Nearly two years ago, Kroger and Albertsons, America’s two largest traditional brick and mortar supermarket companies, agreed to a $24.6 billion merger. Ever since, the Federal Trade Commission has argued against allowing the merger, claiming that it would “lead to higher prices for groceries and other essential items” and “lead to lower quality products and services.” 

That led to a just-completed hearing (whose results have not yet been announced) about whether to grant an injunction against the merger, until the FTC takes its case before one of its administrative law judges. There are also state level challenges. On the other hand, Kroger has sued to challenge the constitutionality of the FTC trying their case before a “home team” ALJ rather than an actual trial in federal court.

However, the picture the FTC is painting of the “biggest getting bigger,” leading to consumer harm, is so muddled it cannot support their argument.

To begin with, simply looking at the increased number of stores in a merged K-A chain–to over 5,000–is far less indicative of any increased market power than it is being presented as. The reason, seldom even mentioned, is that “the vast majority of Kroger and Albertsons stores are in markets where the other is not located.” That means that in the vast majority of areas, where their footprints do not significantly overlap, merging the chains will create no increased market power to harm consumers. In all those places, the FTC case that merger will cause consumer harm collapses. In contrast, the claims in support of the merger, that it will allow merged operations to lower costs and make them more effective competitors for shoppers’ patronage at all their stores, still makes sense. 

The magnitudes involved are instructive. Most measures put the number of overlapping stores at about 1,400 (roughly 28 percent). How believable is it that K-A would go to the great expense of integrating all their operations just to be able to raise prices in no more than 28 percent of their stores? Not very.

In addition, not every case where the chains’ stores are in proximity would cause competitive concerns. I live in one such area. My wife and I live roughly a mile from a Ralphs (Kroger) and a mile in the other direction from a Vons (Albertsons), and between us, we shop at both of them multiple times in most months. But if they merged, it would not be a competitive disaster that puts us at risk. We are even closer to a Trader Joes and a Sprouts (in what was previously an Albertsons store) which we also shop at. We are two miles from a Walmart neighborhood market and a Target with a sizeable supermarket section. We are within 5 miles of Costco (and another one is being planned even closer to us), Sam’s Club, a Walmart Super Center and an Aldi. We also use Amazon and Instacart to get groceries. There is intense competition, whether or not Vons and Ralphs merge. But if that merger made them a stronger, lower-cost competitor, we would gain as consumers. And our case is not so unusual. Supermarket News has reported that “the average family today shops at five different grocers on a regular basis.”

Even if we ignore the fact that proximity does not equate to monopoly power to abuse consumers, it would only require roughly 700 divestitures (half of the number of overlapping stores, or 14 percent percent of the over 5,000 combined stores)–to address all such market power concerns. And Kroger has from the beginning offered to make divestitures to ameliorate the FTC’s competitive concerns (which have long been satisfactorily utilized for that purpose in grocery mergers), making it all but impossible to believe that such a Kroger-Albertsons merger would harm consumers. Interestingly, the FTC argued that the company who would manage the divestitures (C&S Wholesale Grocers) might not operate as efficiently as Albertsons, which would undermine competition. But since Albertson’s costs are reportedly higher than Kroger’s, the FTC is essentially admitting the case for the K-A merger increasing their efficiency. 

We must also understand that in antitrust, the higher the market share forecast to result from a merger, the greater the presumption of greater monopoly power and harm to consumers, and the more likely the FTC could prevail in litigation (despite a recent series of court losses due to its over-reaching). That provides a FTC determined to win with a massive incentive to manipulate market definitions to make monopoly power appear even where it doesn’t exist. For instance, say you had a small store on a street corner which sold salt, among other things. If it was the only store on that corner selling salt, defining the relevant market as sellers of salt on that street corner would make you a monopolist, even though you had no market power in fact. 

That explains why the FTC has in this case reached back into their long-rejected 1960s bag of anti-consumer tricks to get their desired result, aiming to uphold Justice Potter Stewart’s famous dissent that “The sole consistency I can find is that, in [merger] litigation under Section 7 [Of the Clayton Antitrust Act] ‘the Government always wins’.” Or as I put it elsewhere, “The government’s desire to demonstrate monopoly power to justify the rejection of a merger led to a cottage industry of sorts, finding ways to distort measures…to find monopoly power where there was no power to hurt consumers.”

In recent years, the FTC has defined the relevant market for such mergers as including “traditional” brick-and-mortar supermarkets (of which Kroger and Albertsons are the largest) and food and grocery sales at hypermarkets (Walmart supercenters). Further, they have viewed the relevant market as only including stores where a consumer could purchase all or nearly all of their household’s weekly food and grocery needs at a single stop at a single retailer, within a range of between two and 10 miles (depending on circumstances).

That definition is nowhere near reasonable today, unless that the goal is to maximize the apparent monopoly power a K-A merger would create, in spite of the current grocery market being perhaps the most competitive one in history. 

Walmart stores that are not supercenters are excluded. But Walmart and Sam’s Club have more than 5,300 stores, and its grocery revenue is more than twice that of Kroger and Albertsons combined. And when it comes to local competition, it is worth noting that 90 percent of the US population lives within 10 miles of a Walmart store.

Wholesale club stores, like Costco (and Sam’s Club and BJ’s Wholesale Club) are omitted from that definition of the market, which is particularly problematic because they also have a larger catchment area than supermarkets. Further, it is hard to see how they are not part of the relevant market when roughly 40 percent of Americans are Costco members, an average Costco (the world’s second largest grocer) store sells five times the groceries of the average US supermarket, and Costco does half again as much business as Albertsons.

Online sellers like Amazon/Whole Foods are also excluded, even though it is the worlds’ fifth largest grocer, and closing in on Albertsons. Aldi (also owner of Trader Joe’s) is excluded (as a “hard discounter” or “limited assortment” store), even though a quarter of Americans now shop there. Instacart sales are excluded, as are natural and organic markets and ethnic and specialty stores.

Looking at the broader grocery market also undermines the FTC claims. Kroger might be the biggest traditional grocery retailer, but they sell fewer total groceries in the US than Walmart, Amazon, or Costco. Even after the proposed Kroger-Albertsons merger, it would only represent 9 percent of those grocery sales. And while a Kroger-Albertsons merger would appear to threaten competition based on their share of the FTC’s market definition, traditional supermarkets have been losing a great deal of market share to those excluded from that definition, showing just how effective they are as competitors. Since 1998, warehouse clubs and supercenters have seen their share of retail grocery sales double, while supermarkets’ share dropped by more than a quarter. In 2020, 98 percent of people who regularly bought “center aisle” products like paper towels, cleaning supplies and canned goods bought them at a grocery store, but by 2023, 37 percent said they made none of those goods in a grocery store, largely shifting to online purchases. And now about one out of eight consumers buy their groceries “mostly” or “exclusively” online.

