The results of the 2024 election have inspired much hand-wringing and soul-searching on the political left. What should be the new direction of the Democratic Party?
They might start with a different question: Why are some voters Democrats in the first place? Those who so identify, I believe, tend to think differently than the typical Republican on five dimensions.
Psychology
If you think back over the long scope of human history, the way we are living our lives today is very unusual. On a typical weekday, more than 200 million US adults of working age get up in the morning, and most of them go to work. When they are not working, they are shopping, running errands, or pursuing some form of socialization or entertainment.
In doing these things, we are all acting in our own self-interest. Although there are government and social restrictions here and there, for the most part we are not told what to do by government, by neighbors, or by friends. We live in a world where virtually everything that happens is the result of people pursuing their own interests.
Adam Smith told us why this arrangement works so well. The way you can meet the most needs of the most people is to pursue your own interest in the marketplace. The more successfully you meet the needs of others, the more profitable your business.
But for the first 200,000 years or so, this is not how our ancestors lived.
Our ancestors lived in small tribes. They had no market economy or even a government as we know it today. Survival depended on individuals subordinating their self-interest to the welfare of the group as a whole. Cultural institutions encouraged this behavior.
In battles with other tribes, for examples, heroes were needed. But it is in no one’s self-interest to be a hero. In hunting large game, they needed risk-takers. Yet it is in no one’s self-interest to take such risks. In gathering food and maintaining their camp, they needed people who do not shirk. Yet substituting leisure for work is in the natural self-interest of most people.
The psychological framing of our ancestors, therefore, was quite different from the psychology that makes the modern world as prosperous as it is. To the extent that evolutionary psychology is at work, it seems likely that some people have a genetic predisposition to think the way our ancestors thought.
When Bernie Sanders says no one in any part of the health care system should be making a profit, he is speaking emotionally, not logically. He may in fact think anyone, in the entire economy, making a profit evidences injustice. If he were living in a tribal community thousands of years ago, he would fit right in.
Economics
Economists envision a market of many different people with different resources and different tastes. By trading, people exchange something they value less for something they value more. They continue making trades until a point at which no one can be made better off through any more transactions.
Economists are so enamored of this result that they have a name for it: “Pareto optimality.”
Note, in achieving this bliss point there is not a single act of altruism. It is totally the result of self-interested behavior.
I find that, like Bernie Sanders, many people on the left do not like the idea of a market. Perhaps for that reason, they don’t spend much time trying to understand economics. Consequently, they propose many well-intentioned government interventions that defy economic logic and impose great harm and hardship in the real world.
Public Choice
The basic approach to politics by the Democratic Party was shaped by Franklin Roosevelt. He was the politician who understood better than any before him that successful politics is interest group politics. In particular, if you promise special interests the one thing they want most, they will support you even if they disagree with everything else you are doing.
So, farmers got price supports. Labor unions got the Davis-Bacon Act and other favorable interventions. Big city machines got money for patronage. Southern segregationists got no challenge to Jim Crow.
The crown jewel of the Roosevelt approach was the National Industrial Recovery Act (NIRA). The dark genius of this approach is that people are far more focused and reliable as a political force in their role as producers than they are in their role as consumers.
So, the NIRA allowed (even required) every industry and every trade to organize as a cartel— restricting output and charging monopoly prices. This is a classic example of taking from Peter (the consumer) and giving to Paul (the producer) in a way that makes society as a whole worse off.
The Supreme Court eventually declared the NIRA unconstitutional. However, the spirit of the effort continues today in the form of occupational licensing by state governments. In most places, to be a hair braider, a barber, an interior designer, or to enter hundreds of other occupations you need a license. Studies show that licensing acts as a barrier to entry, restricting supply and forcing prices higher.
In the 1950s, only one in twenty US jobs required a license. Today it is one in four. Of course, Republicans can be as bad as Democrats on this score. Politically manipulated via protection of their role as producers, voters inflict damage on themselves as consumers.
Regulation
Proponents of government regulation almost always claim that regulation protects consumers. But for regulations in most of US history, the benefit has been to producers at the expense of consumers. By the time Jimmy Carter (a Democrat) became president, this was well understood by economists.
The Civil Aeronautics Board was acting as a cartel agent for the airlines. The Interstate Commerce Commission did the same for the truckers and railroad interests. The Federal Communications Commission did the same for the broadcasters.
Among the most significant accomplishments of the Carter presidency was the deregulation of these and other industries. But you’ll almost never hear Democrats praise Carter for the effort.
In future, if they wish to recapture public support, Democrats would be well advised to see regulations as generators not only of benign and agreeable consequences, but of higher prices, pinched growth, and public discontent.
Redistribution
Many Democrats believe that their party’s goal is to take from the rich and give to the poor. But their approach to both taxes and spending is almost completely in service of special interests and lobbyists. We spent trillions on the War on Poverty, only a pittance of which ever went to the poor in the form of cash. Healthcare dollars go to hospitals and insurance companies, rather than to those in need of healthcare. Food stamp money goes to agribusiness. Housing dollars go to developers. Education dollars go to the education establishment, which consists of adults, not kids.
Democrats favor high marginal tax rates, but that gives them the opportunity to trade loopholes for political support, and to attempt social engineering by crudely manipulating incentives.
For the Future: Face Facts
The Democratic Party faces a crossroads. While its traditional industry-lobbyist politics, regulatory instincts, and redistributive policies have shaped its identity for decades, voters have turned away. If Democrats hope to regain momentum, they must grapple with the unintended consequences of their interventions — how regulation can stifle competition, how redistribution often enriches special interests rather than those in need, and how outdated economic thinking alienates potential supporters. A party that trades in economic realities, rather than mere rhetoric, may find broader appeal in the years ahead.
In December 2024, the AIER Business Conditions Monthly indicators continued to show strength in leading and current economic activity, though the lagging components pointed to signs of underlying weakness. The Leading Indicator remained elevated at 71, holding steady near its November level of 79 and reflecting sustained economic momentum heading into the new year. Similarly, the Roughly Coincident Indicator climbed to 92 from 75, marking its highest reading in the past 18 months and signaling broad-based expansion in real-time economic conditions. However, the Lagging Indicator fell sharply to 17 from 50 in November, suggesting deterioration in slower-moving areas of the economy, such as credit conditions and long-term employment trends. While forward-looking and present conditions remain firmly expansionary, the divergence with lagging indicators warrants continued attention.
Leading Indicator (71)
Of the twelve components of the Leading Indicator, five increased, six declined, and one remained unchanged in January.
The most significant gain came from US New Privately Owned Housing Units Started by Structure Total SAAR, which rose 15.8 percent, indicating a strong rebound in housing activity. Other notable increases included FINRA Customer Debit Balances in Margin Accounts (0.9 percent), Adjusted Retail and Food Services Sales Total SA (0.5 percent), Conference Board US Leading Index of Stock Prices 500 Common Stocks (1.4 percent), and Conference Board US Leading Index of Manufacturing New Orders Consumer Goods and Materials (0.2 percent), all of which suggest improved liquidity and positive market sentiment.
On the downside, the 1-to-10 year US Treasury spread plunged by 408.5 percent, reflecting a dramatic yield curve shift. United States Heavy Trucks Sales SAAR (-7.5 percent), US Initial Jobless Claims SA (-6.2 percent), and University of Michigan Consumer Expectations Index (-4.7 percent) also saw declines, pointing to labor market weakness and declining consumer sentiment. Additionally, the Inventory/Sales Ratio: Total Business (-1.5 percent) and Conference Board US Manufacturers New Orders Nondefense Capital Goods Ex Aircraft (-0.1 percent) showed slight declines, indicating modest headwinds for capital investment.
