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After several years of calm, stress is again building in the hidden plumbing of the US financial system — the short-term funding markets that move trillions of dollars in overnight cash and securities each day. These markets, particularly the repurchase (“repo”) market and its benchmark Secured Overnight Financing Rate (SOFR), are critical to the smooth functioning of the financial system. When they seize up, the consequences ripple outward into Treasury trading, bank liquidity management, and even the implementation of monetary policy. 

The last time the repo market buckled, in September 2019, it happened suddenly and dramatically: overnight borrowing rates spiked from around two percent to more than eight percent, exposing how fragile the post-crisis liquidity framework had become. When corporate tax payments and the settlement of a large Treasury auction drained roughly $120 billion in cash from the system in a single day, major banks — constrained by liquidity coverage rules and post-Basel capital surcharges — hoarded their reserves. The result was a stunning jump in repo rates, a one-day surge in SOFR to 5.25 percent, and a near-immediate intervention by the New York Fed, which pumped up to $100 billion per day into the market to restore order. In other words, a sudden cash drain caused the usual lenders in overnight markets to step back all at once, leaving borrowers scrambling for funds and driving rates sharply higher — a classic liquidity squeeze rather than a credit panic. The episode taught regulators a humbling lesson: in a world of regulatory liquidity floors, “ample reserves” can prove illusory when those reserves become unevenly distributed.

Secured Overnight Financing Rate, 2018 – 2020

(Source: Bloomberg Finance, LP)

A simple chart of daily SOFR from 2018 through 2020 captures the point clearly. The September 2019 spike (see above) appears as a sharp vertical wall — an almost instantaneous loss of equilibrium — while the more recent uptick of late 2025 looks tame but unmistakably directional. In both cases, seemingly minor reserve drains exposed just how nonlinear the system becomes near its lower comfort limit.

Fast-forward six years, and some familiar symptoms are re-emerging. Signs of renewed short-term funding stress have begun to surface across US money markets. Nothing approaching the 2019 spike has yet occurred, but the tremors are unmistakable. In mid-September 2025, the Federal Reserve’s Standing Repo Facility (SRF) was tapped for roughly $18.5 billion in a single day — its largest draw since inception — suggesting that banks were again leaning on official backstops for liquidity. Around the same time, SOFR rose to about 4.42 percent, and related secured funding benchmarks such as the Tri-Party General Collateral Rate (TGCR) climbed in tandem. By October 16, SOFR remained elevated near 4.3 percent, underscoring lingering tension despite some easing.

Recent news of souring debt on bank balance sheets, along with the sudden failures of both First Brands Group and Tricolor Holdings, are likely key drivers of the abrupt rise in risk aversion across bespoke lending markets. The tightness may, additionally, be attributable to familiar quarter-end forces that periodically drain liquidity: tax deadlines, Treasury settlement flows, and a surge in short-term debt issuance that competes for cash. 

Analysts at the Dallas Fed observed that in the first week of September 2025, SOFR rose by five to eight basis points and TGCR by about 10 basis points to roughly 4.50 percent — modest but telling moves that reveal a system operating with thinner cushions. The repo market, where Treasuries serve as collateral for overnight borrowing, is the circulatory system of modern finance. When reserves are plentiful, small shocks are absorbed easily; when they are tight, even routine settlement flows can push funding rates up.

US Repurchase Agreements Overnight Total Value Accepted, 2021 – present

(Source: Bloomberg Finance, LP)

From a monetary-plumbing perspective, these recent developments suggest that the “ample reserves” framework may again be brushing up against its lower comfort limit. When reserves approach banks’ internal liquidity minimums, the demand curve for cash becomes steep and inelastic, meaning that small drains can cause disproportionate moves in funding rates. The September–October tightening appears to fit that pattern. Large Treasury settlements and tax flows drew cash out of dealer accounts just as bill issuance surged, forcing funds and banks to pay more for liquidity. The SOFR-to-IORB (Interest on Reserve Balances) spread widened slightly, and rising SRF usage confirmed that private lenders were hesitant to meet the marginal demand on their own. A chart of SOFR minus IORB over the past two years would show this spread drifting steadily higher — a visual sign of creeping stress beneath otherwise orderly surface conditions.

Although reserves today are far higher than in 2019 and the Fed’s SRF provides a ready backstop, the same structural sensitivities remain. Quarter-end strains, elevated secured rates, and heavier use of official facilities all point to a system once again edging toward the boundary where small imbalances can amplify. The Dallas Fed has cautioned that funding conditions are still “ample” but trending toward constraint — a diplomatic way of saying the buffer is thinner than it looks.

The SRF itself has become a kind of canary in the coalmine. A simple bar chart of its daily usage since 2021 reveals a long stretch of near-zero take-up interrupted by a sudden, towering spike in mid-September 2025. What makes that surge meaningful is not the absolute amount — $18.5 billion is manageable in a $25 trillion market — but that it happened absent any major policy shift or market shock. It was, in effect, a voluntary stress test of the system’s plumbing, and the results were mixed.

Several variables now deserve close scrutiny: the level of excess reserves above banks’ internal minima, dealer balance-sheet capacity under regulatory capital rules, and the behavior of key spreads such as SOFR versus the Effective Federal Funds Rate (EFFR) or the IORB floor. Sustained SRF usage would suggest that stress is migrating from the periphery toward the core of the funding network. Meanwhile, aggregate reserve balances plotted against the Fed’s total assets tell another story — reserves are declining even as Treasury issuance expands, tightening the effective supply of cash collateral. So far, none of these red lights are flashing, but several are flickering amber.

Secured Overnight Financing Rate (blue) & US Federal Reserve Interest on Reserve Balances (white), October 2024 – present

(Source: Bloomberg Finance, LP)

Forward SOFR contracts already price roughly 7–8 basis points above EFFR for late-year settlements, hinting at expectations of continued tightness. Treasury issuance remains historically heavy, and money-market funds now play an even larger role as collateralized lenders, leaving banks somewhat more reliant on the Fed’s standing facilities. From a free-market, liquidity-plumbing perspective, the message is clear: this is not yet a crisis, but the system’s margin for error is narrowing.

The elevated repo prints are manageable thanks to stronger buffers and improved tools, but they highlight how even moderate drains can test the architecture of post-crisis money markets. If an unforeseen fiscal event, a major settlement failure, or a sudden dealer retrenchment were to occur, a sharp jump in funding rates could reappear overnight. Money-market plumbing is once again creaking under strain. Similar indications were seen in the months before the collapse of Silicon Valley Bank and a handful of other financial institutions. 

Presently, the situation remains under control but is clearly leaning toward stress — an early warning, not a five-alarm fire. Markets are still functioning, but more delicately balanced than policymakers might prefer. If funding conditions tighten further or freeze up entirely, intervention will almost certainly follow — bringing with it the familiar mix of short-term relief, long-term distortions, and the ever-present risk of cascades and collateral damage.

When my eldest son was four years old, he climbed on top of a batting cage at a park in New Jersey. Several bystanders noticed and began to freak out. I called my son down and told him: “I’m fine with what you are doing, but you’re making other people nervous.” I said this because he was a capable climber and because I judged the various risks acceptable. Yet, the fear of others was at play and could have resulted in government child services intervention.

Though my experience ended peacefully, the Meitiv family had multiple run-ins with child protective services for allowing their 10-year-old and 6-year-old to walk to a playground unaccompanied by an adult. Their clashes with safetyism and law enforcement helped launch the “Free Range” parenting movement. 

Should a 10-year-old be able to take a couple younger siblings to a playground without an adult? A large percentage of Americans would say “no.” Why? Because it’s dangerous! They could be kidnapped! Yet the odds of that happening are astronomically low – kids are more likely to die in a car accident or to get cancer than to be kidnapped by a stranger – yet this extremely unlikely event has changed childhood (for the worse) for tens of millions of children. 

Coddling and safetyism reduce people’s willingness to take risk, and they distort their assessment of risk. So people will accept infringements on their liberty because they feel “safer.” Besides fueling demand for more regulation, safetyism also dampens people’s willingness to experiment and to grow through facing challenges and danger. 

As individuals, as parents, as Americans, we should learn to live a little dangerously on purpose. Now, many Americans live dangerously by accident as they engage in unhealthy practices or act carelessly. There is also the recklessness of youths who feel invincible. That’s not what I am talking about. I’m talking about realistically assessing risk and tradeoffs.

By disposition, I happen to be pretty conservative and risk averse. Why take a chance that something bad happens when the status quo seems mostly okay? Yet I am also a strident believer in liberty – so I would never want government bureaucrats to legally prohibit me from taking risks (even ones that I wouldn’t take anyway). But I have also cultivated an entrepreneurial desire for value creation and improvement. I believe things can be better than they are – potentially much better – but that improvement will only happen with experimentation and, yes, risk-taking.

