In a recent blog post, Matt Yglesias chides northeastern Republicans for opposing pro-housing deregulation in state legislatures:

Republicans have led several major pushes for housing reform in red states. These efforts are inevitably GOP-led because these states have GOP-controlled legislatures, and to the best of my knowledge, none of them have met with uniform GOP opposition. But in New York and Maryland, we’ve seen divided Democrats unable to push through housing reforms supported by Democratic governors in the face of relentless GOP hostility. 

He also references a recent bill that passed in Connecticut with exclusively Democratic support, Republican politicians in Virginia and New Jersey who have made statements against any attempts to legalize more home-building, and even a free-market Maine think-tank that opposes any diminution of local zoning powers.

So what’s the explanation? Yglesias’ own view is that “a perennial favorite activity of GOP-controlled state legislatures in places like Tennessee, Texas, and Georgia is passing laws to preempt local efforts to raise the minimum wage or otherwise lib out” (presumably referring to city-level gun control, tenant protections, and the like, as well as school policies on books, LGBT issues, and the like). 

Because they’re used to preempting cities on other issues, preempting local zoning feels like a natural move for red-state Republican legislators, especially when they can focus it on larger cities and exempt suburbs and small towns, as recent legislation in Texas and Montana has done.

But “blue-state Republicans are anti-housing” doesn’t explain California, where Republicans from rural and inland areas joined just over half of Democrats in the state Senate to pass SB 79, requiring upzoning near transit stops. Of course, many Republicans in California are anti-housing – conservative Huntington Beach has even flirted with imposing strict rent control to stop apartment construction – but some of them are not.

Nationally, housing remains one of the last remaining cross-cutting issues: there are pro- and anti-housing Republicans just as there are pro- and anti-housing Democrats. Red states tend to regulate housing development less (Figure 1), but the causation probably runs from lack of strict zoning to partisanship rather than the other way around (Figure 2). The details make a difference, though. I remember speaking to a Republican Minnesota state senator a few years ago, who drew a distinction between types of housing. “We want more single-family, and the other side wants more multifamily.” (To date, Minnesota has failed to pass any statewide housing deregulation.)

Some of the explanation for why northeastern Republicans oppose housing bills is that many of these housing bills have not been clearly deregulatory or have been nakedly partisan and left-wing, like the Connecticut bill, which strengthened rent regulation and enacted large giveaways to labor unions on top of its pro-housing measures. In other cases, good legislation like Massachusetts’ MBTA Communities Act has attracted Republican opposition (despite support from then-Governor Charlie Baker) because of its focus on zoning for multifamily housing, which is assumed to be mostly occupied by renters rather than condominium owners.

We should also question whether northeastern Republicans are always opposed to statewide pro-housing legislation. In Vermont, Republicans overwhelmingly supported 2023’s S 100 (now Act 47), relaxing the stringent requirements of the state’s environmental policy act, known as Act 250, and it passed into law easily. Last year, they opposed H 687 (now Act 181), which liberalized multifamily housing in infill locations while restricting suburban and rural development, but it passed over Gov. Phil Scott’s veto. In New Hampshire, Republican legislators are probably about 55 percent anti-housing and 45 percent pro-housing, depending on the bill, but every major center-right organization, including the free-market Josiah Bartlett Center, the socially conservative Cornerstone Action, the Business and Industry Association, Americans for Prosperity, and the New Hampshire Liberty Alliance, supports zoning reform.

What drives these differences in Republican views across states? The answer lies in a combination of factors.

1. Beginning in the 1970s, a conservative property rights rebellion began in the western states. The “wise use” movement, as it came to be called, also took hold in Vermont, where I once spoke to a group called Citizens for Property Rights that originally formed to oppose Act 250. This movement was a reaction to environmentalist land-use regulation, and traces of that pro-property rights mentality survive to a greater extent among western Republicans than among northeastern ones. But western Republicans aren’t uniformly supportive of property rights, as we’ve seen in Colorado, where most (but not all) Republicans have voted against housing deregulation.
2. As already mentioned, individual bills can be tilted for or against traditional Republican priorities. Unsurprisingly, in states where Democrats control the legislature, successful housing legislation tends to be tilted toward Democratic priorities (supporting unions, retaining or enhancing some environmental reviews, promoting multifamily over single-family, regulating rents, etc.).
3. In metro areas with a history of political trauma related to urban riots, forced busing, and related issues, Republicans tend to be more protective of the suburbs and don’t mind a high-cost housing wall around cities that, to their minds, keeps urban problems at bay. The work of political scientists Jessica Trounstine, Eitan Hersh, and Clayton Nall strongly supports various elements of this conjecture.

The last one in particular seems to help explain why so many right-wing activists in New Hampshire oppose zoning reform. I have tried to have reasonable conversations with them about what underlies their objections, and once we clear away the rationalizations about “local control” and so on, I can sometimes get to what seems to be their authentic fear: that these bills will allow for high-rise apartment buildings that will import impoverished criminals.

