Outlook shows debt held by the public exceeding 100 percent of GDP this year and rising past its World War II record by 2030. Ten years from now, debt reaches roughly 120 percent of GDP and continues climbing to 175 percent by 2056 — and that is under optimistic projections that assume no economic, financial, or public health crises over that time frame.
Revenues are not the problem. Even after extending and adding to the Trump tax cuts, federal receipts are projected to remain near or above their historical average as a share of the economy, growing from $5.2 trillion (17.2 percent of GDP) to $8.3 trillion (17.8 percent of GDP) over the decade.
The problem is that federal spending exceeds revenues by a lot and is growing much faster than revenues. Spending is projected to grow from $7 trillion (23.1 percent of GDP) to $11.4 trillion (24.4 percent of GDP).
The widening annual deficit (the gap between annual spending and revenue) is overwhelmingly driven by the growth in Social Security, Medicare, Medicaid, and rising interest costs. By 2036, interest costs, Social Security, Medicare, and Medicaid are projected to consume 100 percent of federal revenues.
Read that again.
Under current law, within a decade, every dollar collected in revenue will be absorbed by health care programs, Social Security, and interest spending to service the ballooning federal debt, leaving nothing for national defense or any other core function of government.
Against that backdrop, the claim that revoking tariff authority would produce “financial ruin” or “bankrupt” the country does not withstand scrutiny.
Multiple estimates, from the Congressional Budget Office, the Yale Budget Lab, the Penn Wharton Budget Model, and the Tax Foundation, estimate that the Trump tariffs would generate from $1 trillion to $3 trillion in additional revenue over a decade, depending on assumptions and whether economic feedback effects are included.
Those are large numbers in isolation. But they are small relative to the size of the federal budget hole.
CBO projects that the United States will borrow an additional $25 trillion over the next decade. Closing that gap would require eight to 25 times the revenues that Trump administration tariffs were estimated to bring in. About $16 trillion of those deficits will go toward interest payments alone. Even under optimistic assumptions, tariff revenue would offset only a small fraction of that amount.
Put differently: even if every dollar of projected tariff revenue materialized, the debt would still surge past its historic high within a few years and continue unsustainably climbing thereafter.
Moreover, tariffs are neither free money nor are they paid by foreign exporters. They function as taxes on imported goods and production inputs that are paid by Americans. According to the Kiel Institute, American consumers and importers paid 96 percent of tariff costs, while foreign exporters absorbed only four percent. Higher input costs reduce business profits and workers’ wages, shrinking corporate and individual income tax collections. From generating uncertainty to reducing available capital for investment, tariffs reduce hiring and dampen economic growth.
Part of the “revenue gain” from tariffs is thus clawed back through weaker economic performance and a smaller tax base. That’s one way to shoot yourself in the foot.
Meanwhile, the real driver of America’s debt trajectory is far more entrenched.
The entirety, more than 100 percent, of the federal government’s long-term funding shortfall stems from the growth of Social Security and Medicare, according to the Financial Report of the United States Government. These programs expand automatically as the population ages, beneficiaries live longer, benefits increase by design, and health costs rise. They were set up for a younger country with far fewer retirees per worker and transfer income from working Americans to retirees, regardless of need. One of the best ways to curb their growth is to refocus these programs’ benefits on seniors in need.
As debt climbs, interest costs compound. CBO projects that net interest will more than double over the next decade, consuming a growing share of the budget.
Interest costs already surpass what the United States government allocates toward national defense expenditures. As the Hoover Institution’s Niall Ferguson writes: “when a great power spends more on debt service than on defense, it will not be great for much longer.” The US Senate unanimously recognized deficits as “unsustainable, irresponsible, and dangerous,” but Congress has yet to act to curb the debt threat.
This is how fiscal crises develop — not because a single revenue stream disappears, but because structural commitments grow faster than the economy that must finance them.
The United States is already well above the debt levels that much of the economic literature associates with slower long-term growth. Every year of delay increases the eventual adjustment required to stabilize the debt.
Congress should adopt a credible plan that stabilizes spending and the growth in debt. Members of the bipartisan fiscal forum in Congress recently proposed a three-percent-of-GDP deficit target, led by Representatives Bill Huizenga (R-MI), Scott Peters (D-CA), Lloyd Smucker (R-PA) and Mike Quigley (D-IL). That’s a promising goal. To succeed in meeting it, Congress will need structural entitlement reforms. Not killing the goose that lays the golden eggs with economy-crushing tax hikes — whether those are dressed up as tariffs or as a border adjustment tax.
Congress can reduce excess health care spending, streamline taxes, and cut welfare programs prone to fraud and abuse, using the same reconciliation process that Republicans leveraged in July to extend and expand the Trump tax cuts and slow the growth in Medicaid and food stamps (SNAP).
Going yet further, Congress can work toward advancing a Base Realignment and Closure–style fiscal commission to overcome policy inertia and provide Congress with political cover to advance necessary entitlement reforms. The Fiscal Commission Act, championed by Representatives Scott Peters (D-CA) and Bill Huizenga (R-MI) is a promising step in that direction.
If America ever experiences fiscal “ruin,” it will not be because presidential tariff authority was constrained. It will be because elected officials of both parties failed to modernize the country’s largest entitlement programs and halt their automatic spending growth.