Coincident Indicator (92)
The Coincident Indicator saw gains in five components, while one remained unchanged.
The strongest increase came from the Conference Board Consumer Confidence Present Situation Index (1.8 percent), suggesting improved sentiment regarding current economic conditions. Modest gains were also recorded in US Industrial Production SA (0.9 percent), Conference Board Coincident Manufacturing and Trade Sales (0.2 percent), and Conference Board Coincident Personal Income Less Transfer Payments (0.2 percent), indicating continued stability in core economic activity. Meanwhile, US Employees on Nonfarm Payrolls Total SA (0.2 percent) showed slight job market growth, reflecting ongoing labor market resilience. The US Labor Force Participation Rate SA remained unchanged, signaling that broader workforce engagement held steady.
Lagging Indicator (17)
The Lagging Indicator declined steeply, with five components falling and one rising. The only increase came from the Census Bureau US Private Construction Spending Nonresidential NSA (0.1 percent) which recorded a marginal gain indicating modest stability in business-related construction investment.
On the downside, the US Commercial Paper Placed Top 30 Day Yield (-5.5 percent) and US CPI Urban Consumers Less Food and Energy Year-over-Year NSA (-3.0 percent) both declined, reflecting lower long-term yield expectations and easing inflationary pressures. Additionally, Conference Board US Lagging Commercial and Industrial Loans (-1.6 percent) and US Manufacturing and Trade Inventories Total SA (-0.1 percent) posted slight declines, pointing to a pullback in credit expansion and inventory accumulation. Conference Board US Lagging Average Duration of Unemployment rose 0.4 percent, indicating that unemployed individuals are taking longer to find work.
Throughout the period from January 2021 to December 2024, the Leading Indicator exhibited considerable volatility, starting at 75 in early 2021, peaking at 92 in March 2021, and then entering a prolonged decline through 2022, bottoming out at 21 in December 2022. The measure rebounded in 2023, fluctuating through the year before rising sharply to 79 in November 2024 and remaining elevated in December 2024, indicating ongoing economic momentum. The Roughly Coincident Indicator demonstrated stronger consistency in the meantime, maintaining levels at or above 75 for much of the period, including a peak of 100 in early 2021, before holding steady in the 75 to 92 range throughout 2024, suggesting continued strength in real-time economic activity. In contrast, the Lagging Indicator struggled throughout much of the timeframe, spending extended periods below 40, briefly reaching 75 in early 2022, but declining again, hitting zero in December 2023 before remaining subdued at 17 in December 2024.
The divergence between leading and lagging indicators underscores the lasting economic disruptions caused by the heavy-handed nonpharmaceutical interventions during the COVID-19 response, compounded by the inflationary effects of the Federal Reserve’s massive monetary expansion in 2020 and 2021, record levels of government debt and deficit spending, and the rapid expansion of the regulatory state under the previous administration. Despite these structural challenges, the past two months have seen a sharp improvement in forward-looking and present indicators, with the Leading and Roughly Coincident measures surging in November and December 2024, suggesting that business conditions and economic activity have gained momentum. However, the persistent weakness in the Lagging Indicator reflects ongoing fragility in slower-moving sectors, particularly those tied to credit conditions, debt burdens, and long-term employment trends, which remain weighed down by years of policy-driven distortions.
DISCUSSION
The January 2025 inflation report sent mixed signals, with a stronger-than-expected headline and core Consumer Price Index (CPI) print but downward revisions to prior data suggesting faster disinflation in 2024. The month’s inflationary pressures were largely driven by services, particularly shelter costs, transportation services, and recreation, alongside a continued rise in food and energy prices. Residual seasonality appears to have amplified the January reading, as the non-seasonally adjusted core CPI change closely mirrored last year’s level, while adjustments to seasonal factors led to a more pronounced month-over-month increase. While core goods prices edged higher, mainly due to used-car price increases, this was partly offset by declines in household furnishings and apparel. The breadth of inflation also widened, with 42 percent of core spending categories now seeing price gains above 4 percent annualized, up from 32 percent in December. Despite concerns over sticky service-sector inflation, the report offers little new information to alter the Federal Reserve’s stance, and a March rate cut remains unlikely. However, with inflation becoming more diffuse, policymakers may take a cautious approach before committing to any policy shifts later in the year.
Indeed, a broad range of economic indicators support the case for persistent price pressures. The ISM Manufacturing Prices Index rose to 54.9, its highest level since May, while ISM Services Prices remained elevated at 60.4, signaling ongoing expansion. Similarly, S&P Global U.S. Manufacturing and Services reports indicated rising output and selling prices, with firms continuing to pass cost increases onto consumers. Regional Fed surveys reinforce this trend, with the Kansas City, New York, Philadelphia, and Dallas Fed manufacturing and services reports all showing significant increases in prices received. Notably, the Philadelphia Fed Manufacturing Index surged to 29.7, while the Dallas Fed Services Index climbed to 13.7, nearly doubling from December. In contrast, only a handful of indicators suggest downward price movement. The Philadelphia Fed Non-Manufacturing Index saw a dramatic decline in prices received, dropping from 23.3 to -0.3, while Richmond Fed Manufacturing and Services reports showed only marginal decreases in prices received. These isolated declines, however, appear insufficient to counteract the broader inflationary pressures reflected across multiple data points.
On the wholesale side, US producer prices rose 0.4 percent in January, driven largely by higher food and energy costs, marking a third consecutive month of strong gains and signaling only limited progress on inflation ahead of new tariffs imposed by the Trump administration. The producer price index (PPI) increased 3.5 percent year-over-year, exceeding expectations, though key components feeding into the Federal Reserve’s preferred personal consumption expenditures (PCE) price index were more subdued, with declines in health care costs and airfares. However, food prices surged 1.1 percent, including a 44 percent jump in egg prices, while energy prices rose 1.7 percent, reinforcing concerns about supply-driven inflation pressures. Meanwhile, service prices climbed 0.3 percent, with traveler accommodation costs accounting for much of the increase. Given the persistent inflationary pressures reflected in both wholesale and consumer price data, market expectations for multiple Fed rate cuts in 2025 have diminished, with some economists now forecasting no cuts at all due to the inflationary impact of higher import duties.
Taken together, the consumer and producer price trends send a cautionary signal for already-extended US equity valuations, as rising input costs threaten corporate profit margins outside the tech sector. With producer prices outpacing consumer prices for a fourth consecutive month, historical patterns suggest a heightened risk of margin deterioration, similar to what occurred in 2018 and 2022. Fourth-quarter data already show a decline in S&P 500 operating margins to 15.1 percent from 15.4 percent, and while forecasts anticipate a rebound in the first quarter, sustained increases in input costs could challenge those expectations. Sectors most vulnerable to this squeeze include consumer-facing industries reliant on goods sales, as firms may struggle to pass cost pressures onto consumers. While margins in tech, consumer discretionary, and consumer staples stocks have remained resilient, that stability could weaken if inflationary trends persist, further complicating the outlook for corporate earnings growth.
