President Trump’s tariffs appear to be pushing prices higher. Inflation picked up in June, according to new data from the Bureau of Economic Analysis. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at an annualized rate of 3.4 percent last month, up from 2.0 percent in May. It has averaged 2.5 percent over the last three months and 2.6 percent over the last year.

Core inflation, which excludes volatile food and energy prices but also places more weight on housing services prices, was a bit lower. According to the BEA, core PCEPI grew 3.1 percent in June, up from 2.6 percent in the preceding month. It has averaged 2.6 percent over the last three months and 2.8 percent over the last year.

The uptick in inflation observed in June is largely due to newly-imposed tariffs by the Trump administration. Tariffs on foreign-produced goods get passed through to consumers, and enable domestic producers to charge higher prices for close substitutes. Consistent with this view, the BEA reports that the recent rise in prices was especially pronounced for goods. 

Goods prices grew at an annualized rate of 4.8 percent in June, compared with 0.9 percent in the prior month. Durable goods prices, including prices for motor vehicles and parts, furnishings and durable household equipment, recreational goods and vehicles, as well as other durable goods, grew at an annualized rate of 5.7 percent (up from 0.3 percent in the prior month). Non-durable goods prices, including prices for food and beverages purchased for off-premises consumption, clothing and footwear, gasoline and other energy goods, as well as other non-durable goods, grew 4.3 percent (up from 1.2 percent).

Services prices, in contrast, grew just 2.8 percent (annualized) in June — only slightly higher than the 2.5 percent rise observed in May.

All else equal, higher tariffs cause a one-time rise in the level of prices and, hence, a temporary increase in the rate of inflation. Once tariffs have passed through, the rate of inflation will return to its longer run trend — though the level of prices will remain permanently elevated.

As my colleague Bryan Cutsinger has recently argued, the Federal Reserve should look through tariff-induced price hikes when setting monetary policy. That doesn’t mean, however, the Fed should leave its federal funds rate target unchanged:

[…] when productivity prospects dim — as they often do in the face of trade uncertainty: higher input costs, reduced access to more efficient foreign suppliers, and resource misallocation driven by protectionist policies — investment demand falls, dragging the neutral rate down with it.

In order for monetary policy to remain on track, the Fed must adjust its policy rate when the neutral rate changes. For example, if tariffs are pulling the neutral rate lower, then the appropriate course of action is for the Fed to cut its policy rate. 

If the Fed leaves its federal funds rate target unchanged as tariffs pull the neutral rate down, monetary policy will passively tighten.

And yet, that is precisely what the Fed did at this week’s meeting. The Federal Open Market Committee voted 9-2 to hold the federal funds rate target in the 4.25 to 4.5 percent range.

Back in June, the median FOMC member projected the longer run federal funds rate at 3.0 percent. That suggests monetary policy was already quite restrictive. Hence, the Fed has not merely allowed monetary policy to tighten passively. It has done so from a position where monetary policy was already tight.

Prior to the meeting, Fed Governor Christopher Waller — one of two FOMC members to dissent from Wednesday’s decision — explained why he thought the FOMC should begin cutting rates. “While I sometimes hear the view that policy is only modestly restrictive,” he said, “this is not my definition of ‘modestly.’”

In fact, the distance that must be traveled to reach a neutral policy setting weighs heavily on my judgment that the time has come to resume moving in that direction. In June, a majority of FOMC participants believed it would be appropriate to reduce our policy rate at least two times in 2025, and there are four meetings left. I also believe — and I hope the case I have made is convincing — that the risks to the economy are weighted toward cutting sooner rather than later. If the slowing of economic and employment growth were to accelerate and warrant moving toward a more neutral setting more quickly, then waiting until September or even later in the year would risk us falling behind the curve of appropriate policy. However, if we cut our target range in July and subsequent employment and inflation data point toward fewer cuts, we would have the option of holding policy steady for one or more meetings.

Alas, a majority of voting FOMC members ignored Waller’s warning. 

With the decision made, we must now hope the Committee comes around to Waller’s view by September — and that their decision in September is not too little, too late.

The idea that people have an unalienable right to pursue their own happiness is a very radical idea. Prior to the eighteenth century, almost no one in the world believed it. Even today, only a small sliver of humankind agrees with it. 

Equally radical is the idea that the only purpose of government is to protect that right. We can quibble about some of the details, but the central idea is unequivocal. If you and I both have the right to pursue our own happiness, it would be wrong for a government to impose burdens on you just to make me happier. 

Critics of this political philosophy invariably note that some of the authors of the Declaration of Independence owned slaves. But remember, just about everyone else in the world at the time thought that there was no such thing as an individual right. In recognizing that some people had rights, the founders opened a door that would inevitably extend to everyone else.

Their declaration of the right to representation and self-governance initially applied to the free, property-owning men of thirteen North American colonies. Thanks to their foresight, we’ve been extending the right to pursue happiness to more Americans ever since. 

A Radical Declaration: All Men Are Created Equal

The Declaration of Independence was written at a time when the world was undergoing two major changes — both of which made the Declaration possible. 

One major change was intellectual: a radical shift in thinking about the relationship of human beings to one another. Today it is called The Enlightenment or the Age of Reason. In place of domination by the Church or the State (empire or monarchy), Enlightenment thinking held that human beings were independent moral entities who should deal with each other on the basis of reason, persuasion, and voluntary exchange. 

Stephen Pinker has devoted an entire book to the idea that The Enlightenment is the reason why we are not living at the subsistence level today — grubbing around in the forest for roots and berries, as our ancestors lived for several hundred thousand years. 

The other major change was economic. 

Prior to the eighteenth century, most people in most places could probably not have survived under the political arrangement envisioned by the Declaration of Independence. 

Our distant ancestors were hunter-gatherers who lived in small groups. They existed at the subsistence level, and they were continually at war with other tribes. In hunting and gathering and in making war, they relied on cooperative action, in which individuals subordinated their short-term self-interest to the long-term welfare of the group.

