1. Introducing the Jones Act

This Explainer seeks to provide a better understanding of the Merchant Marine Act of 1920, known as the Jones Act. This law was passed with the best of intentions and has been a staple of the American political landscape for over one hundred years. It has also created many unintended consequences, challenges, and problems, suggesting a need for substantial legislative reform in this area.

2. A Summary of the Jones Act

The Jones Act was signed into law on June 5, 1920, by President Woodrow Wilson. The purpose of this law was simple enough: “the promotion and maintenance of the American merchant marine.” The spirit of the law, however, was not to protect these jobs for domestic workers. It was to “ensure adequate domestic shipbuilding capacity and a ready supply of ships and merchant mariners that can serve as an auxiliary in times of war or other national emergencies.” 

To accomplish this goal, the Act stipulates that all ships transporting goods between US ports meet four conditions:

1. Be American-made.
   1. All major components (hull and superstructure) must be made in the US and the vessel’s actual assembly must be entirely done in the US.
2. Be American-crewed
   1. All officers on deck and at least 75 percent of the crew must be US citizens.
3. Be American-owned
   1. 75 percent of the ownership stake must be by US citizens or by US companies that are controlled by US citizens.
4. Be American-flagged
   1. All vessels must be registered in the US and must fly a US flag. They must also follow all regulatory requirements of the US and be subject to inspection by the US.

This law was passed with the best of intentions, and may have been warranted in the immediate term due to World War I, the War’s extension throughout the Atlantic, and German attacks on American shipping from 1917 onwards. The long-lasting results of this law, however, can only be described as “disastrous.” It neither promotes the domestic merchant marine industry nor bolsters national defense. 

Because of the restrictions on the domestic shipping industry — specifically, the protections from foreign competition — the cost of shipping goods domestically skyrocketed. Some estimates find that the Jones Act increases shipping costs dramatically over the going rate for international shipping. Estimates vary on the exact figure. 

The US Department of Transportation acknowledged this in 2020, citing its own previous report: the cost of operating a Jones-Act-compliant vessel was at least double compared to non-Jones-Act-compliant vessels. In 2020, the nonpartisan Congressional Research Service, citing numerous studies, calculated “the price of a US-built tanker is estimated to be about four times the global price of a similar vessel, while a US-built container ship may cost five times the global price.” That corresponds to previous research: a 2011 study by the US Maritime Administration (MARAD) found “the average operating cost of a US-flagged ship was 2.7 times greater than a foreign-flag ship,” a cost differential MARAD predicted would increase.

3. Unintended Consequences: The Status of the US Shipbuilding Industry Today

Counter to the goals of the Jones Act, raising the cost of domestic sea-shipping to such a degree has encouraged domestic producers to find alternative means of transporting their wares. In an extreme case, cows from Hawaii are frequently shipped by air because it is cheaper than shipping them by water. By reducing demand, high shipping costs actually reduce the number of domestically produced ships, the domestic shipbuilding facilities, jobs in the shipbuilding industry, and the number of qualified mariners available to crew Jones-Act-compliant ships.

Rather than nurturing an abundance of ships and mariners standing ready to bolster naval operations, the Jones Act has produced the opposite: shortages of both. In 2017, the Maritime Workforce Working Group reported a deficit of 1,839 mariners for a “sustained sealift,” meaning “sustained wartime efforts.” Even this estimate assumes that all currently “actively sailing and qualified mariners with unlimited credentials available to crew… [were] available and willing to sail.” At a 2023 hearing before the Department of Transportation, Ann Phillips, then the Maritime Administrator, noted that since the 2017 study, “globally standardized credentialing requirements” and “the COVID-19 pandemic” have both “negatively impacted mariner retention.” While she did not provide new figures for the deficit, one can only surmise that the situation has gotten worse, not better.

The sobering unintended consequences of the Jones Act go further. At a 2013 hearing before the House Subcommittee on Coast Guard and Maritime Transportation, the Subcommittee’s staff reported as “Background” that between 1983 and 2013, at least 300 shipyards closed, leaving just four remaining open today.

The result of all of this has been a massive decline in the capacities of the US shipbuilding industry. In a 2019 statement before the House Subcommittee on Coast Guard and Maritime Transportation, Mark Buzby, the Administrator of the Maritime Administration of the US Department of Transportation, testified: “In the case of large self-propelled oceangoing vessels, U.S. shipyards still lack the scale, technology, and the large volume ‘series building’ order books needed to compete effectively with shipyards in other countries.” 

Compared to other countries, the US has clearly fallen behind. A 2025 report from the US Trade Representative states that “today, the US ranks nineteenth in the world in commercial shipbuilding, and we build fewer than five ships each year, while the [People’s Republic of China] is building more than 1,700 ships. In 1975, the United States ranked number one, and we were building more than 70 ships a year.”

4. A World Without the Jones Act

One starting point for such reform would be to ask the following question: what would the world of American shipping and ship-building look like in the absence of the Jones Act?

First, it is useful to lay some groundwork for what this world looks like with the Jones Act. Shipping from, for example, Alaska to California can be done in one of two ways. The first is by using a ship in compliance with the Jones Act. The second is by using a legal workaround. The Jones Act applies to ships moving directly between two American ports, but not if a ship stops at a foreign port between two US ports. Many ships leaving Alaska briefly stop in British Columbia before heading to California, just to avoid having to comply with the Act.

A more famous example of a means of circumventing the Jones Act was the Bayside Canadian Railway, a 200-foot railway built in New Brunswick, Canada, that was used to take advantage of an exemption for goods shipped “by rail” in Canada. By unloading the cargo, driving it 100 feet by train, and then pushing it back 100 feet before loading it again, massive amounts of money could be saved. The US Department of Justice received a tip about this in August 2021 and, after a “months-long court battle,” the US District Court for Alaska ruled that the Bayside Canadian Railway was not compliant with the Jones Act; it did, however, waive the fines imposed by the US Customs and Border Protection Agency. That it took the court months to render a ruling is telling.

In a 2023 analysis, Scott Lincicome argued that US highways are more congested, particularly those along the coasts, than they otherwise would be because of the high costs of domestic shipping by sea. Shipping within the United States, even along the coasts, is primarily done with trucks on the road, thus putting more traffic on the road and strain on infrastructure than there would otherwise be.

At present, the US Virgin Islands, American Samoa, and the Northern Mariana Islands are all exempt from the Jones Act, meaning that ships coming into their ports, regardless of their port of origin, can dock there no matter where the ship was built, where it is registered, or who crews it. The exemptions create massive comparative savings for these islands.

In 1999, for example, the Government Accountability Office released a study describing the costs of shipping Alaskan North Slope Oil to various destinations. To ship oil to the Gulf Coast region of the United States, it took 41 days at sea and cost $7.15 per barrel. By comparison, shipping the oil from the same place in Alaska to the Virgin Islands took 84 days at sea (which involved going around Cape Horn in South America) and cost a mere $2.35 per barrel. While many factors determine the cost of shipping a barrel of oil, the exemption to the Jones Act is playing a significant role in lowering the cost of oil to the Virgin Islands compared to other regions in the area.

The Jones Act has a long history of being waived under extraordinary circumstances, having been waived at least 39 times since its inception for varying lengths of time and purposes. In September 2022, a foreign-flagged tanker shipping diesel fuel from Texas to Europe was rerouted to Puerto Rico in response to Hurricane Fiona and the devastation that was wrought upon the island. Sadly, the tanker had to wait offshore for several days before receiving permission to dock and deliver the diesel fuel that people desperately needed. The Jones Act was waived again the very next month, allowing shippers to meet the “unique and urgent need for liquefied natural gas in Puerto Rico.”

September 2017 proved to be a chaotic month for the Jones Act. It was waived three separate times with regard to different territories and products, in response to Hurricanes Harvey, Irma, and Maria. The waiver for Puerto Rico was only granted after considerable drama, with the Department of Homeland Security initially refusing to do so, before eventually capitulating to widespread public outcry.

