Twenty-five years ago, Bill Clinton was gearing up to “save” Social Security. The year was 1998, and the national mood was cautiously optimistic. Internet startups were booming, the Cold War was seemingly behind us, and there were discussions about bringing the American spirit of innovation and personal freedom to one of the most stagnant policy areas: Social Security and retirement options more generally.

In part, this conversation had been sparked by the ideas of José Piñera, a relatively unknown (at least to the American public) Chilean official. His ideas came to prominence after a Newsweek article spotlighted Chile’s bold pension reform. The piece caught the attention of thinkers in Washington, and whispers of reform turned into White House meetings and Congressional speeches.

That Piñera was a bold thinker in this area isn’t a surprise; he wasn’t just another economist. He was a fervent believer in the American Dream and the power of the market to improve individuals’ lives. After earning his Ph.D. from Harvard in 1974, he returned to a Chile ravaged by Marxist and Keynesian policies. As Chile’s Secretary of Labor and Social Security, he didn’t just tinker with their public retirement system; he reinvented it. By 1980, Chile had implemented the world’s first fully funded system of personal retirement accounts, empowering workers to invest their own money, choose among private firms, and build wealth.

President Clinton’s team took notice. In 1996, Mack McLarty — Clinton’s special envoy to the Americas and former chief of staff — visited Chile and wrote upon his return, “Without a doubt, the reform of Chile’s pension system has been a critical contributing factor… to Chile’s ongoing economic success… I believe we can learn a great deal from your country’s bold initiative.”

In a 1998 letter to The Wall Street Journal, Piñera explained the Chilean reform:

This reform is about citizens’ empowerment… Individual retirement accounts will help people experiencing poverty. Workers now choose among competing private companies to invest the equivalent of what used to be their payroll taxes… harnessing the power of compound interest.

He understood what America once knew: that the dignity of the individual lies in choice, in ownership, in self-determination. The Chilean model didn’t just fix numbers — it affirmed that people, not the state, are best suited to control their futures.

Reform didn’t mean abandoning the elderly. Piñera emphasized maintaining benefits for current retirees and those who chose to stay in the government system. The transition had tradeoffs. The so-called “sunk costs” of our entitlement state wouldn’t disappear, with or without reform.

By 1998, Clinton stood at the podium for his State of the Union address and declared: “I will convene the leaders of Congress to craft historic bipartisan legislation… a Social Security system that is strong in the twenty-first century.”

It was a moment. A window. A shot at real reform. But soon, Clinton, impeached, diminished, and drained of political capital, was sidelined. Personal retirement accounts, once on the verge of becoming law with growing bipartisan support, became just another “what if” in the annals of American policy.

In 1999, Clinton made one last effort.

“With the number of elderly Americans set to double by 2030,” he said, “I propose that we… establish universal savings accounts.”

It was the first time a sitting US president publicly called for personal retirement accounts. Clinton’s plan would have seen tax credits automatically invested in individual accounts, and funded by the then-projected budget surplus.

But the political moment for even the possibility had passed, and Clinton no longer had the strength and the credibility to lead significant legislative efforts.

So, the Social Security time bomb kept ticking — and continues to tick. Entitlements remain the largest drivers of federal debt, but the conversation has gone quiet. José Piñera’s vision remains as relevant today as it was 25 years ago. In a world of big government and even bigger debt, the American Idea — free markets, limited government, and personal responsibility — isn’t just worth defending. It’s the only way forward, and with the ticking growing louder, restarting that conversation is more important than ever.

Peter C. Earle

The AIER Everyday Price Index (EPI) rose 0.21 percent to 296.7 in August 2025. Our proprietary inflation index is up 2.9 percent since January 2025, and this increase marks its ninth consecutive monthly rise. Among the 24 price categories, thirteen saw price increases, two were unchanged, and nine saw declines in August. The largest price increases occurred in internet services and electronic information providers, tobacco and smoking products, and recreational reading materials, with the top three price declines seen in nonprescription drugs; admission to movies, theatres, and concerts; and purchase, subscription, and rental of videos.

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

On September 11, 2025, the US Bureau of Labor Statistics (BLS) released its August 2025 Consumer Price Index (CPI) data. The month-to-month headline CPI rose 0.4 percent (missing forecasts of a 0.3 percent increase) while the core month-to-month CPI number increased by 0.3 percent, which met expectations.

August 2025 US CPI headline and core month-over-month (2015–present)

The food index rose 0.5 percent in August after being unchanged in July. Food at home increased 0.6 percent, with all six grocery categories higher. Fruits and vegetables climbed 1.6 percent, led by tomatoes up 4.5 percent and apples up 3.5 percent. Meats, poultry, fish, and eggs gained 1.0 percent, with beef rising 2.7 percent. Nonalcoholic beverages increased 0.6 percent, while both dairy products and cereals and bakery products edged up 0.1 percent. Other food at home also rose 0.1 percent. Food away from home advanced 0.3 percent, with full-service meals up 0.4 percent and limited-service meals up 0.1 percent.

The energy index increased 0.7 percent, reversing a 1.1 percent July decline, with gasoline up 1.9 percent, electricity up 0.2 percent, and natural gas down 1.6 percent. Excluding food and energy, the core index rose 0.3 percent, matching July. Shelter advanced 0.4 percent, including owners’ equivalent rent up 0.4 percent, rent up 0.3 percent, and lodging away from home up 2.3 percent. Airline fares jumped 5.9 percent after a 4.0 percent rise in July. Used cars and trucks gained 1.0 percent, apparel rose 0.5 percent, new vehicles increased 0.3 percent, and household furnishings advanced 0.2 percent, while recreation and communication both slipped 0.1 percent. Medical care declined 0.2 percent, following a July increase of 0.7 percent, as dental services fell 0.7 percent and prescription drugs dropped 0.2 percent; physicians’ services rose 0.3 percent and hospital services were unchanged.