Think about a troop of soldiers on a military mission. If each one pursued his own happiness, the mission would never be achieved.

Our distant ancestors, like that military troop, were at war with other tribes and at war with nature. Since they had no markets and no government (at least as we know those institutions today) they relied very heavily on cultural norms to enforce cooperative activities. 

Cultural rites and rituals celebrated self-sacrifice — heroism in battle, risk-taking in the pursuit of large game, diligence in gathering food and other cooperative duties. People were encouraged to think of the entire tribe as extended kin. Other tribal inhabitants were seen as family, not parties to exchange. Outsiders were enemies. 

In time, the tribal life that dominated human existence for over 200,000 years began to give way to the marketplace. 

People began to view strangers in other communities as trading partners rather than military adversaries. Specialization and trade began to link people who lived in distant places. Tribes grew into cities, and specialization and trade replaced kinship relations in local communities as well. 

One recent paper, though writing of more recent market developments, summarizes trade’s pro-social benefits by noting that: “increased market access fostered universalism, tolerance, and generalized trust.” When we are supported in predictable patterns of cooperating with strangers, we extend trust and willingness to transact beyond our tribal and kin-based ties.

In the communities populated by our distant ancestors, an individual could do the most good for others around him by sacrificing his own self-interest to the whole group. In an interconnected marketplace, an individual could do the most good for the most others by pursuing his own self-interest, providing something others wanted to buy.

It may be no coincidence that the Declaration of Independence was published in the same year as Adam Smith’s The Wealth of Nations. By 1776, the best minds in the western world believed individuals had a right to pursue their own happiness and government should ensure they respected the rights of others. The two big changes — a change in how people thought and a change in how they made a living — fused into a political arrangement that had never existed before: classical liberalism.

The Pursuit of the Pursuit of Happiness: 

The Constitution that embodied the spirit of the Declaration of Independence placed restrictions on the federal government, but placed no such constraints on state and local governments. Rights guaranteed under federal law were increasingly seen as appropriate under state and local governments as well, after the Civil War. The Supreme Court and evolving popular opinion rapidly expanded the ideals of the Declaration to more residents of the nation. The rights of Black men to vote, and later of all women to vote, were eventually recognized.

Even so, as we approach the Declaration’s 250th birthday, it is helpful to think about which subsequent policy shifts were consistent with its underlying vision, and which were not. 

Where have we lived up to its ideals, and where have we failed? 

When Government Blocks Your Pursuit of Happiness

When it comes to the role of government in protecting our pursuit of happiness, history is a public policy roller coaster. 

In 1905, the Supreme Court struck down a state law that prohibited bakery workers from working more than 60 hours a week. The law protected established bakers by suppressing competition from bakers who were willing to work longer hours, mostly ethnic immigrants, including Italians, Jews, and German immigrant Joseph Lochner, the plaintiff. Incumbent businesses were using the state government to block people’s productive pursuits, operating like a medieval guild. 

​Between 1897 and 1937, in what is known as the Lochner era, the Supreme Court struck down 184 laws. For the most part, these were laws that limited people’s freedom of contract — usually for some obvious special interest reason. Clearly, the Lochner era rulings were consistent with the classical liberal concept of the proper role of government. They reversed special-interest public policies that trace their roots all the way back to the early settlements in this country.  

The political pressures of the Great Depression ended the Lochner era, and special interests regained their power. Today, even if the backers of a public policy admit that it has no defensible public purpose, that it robs the many for the benefit of the few, and that it makes almost everyone worse off — the courts will not step in to stop it. 

During the twentieth century, economic studies show that the Interstate Commerce Commission largely served as a cartel agent for the railroads and then for the trucking industry. The Civil Aeronautics Board served as a cartel agent for the airlines. The Federal Communications Commission served the interests of the broadcasters. Through price supports, quotas and other devices, the federal government helped farmers restrict output and sell at higher prices. All of these interventions were to the detriment of consumers. 

Beginning in the Jimmy Carter era, deregulation helped undo some of the special-interest harm — much of it stemming from the administration of Franklin Roosevelt. And we are lucky that the Roosevelt era wasn’t even worse. 

Had he not been stopped by the Supreme Court, Roosevelt was willing to allow every industry in the country to limit output and fix prices through the National Industrial Recovery Act — mercantilism on steroids. 

Today, nearly 30 percent  of all jobs require a government license, and economists across the political spectrum often agree that these requirements serve as barriers to entry. City after city has regulated low-income housing out of existence. Teachers’ unions are successfully blocking escape routes for disadvantaged children almost everywhere. Government continues to select who may pursue happiness.

Reclaiming the Promise of the Declaration 

Political change is hard. But acknowledging the meaning of the Declaration and honoring its creators should not be hard. 

In 1776, few people anywhere in the world believed anyone had an essential right to life, liberty or the pursuit of happiness, that his government was bound to honor. Fewer still were ready to die for that belief. 

When the founders first asserted the existence of individual rights — while it’s true they didn’t include everyone they should have — they were challenging what everyone else thought, and at great cost. For this, even as we acknowledge their failings, we owe them a great deal of gratitude. In opening the door for themselves, the founding fathers ultimately opened it for everyone else. 

To honor the real spirit of the Declaration, a public policy inventory is long overdue. So much of our government actions neither protect individual rights nor promote the general welfare. We could honor the Declaration by scuttling them. 

Any practicing Catholic will tell you that Pope Leo XIV answers to a higher power, but none would say that higher power is the Internal Revenue Service. Yet, as Tax Notes’ Robert Goulder notes, the Holy Father will likely still need to file income taxes. 

This debate highlights the importance of tax simplicity. If a government must levy taxes, the system should be straightforward enough for the average citizen to understand. If a government taxes income, it must be a simple flat rate. Even better would be to eliminate income taxes altogether. 

As reported by The Washington Post back in May, the US requires all citizens (including those living abroad like Pope Leo XIV) to file an annual tax return. Most Americans residing overseas can exclude up to $130,000 in foreign-earned income from US income taxes. This doesn’t apply, however, to Pope Leo, because that income is earned working for a foreign government: the Vatican. 