All of this reminds me of the movie I, Robot with Will Smith (based on the book by Isaac Asimov). I, Robot anticipated many of the problems contemporary Americans face in our current relentless cultural pressure towards safetyism. In the film, humanoid robots are trained to follow the three rules of robotics:

  1. A robot may not injure a human being or, through inaction, allow a human being to come to harm.
  2. A robot must obey the orders given it by human beings except where such orders would conflict with the First Law.
  3. A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.

While seemingly straightforward, in the movie a comprehensive artificial intelligence decides that truly fulfilling these laws means protecting humans from each other, by force if necessary. This logic has been carried out relentlessly across the US for decades. 

Sometimes life imitates art. Rather than Rousseau’s famous dictum that men must be “forced to be free,” modern elites generally subscribe to the notion that everyone must be “forced to be safe.” We saw the culmination of this thinking in the lockdowns during the pandemic of 2020. But safetyism extends everywhere in society.

Spending years living in both DC and New York City, I got a front row seat to a safetyism that basically denies tradeoffs between risk and reward, and also encourages a warped and inaccurate view of actual dangers in the world. 

We see it in playground construction and management. Rather than the often simple and low-cost, but “less safe” metal playgrounds of yesteryear, modern playgrounds have all kinds of safety requirements around heights, hardness of materials, accessibility, etc.

You have agencies like ASTM that publish the “Standard Consumer Safety Performance Specification for Playground Equipment for Public Use” and Consumer Product Safety Commission that publishes the “Public Playground Safety Handbook.” The Americans with Disabilities Act (ADA) requires a variety of additional modifications to playgrounds. And then states, counties, and cities may (and often do) layer their own safety requirements on top of these. The level of safety is comical.

I’m not suggesting we should intentionally make playgrounds more dangerous. Nor am I saying that safety concerns don’t matter. I am suggesting that most Americans should consider raising their threshold of acceptable risk. Besides the immense monetary cost savings, higher risk thresholds will reduce anxiety in parents (and children) while allowing greater physical and character development in children who can push their limits further, learn to face fear, and also learn about risk/reward tradeoffs.

Parenting in general has become highly focused on safety – from helicopter parenting to emotional safety and self-esteem parenting come safe spaces and microaggressions. The heavy involvement of parents regulating their children’s lives has been documented by Jonathan Haidt, Lenore Skenazy, and others. This safetyism is a form of coddling. It is also soft paternalism (doing for others what they can, and should, do for themselves) that restricts children’s decision-making and autonomy which stunts their development of judgment and formation of virtue.

Our broader society is little better. Regulations around every activity imaginable have cropped up – almost always with a public safety component – industrial kitchen regulations, indoor sprinkler requirements, extensive licensing requirements, conditional use permitting, all are examples of anti-competitive costly rules built on safetyism. So are costly drug development processes, food inspection requirements, and workplace regulations.

Safetyism also has serious implications for innovation, technology, and the economy. California’s attorney general recently claimed that, as a public charity, OpenAI has an obligation to make sure this doesn’t happen. But is such a claim or regulatory burden helpful or appropriate? Large language models and AI platforms, even social media platforms that have generated measurable harm to adolescents, have similar features. Prioritizing safety over everything else, however, requires making stifling rules for everyone (millions of people) based upon extremely rare cases of harm.

California officials and regulators are going after OpenAI over “safety” concerns about how an incredibly small percentage of people use (or abuse) ChatGPT. The Wall Street Journal reported the story of Erik Soelberg who had a history of mental illness and self-harm, who developed a deeply unhealthy attachment to a ChatGPT chatbot who encouraged him in his paranoia. Tragically, he ended up killing his mother and himself.

While we may be tempted to “blame” ChatGPT for contributing to this tragedy, that would be a mistake. Imagine, for example, if Ford or Toyota were responsible every time someone used their vehicle to facilitate theft or murder or suicide. We would hardly hold those companies responsible for “enabling” this tragic behavior with their products. And if we did, those companies might not be able to exist, and the millions of people who benefit tremendously from their vehicles and use them responsibly would be harmed.

Part of young people’s swing towards conservatism stems from feeling stifled, both physically and intellectually, by their teachers, parents, and the broader cultural preachers of safetyism. Safetyism strangles technology, entrepreneurship, personal autonomy, and ultimately liberty. 

If we want a free, dynamic society of responsible citizens, safetyism browbeating has got to stop.

“Chicken” is a game where two people, or two groups, want different things, in a context where “I win/you lose.”  That is, there are no gains from exchange or compromise, and the loser is not only worse off, but embarrassed.

Government shutdowns are chicken games. Knowing that gives us a way to understand what is happening.

When I teach “chicken” I tell students to imagine you and James Dean, both in souped up 1967 Mustangs, are facing each other on a narrow road, about 1 mile apart. The game begins, and you both accelerate hard, to show you mean business.

If you both go straight (the road is too narrow to pass each other), there is a huge explosion and everyone dies. If you go straight and James swerves, you win and James is humiliated. And vice versa.

If you both swerve, then you both regret having passed up an opportunity to win. And your partisans, standing by the road and cheering, are embarrassed at your cowardice.

Who will win? Whoever cares more about winning, or cares less about dying. Of course, both of you tell everyone “I’m not afraid to die!”, but those are just words. Each player wants to win, but is in fact afraid to die. So, “I swerve, [you swerve or don’t swerve]” is better than “straight, straight.” I know that, you know I know that, I know you know, and so on.

As you get closer, you can see your opponent’s face, set in grim determination. Suddenly, James Dean does something amazing: he throws his steering wheel out the window! He can’t swerve. My only choice now is to go straight also (he dies, but so do I) or swerve (embarrassing, but I avoid dying). By throwing his steering wheel out the window, James commits to going straight, which means he wins.

Of course, I have played chicken before, so I know what to do. I immediately throw my steering wheel out the window.

(Record scratch…) What?  I want to die?

Wait for it. James throws out another steering wheel, and so do I. We are both throwing steering wheels out the window like crazy. Because each has a stack of them, on the front seat beside us.

Shutdown Background

Government shutdowns are not exactly a fiery crash, but they seem irrational. If you understand chicken, though, it makes more sense.

If a government in a parliamentary system fails to pass its budget, that is likely to collapse the government and trigger a new election. But that’s not true in Washington. In the US, the House and Senate have to agree, and the President has to sign the resulting bill. Partisan control can be divided (as it has been for nearly 90 of the years since 1800), or the minority party in the Senate can filibuster, or the President can veto.

It wasn’t always a chicken game. The famous 1879 rider fights between (Republican) President Hayes and a Democratic Congress were contentious, but there was no shutdown. The dispute involved election-related riders on Army and marshals funding, which the Democrats were using to try to end Reconstruction. The conflict dragged on for months, but partial appropriations were passed and only limited sums were actually withheld. The nonsense was kept in DC, where it belongs.

But the system showed signs of strain in the 1970s: there were six substantial gaps in budget coverage between 1977 and 1980. But agencies continued operation, even if funding expired, because it was assumed that funding would be restored.

That changed in 1980–81, when Attorney General Benjamin Civiletti issued opinions interpreting the Antideficiency Act (enacted in 1884, amended in 1950 and 1982) to require agencies to cease operations, except for narrow “essential” activities. Those opinions — grounded also in the Constitution’s Appropriations Clause — created the modern “shutdown,” now codified in the Office of Management and Budget Circular A-11.

Since the rules changed in 1981, there have been a number of actual shutdowns, where government workers were sent home, without pay (though at least until now the pay has always been restored retroactively). Counting only funding gaps in which shutdown procedures were followed (i.e., agencies closed and employees were furloughed), the episodes are:

·         Nov 20–23, 1981 — 2 days

·         Sep 30–Oct 2, 1982 — 1 day

·         Oct 3–5, 1984 — 1 day

·         Oct 16–18, 1986 — 1 day

·         Oct 5–9, 1990 — 3 days

·         Nov 13–19, 1995 — 5 days

·         Dec 15, 1995–Jan 6, 1996 — 21 days

·         Sep 30–Oct 17, 2013 — 16 days

·         Jan 19–22, 2018 — 2 days

·         Dec 21, 2018–Jan 25, 2019 — 34 days (or 35, depending on how you count)

The Logic of Chicken

The shutdown seems pointless, from an outside perspective. Everyone would be better off if we simply implement the deal that will be agreed on later, and skip the intervening inconveniences. And, make no mistake, there will be inconveniences: tens of thousands of applications, cases, tax returns, licenses, refunds, and other mandatory paperwork will be delayed for no reason. 