That fear seems out of all proportion to what these bills would actually do. Their main target this year was Senate Bill 84, which essentially would have required towns to have some place where you’re allowed to build a house on two acres. Two acres! Far from solving the housing affordability problem, this bill would simply have curbed some of the grossest excesses of “expropriation-by-regulation” in New Hampshire towns. Still, because of the outcry, it was retained in committee in the House after easily passing the Senate.

My impression, admittedly anecdotal, is that most of the vociferous opponents of zoning reform in New Hampshire grew up near Boston or New York, and have internalized the view that zoning is some kind of symbolic totem with which to stave off the darkness. The details of legislation don’t matter; what matters is maintaining the status quo at all costs. By contrast, Republican farmers in rural northern New England have the same mentality as western ranchers and miners: hands off my property! In Vermont, remote, rural, and stagnant enough to lack a big suburban Republican constituency, and in New Hampshire, which has a uniquely large libertarian bloc in the Republican Party, Republican YIMBYism stands a chance that it might not, unfortunately, in the rest of the Northeast, with the possible exception of Pennsylvania.

If these conjectures are correct, getting Republicans to support pro-housing-supply reform in the Northeast and Midwest will require: 1) moderate bills that put as much emphasis on freeing up land for single-family development as they do on new rental housing, and 2) a focus on solutions like speeding up permitting, compensation for regulatory takings, and neighborhood-option upzoning that leave the symbolic core of zoning untouched.

The Trump administration has increased tariff rates on dozens of countries in part to kickstart trade policy negotiations. These tariffs include 10 percent tariffs on dozens of countries, tariffs of over 30 percent on China, 50 percent tariffs on steel and aluminum, and 25 percent tariffs on autos. While the specifics of each negotiation will vary depending on the country’s role in the global economy and its current trade laws, there are three high-level goals relevant to all countries Trump should pursue. If he is successful, these negotiations will make US manufacturers more competitive, keep prices low for consumers, improve America’s ability to confront China, and help reduce the risk of a global trade war. 

The US Court of International Trade recently ruled that many of Trump’s tariffs are illegal, but they’ve been allowed to remain in place pending appeal. In the meantime, Trump’s administration is discussing trade policy with several countries. This is wise since keeping the tariffs in place long-term will hurt the USeconomy. The Penn Wharton Budget Model estimates that Trump’s reciprocal tariff plan would reduce GDP by 6 percent and wages by 5 percent if it became permanent. A middle-income household would face a long-term income loss of $22,000. This income loss would offset nearly 15 years of tax savings that the average family receives from the Tax Cuts and Jobs Act, Trump’s signature tax plan from his first term.

The primary goal of Trump’s trade negotiations should be to expand trade by reducing tariff rates and other trade barriers. Here are three ways his administration could achieve this goal. 

First, negotiate zero-for-zero tariffs on manufacturing inputs that would remove tariffs on inputs needed by USmanufacturers. These could be modeled on the terms contained in the United States-Mexico-Canada Agreement (USMCA) that expanded access to intermediate inputs for thousands of small and medium-sized US manufacturers, allowing them to expand production and increase jobs for American workers. Agreeing to similar terms with other countries would ensure American manufacturers can get the materials they need to produce high-quality products.

Second, negotiate the elimination of non-tariff foreign trade barriers that inhibit US exports, US foreign direct investment, and US electronic commerce. Trade barriers include laws, regulations, policies, and practices—including non-market policies and practices—that distort or undermine competition. Examples include inadequate intellectual property protections, local content requirements, export subsidies, and unnecessary safety or sanitary standards. Country-specific examples that should be reformed are provided annually by the United States Trade Representative in its National Trade Estimate Report on Foreign Trade Barriers.

Third, negotiate tougher trade enforcement provisions to prevent China and other countries from evading US trade laws by rerouting exports to the United States through other countries. Countries should agree to allocate more resources to the enforcement of trade laws and verifying the country of origin of the goods that cross their borders. This would protect US consumers and firms from illegal or unsafe goods and help maintain the integrity of the global trade system.

Reducing tariffs on manufacturing inputs, eliminating non-tariff trade barriers, and improving enforcement of US trade laws would help the Trump administration accomplish several of its goals. First, US exports would be more competitive, which would boost manufacturing output and create jobs. Second, the cost of inputs would be reduced, and reciprocal tariff rates could be lowered, which would help keep consumer prices low. Third, by enhancing enforcement of US trade laws, the administration would be better equipped to address China’s objectionable trade policies without unduly inhibiting mutually beneficial trade with friendlier countries. 

Nations that close themselves off from the world stagnate and fail. The best known example is China’s inward turn that started in the fifteenth century and lasted until the late twentieth. China missed out on the industrial revolution and by the 1800s it had dramatically fallen behind the West. Today, it is still playing catch-up. 