Although the pope does not have an official salary, the Vatican covers his housing, food, travel, and health care; it also provides a monthly stipend for personal expenses. 

Figuring out what he must report will be the daunting task of his accountants. Fortunately, the Holy Father is not on the hook for Illinois personal income taxes because he has not earned income in the state since 2014 (the last year he resided there). 

If he pays income taxes to a foreign government, however, it can be used to subtract his federal income tax bill by claiming the foreign tax credit. The pope likely utilized this credit during his time in Peru, where he became a naturalized citizen in 2015. Questions also arise about the specific tax forms he must file. 

Declining a salary and giving the earnings to charity, however, does not mean Pope Leo escapes the IRS. Goulder explains, “For US tax purposes, a decision to decline salary may not be sufficient to prevent the earnings from being treated as gross income.” 

The Holy Father is hardly alone in facing the headache of tax compliance. In 2024, 66 percent of Americans said that they believed the US Tax Code was “Overly Complex,” and for good reason. The Tax Code is 6,871 pages long. When adding on the federal tax regulations and official tax guidance, the total exceeds 75,000 pages. In 2024, Americans collectively spent 6.5 billion hours preparing and filing their taxes. This came at the cost of losing over $280 billion in foregone income and $133 billion in out-of-pocket costs.

Still, these complications are not likely to cause the Church to call for a crusade against the IRS. The Catholic Church acknowledges the legitimacy of civil authority while recognizing God as the ultimate authority. When questioned by the Pharisees about taxes, Jesus responded, “Then repay to Caesar what belongs to Caesar and to God what belongs to God” (appearing in Matthew 22:21, Mark 12:17, and Luke 20:25; also referenced in Romans 13:7). 

That said, “Caesar” is not above criticism. The Tax Code needs to be simplified. In 2025, one in four Americans feared they would make a mistake filing their income taxes, which would likely result in an audit. These fears are valid. Research shows that low-income taxpayers claiming the Earned Income Tax Credit are disproportionately audited compared to the average taxpayer. 

Enacting a flat income tax rate and eliminating loopholes would help ease those concerns. A flat tax rate is easier for taxpayers to understand and keeps government accountable. Carving out exceptions for specific cases (such as Pope Leo XIV’s) within the current framework is likely to invite fraud and manipulation.

Moreover, no income tax is better than a flat income tax rate. Taxing income (when money is earned) penalizes work, investment, savings, and hiring, which harms economic opportunity and overall quality of life. 

Alternatively, taxing consumption (taxing when money is spent) is less distortionary. Doing so shifts when people spend without discouraging them from earning and investing. 

In 2024, the federal government took 84 percent of all 2024 revenue directly from individual income taxes and payroll taxes (in other words, directly from the paychecks of hardworking Americans) — yet still ran a $1.83 trillion deficit. Calls for higher taxes belie the fact that the government’s budget problems stem from spending and overregulation, not a lack of revenue. 

“Caesar” cannot manage and fund everything. 

Simplifying the Tax Code will make life for Pope Leo and millions of Americans much easier going forward. The petty Caesars at the IRS should take note.

Despite mounting pressure from President Trump to cut rates, the Federal Open Market Committee (FOMC) voted yesterday to hold the target range for its policy rate constant at 4.25 to 4.5 percent, where it has remained since December 2024. Notably, two members of the committee — Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller — dissented, favoring a 25-basis point cut. It was the first time that two Board members have dissented since 1993.

Fed Chair Jerome Powell’s comments at the post-meeting press conference largely echoed his earlier statements this year. He reaffirmed the Committee’s view that the economy remains strong, with the labor market at or near maximum employment, while acknowledging that inflation remains slightly above the Fed’s 2 percent target.

Pointing to newly released GDP data, Powell noted that while the economy grew at an annualized rate of three percent in the second quarter, averaging that figure with the weaker first quarter suggests that growth has slowed overall. The economy is now on track to expand by just 1.2 percent in 2025, down from 2.5 percent in 2024. Powell attributed the slowdown to weaker consumer spending growth but emphasized that business investment is running ahead of last year’s pace.

The labor market remains in balance, according to Powell, who noted that the unemployment rate remains low — around 4.1 percent — and has fluctuated only minimally over the past year. At the same time, wage growth, while moderating, continues to outpace inflation. In short, the Committee appears satisfied with progress on the employment side of the Federal Reserve’s dual mandate.

Powell acknowledged that although inflation has moderated substantially over the past three years, it remains above the Fed’s 2 percent target. He noted that data from both the Consumer Price Index and the Personal Consumption Expenditures Price Index show that the overall price level rose by 2.5 percent over the past 12 months, driven in part by higher prices on tariffed goods. While short-term inflation expectations have risen in response to recent tariff developments, Powell emphasized that longer-term expectations remain well anchored around the Fed’s target.

He also cautioned that it is still too early to determine the full effect of the tariffs on the economy. The Committee’s baseline view, he reiterated, is that the inflationary effect is likely to be short-lived: the tariffs will cause a one-time upward shift in the price level, not a sustained increase in inflation. Nonetheless, Powell noted that if the effects prove more persistent than expected, the Committee may need to reassess its baseline.

The Fed’s obligation, Powell emphasized, is to ensure that long-run inflation expectations remain anchored at its 2 percent target and to prevent one-time increases in the price level from turning into sustained inflation. He argued that the Fed is well-positioned to adopt a wait-and-see approach to the inflationary effects of the tariffs — a view I have recently criticized as reflecting a fundamental misunderstanding of how monetary policy works. Nonetheless, Powell maintained that the Fed’s current policy stance is appropriate given the ongoing inflation risk.

Interestingly, Powell also signaled that the Committee remains attentive to risks on the employment side of its mandate — presumably those arising from an overly restrictive policy stance. This marks a subtle shift from recent press conferences, where he emphasized that the Fed would, if necessary, prioritize price stability, rightly arguing that it is a precondition for a strong labor market.