In 2012, the Jones Act was waived in response to Hurricane Sandy to “immediately allow additional oil tankers coming from the Gulf of Mexico to enter Northeastern ports, to provide additional fuel resources to the region.” The very next day, this exemption was expanded to allow “the transportation of feedstocks, blending components, and additives used to produce fuels.”

In 2011, an ice-breaking ship from Russia received a waiver of the Jones Act, allowing it to deliver critical fuel to the isolated city of Nome, Alaska.

In 2005, a waiver was granted to allow “the transportation of petroleum and refined petroleum products” in response to Hurricane Katrina, which sped up the natural disaster recovery process for the Gulf Coast States.

Beyond natural disasters, the Act has been waived in response to particular economic conditions. In 2010, it was waived to “exempt vessels used in the anchoring of oil rigs off the coast of Alaska”; in 2002, to “allow the use of foreign-flag tanker (sic) in Jones Act trade if construction of a Jones Act-compliant tanker was delayed by unusual circumstances”; and in 1996 for oil spill clean-up operations.

The list goes on (see Table A-1 here), but what each case has in common is that exemptions were deemed “necessary in the interest of national defense,” which is striking given that the Jones Act’s stated purpose is to promote national defense. When we need to grant exemptions to a law to serve that law’s purpose, we really need to question the efficacy of the law itself. 

Estimated savings from repealing the Jones Act would be enormous. In 2019, the OECD projected that “an abolishment of the Act will result in net economic gains for the US, in particular for US industries dependent on water transportation services for intra-US sales, and the shipbuilding industry itself” (emphasis added).

A different perspective is presented by the American Maritime Partnership, which in 2018 found that the Jones Act has “no impact on either retail prices or the cost of living in Puerto Rico.” This report has been cited time and again among pro-Jones Act groups. But digging into the Who We Are portion of the Partnership’s website, we find that it is “the broadest, deepest coalition ever assembled to represent the domestic maritime industry.” On the “What We Do” page, the partnership claims to have “led the way in telling the story of the positive impacts of America’s domestic maritime industry.” Note the careful phrasing here: the partnership exists only to tell the positive impacts and eschew the negative. A group of people with a financial interest in the Jones Act having no negative effect on prices or the cost of living in Puerto Rico was able to find that there was no such effect; simple skepticism should raise serious questions about the report.

5. A Call for Reform

That the Jones Act has been waived so many times and in the name of promoting national defense strongly indicates the need for reform. Recognizing that immediate and full repeal may not be feasible, this section provides three pathways toward reform — two forms of selective repeals and sunsetting.

Product-Selective Repeals — Liquefied Natural Gas

The Jones Act has been a staple of US maritime shipping rules and regulations for over 100 years. A full repeal would create considerable disruption to entire industries, including those beyond the shipping industry. Rather than a full repeal of the Jones Act, and in keeping with the Trump Administration’s focus on improving government efficiency, selective repeal of certain aspects of the Jones Act and reform of other Congressional statutes could achieve meaningful cost reductions and national security gains without causing widespread disruption to the maritime industry.

A permanent exemption, for example, could be granted to the shipment of liquefied natural gas (LNG). Today, approximately 500 ships globally can transport LNG. None are compliant with the Jones Act. In 2011, three such ships that were previously Jones Act-compliant (and lost their status after being purchased by foreign investors) were allowed by Congress to reenter the Jones Act trade. According to the Congressional Research Service, none did, and the ships are now 45 years old.

Most tellingly, New England relies heavily on foreign LNG, despite the US being one of the largest exporters of LNG in the world. Transport restrictions due to the Jones Act make importing cheaper than using domestic supplies. Similarly, Puerto Rico imports LNG from Trinidad and Tobago instead of using domestic suppliers.

Exempting LNG shipments from the Jones Act requirements would lower energy costs at a time when those savings are desperately needed. Likewise, reopening cost-prohibitive domestic markets would encourage more domestic production of LNG and energy as well, creating jobs in a sector crucial to the future viability of the US economy.

Geographically Selective Repeals — Alaska, Hawaii, and the Unincorporated Territories

The ports within Alaska, Hawaii, Puerto Rico, Guam, American Samoa, the US Virgin Islands, and the Northern Mariana Islands are all legally considered “US soil.” Presently, the Virgin Islands, American Samoa, and the Northern Mariana Islands are all exempt from the Jones Act, but of these, only the Virgin Islands are truly exempt, as shipping routes from American Samoa and the Northern Mariana Islands almost all go through Hawaii before going on to the contiguous United States. Because they stop in Hawaii, the ships effectively need to be Jones Act-compliant throughout the entire journey, thereby nullifying their exemption.

Instead, all of these non-contiguous regions of the United States could simply be exempt entirely. This would pose minimal national security risk, imperil virtually zero ship-crewing jobs, and, by making shipping to and from their ports less costly, would actually spur economic development.

Taking these steps would improve the disaster recovery and response in these regions immensely, as they would no longer have to wait days or even weeks for a waiver when disaster strikes. Not just the rebuilding efforts, but also search and rescue operations and medical care for the wounded would move more quickly without Jones Act impediments. 

Sunsetting the Jones Act

Just as Congress does with other legislation, the Jones Act could be subject to sunset after a specified period of five or ten years. A study could be commissioned — and preferably conducted by an external, independent, and non-partisan organization — to systematically assess the benefits and costs of the Jones Act. From this, benchmarks for any benefits of the Jones Act could be presented to the domestic maritime shipping industry.

In the spirit of government efficiency, a law that does not clearly provide benefits in excess of its costs should be modified, if not outright eliminated. If the domestic maritime shipping industry cannot hit these benchmarks, a process might be triggered by which certain provisions of the Jones Act would be wound down.

Adjusting the Made-in-America Requirements

Four key provisions drive the Jones Act: a vessel must be American-made, -crewed, -owned, and -flagged. While these may be sensible requirements for military vessels, they are (at best) overly cumbersome when it comes to commercial vessels. 

A 2011 US Department of Transportation Maritime Administration report found that operating a Jones Act-compliant vessel costs $12,600 more per day than a “open registry” ship, with almost 90 percent of this increase attributable to higher crew costs. A 2022 Government Accountability Office report found that the additional cost of operating a Jones Act-compliant vessel had increased further, “to about $6.2 to $6.5 million [annually]” or nearly $17,000 per day. To put that into perspective, the USDA estimated in 2024 that $12,600 is enough money to feed a family of four for an entire year. Rescinding the requirement that 75 percent of the crew must be American citizens, or even just lowering this number to, say, 50 percent, would afford massive savings on shipping costs. 

The same could be said about the requirement that vessels be owned by Americans. Removing or lowering this requirement would encourage foreign investment in American shipbuilding. At a time when the Trump Administration is touting the increased foreign investment across the nation in the automotive and semiconductor sectors, it would make sense to encourage this same activity in domestic maritime shipping.

6. Curtains for the Jones Act?

The Jones Act will celebrate its 105th birthday this year. In its current form, the Jones Act has failed to deliver on its goals. It has not promoted nor even maintained the American merchant marine; instead, it has reduced and undermined the American commercial capacity and military readiness. Nor has it ensured adequate domestic shipbuilding capacity or a ready supply of ships and merchant mariners that can serve as auxiliaries in times of war or national emergencies. Instead, it has reduced domestic shipbuilding capacity and decreased the supply of ships and merchant mariners.

In its current form, the Jones Act is detrimental to national security, saddles Americans with higher prices, and reduces the number of good, high-paying manufacturing jobs on America’s coasts. This leaves the US at both a strategic and economic disadvantage.

A new, reformed and pared-down Jones Act would boost manufacturing jobs in the US, lower prices for American consumers around the world, and boost US exports. Most importantly, it would make Americans safer by boosting naval capacity.

Federal Reserve Vice Chair for Supervision Michelle Bowman offered a pointed observation last week: some of the most consequential shifts in financial policy are not the product of deliberate votes or formal rule changes. Instead, they emerge quietly, when regulations written for one set of conditions become more and more binding as the conditions evolve.