Trump has an opportunity to improve international trade policy and ensure that America plays a leading role in the global economy for decades to come.

AIER’s Business Conditions Monthly indicators suggest that the US economy remained under pressure in April, with the Leading Indicator slipping further into contractionary territory. After March’s sharp 12-point drop, the Leading Indicator declined an additional 4 points in April, landing at 38 — its lowest reading since October 2023 and a sign that forward-looking economic momentum continues to erode.

The Roughly Coincident Indicator held steady at 50, matching its March level. While this neutral reading may appear stable on the surface, it masks the underlying loss of pace that followed a string of stronger readings earlier in the year. The Lagging Indicator, by contrast, rebounded strongly — jumping 33 points to 75 — erasing its March plunge and signaling that backward-looking measures such as credit delinquencies and business debt service remain relatively firm, at least for now. But such lags are typical in economic slowdowns and don’t alter the broader picture of softening conditions across forward and present-focused metrics.

Leading Indicator (38)

In April, the Leading Indicator fell further to 38, down from 42 in March, marking its lowest reading since October 2023. The index reflected weakness across the majority of components, with only four of twelve showing improvement and the rest contributing negatively or remaining flat.

The strongest gains came from the Conference Board US Leading Index Manufacturers’ New Orders: Consumer Goods and Materials, up 1.7 percent, and US New Privately Owned Housing Units Started by Structure Total SAAR, which rose 1.6 percent — a sign that despite higher interest rates, housing construction remains resilient in some regions. United States Heavy Trucks Sales SAAR also rose 1.6 percent, potentially reflecting fleet investment or increased freight activity. Adjusted Retail and Food Services Sales Total seasonally adjusted (SA) posted a marginal gain of 0.1 percent, suggesting flat but stable consumer spending.

On the downside, the University of Michigan Consumer Expectations Index dropped sharply by 10.1 percent, signaling a weakening consumer outlook. US Initial Jobless Claims SA fell 10.0 percent — usually a positive sign — but in this context may reflect tightening labor conditions that are slowing momentum. Equity prices (via the Conference Board US Leading Index Stock Prices 500 Common Stocks) declined by 5.5 percent, while Debit Balances in Customers’ Securities Margin Accounts fell 3.4 percent, pointing to reduced investor risk appetite. Conference Board US Manufacturers’ New Orders Nondefense Capital Goods Ex Aircraft fell 1.1 percent, and US Average Weekly Hours All Employees Manufacturing SA slipped 0.5 percent — both early indicators of slowing industrial demand. The Treasury yield curve remained deeply inverted, with the 1-Year to 10-Year US Treasury Yield Spread at -73.4 percent, reinforcing recessionary signals. One component, the Inventory to Sales Ratio Total Business, was flat.

Altogether, the deterioration across a wide swath of leading components underscores rising downside risks for the US economy heading into mid-2025.

Roughly Coincident Indicator (50)

The Roughly Coincident Index remained unchanged at 50 in April, reinforcing the picture of a plateauing economy with little net forward momentum. Three of the six underlying indicators rose, while three declined — continuing the trend of mixed but stable readings.

Conference Board Coincident Personal Income Less Transfer Payments rose 0.5 percent, suggesting some resilience in household earnings. Conference Board Coincident Manufacturing and Trade Sales edged up 0.2 percent, and US Employees on Nonfarm Payrolls Total SA saw a modest gain of 0.1 percent. However, the US Labor Force Participation Rate SA slipped by 0.2 percent, and US Industrial Production SA was essentially flat, down 0.0 percent. The sharpest move came from Conference Board Consumer Confidence Present Situation SA, which fell 2.5 percent, highlighting persistent caution among households despite stable labor and income trends.

Lagging Indicator (75)

The Lagging Index rose sharply to 75 in April, up from 42 in March, driven by broad-based gains across components — with five of six showing positive movement and only one declining.

Conference Board US Lagging Commercial and Industrial Loans rose 2.1 percent, while Conference Board US Lagging Avg Duration of Unemployment increased 1.8 percent, pointing to a growing credit extension but also a longer job-search cycle. US Commercial Paper Placed Top 30-Day Yield climbed 1.4 percent, and US Manufacturing and Trade Inventories Total SA rose marginally. CPI for Urban Consumers Less Food and Energy, YoY NSA was unchanged, offering no disinflationary relief but no new inflation pressure either. The lone drag came from Census Bureau US Private Construction Spending Nonresidential SA, which declined 0.9 percent — a moderate pullback after earlier strength in the sector.

Altogether, the Lagging Index’s strong rebound reflects late-cycle dynamics: higher credit use, longer unemployment spells, and a firming of borrowing costs — consistent with a maturing, if not yet reversing, business cycle.