Looking ahead, the Fed is expected to conclude its framework review by the end of the summer — potentially signaling a return to its pre-2020 inflation-targeting regime. The FOMC will meet again in September. Markets currently assign about a 45 percent chance to a 25-basis-point rate cut, though that probability is likely to shift in the coming weeks amid economic uncertainty and ongoing political pressure.

Political Philosophy: The Basics, by Bas van der Vossen, published in October 2024 by Routledge, is an accessible introduction to the core questions of political philosophy and how to reason about them. This brief book is divided into six chapters (seven, if you include the introduction), covering how political philosophy is practiced, key topics in political philosophy such as political obligation, freedom and equality, the social contract, and justice, and concludes with an argument against political activism for those studying political philosophy. The book is written for the beginning philosopher, political science student, or the interested political amateur or early graduate student. Its brevity (around 120 pages) well suits it to the task, as it can be finished within two to three hours of reading.

The reader will be rewarded with a clear, engaging, and well-structured introduction to political philosophy. The clarity of the book is brought about by the centering of key arguments and their premises in each chapter. Socrates, for example, argues that since he was raised by the city and stayed within the city, he is obliged to follow the city’s laws, including accepting the death sentence imposed on him. This argument is followed by amended premises that allow for the possibility of disobeying an unjust law.

Van der Vossen opens the door for us to work through the tensions of these arguments by examining their explanatory power, plausibility, and fit to the evidence surrounding the political phenomena under investigation. As we go through this process, we will try to discern what is true and develop theories built upon true premises, valid structures, and sound arguments. He calls this process reflective equilibrium and accepts that any given theory, even after undergoing this process, will be somewhat dissatisfying but better than it was before the process began. Is this another way of packaging Plato’s dialectical reasoning with a splash of Aristotelian logic for flavor? 

Of course, van der Vossen is not committed to the classical rationalism of Plato and Aristotle. He is much more at home in the world of modern liberalism. When mentioning theorists, he is most comfortable with Locke, Hobbes, Rousseau, Hume, Mill, Wollstonecraft, Nozick, and Rawls.

Van der Vossen fails to mention Rousseau’s antipathy to private property, and he questions whether improvements to the wealthiest, which do not harm the poorest, would truly be rejected behind Rawls’s veil of ignorance. His analyses seem sympathetic to Rousseau’s general will and Rawls’ use of the veil of ignorance. Still, he seems to conclude that something very close to classical liberalism emerges if these concepts are correctly applied.

A firm grasp of the mechanisms and logic of the classical and modern liberal project is not a paltry prize. Francis Fukuyama argued three decades ago that liberalism was the final ideology to emerge in history, and this book appears to take Fukuyama at his word. Yet, our world continues to be filled with illiberal realities. Tribalism has been resilient in Africa, Southeast Asia, and the Middle East, and nationalisms of all varieties are asserting themselves globally. Similarly, religious faith plays a prominent role in ordering the world community. The persistence of communalism, exclusionary biases, and metaphysical and ontological claims receive insufficient attention in a book dealing with the basics of political philosophy.

These topics certainly make things messier. The biblical Israelites were given property occupied by other people. Their god instructed them to remove them, and after defeating them, “devote them to complete destruction.” That seems clearly unjust.

But how many foundings occur in similarly messy circumstances, and with similarly lofty claims? God is also the source of commands to be just and humble. Is not the variety of human claims about the correct order of the world the impetus to philosophize?

The final chapter of this work addresses whether a political philosopher should be an activist. Van der Vossen, to his credit, argues that the philosopher should be more like a scientist and avoid polluting experiments with personal biases. If one is to understand political reality, one should have sufficient reflective distance to not be blind to the nature of that reality because of one’s biases. This reflective distance is challenging to achieve, but van der Vossen believes that the political philosopher should be committed to cultivating that openness to reality.

Did van der Vossen succeed on his terms? The liberal tradition he represents in this book may be the best political order. In that case, political philosophy may be about reasoning in a liberal democracy. Whether it is the case or not, the basics of political philosophy should encompass more than just moral or immoral actions from a liberal perspective, but rather a deeper examination of the reality of politics. This would mean including thinkers such as the Prophets, Thucydides, Augustine, Aquinas, Machiavelli, Spinoza, Tocqueville, Marx, Darwin, Nietzsche, Heidegger, and others.

Similarly, one could find fault in this effort for not reaching beyond the horizons of the Western tradition or wrestling with the critical theory so often dismissive of our liberal heritage. Nevertheless, the book is an excellent introduction to the dominant mode of reasoning that students and laypeople would likely encounter in policy circles in the United States and the European Union.

When asked last month at the European Central Bank’s annual forum in Portugal whether the Fed would have cut interest rates if not for the tariffs, Fed Chair Jerome Powell affirmed that was indeed the case. He explained that the Fed chose to pause its rate-cutting cycle in light of the tariffs’ magnitude, opting to wait and see how the trade-policy uncertainty would affect the economy before adjusting policy further.

While such an approach may seem prudent amid the uncertainty surrounding trade policy, it reflects a fundamental misunderstanding of how monetary policy works. If tariffs end up reducing productivity, they will also depress the neutral rate of interest — that is, the rate consistent with full employment and stable prices. And if the neutral rate falls while the Fed holds its policy rate steady, the central bank has, in effect, tightened monetary policy despite taking no overt action.

With the Federal Open Market Committee (FOMC) expected to hold rates steady at today’s meeting, it’s worth asking why the Fed cannot afford a wait-and-see approach — and why it shouldn’t attempt to offset tariff-induced price pressures in the first place.

The neutral interest rate depends in part on investment demand, which itself is closely tied to productivity growth. When firms expect productivity to rise, they’re more willing to invest in new capital projects, raising the demand for loanable funds and, with it, the neutral rate. But when productivity prospects dim — as they often do in the face of trade uncertainty: higher input costs, reduced access to more efficient foreign suppliers, and resource misallocation driven by protectionist policies — investment demand falls, dragging the neutral rate down with it.