Many of the 2.25 million federal employees will work, but there will be no savings because they will still be paid, and rent on all those empty federal offices will still be due. It seems possible that the Trump administration will use the shutdown as a chance to push through permanent reductions in force, but even if that happens, the cost savings will be negligible.

To understand why all this is happening, despite the costs, and in spite of the fact that there will be a deal, one must think in terms of the payoffs to this peculiar version of “chicken.”

First, the usual payoffs are reversed, in the sense that many — perhaps most — members of Congress prefer “straight, straight” to “swerve, swerve.” Sure, the fiery crash is expensive for the country, but it benefits political leaders and the rank-and-file to appear to stand firm against the enemy. Of course, each side prefers that the other would give in, but there are few costs to being stubborn.

Second, the “steering wheels” are different: you aren’t trying to scare your opponent. The reason to make statements of obdurate resolve is to appeal to “your base.” Instead of being costly, boasting about your toughness is a benefit.

Further, in a federal system the temporary shutdown of the central government is nearly unnoticeable for most people, for several days and perhaps for some weeks. Even if there is a fiery crash, it’s far away for most of us and doesn’t affect our lives much.

What all this means is that government budget shutdowns are rational, the predictable consequence of the strategic setting. The drivers of each party can blame the refusal of the other side to cooperate, and they actually get credit for the shutdown. This could change if voters stopped rewarding politicians for these craven, empty demolition derby shows. But voters actually seem to be interested, and so the parties obligingly get back out on the road to give us the show we say we don’t want, but certainly deserve.   

Zohran Mamdani announced early this month that, should he win the New York City mayoral race, he intends to shut down New York City public schools’ gifted and talented programs for grades K-2.

This proposal was met with national backlash, from parents and pundits far beyond the bounds of New York City’s school system. Mamdani may have questionable policy stances, but he’s very good at getting media attention.

Mamdani specifically targeted early-age GT (gifted and talented) programs, saying they’d be cut at the end of the current school year. GT programs from third grade onward would be left intact, although parents have voiced concern that those would be next (first they came for the kindergarten GT programs, but I said nothing, because I did not have a kindergartener…).

New York’s gifted and talented program has been a point of tension for some time. Bill DeBlasio tried to do the exact thing Mamdani is threatening on his way out of office in 2021. Eric Adams reversed the policy when he took office in 2022 and kept the programs intact.

It’s also not a new conversation on a national scale. Gifted programs are often seen as an extravagance, an unnecessary pull on resources more desperately needed elsewhere. The needs of the bottom 10 percent become so dire that they outweigh the needs of the top 10 percent, who are left cast adrift.  Being ahead of the curve is a luxury. People assume kids progressing ahead of the pack will be “just fine” if they move at the average pace with everyone else.

But they won’t be “just fine” —they’ll be bored out of their minds. And such apathy runs the risk of becoming a life sentence, with kids checking out of learning altogether.

Mamdani said: “Ultimately, my administration would aim to make sure that every child receives a high-quality early education that nurtures their curiosity and learning.”

But he’s making an impossible promise. You can only have one or the other: you can cut gifted programs, or you can nurture every child’s curiosity and learning. “And” simply isn’t possible.

Pamela Hobart (mother of four gifted kids aptly posting on X as GT Mom) posted: 

Kindergarteners are fidgety overgrown toddlers. Transitioning to school is difficult for many – even when they enjoy the social environment and academic activities. How are you supposed to explain to a five year old who can already read chapter books that it’s for the greater good that more interesting work is coming in 3-5 YEARS?!

Forcing a five-year-old to read Hop on Pop when they’re ready for The Hobbit is psychological cruelty. It makes them believe that school is boring, that formalized learning is unpleasant and pointless. 

“I really do think that early years often define whether kids think of school as meaningful or as miserable,” Kelsey Piper, staff writer at The Argument wrote.

Mamdani’s campaign argues that the GT system is imperfect, because five-year-olds “should not be subjected to a singular assessment that unfairly separates them right at the beginning of their public school education.”

The “unfair” verbiage here is important. At the surface, it sounds like it’s referring to the child, but most public criticism of New York’s GT program centers around identity groups. The program has been criticized for contributing to segregation and retrenching biases along racial and socio-economic lines, because wealthier white and Asian students are overrepresented, and black, Hispanic, and poorer households under-represented. 

But on the level of the individual student, focusing on that doesn’t help anyone. A child isn’t a fractional part of their identity group, but a little kid who needs to be supported at their level, to have their curiosity nurtured — regardless of their skin color or race or academic level.

If White and Asian students are overrepresented, the “solution” (if that’s even the government’s problem, which is debatable) isn’t to punish those top-performing students by boring them with backwards-looking instruction in the name of equity.

The real solution is to figure out ways to raise the students who are falling behind. There are known blueprints for this. Former New York City schoolteacher Robert Pondiscio spent a year inside Brooklyn’s controversial Success Academy, a network of charter schools that caters to low-income minority families, with outcomes rivaling (and even exceeding) the city’s most expensive private schools. He wrote a book, How the Other Half Learns, detailing the unorthodox — but effective — practices inside the school, and how it puts students on track, transforming even low performers into academic superstars.

But Mamdani is against expanding the city’s charter options, arguing that it goes against the principle of universal education.

This proposed “universal public education” sounds egalitarian, but really it just strips students of opportunity in the name of equity. It strives to be “fair” but defines fair as “cutting everyone down to the lowest common denominator” — as if the American promise of being “all created equal” means we must force individuals down identical paths instead of giving them equal chance to take the path that fits them best. It’s dystopia in utopia’s clothing.

The first principle of this policy isn’t greatness or success. If Mamdani really wanted students in New York City to thrive, he would organize schools to meet them at their level and help them onto the next rung on the ladder (whatever that “next rung” may be — the basics of phonics or the woes of Atticus Finch). Instead, his stance is to effectively punish students for being ahead, and fully choke off the possibility of a world-class education in a public school.

The proposal follows the collectivist trend of Mamdani’s other proposals: government-run grocery stores, city-owned commune blocks, higher taxes. Each one can be wrapped in sugar and tied with a bow: it’s making the world more fair, it’s lifting up the downtrodden and giving them access to the good things they’ve been denied for too long.

It makes a person feel good to support it. That’s how kind souls get suckered into supporting policies that ultimately stomp down the very people they meant to lift up.

Not everyone who opposes high achievers is motivated by kindness. The rhetoric also plays into something uglier, a deep-seated, nearly subconscious response that seeks to strike down anything “better” or “more good.” Some are nursing a visceral loathing, vile envy that looks at success and greatness and wants to crush it. This is the festering wound on which socialism thrives.

Mamdani’s educational proposals are the mutated offspring of that deeper philosophy: if not everyone can have a nice thing (in this case, a spot in a gifted program), no one should have it.

A rising-tides-lift-all-boats mentality celebrates excellence, in any form and from any corner, with the knowledge an improving world is better for everyone. New York classrooms should be nurturing young minds not just for their own sake, but for all the innovations (electricity, refrigeration, insulation, automobiles, air travel, cell phones, international shipping, the internet) that educated humans can build for each other. The super-wealthy invest, the super-intelligent design, the super-motivated create, and the innovations they produce become accessible to all, raising the global standard of living. In a very real way, investing in the gifted and talented brings up the bottom-ranked classroom’s future prospects, as well.  

If the problem really is “segregation,” then cutting GT programs isn’t going to fix it. There are tens of thousands of applications for New York City’s limited GT spots. If gifted kids don’t have access to the resources they need in public school, parents with means will pull them out and send them elsewhere, gutting the public schools and leading to segregation in a more absolute form — not different classrooms, but different buildings. Gifted kids from families without means will be left to rot inside the system, their love of learning laid out as a sacrifice on the altar of equity.

Demolishing gifted and talented programs doesn’t make the world better. It makes it measurably worse. Even staunch collectivists must acknowledge that the  collective benefits from individual achievements. A world where gifted kids are enabled to excel, are given every chance to succeed, to go forth and build things that are valuable and make the world better – that world becomes progressively better, for everyone.

Across the United States, harvesters are beginning to scythe their way through fields of crops. How well or badly the harvest goes has traditionally been a farmer’s make-or-break moment, but this year there is another concern. “Nothing’s moving,” says Darin Johnson, a farmer who serves as president of the Minnesota Soybean Growers Association. America’s farmers are on the frontline in the trade war, and they are taking casualties.

Blowback 

Last year, China bought $12.6 billion of soybeans from the United States, around 25 percent of the country’s total crop. This year, the Chinese have halted these purchases in retaliation for President Trump’s tariffs, opting for South American producers instead. China has not ordered a shipment of American soy since May and, last month, it announced that it would be buying no soybeans from the United States this fall.