The headline Consumer Price Index rose 2.9 percent between August 2024 and August 2025, which was in line with the forecast. Surveys predicted a 3.1 percent increase in the year-over-year core CPI measure, which it did.

August 2025 US CPI headline and core year-over-year (2015 – present)

The food at home index rose 2.7 percent over the year ending in August. Meats, poultry, fish, and eggs climbed 5.6 percent, while nonalcoholic beverages advanced 4.6 percent and other food at home increased 1.5 percent. Fruits and vegetables rose 1.9 percent, cereals and bakery products gained 1.1 percent, and dairy and related products edged up 1.3 percent. Food away from home increased 3.9 percent, with full-service meals up 4.6 percent and limited-service meals up 3.2 percent.

The energy index rose 0.2 percent over the year. Gasoline fell 6.6 percent and fuel oil declined 0.5 percent, while electricity increased 6.2 percent and natural gas surged 13.8 percent. Excluding food and energy, the core index gained 3.1 percent, led by shelter up 3.6 percent. Additional increases were seen in medical care at 3.4 percent, household furnishings and operations at 3.9 percent, used cars and trucks at 6.0 percent, and motor vehicle insurance at 4.7 percent.

Core consumer prices accelerated in August 2025, rising 0.3 percent on the month and 3.1 percent year-over-year, with the headline index up 0.4 percent, the fastest since January. Goods inflation firmed to 0.3 percent, matching the strongest pace since mid-2023, as categories like new and used vehicles, apparel, and appliances advanced. Analysts debated the role of tariffs, noting increases in beef and tomatoes but also outright declines in tariff-exposed categories such as appliances and personal computers. Services inflation proved stickier, with airfares up 5.9 percent and lodging 2.3 percent, while shelter costs added 0.4 percent, their largest monthly gain this year.

Tariff pass-through appears to be plateauing. Estimates suggest the coefficient of tariff shocks to CPI fell to 0.03 in August from 0.23 in July, consistent with recent price drops in categories such as furnishings, sporting goods, and electronics. Firms that raised prices earlier in the year appear to be moderating amid consumer resistance, though average inflation across tariffed goods still rose slightly — a worrisome sign that opportunistic pricing may be creeping in. Diffusion indexes reinforce that price pressures remain broad: nearly half of core CPI components are still rising at an annualized rate above 4 percent, although the share of categories posting outright declines climbed to 36 percent, up from 27 percent last month.

Labor market data adds complexity to the inflation backdrop. Initial jobless claims surged to their highest level in nearly four years, reinforcing concerns that unemployment is trending higher after earlier payroll revisions cut growth estimates sharply. Real wages edged up just 0.7 percent from a year earlier, the weakest in over twelve months, underscoring that household purchasing power remains strained. While surges in discretionary categories like airfares and hotels point to still-resilient demand, the persistence of high shelter costs alongside rising claims suggests a softer labor market may be colliding with entrenched service-sector inflation.

Market reaction captured the tension. Fed funds futures now price about 27 basis points of easing at next week’s FOMC meeting, with expectations for roughly 72 basis points of cuts by year-end. Policymakers are likely to deliver an initial 25 basis point reduction, but today’s firmer inflation print complicates the trajectory for subsequent meetings. If core inflation continues to run at August’s pace, the probability of multiple cuts diminishes, leaving the Fed to balance labor-market softness against risks that tariff dynamics, shelter inflation, and opportunistic price increases could keep underlying inflation elevated well into the autumn.

The laws of economics can be seen at work nearly everywhere if one only endeavors to take note of them. That which Frédéric Bastiat wrote is “not seen” is not invisible but rather overlooked — overlooked by lawmakers and bureaucrats who, in their excitement to achieve some perceived public good, prefer not to investigate the effects of their pet policies; such investigations all too often provide good evidence that those policies should not be pursued.

Earlier this month, federal district court judge Amit Mehta rendered a remedies ruling in the Department of Justice (DOJ)’s antitrust case against Google Search. The court’s lengthy order makes clear that Judge Mehta has seen that which often goes unseen. He largely rejected the government’s extravagant remedies proposals, which amounted to little more than an attempt to leverage a liability finding against Google for the purpose of rearranging the online search market to soothe the myopia of bureaucrats in Washington. 

The DOJ seems to see itself engaged in a great war against a private company, a company that, the Trump administration believes, is hostile to the political faction that this administration leads. In April, standing next to the courthouse, DOJ antitrust chief Gail Slater defended her agency’s suit (a case whose legal particulars concern economics and competitive markets), noting: “You know what is dangerous? The threat Google presents to our freedom of speech.” 

Quite naturally, DOJ has also posited that Google threatens competition in the online search market, but her introduction of non-economic grievances is not insignificant. Such a theory of antitrust points to the conclusion that the economic and cultural power of hostile firms ought to be dismantled, never mind the havoc inflicted on the law, innovation, or the dynamism of American industry. This conclusion has little to do with economics — indeed, it is at odds with Econ 101. 