Bowman’s remarks centered on the need to regularly reevaluate the regulatory framework governing the banking sector. Her core argument is that regulations imposed as prudent guardrails may become inadvertent roadblocks if left unexamined. When this happens, the regulations risk distorting financial behavior and undermining the broader objectives of monetary and financial stability. In short, outdated regulation can become de facto policy, with unintended (and often undesirable) consequences.

Bowman said financial regulation “should not be created in a static world of ‘set it and forget it.’” A rule that was well-designed in a previous era may no longer be effective under current conditions. Indeed, it may even be counterproductive. She pointed to several forces that might cause such a shift: 

• major shifts in monetary policy;
• rapid technological change within the banking sector; and 
• the expansion of financial intermediation outside traditional banks.

Consider the Supplementary Leverage Ratio (SLR). The SLR ensures banks maintain a minimum level of capital relative to their total assets, regardless of how risky the assets they hold are. It was originally intended as a backstop to risk-weighted capital requirements. In recent years, however, macroeconomic developments—most notably, the growth of central bank reserves and heightened liquidity—have transformed the SLR into the binding constraint for some of the largest banks. This was never the rule’s intended function. As Bowman noted, such a shift is not a minor technical glitch. It constitutes a new policy regime that warrants explicit attention and reconsideration.

The practical consequences are significant. Under the SLR, banks are discouraged from holding safe, low-risk assets such as Treasury securities. Since both Treasury securities and riskier assets raise capital requirements when the SLR is binding, but riskier assets have a higher expected return, banks have an incentive to hold the riskier assets. The problem is especially severe when bank balance sheets are expanding, as they did when deposit inflows picked up during the pandemic, since the SLR “increases the amount of required capital as bank balance sheets grow, regardless of the underlying risk.”

For Bowman, the SLR example illustrates the case for dynamic financial supervision, an approach that continually reassesses the relevance, effectiveness, and unintended effects of regulation. Rather than “set it and forget it,” she calls for a supervisory culture that embraces regular recalibration in light of evolving financial realities.

Bowman’s call for “smart” regulation is appealing. But one should not expect all regulatory adjustments to be improvements. If poorly executed, a dynamic framework might just as easily introduce new distortions or instabilities. Regulators might benefit from more frequent rule reviews, as Bowman claims. But they should also develop a greater appreciation of successful market-based, self-regulatory mechanisms, which often adapt more quickly and flexibly than formal rules imposed by the government.

Last month, the Senate approved a version of the so-called GENIUS Act, meant to regulate stablecoins, that will now move on to the House. However, getting the bill over that hurdle required purging not one but two amendments taking aim at an unrelated boogeyman: credit card companies. The bipartisan pair of populist Josh Hawley (R-MO) and avowed socialist Bernie Sanders (D-VT) introduced a provision capping credit card interest rates at a shockingly low 10 percent. Likewise, senators Dick Durbin (D-IL) and Roger Marshall (R-KS) tried to use the opportunity to push a longstanding and not-so-genius pet project of theirs: the deceptively named Credit Card Competition Act (CCCA).

The senators behind these amendments are certainly correct that they would deal a blow to the credit card industry. The changes would also be welcomed by big-box stores with massive market share and a high volume of credit card transactions. But the laws would also dramatically limit options for consumers, disproportionately impacting those with low incomes or bad credit, with no economic benefits to the average consumer. And while the amendments didn’t make it through this time — with all sponsors except Marshall voting “Nay” on the final GENIUS Act — their sponsors’ persistence suggests we will see them again soon.

“This legislation will provide working families struggling to pay their bills with desperately needed financial relief,” Sanders claimed when he and Hawley initially proposed their credit card interest amendment as a separate bill in February. But those who call for caps on interest should be careful what they wish for. More predatory products are here, and they are liable to fill in the space held by credit card companies. And that space will be wide: setting interest rates artificially low — lower than most personal loans — will make credit cards unavailable to consumers with low incomes or poor credit as they become too much of a credit risk. As alternatives crop up at higher costs to the consumer, surely populists like Sanders and Hawley will call to regulate those, too, effectively cutting out lower-income consumers from credit markets entirely.

Meanwhile, the Credit Card Competition Act promises to stick it to the big banks through different means, requiring them to use multiple payment networks to lower swipe fees, ostensibly passing merchant savings on to consumers. Any bank covered by the bill that uses the Visa or Mastercard network must also offer an alternative credit card network — and the only eligible ones in existence at the moment are American Express and Discover. 

Dick Durbin has sporadically pushed the CCCA in the Senate since 2022, but has since earned the bill bipartisan legitimacy through his Republican co-sponsor, Roger Marshall. Durbin has used the amendment tactic in the past for similar financial legislation that might not have had broad support on its own. He attached an amendment regulating debit card swipe fees to the Dodd-Frank Act, passed by the Democrats’ wide but temporary congressional majority in 2010, on the premise that lower swipe fees for merchants would be passed onto consumers. The result? Merchants barely passed any price savings on to consumers, while banks increased fees to recoup their lost debit card revenue.

Financial companies are an easy target for demagogic politicians — look no further than Sanders’ declaration that “we cannot continue to allow big banks to make huge profits ripping off the American people.” While this anti-bank fervor is typical of Democrats, it’s frustrating to see politicians on the Right go along with what is essentially a price control. Roger Marshall has correctly noted in the past that minimum wage hikes don’t lead to broadly higher pay, but instead to fewer jobs for workers who don’t have the skills or experience for a higher wage. In a different application of the same principle, enforcing a price control on credit card swipe fees doesn’t mean there will be a utopia of low-rate revolving debt available to all consumers, but instead that financial institutions will only be willing to accept the risk of lending to the wealthiest or most credit-worthy consumers.

Ironically, industry developments suggest card networks are opening up. Discover Financial Services was acquired by Capital One in May. While some claim this is a sign of industry consolidation, it actually opens Discover’s closed payment network — previously only open to Discover-issued cards — to Capital One’s much bigger credit card issuance business. Capital One’s own investor pitch deck for the acquisition predicted it could add over $175 billion in purchase volume to the Discover payment network by 2027 — an increase of more than 30 percent on a non-Visa, non-Mastercard network. This doesn’t even take into account the potential growth of the network if opened to issuers beyond Capital One, opening another avenue of revenue for the company and improving options for consumers.

The fact remains that, for conscientious consumers, credit cards remain the most convenient and rewarding way to pay on the market. Potential regulatory intrusions on that market will either make credit cards less accessible to consumers, or leave us with credit cards, with greater penalties and fees but reduced rewards and protections. Lawmakers should reject attempts to score cheap political points by blaming credit card providers and allow real competition to improve payment options. Consumers should be wary of new alternatives that claim to be safer than credit cards.

Conservatives are right to celebrate judicial victories, but they would be wise to remember that every courtroom fight is a rearguard action. A judicial victory arrives only after the political branches or national institutions have retreated from conservative positions. Conservatives’ recent victories came only after a president forced nuns to pay for abortions, a state persecuted a religious business owner, and elite universities picked winners and losers by skin color.   

It’s good to win the courts but better to win the offices, institutions, and culture. The judiciary can stave off defeat, but the prior three can push on to victory. Evidence for this claim comes from the Trump Administration’s efforts to turn the judicial victory against universities’ race discrimination into a larger conservative counterattack.  

We see the administration’s strategy in executive orders, proposed rules, and official letters, in which the administration signals its intent to export the logic of Students for Fair Admissions v. Harvard to contexts beyond college admissions. In that case, the Court said that colleges could no longer give preference to applicants based on race, and ended an exemption from the nation’s civil rights laws the Court had previously crafted for colleges. 

At a casual glance, it might not seem obvious that Students for Fair Admissions can be exported to other contexts. After all, that case was about college admissions, and the only thing that the Court seemed to do was close a loophole that it had previously given to universities so that they could ignore the Civil Rights Act and the Equal Protection Clause. Every other government and private entity remained bound by those provisions. But a closer reading of the decision reveals a logic that can’t be limited to universities, and it’s this logic that the administration is aggressively pushing into other contexts.   