These results are summarized by the National Academies of Sciences description of the retail grocery sector as “highly competitive,” largely due to the growth of warehouse clubs, superstores and online retailers, which are overlooked by the FTC’s market definition, not threatened with monopolization by the prospect of a Kroger-Albertsons merger. And no amount of repetition of claims that consumers are being protected by the FTC’s actions makes it true.

When it comes to designing digital currencies that protect the identity and transactions data of their users, developers have made a lot of progress in a relatively short period of time. It is technically feasible to design a retail central bank digital currency — or, CBDC — that promotes financial privacy. But one must also consider what is politically feasible. Unfortunately, there is little prospect that the United States government would actually adopt a privacy-protecting CBDC.

If adopted, a CBDC will eventually — if not initially — be used to surveil the transactions of Americans.

The government is already using existing technologies to surveil its citizens. There’s no reason to think the government would give up its ability to monitor transactions with the introduction of a CBDC. Indeed, it seems much more likely that the government would seize the opportunity to expand its capabilities. Therefore, it is absolutely crucial to maintain a private banking system firewall between the government and our transactions data.

Let’s start with the status quo. The government has essentially deputized the private banking system to monitor customer transactions. Banks keep records on customer transactions, which the government can access by subpoena. The government also requires banks to report suspicious activity and currency transactions in excess of $10,000.

As Nick Anthony at Cato has shown, the real (inflation-adjusted) reporting thresholds have gradually declined over time. When the Bank Secrecy Act rules were rolled out in 1972, banks were required to report currency transactions worth $10,000 or more. If that reporting threshold had been indexed to inflation, it would be around $74,000 today. Since it wasn’t indexed to inflation, banks must file many more reports today on transactions worth much less than those that would have triggered a reporting requirement in the past.

Other thresholds are even lower. For example, money-service businesses must obtain and record information for transactions worth just $3,000.

The government vigorously defends its ability to monitor transactions. It prosecutes those making transactions just below reporting thresholds —a separate crime called structuring. It seizes cash and collectibles, which make it more difficult to monitor transactions, even in cases where there is no evidence of criminal activity. And it undermines new financial privacy-protecting technologies.

Consider the government’s response to cryptocurrencies, some of which offer a high degree of financial privacy. The Financial Crimes Enforcement Network requires cryptocurrency exchanges to register as money-service businesses and comply with Know Your Customer requirements. If transactions can ultimately be traced through the blockchain to these on- and off-ramps, then the financial privacy that cryptocurrencies offer is largely eroded.

Consider the government’s response to cryptocurrency mixing services, which make it more difficult to trace one’s transactions back to an exchange where his or her identity may be discovered. The Office of Foreign Asset Control has added the wallet addresses of mixing services to the Specially Designated Nationals and Blocked Persons list, effectively making it illegal for Americans to employ those mixing services.

Why would a government work so hard to ensure it can monitor transactions just to turn around and issue a financial privacy-protecting CBDC? Again: it seems much more likely that the government would issue a CBDC that bolsters its ability to monitor transactions.

The ostensibly private messaging service ANOM serves as a useful comparison. ANOM was not private. Unbeknownst to its users, ANOM was actually the centerpiece of the Federal Bureau of Investigation’s Operation Trojan Shield. Messages sent using the ANOM app were not only delivered to recipients, but also to the FBI’s database.

The FBI maintains that it did not technically violate the fourth amendment by using a backdoor in the messaging app to snoop on US citizens, because it transferred the data to Lithuania, where foreigners would snoop on US citizens and then tip off the FBI when illegal activity was suspected. Think about that. The FBI developed the ability to spy on US citizens, promoted the use of the enabling technology, and then handed the data collected by this technology over to foreign nationals in order to circumvent the Constitutional constraints designed to safeguard US citizens from such activities. These efforts not only undermined the due process afforded to criminals — though that would be bad enough. It also facilitated the snooping on perfectly lawful messages. Some of these messages involved intimate details shared between romantic partners. Others involved protected conversations between attorneys and their clients.

If the government will build a backdoor into a messaging app — and has been caught trying to bribe engineers to install others — then one should expect it will build a backdoor into a payments app, as well.

Americans do not have much financial privacy today. We would have even less financial privacy if not for the private banking system firewall between the government and our transactions data. This firewall isn’t perfect. But it is better than nothing. 

To see how such a firewall promotes financial privacy, consider the Internal Revenue System’s efforts to access the customer data of Coinbase in 2016. At the time, Coinbase was boasting that it had 5.9 million customers — many more than had reported crypto holdings to the IRS. Citing this discrepancy, the IRS secured a John Doe summons.

In 2017, I described the summons as follows:

Basically, the IRS wants any and all information that Coinbase has so that it can sift through that information for the slightest hint of misreporting. It has requested account registration information for all Coinbase account holders, including confirmed devices and payment methods; any agreements or instructions that grant third party access or control for any account; records of all payments processed by Coinbase for merchants; and all correspondence between Coinbase and its users regarding accounts.

Needless to say, the scope of the summons was very broad.

Recognizing the duty — and, perhaps more importantly, the profit motive — it had to protect its customers, Coinbase appealed. Eventually, the courts decided that Coinbase would have to hand over some customer data on around 13,000 high-transacting users.

Kraken has also resisted an overly broad summons to hand over customer data to the IRS, to similar effect.

I hold the old-fashioned view that, in a liberal democracy, the government should have to demonstrate probable cause before acquiring the authority and ability to sift through one’s financial records. The degree of financial privacy afforded by the current system certainly falls short of that standard. Nonetheless, it affords much more financial privacy than one could reasonably hope for if the government held the data, as would likely be the case with a CBDC.

Financial privacy is very important for a free society. What we do reveals much more about who we are than what we say. And what we do often requires making payments. In order to exercise our freedoms, we must be able to selectively share the details of our lives with others — and withhold such details from those who would otherwise use them to harm us.

We should take steps to bolster financial privacy in the United States. The introduction of a retail CBDC would be a step in the wrong direction.

Donald Trump and Joe Biden began the campaign season by staying away from social security reform. Kamala Harris has only promised to strengthen it without providing details. Mr. Trump then proposed a truly bad idea and has refused to back down. That idea is the elimination of income taxes on social security benefits.  

The richest retirees receive the most Social Security and thereby put the most pressure on an already unsustainable budget. Eliminating the income tax on benefits will result in them getting even more after-tax income, while significantly reducing income tax revenue at a time when it only takes our country 260 days to tack on another trillion to the national debt.  