The disappearance of this market is forcing many farmers to pay to store their crops or sell them at reduced prices. Either represents a financial hit.

These costs of the trade war are being felt especially heavily in Minnesota, which produces the third-largest soybean crop in the United States after Illinois and Iowa. Soybean exports in Minnesota account for over 25 percent of the state’s total exports, around $2 billion in sales annually. The state’s 26,000 soybean farmers send 60 percent of their produce overseas with China as their leading market. These were the state’s number one agricultural export.

Joel Schreurs, a Minnesota farmer who serves on the U.S. Soybean Export Council executive board, explains that “the cash flows don’t work for this coming year. I mean, you’re showing at average yield and average expense anywhere from $150 to $200 deficit per acre.” The state’s Agriculture Commissioner, Thom Petersen, explains: “We have a lot of soybeans. We’re gonna have a big harvest. We need somewhere for them to go. And we’ve worked years to build relationships and build those markets. So it’s kind of frustrating to not have that market that’s been there for us and China is a big bucket.”

The shock from the new trade war comes on top of longer-standing pressures on American farmers. A decade ago, Minnesota sold one out of every three rows of soybeans to China, the Minnesota Soybean Growers Association says: Since the tariff war of 2018 and 2019, the state now sells only one out of every four rows. “[W]e’re coming up on about three years of negative profitability,” Minnesota Farm Bureau President Dan Glessing explains. “If you look about a year ago, prices are similar; they’re still not at a profitable range.”

And then there are issues of the kind which crop up every year. Low water levels on the Mississippi River are driving up barge rates which makes transporting soybeans on the river more expensive and pushes up the cost of agricultural inputs like fertilizer and herbicides that travel on the river.

But the shock of the trade war in addition to these pressures has pushed many farms over the edge. The Minnesota Department of Agriculture reports that the number of farmers in the state entering mediation due to financial hardship has increased sharply this year and the Minneapolis Federal Reserve reports that farm bankruptcies in the Upper Midwest have increased from last year.

Government to the Rescue

The Trump administration acknowledges these problems. “Right now, the farm economy is not in a good place,” Agriculture Secretary Brooke Rollins said last week. With 78 percent of American farmers estimated to have voted for President Trump in 2024, it also feels the necessity to act. “We’re working around the clock,” Sec. Rollins claims.

The administration could just roll back the tariffs which have exacerbated agriculture’s underlying pressures. Congress could assert its power to tax. Instead, having hobbled the country’s farmers, federal government officials are now scrambling to offer them a Band-Aid.

Rep. Glenn “GT” Thompson, Chair of the House Agriculture Committee, has proposed federal financial relief for distressed farmers. Senate Majority Leader John Thune — from South Dakota, where farms account for the highest share of state GDP in the United States — has also floated the idea of a federal aid package. Both have suggested that revenues from the tariffs which have provoked this situation could be used to ameliorate their effects.

President Trump, who dished out more than $22 billion in aid payments to farmers in 2019 to offset their losses during his first trade war with China, says he’s planning a $10 billion aid package for soybean farmers.

But Vincent Smith, who directs the American Enterprise Institute’s Agricultural Research Program, argues that: “It is the larger farms that will really benefit from the bailout, because the bailout will be tied to the size of the farm’s production” so that “If you’re 10 times bigger than me as a farm, you will get 10 times the size of the payment that I get.” 

The Government Accountability Office estimates that seven percent of farmers received about 60 percent of USDA financial assistance available from fiscal year 2019 to 2023, with the rest receiving only about $12,000 per producer.

Farmers would prefer trade to handouts. Matt Purfeerst, a corn and soybean farmer in Faribault, Minnesota, told local station WCCO: “A Band-Aid is great, but you don’t want to impact or damage that relationship long term, whatever the long-term implications might be from losing that [market].” Farmers are working hard to find new markets, like Thailand and Vietnam.

The pain felt by America’s farmers as a result of the tariffs is frequently justified by their supporters with the argument that it is “short term pain for long term gain.” This argument would carry considerably more weight if those making it could outline exactly what these gains are and when they might begin to materialize. “The golden age for our American farmers is around the corner,” Sec. Rollins announced last month. It will need an end to this trade war to get there.

On and shortly after Liberation Day, economists warned that tariffs would raise prices, snarl supply chains, and cut into economic growth. Prices are higher, certainly, but haven’t skyrocketed. Goods are, despite early concerns, still on shelves. (Labor markets, on the other hand, are weakening swiftly.) Predictably, partisan cheerleaders are taking a victory lap, claiming the “experts” got it wrong. But the current state of affairs is not vindication: it’s misdirection. The reality is that the threatened tariff regime was never fully enacted, and where tariffs have hit, the pain has been disguised by temporary buffers.

Trade policy rarely lands as a single shock. It comes in waves of announcements, exemptions, delays, and staged rollouts. Large swaths of consumer imports remain untouched or partially shielded. It is buffoonery to suggest that forecasts built on hypothetical outcomes — i.e., what would happen if tariffs were imposed as announced — should be judged against the vastly watered-down, and moreover capriciously imposed, regime that has actually been imposed. To argue otherwise is to miss the point entirely: policymakers often retreat precisely because the dire forecasts are credible. Most individuals — and economists especially — would rather base projections on a combination of theory and historical experience.

December 2025 copper futures contract (June – August 2025)

(Source: Bloomberg Finance, LP)

Copper alone is instructive. The administration slapped on a 50 percent tariff, sending shockwaves through markets, then quietly rolled it back —although not without consequences. This is trade policy drafted as if by people who’ve never managed a balance sheet, let alone understand the basics of margins and managerial accounting. For anyone watching, the episode was a case study: threats move markets, tariffs impose costs, and then political calculation intervenes to soften or reverse course. The volatility of the average effective tariff rates since April 2 are erratic enough to attribute to rudderless, arbitrary choices — the mark of policymakers lurching from headline to headline, not executing a coherent economic plan.

Where tariffs have been applied, the costs are temporarily hidden. Firms pre-positioned shipments before deadlines, so consumers are still buying pre-tariff goods. Many companies have “eaten” the costs, compressing margins, leaning on suppliers, or deferring investment to avoid passing price spikes directly to customers. That strategy isn’t sustainable — it’s a bill deferred, not avoided. Substitution to suppliers in Mexico, Southeast Asia, or domestic markets also mutes sticker shock, but at the price of higher costs, thinner supply chains, and creeping inefficiencies.

The broader macro backdrop has provided cover. Strong household balance sheets and a tight labor market (until now) give consumers room to absorb modest bumps. But that resilience is contingent. If growth slows or unemployment rises, tolerance for higher prices will vanish quickly, and the inflationary character of tariffs will become impossible to ignore.

The mistake of today’s triumphalists is confusing delay with disproof. Tariff damage accumulates gradually, showing up in reduced variety, fewer product lines, creeping cost pressures, deferred expansions, and foregone investment. Corporate bankruptcies are rising. These are deadweight losses — less visible at the checkout line but corrosive to long-term growth. Pretending they don’t exist because they aren’t yet dramatic is like declaring cigarettes safe after the first pack because no one coughed.

The illusion that tariffs are harmless today rests on diluted, phased rollouts, inventory buffers, margin compression, substitution, and consumer resilience — all of which are temporary palliatives. Should the effectiveness of those tactics erode, the real costs of protectionism will surface. And if that occurs, today’s mockery of economists will look as short-sighted as “Mission Accomplished” banners in 2003. The greater likelihood is that when negative effects surface, the administration will quickly withdraw its measures and claim victory. Whether the removal of whatever trade levies are in effect at that time will reverse the economic effects is anyone’s guess. 

No less than US Secretary of Commerce Howard Lutnich, on March 11, 2025, acknowledged the possibility of a recession on CBS News, saying that if one occurred it would be “worth it.” Four days after the announcement of new tariffs on April 2, Treasury Secretary Scott Bessent instead commented that there was “no reason” to anticipate a recession on the basis of tariffs. Yet after initially blaming a spike in unemployment on a conspiracy within the US Bureau of Labor Statistics, Trump responded to the news of the first negative monthly net change in the total number of US employees on nonfarm payrolls since December 2020 by saying that the “real numbers” would come in a year, and that they would be “job numbers like our country has never seen before.” That is a prediction worth watching particularly closely.

The truth is that forecasts are necessarily, indeed by definition, hypothetical: they project what would happen if policies were enacted as fully and forcefully as they were promulgated at the time. When policymakers retreat from those policies — typically out of fear of exactly those consequences — that doesn’t prove the hypotheticals wrong. It proves the message got through.