The trajectory of the AIER Business Conditions indicators over the past year tells a clear story of fading momentum and increasing economic uncertainty. Following a relatively mixed first half of 2024, November and December saw a notable surge in both the Leading and Roughly Coincident Indicators — likely reflecting optimism around the presidential election outcome, with markets anticipating pro-growth or business-friendly policies under a returning Trump administration. 

However, the sharp drop in the Lagging Indicator in December suggested that longer-term conditions, such as credit and cost structures, were already under pressure. After Trump’s inauguration in January 2025, the Leading Indicator declined again and has since continued its downward path, reaching just 38 in April — the lowest reading since late 2023. This steady erosion likely reflects mounting concern over the implications of the administration’s aggressive tariff posture, which by early April was being formally articulated but not yet broadly implemented. While the Lagging Indicator has rebounded (reflecting higher credit usage and other late-cycle dynamics), the broader pattern — of shrinking forward momentum, steady but unremarkable coincident activity, and an increasingly heavy reliance on back-end economic support — suggests that businesses and investors are growing wary of near-term risks. The honeymoon of post-election enthusiasm appears to have ended, and the economy is now bracing for the real-world impact of rising trade barriers and policy volatility.

DISCUSSION, May – June 2025

May’s inflation data paint a complex picture of offsetting pressures within the US economy. While both headline and core CPI readings came in surprisingly soft — despite the onset of Trump’s overbroad tariffs — underlying details suggest significant tariff pass-through in goods categories with high import exposure, particularly major household appliances and other durable goods. However, persistent deflation in categories like used cars, recreation services, and portfolio management fees helped offset upward pressure, highlighting fragile consumer sentiment and uneven demand. Producer prices tell a more concerning story: core goods in the PPI report show accelerating inflation, particularly in finished durable goods, suggesting that firms are absorbing input cost increases and experiencing margin compression. This divergence between PPI and CPI implies that inflationary pressures may be building beneath the surface, even if they’re not fully reaching consumers yet. Core PCE, the Fed’s preferred gauge, is expected to tick up modestly to a 2.6 percent year-over-year pace, supported by specific categories but restrained by disinflation in healthcare and travel. The Federal Reserve is likely to remain cautious, seeing early signs of tariff-related cost pressures but recognizing that consumer-side weakness continues to dampen broader inflation momentum. In sum, inflation remains subdued for now, but signs of underlying firm-level cost strain and asymmetric pass-through suggest the disinflationary trend could prove fragile in the months ahead.

US manufacturing and services sectors both showed signs of stress in May, reinforcing the picture of a fragile, uneven expansion described in the latest inflation data. The ISM Manufacturing Index slipped further into contraction at 48.5, as firms reported softening demand, tariff-related uncertainty, and significant declines in both imports and exports — with the former plunging to a 16-year low. Inventory drawdowns and lengthening supplier delivery times suggest disarray in supply chains, while order backlogs continued to shrink. Industry comments reflected frustration over chaotic trade policy and its impact on pricing, profitability, and investment plans. Meanwhile, the ISM Services Index fell to 49.9 — its first contraction since 2022 — driven by a steep drop in new orders and delayed purchasing decisions amid federal budget cuts and tariff policy confusion. Although prices paid by service providers jumped to their highest since 2022, respondents noted that much of the burden was being absorbed via profit margins rather than passed on to consumers. Taken together, the data show that even as headline inflation remains muted, business sentiment and forward-looking demand indicators across both manufacturing and services are deteriorating under the weight of persistent policy uncertainty and cost pressures — raising the risk that corporate strain, rather than consumer weakness, may be the next stage of this economic slowdown.

Labor market conditions in May suggest a slow-burn deterioration beneath a still-stable surface. Headline nonfarm payrolls rose by 139,000 — modestly above expectations — but downward revisions to previous months and a flat unemployment rate of 4.2 percent conceal deeper fragilities. ADP’s private payroll data showed only 37,000 jobs added, the weakest in two years, with business services, education, and manufacturing shedding workers. Sectors most exposed to tariffs — like transportation and manufacturing — continued to underperform, while job losses in temporary help and federal employment signal growing caution. Hiring is clearly slowing, but employers are not yet engaging in mass layoffs — what some economists describe as a “low-hiring, low-firing” equilibrium. The labor force shrank by over 600,000 in May, and long-term unemployment as a share of total joblessness remains elevated at over 20 percent, despite a superficial decline. Meanwhile, wage growth — at 3.9 percent year-over-year — remains resilient, reflecting firms’ reluctance to shed workers despite cost and demand uncertainty.