Three of the decision’s premises are key to the administration’s offensive. First, race preferences, if permissible at all, must be temporary. Second, race preferences cannot be based on stereotypes or used as a negative. And third, the racial categories used to administer preferences cannot be arbitrary. The decision does not say that these premises apply only in the context of college admissions. On the contrary, the decision anchors each premise in higher notions of what is moral, prudent, and constitutional. And often, the justices supported each premise with citations to cases in very broad contexts.  

The administration has taken the Supreme Court’s premises at face value, arguing that all three apply just as broadly as the Court seems to suggest.  

We can see this strategy in execution in a recent lawsuit brought by the Wisconsin Institute for Law & Liberty against the Department of Transportation for using race and sex preferences to dole out $37 billion in federal contracts. Like many federal and state agencies, the Department of Transportation sets aside billions of dollars of federal grants for businesses owned by “disadvantaged” minorities. These set-asides sometimes take the form of preferences, and at other times explicit quotas, but they all share a presumption: anyone from one or more specific race and sex categories is presumptively “disadvantaged,” and anyone who is white, or Asian, or male is not.   

The Biden administration defended this preference program, but a few months after taking power, the Trump Administration signed a consent decree admitting that the program “violates the equal protection component of the Due Process Clause of the Fifth Amendment of the US Constitution.” Students for Fair Admission was key to this conclusion. In fact, it is the only authority cited in the consent decree.  

Again, curious, given the different context. But apply each of that decision’s key premises and things become clear. 

First, none of these preference programs is temporary. They have existed for decades and, unless repealed or enjoined, will endure forever, just like Harvard’s discriminatory admissions policies. And there’s no reason to think that these programs are exempt from the temporal requirement that applied to Harvard. The Court based that requirement not on anything specific to universities, but on a principle that applies much more broadly: the “ultimate goal” of all race-based programs must be “eliminating race as a criterion.” That goal applies in all contexts, a fact the Court underscored with a citation to a case about minority contracting preferences. 

Second, most racial contracting preferences rely on stereotypes or treat membership in certain racial groups as a negative. Minority contracting preferences, for example, rely on a presumption that anyone from certain racial and sex groups is “disadvantaged.” Those preferences necessarily treat being white,  (in some cases) Asian, or male as a negative. Those people are denied access to certain contracts in the same way that white and Asian applicants were denied seats in Harvard’s freshman class. In fact, the problem with contracting preferences may be worse. Although Harvard’s “holistic” review theoretically gave white and Asian applicants a chance to explain how, despite their skin color, they brought diversity to Harvard, federal contracting presumptions are nearly irrebuttable. 

Finally, the government’s racial categories are the same categories that Harvard used — categories that are frustratingly arbitrary, as law professor David E. Bernstein showed in his remarkable study of the origins and uses of America’s race labels (black, white, Hispanic, Asian, and the like). In casual conversation, these labels might serve tolerably well. But as the basis of well-reasoned public policy or, heaven forbid, medical research, they create total, sometimes dangerous, confusion.

What, for example, was the relationship between these categories and Harvard’s goal of “diversity”? By Harvard’s logic, no diversity exists among people labeled “white,” even though that category lumped together Israeli Jews, Saudi Muslims, and Irish Catholics. Similarly, there was no diversity among “Asians,” even though that category includes 60 percent of the world’s population, and nations as diverse as Pakistan, Japan, and Indonesia. And there was no diversity worth discussing among “Hispanic” people and “black” people, even though both groups include vast populations spanning myriad cultures, religions, ethnicities, backgrounds, and classes.  

The Supreme Court outlawed these categories in school admissions because they are “imprecise,” “opaque,” “overbroad,” “arbitrary,” “underinclusive,” and lack a “meaningful connection between the means they employ and the goals they pursue.” That flaw recurs when the government uses those labels for minority contracting preferences. When the government presumes that every black, Hispanic, or female person is “disadvantaged” and every white, Asian, or male person is privileged, it acts just as irrationally as Harvard did.

The same goes for nearly any other use we might make of these labels — medical research, reparations, government — and that’s why Trump’s civil rights enforcers have gilded the tips of their spears with Students for Fair Admissions.   

Theoretically, the Supreme Court, too, could wield Students for Fair Admissions against other discriminatory programs. Lower courts are doing so, but for reasons unknown, the high court refuses even to wield the case against other cases of discrimination in school admissions. 

Even if the Court had the courage to take the offensive, it can only ever react to cases brought before it. Serious and sustained forward progress comes when other institutions mount counterattacks based in the Court’s rearguard victories — a lesson that conservatives should take to heart. 

Most nations are bound by tribe or throne. From the beginning, America pioneered to be different, the first nation founded on a proposition: that free people, left to their own devices, could build something lasting. It wasn’t inherited wealth or ancient titles that built the country, it was frontier grit, rugged individualism, and a belief that dignity could be earned through initiative, courage, and ideas. This mixture, over the course of 249 years, made the United States not just an anomaly, but an economic superpower.

Today, the US economy represents nearly one-quarter of global GDP, despite being home to just five percent of the world’s population. Its GDP per capita ($83,000), is double that of the European Union ($41,000) and far surpassing Russia ($15,000) and China with ($13,000), a testament not just to scale, but to productivity, innovation, and dynamism.

As the Institute of Economic Affairs recently highlighted, even Mississippi, the poorest US state, has a per-capita GDP that now exceeds that of the United Kingdom and rivals France. In the words of IEA’s director Douglas Carswell, “The poorest state in America currently has a higher per capita GDP than Britain. And we’re about to overtake Germany in per capita GDP growth terms this year.” 

It’s worth remembering what made America exceptional. This system attracted people who wanted more, gave them room to discover and create, and protected their right to do so. In other words, immigration, innovation, and institutions each made America a powerhouse. 

I. Immigration

Economist Thomas Sowell spent a lifetime dismantling the idea that race or background determines success. What matters most, he argued, is not the origin of the person, but the environment they step into. “Nothing is more common than to have poverty-stricken immigrants become prosperous in a new country and to make that country more prosperous as well.” This is most evident in America’s immigration story.

Immigrants make up just 14 percent of the US population, yet they account for 27 percent of all entrepreneurs. Over 44 percent of Fortune 500 companies were founded by immigrants. Critics of immigration often raise concerns about crime or assimilation, but the data tell a different story. The Cato Institute finds that immigrants commit proportionately fewer crimes than US citizens: “illegal immigrants were 26 percent less likely than native-born Americans to be convicted of homicide, and legal immigrants were 61 percent less likely. This general trend also holds for 2022, where the illegal immigrant homicide conviction rate was 3.1 per 100,000, 1.8 per 100,000 for legal immigrants, and 4.9 per 100,000 for native-born Americans.” Pew Research Center finds no large language barrier as, “about half of immigrants ages five and older (54 percent) are proficient English speakers — they either speak English very well (37 percent) or speak only English at home (17 percent).”

Immigrants make up a small fraction of our population, yet comprise more than a quarter of all entrepreneurs, commit fewer crimes, and arrive ready to embrace our language and culture. What changed wasn’t their DNA, but the system around them. In America, they found legal stability, economic flexibility, and a cultural embrace of striving. Sowell’s insight is clear: the environment matters, and America, more than any other place, has provided one where effort is rewarded.

II. Innovation 

Immigrants have long done more than merely work hard in the United States; they have discovered new possibilities. Austrian economist Israel Kirzner frames entrepreneurship as alertness: the ability to perceive opportunities that others miss and to unlock hidden value. Because America rewards risk-taking and treats failure as a learning step rather than a life sentence, it has proven especially fertile ground for this kind of discovery. The Office of the United States Trade Representative notes that there are 28 million American small and medium enterprises, accounting for over 60 percent of new private sector jobs. 