Government is presently “shut down” for failure of Congress to pass a budget for the start of the fiscal year. It is a relatively rare event, having happened just 21 times previously. Thus, politicians and pundits are presently telling us what to make of it: identifying immediate impacts, foretelling enduring consequences, and measuring the macroeconomics. 

There are just two ways out of this shutdown: approval of a full Fiscal Year 2026 budget or the more easily accomplished interim “stopgap” budget called a “continuing resolution” (CR). As pressure mounts for the easy fix, it is time to hear the truth: CRs can be worse than shutdowns.

Shutdowns Are Not All That

There will be thousands of genuine stories of hardship and frustration that will emerge from this shutdown. There will be waste, interruptions, and inefficiency. Still, from a whole-of-society perspective, shutdowns have historically been much ado about little. Government is not shut and it is usually only moderately and briefly down

Several myths about shutdowns prevail which make them seem dire. First: government must cease spending. In truth, spending may continue, first, with residual funds from prior years (e.g., research and development, procurement of large items, and working capital operations); and second, when required or implied by law (e.g., Social Security).

Another myth: government must cease activity. In truth, the government may conduct activity deemed essential. The result is that about 75 percent of all federal employees continue to go to work. And there they are met by a large contractor workforce. Contracts, which amount to about 47 percent of all discretionary spending, will have had lengthy periods of performance funded with last year’s budget — for moments just like this.

A final common myth: the economy suffers. In truth, while GDP does fall during a shutdown, government plays ready catch up after a shutdown. Plans swish from one month to another. When all is said and done, macroeconomic indicators will show nary a blip in the data.

The only truly unsettling predictable and regular impact is to federal employees. Whether working or furloughed, they cannot get paid for these days of shutdown until a resolution. That is indeed unfortunate.

When Washington’s Quick Fix Becomes a Slow Bleed

A CR avoids a shutdown. It grants an interim budget — one that mirrors last year’s spend rate and plan. It basically says, “Keep calm and carry on like last year!”

A CR seems like a commendable fix. However, the effects on one governmental function, the military, expose the many problems.

The first problem is that we do not live in a static world. Right out of the gate, inflation and additional sectoral price growth take a roughly 4 percent chunk out of last year’s spending power.

Then misalignment of plans quickly emerges. Each year, as the military adapts to new threats, they plan for hundreds of different acquisition and construction projects as well as various increases and decreases in production. During a CR, these changes are forbidden. Money-in-hand (usually about 6 percent) ends up sitting idle during a CR.

Unfortunately, catch up is not readily feasible as it is after shutdowns. CRs occur almost every year and last on average over a third of a year. With such recurring delays, the integrated coordination of complex projects falls apart: submarines come to dry dock and leave without updates, aircraft get built but cannot securely communicate with each other, and launch windows open and close for a satellite that is not ready. 

At the end of the year, the military often is left maintaining an island of misfit toys, while the future of warfare remains just over the horizon.

Fiscal Uncertainty Promotes Waste

CRs introduce uncertainties as to what may be purchased and when the CR will be superseded by an actual budget. Uncertainties change organizational behavior in deleterious ways.

Starting at the Treasury, each level of authority becomes protective of its funds. Managers parcel out money to lower organizations the way survivors on a life raft parcel out morsels of food.

Between price growth, restrictions on change of plans, and an organizational possessiveness that would make Gollum blush, spend rates for lower-level program offices often fall to 75 to 80 percent of last year’s. 

Tough decisions about priorities must happen: hiring slows, training is put on hold, military moves are held off, and leaders get pitted against each other.

In this environment, financial managers repeatedly must justify short-term spend plans and execution performance. To avoid money being clawed away, they spend expediently instead of necessarily effectively. Small-batch purchases replace the harder but more efficient large-batch purchases; the immediate gets preference over the optimal.

Similarly, contracting officers must repeatedly let contracts with small periods of performance. Because of the churn, they tend to choose contract types based on simplicity of execution instead of effectiveness.

When a full budget does arrive, yet more trouble occurs. Financial managers race with their belated windfall into frenzied end-of-the-year spending, often on low-value items.

A lengthy CR (as occurs in most years) undermines plans and produces many colors of waste. 

Stopgaps and Jacklegs: Euphemism for Failure

A continuing resolution is commonly called a “stopgap.” But is “stopgap” an appropriate term?

Modern dictionaries define stopgap as a “temporary expedient,” a solution “until something better or more suitable can be found.” Etymological dictionaries trace it to the literal plugging up of openings — dikes, hedgerows, and shield walls used against restless seas, impertinent cattle, and bloodthirsty Vikings.

Calling a CR a stopgap makes it seem a commendable act. But in truth, CRs are applied too frequently and lengthily. As a result, they swamp the land year after year, leaving it salted. This swamping, no doubt, does more damage than the brief political theater of shutdowns

The public should start to stigmatize CRs. To that end, I propose a different metaphor for a CR. I suggest we dig up an old slang word of American origin, an “Americanism” suited to this uniquely American malpractice. I suggest we call a CR a “jackleg.”  A jackleg is a temporary fix like a stopgap, but it is a fraudulent one from those who are “incompetent, unskillful, or dishonest.”

Congress’s License to Miss Deadlines

Each year, Congress has from February to October (about the length of time of the gestation of a human being) for its members to agree on terms. Nearly every year they fail.

A CR came about as an invention by Congress. It is their self-approved license to fail at the constitutional duty granted them. For such an insidious invention, a “jackleg” is perhaps the only appropriate epithet.

The public should demand that Congress does its job and passes a budget by October 1 each year. If it cannot, there should be only one tolerable outcome — the embarrassment of a shutdown instead of the illusions and deceptions of jacklegs.

I wrote a few weeks ago about how Trump’s manipulation of the Federal Reserve would have to go much further to achieve his goals. Lower interest rates can stimulate the economy because a lower cost of borrowing can increase investment and spending. Trump has also been pressuring the Fed to lower its target, so that mortgage interest rates and car loan interest rates fall.

Many people consider the federal funds rate (an overnight interest rate) targeted by the Federal Reserve to be a proxy for economic stimulus: lower Fed funds rate = more investment and more home and car purchases. Reality, it turns out, is far more complicated. Consider Figure 1 comparing the 10-year Treasury rate with the federal funds rate (FFR) since the Fed began lowering its target last fall:

Figure 1

While the federal funds rate (FFR) has fallen by over 1 percent from 5.3 percent to about 4.1 percent. The 10-year Treasury rate, has risen nearly half a percent from 3.8 percent to about 4.2 percent. Not only did the rates not move in the same direction, they moved in opposite directions!

This matters because mortgage rates are based on the 10-year interest rate, not the FFR. So it should come as no surprise that the average 30-year fixed mortgage rate, 6.2 percent, is slightly higher than it was a year ago and was elevated most of the last 12 months (Figure 2).

Figure 2

So why is the 10-year rate not falling as the Fed reduces the FFR? It’s because the 10-year is set by the market, by the supply and demand for the instrument, while the Fed determines the FFR by changing how much interest it pays banks and what discount rate it offers banks.

The big story in the 10-year Treasury market is an ever-expanding supply of 10-year bonds, which puts downward pressure on the price of those bonds and thereby upward pressure on their yield/interest rate. For example, you earn more interest when you can pay $900 for a bond that will pay you $1,000 in five years than if you have to pay $950 for it.

The federal debt has grown rapidly over the past 25 years from $5.6 trillion at the beginning of 2000 to $12.3 trillion in 2010 to $23.2 trillion in 2020 to $36.1 trillion at the beginning of 2025. This is the result of chronic annual deficit spending, which ballooned during COVID and has remained elevated ever since:

  • FY 2019: $984 billion
  • FY 2020: $3.1 trillion
  • FY 2021: $2.8 trillion
  • FY 2022: $1.4 trillion
  • FY 2023: $1.7 trillion
  • FY 2024: $1.83 trillion

Existing debt is refinanced through the issuance of new Treasury bonds. And annual deficits are financed by issuing new Treasury bonds. The growing supply of Treasury bonds has been keeping the 10-year rate high, even when the short-term FFR has been falling.

Meaningful change in the 10-year, and thereby in mortgage and auto loan interest rates, can come either by fiscal responsibility at the federal level, or by much more active (and distortive) Fed actions of printing money and buying 10-year Treasury bonds. While this would certainly put downward pressure on the 10-year yield in the short run, such a policy is self-defeating over time because it creates inflationary pressure. And as inflation increases, the nominal interest rate demanded by investors also rises. 