A deeper look into the labor dynamics shows a cooling jobs market marked by growing mismatches and rising structural challenges. The job-finding rate continues to fall, as does the quits rate, suggesting that workers are both less able to find new jobs and less willing to risk leaving current positions. The U-6 broader unemployment rate, which includes discouraged and underemployed workers, held steady at 7.8 percent, reinforcing that headline numbers understate slack. Professional and business services employment — a proxy for white-collar sectors — remains stagnant, while job creation is concentrated in health care and construction, intensifying a bifurcation in labor opportunities. Many jobseekers, especially in high-skill sectors, face prolonged job hunts or underemployment. Despite President Trump’s tariff pause on some goods and continued pressure on Fed Chair Powell to cut rates, hiring hesitance driven by tariff unpredictability, shrinking public sector employment, and sectoral divergences suggests a labor market losing traction. Overall, while the surface data supports a narrative of resilience, the underlying indicators reveal mounting strain — with the economy precariously balancing between stagnation and slippage.

Consumer and business sentiment both showed meaningful improvements in recent weeks, but the rebound remains fragile and heavily contingent on policy clarity. The University of Michigan’s consumer sentiment index jumped 8.3 points in June — the largest gain in 17 months — as inflation expectations eased sharply, especially for the one-year horizon, which fell from 6.6 percent to 5.1 percent. Consumers also reported the strongest improvement in personal finance expectations in over three years, suggesting a tentative stabilization after weeks of volatility tied to President Trump’s sweeping tariff hikes. However, views on overall business conditions and buying climates remain subdued relative to late 2024, reflecting lingering anxiety. Meanwhile, the NFIB’s Small Business Optimism Index rose 3.0 points to 98.8 in May, led by improved expectations for sales and business conditions. Capital spending plans and anticipated price hikes both increased, signaling confidence in demand, yet an elevated uncertainty index and falling earnings trends point to unresolved concerns about input costs and federal policy unpredictability — including the delayed tax and spending bill touted as a boost for small enterprises.

Together, the sentiment readings illustrate a US economy at a psychological inflection point: a population cautiously hopeful about the future, yet clearly reactive to unpredictable federal actions. Both households and small firms are responding positively to a pause in tariff escalation and signs of fiscal support on the horizon, but they remain vulnerable to any renewed policy shocks. Importantly, the improved consumer outlook may help sustain spending in the near term, even as business hiring and investment stay subdued. Still, elevated uncertainty metrics in both surveys suggest that optimism is conditional rather than durable. For economic growth to reaccelerate meaningfully, more than temporary relief is needed — clarity on trade, inflation containment, and a credible fiscal path would be necessary to convert tentative optimism into sustained expansion.

Retail sales declined for a second consecutive month in May, dropping 0.9 percent — the steepest fall since early 2025 — as consumers reacted to tariff-driven price uncertainty and tighter household finances. The pullback was concentrated in autos, building materials, and gasoline, suggesting an end to front-loaded purchases made ahead of expected tariff hikes. Broader indicators of demand, including a drop in industrial production and the lowest homebuilder sentiment since 2022, reinforced signs of consumer caution. However, control-group sales — which feed into GDP calculations — rose 0.4 percent, offering a silver lining and suggesting underlying consumption remains resilient. While large retailers note that shoppers are still coming in, they’re becoming more selective, focusing on essentials and scaling back discretionary purchases. The data reflect a bifurcation: higher-income consumers are holding up well, while middle- and lower-income households are adjusting behavior amid ongoing economic anxiety. The mixed report highlights a fragile consumption landscape that, while not collapsing, is increasingly shaped by volatility in prices, policy, and sentiment.

Further back in the term structure from consumer goods, US manufacturing and industrial output data reveal a murky picture of a sector straining under uneven policy signals and rising input costs. Factory production declined 0.4 percent in April and industrial production dipped another 0.2 percent in May, weighed down by weaker output in consumer goods, nondurables, and utilities. While auto and aerospace manufacturing provided isolated strength — likely a front-loaded response to tariff threats — broader industrial activity remains subdued, with capacity utilization falling to 77.4 percent. Production of business equipment eked out gains, but nondurable goods output declined despite an uptick in aggregate hours worked, suggesting productivity shortfalls. The three-month decline in consumer goods output reflects not just softening demand but lingering uncertainty that has stalled capital expenditure plans and dragged on factory sentiment indices. Surveys like the ISM remain in contraction territory, reinforcing anecdotal evidence that firms are delaying hiring and investment decisions until tariff paths and fiscal measures become clearer. The sector’s volatility and conflicting signals illustrate a fragile manufacturing base more reactive than resilient — one that could struggle to recover momentum without decisive and coherent trade and tax policy from Washington.

The Federal Reserve continues to tread cautiously, holding interest rates steady for a fourth consecutive meeting while signaling both a softer labor market and persistent inflation risks. Although the median forecast still implies 50 basis points of rate cuts in 2025, the distribution of views within the FOMC has widened considerably, with nearly equal weight behind either no cuts or two. Revised economic projections reflect a slower return to the neutral rate, with core PCE inflation expectations rising modestly through 2027 and unemployment estimates nudging higher. Chair Jerome Powell struck a more hawkish tone during his press conference, emphasizing tariff-related inflation pressures and the resilience of employment data. Despite this, market participants interpreted the median rate path as modestly dovish, pricing in a slight increase in expected easing. The overall picture is one of growing uncertainty, with internal divisions on the FOMC mirroring broader volatility in the economic data. The Fed remains on hold, awaiting greater clarity on the cumulative effects of tariffs, consumer price pass-through, and labor market dynamics.