Rejecting proposals for an enforced divestment of the Google Chrome browser, extensive compelled data-sharing, and mandates for user choice screens and public education, Mehta instead favored more modest and tailored remedies. Mehta confined his order to remedies likely to ameliorate damage done to competition, as outlined in his liability ruling of August 2024. He would not accede to the DOJ’s request that antitrust law be deployed as a means of central planning. Discrete findings of anticompetitive conduct warrant discrete, tailored remedies — and no more. Perhaps most notably, Google may continue to contract with phone manufacturers and the proprietors of web browsers to secure prime placement — though not exclusive placement — for its search engine. 

Mehta seems to maintain a sturdy skepticism with respect to the knowledge available to judges and bureaucrats and their competency to interfere in, and to tinker with, markets. “Ultimately,” he wrote, “when crafting a remedial decree, judges must ‘be mindful…of their limitations’ and approach the task with ‘a healthy dose of judicial humility.’” 

In his discussion and rejection of the DOJ’s bid to forbid Google to pay to secure preferential placement on, e.g., browsers and mobile devices — the prohibition of which would rob companies such as Apple and Mozilla of a good deal of revenue — Mehta professed outright ignorance. Outlining the likely impediments such a ruling and such revenue losses would erect against innovation and competition, he wrote: “The court cannot predict to any degree of certainty that one or more of these effects will in fact occur.”  Moreover, he argued, “if one or more of these adverse market impacts were to come to pass, it would harm consumer welfare. That could manifest in various ways, including higher prices, less innovation, and less competition.” The DOJ (not to mention the left- and right-wing antitrust activists who share its technocratic sensibilities) has no such qualms. Nonetheless, as the court acknowledged, knowledge problems persist — even in digital markets, which many in both major political parties yearn to regulate.

Even since issuing his liability finding last year — which, it ought to be noted, is likely to fall on appeal — Mehta seems now to have discovered new reason for his skepticism. Google now contends with new competitive threats to its dominance of online search: social media, specialized online platforms, and most significantly generative artificial intelligence (GenAI). It has been noted that Mehta’s liability finding expended few words discussing AI, yet the intervening year, and the developments that have occurred in that time, rendered a consideration of the technology in the remedies order unavoidable.

Mehta has grasped another fundamental element of markets and innovation: time. Time comes for all — especially market incumbents. The DOJ’s case began in 2020, filed under the first Trump administration. It was carried forward by the Biden administration, and Trump 2.0 has sought to bring it to completion. In these years, innovation has proceeded too quickly for the government’s lawyers to keep pace. It will not surprise free marketeers to learn that, once again, state action has fallen years behind the evolution of markets.

“The emergence of GenAI changed the course of this case,” Mehta stated. This observation appears on the first page of his opinion. “Google’s own witness…testified that the volume of Google Search queries in Apple’s Safari web browser had declined for the first time in 22 years likely due to the emergence of GenAI chatbots,” Mehta noted later. To strengthen its slipping hold on its dominant market share, the company has integrated AI features into Google Search and has marketed its own GenAI product, Gemini. Again, the changes wrought in markets by time and innovation became central: “Since the liability trial, Google has deepened the integration between Search and GenAI by incorporating AI Overviews into its SERP and introducing AI Mode, both of which ‘are expanding the types of queries [users] are typing into Google Search,’” he reported.

Google has good reason to fret. According to one analysis, summarized by The Wall Street Journal, “[a]lmost 60 percent of US consumers used a chatbot to help research or decide on a purchase in the past 30 days.” While GenAI tools synthesize and serve up information differently from traditional general search platforms, they fulfill many of the same consumer demands. Technology companies — incumbent and upstart alike — innovate unceasingly to perfect old products and develop new ones to serve their consumers better. Innovation and competition are a fierce game — unflaggingly iterative and ruthlessly responsive to consumer demand — and any firm that stumbles is likely to join the likes of Myspace and Yahoo in the netherworld. 

The premises underlying Mehta’s order illuminate the beautiful unpredictability of markets, the capacity of spontaneous order to provide for the needs and desires of humanity. From this process of experimentation and innovation springs new goods and services undreamt of by legislators, bureaucrats, and judges (and, for that matter, likely undreamt of by entrepreneurs themselves until the moment of discovery). Untold numbers of men and women — generally unknown to one another — combine their talents and tenacity and hazard great and risky endeavors for the purpose of serving their fellow man, most of whom also remain unknown. Myriad threads are woven together into a tapestry, across time, industries, and national borders.

Even if only latently, Judge Mehta realized two things: First, that he could not foresee what is to come next in the online search market and the technology sector generally; second, bureaucratic micromanagement of technology markets would produce ills — even if he could not foresee what those ills might be.

The laws of economics can be seen at work nearly everywhere, and Judge Mehta very wisely took note of them.

On September 5, President Trump signed an executive order making The Department of War an official secondary name for The Department of Defense, seemingly with the expectation that legislation will make the switch official and eliminate that Department of Defense name entirely down the road. 

The change was accompanied with the usual macho swagger that has become the norm in his second administration, with talking points about this name clearly sending a message to potential adversaries that we mean business and won’t be limited to just “playing defense.”

I doubt that many adversaries, contemporary and historical, were under the illusion that the Department of Defense meant that the US would be somehow limited in its military undertakings, as the cratered wrecks of Iraq, Afghanistan, Libya, or further back the multiple millions of tons of bombs dropped on Southeast Asia can readily attest. So while the stated aims of the change are questionable to say the least, this change is, in fact, a surprising step down the pathway of good governance, or so at least the Chinese sage Confucius would argue. 