The Social Security program was too vulnerable to demographic bubbles from the very beginning and subsequent reforms have increasingly over-promised benefits thereby inviting our present budget insolvency. Voters are frustrated and losing confidence. They are looking for genuine leadership, not the “third rail of politics” policy détente we now have.

Harris and Trump now have an opportunity to such leadership. One thing could be done quickly to reduce the unfunded liability gap in Social Security funding. It’s easy to explain to voters, it will appeal to both younger and older voters, and it will especially appeal to those in the political middle who are looking for practical solutions rather than ideologically driven bumper sticker slogans. It would behoove both candidates to jump on this reform proposal first. 

In 1972, an amendment was passed to protect Social Security beneficiaries from the effects of inflation. A mistake was made in the procedure for implementing the Cost of Living Adjustments indexing of benefits. This had the effect of over-accounting for the effects of inflation, leading to the prospect of benefit levels soaring out of control as inflation worsened in the 70s. In 1976, a Congressional panel led by a Harvard economist, William Hsiao, was convened in part to correct the error. The panel also recommended that the initial benefits calculation employ price indexing rather than wage indexing out of fear that the latter would produce an unsustainable budget. Unfortunately, wage indexing was chosen over price indexing. 

This was a costly mistake, and we are still paying for it. As noted by Alex Durante in a recent Tax Foundation report,   

Had price indexing [rather than wage indexing] been implemented under Hsiao’s proposal, Social Security would have run surpluses every year from 1982 to 2023, except for 2021. There would have been temporary shortfalls starting in 2024, but by 2044, Social Security would have been running surpluses again. Surpluses in Social Security could permit a reduction in the tax rate or allow some of the revenue raised from payroll taxes to support Medicare, which is also running large deficits.

While this was a terrible missed opportunity, the main lesson is still valid: wage indexing makes benefits grow too fast for program stability. Luckily, it is not too late to take Hsiao’s advice.   

According to the Social Security Administration’s 2023 Trustee Report, adjusting the initial benefit calculation with a price index rather than a wage index will remove about 80 percent of the unfunded liability gap over the next 75 years, and that’s if instituted in 2029. The results are even more dramatic if we start sooner. That is major gain with minimal pain. 

Most voters don’t realize that social security benefits have been, and continue to be, rising in inflation-adjusted terms due to wage indexing of the initial benefit calculation. This is because when the economy is growing, wages normally grow faster than prices (that’s what produces growing real personal income over time). As a result, since 1977, each new class of social security recipients lives a little larger than the ones before.  

This is very foolish.  

Young people are understandably worried about being cheated out of some of their Social Security benefits, and having the real value of the benefits they do receive eroded by inflation. They are not worried about not getting more from Social Security when they retire in real terms than their parents and grandparents did.  

Most young people will happily support this reform because it provides strong assurance that they will get something they value greatly (a credible guarantee of not being impoverished in old age) in return for giving something up they don’t care about (getting more than their parents and grandparents did per dollar contributed).  

This simple reform will not harm current retirees in any way and will produce a tremendous relief to those who are ready to retire and are already uneasy about their 401Ks, as well as younger workers who are simply looking for fair treatment.  

The media and voters should force the candidates to explain why they won’t pledge, now, to drop wage indexing to stabilize Social Security going forward.  

“Should auld acquaintance be forgot and never brought to mind?” Many in DC seem to think so, especially when it comes to taxpayers. The federal government rang in Fiscal Year 2025 on October 1 like many fiscal years with a last-minute continuing resolution to prevent a government shutdown. To make matters worse, the national debt and fiscal instability seem to be topics both presidential candidates seem to be avoiding. 

Many lawmakers in DC make resolutions to be more fiscally responsible, but much like our New Year’s resolutions, they rarely follow through. When it comes to resolutions, one must be willing to achieve small, actionable goals on the path to larger change.  

Some Resolutions for the Federal Government 

Taxes 

The focus of tax policy should be to allow Americans to keep as much of their hard-earned money as possible. This will come from a combination of taxes and spending (discussed next) reforms. 

A more manageable first-step should be to not further complicate the tax code. Last month, the Biden-Harris Administration published a 603-Page Rulebook for the new 15 percent corporate alternative minimum tax. The time, talent, and resources business deploy to comply with these Byzantine rules comes at the cost of putting those things toward research and development, hiring new employees, and increasing employee compensation, known as a deadweight loss. Stopping these rules from taking effect will save American businesses from the headache of compliance costs. 

Stopping the expiration of the Tax Cuts and Jobs Act (TCJA) would also help Americans keep more of what they earn. The TCJA simplified individual income taxes and reduced tax rates across the board. While research shows that the TCJA will not pay for itself without serious spending cuts, it generated a significant amount of economic activity due to behavioral changes from Americans being able to keep more of their own money. 

While eliminating taxes on income is a laudable goal, it’s just about as feasible as becoming an award-winning bodybuilder after spending only a week in an exercise routine. 

Spending and Debt 

A good start is for the federal government to stick to the Fiscal Responsibility Act of 2023, where the federal government will be penalized for using a continuing resolution in FY 2025 by reducing both defense and nondefense funding levels by 1 percent if appropriations bills are not enacted by April 30, 2025. 

However, this does not solve the problem. Policymakers need to seriously consider fiscal review commissions. These review commissions may start small, but they must eventually work up to what Economist Romina Boccia calls “a BRAC-Like Fiscal Commission to Stabilize the Debt.” The key benefit of a BRAC commission (whether for spending on military bases or managing the national debt) is that it mitigates the incentive problems facing politicians and bureaucrats by requiring “silent approval.” Instead of a politician going on record in support of spending cuts (which will hurt reelection prospects), the spending cuts are enacted so long as the member of congress does nothing. Instead, they must voice their disapproval to prevent spending cuts. 

Amending the constitution to include spending limits is another admirable goal but would require significant effort to get there. Further reforms show constitutional spending limits can help constrain the growth of spending, and, ultimately, the national debt. As Vance Ginn and I wrote, a proper constitutional spending limit (such as tying taxes and expenditures to the sum of population and inflation growth) can nudge even the worst in DC to make fiscally responsible choices. 

Entitlements 

The largest drivers of spending and debt are entitlement programs. A recent WSJ article reports that 53 percent of all US counties draw at least a quarter of their income from government aid. However, recent Congressional Budget Office estimates show that 53 cents of every dollar the federal government spends goes toward entitlement programs. 

There are several actionable steps in the process of entitlement reform. For instance, state governments that administer many welfare programs can do eligibility checks and frequently update rolls so that those who are ineligible for income security programs are not receiving it. The same goes at the federal level for Social Security’s Old Age and Disability Insurance programs. Research also finds that overpayments are a key source of Medicare spending growth. To reduce costs, policymakers can reduce government subsidies for wealthier beneficiaries. This can be achieved by adjusting income thresholds at which means-testing applies, expand definitions of wealth for means-testing, and use alternative mechanisms of means-testing (such as using Medicare Part A premiums based on income). 