In labor markets, January’s employment report signaled growing disinflationary pressures, as payroll growth came in weaker than expected and prior estimates were revised downward. Nonfarm payrolls increased by 143,000, well below the 175,000 consensus forecast, while downward revisions to 2024 data suggest job growth was overstated in real-time reports. Meanwhile, the household survey reflected a much larger labor supply due to population control adjustments, raising both the unemployment and labor-force participation rates by 0.1 percentage point. Wage growth remained firm at 4.1 percent year-over-year, but a decline in the average workweek to 34.1 hours limited overall income gains. Despite this, service industries—including health care, retail trade, and social assistance—led job creation, while goods-producing industries saw no net employment growth – an interesting finding given other data sources (described below). The decline in the unemployment rate to 4.0 percent resulted from employment gains outpacing labor force growth, but the population adjustments complicate any attempted comparisons to prior months’ data. On top of that, weather-related job absences surged in January, potentially distorting payroll data, though the Bureau of Labor Statistics noted no measurable impact from California wildfires. Government hiring added 32,000 jobs, though this trend is unlikely to continue given President Donald Trump’s stated goal of reducing the federal workforce.
Despite the January 2025 BLS report finding, other key measures point to job growth in manufacturing as well as service sectors. The Institute for Supply Management (ISM) Services Employment Index rose to its highest level since September 2023, while ISM Manufacturing signaled a return to expansion after a prolonged period of contraction. Similarly, S&P Global Services employment reached a 31-month high, and S&P Global Manufacturing reported the strongest job creation since June. The ADP report exceeded expectations with a 183,000 increase in private payrolls, and regional Fed surveys reflected broad-based improvements in hiring. Notably, the New York Empire Manufacturing employment gauge flipped into expansion, while the Philadelphia and Richmond Fed employment indicators pointed to stronger hiring momentum.
But the labor market picture was not uniformly strong, as some indicators suggested pockets of weakness. New York Fed Services employment slipped further into contraction, and Dallas Fed Services full-time employment declined after expanding in December. Initial jobless claims edged up to 223,000, while Challenger job cuts surged 28 percent month-over-month to nearly 50,000, signaling that some firms are trimming payrolls in response to shifting economic conditions. Meanwhile, the Kansas City Fed employment indicators were unchanged, suggesting stable but tepid hiring in that region. Taken together, the data indicates a labor market still exhibiting strength, particularly in services and to a growing extent manufacturing, but with emerging signs of caution as businesses navigate uncertainty surrounding inflation, policy shifts, and economic momentum.
From January into February, US consumer sentiment weakened significantly, with the University of Michigan’s preliminary February index falling to 67.8, its lowest reading in seven months. The decline was broad-based across political affiliations and driven in part by a sharp increase in short-term inflation expectations, which rose to 4.3 percent from 3.3 percent as concerns about tariffs mounted. Consumers also saw long-term inflation rising modestly, fueling worries about the future cost of living and personal finances. Buying conditions for big-ticket items (automobiles, furniture, major appliances) fell a whopping 12 percentage points, signaling heightened caution around major purchases. Confidence also dipped as consumers’ expectations for their financial situation reached their lowest level since October 2023, while views on the broader economic outlook declined along with them. Additionally, labor market softness added to concerns, with unemployed Americans taking longer to find jobs and January payroll revisions revealing weaker employment growth than initially reported. With inflation uncertainty lingering, the risk of tariffs driving up prices for households already stretched thin weighs heavily on consumer confidence and spending decisions.
Perhaps more surprisingly, US small-business optimism also declined in January, falling 2.3 points to 102.8 after reaching a six-year high in the aftermath of Trump’s election victory. Seven of the ten index components dropped, with the steepest decline in capital spending plans since 1995, reflecting a swift pullback in confidence where sizable investment decisions are concerned. Fittingly, the uncertainty index surged by 14 points, its largest monthly jump in data going back to 1986, as businesses grappled with the Federal Reserve’s rate pause and looming trade policies. While nearly half of small-business owners still expect economic conditions to improve, optimism is cooling rapidly as fewer see it as a good time to expand and expectations for easier credit conditions declining for the first time since August. At the same time, sales expectations remained near a four-year high, suggesting continued business resilience. Both consumers and small-business owners are weighing the impact of tariffs and inflation pressures, with households growing more cautious while businesses remain moderately optimistic about the broader economic outlook despite mounting uncertainties.
Retail sales declined in January following a strong holiday season, as colder-than-usual weather and post-holiday spending fatigue weighed on consumer activity. Headline retail sales fell 0.9 percent, well below expectations, with vehicle sales accounting for much of the decline. Excluding autos and gas, sales dropped 0.5 percent, and control-group sales, which feed into GDP calculations, fell 0.8 percent, suggesting a slower start to the year for consumer spending. Notably, big-ticket purchases such as furniture and home furnishings saw a sharp pullback, likely reflecting a pause in tariff-related front-loading that had boosted demand in late 2024. Online sales also declined 1.9 percent, likely a reversion after the strong holiday shopping period, while restaurant and bar sales rose 0.9 percent, pointing to continued strength in services spending. Though retail sales data are frequently revised, the weak January print suggests that first-quarter consumer spending could slow to around 2.0 percent, down from 4.2 percent in the prior quarter.
While seasonal factors undoubtedly played a role in the consumption sag, an accumulation of data suggests that the long-anticipated consumer fatigue may finally be taking hold.
The share of outstanding US consumer debt in delinquency rose in the fourth quarter of 2024 to its highest level in nearly five years, signaling growing financial strain among households. According to the Federal Reserve Bank of New York, 3.6 percent of total consumer debt was delinquent, the highest since mid-2020, with transitions into serious delinquency increasing for auto loans, credit cards, and home equity lines of credit. Auto loans have become a particular point of stress, as higher car prices and elevated interest rates have pushed monthly payments to levels that many borrowers are struggling to afford. Credit card delinquencies also climbed, with 7.2 percent of balances transitioning into serious delinquency, matching the highest level since 2011. Meanwhile, total household debt rose 0.5 percent to a record 18 trillion dollars, with credit card balances growing the fastest at 3.9 percent in the fourth quarter, followed by increases in auto loan, student loan, and mortgage debt.
Adding to these pressures, the resumption of student loan payments in late 2024 following years of pandemic-era forbearance is expected to further contribute to delinquencies in early 2025. The New York Fed noted that millions of borrowers may already be behind on payments, though these missed payments have not yet appeared in delinquency data due to reporting lags. With interest rates remaining elevated for a third consecutive year, household financial conditions are likely to remain strained, particularly for lower-income borrowers who are disproportionately affected by rising borrowing costs. While mortgage delinquencies have remained stable, the rise in late payments across other forms of debt suggests that consumers are feeling the effects of ongoing inflation, high interest rates, and slowing wage growth, increasing the risk of further financial stress in the months ahead.
Just last month, a number of measures of economic conditions appeared poised for marked improvement, with some hesitance stemming from concerns over trade. One month later stubborn inflation, mixed employment data, and clear indications of consumer distress have contributed to a sharp reversal in sentiment among both business owners and consumers; not nearly as much, though, as the unprecedented pace of executive orders, tariff threats, and Higgsian regime uncertainty injecting debilitating layers of instability into economic decision-making. Businesses and households are edging toward the sidelines of increasingly murky business and commercial landscapes.
On February 7, the National Institutes of Health (NIH) announced that it will be reducing its negotiated proportion of grant funding that goes to overhead, or “indirect costs,” to 15 percent across the board.
Indirect costs are basically fungible dollars that a research institution can spend however it wants. They are meant to cover all the ancillary services that researchers need, like human resources, information technology, buildings and grounds, and so on. When private foundations give grants, they generally require that 80, 85, or even 90 percent of the funding go to direct services, like research for research grants, so the new NIH rule finally puts the federal government in line with the private sector.