Elon Musk left South Africa to show the world that electric cars, Tesla, and private spaceflight, SpaceX, could be both viable and desirable. Jensen Huang arrived from Taiwan as a child and founded NVIDIA, now central to the AI revolution. Raised in India, Sundar Pichai rose to lead Alphabet, the parent of Google. From all corners of the globe, these innovative immigrants came, spotting possibilities hidden in plain sight and daring to act on them. These innovators didn’t merely benefit from the American system; they extended its promise and returned tenfold their contributions to society. Tesla, NVIDIA, and Google are household brands changing our world because their founders risked everything. 

Neither is innovation incarcerated in Silicon Valley. In industries as diverse as biotech (Pfizer’s mRNA breakthroughs), energy (ExxonMobil’s carbon capture), agriculture (John Deere’s AI farming), American innovation remains multifaceted and diverse. Indeed, rag- to-riches stories still exist, as former CEO of Starbucks, Howard Schultz, proclaimed during a Senate Health Committee hearing: “I came from nothing. I thought my entire life was based on the achievement of the American dream.” Kirzner’s theory explains their success: in an open society like America, where failure isn’t fatal and risk is rewarded, entrepreneurial discovery flourishes.

III. Institutions 

But none of this, neither the immigration nor the innovation, would have mattered without the right foundation. That foundation, as recent Nobel laureate Daron Acemoglu has shown, relies on a nation’s institutions. 

In Why Nations Fail, coauthors Acemoglu and Robinson explain that prosperity arises not from natural resources or population size, but from institutions that protect property rights, enforce contracts, and enable open participation. What they call inclusive institutions create the structural environment where individuals can pursue opportunity without fear of expropriation or arbitrary rule. No document embodies this better than the Declaration of Independence: “all men are created equal… endowed by their Creator with certain unalienable Rights… Life, Liberty and the pursuit of Happiness.” With quill and ink, the Founding Fathers embedded principles that limited government power, safeguarded property rights, separated powers, and recognized individual liberty as inherent rather than granted by the state. From the beginning, these inclusive institutions promoted individuals’ self-determination to command their lives, providing the legal and political scaffolding for America’s long-term prosperity.

The United States created a unique framework, grounded in common law, decentralized governance, and separation of powers, foreign to all other nations led by despots and dictators (then called kings and queens). The new landscape emboldened the brave, equipped with courts, capital markets, enforceable contracts, and a can-do culture. The consequences include America’s position with the most billionaires in the world. We must ask: if poverty is man’s natural state, what is this country doing so differently?

America’s greatness wasn’t inevitable. It was earned through three interlocking forces:

• Immigration, which brought the dreamers and doers.
• Innovation, which turned dreams into industries.
• Institutions, which protected both the dream and the dreamer.

To commemorate the 249th anniversary of this American experiment, we’d do well to remember what built it. Not protectionism. Not bureaucracy. Not walls. But the courage to arrive, to try, to fail, and to build again.

In his work on the American character, Australian Sam Gregg (now president of the American Institute for Economic Research, the oldest think tank in the country), describes the United States as a “merchant republic,” a society not embellished in its aristocracy or bureaucracy, but in enterprise and opportunity. It wasn’t crafted for elites; it was shaped by ordinary citizens who took risks, built businesses, and believed that dignity could be earned through effort. Here, for the first time, the builder came before the bureaucrat. 

We didn’t become great by keeping people out. We became great by letting the best in, treating them fairly, and giving them a reason to stay.

For decades, economists and journalists have discussed the “Pink Tax”: the idea that products marketed to women price higher than identical ones for men. In 1992, the New York City Department of Consumer Affairs released a study asserting that women were routinely charged higher prices for haircuts, dry cleaning, and other services. Then-Mayor Bill de Blasio commissioned a second study in 2015, which found that women’s products were more expensive for 43 percent of a representative sample (this figure is slightly misleading: of 800 products with distinct male-female versions, fewer than 350 had higher prices for women). These studies influenced legislation in New York and California, aiming to ban gender-based price differences for similar goods and services.

But lawmakers and economists have missed a key question: why don’t women switch to the same products men use? If we assume they don’t switch and are worse off because of it, we’re also assuming women can’t make the best choices for themselves.

On the contrary, any sound economic explanation must assume that women are no less capable than men of making decisions that maximize their well-being. The so-called Pink Tax (to the exclusion of explicit taxes on feminine products) can be understood as a difference of cost, even for identical products. As I’ll show below, this approach also correctly predicts which types of products are likely to cost more for women. Legislation to “fix” this issue, as I’ll show, may actually harm female consumers more than help them.

Some Price Theory

Imagine a product that varies in certain features — it could be more or less “X,”  very “X,” or not very “X” at all. A potato could have a lot of bruises, or not a lot of bruises; it could be very brown, or barely brown. John approaches the potatoes and selects at random, not caring about these traits. As he continues picking, the average potato in his bag starts to look like the typical one: mid-brown, lightly bruised. But John doesn’t care about these characteristics. He cares only about one thing: is it a potato or not?

Jane, however, wants a more specific potato: mid-brown, and lightly bruised. She’s willing to spend time searching for her preferred potato. But as economics teaches us, costs are shared between buyers and sellers. A six-percent sales tax does not mean buyers pay exactly six percent more, and a $100,000 fine on pollution does not fall entirely on the producer. Even if all potatoes are identical, and every potato in the bin meets Jane’s specifications, John and Jane are effectively searching for different things. Jane’s potato must have certain characteristics. John’s potato must simply be a potato.

We can therefore model these two distinct markets, and evaluate what happens when a  “generic” good is replaced with a more “specific” good. Put another way, we shift from a consumer with John’s preferences to one with Jane’s, all else held equal. See below:

In the example above, an introduced “search cost” is shared by both consumers and producers, raising the equilibrium price compared to markets with lower search intensity.  Producers absorb part of this cost by investing in or renting assets that mitigate the “search” burden; for example, a potato producer may build a brand for a specific type of potato, or may package potatoes in ways that help consumers recognize the right potatoes sooner. Consumers absorb some of the search cost by increasing the reward to suppliers for providing a more correct product, paying a premium for a more suitable product.

As economists Klein, Crawford, and Alchian have described, consumers are willing to pay a premium to suppliers who fulfill expectations. Without the price premium, sellers are more induced to “cheat,” misidentifying their products to consumers.

Prices rise when they include added search costs. We should expect, then, slightly higher prices for products that women search for characteristics, while men do not. The aforementioned studies explicitly mention three products with the largest gender disparity: cosmetics (shampoo, etc.), haircuts, and dry cleaning. These are all products where men clearly search for more generic goods than women. It would be no rash generalization to describe men’s haircuts as “make it shorter,” and men’s shampoo choices as utterly indiscriminate of ingredients, specific use, or even scent. Two shampoos may have the same ingredients, but women’s shampoo might be branded more specifically (‘sulfate free,’ or ‘color protecting,’ or ‘all natural ingredients’) because they search relatively more.

But we needn’t rely only on the most obvious cases. Why, as one study shows, does a girl’s bicycle helmet have an equilibrium price higher than a nearly identical helmet for boys? One explanation is market segmentation — charging different groups according to their (presumably different) willingness to pay. But there’s another possibility: women face, and are willing to pay, higher search costs. 

Why women might have these preferences and be willing to pay a premium for them where men and boys are not — for example, to achieve a particular hair texture, to have a basket and a bell included on a bike, or because they really do enjoy using a pink product more than a black one — is not the economist’s to examine. It is enough to know women reveal the preference of being willing to search and pay slightly more for their particular, preferred potato. 

Consumer Welfare Implications

Legislation that bans price premiums for women’s products has predictable consequences. We can model the market for specific products resulting in a higher equilibrium price. I previously omitted this step for clarity, but show it below (along with a price ceiling) to illustrate the impact on consumer welfare.