After adjusting, these programs, a larger goal would be to reform entitlements altogether. Replace all entitlements with a “universal savings account (USA)”. Economist Adam Michel describes a USA as an account, “that would function similarly to retirement accounts—income saved in the account would only be taxed once—but without restrictions on who can contribute, on what the funds can be used for, or when they can be spent.” Michel and others note that current tax and fiscal policy punishes savings through income and payroll taxes and then again through corporate income taxes, taxes on investment income, or taxes transfers (i.e. taxes on gifts and inheritance). 

Sound Money 

Economist Judy Shelton notes, “Just as government should function as a servant to the people, not vice versa, money should provide a dependable unit of account for free people engaged in free enterprise.” Ending political meddling in monetary policy is a difficult, but necessary resolution to keep. 

Policymakers can start by changing the Fed’s dual mandate (maintain stable prices and full employment) to a single mandate of stable prices. “If the Fed is doing its job,” Economist Alex Salter comments, “keeping inflation under control will foster robust labor markets.” By keeping the Fed bound to this rule, it can help keep the Fed out of other areas (such as racial equity, climate change, and other social issues beyond that narrow mandate). 

From there, enacting a monetary rule would help further separate fiscal and monetary policy. The stronger the rule, such as a constitutional monetary rule, the better able to keep fiscal influence out of monetary policy. 

Ultimately though, the best check on fiscal and monetary policy is returning to the gold standard. A gold standard provides a check on fiscal policy by limiting the amount of paper money that can be issued by a bank to the supply of its gold reserves. In principle, this means government budget deficits must be covered by tax increases, spending cuts, and/or issuing debt instead of money printing. 

Returning to the gold standard, however, is probably the most difficult resolution to keep. Economist Bryan Custinger comments, bringing back the gold standard would “deprive government of this revenue source,” and would require a cost-benefit analysis of decreased spending and/or higher taxes. 

DC: New Year, New You? 

Just like our own New Year’s resolutions, there’s no shortage of guides and programs to help the federal government improve its fiscal health. Without the willingness to take political risk, the advice is not worth the paper it’s printed on. Sadly, given the eagerness to talk about anything but the national debt in DC, it seems that these fiscal year resolutions may end up abandoned faster than a gym in mid-January. 

Recently on Facebook, an attractive young woman – or so I judge from the picture accompanying her message – asked me to accept her as a Facebook friend. She assures me that she’s positively enthralled with the messages that I regularly post at that social-media site. And so she really, really wants to get to know me better. (Hint! Hint!) How lucky I am, a man in his mid-60s, to catch the eye and spark the interest of a beautiful young woman! Who knows what delights await me if I befriend her?!

This “friend request” reminded me of the many e-mails that I (like many others) have received over the years promising me instant riches in exchange for helping some third-world-country innocent person escape injustice. For kicks, I saved one of these e-mails that dates back to November of 2011. Marked “URGENT,” it’s from one Mitchell Joy. Although I’d never before heard of Mr. Joy, he wrote to me from his home in Ghana with assurances that he knows me to be a man of impeccable character. Mr. Joy, unfortunately, was in desperate need of my help. But he would make it worth my while. He assured me that together we could both be of great benefit to each other.

Mr. Joy, you see, very tragically had recently lost his saintly father, Coleman, who was a successful and upstanding businessman worth tens of millions of US dollars. But Ghana’s nefarious government threatened to block Mr. Joy’s access to Papa Coleman’s money. Mr. Joy was of course desperate to get these funds out of Ghana ASAP before they would be confiscated from him and his family and lost to them forever.

That’s where I was to come in. Having been assured by certain nameless worthies of my integrity, Mr. Joy wanted to use my US bank account as the escape vehicle for his $25 million. All I had to do was to send to Mr. Joy my bank’s name and routing number, and my checking-account number. Within days $25 million would have been deposited therein, half of which I was to transfer to Mr. Joy when he arrived in the US sometime in the next year. I was to keep the remaining $12.5 million, as just payment for my goodness and willingness to trust and assist Mr. Joy.

What a deal! I’d become rich as I promoted justice by keeping the Ghanaian government’s greedy paws off of assets that rightfully belonged to Mitchell Joy and his kin.

I would have used my $12.5 million to buy the Brooklyn Bridge. It was, I was assured, for sale.

Although the frequency of receipt of such e-mails has trailed off in recent years, they still arrive from time to time. And while the details of the schemes to separate me from my money differ from e-mail to e-mail, the writers of each of these messages claim to be champions of righteousness who, if I join their cause, will materially enrich me.

Obviously, it doesn’t remotely dawn on me that “Mr. Joy” is anything other than a vile scam artist. Ditto the lovely young female stranger on Facebook. Who trusts such strangers? What kind of credulity must someone possess to think, upon reading messages such as the one from “Mr. Joy,” “Oh wow! This perfect stranger wants access to my bank account so that he can fill it with plenty of money! How lucky I am!” How imbecilic would I have to be to believe that a fetching young lady is so desperate for physical companionship that she must pursue that companionship by befriending on Facebook a man whom she’s never met and who’s old enough to be her grandfather?

Fortunately, good ol’ American horse sense ensures that almost all Americans immediately recognize the “Mr. Joys” of the world to be con artists. Messages from “Mr. Joy” and his legions of fellow rip-off artists are immediately deleted. The same is true, I’m sure, for nearly all such Facebook messages from beautiful young women professing their sincere desire to become intimate with older men.

But where is this horse sense at election time? With the November election fast approaching, websites, television, radio, newspapers, and local streets are bursting with pleas from perfect strangers asking me to trust them with my wealth and liberties.

“Vote for me and I’ll make your life better by building more roads for your use – and at no expense to you! Under my plan, only people richer than you, who now don’t pay their fair share in taxes, will pay for the roads!”

“Elect me and I’ll improve your well-being by reducing the cost of medical care and improving its quality!”

“Once in Congress, I’ll work tirelessly for you and all Virginians!”

These television and website ads are also filled with clips – obviously staged – of the candidates talking with school children, shaking hands with senior citizens, listening earnestly (usually while wearing hard hats) to factory workers, commiserating with ordinary townsfolk at the local diner, and playing touch football at community picnics. We’re supposed to believe that these office-seekers are singularly special and caring servants of others. We’re supposed to feel confident that we can trust these individuals with power as well as with access to our purses.