The Supreme Court’s ruling does not create a fiscal crisis. Tariffs raised revenue at the margin. In the process, they also distort trade and slow growth. But they do not alter the fundamental arithmetic driving America’s debt.
The path to fiscal stability runs through entitlement reform and spending control — not through executive-imposed tariffs that were never large enough to solve the problem in the first place.
Conversations around artificial intelligence have dominated the news cycle and culture at large for the better part of three years, with concerns becoming amplified more and more as time has gone on. These concerns focus mainly on regulation, safety, and environmental impacts.
Many policymakers argue that the scale of “Big Tech” threatens innovation, a claim often more motivated by political incentives than true economic analysis. More helpful than anecdotal assumptions, however, is the work of two twentieth-century Austrian economists, F.A. Hayek and Joseph Schumpeter. It seems the real threats to innovation may be less about Big Tech and more akin to bureaucratization and central planning by regulators. While critics fear capitalism’s excesses, both Hayek and Schumpeter warn that overreaction can stifle innovation. Overall, the two thinkers demonstrate that the danger is not “unregulated capitalism,” but the merger of large corporate bureaucracy with state planning impulses.
As Schumpeter describes in his magnum opus, Capitalism, Socialism, and Democracy, the process of capitalism is a complex one. He describes the phenomenon of creative destruction, where an entrepreneur innovates a particular good or service. This eventually erodes the very entrepreneurial ambition that created the product, replaced instead by a large bureaucratized firm, drunk on its own success and unable to innovate with the same veracity as before, until the next innovative competitor comes along and the cycle continues. This is evident in Big Tech: Amazon, Apple, and Meta are no longer scrappy startups but what Schumpeter would call “perfectly bureaucratized industrial units.” The innovation that led to their initial success becomes routine inside R&D departments, layers of middle management, and the firm ultimately becomes technocratic. This erodes the risk taking that led to the innovation in the first place, and risk taking becomes less commonplace. The public then interprets this slowdown as a “market failure,” opening the door to the appeal of government involvement.
This slowdown is happening in the midst of the AI revolution, with massive tech company layoffs. The mantra of ‘move fast and break things’ has given way to a crisis of middle management, most visibly in Elon Musk’s decision to lay off over half of Twitter’s workforce. These firms are not “monopolies” preventing competition, as much as they are bureaucratic giants facing internal stagnation, an ironic product of their own entrepreneurial success.
If Schumpeter shows why big firms ossify, Hayek shows why regulators cannot fix the stagnation, and often make it worse. Policymakers always assume they can design rules for “safe AI,” “fair algorithms,” or something of the like, and appeal to a populous afraid of change and often experiencing paralysis around technological development. Such regulatory interest may seem like “common sense,” but they each require information that no central authority can gather, even with hearings, white papers, and expert panels.
Hayek dubs this phenomenon “the knowledge problem,” a commonality in his critique of socialism and the “fatal conceit” of central planning. Hayek famously said, “The curious task of economics is to show men how little they know about what they imagine they can design.” The best opportunity for AI progress is decentralized, happening in small labs, and promoting innovation and development as much as possible. The “best” AI architectures, training data, or safety protocols cannot be known ahead of time, because the extent of the technology has yet to be explored. Regulation attempts to “freeze” innovation into one approved path, which amplifies the sclerosis Schumpeter describes and stifles incentives to innovate. There are several notable examples of these bad regulations, including the EU’s recent AI act which prohibits certain model categories and imposes heavy ex ante compliance. With regulatory capture comes tremendous barriers to entry for smaller firms. This means only large tech companies can comply with the regulation, entrenching the narratives around Big Tech by preventing new innovators from coming to the table. The more policymakers decide the future of innovation, the less room innovators have to discover what actually works.
With both of Schumpeter and Hayek’s concerns put together, managerial bureaucracy merges with managerial government regulation, forming what Schumpeter calls “the heir apparent to capitalism,” a hybrid of corporate technocracy and state regulation, akin somewhat to China’s current economic system. This results in lower entrepreneurial entry, less experimentation, higher regulatory moats, more political dependence of firms, a decline of economic freedom, and a decrease in innovation, already seen in non-AI sectors. The threat is not “monopoly power,” but policy-induced stagnation. Big Tech, combined with big government, creates a self-reinforcing cycle of bureaucratization.
In order to prevent this vicious cycle of bureaucracy, there are Hayekeian improvements that could prove helpful, including reducing regulatory barriers that privilege incumbents, and allowing open entry, open-source experimentation, and competitive discovery. A system of stable rules rather than discretionary regulatory action prevents cronyism and the kind of corporate welfare involved with regulation.
From a Schumpeterian standpoint, solutions are less direct. Generally encouraging entrepreneurship—through lower compliance costs and reduced barriers to entry—fosters innovation and a more competitive market, which better serves consumers. At the end of the day, creative destruction should be recognized as a healthy feature of economic life, not a pathological one.
If policymakers treat Big Tech’s bureaucratic stagnation as a justification for more bureaucracy, the outcome will be a self-fulfilling Schumpeterian slide into managerial socialism. The path forward is not to plan innovation, but to let a new wave of entrepreneurs challenge bureaucratic giants. Big Tech does not need to be centrally managed, and AI does not need a planner.
What it needs is competition, openness, and the freedom to discover what no regulator or executive committee can foresee. Hayek and Schumpeter help us see that innovation survives only when we defend the institutions that make creative destruction possible.