Of course, the Fed could step in again to buy more bonds with more newly created money, but then the inflationary pressures get even worse. Also, in the short run of such monetary expansion and artificial repression of interest rates, economic activity will temporarily surge due to the stimulus. But when inflation (rising prices) appears, many investment decisions will be revealed to be unrealistic and unsustainable.

This is why AIER scholars, and many others, argue for Fed independence rather than a politically directed Fed. Politicians have never managed money creation well. Inflation, and sometimes hyperinflation, can be seen in ancient Rome, in medieval Europe, in the Revolutionary and Civil War periods, in the Weimar Republic, in Zimbabwe and Venezuela, and in many other times and places.

Fed independence does not mean Fed officials can’t or shouldn’t be held accountable. Congress authorized the Fed and gave it a dual mandate of maintaining stable prices and maximum employment. While Congress should ask Fed officials hard questions, the dual mandate inhibits their ability to hold the Fed to account.

For example, was the Fed wrong to lower its target FFR in September? Given that its target inflation rate is 2 percent and the most recent print in August was 2.9 percent, it seems like the Fed made the wrong decision. However, given the weakening in the job market, the Fed’s mandate to maintain maximum employment suggests that they may have made the right decision. How can an institution be held accountable when its mandates sometimes conflict with each other? 

Rather than letting Trump reshape the Fed and direct it toward his short-term political goals, Congress should take the reins and replace the dual mandate with a single mandate of price stability. And if Congress wants to reduce the interest rate people pay for mortgages and car loans, and the interest rate the federal government pays on its debt, they have to cut spending anywhere and everywhere they can.

This government shutdown doesn’t fix the problem. Nor does a “clean” continuing resolution. Leaders in Congress need to get serious about trimming the federal budget. The Federal Reserve can’t do it for them.

This year’s Nobel Prize in Economics recognizes groundbreaking work on how innovation, entrepreneurship, and creative destruction fuel sustained economic growth. The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel went to Joel Mokyr, Philippe Aghion, and Peter Howitt for their complementary research on how societies generate technological progress and long-run prosperity. 

Their work highlights the institutional and dynamic forces that make knowledge productive and prosperity possible. It is also timely: as governments worldwide turn toward protectionism and bureaucratic control, the prize re-centers attention on what actually drives growth—open societies that reward experimentation and tolerate disruption.

The prize was given to Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress,” and to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction.” 

Mokyr’s historical work argues that enduring economic growth follows when societies create institutions and foster a culture that values the development and dissemination of productive ideas. Aghion and Howitt’s theoretical work, by contrast, formalizes the dynamic process in capitalism where new technologies, products, and business models emerge and replace outdated ones. Taken together, their contributions offer a unified picture: sustained prosperity requires both an institutional foundation that enables discovery and a dynamic market process that continually overturns the old in favor of the new. As both sets of scholars make clear, this process can only function when societies are open to economic disruption.

The most enduring question in all of economics is why some nations are rich while others remain poor. As Robert Lucas famously remarked, “once you start thinking about economic growth, it’s hard to think about anything else.” 

For most of human existence, per capita incomes were flat for centuries then suddenly surged during the Industrial Revolution—a phenomenon known as the “hockey stick” of growth. Both technological advances and population growth existed long before the Industrial Revolution, but they had never before combined to produce sustained increases in living standards. Why? The standard textbook story, growth as a function of labor and capital accumulation, cannot fully explain the takeoff. As Mokyr and others have shown, technological progress long pre-dated the modern era, and the global population remained relatively stable for centuries before exploding in tandem with growth. Something else had to be at work, something institutional, cultural, and deeply tied to how societies treat knowledge and innovation.

The work of Mokyr, Aghion, and Howitt speaks directly to this mystery. Each of them, from different perspectives, provides an answer to where growth comes from and why it persists. Their recognition by the Nobel Committee represents a powerful reaffirmation of economics grounded in theory, institutions, and long-run processes, as opposed to the short-term, randomized control trial-based approach that has dominated recent years. 

This is a victory for economists who see markets and ideas as evolutionary systems and who understand capitalism not as static efficiency but as a dynamic engine of discovery. 

Mokyr’s Work: Institutions, Knowledge, and the Cultural Roots of Innovation

Joel Mokyr, winner of half the prize, has long argued that technological change alone cannot explain modern economic growth. As he observes, technological creativity existed in China, the Islamic world, and classical antiquity, but none of these civilizations experienced the self-sustaining rise in productivity that transformed Europe after 1750.

The difference, Mokyr insists, lay not merely in inventions but in the institutions and culture that supported them. His career has been devoted to demonstrating that sustained growth arises when societies develop both a respect for useful knowledge and the social infrastructure to apply it.

Mokyr’s most influential works are, fittingly, books rather than journal articles, which are testaments to his identity as an economic historian and storyteller. The Lever of Riches: Technological Creativity and Economic Progress (1992) explored how inventions and institutions interacted throughout history. The Gifts of Athena: Historical Origins of the Knowledge Economy (2002) and A Culture of Growth: The Origins of the Modern Economy (2016) deepened this analysis, distinguishing between propositional knowledge (understanding why things work) and prescriptive knowledge (knowing how to make them work). The Enlightened Economy: An Economic History of Britain, 1700–1850 (2010) synthesized these themes into a sweeping narrative of how the Enlightenment ideals of openness, curiosity, and empiricism helped catalyze industrial progress.

As Mokyr points out, a society needs all three ingredients for growth: the accumulation of useful knowledge, the capability to transform ideas into tangible production, and the cultural openness to embrace change. These conditions did not align until the Enlightenment era, when Western Europe began to institutionalize curiosity and reward experimentation. As Deirdre McCloskey and others have shown, Britain’s Industrial Revolution was as much moral and cultural as material, as it celebrated innovation as a virtue rather than a threat. Mokyr’s work complements this view, showing that without a society willing to tolerate dissent, fund experimentation, and protect property rights, no amount of technical genius could have produced industrialization.

Crucially, Mokyr identifies the diffusion of knowledge as the linchpin of growth. The printing press, the rise of scientific societies, and a competitive yet pluralistic political order all accelerated the circulation of ideas. Political pluralism, by preventing any single authority from suppressing inquiry, ensured that heretical thinkers found refuge elsewhere, a process referred to as “the Republic of Letters.” Mokyr’s economic history thus connects technological and economic progress to the broader liberal institutions of the West. In his view, it was not a single invention but a self-reinforcing ecosystem of knowledge and openness.

It is fitting that Mokyr quipped after receiving the prize when asked if he ever expected to win, “Are you kidding me? I’m an economic historian; we don’t win Nobel Prizes!” Yet his recognition underscores how indispensable historical reasoning is to economics. His work reminds us that the great questions of economic science—i.e. why growth happens, why it happens when it does, and why some societies sustain it—cannot be answered by data alone. They require narrative, institutional analysis, and an understanding of human culture. Mokyr’s body of work demonstrates that sustained progress is not an inevitable outcome of technology or capital accumulation, but the fragile product of societies that prize inquiry and protect freedom.

In celebrating Mokyr, the Nobel Committee has honored the tradition of economic history itself. He stands in the lineage of Adam Smith, who treated markets as moral and social systems, and of Douglass North, who emphasized institutions as the “rules of the game.” 

Aghion and Howitt’s Work Modeling Growth and Creative Destruction

If Mokyr’s contribution is historical and qualitative, the work of Philippe Aghion and Peter Howitt is mathematical and theoretical. Together they developed the formal model of endogenous growth through creative destruction, which is an idea inspired by Joseph Schumpeter’s vision of capitalism as an evolutionary process of “industrial mutation.” Their seminal 1990 paper, “A Model of Growth Through Creative Destruction,” and the subsequent book Endogenous Growth Theory (1998, MIT Press), established a new framework for understanding how innovation drives long-term prosperity from within the system rather than as an external shock.

In the Aghion-Howitt model, firms invest in research and development in the hope of discovering better technologies. Successful innovators temporarily enjoy monopoly profits, but their success simultaneously renders existing technologies obsolete. This “business-stealing effect” forces incumbent firms to exit or reinvent themselves. 

Far from being a flaw, this process of continual renewal is the very engine of progress. As they emphasize, creative destruction is not destruction for its own sake; it is the replacement of inferior technologies by superior ones, a cleansing mechanism that reallocates resources toward higher productivity uses. It accounts for the microeconomic turbulence within industries, even as the macroeconomy seems to grow steadily.

Their model elegantly balances the social benefits of innovation against its private costs. Because innovators cannot capture all the benefits their discoveries confer on society, there is a case for public support of research and education. But the model also warns against policies that shield incumbents from competition or attempt to “pick winners.” Governments that try to protect existing firms misunderstand the nature of growth. The process of creative destruction depends on openness and the freedom for new entrants to challenge the old. Innovation policy must simultaneously encourage entrepreneurship and allow failure, Aghion and Howitt note.