Meanwhile, fiscal policy is increasingly defined by partisan urgency and legislative congestion, with three concurrent budgetary battles underway. The centerpiece is the GOP’s reconciliation package—a sweeping tax cut extension and spending bill with a ten-year, $2.4 trillion debt impact, facing internal Republican friction over Medicaid cuts and green subsidies. Additional efforts include a more modest rescission plan targeting $9.4 billion in discretionary cuts, and the annual appropriations process, which risks a government shutdown if no agreement is reached by September 30. Democrats are largely sidelined from reconciliation, but are preparing to leverage the bill’s political liabilities—such as expanded uninsured ranks and massive deficits—heading into 2026. Adding complexity is the administration’s assumption that high tariff revenues will offset lost tax income, a scenario dependent on uncertain long-term trade policy. In tandem, the monetary and fiscal landscapes reveal a fractured policy environment: monetary easing remains tentative, while fiscal expansion barrels forward with limited bipartisan consensus. The combined effect may prove pro-cyclical at the wrong moment—stimulative fiscal policy colliding with a Fed reluctant to declare victory over inflation.

The present economic outlook is being expressed through soft surface data sitting atop solidifying structural strains. Inflation readings remain subdued on the consumer side, yet firm-level data show rising producer prices and margin compression, hinting at suppressed cost pressures with an unclear timing of impending tariff pass-throughs. Manufacturing and services activity continue to contract, with supply chain dysfunction and trade policy uncertainty weighing on investment and hiring. Labor market indicators present a stable façade, but reveal a deeper deterioration in participation, job-finding, and sectoral balance — particularly in tariff-sensitive industries. Consumer and business sentiment have improved modestly, but remain fragile, highly dependent on policy stability, and uneven across income levels. Fiscal policy, meanwhile, is charging ahead with expansive tax cuts and spending proposals, while monetary policy stays cautious, its easing path clouded by internal FOMC divisions and ongoing inflationary risk. Together, this produces a policy collision course where stimulative fiscal actions may amplify the very inflationary dynamics the Fed seeks to restrain.

In sum, the US economy is balancing on a narrowing ledge: demand remains intact but increasingly selective, sentiment is conditionally optimistic, and hiring continues at a slowing pace in an increasingly bifurcated labor market. With core PCE likely to tick higher and industrial data showing signs of stagnation, the real economy is absorbing more stress than headline indicators suggest. A clearer outlook depends on answers to several pressing questions: Will tariff-related cost pressures pass through more forcefully to consumers this fall? Can fiscal stimulus offset deteriorating business investment without overheating demand? And how credible is the current path of policy restraint if labor market slack re-emerges? 

Until these uncertainties resolve, the US economy remains singularly vulnerable to asymmetric shocks: a system stabilizing for now, but dependent on coherence between Washington’s fiscal ambitions and the Fed’s inflation-fighting resolve.

LEADING INDICATORS

ROUGHLY COINCIDENT INDICATORS

LAGGING INDICATORS

CAPITAL MARKET PERFORMANCE

Introduction

Economists, policymakers, and business leaders widely regard central bank independence as a desirable feature of monetary-institutional design. What is central bank independence, and why is it valuable? How has central bank independence worked in practice? And how should we think about the independence of the United States’ central bank, the Federal Reserve (“the Fed”)? This explainer answers these questions for interested non-experts.

The explainer begins by defining central bank independence and describing its theoretical desirability. Next, it reviews classic and contemporary studies on how central bank independence affects key macroeconomic variables, particularly inflation. The explainer then discusses the constitutional and legal standing of the Fed and how each relates to central bank independence.

Defining Central Bank Independence

An independent central bank can make monetary policy decisions without direct interference from politicians. Our central bank does not need the president’s permission to change its target for the federal funds rate, and it does not need to check with Congress before it conducts open-market asset purchases to increase the money supply. “Independent” is thus a reasonable description of the Fed’s day-to-day activities.

There are four kinds of central bank independence. A central bank has goal independence if it can choose its own objectives. It has instrument independence if it can choose the means for pursuing its goals. It has financial independence if it controls its own budget—for example, by being self-funded. And it has personnel independence if its chief officers cannot be removed except for cause.

A plausible link exists in economic theory between central bank independence and good macroeconomic outcomes, such as low and stable inflation. Policy is a matter of incentives. If the Fed’s monetary policy decisions were under direct political control, politicians might loosen monetary policy in the run-up to elections to bolster their chances of staying in office. Artificially cheap credit and rapid money growth would make the economy look stronger than it is, but the inevitable long-run result is painful inflation, and perhaps even a recession if investors are fooled by low rates into undertaking unsustainable projects. Also, since the Fed can make loans but is not subject to the same profitability constraints as private banks, politicians might use a central bank to steer credit to politically favored, but economically wasteful, causes or projects.