Last year, the NIH spent 26 percent of its research grants on indirect costs, and some institutions (including Harvard, Yale, and Johns Hopkins) received more than 60 percent of their grant funding for indirect costs. In other words, most of the money they received to do research didn’t go directly to research. The reduction of indirect funding should save taxpayers as much as four billion dollars a year.
It still isn’t clear whether the move is lawful or not. Sen. Susan Collins reportedly claims it isn’t. I’m not an expert on constitutional law, but I am equipped to discuss the policy merits of the change.
Scientists are claiming that the cuts will “decimate basic and clinical research” and “are detrimental to academic biomedical research,” while economists tout “the case for government funding of basic research.” Reporters cover the political angle: “NIH funding cuts cause concern in Alabama.” A Brandeis professor even touted Hitler’s allegedly stellar record in funding German research in a piece for a progressive magazine to make the case why Trump needs to reverse the NIH rule. (If you’re confused as to why he would reach for Hitler of all people as his preferred example, you’re not alone.)
Government spending cuts are never easy, but this one really has sent the PhD class into a tizzy. But from the standpoint of the beleaguered American taxpayer, are these cuts a good idea or not?
Some economists will defend government funding of basic research as something that benefits the taxpayer. Basic research doesn’t pay, so the argument goes, but it’s valuable because the private sector can build on it. It’s a nonexcludable good that everyone can access, but for which no one has an incentive to pay. Compulsory payment for the good through taxes, therefore, will supposedly make everyone better off.
Now, it might be an interesting philosophical discussion whether all government science funding should be abolished, but that’s not what’s on the table. The question is whether the government should redirect funding away from fungible dollars for institutions that do research, and toward actual research costs.
As a recovering academic, I can tell you that the high proportion of “indirect” funding (in grant lingo) distorts incentives at universities. University administration makes successful grant-writing a major part of tenure and promotion decisions for faculty members. They shift resources away from departments that don’t get big grants toward ones that do. After all, the money that the chemistry department brings in on federal grants doesn’t just fund the chemistry department; it funds the new student center and the fancy new dorm and the study-abroad program and a fleet of deans and deanlets to manage it all.
Will cutting “indirect” hurt basic research at all? It will certainly hurt some of the institutions that do research, such as large research universities and research hospitals. But the policy change has both income effects and substitution effects. By shrinking the incomes of institutions that support research, the change could indeed reduce their ability to do research. But it also gives those institutions an incentive to switch from non-research activities toward research activities. As a result, we might end up with more research, not less.
If they hold and spread, cuts to federal indirect funding ratios should cause universities to prioritize undergraduate teaching more for hiring and promotion, and more basic research will take place in standalone research institutions staffed by scientists who do nothing but research.
That bifurcation between teaching and research could be good for both. Science has progressed to the point that the vast majority of undergraduates simply cannot understand research at the frontier of scientific progress, even in their major fields of study. It doesn’t make much sense for world-class scientists to spend a lot of time in the classroom correcting the elementary errors of eighteen-year-olds. And they often do a bad job of that! Why not leave teaching to scholars who may not be at the frontier of scientific progress, but who can enliven the subject for those encountering it for the first time?
Let’s not forget, too, that the NIH has been shifting away from basic to applied research. Over time, the NIH has funded a greater proportion of applied research projects and offered applied research projects a greater share of funding. The majority of NIH funding now goes to applied, not basic research projects.
But the nonexcludability rationale for basic research doesn’t carry over to applied research. Intellectual property law provides ample protection for applied technology innovators to make a profit from their publicly funded research. If the policy change cuts government funding for applied research, that cut likely benefits the American taxpayer.
We don’t really know what the right proportion of indirect funding for basic research is. It’s possible that private foundations keep their ratios so low because they know recipients get plenty of indirect funding from government grants. So cutting government indirect ratios could cause private foundations to raise theirs. A process of discovery in the marketplace could lead to a more efficient allocation of research grant dollars
The DOGE-inspired move to cut NIH indirect expense funding has produced a lot of wailing and gnashing of teeth, but that reaction seems disproportionate to the real effects of the move. The overall amount of basic research that the American economy produces, and the benefits it provides to American industry, could just as easily grow as shrink.
Examples of government waste are a dime a dozen these days. From the debacles over the $640 toilet seats in the Pentagon and the Air Force’s $1,300 coffee mugs and little-known Agricultural Marketing Service using the even-less-known Watermelon Research and Promotion Act of 1985 to “strengthen the position of watermelons in the marketplace” and the Consumer Product Safety Commission renewing its efforts to conduct the Child Strength Study to test children aged three months to five years so that they may, “obtain child strength measures for upper and lower extremities and bite strength.”
Budget hawks will use humor to point out the millions of dollars that are wasted on things like these. Cutting these programs is clearly beneficial to the American people, and importantly, do not meaningfully impinge on the ability of the agency to carry out its job nor do they come with many downstream effects. Does anyone really think that Air Force pilots will be unable to fly their planes without these $1,300 mugs, that Pentagon officials will meaningfully suffer using cheaper toilet seats for the commode, or that the American consumer will forget about watermelons if not for the Agricultural Marketing Service’s efforts?
But what about when the cuts are deeper and more fundamental than these? What if, instead of finding cost savings to a given task, the entire agency created to handle those tasks were eliminated? With the recent closure of USAID, this question has come into view. Now, it looks like the Department of Education may be up next.
The use of humor is an effective tool of communication. But there also needs to be a sobering reality check in all of this. While eliminating things like USAID and the Department of Education may (and I want to emphasize the use of “may” there) score some political points, the reality is that the economic wins may not be as impressive as we might think.
Budget Effects
To begin, let’s look at the overall projected savings of eliminating USAID and the Department of Education. The most recent data suggests that USAID managed about $44.2 billion, though even the Congressional Research Service admits that determining USAID’s precise budget remains difficult due to their entanglement with the US Department of State. Meanwhile, the Department of Education has a current budget of $103.1 billion, which is down considerably from their budget during the pandemic.
Eliminating these areas entirely and replacing them with nothing would amount to a total savings of $147.3 billion. While this amount of money is gargantuan to us mere (fiscal) mortals, it pales in comparison to the overall federal budget for this year of $7 trillion. These savings amount to just two percent of the federal budget.
By way of comparison, as of this writing, since the start of the fiscal year in October, the national deficit for this year alone already exceeds $700 billion. We would have to eliminate USAID and the Department of Education almost five times just to avoid the deficit spending that has already occurred this year. Over the course of the next eight months of this fiscal year, the CBO projects that we will add another $1.2 trillion of deficit spending, bringing this year’s total deficit to a staggering $1.9 trillion. For some context, it took the entirety of the nation’s history through 1981 for the national debt to hit $1 trillion. Congress will doubt double that in this year alone. Just to avoid adding to the national debt and to bring about a balanced budget that President Trump recently called for, we would have to eliminate these programs, or those of comparable size, thirteen times over.
A Dose of Reality
The problem with the government is not that it is inefficiently run, nor that there are billions of dollars of government waste that we could find and eliminate. The problem, as Edmund Burke once said, is with the thing itself. For far too long, government has expanded in both size and scope. Finding wasteful spending like expensive coffee mugs and toilet seats, a bloated budget for federally supported marketing efforts, etc. only sidesteps the real issue, which is that as it stands today, the government plays far too large a role in too many aspects of our lives.
With a budget of $7 trillion, the federal government already accounts for almost a quarter of all economic activity in the US. Adding in state and local governments, which contributed another $4 trillion, and “government spending” writ large accounts for over a third of all economic activity.