In order for monetary policy to remain on track, the Fed must adjust its policy rate when the neutral rate changes. For example, if tariffs are pulling the neutral rate lower, then the appropriate course of action is for the Fed to cut its policy rate. By contrast, if the Fed holds the policy rate constant, as it has since December, and the neutral rate is indeed falling, then the Fed is passively tightening monetary policy. In short, the Fed’s wait-and-see approach is anything but.

To see why, suppose the neutral rate falls from 4 percent to 2 percent but the Fed holds its policy rate constant at 4 percent. In that case, the real — that is, inflation-adjusted — interest rate will exceed the neutral rate, making monetary policy contractionary. This occurs even though the Fed has, in some sense, “done nothing.” But holding rates steady amid a falling neutral rate is a policy choice, and one with real consequences — namely, slower growth.

One way to assess whether monetary policy is appropriately calibrated is to compare the current policy rate to a benchmark of where it ought to be. A commonly used benchmark is the Taylor Rule, named after economist John Taylor. The rule incorporates the current inflation rate, the Fed’s inflation target, the output gap, and an estimate of the neutral interest rate to generate a recommended policy rate.

The Federal Reserve Bank of Atlanta publishes a range of Taylor Rule estimates that incorporate different measures of inflation, output gaps, and neutral interest rates. Notably, two of the three versions currently suggest that the federal funds rate is too high — implying that monetary policy is contractionary, even though the Fed hasn’t raised rates in several months.

To be sure, estimating the neutral rate is notoriously difficult, since it is not directly observable. But the weight of evidence suggests that, regardless of Powell’s intentions, the Fed’s inaction is having a contractionary effect.

At a more fundamental level, the Fed should not be responding to tariffs, even if they push prices higher. The reason is straightforward: while the Fed can influence the demand side of the economy, it has little control over the supply side — where tariffs primarily operate. Responding to supply-driven price fluctuations risks compounding the problem rather than solving it, especially if tighter policy suppresses demand in an already constrained economy.

The Federal Open Market Committee will likely hold its policy rate steady at today’s meeting. But if trade policy is indeed exerting a drag on productivity and investment, then standing pat will amount to passive tightening. In short, when the neutral rate falls, doing nothing is not a neutral act — it’s a contractionary one.

A few centuries ago, Europe was the beating heart of global innovation. From the Enlightenment’s embrace of reason to the Industrial Revolution’s transformative power, it was a hub of bold thinkers, inventors, and entrepreneurs pushing boundaries. 

Today, that spirit has faded. Europe no longer leads technological innovation — not due to a lack of talent or scientific exploration, but because of a deeper issue: an overly restrictive regulatory environment. While the US advances rapidly in AI, biotech, and space, and China heavily invests in deep tech, Europe remains tangled in bureaucracy, risk aversion, and a rigid application of the precautionary principle — prioritizing control over creativity and caution over progress.

Europe’s Innovation Crisis: How the Precautionary Principle Is Paralyzing Europe 

Over the past two decades, Europe has rebranded itself—from the birthplace of industrial revolutions and scientific breakthroughs to the world’s regulatory superpower. The so-called Brussels Effect — Europe’s ability to shape global standards through its regulatory power — has given the EU influence. But at home, it has stifled the very innovation it once championed.

At the heart of this approach is the precautionary principle — the idea that new technologies must be proven completely safe before use. Though well-intentioned, it often stalls progress. Innovation becomes seen as a threat, and entrepreneurs face the near-impossible burden of proving zero risk. Instead of managing risk, European regulators demand its total elimination, halting experimentation before it even starts. 

Contrast this with the United States, where a culture of permissionless innovation prevails. There, innovators are generally free to experiment unless they demonstrably cause harm. This difference in mindset explains why the US leads in AI, biotech, quantum computing, and space technology — and why Europe is falling behind.

Take the EU’s 2024 AI Act. While praised for its ethical goals, the legislation imposes strict risk classifications and high compliance costs that only large corporations can navigate. Startups, lacking legal teams and capital, are left behind. As a result, Europe sees fewer AI startups, diminished innovation, and a talent exodus to the US and China, where one-third of AI experts at American universities come from Europe. And when it comes to leading the development of AI models, the gap is even wider. In 2022, 54 percent of the creators of major AI models were American, while Germany — Europe’s top performer — had just three percent. 

This isn’t limited to AI. In biotechnology, Europe’s approval process for genetically modified organisms is among the slowest and most restrictive in the world. Experimental energy technologies are bogged down in red tape. Startups in high-risk, high-reward industries are routinely denied capital, not just because of investor caution, but because an overregulated financial system is conditioned to avoid anything uncertain. Rigid labor laws add further friction — hiring is inflexible, firing is expensive, and adaptation becomes difficult. 

Europe’s Innovation Exodus: The High Cost of Playing It Safe

The cumulative impact of Europe’s regulatory overreach is increasingly hard to ignore: talent, capital, and innovation are steadily flowing out of the continent. Europe has become a place where ideas are born but rarely scaled. Nearly one-third of European startups that achieve unicorn status eventually relocate abroad — most often to the United States — in search of more supportive ecosystems and easier access to capital.

The numbers underscore the magnitude of the issue. The US dominates the global unicorn landscape, hosting over 55 percent of all unicorns and 75 percent of total unicorn valuation. In contrast, the EU accounts for less than 10 percent of unicorns and just 3 percent of global value. A key reason is the disparity in venture capital: European VC investment fell from $100 billion in 2021 to just $45 billion in 2023, while US startups raised $170 billion. As a share of GDP, US venture capital reached 0.21 percent in 2023, five times higher than the EU’s 0.04 percent.

In deep tech, the gap is striking. Seven of the top ten quantum computing firms are American, and none are European-headquartered. In AI, more than 80 percent of global investment flows to firms in the US and China, while Europe receives just seven percent. This investment gap is reinforced by weaker R&D spending. Europe invests only 2.2 percent of its GDP in R&D compared to 3.4 percent in the US and 5 percent in South Korea. 