Perhaps some politicians are indeed especially caring and trustworthy servants of the public. But surely we shouldn’t presume these people to be such rare saints merely because they tell us that they are such rare saints. We don’t believe the Mitchell Joys of the world when they boast to us of their sincerity and trustworthiness. Nor do we feel proud of ourselves when the Mitchell Joys stroke our egos by telling us that they know us to be unusually laudable and worthy. We know that the Mitchell Joys are lying through their teeth as they attempt to lure us into a trap. And we know the same about the fresh-faced blonde young lady who insists that she’s oh-so-charmed by some older-man’s Facebook posts.

Strangers asking for bank-account numbers do differ in some ways from strangers asking for votes. But I’m struck by the similarities. In both cases, individuals who we don’t know and who don’t know us seek to gain our trust so that they can then gain open-ended access to our wealth. In both cases, the strangers seeking our trust proclaim there to be a special, personal connection between them and us. And in both cases there is every reason to distrust these proclamations.

It’s too bad that the same horse sense that stoutly and successfully counsels us to dismiss the “Mr. Joys” of the world, and the eager young ladies on Facebook, abandons so very many of us at election time.

Millions of American homeowners would love to move — if they could pack up the mortgage interest rate they locked in at under four percent.

“We hate the area we moved to but cannot justify moving again due to mortgage rates,” says Ben Young, who bought in 2021 at a 2.25 mortgage interest rate. 

The post-COVID rate crater saw millions of mortgages written or refinanced at historically low interest rates. Homeowners holding onto that 2.8 percent interest rate will be hard to dislodge from their current digs. Staying put often makes sense for individual families, at least financially, but both housing markets and labor allocation are suffering as a result.

Rates for 30-year mortgages remain well below historic averages, but they’ve almost doubled in the past three years, right alongside the Federal Reserve’s interest rates. The psychological impact of that sticker shock is significant. After underestimating the inflationary damage its post-pandemic loose money would generate, the Fed overcorrected with historically quick monetary tightening, raising rates 11 times since spring 2022. The average interest rate on a 30-year fixed mortgage inched above six percent in September 2022 and has stayed there. Anyone who locked in a low rate then is thinking twice about giving it up now.

Insurance, property taxes, and cost of living all impact monthly expenses for homeowners, and in some cases dwarf the interest rate differential. But for many, and certainly psychologically, giving up a guaranteed low mortgage payment is difficult.

David and Sarah Veksler welcomed a third child this year, but upgrading their home in Denver feels daunting. “Definitely feeling stuck here,” he told me. “We have a new baby boy and he’s waiting for rates to go down before he can get his own room. He’ll have to share with his sisters until then.” 

Individually rational choices, in aggregate, are causing a huge problem. Even if they didn’t buy, millions of homeowners refinanced during the low-rate years. By spring of 2022, 92.8 percent of homeowners had a mortgage rate under six percent. Six in ten homeowners still have a mortgage below four percent.

Fixed-rate mortgages are actually adjustable, thanks to the ready availability of refinancing options, but only in one direction. Borrowers refinance to lower their payments, so rate adjustments are almost exclusively downward. When a buyer refinances, generally speaking, the new bank issues a new mortgage and pays off the original mortgage. The original lender receives back the principal to lend at 7 percent, instead of waiting for a 30-year mortgage to trickle in at the now-paltry 2.8 percent. As with other voluntary transactions, all parties benefit. 

A low mortgage rate is highly desirable, and non-transferable. Once “locked in,” a comparatively low mortgage rate functions as an emotional and economic anchor. Homeowners are less likely to step up the property ladder (vacating their starter home for a larger one, or a more desirable school district), and also less likely to downsize and move on when their needs change. Both the supply (existing homes entering the market) and the demand (people searching for a new one) are suppressed by mortgage rate lock-in. The property market stagnates.

This helps explain why, as of August 2024, the inventory of homes for sale in the US remains 38 percent off its July 2016 peak and 26 percent below where it was in August 2019.

How high are the costs of mortgage lock-in? According to research by economists Jack Liebersohn and Jesse Rothstein, a 2.7-percentage-point rate gap between locked in and prevailing interest rates raises the average mortgage balance – the ‘price’ of moving – by $49,400. Na Zhao, economist with the National Association of Home Builders, found that a rise in prevailing mortgage rates of 100 basis points increases the annual income required to qualify for a loan by $10,000. Each such bump (from a 4.0 interest rate to 5.0, or 5.5 to 6.5) “prices approximately five million additional households out of the market for a home at the same or similar price level.” Just one in five American families earns enough to qualify for median-priced homes at seven-percent interest. 

In a turbulent economic time, moving presents a major cost that can be avoided entirely by riding out at least another few years at a locked-in pandemic fire-sale rate. Homeowners facing those incentives are more likely to stay put.

Data confirm mobility declines as mortgage rates rise. Liebersohn and Rothstein calculated that rate lock discouraged 660,000 moves in 2023, a deadweight loss to the economy of $17 billion that year. 

Mortgage Lock-In Reduces Labor Mobility

As the property market locks up, labor mobility does, too. Someone who bought a typical home  at a typical rate in 2016 (3.5 percent) would pay almost 40 percent more each month, if they were to take out a fresh mortgage on an identical home at the now-common rate of around 7 percent. One study placed the annual increase in mortgage payments at $5,000 when moving to a roughly equivalent new home, but given the rising price of homes and property taxes, that’s likely conservative.

Researchers Julia Fonseca and Lu Liu report, “mortgage lock-in modulates the geographical allocation of labor and leads to a mismatch between workers and jobs, as some households forego higher-paid employment opportunities due to the financial cost imposed by mortgage lock-in.” Locked-in households were half as likely to move in response to potential wage growth.

The favorable difference in pay or cost of living must be commensurately larger to entice someone to seize her potential by moving to a new city, or even across town. Another finger on the scales: locked-in mortgage rates are less likely to transfer into or out of self-employment, and the availability of work-from-home jobs may also make people less likely to move. 

International Alternatives

Other countries have experimented with ways to alleviate lock-in. In the United Kingdom and Canada, many mortgages are portable, meaning you can essentially transfer your mortgage terms from an existing property to a new one. Americans, in general, secure a mortgage for a particular property and must start over, with a new interest rate and repayment terms, to purchase a subsequent one. Other international mortgages are assumable, meaning you can sell your mortgage, with its favorable low rates, to a buyer along with the property. Individual owner-occupants must qualify under the original lending terms. Where do we find assumable mortgages in the United States? Among those issued by the Federal Housing Administration (FHA), the Department of Veterans’ Affairs (VA) and some Department of Agriculture (USDA) loans. 

The complex web of regulation surrounding home-lending put these options off limits for most Americans, or at least those buying without the help of the federal government. The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, told The New York Times and American Banker earlier this year that portable mortgage options “are not under consideration” for the general public. The Times concluded, “Right now by law there’s no way to detach that loan from the property that serves as its collateral and reattach it to a new property.”