In book 13 of the Analects of Confucius, Confucius is asked by a disciple what he would do as his first order of business if he was put in charge of the Kingdom of Wei. Confucius replied, “It would, of course, be the rectification of names.” His disciple is incredulous at this, but Confucius replies:

If names are not rectified, speech will not accord with reality; when speech does not accord with reality, things will not be successfully accomplished. When things are not successfully accomplished, ritual practice and music will fail to flourish; when ritual and music fail to flourish, punishments and penalties will miss the mark. And when punishments and penalties miss the mark, the common people will be at a loss as to what to do with themselves. This is why the gentleman only applies names that can be properly spoken and assures that what he says can be properly put into action. The gentleman simply guards against arbitrariness in his speech. That is all there is to it.

From this way of thinking, renaming the Department of Defense to the Department of War may not do much to change the Chinese or Iranian assessment of American intentions, but in a small way, it might actually be a small step towards the restoration of good governance. 

“Defense” has much more positive connotations than “war” and it is much easier to advocate for “defense spending” in order to “defend” America by bombing hither, thither, and yon. In contrast, “war” is a much more honest term that encompasses defensive measures alongside everything else. And there can be little doubt that for decades most of the actions undertaken by the Department of Defense have fallen under the “everything else” classification. 

America’s foreign policy went off the rails decades before the Department of War was turned into the Department of Defense in 1947, arguably beginning in earnest with the annexation of the Philippines following the Spanish American War in 1898. But for over a century prior, American foreign policy, under the Department of War, more or less managed to adhere to the Monroe Doctrine and the principles laid out in Washington’s Farewell Address and John Quincy Adams’ Monsters to Destroy speech. 

During this time, “words accorded to reality” a great deal more than they do today and “things,” namely defending the American homeland, were much more “successfully accomplished” than in the days of the Orwellian Department of Defense, where “defense” came to mean anything and everything, and therefore nothing. For decades, American military might has flopped around from one disaster to another, spending untold trillions of dollars and immeasurable American blood while doing little that actually defends America. 

Given the Trump administration’s less-than-thrilling foreign policy track record thus far, there is little reason to suspect that merely changing the name of the world’s largest bureaucracy will immediately transform our America-first foreign policy to one of realism and restraint. However, it would be unwise, following in Confucius’ disciples’ footsteps, to dismiss the significance of this rectification as being “out of touch with reality.”

As Mises explains in Theory and History, “A language is not simply a collection of phonetic signs. It is an instrument of thinking and acting. Its vocabulary and grammar are adjusted to the mentality of the individuals whom it serves.” In other words, the language that we use to communicate is inextricably tied to our thinking process about the realities that such words concern.

As a fundamental building block to understanding reality itself, and furthermore to engage in the inter-personal communication that makes social life possible, the words we use are truly of essential importance.

Given the vast sea of lies and “euphemisms” that have infected American society and institutions, especially in government and business, a return to reality for something as significant as the Department of War demonstrates that perhaps not all is lost. Perhaps a return to less outright lying in official communications is possible after all. 

A small ray of the light of truth has burst onto the scene, and as Václav Havel wrote in The Power of the Powerless:

As long as living a lie is not confronted with living the truth, the perspective needed to expose its mendacity is lacking. As soon as the alternative appears, however, it threatens the very existence of appearance and living a lie in terms of what they are, both their essence and their all-inclusiveness.

Let us hope that this small rectification of a name portends more rectification, and therefore truth and ultimately order, to come. 

“History doesn’t repeat, but it often rhymes,” is a famous saying attributed to American author Mark Twain. When you read today’s news about the French government and its debt situation, it’s not unlikely that the saying comes to mind.

The European Debt Crisis Revisited

It has been about 15 years since the European Union faced its first severe crisis. As a result of the aftermath of the Great Financial Crisis in 2008, the continent stumbled into a multi-year debt crisis that brought enormous economic hardship to many members of the Eurozone. 

Back then, it was the so-called PIIGS states (Portugal, Ireland, Italy, Greece, and Spain) that got into the spotlight of financial markets. After the euro was implemented in 2002, these countries were able to issue government debt at rates they had never seen before. Unsurprisingly, politicians couldn’t withstand the pressure and issued more and more debt in an attempt to bring their countries into prosperity. 

As always, things that sound too good to be true turn out not to be true. And when the appetite for new debt and risky credit abated after the US housing bubble started to burst, it was only a matter of time before the crisis would spread and affect European countries that piled up debt under the low-interest rate regime. 

Interest rate spreads of government bonds compared to German Bunds (figuratively the “US treasury bond” of the Eurozone) widened significantly. Mario Draghi, then the head of the ECB, intervened verbally with his famous “Whatever It Takes” speech, and interest rate spreads began to narrow again. Greece suffered extraordinarily under the crisis. Things deteriorated to the point of requiring financial support from the EU and the IMF. 

The EU also put political instruments in place, which somehow wiggled around the “no-bailout” clause from the Maastricht Treaty.  In the end, one could say that the crisis wasn’t solved, but instead covered up by political actions aimed at alleviating the nervousness of financial markets.

Debt Accumulation of the French Government

Although France was not necessarily a fiscally frugal country at the time, it did not come into the spotlight. Notably, France’s interest rate risk spread over German Bunds was substantially higher during the height of the sovereign debt crisis in the 2010s compared to its current level.

What changed is the debt situation of the French government. In 2000, France’s debt-to-GDP ratio stood at approximately 60 percent, and it has continued to rise steadily since then. Until 2010, it had climbed to 84 percent. At the end of 2019, it was close to 100 percent and had gone up to 113 percent by the end of 2024. In percentage terms, its debt rose much faster than Italy’s. 

What’s also noteworthy is that the ratio was similar to Germany’s until 2008, after which it diverged significantly. 