If we want to see real steps taken to cut government spending, we must first reduce the scope of government activity. Unless or until DOGE starts recommending eliminating responsibilities from the federal government (which Congress would have to approve), there is little hope of even a balanced budget this year, let alone returning the nation to a healthy fiscal path.
Private equity (PE) firms play a vital role in the life cycle of private firms. They improve operational efficiency and restructure businesses to enhance productivity and profitability. Their strategies typically involve streamlining operations, eliminating redundancies, and focusing (or frequently refocusing) companies on their core competencies, as demonstrated by the successful turnarounds of Dunkin’ Brands and Hilton Worldwide. Additionally, PE firms excel in capital allocation, targeting struggling or undervalued businesses and injecting both financial and managerial expertise to unlock hidden value. By reallocating inefficiently used resources to more productive areas, they not only improve individual business performance, but also contribute to overall economic growth.
Investment by PE interests is typically drawn to industries with strong cash flow potential, opportunities for operational improvements, or undervalued assets. Those often, while not exclusively, come in the form of fragmented markets (healthcare, technology, consumer goods, logistics/transportation, and others) where consolidation can enhance commercial prospects.
Cyclical sectors like energy and manufacturing also attract PE interest during economic downturns: when valuations fall, firms become more affordable and the likelihood of substantial upside growth becomes higher. More recently, businesses providing essential goods or services have become appealing because of their resilience to economic fluctuations. Of particular note is that periods of low interest rates encourage PE investments taking the form of leveraged buyouts, making it easier for private equity firms to acquire companies and optimize them for long-term profitability. (A leveraged buyout is a takeover strategy whereby a business is acquired using borrowed money, with the target company’s assets and future cash flows serving as collateral to repay the debt.)
In recent years, residential real estate has become a prime focus for private equity for several reasons: soaring demand, constrained supply, and strong rental income potential – all three of which are largely consequences of the building boom and bust around the 2008 housing crisis. Historically low interest rates in the wake of the pandemic have further accelerated private investment in housing by making borrowing cheap.
Over the years, smaller landlords and property management companies have struggled with growing regulatory complexities, making them attractive acquisition targets for well-capitalized private equity firms. And finally, the predictability of cash flows associated with residential properties broadly aligns well with PE firms as both businesses in their own right and alternative investment vehicles for investors including pension funds, insurance companies, high net worth individuals, family offices, and others.
Regulatory Dynamics Paving the Way
Local, state, and federal housing regulations have inadvertently facilitated private equity’s expansion into residential markets by increasing operational complexities that individual landlords and small property firms struggle to manage. Compliance with housing codes, rent control laws, environmental regulations, and zoning requirements have become increasingly burdensome for independent landlords and small-scale property management companies, leading to financial strain and falling returns. PE firms, with management expertise, legal resources, and access to capital are well-positioned to acquire those businesses, streamline operations, and achieve cost savings. By operating at scale, they are able to navigate complex regulations more efficiently and improve profitability in ways that smaller competitors cannot.
More recently, temporary regulatory shifts associated with pandemic policies—eviction moratoria, rent stabilization policies, and tax incentives—have created a new crop of distressed assets and undervalued opportunities for PE firms to acquire and operationalize. For example, federal programs like the Opportunity Zones Initiative provide lucrative tax benefits for investment in distressed areas, attracting private capital into select residential markets. Similarly, foreclosure moratoriums and government-backed loan forgiveness programs have inadvertently led to undervalued and distressed properties ripe for acquisition. These and others have allowed the PE sector to expand their real estate portfolios by acquiring properties that small landlords struggle to, or find cost ineffective, to maintain.
At the local level, poorly designed regulations have invited private equity into housing markets. Rent control ordinances in cities like New York and San Francisco, while intended to protect tenants, put it between difficult and impossible for smaller landlords to remain profitable – especially recently, amid 40-year highs in inflation. By leveraging massive economies of scale, properties subject to distorting regulation such as rent caps can operate efficiently despite rent caps; a situation where poorly-crafted laws and ordinances inadvertently favor large-scale investors. Similarly, zoning reforms which, intentionally or not, promote higher-density housing or mixed-use developments, present opportunities for PE companies to acquire, redeveloping underperforming properties for higher returns.
Market Realities and Rent Increases
Private equity’s growing role in residential real estate has sparked concerns about rising rents, capitalizing upon economic ignorance to reignite perennial fears about financial firms and markets. There are, of course, factors that limit the extent to which firms can realistically increase rental prices. Market competition naturally places a ceiling on rent hikes; if prices are pushed too high, tenants seek more affordable alternatives, or turn to homeownership in areas where housing supply is sufficient. Additionally, costs associated with tenant retention and renter acquisition discourage excessive rent increases. High turnover rates lead to lost rental income, advertising expenses, and higher property maintenance costs. Economic factors play a role as well, as local employment rates, prevailing wages, and the broader supply of housing constrain rent hikes. Whether it’s an individual living next door or a massive financial corporation hundreds of miles away, landlords must keep rents within tenants’ ability to pay. Yes: rents can be “too low.”
US CPI Owners Equivalent Rent of Primary Residence NSA & US PCE Rent of Tenant-Occupied Nonfarm Housing SAAR (2000 – present)(Source: Bloomberg Finance, LP)
Government regulations also limit rent increases through regulatory measures including rent control and rent stabilization laws, usually in California, Oregon, and New York. These laws cap annual rent increases, often tying them to inflation or a fixed annual percentage, preventing landlords from imposing hikes beyond a various amount. Such policies discourage property maintenance and new housing construction, though, ultimately reducing long-term supply and exacerbating affordability issues. Eviction protections, such as “just cause” eviction laws, prevent landlords from removing tenants solely to reset rents at market rates. Additionally, housing assistance programs like Section 8 vouchers further limit rent levels by tying payments to “fair market rents” set by HUD.
It has become fashionable to blame PE firms for driving up rental prices. But less has been said about decades of heavy-handed regulatory interventions—including rent control, zoning laws that restrict density, and tenant protection policies—which have artificially suppressed rents in many markets. By limiting landlords’ ability to adjust prices in response to market conditions, the very policies which have allegedly sought to bring “fairness” to residential markets have created the shortages and distortions which private equity firms have not only responded to, but are now addressing.
The Case for Rent Increases
Higher rents are defensible through several arguments. First, aligning rents with market levels ensures actual fairness, particularly in cases where prior or prevailing regulations kept prices artificially low. Second, rent increases are usually necessary to finance capital improvements, such as property renovations, security enhancements, and energy-efficient upgrades – all of which benefit tenants in the long run. Economically, higher rents signal a demand-supply imbalance, encouraging new construction or redevelopment that can help alleviate housing shortages over time.
Like their investments in other sectors, PE firm involvement in residential real estate brings efficiency, modernization, and capital investment that smaller landlords have difficulty or are unable to provide. Professional property management contributes to a more stable rental market. Furthermore, the ability to inject capital into underutilized properties ultimately increases housing supply, mitigating some of the affordability challenges caused by restrictive zoning and development policies.
Recent criticism of private equity firms has targeted the pursuit of profitability. But operating profitability indicates that a firm is efficiently allocating resources, and in the process producing goods or services that consumers value more than their cost of production. Profits are a clear sign of successful entrepreneurship responding to market demand. By pursuing and attaining profits, PE firms demonstrate unquestionably that unlike the haphazard, short-term, and usually destructive and wasteful outcome of government interventions, their role in the housing market is not only not exploitative but a positive outcome arising of ill-conceived regulatory initiatives and unintended consequences of monetary policies.