The warning signs are already clear. 

Since 2015, Europe’s productivity growth has averaged just 0.7 percent per year — less than half the US rate and barely one-ninth of China’s. In 1995, US and EU productivity were roughly equal. Today, Europe lags by nearly 20 percent — a gap that threatens its long-term competitiveness and economic growth.

Europe is running out of time. With an aging population and shrinking workforce, it cannot afford to rest on past achievements. Without bold structural reform, the continent risks becoming a museum of past glories rather than a factory of future breakthroughs. 

But decline is not destiny. Europe can still reclaim its innovative edge — if it’s willing to abandon the comfort of overregulation and embrace a new era of economic freedom and market dynamism. That means accepting risk and uncertainty, unleashing permissionless innovation, expanding access to venture capital, and reforming rigid labor and bankruptcy laws that stifle entrepreneurial ambition.

The US leads because it rewards bold ideas and tolerates failure. Europe’s culture, by contrast, punishes risk and drives talent away. The solution is not tighter control, but greater freedom. 

As Milton Friedman famously explained: 

The great achievements of civilization have come not from government bureaus but from individuals pursuing their own interests. Wherever masses have escaped grinding poverty, it’s been through capitalism and largely free trade. History shows clearly there’s no better way to improve the lot of ordinary people than the productive energy unleashed by the free-enterprise system.

Until Europe learns to trust its innovators and entrepreneurs, it will remain sidelined in the global innovation race.

We’ve seen this before: fear, overregulation, and political hubris at the dawn of an economic breakthrough. Will we learn from history — or repeat its mistakes?

In every era of transformation, one thing never changes: politicians panic.

When the agricultural revolution spread through Europe and into the early American colonies, it upended social orders. Elites feared farmers with new tools would abandon the land. During the Industrial Revolution, steam power and factory machines were labeled threats to jobs and morality. And in the digital age, the rise of the internet was met with a flurry of federal blue-ribbon panels warning about everything from pornography to “cyberspace addiction.”

Now comes artificial intelligence — the next great leap in human productivity — and the cycle is repeating itself. Only this time, the stakes are global, and the timeline is faster.

Last week, the Trump administration released its AI Action Plan — a significant course correction from the Biden years that scraps top-down federal control and embraces innovation through deregulation, investment, and infrastructure. It’s one of the most pro-market approaches to AI policy we’ve seen from any Western government.

However, while the plan’s vision is mostly correct, it lacks a crucial protection: a federal moratorium on state-level AI regulation. That omission leaves the door wide open for 50 different states to suffocate innovation under 50 different bureaucratic regimes.

This Moment Is America’s to Lose

Artificial intelligence isn’t a robot uprising — it’s advanced computing, a continuation of decades of machine learning, data science, and automation. Like past revolutions, it is a general-purpose technology with a massive upside: from medical diagnostics to precision agriculture, logistics, and personalized education.

This is the beginning of a transformation on par with the printing press, the steam engine, and the internet. Yet like every leap forward, it’s greeted with a mix of excitement and fear. And fear tends to invite government overreach.

Entrepreneurs don’t know exactly what AI will look like ten years from now — but they have vastly more insight than politicians ever will, because they live in the feedback loops of real-time trial and error. Markets discover. Governments delay.

Just look at where capital is going: AI startups raised $104 billion in the first half of 2025 alone — more than in any full year prior. Guggenheim analysts expect even larger gains ahead as enterprise adoption continues to soar.

This may not be a bubble but a boom. And America is positioned to lead — if we don’t regulate ourselves into stagnation.

Can Washington Rein in the States?

Some may question whether the federal government has the constitutional authority to stop states from regulating AI. The answer is yes — when interstate commerce is clearly involved, as it is with nearly every AI tool, system, and application. From cloud infrastructure to multi-state model deployment to international data flows, AI is not a local matter. It’s a global one.

The US Constitution empowers Congress to “regulate Commerce… among the several States,” and the courts have long upheld federal preemption in nationally integrated markets. In Gibbons v. Ogden (1824), the Supreme Court made it clear: when a state law interferes with the free flow of interstate commerce, the federal government has both the right and duty to act.

As James Madison wrote in Federalist No. 42, the Commerce Clause was essential to “guard against the many practices… which have hitherto embarrassed the intercourse of the States.” That applies perfectly to today’s AI patchwork.

While states have roles to play, they should not be left to erect legal walls around innovation or preempt national policy through fear and overreach. A temporary moratorium, while aggressive, would be both constitutional and necessary to ensure America doesn’t fumble the biggest economic opportunity in a generation.

The Trump Plan Is Pro-Growth, but the States Are a Risk

Fortunately, Trump’s new Executive Order 14179 repealed Biden’s restrictive EO 14110, which had empowered bureaucrats to embed fairness checks and ideological audits in AI tools. That approach mirrored the EU’s bloated AI Act — and would have ensured US developers got bogged down in red tape while China continued to advance.

The new federal plan rejects that path. It commits to:

• Cutting permitting delays for AI infrastructure and semiconductor fabs
  
• Encouraging open-weight AI models to foster competition
  
• Expanding workforce education and employer training with fewer tax penalties
  
• Prioritizing innovation over precaution
  

This is the right vision. But without a preemptive strike against state overreach, it may be impossible to implement in practice.

The House-passed version of Trump’s One Big Beautiful Bill (OBBB) included a federal moratorium on new state AI regulations. That language was dropped by the Senate before final passage. The expected result is chaos.

State Capitols Are Legislating Blind

In 2025 alone, more than 1,000 AI-related bills were introduced across all 50 states — up from nearly 700 in 2024, according to the James Madison Institute. The National Conference of State Legislatures confirms that dozens of those have already become law.

Here’s the problem: these aren’t coherent guardrails — they’re preemptive policy panic.

• California wants every AI output evaluated for “equity harms,” whatever that means.
  
• New York is pushing for AI licensing boards and pre-release approvals.
  