Back in the 2010s, however, when interest rates were falling and near zero, it was much easier to refinance that debt. The expansion of the deficit had limited consequences, as borrowing became cheaper and cheaper. 

When interest rates begin to rise, however, one must borrow increasingly more money just to pay the interest on the debt. In France, the portion of debt-service costs is on its way to becoming the second-largest budget item by 2026, Le Monde reported:

According to government forecasts, debt service is expected to be the second-largest item of public spending in 2026, with a projected €75 billion. This would put it well ahead of national education and defense spending, but behind tax reimbursements to businesses and individuals (linked to tax breaks and other incentive schemes).

Although the size of France’s debt is still far lower than in Greece, financial markets are becoming concerned due to the trajectory of the debt. For example, while Greece has implemented fiscal measures and economic reforms to reduce its deficit and has experienced solid economic growth in recent years, France has seen increasing deficits since 2022. Currently, the IMF even anticipates that France will have a higher debt-to-GDP ratio than Greece. 

An Ongoing Political Crisis

Beyond the darkening fiscal situation, France is also in a political crisis. During the sovereign debt crisis of the 2010s, France remained a stable political environment. These days are long gone now. 

In 2022, Emmanuel Macron secured a victory for the presidency that was closer than anticipated against far-right candidate Marine Le Pen. In the spring of 2024, Macron called for snap elections, which resulted in a significant win for the far-right in the first round. Still, the second round ended with a surprising victory of the leftist New-Popular-Front. 

Michel Barnier, a former EU Commissioner, became prime minister in September, only to lose a confidence vote in December 2024 after he failed to secure a majority for his Budget. He became the shortest-serving prime minister of France’s Fifth Republic. 

The Current Political Crisis

Barnier’s successor, Francois Bayrou, was unable to calm the political turbulence and solve the budget problems. He invoked special constitutional powers to pass the 2025 budget and used concessions to the left to survive several confidence votes.  

In March, Bayrou proposed extending taxes on the wealthy and a mechanism that forces individuals with “excessive savings” to invest in defense expenditures. French academics rallied behind him and posted an op-ed in Le Monde in support of taxing the “ultra-rich.” Yet, evidence from Norway suggests that such actions could lead to lower, not higher, tax revenues.

So far, however, Bayrou hasn’t been able to secure a majority for the 2026 budget, which also aims for drastic spending cuts. As a result, he decided to take action: At a press conference on August 25, he called for a no-confidence vote in Parliament, which will be held on September 8. 

Calling for the IMF: A Political Maneuver

As a result, risk spreads on French government bonds spiked to their highest level since January. Finance Minister Eric Lombard warned that snap elections (following Bayrou’s loss of the confidence vote) could even result in an IMF bailout. His comment poured more fuel on the fire.

Nevertheless, the warnings are clearly a political maneuver to put pressure on the members of parliament to support Bayrou on September 8. There’s no hard evidence that France will need help from the IMF at the moment, something that Christine Lagarde (head of the ECB) confirmed too. Although that calmed down financial markets a bit, it remains to be seen how things evolve once we know the outcome of the no-confidence vote. 

France: A Warning To The United States

While one can only speculate, the most probable outcome is a combination of higher taxes and increased government spending, which then falls short of expectations and drives the debt-to-GDP ratio higher. Financial markets will judge the measures as successful when there’s clarity on their effectiveness. 

Yet, Americans should watch the developments in France because it could give an idea of where the US is headed if it also continues to pile up debt. Although President Trump generally promotes low taxes and is pro-business, he has also stated that he’s open to taxing wealthy Americans more when necessary. Nevertheless, such a scenario seems unlikely at the moment. After all, the United States isn’t France, and still has a significantly lower debt-to-GDP ratio. 

But piling up debt above levels typically seen only in wartime, in an era where interest rates have just returned to historically normal levels, could also lead to increased nervousness in financial markets at some point. If such a case were to arise, the US might also face a similar day of reckoning. Nevertheless, the US also benefits from its privilege to issue the world’s reserve currency. This privilege is unlikely to disappear in the near future due to the lack of viable alternatives.

This year marks the ninetieth anniversary of the Banking Act of 1935, the law that gave the Federal Reserve its current structure. Often overshadowed by the 1933 Act, which created deposit insurance and separated commercial from investment banking, the 1935 Act was just as important. By shifting power to Washington and redefining the Fed’s role, it built the framework for modern US monetary policy.

In its early years, the Fed — founded in 1913 when President Woodrow Wilson signed the Federal Reserve Act — looked very different.

Each regional Reserve Bank conducted open market operations on its own, deciding which securities to buy and at what price. Because US markets were so interconnected, one bank’s actions spilled into other districts, leaving monetary policy pulling in different directions. This wasn’t a flaw so much as a feature of the system’s decentralized design. But it didn’t work well in practice.

To bring some order, five Reserve Banks — Boston, Chicago, Cleveland, New York, and Philadelphia — formed a committee in 1922 to coordinate their trades. A year later, it became the Open Market Investment Committee (OMIC), which operated under the Board’s supervision in Washington. But the arrangement was voluntary. Other Reserve Banks could still go their own way, even if they rarely did.

In 1930, the OMIC gave way to the Open Market Policy Conference (OMPC), which included all twelve Reserve Bank governors (later retitled “presidents” by the 1935 Act). A smaller five-member group, comprising the original OMIC members, carried out the trades. But, again, participation was voluntary, and regional banks retained the right to act independently.