Policy Failures and the Broader Economic Context
At its core, the debate over private equity’s role in residential real estate is a reflection of deeper systemic issues. Inflationary pressures, driven by Federal Reserve policies and expansive government spending, have played a significant role in pushing housing prices higher. On top of those, decades of short-sighted regulations aimed at affordability and land activism have reliably backfired, creating market distortions. Private equity firms have certainly capitalized on those outcomes conditions, but they did not create them. Instead, and thankfully, they are responding to urban and rural landscapes twisted into economic incoherence by interventionism.
Ultimately, concerns over rising rents should first be addressed by examining the policies that contributed to consolidation in the housing market. The Federal Reserve’s role in creating inflation, along with haphazard restrictive zoning laws and unrealistic rent control policies, have done more to create unaffordable housing than private equity could ever hope to. If policymakers are serious about creating a more equitable housing market, they must address the root causes of supply constraints and economic distortions and pledge to stay out of housing markets rather than emptily vilifying investors responding to simple incentives.
Private equity is not inherently exploitative. A more thoughtful analysis of the growth of private equity deals would recognize that it is not greed, but increasing opportunities created by macroeconomic mismanagement, that are fueling its penetration into ever more sectors and businesses. Furthermore, the uptick in those misallocations undoubtedly parallels the ever-growing page count of the Federal Register.
There is always reason to be skeptical of claims about what defines the “American Dream,” but if it hinges on homeownership, private equity investment offers the most sustainable long-term path to making it a reality. Unlike politicians and activists, PE firms pursue long-term strategic goals by responding to economic realities rather than ideological pressures or vote-harvesting schemes. While their entry into residential real estate has raised concerns, they are bringing financial stability, capital investment, and innovation to a long-overlooked and government-mishandled sector. A balanced approach that considers both the need for private capital investment and closely considers the consequences of excessive regulation will, if permitted to, ensure an affordable, sustainable housing market for the future.
In November 2023, the warning came, as clear as an omen.
A political upstart was seeking office and, if elected, his policies were likely to cause “devastation” in his own country and “severely reduce policy space in the long run.”
The threat was a chainsaw-wielding disciple of Austrian economics from Argentina who embraced laissez-faire economics. The predictions of doom came not from Old Testament prophets, but 108 economists who signed a public letter saying his anachronistic ideas had long ago been discredited.
“As economists from around the world who are supportive of broad-based economic development in Argentina, we are especially concerned by the economic program of one of the candidates, which has become a major issue of discussion in the national election,” the letter read.
The economists (who included Thomas Piketty, a leading global scholar on wealth and income inequality) conceded that a desire for change in Argentina was understandable, considering the rampant inflation and economic crises the country was experiencing.
Yet the warning was clear.
“Javier Milei’s economic proposals are presented as a radical departure from the traditional economic thinking,” the economists wrote. “…we believe that these proposals, rooted in laissez-faire economics and involving contentious ideas like dollarization and significant reductions in government spending, are fraught with risks… . “
Milei’s ‘Shock Therapy’
The people of Argentina either failed to hear or declined to heed the warning.
On November 19, voters elected as their next president the wild-haired Milei, who defeated his Peronist opponent by a ten-point margin. Milei was inaugurated on December 10 and wasted little time implementing his laissez-faire agenda, which included an immediate five-percent (chainsaw) slash in government spending.
More reforms followed.
Public work programs were put on hold, welfare programs were slashed, and subsidies were eliminated. State-owned companies were privatized and hundreds of regulations were cut. Tax codes were simplified and levies on exports were lifted or reduced. Labor laws were relaxed. The number of government ministries was reduced from 18 to 9 (¡afuera!) and a job freeze was implemented on federal positions. Tens of thousands of public employees were given pink slips.
On the monetary side, the currency was sharply devalued and the central bank was ordered to halt its money-printing.
These actions were not painless. Indeed, Milei himself had described them as a kind of “shock” therapy that was necessary for economic healing. Argentina was battling triple-digit inflation, economic sclerosis, and mass poverty.
“I will make a shock adjustment and I will put the economy in a fiscal balance,” Milei said following his win. “As I pledged not to raise taxes, this means I will do so by cutting spending.”
The Results, One Year Later
Milei recently completed his first year as president, and the results are not what Piketty and company predicted. Duke University economist Michael Munger, a contributor to these pages, recently pointed out that Argentina’s economy outperformed any reasonable expectation under Milei. He’s right.
Inflation, which had peaked at an annualized rate of 300 percent in April, nosedived, reaching a four-year low in November. In his first month in office, the Associated Foreign Press reports, Milei oversaw a record 25.5 percent inflation rate. By November, inflation had fallen to 2.4 percent.
“In just 12 months we pulverized inflation,” the Economy Ministry wrote on X.
GDP grew nearly four percent in the July-to-September quarter after a sluggish first half, and the International Monetary Fund forecasts growth of five percent in 2025 and 2026. Meanwhile, Munger notes, there is a strong likelihood of foreign investment, as evidenced by the JP Morgan “country risk index.”
There’s more work to be done in Argentina, a country that for decades has struggled economically under the yoke of Peronism. Yet the results are nothing short of miraculous — and precisely the opposite of what the 108 economists predicted (not to mention prestigious media outlets like The New York Times, which reported on the “concern in Argentina and beyond about the damage [a Milei] government could inflict on Latin America’s third-largest economy”).
A ‘Superficial’ Understanding
It bears asking, how did Piketty and company get things so wrong?
Economics, after all, is a science — a dismal one perhaps, but a science nevertheless. And though there was never a clear consensus on Milei among professional economists, many of the most vocal and prominent ones were predicting that Milei and his laissez-faire policies would be disastrous.
I reached out to several professional economists to get their hypotheses on why their peers missed so badly in their predictions on what Milei’s policies would achieve. I didn’t sense an eagerness to discuss the issue, perhaps because these economists are more humble than the 108 who signed the letter in 2023, and fully understand that predicting economic outcomes is challenging.
One economist who has written about the failed prediction is David Henderson, a research fellow at the Hoover Institution. In a post, Henderson attributes the failure of Piketty and company to a lack of understanding of free markets and government intervention.
Henderson points out several flawed assertions the authors make and demolishes at least one straw man — “the laissez-faire model assumes that markets work perfectly” — before offering a blunt assessment of the economists.
“Their understanding of how markets work and of how governments work is superficial,” writes Henderson. “I wonder if any of them, seeing the apparent success of Milei’s policies, are questioning their prior views. We can always hope.”
Indeed we can. But for now, it’s not unfair to assume from their silence that they’ve learned little from Argentina’s economic progress.
As President Donald Trump begins his own second term as president, there’s much he can learn from Milei’s first year in office.
This includes ignoring economists who claim that cutting government spending, regulations, and bureaucracy will result in economic devastation. And perhaps most importantly, the danger of using government printing presses to avoid making difficult budget decisions.
American Institute for Economic Research President William Ruger and investigative journalist Michael Shellenberger testified before Congress on Thursday to highlight waste and abuse in the United States Agency for International Development (USAID) program.
USAID came under scrutiny after President Donald Trump’s extended freeze on foreign aid and development funds worldwide. Many contend that USAID, which spent about two-thirds of the $65 billion the US allocated in foreign aid in 2023, is funding programs that do not support US interests.
Trump critics argue freezing USAID funds endangers global humanitarian efforts and US national security, citing threats to programs combating HIV/AIDS and aiding violence victims in Latin America. Democratic critics have framed national security concerns to counter Trump’s reforms, emphasizing their impact on US influence against China.