• Even Texas, which often leads in free-market policy, passed HB 149 (TRAIGA), creating a new bureaucracy to oversee so-called “high-risk” AI applications. It’s better than where it started, but still opens the door to creeping state control.

This is not just regulatory noise — it’s a threat to the scalability of American innovation. It fragments compliance and deters investment, particularly in open-source or startup environments.

Don’t Let History Repeat

Every time a new tool comes along that threatens old structures, lawmakers feel the need to “do something.” But as Milton Friedman taught us, the government solution to a problem is usually worse than the problem.

In truth, the best response to AI fear may be no response at all — at least not yet. We already have laws on the books to address fraud, discrimination, theft, and safety. We don’t need to build new bureaucracies to police speculative harms that may never materialize.

The biggest risk is not that AI goes rogue. It’s that our political class chokes off its development with regulatory hubris.

The EU is already moving in that direction. And while China may look fast on the surface, it’s doing so through central planning and repression, which ultimately stifles the kind of open innovation that gave the world the microchip and the internet.

America can still lead. But it must do so by trusting markets, not mandates.

Let Parents and Entrepreneurs Lead

Rather than preemptively outlawing AI tools in classrooms or forcing private businesses to submit models for approval, we should let parents, workers, students, and entrepreneurs decide what works best for them.

We don’t need governors and attorneys general positioning themselves as AI overlords to score political points. We need an environment where knowledge creation is decentralized, experimentation is encouraged, and failure is an integral part of the process.

Just as in the past, those who fear the new are demanding power over it. But history tells us: the real danger is not the technology — it’s the legislation that follows fear.

Give Innovation a Fighting Chance

The Trump administration’s AI Action Plan is a welcome course correction. It prioritizes innovation over regulation, removes ideological roadblocks, and trusts the market to do what it does best — discover, adapt, and grow.

But unless Congress follows through with a moratorium on new state AI laws, this moment of opportunity will collapse under a pile of conflicting mandates and political micromanagement. We can’t lead the world while tripping over our own red tape.

We’ve seen this before. Every great economic revolution — agriculture, industry, technology — was nearly smothered by fear and top-down control. We can’t afford to make the same mistake with artificial intelligence.

Let’s stop pretending politicians know what’s coming next. They don’t. Entrepreneurs have a better shot — not because they’re perfect, but because they’re accountable to reality, not to reelection.

Congress should act now. Delay the deluge of state AI regulation. Let existing laws do their job. And give this generation’s innovators the space to build the future. That’s how America wins the AI race — not with more government, but with more freedom.

In a recent essay, John Tamny, at RealClearMarkets got rather SALTy. Worth reading.

John (whom I know and like, and have hosted to give a talk to my big undergrad “Intro to Capitalism” class at Duke) is taking issue with the claims I made about state and local tax deductions (SALT) here, at AIER’s The Daily Economy.

Now, John is a fine, smart man. But we really do disagree about this.  Consider two points:

First, John claims that the most important policy change needed is a substantial cut in federal spending.  He’s right about that, of course. But for some reason, he equates cutting taxes with cutting spending.

As I have argued for years, starting when I sometimes got little policy pieces discussed by Rush Limbaugh, US policy is “DAFT” — Deficits Are Future Taxes. Since we are not cutting spending, a SALT deduction is a tax increase. The SALT deduction increases the deficit; deficits are future taxes, so SALT deductions are straightforward tax increases.

I could see Tamny’s point if there were a balanced budget requirement at the federal level. But since there isn’t, SALT is a tax increase on everyone else, because we have to pay for the increased deficit.

Yes, the “everyone else” includes people in the future, but that’s even worse! Generations yet unborn are paying higher expected taxes so that Californians can subsidize state spending with lower federal taxes. There is simply no connection between a SALT deduction and a decrease in federal spending, but SALT deductions enable state governments to spend more, at the expense of the entire nation. SALT deductions enable spending increases at the state level, precisely because states have balanced budget requirements but the federal government does not.

Second, I agree completely with Tamny’s point that California is wealthy despite its high government spending. But that’s all the more reason to make California taxpayers bear the full burden of having legislators light their solar-powered cigars with hundred dollar bills. If Golden State citizens actually had to pay for the government they vote for, they might vote smarter. With the SALT deduction, California can slip by and keep spending, because a big part of their tax revenue is being subsidized by the hardworking citizens of Texas, and by future generations of taxpayers that are already burdened with having to pay John Tamny’s Social Security.

One more thing: Tamny called me a Keynesian.  Now,  Keynes drank scotch. I drink scotch. That doesn’t make me a Keynesian.  Keynes wanted to increase government spending; I want to decrease it. 

The fact is that deficits are future taxes, and SALT increases deficits. Given that the current debt is approaching $40 trillion (well over $100,000 per US citizen!), increasing the deficit is moving the already egregious debt in the wrong direction. How much depends on your assumptions about growth, and on the exact form of the legislation. But according to the Committee for a Responsible Federal Budget, raising the cap to only $20,000 would add between $150 and $200 billion over the next decade. 

And that’s the best case scenario. If the cap structure now in the bill ($15,000 single/$30,000 joint filers) goes through, the cost is half a trillion.  And if the real hawks like John Tamny get their way, with the cap going up to $100,000 or more, the loss in tax revenue could top a trillion in the next ten years.

These costs might be tolerable if there were some benefit. But all the cost savings go to the states that have irresponsible tax and spending policies. A recent study by David Ditch, of the Economic Policy Innovation Center, makes the case starkly: California’s state spending is nearly double the combined state budgets of Texas and Florida. That’s in spite of the fact that Texas and Florida have 15 million more people. California, which does have (more or less) a balanced budget requirement, can only get away with that kind of spending because citizens in Texas and Florida are making up for the federal tax losses!