That freedom became a liability in the summer of 1932, when disagreements among the Reserve Banks led to a breakdown of cooperation. The result was to deepen the Great Contraction of the money supply that had begun in 1929. The Banking Act of 1933 addressed this issue by creating the Federal Open Market Committee (FOMC). Like the OMPC, it included all twelve Reserve Bank governors. Unlike the OMPC, the FOMC’s decisions were binding.

Careful readers will notice that today’s FOMC looks very different. Instead of twelve Reserve Bank presidents, it includes the seven members of the Board of Governors in Washington and five Reserve Bank presidents: the New York Fed president and four of the remaining eleven on rotation. The 1935 Act established this structure, giving the Board a majority on the committee for the first time. That change remains one of the Act’s enduring legacies: the centralization of monetary policy in Washington, DC.

The 1935 Act went further still. It gave the Board direct authority over other key tools of monetary policy. The Board could now set reserve requirements, regulate interest rates on member bank deposits, and approve the discount rates Reserve Banks charged when lending to commercial banks.

Previously, each Reserve Bank set its own discount rate. The Board could sign off, but lacked the power to force changes or to impose a uniform national rate. The 1935 Act changed that. From then on, the Board could compel changes and, if it wished, establish a single discount rate for the entire country.

Finally, the Act strengthened the Fed’s independence. Before 1935, the Treasury Secretary and the Comptroller of the Currency sat on the Federal Reserve Board, with the Treasury Secretary serving as its chair. The Act removed them, creating a new Board of Governors composed solely of presidential appointees serving long, staggered terms, with a separate chair nominated by the President. Around the same time, the Fed left the Treasury Building for its own headquarters on Constitution Avenue. The Fed’s move was both a symbolic and practical marker of independence.

Ninety years later, every Fed decision — from raising rates to curb inflation to cutting them in a downturn — still flows through the framework the 1935 Act created. By redesigning the FOMC, consolidating control over monetary tools, and strengthening independence from the Treasury, the law built the modern Federal Reserve. 

Yet centralization has tradeoffs. 

The Act reduced the influence of regional banks, gave New York a privileged seat, and concentrated power in Washington — a trend extended by later reforms like Dodd–Frank, which limited the banking sector’s role in selecting Reserve Bank presidents. Centralization freed the Fed from Wall Street and the Treasury, but it also concentrated authority in Washington, where political pressures are never far away — a tension that continues to shape monetary policy to this day.

“I don’t give a sh*t what you call it.”

So wrote Vice President J.D. Vance in response to journalist Brian Krassenstein, who questioned Vance’s assertion that assassinating suspected drug smugglers with missile strikes is “the highest and best use of our military.” Krassenstein called killing civilians without due process “a war crime.”

Killing cartel members who poison our fellow citizens is the highest and best use of our military.

— JD Vance (@JDVance) September 6, 2025

Public profanity and crude insults are the stock-in-trade of politicians left and right now. Political consultants, I’m sure, tell their bosses it makes them sound strong. Red meat for the base, one small symptom of our late-republic degeneracy.

To be fair, the words “due process” are triggering to the Trump Administration. Vance himself earlier defended abrogating due process to speed up deportations. President Trump answered, “I don’t know,” when asked if he agreed with Marco Rubio that presidents must respect constitutional guarantees of due process.

The Trump Administration is taking precedents set by Barack Obama to a new level. As President, Obama developed a “kill list” beginning in 2010 in consultation with CIA chief John Brennan. He ultimately ordered the assassination of thousands of suspected Islamists, including American citizens, with drone strikes. Disturbingly, many of these drone strikes killed innocent people, including Abdulrahman al-Awlaki, son of Anwar al-Awlaki, who had himself earlier been killed by drone strike. The strike on Abdulrahman was admitted to have been a mistake.

Obama and Brennan never disclosed who was targeted for assassination or why, and the courts dismissed challenges to the list on the grounds of standing. Only those targeted for elimination, the opinion in the al-Awlaki case held, had standing to challenge it. Needless to say, people targeted for assassination were not eager to travel to the US to challenge their assassination order in open court. The Obama Administration’s legal theory held that the targeted individuals were on an active battlefield — but they also defined the active battlefield to include virtually the entire Middle East.

The Trump Administration is now further relaxing limits on the presidential assassination power, justifying blowing up a boat of suspected drug smugglers on the grounds that the White House has declared drug cartels and gangs to be “foreign terrorist organizations.” Just as with al-Awlaki on Obama’s kill list, there is no recourse for anyone the White House considers to be affiliated with one of these “terrorist” groups and thus fair game for killing.

What makes the Trump Administration’s assertion of power more alarming is the fact that they also consider asylum seekers and illegal immigrants to constitute a literal “invasion” in the legal sense. It doesn’t take an expert logician to see that this administration’s position implies it would be lawful — and beyond judicial review — to employ federal agents to kill anyone suspected of entering the country illegally.

Obama could at least claim the authority to order the killings of foreign combatants under the congressionally enacted Authorization for Use of Military Force against al-Qaeda. The legal authority claimed by the Trump Administration for extrajudicially executing suspected drug traffickers is, believe it or not, the International Emergency Economic Powers Act, the same law it uses as authority for its sweeping tariff war against the world, despite the fact that it doesn’t mention tariffs or the power to kill.

In the second Trump term, we are getting a clear picture of an administration dedicated to punching holes in the rule of law. Since the Magna Carta, the Anglo-American legal tradition has held that the sovereign is subject to the law, a principle that amounts to words without substance if the law permits the sovereign to forfeit the lives, liberties, and properties of his subjects by simple command.