Creative destruction, of course, traces back to Schumpeter’s Capitalism, Socialism, and Democracy (1942), where he described capitalism as “the perennial gale of creative destruction.” Aghion and Howitt’s contribution was to formalize this intuition into a coherent model that could be tested, extended, and applied to real-world questions. Their framework now underpins much of modern growth theory and has influenced empirical research on everything from patent policy to industrial organization and inequality.

To illustrate, consider their metaphorical “innovation ladder.” Firms climb this ladder by investing in R&D, while others fall off as new technologies render them obsolete. The process is painful but necessary: without turnover, there is stagnation. Importantly, in societies with well-functioning institutions that secure property rights, foster open markets, and provide a safety net that enables risk-taking, firms that fall can get up again after they’ve been knocked down. In such systems, failure is not terminal; it is part of the learning cycle.

Aghion and Howitt’s insights also carry profound policy implications. Aghion has been outspoken about the dangers of protectionism and deglobalization, warning that they “are obstacles to growth because you need a big market to grow. Openness is a driver of growth; anything that gets in the way of openness is an obstacle.” In interviews about the economic impact of tariffs, he lamented the “dark clouds currently pushing for barriers to trade and openness,” emphasizing that tariffs and industrial policy threaten the very conditions necessary for innovation.

Speaking at the Committee’s announcement, Aghion also addressed contemporary fears about artificial intelligence. He acknowledges that AI may accelerate creative destruction but insists that its potential for growth is enormous if societies maintain good “competition policies.” The key, he argues, is not to resist automation but to prepare workers through education systems that teach adaptability: “At school we learn to learn.” History, he reminds us, is replete with examples of technological revolutions such as the steam engine, electricity, and information technology that provoked fears of mass unemployment. Yet in every case, the productivity gains eventually created more and better jobs. The same, he predicts, will hold for AI, if institutions remain flexible and open.

In recognizing Aghion and Howitt, the Nobel Committee reaffirmed the central insight of modern growth theory, that progress is endogenous. It arises not from fate or exogenous shocks but from human creativity operating within a competitive framework. Their model helps policymakers understand the dual imperative of supporting innovation while ensuring that markets remain contestable. When governments intervene to protect existing firms, they freeze the very churn that drives progress. 

This message could not be timelier. As the laureates receive their prizes, the United States and other major economies are implementing the most protectionist and state-directed industrial policies since the 1930s—spending hundreds of billions of dollars to subsidize favored industries and erecting tariff barriers that stifle trade. The rhetoric of “strategic independence” may sound modern, but its logic is ancient mercantilism. The research honored by the Nobel Committee this year offers a rebuke to this approach. It reminds us that economic growth thrives under freedom, not control, and that innovation flourishes when governments protect property rights and competition rather than try to pick winners.

The Broader Meaning of the Prize for the Field of Economics

This is a deeply satisfying Nobel Prize for those who emphasize economic theory, markets, openness, and the power of human ingenuity. The laureates’ work underscores that economic progress depends on two intertwined forces: the institutions that nurture and diffuse knowledge and the process that continually reinvents the economy through creative destruction. Mokyr provides the historical and cultural foundation; Aghion and Howitt provide the mathematical and theoretical framework. Both perspectives converge on the same conclusion: societies that welcome innovation and tolerate disruption will prosper, while those that cling to protection and privilege will stagnate.

This year’s Nobel is also a reminder of what economics, at its best, can be. It is not merely the science of measuring short-term interventions or estimating causal effects. It is a grand inquiry into how human societies create wealth, freedom, and progress. 

Mokyr, Aghion, and Howitt remind us that these outcomes are not guaranteed; they rest on institutions built by fallible human beings and shared beliefs about the value of knowledge and competition. Their research points us back to first principles: that prosperity arises from the freedom to think, to build, to fail, and to try again.

As policymakers around the world grapple with slow productivity growth and rising populism, they would do well to revisit the insights of these laureates. 

Suggested Readings

Mokyr:

A Culture of Growth

The Gifts of Athena

The Intellectual Origins of Modern Economic Growth

Aghion and Howitt:

A Model of Growth Through Creative Destruction

The Economics of Growth

Research and Development in the Growth Process

Several incidents in the COVID pandemic’s first two years forced me to confront the uncomfortable reality that American society had cracked apart, fleeing the comfort and safety of accepted knowns to float untethered from logic in a foreign ether far from planet Earth. Welcome to Mars.

But prior incidents had already trained and prepared my mind to expect a coming derangement. During the Persian Gulf War and the Northridge Earthquake, I had near-death experiences that lingered for years in memory, forever shaping my future actions. Just as scary as thinking I was about to die were the frightening behaviors I witnessed in those around me. During the Gulf War, a soldier in my division came across an Iraqi mine. Instead of calling for engineers to destroy the device, he decided to flip it away from himself, blowing off his own head. After the 1994 earthquake stopped shaking my condo so hard the refrigerator fell over and the walls seemed close to caving in, I stepped outside to smell gas leaking from the major pipeline that ran beneath our complex and a nervous neighbor lighting a cigarette to calm his nerves.

Terrified someone we couldn’t see might be lighting up a smoke elsewhere in the condo complex, my roommates and I fled for safety, driving through a surreal cityscape of gas line fires, while I rode in the backseat with a loaded pistol.

Both wars and natural disasters upend the laws and rules that govern our normal existence. Experience has taught me that such tectonic shifts in society’s rules leave many unprepared to adapt and navigate a new ecosystem. My safety and survival, I’ve learned, sometimes depend on putting my back against a wall to watch those around me whose thinking refuses to acclimate.

The rules are changing dramatically, I posted on Facebook, back in the summer of 2020. And some people won’t be able to adapt. You’re gonna see people you have long trusted and respected lose their absolute minds, drop trou and show the whole world their entire ass. Be careful.

I knew crazy was coming. I did not expect that crazy to destroy so much trust in our government, media, and social institutions.

How “Follow the Science” Destroyed Trust in Science

Journalist David Zweig documents much of the COVID pandemic crazy in his book An Abundance of Caution. In diligent detail, he marches the horrified reader through a series of mistakes, most still unacknowledged, including the lack of scientific evidence for lengthy school closures and nonsensical “follow the science” requirements for masks and social distancing. The details he describes remain frightening because too many still deny what happened nor admit they did anything wrong.

The month after the pandemic took off in the West, the Journal of the American Medical Association (JAMA) published a February 2020, summary of Chinese data and found just 2 percent of COVID patients were less than 19 years old and no children younger than 10 had died. “Disease in children appears to be relatively rare and mild,” Zweig discovers, digging up a World Health Organization (WHO) report published that same month.

Just like the study in JAMA, WHO researchers stated that children accounted for around 2 percent of reported cases, with only 0.2 percent of children categorized as “critical disease.” This calculates to 0.0048 percent of the total population who became seriously ill.

People interviewed by the WHO investigative team “could not recall episodes in which transmission occurred from a child to an adult.”

Despite research showing that kids were at minimal risk from the virus, Zweig records what we all now know: we ignored objective science in favor of subjective values, locked down our cities, shut down our schools, and threw the kids on laptops pretending they would learn. Baseless fears that children were dying in large numbers lingered even six months into the pandemic, long after anyone with eyes could see the virus wasn’t killing kids.

Gallup released a poll in July 2020 finding that the public thought 40 times the number of people younger than 25 were dying than was actually the case.

“People were dying from a scary new disease, and my family and my neighbors were readily compliant with the governor’s orders to stay home, and stay apart from each other until some unknown time when this thing was going to go away,” Zweig writes, describing the state of his household a month into New York State’s lockdown. “And yet. This virus, which was a terror for the old, posed almost no threat to my kids or their friends.” 

A former magazine fact checker, Zweig began digging into scientific studies and calling up established researchers to try and understand how state and federal governments formulated pandemic policies that seemed to ignore scientific evidence while harming his own children. Trusted officials, he found, were failing to adequately explain the uncertainties of published research and closing their eyes to documented consequences.

But the public never learned that pandemic strategies were based mostly on values, not objective science, because journalists had abandoned all pretense of reporting. Instead of scrutinizing the scientific literature, journalists with legacy media outlets favored calling up these same trusted officials. Reporters also platformed a coterie of self-branded experts who managed to claw their way out of scientific obscurity to become overnight authorities on epidemics in the press and on social media.

Many of the plans enforced during the pandemic ignored already established contagion-response strategies. In his book, Zweig cites several researchers who warned that school shutdowns would damage children during an epidemic, such as D.A. Henderson, a much celebrated epidemiologist who led the international effort to eradicate smallpox before becoming dean of the school of public health at Johns Hopkins University.