Rapid changes in mortgage rates cause homeowners to stay put, and the housing and labor markets suffer the consequences. People are less likely to move, either to bigger homes or to better jobs, stagnating economic mobility. While other countries have found creative, free-market solutions to reduce the impact of mortgage lock-in, America’s complex regulatory environment keeps these options out of reach for most buyers. 

Portability has its own peculiarities, like shorter lending terms and high qualification criteria. Portability and assumability also post major risks for investors who buy securitized mortgages. Powerful interest groups, including financial institutions who currently impose their own terms and mortgage brokers who profit from underwriting and replacing each reissued mortgage, also play a role in maintaining the status quo. Giving Americans a freer mortgage market with more choices might benefit the economy, but would take a major lobbying push. 

Mortgage lock-in is just one more example of the inevitable, if unintended, consequences of asking the Federal Reserve (or any other group of mortals) to exercise discretion in these macroeconomic matters. The Federal Reserve has just cut the rate by 50 basis points and is expected to make another cut before December, but homeowners will continue to feel locked into their mortgages — and the broader economy will continue to feel the strain created by recent, artificially low rates. Until then, we can expect fewer “For Sale” signs and more “Stay Put” decisions, as financial incentives restrict economic mobility.

The Biden administration’s National Security Strategy frames the current international order as one in which the democracies of the world are locked into a Manichean, dualist struggle with autocracies: “Democracies and autocracies are engaged in a contest to show which system of governance can best deliver for their people and the world.” It pledges to strengthen democracy at home and defend democracy abroad but offers no real specifics on what such a strategy means or how it might foster democracy outside US borders. Will it use US military force to protect every democracy in the world, including the many quasi-democracies that do not necessarily share American political traditions or cultural values? How strongly will it encourage other countries to become democracies, or improve their systems of government along democratic lines? What if countries resist becoming more democratic? Will the United States use military force to impose democracy on countries that don’t want it? And what, actually, is democracy? Most countries, including the most autocratic, claim to be democracies. Even one of the world’s most totalitarian states calls itself the Democratic People’s Republic of Korea.

This is a facile view of the world that presupposes that all democracies share national interests and that democracies and non-democracies must inevitably be opposed to each other. Neither is the case.

Such a democracy promotion strategy is at odds with actual American foreign policy and self-interest. US foreign policy must be in accord with its own national interests, not the interests of other countries. It may sometimes be in the US interest to partner with a democracy, just as it may sometimes be in the national interest to partner with a non-democracy. So be it. What the United States must not do is to automatically assume that every autocracy is an enemy and that every democracy is a friend. Nor should it go out of its way to forcibly install new “democratic” governments elsewhere in the hope that they will share our interests.

In the past two decades the United States has attempted to impose American-style democracy on Iraq and Afghanistan, failing in both instances and leaving the US worse off in terms of money spent. It should learn the right lessons from those failures and, rather than trying to do it again in the future (only better this time) learn that democracy cannot be imposed from without. It must be built and fought for by those who will live within that system, not the United States. Pretending otherwise can only lead to tragedy and waste for all concerned.

Likewise, we must acknowledge that the United States has many close partnerships with non-democracies; for better or worse, Saudi Arabia, an actively anti-democratic and repressive state, is a close partner. Current US major allies also include Pakistan and Qatar, not exactly exemplars of liberal democracy. The United States has close ties with many other semi-democratic states that have some trappings of democracy without free and fair elections, protections of civil liberties, and other core components of democracy. It would be better if these countries shared American values, but they do not, and likely will never.

The idea that the United States does, can, or should, only have positive relationships with democracies is also ahistorical. Since the dawn of the Cold War, the United States has interfered in democratic elections to overthrow duly-elected socialist governments and partnered with dictators who were otherwise pro-United States. (One of the first covert actions undertaken by the CIA after its founding in 1947 was to interfere in the 1948 democratic election in Italy because it feared that a leftist coalition of political parties would win.) This is not to suggest that those interventions were necessarily positive or advisable, but they are deeply embedded in American political history and, sadly, are likely to remain as potential policy options by future administrations. The United States has never behaved in a purely idealistic way toward other countries, and it is disingenuous to suggest that it does or will behave in such a way now.

The idea that the United States should spread democracy around the world is predicated on two deeply flawed premises: first, the apparent success of regime change and democracy promotion cases in West Germany and Japan after World War II, and second, the controversial “democratic peace theory” of international relations.

The United States has a dismal track record of imposing democracy. Two cases in particular — West Germany and Japan — are usually held up as successes, the exemplars of what can be achieved by forcibly transforming autocracies into democracies. Unique factors present in both those societies are present in few others since World War II. Both were orderly, disciplined, homogeneous societies already interested in liberalization, reform, and embracing Western values and institutions. Contrast those cases with the two most recent ones attempted by the United States: Afghanistan and Iraq. Both efforts failed catastrophically and have not resulted in the creation of Western-style liberal democracies. The key problem is that many states and societies don’t currently want to be democratic. To impose democracy on these countries would be an unwanted imposition, and one likely to require the use of US military force.

In democratic peace theory, the idea is that democracies don’t go to war with each other, and so the more democracies there are, the more peaceful the world would be. If every country in the world were democratic, there would be no more war. Unfortunately, democratic peace theory is fatally flawed. There are dozens of cases in which democracies have gone to war with each other. Additionally, democratic peace theory does not claim that democracies don’t go to war with non-democracies. They often do, as American history attests. Newly emerging democracies are especially prone to going to war with other states, a track record that suggests that fledgling democracies are far more dangerous and aggressive toward their neighbors than stable non-democracies.

What then, should the United States do instead? Clearly democracy and the establishment and maintenance of a free society has enormous value and should be encouraged. It should not, however, be encouraged at the point of a bayonet because not only is such a forced democratization likely to fail, but the very idea runs counter to a free, open, democratic society. Other countries should be encouraged to become democratic if they choose. Rather than looking outward for opportunities to impose democracy, the United States should look inward and focus on improving democracy at home, serving as a model for others. As one example, the United States could focus on developing a world-class set of election security infrastructure, practices, and standards to ensure absolute voting integrity that could be emulated by non-Americans. It could also focus significant additional law enforcement resources on rooting out corruption of elected officials and civil servants (regardless of political party) to detect, punish, and deter political malfeasance.

Such an approach will pay dividends in the competition in which the United States finds itself in with alternative governance models. The United States of America must demonstrate that its values and system are superior to authoritarian and illiberal systems, must strive to become closer to that allegorical City on a Hill, a beacon of not just strong democratic tradition, but a just and limited government that exists to safeguard the liberty of its citizens.