The framers of the American Constitution understood that the rule of law is not self-executing. The survival of the rule of law requires tight constraints on the executive branch. Congress and the judiciary must sanction the executive when he gets out of line. States must place roadblocks in the way of a federal government that tramples our rights.

I don’t so much blame Trump or Vance for trying to take power. Trump often behaves like a petulant child who doesn’t understand why he can’t always get what he wants. Vance has consistently chosen political power over principle, embracing positions that betray the very values he once claimed to defend. The genius of the Constitution is supposed to be that the ambition of each branch of government checks the power-grabs of evil men.

So I blame cowardice in Congress and the courts, if these assaults on the rule of law manage to go through. If vague legislation authorizes sweeping executive emergency powers, then we no longer live in a constitutional republic, but an elective dictatorship.

Obama set the precedents for presidential lawlessness; now Trump is exploiting them. It’s not difficult to see where this trajectory is heading.

President Trump’s “One Big Beautiful Bill” (OBBB) is a mixed bag for the Federal Reserve. On the one hand, OBBB’s passage removes the near-term difficulty of conducting monetary policy in the face of huge swings in the Treasury General Account. On the other hand, it may make it more difficult for the Fed to see through its planned balance sheet reduction.

The Federal Reserve’s $7 trillion balancing act just got easier—and more complicated—thanks to President Trump’s historic $5 trillion debt ceiling increase. While this “One Big Beautiful Bill” resolved an unprecedented collision between fiscal brinksmanship and monetary policy, it created new challenges that could complicate Fed operations down the road.

Let’s start with the Fed’s massive balance sheet. During the 2008 financial crisis and COVID-19 pandemic, the Fed expanded its asset holdings from around $800 billion to nearly $9 trillion—that is, $9,000 billion. Then, in 2022, the Fed began slowly shrinking its balance sheet. It is not actively selling assets. Rather, it is not replacing a portion of its maturing bonds. The Fed intends to use this “balance sheet runoff” approach to transition from an abundant reserves to an ample reserves regime.

Plot data: here

The Fed’s balance sheet runoff approach was designed to run in the background, on autopilot, while interest rates did the heavy lifting of monetary policy. So far, it has reduced the balance sheet by approximately $1.7 trillion. 

Before the passage of OBBB, debt ceiling politics created a roadblock for the Fed’s balance sheet runoff plans. 

The Treasury has an account at the Fed known as the Treasury General Account (TGA), which is essentially the government’s checking account. Typically, the government will maintain a large balance in the TGA, in order to ensure it can make payments over the next few weeks. It will draw down this balance gradually, and replenish it as it sells bonds and receives tax payments throughout the year.

When the debt ceiling becomes binding, however, the TGA can increase reserve volatility. Unable to issue new debt, the Treasury must rapidly drain the TGA to keep the government funded. When the government spends this money, it flows into the banking system, causing bank reserves to spike. Then, when Congress raises the debt ceiling, the Treasury rebuilds its TGA balance by issuing new debt. That results in a sudden drain of reserves from the banking system. For example, after the debt ceiling was raised in June 2023, the TGA “increased by $600 billion over the short period of three to four months.”

Huge swings in the TGA balance create a dangerous scenario for the Fed. If bank reserves fall too quickly, financial markets might become volatile. This is especially difficult if the Fed is engaged in balance sheet runoff, since that also removes reserves from the system. Indeed, when the Fed faced this risk in March 2025, it slowed its balance sheet runoff. In other words, the Fed took its balance sheet runoff approach off autopilot to prevent a potential reserves shortage.

The OBBB raised the debt ceiling by $5 trillion—the largest increase in US history. This massive increase in the debt ceiling likely provides sufficient borrowing authority for the next five years, allowing the Treasury to operate normally without the dramatic swings in the TGA that complicated Fed policy. Correspondingly, the Fed can resume normal balance sheet runoff operations.

But solving one problem created another. The Congressional Budget Office projects that the OBBB will add $3.4 trillion to the national debt over the next decade—equivalent to roughly $340 billion in additional Treasury issuance each year. That creates a challenging market dynamic. Private markets must absorb both normal Treasury financing needs (approximately $3 trillion in maturing debt this year) plus the additional $340 billion annually. Assuming this increase in the supply of Treasuries outpaces demand, interest rates will be pushed up.

Presumably, the White House will not be happy about the prospect of paying higher interest rates on its debt. It may pressure the Fed to step back in as a buyer of national debt to help reduce the financial cost to the Treasury. Congress could even require the Fed to purchase more government debt, effectively ending the Fed-Treasury accord.

Even if the Fed is neither required nor pressured to buy more government debt, it will have to decide how to react to the corresponding interest rate movements. That, on its own, may push the Fed to reduce the pace of the balance sheet runoff or become a buyer once again.

Thomas Sowell famously quipped that there are no solutions, only tradeoffs. Fed officials can surely appreciate the sentiment. By raising the debt ceiling, OBBB takes them out of the reserve-volatility frying pan. It may also put them into the debt-monetization fire.

National security is the textbook case of a subsidized public good — taxpayer-funded, centrally coordinated, and traditionally insulated from market prices. Ukraine’s wartime economy, however, offers a powerful counterpoint: a state-dominated sector that uses market-like incentives and achieves faster, cheaper, and higher-quality results. Western governments are rushing into a new age of rearmament — so if public funds must be spent, the most critical question is how to spend wisely.