Consumer surplus (a measure of how much satisfaction buyers gain from a purchase) shrinks from the blue triangle to the darkly shaded trapezoid.  Producer surplus also declines. A price ceiling might improve welfare if firms were mistakenly overpricing products for women. But, as shown earlier, that doesn’t appear to be the case.  Women tend to pay more for products they search for more intensively. Producers, in turn, invest in branding that reduces those search costs—like making the product pink or highlighting desirable traits more clearly.. A price ceiling only creates a relative shortage, further shrinking women’s consumer surplus. 

Unless we assume women consistently fail to substitute away from more-expensive products they do not actually prefer, a price ceiling is unlikely to enhance their well-being.

Last week, Fed Chairman Jerome Powell delivered his semiannual monetary policy report to Congress. Fed watchers will find lots to chew on, but the really interesting material comes in his responses to legislators’ questions. In particular, Powell’s statements about the Fed’s role in credit allocation deserve a closer look.

Senator Mike Rounds (R-S.D.) asked the Fed chairman about shrinking the Fed’s massive (~$6.6 trillion) balance sheet. This would move the Fed back from an abundant reserves system to a scarce reserves system. Chairman Powell responded that the abundant reserves system was:

…a result of the global financial crisis and the desire to have lots and lots of liquidity and large liquidity requirements, for our largest banks in particular. So that’s a good thing. And that enables banks to keep lending through stress and that kind of thing. If you were to want to go back to scarce reserves, it would be a long and bumpy and volatile road. I wouldn’t recommend that we undertake that road. It would not save any money. There’s an illusion that it would save money. That is not the case. And it would also not make credit more available. This, you know, in effect—I would say having a lot of liquidity in the system, which is what goes with ample reserves, makes sure that banks will be able to continue to lend. So, we think it works. And I think unwinding it is a policy choice which could be executed, but it would take years to execute and it would be challenging and quite volatile.

In brief, Powell thinks the switch from scarce to abundant reserves was justified by credit conditions. This is a strange claim by the chairman. The distinguishing feature of an abundant reserves system is not expanding credit. Instead, it’s allocating credit. Fed officials have much more power to pick winners and losers under the post-Great Financial Crisis framework. That Powell won’t acknowledge legislators’ concerns with this system is worrying.

Let’s start with the basics. Prior to the Great Financial Crisis, the Fed operated within a scarce reserves system. Since the federal funds rate was generally between the discount rate and the interest the Fed paid on reserve balances (which was zero before October 2008), changes in the supply of or demand for bank reserves caused the federal funds rate to rise or fall. The Fed’s job was to manage liquidity in the banking system through open market operations. Increasing the supply of reserves decreased the federal funds rate; decreasing the supply of reserves increased it. 

The Fed’s ability to expand its balance sheet under a scarce reserves system without creating inflation is limited. Banks would lend out new reserves, pushing up the money supply and total spending on goods and services (aggregate demand). Output may temporarily expand in the short run if businesses are fooled into producing for dollars that are not worth as much as they think. But sooner or later, they will spot the easy money and return to normal production. The resulting dollar depreciation, in contrast, is definite and permanent.

Things are very different in an abundant reserves system, where the federal funds rate is at or below the interest rate the Fed pays on reserves. In this system, further increases in the supply of reserves do not affect the federal funds rate. Instead, the Fed hits its interest rate target by altering the interest it pays banks to hold reserves. This is an administered rate, unlike the market-determined federal funds rate. Administrative fiat, rather than market forces, takes the lead.

An abundant reserves system makes it much easier for the Fed to steer credit to preferred counterparties without causing inflation. Suppose the Fed wants to support a specific asset price, such as mortgage-backed securities. The Fed credits its counterparty with bank reserves and puts the MBS on its own books. It then pays a sufficiently high rate on those reserves to ensure they are not lent and spent. If the Fed’s counterparties do not lend against the additional reserves in their accounts at the Fed, neither the money supply nor aggregate demand rise. And, if there’s no additional spending,  inflation remains muted, too. All we get is a balance sheet effect: the private firms that sold MBS to the Fed now have a much safer and more liquid asset (bank reserves) on their balance sheet than the questionable security (MBS) they previously held. And, in the broader market, MBS prices rise, too.

This is what makes the abundant reserves system attractive to monetary technocrats: it allows them to meddle with relative prices, and hence direct funds to specific borrowers or sectors, without the spillover effects on inflation. Any institution the Fed deems “systemically important” can now get an injection of reserves without the accompanying headache of price level instability. In short, the abundant reserves system allows the Fed to put its thumb on the scale, allocating credit as it sees fit.

From this, we can see that Chairman Powell’s other claims (about helping taxpayers and fostering liquidity) are also unfounded.

To prevent new bank reserves from driving up the money supply and total spending, the Fed has to pay banks to keep new liquidity parked in Fed accounts. That’s a cost for the Fed that, all else equal, lowers its profits. Thus, Treasury remittances, which come from Fed profits, fall as well. Of course, all else may not be equal. In particular, the Fed’s profits may remain constant or rise if it holds a riskier portfolio, implicitly on the Treasury’s behalf. Either way (via reduced remittances or additional risk), taxpayers bear the cost of the abundant reserves system.

Nor does an abundant reserves system make it easier for banks to lend. The whole point of the abundant reserves system is to prevent banks from lending. If banks lent against reserves as they did before October 2008, Fed asset purchases would spark inflation. The Fed wants to bolster asset prices without the downstream inflationary consequences that would occur in a scarce reserves system. The abundant reserves system is not about promoting general macroeconomic stability. It’s about targeting specific institutions and assets based on central bankers’ judgment. The Fed is engaging in credit allocation, not broad-based monetary policy.

Chairman Powell’s testimony is best explained by his desire to protect the independence of his institution. It’s what any central banker would do. If Powell admitted the Fed is allocating credit, Congress might restrict its powers. But what’s good for the Fed is not necessarily good for the American people. In fact, there’s a serious case that the Fed has become a self-licking ice cream cone. Wall Street benefits from Fed credit policies, but it’s Main Street that pays. 

Powell’s comments suggest we need more Congressional involvement in Fed governance and oversight, not less. Monetary policy will remain unconstrained by the rule of law until legislators exercise their constitutional authority to discipline the Fed’s perpetual self-promotion.

In April, President Trump, who has expressed concerns about the US’s low fertility rate, was asked about a proposal to provide a $5,000 “baby bonus” to every American woman who gives birth. His response: “Sounds like a good idea to me.” The average woman must give birth to 2.1 children to maintain a population, according to traditional assumptions. The US number is 1.6.

Industrialized countries around the world are grappling with a similar problem, and for some, it poses an existential threat. In China, long touted as the world’s most-populous nation, the average woman now gives birth to less than one child, and by 2100, its population is projected to fall from a reported 1.4 billion to 525 million. A 60 percent loss in population is as devastating as a plague.

The situation is equally grim in Russia, where the fertility rate has been falling steadily for two decades, a situation the Kremlin describes as “catastrophic.” This decline in birth rates accelerated dramatically during the war in Ukraine, which has injured, killed, or exiled millions of young men who might have become fathers.

Governments respond to such threats in different ways. Many countries have enacted the equivalent of Trump’s “baby bonus.” In China, which for decades punished couples for having more than one child, the government is scrambling to provide pro-natal workplace policies and expanded childcare services.

In Russia, however, the government has taken an especially notable step by imposing restrictions on speech. Specifically, speech that encourages people not to have children or praises a child-free life, labelled as “child-free propaganda,” is subject to fines of up to 400,000 rubles for individuals and 5 million rubles for businesses.

Ahead of the Russian vote on the measure, the Duma’s speaker was quoted as saying, “Without children, there will be no country. This ideology will lead to people stopping giving birth to children.” The goal of the legislation, he said, was to ensure that “new generations of our citizens grow up oriented toward traditional family values.”

Such efforts to restrict speech reflect a willful tone-deafness. While speech discouraging parenthood may be a factor in population decline, Russians face far more substantial reasons not to have children. For one thing, bringing a child into the world is a profound expression of hope, and Russians have many reasons to feel hopeless.

The fiscal outlook for Russia is bleak. Its economy is based on agriculture and raw materials, and what industrial base it has, has shifted largely to a wartime model. Inflation is rising, and high interest rates make it difficult for young couples to afford the sort of housing they associate with raising a family.