Classic Studies of Central Bank Independence

A large academic literature explores central bank independence. Below are summaries of classic works, as well as more recent investigations. Interestingly, the newer studies are less supportive of central bank independence than the classic studies.

Alex Cukierman, Steven B. Webb, and Bilin Neyapti published a paradigm-defining paper on central bank independence in 1992. They created an index measure of central bank independence, which has been widely used in follow-up studies, and showed that central bank independence correlates with lower inflation in developed countries. This paper set the stage for decades of investigations into the consequences of central bank independence.

A year later, Alberto Alesina and Lawrence Summers showed that increased central bank independence is associated with lower inflation without any harm to real economic performance, as measured by unemployment, GDP growth, and interest rates. This provided additional support for the argument that central bank independence was desirable.

Economists have also interpreted three influential papers, which predate the above studies, as supporting central bank independence. The first two, one by Finn Kydland and Edward Prescott and the other by Robert Barro and David Gordon, show that discretionary (self-chosen) monetary policy has an inflationary bias compared to rule-bound monetary policy. Economists tend to associate period-by-period decisions with politicians on short-term election cycles and a more stable, long-term outlook with central bankers.

The third paper is Kenneth Rogoff’s study of monetary policy commitment as embodied in a “conservative” central banker, meaning one who is more hawkish on inflation than the general public. Credibility is key to keeping inflation low. Political control of central banking damages central bank credibility because politicians cannot long diverge from the public’s inflation preferences. The less political dependence, the greater the macroeconomic stability.

Recent Studies of Central Bank Independence

Given these articles and their reception, it is unsurprising that central bank independence enjoys strong support among economists and policymakers. But this may be starting to change. Recent studies show that central bank independence does not necessarily lead to better macroeconomic outcomes, especially in terms of price stability.

In 2010, Jeroen Klomp and Jakob de Haan published an important paper showing that “there exists no general significant negative relation” between central bank independence and inflation. Earlier results, while valid, are not robust to alternative estimation methods and newer data.

Daniyar Nurbayev’s 2017 article goes even further: the apparent effect of central bank independence on price stability (e.g. low and predictable inflation) is due to broader commitments to the rule of law, rather than central bank independence alone. Notably, “CBI [central bank independence] has no significant effect on price stability when the rule of law is weak.”

Cep Anwar published a paper in 2022 focused on central bank independence in developing countries. The effects of central bank independence on inflation are not uniform; the particulars of a country and its government matter more. This may be confirming evidence of Nurbayev’s claim that more basic institutional and legal commitments to the rule of law actually explain the correlation between greater central bank independence and lower inflation.

Not all recent studies run against the older consensus. Carola Binder, for example, showed in her 2021 paper that increased political pressure on central banks is correlated with higher inflation and greater inflation persistence. “Even central banks with high legal independence frequently face pressure — nearly always for looser monetary policy,” she notes. Empirically distinguishing between (formal) independence and (informal) pressure is a worthwhile endeavor. Of course, political pressure itself has institutional antecedents. Following Binder, the next round of papers will likely attempt to identify these antecedents.

The takeaway is this: the benefits of central bank independence appear to be contingent. Underlying political and economic institutions matter greatly. The conditional benefits of central bank independence should make us hesitant to treat it as a macroeconomic panacea.

Is the Modern Fed Independent?

So how does the US Federal Reserve rank among the four types of independence — goal, instrument, financial, and personnel?

When discussing the independence of the Fed, we need to distinguish between its ordinary operations and its legal standing. It enjoys significant independence in terms of the former, but not the latter.

The Fed has considerable goal independence. It is true that Congress sets the goal as a legislative mandate: currently, a three-part mandate of “maximum employment, stable prices, and moderate long-term interest rates.” But the Fed has broad latitude in determining what constitutes success in achieving those goals. The Fed decided on its own that the best way to achieve the goal of stable prices is by adopting a two-percent inflation target.

Similarly, the Fed enjoys a high degree of day-to-day instrument independence. It can use its monetary policy tools, such as setting the target range for the federal funds rate, conducting open-market operations (buying or selling securities), and setting the discount rate (the rate for borrowing directly from the Fed), without consulting elected officials.

The Fed is also financially independent. It funds itself through its monetary policy activities. Its revenues come from returns generated by its asset portfolio. Congress does not currently authorize its funding.

Finally, the Fed has significant personnel independence. It is very difficult to remove the Fed governors or the chair, for example. It is not clear how Congress’s impeachment powers apply to the Fed. The president can remove a Fed chair, but only for incompetence or inability to perform essential duties, not for policy disagreements.