Russia’s invasion in February 2022 has transformed Ukraine’s defense sector into an engine of decentralized innovation. Startups prototype lethal drones in garages. Battlefield software is crowdsourced by the Ministry of Digital Transformation. Soldiers use apps to provide frontline feedback, producing design tweaks in days, not months. More than 500 companies are producing short- and long-range drones for military use and Ukraine will produce more than four million drones in 2025, many without a single Chinese component. Ukrainian short-range drones cost around $400 per unit, while comparable American drones are often more than $100,000 — and deliver inferior performance. Drones in Ukraine have revolutionized warfare: about half of all casualties are now inflicted by drones.

Russia, in contrast, uses a command-and-control industrial policy beholden to state-owned giants and bureaucratic procurement agencies, with six major umbrella corporations in 2025. Despite vastly larger military expenditure — $149 billion in 2024 versus Ukraine’s $64.7 billion — Russia struggles to match Ukraine’s tempo in drone warfare and battlefield adaptation. Why? Because Ukraine’s Ministry of Defense has transitioned from a similar post-Soviet monopoly to a monopsony model — where government is the sole buyer but is no longer the main producer — and purchases from a competitive field of private firms. 

Ukraine funds public competitions, invites diverse bids for contracts, and rewards battlefield results. One pilot program provides drone operators with points for kills, which encourages the operators to experiment and purchase materials as they see fit. This type of initiative unleashes innovation, reduces costs, streamlines production, and avoids the bureaucracy and interference that characterizes centralized planning. Strategic demands are continuous; and Kyiv responds by adjusting price incentives toward any new priority, and the market responds accordingly. Crucially, Ukraine’s defense firms have repositioned to become both domestic and export industries, and entice foreign investment to help build momentum. Ventures that arose to meet urgent battlefield needs are now marketing to international buyers and Ukraine’s president recently announced new arms development partnerships with the US, Germany, and Denmark. 

Of course, none of this would be possible without foreign aid. American and European funding kickstarted local industry and still sustains Ukraine’s resistance. But Ukraine’s approach shows that, for defense, what matters most is how public money is spent, not just how much. Instead of concentrating funds in a few politically connected firms, Ukraine distributes capital widely, promoting competition. Ukraine’s future is bleak, but its defense industry is well-positioned to rearm an anxious Europe facing uncertain US support, and to provide an alternative to Chinese-backed supply chains. 

President Eisenhower warned in 1961: 

…we have been compelled to create a permanent armaments industry of vast proportions… Yet we must not fail to comprehend its grave implications… we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

The Pentagon is ensnared in a procurement labyrinth Eisenhower would recognize. The F-35 program is projected to cost more than $2.1 trillion and continues to suffer from readiness and reliability issues. The Joint Systems Manufacturing Center, the only US plant that produces Abrams tanks, has halted new production in favor of refurbishment due to delays in its fragile supply chain.

Defense contractors such as Lockheed Martin and Raytheon operate in respective oligopolies and are shielded from competition by compliance regulations and lobbyists. In 2024, US defense contractors spent nearly $150 million lobbying Congress. This labyrinth poses grave implications for American readiness in case of a broader conflict in the Indo-Pacific or Middle East, and low stockpiles were recently cited as the reason for halting arms shipments to Ukraine. 

None of this is inevitable. America has a vibrant tech sector and firms like Anduril and Palantir build first and sell later, which shows that grass-roots innovation can break into the most entrenched markets. America’s procurement system also appeals to diverse bidders; however, over-regulation and strict compliance regimes favor incumbents over innovators.

The Pentagon is a monopsony buyer just like Ukraine’s Ministry of Defense. However, unlike Ukraine, it often rewards risk aversion, compliance with documentation, and maintenance of political connections. Labor unions push for job guarantees, and local domestic concerns cause retention of outdated production lines, even when newer, better alternatives exist. Lobbyists for incumbent firms engineer compliance regimes tailored to their existing processes and lock out leaner competitors. Self-serving legislators eager to deliver jobs to their districts may champion pork-barrel projects that prioritize electoral influence ahead of strategic utility and national interest. The results are high prices that reflect negotiation savvy and bureaucratic finesse more than competitive merit. Mediocrity earns a paycheck, and innovation waits in the lobby.

So, are the Ukrainians simply desperate, and therefore inclined to be more productive and take shortcuts? Partly, sure. Necessity dictates changes be made quickly, but just because Ukraine innovates out of necessity doesn’t mean its approach is nearsighted. The US has the luxury of time, and changes Ukraine has made out of necessity, the US can pursue by choice. What Eisenhower warned of has come to pass: a socialized military-industrial complex that serves special interests, not the nation.

Ukraine offers a vision of deregulated defense production and enhanced capability, informed by modern warfare. Its evaluation of battlefield needs is not perfect, but it reflects a broader trend characterized by responsiveness, experimentation, and rapid iteration. They are the hallmarks of a functioning market, even though the ultimate customer is the state. 

There are, however, some challenges that come with decentralized production. It is easier for Russia and its allies to infiltrate the numerous supply chains and small firms, and parts sourced from overseas pose data-collection and sabotage risks, as was seen in recent Israeli attacks on Hezbollah in Lebanon. Ukraine seems to be handling these issues well and increasingly sources parts domestically, as doing so becomes more efficient due to economies of scale.

What ‘victory’ looks like for Ukraine is unclear, and a positive outcome for its people is far from guaranteed. I make no judgment on whether lowering the cost of warfare is actually in the best interest of Ukrainian or American citizens — many want the war to end today. If the aim, however, is efficiency in defense production, Ukraine is doing something right. If America is committed to spending $1 trillion of public funds annually on defense, it should demand rapid innovation and the pursuit of excellence.