In his testimony, which took place before the Senate Committee on Homeland Security & Governmental Affairs, Ruger argued these criticisms were not compelling and fail to address the larger problems in how US foreign aid is currently allocated.
Ruger, a veteran of the Afghanistan War who remains an officer in the US Navy (Reserve Component) with the rank of Commander, rejected the idea that cuts to USAID would threaten US defense capabilities or weaken America’s position against China.
“The results of great power competition will be decided primarily on these margins,” Ruger told the committee. “Thus the geopolitical implications of the fight over foreign aid are fairly limited. In terms of our material power, maintaining a large national defense capability second to none is what allows us to defend our interests and deter attacks on our territory.”
Shellenberger, a journalist and CBR Chair of Politics, Censorship, and Free Speech at the University of Austin, said USAID’s health programs warrant scrutiny due to the agency’s documented history of using humanitarian aid as cover to promote regime change and biodefense research.
Though Thursday’s hearing broadly addressed USAID’s wastefulness, Shellenberger said his goal was to highlight the agency’s increasingly aggressive attempts to influence independent investigative journalism and promote censorship.
“USAID has in recent years been funding censorship advocacy worldwide through its ‘Countering Disinformation’ program, which is part of its Consortium for Elections and Political Process Strengthening (CEPPS),” Shellenberger said. “This work has included funding for so-called ‘fact-checking’ organizations, including in Brazil, which governments use as a predicate for demanding censorship by social media companies.”
“Free” parking has a huge cost. That’s the message that UCLA planning professor Donald Shoup, who died last week, took to the world. He lived to see his research gain credibility and influence, bit by bit, until just a few years ago a nationwide parking reform movement burst onto the scene and started winning policy victories.
Shoup was trained as an engineer and an economist, but he made his mark in urban planning, which he taught at UCLA for over four decades. He is best known for his 2005 book, The High Cost of Free Parking, published when he was 66 years old.
In that book, Shoup points out that city parking is often allocated free of charge at point of use. “Free” parking has real costs, though. Because there’s no charge, drivers demand too much of it. In particular, they demand too much of it at the wrong places at the wrong times.
Suppose you want to run into a bagel shop on your way to work. You don’t need to park there for long, but you highly value having a nearby parking spot so that you can run into the shop, run out with your bagel, and be on your way. The only problem is that there might not be any spot for you, because the lack of a price might lead other drivers to leave their car for long periods of time.
This is precisely what happened when the automobile became a mass consumer good, says Shoup. Drivers couldn’t find places to park, and planners’ response was to require developers of buildings to include parking proportionate to the buildings’ use. The parking minimum was born.
It was a cure worse than the disease, says Shoup. Like “lead therapy” recommended by eighteenth-century physicians, parking minimums poisoned the city. “Free parking increases the demand for cars, and more cars increase traffic congestion, air pollution, and energy consumption,” he writes. “More traffic congestion in turn spurs the search for more local remedies, such as street widenings, more freeways, and even higher parking requirements.” Cities were turned over the automobile and became danger zones for pedestrians and cyclists.
To these ills, Shoup adds the effects of parking minimums on the cost of development. These costs are paid by property owners initially and then passed on to tenants, both residential and commercial, and ultimately show up in the costs of all locally produced goods and services.
Shoup meticulously goes through study after study of how the introduction of parking requirements affected development. In Oakland, parking minimums drove up the cost of building apartments, significantly reduced the number of apartments built, and reduced land value per acre. That meant in turn that more of the property tax burden had to be shouldered by other residents of the city. The same dynamic played out with single-family housing in San Francisco, office development in southern California, apartments in Los Angeles, and apartments in Palo Alto, to name just a few studies he reviews in one section of the book.
Shoup notes the aesthetic and environmental costs of surface off-street parking lots too. Air pollution comes from drivers circling for parking. Water pollution comes from pavement runoff. Surface lots are ugly and uncomfortable: hot in summer, cold in winter, and always windy. He even advocates placing limits on off-street parking, perhaps taxing it and shunting it to the urban periphery, as Carmel, Indiana does.
Even if we don’t go that far with him, he persuasively argues that instead of mandating free parking, cities should charge market prices for on-street parking. Shoup pioneered technologies to adjust the price of parking in real time to ensure that there are always spots available on every block. The new revenues from charging for parking could be used to improve infrastructure in the area, building public support for the new market. Experimental deployments of the technology showed that they worked to keep parking available for those who urgently needed it. While there is an upfront cost to deploy the technology, cities across the country are gradually adopting it.
Today, the Parking Reform Network advocates Shoup’s ideas of abolishing minimum parking requirements and charging market prices for on-street parking. Thanks in part to their efforts, 99 places in eight countries have since abolished all parking minimums. (New Hampshire could be the first state to do so.)
Unfortunately, decades of misregulation have scarred our cities. In many medium-sized cities, off-street parking lots make up more than a third of the land area in downtown (Albuquerque, Fresno, Little Rock, Orlando, and Arlington, Texas are examples). Most major cities have lost human-scale neighborhoods and classic architecture to pavement as a result of urban renewal and zoning. You can see photos of this change in Denver here.
That’s just to say that the modern parking reform hasn’t arrived on the scene a moment too soon. We have Donald Shoup’s work to thank for opening so many people’s eyes to how central planning wreaks havoc even at the level of the humble parking space. Now, let’s take back our cities.
Last year, the American College Student Freedom, Progress, and Flourishing Survey polled 2,250 undergraduate students from 131 colleges across the United States in order to understand the state of free speech and viewpoint diversity on college campuses. They found some bleak trends. Fully 40 percent of students surveyed believed that a professor should be reported to the administration for saying that “If you look at the data, there is no evidence of anti-black bias in police shootings.” 27 percent of students said a professor should be reported for saying that there are only two sexes. On issue after issue, students (especially leftist students) wanted professors sanctioned or punished for deviating from approved leftist orthodoxy.
What’s going on here? This isn’t just an issue with leftist intolerance, or with young people not yet understanding the value of free speech and viewpoint diversity. Instead, the fact that so many young people have trouble hearing views that they disagree with reflects a huge problem with how we as a society are raising the next generation.
In The Coddling of the American Mind, social psychologist Jonathan Haidt and president of the Foundation for Individual Rights and Expression Greg Lukianoff describe a pervasive culture of “safetyism.” Safetyism is the idea that safety, especially emotional safety, is all that matters when it comes to raising young people.
Safetyism can be seen in a piece in Parenting magazine that warned that you should never leave your child and their school-age friends alone for even a moment, because what if one of them says something that upsets the other’s feelings? It can be seen in neighbors who call the police when they see a child playing unsupervised in the park, and in the police who then show up and (sometimes) arrest the parent for negligence. It can be seen in the playgrounds that are so bereft of thrills that they seem more fitting for toddlers than for older children.
Haidt and Lukianoff make a powerful case that safetyism is making the next generation emotionally fragile. When we never give children the opportunity to take risks, get into conflict, and deal with bruises (both physical and emotional), they never learn how strong they truly are. They don’t develop emotional resilience. As a result, they go to college and the exposure to new ideas feels dangerous and threatening.
As Lenore Skenazy, co-founder of Let Grow (a nonprofit dedicated to promoting childhood independence) told me, “We believe that when kids grow up knowing that being a little distressed or a little scared isn’t the end of the world, it’s easier for them to become engaged with people and ideas that are new to them as well, because they’re excited as opposed to afraid.”
Unfortunately, the reverse is also true. When we as a society try to protect children from every bump and owie, we accidentally teach them to approach new ideas and perspectives from a place of fear, because they’ve never been given the opportunity to learn that they can handle a little bit of distress.