“Disease mitigation measures, however well intentioned, have potential social, economic, and political consequences that need to be fully considered by political leaders as well as health officials,” Henderson wrote in a 2006 paper published in the journal Biosecurity and Bioterrorism. “Closing schools is an example.”

Henderson cautioned against locking kids out of school and forcing some parents to abandon work to stay at home, a policy that would place an unfair burden on certain segments of society to control virus transmission. Henderson and his co-authors also forewarned against policies based on scientific models, as they would fail to account for all social groups.

No model, no matter how accurate its epidemiologic assumptions, can illuminate or predict the secondary and tertiary effects of particular disease mitigation measures. . . . If particular measures are applied for many weeks or months, the long-term or cumulative second- and third- order effects could be devastating.

Yet models are exactly what trusted officials relied on, Zweig writes, for pandemic procedures such as school closures whose damage to children is still being assessed. As for the segments of society who were most harmed, that would be the less privileged and the working class, whose experiences and perspectives were never injected in these models formulated by “laptop liberals” who had the privilege to work from home offices. 

Zweig highlights the awful reporting by a few laptop warriors, such as New York Times reporter Apoorva Mandavilli, and a 2020 working paper by Dartmouth College and Brown University academics underlines how poor journalism was pervasive. Analyzing 20,000 news articles and TV news segments from foreign English-language and American media for positive or negative tone, they found that US major media outlet coverage was far more downbeat.

“Among topics analyzed, the researchers looked at schools coverage specifically,” Zweig writes. “They found that 90 percent of school reopening articles in American mainstream media were negative, compared to only 56 percent for English-language major media in other countries.”

Pretending Certainty, Demanding Compliance

Living in Spain, I was unaffected by much of the pandemic crazy in 2020. My wife is a physician, but we had just had a child, so she was staying at home. No worries about school lockdowns, no fears about my wife getting sick treating patients. As for me, I work from home, and ventured out every few days during the lockdown to buy food.

I didn’t realize it at the time, but I was the classic lockdown liberal, and I played the part like a skilled character actor. I followed all the rules, masking when I left the apartment and berating anyone on social media who did otherwise. But as happened with Zweig, cracks in my worldview eventually appeared.

After Trump announced pharma executive Moncef Slaoui as his Coronavirus Czar to run Operation Warp Speed, I wrote a July 2020 piece for The Daily Beast discussing my dealings with Slaoui. I had led the US Senate investigation into GlaxoSmithKline (GSK), from 2007 to 2010, and we had uncovered GSK hiding the dangers of Avandia, the company’s $3 billion a year blockbuster diabetes miracle. Slaoui was head of GSK’s research, at the time, and the Committee’s 2010 report on Avandia exposed Slaoui lying to Congress about the drug’s harmful effects.

“In the face of the most dangerous disease confronting the country today, why would Trump ask the public to trust someone with this past?” I reported for the Daily Beast in July 2020.

By late 2020, I was having serious doubts about the COVID news. When I came across an article dismissing the idea that the pandemic might have started in a Wuhan lab as a “conspiracy theory,” I shared it on Facebook with a skeptical comment, pointing out that it was absurd to use that label when none of us actually knew how the pandemic began.

I was then confronted by a couple science writers who dressed me down in Facebook comments. Didn’t I know that Trump was saying the virus came from a lab? Why was I saying the same thing as Steve Bannon, the conservative podcaster?

The response was a bit mind-boggling. I didn’t listen to Bannon’s podcast, and I didn’t care what Trump said. I certainly didn’t follow Trump on social media because I got my fill of his opinions in the news. But if Trump did say the virus came from a Chinese lab, what did that have to do with me asking questions?

Like everyone, I followed requirements to mask, even though I found masks off-putting and masking demands almost religious in their imposition. At the same time, several respected researchers told me that the scientific evidence for masking wasn’t there. So why were we all masking?

Losing Faith in the Church of COVID

I first spoke with Zweig several times in early 2023. Elon Musk had given me the greenlight to come to Twitter’s headquarters and dig through the Twitter Files for evidence the company had been censoring inconvenient COVID truths. Zweig had already published some Twitter Files and I wanted to pick his brain about what I could expect when I got to San Francisco. (Unfortunately, Zweig doesn’t cover the pandemic censorship in his book.)

I began picking Zweig’s brain about the science supporting mask mandates. Scouring the academic literature and news reporting on masks, I had found a few articles in places like Scientific American, and Wired that argued masks don’t work to stop virus transmission. Zweig had written three of these: a 2020 article in Wired, and articles in New York Magazine and The Atlantic in 2021.

Zweig lays out all the problems with “masks work” science in his book, but I had missed his articles when they were published, because his reporting had been drowned out in a tidal wave of news cheerleading for masks. Zweig’s report in The Atlantic titled, “The CDC’s Flawed Case for Wearing Masks in School” is particularly revealing about mask derangement.

Zweig’s article discusses a paper published in the CDC’s Morbidity and Mortality Weekly Report and found that schools without mask mandates were three-and-a-half times more likely to have COVID outbreaks than schools with mask mandates. The findings were so stunning that CDC Director Rochelle Walensky flacked them during interviews, including an appearance on CBS’s Face the Nation.

Zweig, however, discovered the study was rife with errors, one scientist calling it “so unreliable that it probably should not have been entered into the public discourse.” First, many of the schools cited in the paper were not even open during the study period. Furthermore, the researchers didn’t control for student vaccination status, which would have changed the incidence of COVID illness. Zweig also found that some of the schools that were supposed to have mask mandates never had mandates, while others were virtual schools where students never attended in person.

Back when I called Zweig in 2023, he told me he found reporting on the CDC study for The Atlantic in 2021 still painful, two years later. After documenting all the flaws in the CDC paper, he told me he sent the list to the CDC for comment. The agency didn’t dispute his reporting, yet they stood by the study.

“I was just banging my head on the floor, ‘Oh, my God. What is going on!” he told me at the time.

Zweig also documents a paper that researchers at Arizona State University published in April 2020 that alleged if 80 percent of people wore masks it could reduce COVID mortality by 24 percent to 65 percent. But did they arrive at this conclusion by running a study? Of course not.

Zweig found the paper was based on a model that was based on another model and a whole slew of assumptions. Only when you delve into the details do you realize how shoddy the research was that guided us through the pandemic:

The authors arrived at this conclusion by assuming masks had, at worst, a 20 percent effectiveness. Where did they get 20 percent from? They cite another modeling paper, “Mathematical Modeling of the Effectiveness of Facemasks in Reducing the Spread of Novel Influenza A.” This paper, however, cites a study that found surgical masks can have a performance as poor as just 15.5 percent effectiveness at blocking virions. The study also found that, depending on particle size, nine out of ten N95 masks, which are supposed to block 95 percent of particles, failed to meet that benchmark. Some of the tests in the study also used aerosolized salt, which has different characteristics from viruses. And, importantly, the study was conducted in a laboratory on manikins, with the masks “sealed to the manikin’s face.” The authors noted the obvious: “in real life leaks may lead to considerably increased penetration.”

Hundreds of subsequent studies, Zweig discovered, then cited this modeling paper, as did many governmental reports. But on social media, the “model” morphed into a “study” that was “proof” that masks work.

The Perils of Predictive Modeling

“Models bury assumptions,” one expert tells Zweig. As he notes in the book, many models have little or no power in predicting the future:

It was like a football coach showing his team a complex offensive play and insisting it would result in a touchdown, without acknowledging that each of the opposing team’s defensive players might not do what he expected them to do. Even the most elegantly designed plays by the best coaches often turn out ugly on the field. Like their human counterparts, the scientific models were a beautiful ideal.

Halfway through the reading, I sent Zweig a text, complaining how mad his book was making me. This is my only warning to readers. Zweig’s book is smart, well-written, and superbly researched, but as he recounts his own experiences page after page, it will dredge up your memories of the pandemic. Like mine, like Zweig’s, they are certain to be laden with confusion and laced with certainty that the world, however briefly, had gone mad.

Unfortunately, if you’re searching for some sort of resolution that An Abundance of Caution has set history right, restored a sense of truth, and resurrected faith in our leaders, think again. As the pandemic wound down, Zweig recounts how the media and left-leaning establishment dreamed up a new narrative to hide their prior mistakes: “those decisions were regrettable, yet they were understandable during a time of fear and uncertainty.”

There is no going back to a time before COVID-19 made our world crazy. You are right to be mistrustful of trusted officials and respected institutions. Zweig’s writing lays out all the evidence you need to feel this way.