The educational system has been degrading for decades. Levels of funding and numbers of teachers have been falling. The curriculum has been restructured, promoting government propaganda at the expense of free speech, critical thinking, and research. Millions of well-educated people have left the country, reflecting a profound brain drain.

The war in Ukraine has taken its own toll, in ways that extend far beyond a million battlefield casualties. As the war drags on, prospective parents worry that the conflict will move increasingly onto Russian soil, that assaults on oil and gas fields could quickly destabilize the economy, and that their sons will face conscription.

Another sign of Russian hopelessness is high rates of alcoholism, drug abuse, and violent crime, all driven higher by the war and all disproportionately affecting males. Healthy life expectancy for men, which was barely above 60 years before the war and seven years below that of women, has almost certainly dropped far below that level now.

The situation is almost certainly worse than it appears, because Russia has effectively stopped collecting, analyzing, and releasing accurate statistics on its population, a move emulated by China. One thing, however, is certain: deaths exceed births in both Russia and China, and both nations are in the midst of a population collapse.

In both Russia and China, the truth about birth and death rates takes a backseat to political calculations, with leaders judging it best to suppress information that might cast the regime in a bad light. It is likely that other related statistics, such as abortion rates, have also long been suppressed for political purposes.

This gets at the core of the problem. Without free and independent institutions such as universities and news media, there are few checks on government officials’ ability to portray matters in terms they find convenient, rather than the way things really are. If the facts begin to paint an unflattering picture, they are suppressed or fudged as needed.

One dangerous implication, however, is that those who attempt to portray the situation as it actually is — in other words, who speak the truth — are often punished, and soon even those at the highest levels of government, including the advisors of heads of state, are unable or unwilling to deal in reality.

As a result, leaders such as Vladimir Putin and Xi Jinping end up living in an information bubble, basing their decisions on inaccurate portrayals of situations they are attempting to address. For example, Putin likely had little idea how ill-prepared the Russian military, riddled by decades of corruption, was to invade Ukraine. 

Similar problems beset both countries’ efforts to respond effectively to their demographic collapses. Over time, an authoritarian begins to suppose that everything depends on him and that his word is law. He supposes that his decrees can end speech favoring childlessness or reverse a decades-long one-child policy on a dime.

In fact, however, the truth lies elsewhere — namely, in the inherently limited capacities of a highly centralized, autocratic government. The Russian regime may be able to enact penalties for praising a child-free life, but it cannot prevent young adults from seeing for themselves, nor from viewing their government with cynicism and their future as hopeless.

Federal Reserve officials are concerned they may soon find themselves in a tight spot. They have been tasked with delivering price stability and maximum employment—and worry they will not be able to deliver on both given President Trump’s new tariffs.

“It is far from certain, but it is entirely possible that the [Federal Open Market] Committee will be facing both upward pressures on prices and rising unemployment,” Philadelphia Fed President Patrick Harker said last month. “Once there is a trade-off between our mandates, the direction of travel is in question. That is quite different from, say, the last tightening cycle.”

Chicago Fed President Austan Goolsbee recently expressed the same concern. “That’s not an easy situation for the Fed to be in,” he said, “because […] both sides of the mandate get worse at the same time.” Goolsbee confessed that it is unclear what the Fed would do if it faced a tradeoff between its price stability and employment goals: “there’s not an automatic playbook,” he said.

Fed governors have noted the potential tradeoff, as well. Governor Lisa Cook believes “the response of financial markets, firms, and consumers” to President Trump’s trade policy “suggest risks to both sides of our dual mandate.” Likewise, Governor Adriana Kugler sees “greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road.”

Indeed, the latest Summary of Economic Projections suggests the concern is widespread among Fed officials. The median FOMC member projected a sluggish 1.4 percent real GDP growth in 2025, with the unemployment rate rising to 4.5 percent. As for inflation, the median member now projects 3.0 percent growth in the Personal Consumption Expenditures Price Index.

At the post-meeting press conference on June 18, Fed Chair Jerome Powell said the FOMC’s “obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level” associated with the tariffs “from becoming an ongoing inflation problem.” However, he also warned about the potential tradeoff:

As we act to meet that obligation, we will balance our maximum employment and price stability mandates, keeping in mind that without price stability we cannot achieve the long periods of strong labor market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close. 

Powell said the FOMC was “well positioned to wait—to learn more about the likely course of the economy before considering any adjustments to our policy stance.”

In other words, Fed officials worry they will not be able to deliver both price stability and maximum employment; they will need to choose between the two. And, since the new tariffs will tend to push inflation up and employment down, they fear improving on one side of the mandate might come at a steep cost in terms of the other.

The Dual Mandate

Despite all of the concern expressed by Fed officials, the supposed tradeoff between delivering price stability and maximum employment is easily dealt with. Fed officials need only adopt a sensible interpretation of the dual mandate.

The Federal Reserve Act requires the Fed to conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Despite listing three distinct goals, this directive from Congress is commonly known as the Fed’s dual mandate: it is generally accepted—and attested in Fed documents—that achieving maximum employment and stable prices “creates the conditions needed for interest rates to settle at moderate levels.”

Just as the first two objectives are generally thought to be consistent with the third, there is a sensible interpretation of “maximum employment” and “price stability” that renders the first two objectives wholly compatible, as well. That this interpretation is also consistent with standard macroeconomic theory is better still, since adopting such an interpretation would not saddle the Fed with an obligation to do what cannot be done.

Economists typically make a distinction between the prevailing rate of unemployment and the natural rate of unemployment. The prevailing rate of unemployment denotes whatever unemployment rate happens to be realized at a particular point in time. The natural rate of unemployment denotes the unemployment rate that would be realized if no one were fooled into over- or underproducing. It is the best unemployment rate one can hope for given people’s preferences and abilities to produce goods and services.

When prices rise faster than people expect, they might be fooled into producing more goods and services than they would if they understood what the dollars they are receiving will actually be worth in the months ahead. Correspondingly, this misinformed overproduction will tend to push the unemployment rate below the natural rate of unemployment. Likewise, when prices rise slower than people expect, they might be fooled into underproducing, with unemployment rising above the natural rate.

Ideally, Fed officials will anchor expectations and then conduct monetary policy to meet those expectations. If the public expects 2 percent inflation and the Fed delivers 2 percent inflation, no one will be fooled into over- or under-producing and the unemployment rate will coincide with the natural rate. Economists call this the divine coincidence, and it implies there is no necessary tradeoff between the price stability and maximum employment mandates.

Given the divine coincidence, there are three ways to achieve macroeconomic stability—that is, to prevent periods of over- or underproduction:

1. Target a real (i.e., inflation-adjusted or quantity) variable, like the unemployment rate.
2. Target a nominal (i.e., current dollar-denominated) variable, like inflation.
3. Target both real and nominal variables, by putting some weight on each.

The Fed’s dual mandate corresponds to the third approach. 

While all three approaches achieve macroeconomic stability on paper, they might differ significantly in practice. For example, suppose the Fed conducts monetary policy to ensure the prevailing unemployment rate is always equal to the natural rate of unemployment. We do not observe the natural rate of unemployment. Moreover, since technology grows in fits and starts, there is no reason to think the natural rate of unemployment is stable over time. Targeting the unemployment rate, therefore, is like trying to hit an invisible, moving target.

In contrast, targeting inflation is relatively straightforward. We know what inflation should be: what people expect it to be. And, so long as monetary policy is credible, the Fed can anchor inflation expectations on its inflation target rate. If it does so, people will not be fooled into over- or under-producing. The Fed will achieve macroeconomic stability, and the prevailing unemployment rate will be equal to the natural unemployment rate.

To be clear, the argument for targeting a nominal variable exclusively is not an argument that the Fed should not care about real variables. Rather, it is to acknowledge the difficulty of targeting real variables directly. In practice, the most effective way to ensure that real variables are close to their respective natural rates is to target a nominal variable exclusively. That may seem counterintuitive. But that’s what the divine coincidence implies.