A day prior to the presidential debate between Vice President Kamala Harris and former President Donald Trump, CNN reported a scoop: in 2019, presidential candidate Kamala Harris told the American Civil Liberties Union (ACLU) that she supported “taxpayer-funded gender transition surgeries for detained immigrants and federal prisoners.” 

The story gained traction on X prior to the debate, and it’s not difficult to see why. Compelling Americans to pay for the sex changes of federal inmates and jailed immigrants is not a policy supported by a majority of Americans, which is probably why then-candidate Joe Biden declined to answer the question, as did other candidates.

The unpopularity of Harris’s stance is also likely why her political opponent brought it up during the debate. What’s notable is that the policy, which sounds like a Babylon Bee headline, was strange enough to fool members of the media who couldn’t fathom that Harris would support it. Susan Glasser of The New Yorker accused Trump of lying and creating the story out of thin air.

“[Trump’s] line about how the Vice-President ‘wants to do transgender operations on illegal aliens that are in prison’ was pretty memorable,” Glasser wrote. “What the hell was he talking about? No one knows…”

To anyone who saw CNN’s story, it was clear what Trump was referring to. Just as it would be to any journalist or fact-checker who had access to Google and did his due diligence. 

People make mistakes, of course, but one week after the debate, The New Yorker still hadn’t corrected Glasser’s article, and many on X had made note of the error. 

Putting the credulity of reporters and the credibility of editorial standards aside, the flap over taxpayer-funded gender transition surgeries for inmates is a policy worth examining. It might seem like a fringe issue, but it can illuminate interesting economic ideas.

For starters, Harris’s support of the policy can be understood through the lens of public choice theory, a branch of economics that suggests public officials arrive at decisions much like everyone else: through self interest. While it’s doubtful Harris would today vocalize her support for such a policy, her incentives were different in 2019 when, as CNN’s Andrew Kaczynski observed, Harris was “trying to get to the left of Bernie Sanders.”

To call her positions self-interested does not condemn Harris in particular: public choice theory would suggest that few politicians reach decisions purely on principle

And then there’s the matter of costs, which would be relatively small and highly dispersed, so much so that they could seem entirely free. Many might argue, Why shouldn’t we provide these surgeries?

It’s a more difficult question to answer than many might think. I’m reminded of the Seinfeld episode “The Airport” where Jerry is flying first class. He is sitting next to a beautiful swimsuit model and they are enjoying warm towels, champagne, and ice cream sundaes.

“More anything,” the flight attendant asks, as she takes away their ice cream dishes. 

“More everything!” Jerry responds.

Many of us accept “free” things all the time when they are offered to us. But we live in a world of scarcity, and there are no free lunches. Whether it’s champagne on a flight or a prison sex-change operation, someone is paying. 

In Jerry’s case, he paid for the ice cream and champagne himself, which was included when he bought his ticket. The resources for taxpayer-funded sex changes for federal inmates aren’t coming from an individual voluntarily paying. Those dollars will come from taxpayers, who are being ordered to pay. 

Americans have different ideas on taxation, of course. Some, like myself, view it as a kind of legalized plunder, to borrow a description from the 19th century economist Frédéric Bastiat, who explained how it can be identified. 

“See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong,” Bastiat wrote in The Law. “See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

Some people believe taxation is appropriate, if spent on a “public good.” This squishy phrase is prone to problems, and it still ignores the scarcity problem. There’s only so much stuff to go around, and resources spent on one thing cannot be spent on another..

In other words, federally funded sex change operations have an opportunity cost. 

Dollars allocated for gender reassignment surgeries cannot be spent on fighter jets, classroom projects, employee salaries, highways, food stamps, worker pensions, cancer research, border security, cruise missiles, or anything else. 

Some people will say this is good. Many of the things on that list are bad, they reason, or perhaps that gender reassignment operations are more important than everything else.
 
But few people will take that view. So few, in fact, that The New Yorker believed the whole story was made up.

When the Federal Reserve’s Federal Open Market Committee (FOMC) voted to lower its federal funds rate target last week and thereby begin the process of un-tightening monetary policy, it said FOMC members had “gained greater confidence that inflation is moving sustainably toward 2 percent.” In fact, inflation appears to have already moved to 2 percent. If anything, inflation appears to be somewhat below target today. 

The Bureau of Economic Analysis (BEA) reports that the Personal Consumption Expenditures Price Index (PCEPI), which is the Fed’s preferred measure of inflation, grew at a continuously compounding annual rate of 2.2 percent over the last year. However, it has slowed considerably in recent months. PCEPI inflation has averaged 1.9 percent over the last six months and 1.4 percent over the last three months. In August 2024, it was just 1.1 percent.

Core inflation, which excludes volatile food and energy prices and is therefore thought to be a better predictor of future inflation, has also declined. Core PCEPI grew at a continuously compounding annual rate of 1.6 percent in August 2024. It has averaged 2.4 percent over the last six months and 2.0 percent over the last three months.

Although the Fed has successfully reduced inflation over the last two years, it seems reluctant to declare victory. Monetary policy is still tight today and is projected to remain tight through 2025. At the post-meeting press conference last week, Fed Chair Jerome Powell said “there’s no sense that the committee feels it’s in a rush” to return policy to neutral.

Economists say that monetary policy is neutral—that is, neither tight nor loose—when the Fed’s federal funds rate target is equal to the real Wicksellian natural rate of interest plus the Fed’s inflation target. We do not observe the natural rate, but estimates from the New York Fed range from 0.74 to 1.22 percent. Those estimates would put the neutral federal funds rate between 2.74 and 3.22 percent.

FOMC members’ estimates of the neutral federal funds rate are generally consistent with this range. Earlier this month, the median FOMC member projected the midpoint of the longer run federal funds rate target range at 2.9 percent. Twelve of the nineteen projections are between 2.74 and 3.22 percent.

At 4.75 to 5.0 percent, the current federal funds rate target range is more than 150 basis points above conventional estimates of the neutral rate. In other words, monetary policy remains tight.

The median FOMC member projected an additional 50 basis points worth of cuts would be appropriate this year. However, seven members thought it would be appropriate to cut just 25 basis points more and two members projected no additional cuts this year. Only one member thought it would be appropriate to reduce the federal funds rate target by more than 50 basis points this year.

More cuts are projected for 2025, but not enough to return the stance of monetary policy to neutral. The median FOMC member projects that the federal funds rate target range will be between 3.25 and 3.5 percent by the end of 2025. Hence, most members project the federal funds rate will remain above their own assessment of the neutral federal funds rate through the end of next year.

Given the high inflation realized over the last few years, it is easy to understand the appeal of keeping monetary policy tight: no one wants inflation to resurge. But the risks are two-sided. If the Fed holds its federal funds rate target too tight for too long, it will cause a recession. It must balance these risks.