While it’s hard to give an exact estimate, here is a table of the top five states, in terms of targeted benefits from the increased SALT deductions in the One Big Beautiful Bill Act (source: CRS and Tax Policy Center):

Top Five States Most Affected by SALT Deduction Limits

Rank	State	Why Affected
1	New York	High state income taxes and property taxes; large number of high-income households; suburban and urban property owners hit hardest.
2	California	Highest state income tax rates in the US; expensive real estate market leads to large property tax bills.
3	New Jersey	Extremely high property taxes; high-income suburbs around NYC heavily affected.
4	Connecticut	High property taxes and state income taxes; large concentration of wealthy taxpayers.
5	Massachusetts	High property values, significant state income tax; many affluent taxpayers in Greater Boston area.

Those are not Republican states; in fact, there is not even one Republican Senator from any of the five states that would benefit most.  Why do people want to take money from honest people who earn it in Red states, and use it to fund government spending in the Heart of Blueness?

All this means that increasing the SALT deductions has two effects, both bad:

1. There will be a substantial increase in the federal deficit, and a ballooning of the debt, all of which amounts to a tax increase (because DAFT). Raising SALT deductions is a big tax increase, on other states and on future generations. 
2. SALT excuses and covers for profligate and wasteful state government. The five biggest beneficiary states, disproportionately to the total benefit, subsidize wasteful and intrusive government. People are leaving California, New York, and the other high tax states. But not as fast as they would be moving if states bore the full costs of their bad decisions and spendthrift policies.  

SALT defenders are living in the past. There is a long and embarrassing history of attempts to “starve the beast” by cutting taxes without cutting spending.  But the US federal government, unlike the states (even California) now completely disregards any connection between revenues and spending.

The beast doesn’t starve; we never cut spending. And if we impose SALT deductions, we are actually raising taxes on most Americans.

Let’s be honest, many people move to New York City to make money, not have it taken away. Since over half of NYC’s population isn’t even from New York, millions made the decision to move to this amazing and incredibly expensive city.

They knew it was expensive, and that life would be tough — NYC does not have a global reputation of glamor and grit for nothing — but they didn’t realize life would be this tough. The cost of living in NYC is 2.30 times the national average!

This frustration with the cost and difficulty of living has led many New Yorkers — especially young ones — to vote for Zohran Mamdani. Since Mamdani’s unexpected win in the Democratic primary, pundits have been scrambling to understand how and why a city that epitomizes the capitalist spirit could so enthusiastically embrace a socialist candidate.

The answer is far from simple, but at least in part it’s a response to the deep frustration born of living in a city where life is already difficult but made even harder by a bloated, inefficient local bureaucracy that drains the life out of its residents.

And it’s this bureaucracy that permeates almost every aspect of New Yorkers’ lives. Consider a few examples.

Renting in NYC is a nightmare of paperwork. Tenants must submit tax returns, proof of income, and wait weeks or months for approval. Brokers add fees — sometimes 15 percent of annual rent! — making the process even more frustrating.

While landlords in most cities require tenants to have a gross annual income of 36 times the rent, NYC landlords demand 40-50 times. The average one-bedroom apartment in Manhattan costs around $3,500 per month, significantly higher than the $1,200 to $1,500 typical in other major cities.

Public housing managed through the New York City Housing Authority (NYCHA) is home to 1 in 17 New Yorkers. Its maintenance is riddled with delays. Non-emergency repairs take an average of 65 days, and emergency repairs can take up to 24 hours. As of 2024, over 600,000 outstanding work orders remain, leaving tenants with broken elevators, mold, and leaking pipes — all of which have been compounded by a bribery scandal that took attention away from New Yorkers’ real problems.

The New York City Department of Buildings (DOB) takes an average of 3-4 months to process a standard building alteration permit. Compare this to Chicago’s Department of Buildings (not exactly known for its efficiency) which manages to issue many building permits the same day.

A 2023 audit revealed that NYC failed to process Supplemental Nutrition Assistance Program (SNAP) applications within the mandated 30-day period. Processing rates dropped below 40 percent for SNAP and 30 percent for cash assistance (under court order, the backlog has been mostly cleared). Low-income New Yorkers are left without support due to staffing shortages and increasing application volumes.

Food truck operators struggle with a complex regulatory system that limits the number of vendors allowed to operate. These restrictions led to the formation of a secondary market where basic food truck permits can cost tens of thousands of dollars, discouraging new entrepreneurs and hindering the growth of existing businesses.

Entrepreneurs trying to secure a business license must navigate various agencies like the Department of Consumer and Worker Protection (DCWP), which can take weeks for approval. Additional city fees also add to the financial burden on businesses. In contrast, Los Angeles issues business licenses in 4-7 days.

This bureaucratic nightmare is not just an inconvenience — it’s the root of the frustration that leads people to vote for a candidate like Mamdani. It is also a big reason why the city is struggling in many macro ways. 

New York City has been in a housing crisis for decades, unable to keep up with growing demand which drives away people and jobs and harms the tax base. The city is facing potential billions in budget gaps, it is experiencing financial challenges from housing asylum seekers, and is struggling with high crime rates. 

When the government is inefficient, corrupt, and costly, ideas like freezing rent, city-run grocery stores, and free buses start to sound a lot more appealing than working hard and hitting countless roadblocks. Out of frustration it seems, New Yorkers are doubling down on policies that exacerbate these problems from the start like rent control, price freezes, and state-owned grocery stores.

Many New Yorkers see voting for the status quo as endorsing a bloated government structure that’s designed more for self-preservation than for problem-solving.

The vote for Mamdani may not be about supporting socialism per se but about demanding that the system fail so that something can finally give. They hope that by burning down the current system, they can rebuild one that serves them better.

New Yorkers aren’t yearning for socialist utopia – they’re fighting to survive in a system that’s broken. In this sense, Mamdani’s rise is less about ideology and more about using a sledgehammer to break through the status quo.

Mamdani may represent the radical shift that many New Yorkers believe is needed to escape the bureaucratic quagmire and address the pervasive inequality they face every day. Whether that shift succeeds or fails at getting Mamdani elected is a question only time — and the electorate — can answer.

But one thing is for certain, the socialist policies Zohran Mamdani advocates have been tried throughout history and have shown themselves to be utter failures, time and time again.