What’s the Harm with the Dual Mandate?

If Fed officials can best achieve their dual mandate by focusing exclusively on the price stability portion, what harm is there in including the employment portion as well? In brief: it can only make policy worse, not better.

If Fed officials focus exclusively on the price stability portion of the dual mandate, the employment portion will do no harm. But there is little reason to think Fed officials will focus exclusively on the price stability portion, especially considering they know they will be called to account for the employment portion as well. Fed officials may be tempted to “improve upon” the natural rate of unemployment—that is, they may reduce the prevailing unemployment rate below the natural rate of unemployment by fooling people into taking jobs those people would not take if those people understood how fast the dollar was depreciating. Even if they can avoid that temptation, they risk miscalculating the natural rate of unemployment. If they split the difference when their properly calibrated inflation target and improperly calibrated unemployment target require different adjustments to monetary policy, monetary policy will be worse than if they had focused exclusively on price stability.

The risk that including the employment portion of the dual mandate will make monetary policy worse is not hypothetical. Consider recent statements from Fed officials. They generally understand that they should look through any price effects of a tariff, since those price effects are supply-driven and, hence, outside the control of the Fed. But they are inclined to interpret any upward movement in the unemployment rate as an indication that they are performing worse on the employment portion of their mandate. That interpretation ignores the (very likely) possibility that tariffs will cause the natural rate of unemployment to rise. If the natural rate of unemployment rises, the Fed should target a higher unemployment rate. Again: it is hard to hit an invisible, moving target.

Fed officials could ease their minds by adopting a sensible interpretation of the dual mandate, based on the divine coincidence. With this sensible interpretation in mind, they might go about achieving the dual mandate by focusing exclusively on inflation. Better still, Congress could remove the ambiguity by replacing the error-prone dual mandate with an easy-to-follow single mandate that requires the Fed to deliver price stability. In doing so, Congress would help ensure the unemployment rate remained near the natural rate of unemployment, as well.

If you pay attention to public policy discussions, you know that people have proposed a Basic Income Guarantee or a Universal Basic Income as one option among many to deal with technological unemployment or the distributional consequences of new technologies like generative AI. You might not know that the idea of a Basic Income is nothing new, and it has a long and interesting history. That’s what the historian Anton Jäger and the historical sociologist Daniel Zamora explore in Welfare for Markets: A Global History of Basic Income.

In five chapters, bookended by an introduction and epilogue and followed by copious endnotes, the authors take us through the intellectual history of the idea. Instead of a massive welfare state that provides carefully chosen goods and services like housing, education, food, and so on at public expense, market-friendly Basic Income proponents suggest adjusting the starting points through taxes and cash transfers. Basic Income Guarantees make dollars, not bureaucrats, the first responders in crises.

They start by discussing unconditional cash grants throughout the COVID-19 pandemic and then explain how, contrary to accounts that trace Basic Income from Thomas More through Thomas Paine to today, the Basic Income idea is of more recent vintage. The real “Basic Income” idea emerged from early twentieth-century fiscal innovations, making tax-and-transfer schemes easier and cheaper to implement and administer than in-kind redistributions. They then explain how the idea developed through the middle of the twentieth century by engaging scholars like Juliet Rhys-Williams, Abba Lerner, and W.H. Hutt, before Milton Friedman proposed his Negative Income Tax. 

The idea developed further as postwar observers wrestled with the idea that automation meant the end of work, which in turn meant transferring purchasing power, not creating jobs, was the right way to fight technological unemployment and, in Chapter 4, the post-work world where automation meant leisure and cash meant autonomy. They then explore cash transfer programs in developing countries before concluding with thoughts on what twenty-first-century technopopulism means for the debate.

Welfare for Markets has much to recommend it. It explains how the idea developed parallel with economic ideas about socialism, noting that economists coalesced around Mises and Hayek’s idea that prices were necessary for rational, efficient production. Indeed, they quote James Meade, who described the price system as “among the greatest social inventions of mankind.” I think they could have built on the intellectual history of economics by exploring how the first and second fundamental theorems of welfare economics developed and influenced the debate. The First Fundamental Theorem of Welfare Economics explains that any competitive equilibrium is Pareto-efficient under perfect competition. The Second Fundamental Theorem of Welfare Economics says that any Pareto-efficient resource allocation can emerge as a competitive equilibrium if we adjust the starting points with lump-sum taxes and transfers.

It might look like economists disagree about a lot, and we do. But we agree, fundamentally, that markets are efficient under the right conditions and quibble mostly about whether the conditions are right. The left wing of the economics profession looks radically pro-market compared to the rest of academia, because it embraces markets (maybe not enthusiastically) and mostly seeks to solve social problems through taxes, subsidies, and transfers that either leave prices unmolested or align incorrect prices with marginal social benefits and social costs. 

Many proponents of the Basic Income argue that a simple tax-and-transfer scheme like the Negative Income Tax (the Earned Income Tax Credit in the US tax code) should replace the welfare state. Similarly, governments can make a case for financing schooling, but the case for governments owning and operating schools is much weaker. As I’ve told my students, I’d be very happy if I woke up tomorrow and a Negative Income Tax replaced the US welfare state. As Milton Friedman has explained, the benefit of a negative income tax is that it is easy to structure it so that it never penalizes work. In his 2011 book The Redistribution Recession, the economist Casey Mulligan explained how the tax code and existing welfare programs are a mess of contradictory and often pathological incentives where people get locked into the system by very high implicit marginal tax rates when earning income causes some benefits to expire.

The book’s global perspective is also refreshing, as it discusses the developing consensus among development economists, philanthropists, and practitioners that cash transfers are likely more effective than top-down, planning-centered approaches like Jeffrey Sachs’s Millennium Village project. As I’ve been working on the economist W.H. Hutt (whom they reference) for some time now, I was especially interested in and will refer back to their discussion of South Africa. Mises, Hutt, Hayek, and Adam Smith understood that markets are fundamentally conversational spaces where every dollar is a ballot and prices convey information rather than power. In principle, a Basic Income Guarantee can achieve distributional goals without sacrificing the mechanism that makes rational economic calculation possible.

Some progressives have interpreted proposals to replace the existing welfare state with a Basic Income Guarantee as some kind of neoliberal conspiracy. For people who don’t trust markets, “adjust the starting points and let markets rip” is less than attractive. There is a tension between low liberalism (give people money and let them decide for themselves) and high liberalism (give us money so that we can train people to want what they should want, and then provide them with the capabilities to get it via programs that provide it directly). Future work needs to address these tensions carefully.

On the subject of future work, the authors can improve the book’s next edition — or their future work — by engaging carefully with the economics literature on Basic Income Guarantees. The authors probably could have found a lot of work out there as they were doing the research and moving the book through the publication process. It was the subject of a 2015 symposium in the Independent Review, which included perspectives from philosophy, politics, and economics that the authors should consult. Several distinguished economists have papers in the 2021 Annual Review of Economics assessing Basic Income experiments and programs. There is a paper on Basic Incomes in the Journal of Economic Perspectives in 2018 that would have been useful. It would have been interesting to know, for example, how experiments with Basic Incomes have turned out. How responsive is the labor supply to a Basic Income Guarantee? Innovation? Education? And so on. The gap points to opportunities for scholars to build on this work and enrich our understanding by working harder to bring disciplines into conversation with each other.

Welfare for Markets is an interesting and relatively compact tour through the history of the idea of a Basic Income. It shows us how the idea developed and changed over the twentieth century and how it has evolved in the twenty-first century. It explores discussions about “the future of work” in the face of technological change that look like they are taken from recent issues of popular business magazines but were happening in the 1960s and before. While they do not evaluate philosophical arguments for or against a Basic Income, that’s not their task. They put the idea in its context of intellectual history since the Enlightenment. It is a valuable contribution on which scholars studying the history of economic ideas and the effectiveness of Basic Income Guarantees will certainly be able to build.