With inflation now running below target, the risk of resurging inflation is much smaller and the risk of recession is much larger. Now is the time to ease up. If the Fed neutralizes the stance of monetary policy quickly and completely, it may yet avoid a recession. If it delays, as FOMC members project, we may not be so lucky.

The Federal Reserve’s recent decision to cut the federal funds rate by 50 basis points to a range of 4.75 percent to 5 percent, despite inflation still exceeding its 2 percent target, bears alarming similarities to the monetary policy missteps of the late 1970s. Back then, under pressure to stimulate economic activity, the Fed loosened monetary policy too soon. 

What was the result? Inflation soared as high as, if not higher, depending on the inflation measure. This culminated in Fed Chairman Paul Volcker reining in the money supply, which drove interest rates even higher. The result was necessary though painful double-dip recession before inflation persisted at a lower rate and the economy expanded during what’s been called the “Great Moderation.”

The recent Fed decision comes when inflation, though moderating, remains elevated. According to the latest Consumer Price Index (CPI) data, inflation increased by 2.5 percent year-over-year in August, with core inflation (less food and energy) rising by 3.2 percent. The Personal Consumption Expenditures (PCE) price index, the preferred core inflation measure for the Fed, showed a 2.6 percent year-over-year increase in July, further confirming that inflation is well above the 2-percent average inflation rate target (FAIT). 

The risk is clear: repeating the premature rate cuts of the 1970s could ignite inflation once more, forcing even harsher corrective measures later.

The Fed’s Balance Sheet Problem

The Federal Reserve’s balance sheet expanded dramatically during the COVID-19 pandemic, nearly doubling from $4 trillion in February 2020 to nearly $9 trillion in April 2022. While the Fed has made some progress in reducing its balance sheet, which now stands at $7.1 trillion, this figure remains 75 percent higher than its pre-pandemic level, with potentially risky assets. This massive increase in the money supply has distorted the economy, contributing to inflationary pressures by artificially boosting demand as supply hasn’t kept up.

Rather than relying on interest rate cuts, the Fed should be focused on aggressively reducing its balance sheet. Milton Friedman’s insights remain as relevant today as ever: inflation is “always and everywhere a monetary phenomenon.” The rapid expansion of the Fed’s balance sheet and the excessive money printing during the pandemic era are key contributors to the inflation we are battling now. Shrinking the balance sheet would help reduce the excess liquidity in the system, curbing inflation more effectively than rate cuts alone.

Distortive Power of Government Spending and Policy

While monetary policy is one part of the equation, we cannot overlook the role of fiscal policy in the current inflationary environment. Government spending has exploded since 2020 during the pandemic lockdowns, with the gross national debt soaring by nearly $13 trillion since 2019 to $35.3 trillion. The House of Representatives, rather than addressing this spending crisis, is set to pass another spending bill ahead of the September 30 deadline. As currently designed, this bill includes little in the way of meaningful spending restraint. Kicking the can down the road without addressing the structural imbalance in government finances only weakens the economy.

When the government spends recklessly by redistributing productive private resources to fund politically determined provisions, this contracts the potential supply of goods and services. And with the Fed printing so much money over the last few years, we have a clear explanation for the persistent general price inflation that reached a high of 9 percent in June 2022. But the inflationary pressures remain in the economy. This creates a vicious cycle, where excessive government borrowing leads to higher interest payments, necessitating further borrowing and money printing by the Fed to keep interest rates near its target. The only way to break this cycle is through fiscal discipline — capping government spending, reducing the deficit, and removing unnecessary programs — and more economic growth.

The government’s heavy-handed interventions in the form of taxes, regulations, and excessive spending distort market signals, stifle entrepreneurship, and create inefficiencies. These interventions raise business costs, leading to higher consumer prices and reduced economic growth. Rather than focusing on rate cuts and temporary relief, policymakers should aim for long-term solutions addressing inflation’s root cause: excessive money printing.

The Fed’s Mixed Messages

The Federal Open Market Committee’s (FOMC) latest statement signals an optimistic view that inflation is making “further progress” toward the 2 percent target. The Committee also highlights that it has “gained greater confidence that inflation is moving sustainably” toward its goal. However, this confidence is misplaced, given the persistent inflationary pressures evident in the data. The energy index has declined 4 percent over the past 12 months, but core inflation remains stubbornly high, and key services sectors continue to experience rising prices.

Cutting rates under these conditions risks reigniting inflation, just as the Fed’s premature monetary policy, including rate cuts, in the late 1970s exacerbated inflation and led to economic instability. The FOMC’s decision to reduce the target range for the federal funds rate while signaling its commitment to further rate cuts, if “appropriate,” creates uncertainty in the markets. This mixed messaging signals that the Fed is willing to sacrifice long-term price stability for short-term gains, which could lead to more aggressive corrective actions. Given the double-dip recession in the early 1980s, there is reason for concern.

The Path Forward: Fiscal and Monetary Solutions

The Fed’s dual mandate is to ensure price stability and maximum employment. With inflation still above target, its focus should be on controlling inflation–its balance sheet and inflation are the only two things it can control. This highlights the need to make it a single mandate to ensure price stability rather than trying to stimulate economic growth. History teaches us that premature rate cuts — like those in the 1970s — lead to higher inflation, more aggressive rate hikes, and economic contraction.

A more prudent approach would involve reducing the Fed’s balance sheet more aggressively, which would help soak up the excess liquidity, fueling inflationary pressures. Moreover, Congress must confront the spending crisis head-on. A balanced approach to fiscal policy, with spending limits tied to a maximum rate of population growth and inflation, would help stabilize government finances and reduce the deficit. Even better is Sen. Rand Paul’s Six Penny Plan, a “federal budget resolution that will balance on-budget outlays and revenues within five years by cutting six pennies off every dollar projected to be spent in the next five fiscal years.” Without these structural reforms, inflation will continue to threaten the purchasing power of Americans.

Furthermore, the government should remove barriers to productivity by cutting excessive regulations and taxes that stifle growth. Allowing the free market to operate efficiently without the distortive effects of heavy-handed government policies will promote sustainable, long-term growth.

Conclusion: A Critical Moment for the Economy

The Federal Reserve and Congress are at a critical juncture. The Fed’s decision to cut rates prematurely risks repeating the costly mistakes of the 1970s, where loose monetary policy fueled inflation, leading to severe economic instability. Simultaneously, Congress’s reluctance to tackle deficit spending driving the ballooning national debt only exacerbates the underlying issues plaguing the economy.

Now is not the time for short-term fixes. The Fed should focus on reducing its balance sheet and controlling inflation, while Congress must enact serious spending reforms to prevent further economic deterioration. If we fail to act now, we risk plunging into an inflationary spiral reminiscent of the 1970s — a government-induced failure the American economy cannot afford.