The culture of safetyism that Haidt and Lukianoff describe is bad for our country’s future. Democracy is naturally rough-and-tumble; it requires citizens who are willing to hear ideas they disagree with, who are able to accept that they won’t always get their way in elections, and who prioritize liberty just a little bit more than they prioritize an ever-present nanny state hovering over them to protect them from every possible negative outcome.
But safetyism is also bad for the young people themselves. This is something that I call Adorney’s Trident. If you’re raised to believe that viewpoints that don’t align with your own represent a genuine threat to your safety, then you have three options:
1) Move to a country that doesn’t have a First Amendment (or, try to turn the United States into such a country).
2) Develop the necessary emotional resilience to hear people disagree with you without feeling threatened or like the world is ending.
3) Suffer endlessly because it feels like at least half the country not only disagrees with you, but is an active threat. This can contribute to fear and paranoia.
Right now, a lot of young people are choosing option three. It is better for them, and for society as a whole, if we can help them to choose option two instead.
So how can we help them?
Parents can help their children by trusting them with some freedom and responsibility. Skenazy recommends that schools adopt the Let Grow Experience. Teachers give their students the simple homework assignment: Go home and do something new, on your own, WITH your parents’ permission, but WITHOUT your parents. For instance: Go to the grocery, climb a tree, walk to school, make the family breakfast…. As Skenazy says, “The only thing that can change a parent is their own kid. Not me. Not statistics or brilliant articles. It’s only when the parent sees their kid do something on their own that they change.” Once parents see their child’s strength and resilience and wisdom — or even that their kid can survive a bit of confusion or disappointment — they are so proud that this rewires them. They become far more likely to give their child more independence in the future. It’s essentially exposure therapy for both generations.
What about young people who have already flown the nest? In these cases, we as a society need to help them to develop the emotional resilience necessary to navigate life in a republic (as well as life in general). One way to do this is to help them to find their true identity. Our true identity is the deepest and most essential essence of ourselves. It is the part of us that was knit together in our mother’s womb, and that will still remain with us until our dying breath. It can never be taken away from us or hurt by another person. When we truly understand our true identity, we can live the wisdom of Dietrich Bonhoeffer, who wrote of our enemies that “Their curse can do us no harm.”
Building emotional resilience is essential to being a good member of a republic, as well as to living any kind of good life. So many young people have been deprived of the opportunity to cultivate this essential virtue. But it’s never too late. Skenazy told me that, “More exposure to the world means that kids are less likely to mistake feeling uncomfortable for literally being unsafe.” Helping young people make that essential distinction is good for them.
It’s also essential to the long-term health of our republic. If we don’t help young people develop a robust respect and appreciation for the benefits of free speech, then we run the risk of losing our right to speak freely in years to come. We run the risk of going down the same dark road as the United Kingdom, a once-beacon of freedom where people can now be jailed for Facebook posts that the government finds offensive. As the police recently explained to one English citizen who made a post mocking trans rights activists, “Someone has been caused anxiety based on your social media post. And that is why you’re getting arrested.”
The best intentions of critics of free speech aside, a lack of free speech doesn’t mean a world in which everyone holds hands and only says nice things to each other. It looks like a world in which ordinary people get thrown behind bars for the crime of making statements with which the ruling powers disagree. If you think free speech is anxiety-provoking, imagine how anxiety-provoking the lack of free speech will turn out to be.
The swift rollback of diversity and environmental priorities in the US has been nothing short of breathtaking. Corporate America seems to be tripping over itself to scale back its commitment to DEI. International net zero alliances for insurers, asset managers, and financial institutions have collapsed. Blackrock has been put on notice by the Texas Attorney General and by a Texas district court that its pursuit of ESG priorities violates its fiduciary duty to its customers and may have violated antitrust statutes. Every state pension board must now formally reassess whether it can continue using Blackrock to manage its pension funds.
And the Trump administration has hit the ground running and intends to root DEI out of every corner of the federal government – from hiring policy to contractor requirements to grant considerations to training regimes. Trump swiftly axed DEI mandates and programs in the federal government via executive order – including rescinding over seventy of Biden’s DEI orders. In the military, Trump has banned race-based and sex-based preferences, and ordered an end to any remaining DEI personnel and training.
But despite this progress, DEI remains the de facto priority of large swaths of US elites and institutions. Costco’s board of directors continues to vocally support the company’s DEI policy. And Costco’s shareholders soundly rejected an anti-DEI shareholder proposal. Jamie Dimon has said [link] he will defend JP Morgan’s DEI priorities. PepsiCo, despite scaling back how it implements DEI priorities in advertising decisions, remains committed to DEI.
A deep irony of the DEI movement is its posturing as a movement of the downtrodden and disadvantaged simply asking for a fair shake. That’s not the case at all. Many working-class minorities are fed up with identity politics. White women, for example, seem to have benefited disproportionately from DEI priorities. Meanwhile, black people only hold about 4 percent of DEI positions. Perhaps that contributed to the share of black men voting for Trump in November doubling.
You know who are major DEI advocates? Millionaires (and in the case of Bloomberg and Soros, billionaires), also highly paid consultants at McKinsey & Co. and other consulting firms, highly influential university administrators, highly credentialed university faculty and medical professionals, the rank-and-file government employees, and, of course, DEI peddlers.
Academia remains rife with the ideologies that birthed DEI: critical race theory, cultural Marxism, intersectionality, and the like. Although a few universities have rolled back their commitment to DEI, for most DEI remains the dominant modus operandi. Though less prominent, and couched in other terms, DEI continues to be advanced in the halls of academia. And not just there. The enormous public K-12 education apparatus remains riddled with DEI, especially when it comes to transgender ideology.
Management consultants and investment groups have built revenue streams around DEI consulting and ESG investing. They haven’t all closed up shop and gone home. McKinsey & Co. seems just as committed to its DEI and ESG priorities as ever. S&P Global, ISS, Glass-Lewis, and Sustainalytics continue to churn out meaningless ESG ratings and recommendations for investors. Even as global net zero alliances fall apart, large US financial institutions remain unrepentant.
Blue state leadership still seems to be on the DEI train. California has gone after businesses for offering “ladies night” discounts — in part because of DEI and claims from men that they are not being treated “fairly.” Over a dozen blue state attorneys general wrote a letter to Walmart expressing concern about its pullback from DEI. These states also continue to pressure asset managers and financial institutions to remain committed to DEI and environmental priorities in how they invest billions of state pension dollars – even as courts have begun ruling that such priorities violate legal fiduciary obligations.
Businesses have left themselves vulnerable to criticism by claiming DEI was a good business practice when it was popular. But if it was good business practice, investors and others are justified in questioning the wisdom and motives for abandoning it. And if DEI is not a good business practice, then businesses made a mistake – either honest or cynical – in embracing it. Unless they acknowledge their mistake, they can’t justify reversing course while claiming that nothing has changed about their business and its priorities.
Advocates of freedom, excellence, and the dignity of the individual need to continue pressing the case against DEI – now we need to up the ground game. The recent lawsuit by 19 conservative Attorneys General against Costco over the legality of their DEI policies is one example. Efforts will involve addressing the presence of DEI in universities (including medical schools), in local government, and in remaining pockets of corporate America.
The elitism of DEI reveals itself in how ideological its advocates are and how little they care about what other people think and believe. Despite legal, political, and public opinion losses, the DEI establishment presses on for its own privileged, elite benefit.
(Source: Bloomberg Finance, LP)