Limits of Fed Independence from Congress

Whatever independence the Fed has, however, ultimately depends on Congress. Article I, Section 8 of the Constitution vests in Congress the power “To coin Money, regulate the Value thereof, and of foreign Coin,” establishing that monetary policy is ultimately the prerogative of the legislature. Ordinary (operational) independence is best understood as a legislative grant.

The Fed’s history bears this out. Congress passed the Federal Reserve Act in 1913 and has since amended it more than 200 times. The Fed’s mandate comes from Congress and was last modified in 1977. And many laws, such as Dodd-Frank, enacted structural and procedural reforms. Congress could change the Fed’s goals or operating framework again if it wished.

There are also limits to the Fed’s personnel independence. The Senate must confirm the president’s nominees to the Board of Governors. Most recently, one confirmation failed during President Trump’s first term, when economist Judy Shelton did not secure a majority in a full Senate vote. Stephen Moore and Herman Cain, whom Trump also put forward, withdrew their nominations, presumably because they lacked the confirming votes in the Senate. Under President Biden, Sarah Bloom Raskin withdrew her nomination due to opposition from members of the Senate Banking Committee.

Congress could also restrict the Fed’s instrument independence if it so chose. Legislators could limit the assets the Fed may purchase (e.g., Treasury debt only) or restrict its lending activities (perhaps even closing the discount window).

As for financial independence, while the Fed is currently self-funding, Congress could make the Fed get its financial resources for non-monetary policy activities (namely, regulation) from the normal appropriations process. Importantly, this would not work for open-market monetary policy. The Fed does not need taxpayer resources to buy or sell assets; it creates or destroys dollar reserves to conduct these operations. Of course, Congress could divert Fed earnings or other balance sheet resources for fiscal purposes, as it did in 2018.

In short, the Fed’s independence is a Congressional delegation of power. It lasts as long as Congress pleases and no longer.

Fed Independence from the President

A stronger argument can be made that the Fed is independent from the president. The chief executive nominates Fed governors, but cannot remove them except for cause — something which has never been done. Legal precedent holds that the president can only remove officers who wield purely executive power. Because much of what the Fed does is quasi-judicial (e.g., issuing cease-and-desist orders) and quasi-legislative (e.g., setting reserve requirements for depository institutions), its highest decision-makers enjoy formal protections from the president.

While the Supreme Court recently extended the degree of presidential control over federal personnel, it also exempted the Federal Reserve. The court’s majority wrote in support of its order that the Fed is “a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.” However, nobody knows what a “distinct historical tradition” means, nor is it well understood why the Fed specifically merits a carve-out. Justice Kagan, for example, was puzzled by the “bespoke Federal Reserve exemption.” These ambiguities mean additional court cases could ensue.

Of course, presidents can wield all sorts of informal pressure on Fed chairs and governors. Nearly every president since Eisenhower has tried to influence monetary policy decisions. President Nixon (in)famously prevailed upon then-chairman Arthur Burns to loosen monetary policy in the run-up to the 1972 presidential election. Even President Reagan, whom history credits with presiding over America’s economic revitalization during the 1980s, was worried about how then-chairman Paul Volcker’s battle against inflation would affect his reelection prospects. More recently, during the Biden administration, there is some evidence that the Fed delayed monetary tightening in the wake of rising inflation because Chairman Powell wanted to secure his reappointment over Lael Brainard, a more dovish candidate. Presidential interference with monetary policy more closely resembles the bad-incentives concerns about running the printing press for partisan or electoral reasons than does Congressional oversight.

Independence in the Balance

In the last analysis, monetary policy cannot be independent from elected officials because monetary policymakers answer to Congress. We may wish to insulate central banks from overly ambitious presidents. History shows that chief executives may be willing to sacrifice price stability for political or electoral success. Nevertheless, central bankers still answer to legislators, as the Constitution requires.

Fed watchers in academia, government, and business largely assume the Fed both is and should be independent. The reality is more complicated. As economists Jerry Jordan and William Luther note in a recent study, “The United States ranks in the bottom quartile of countries on several measures of central bank independence.” This is by design: Constitutional principles require Congress to oversee any monetary authority to whom Congress delegates power. Furthermore, while economic scholarship has no legal standing, it is important to note that recent studies of central bank independence rarely find unambiguously positive effects.

The Fed’s operational independence de facto depends on Congress’s continued goodwill. Congress controls the Fed de jure and can intervene at any time to restrict goal, instrument, financial, or personnel independence.

Yesterday, the Federal Reserve’s monetary policy committee kept the target range for its policy interest rate at 4.25 to 4.5 percent, unchanged since December 2024. The decision came as no surprise to market participants who, despite President Trump’s recent clamor for rate cuts,  widely expected the Fed to hold steady amid ongoing economic uncertainty.

At the post-meeting press conference, Fed Chair Jerome Powell said the committee continues to view the economy as being in a solid position. He emphasized that the unemployment rate remains low and that the labor market is at or near full employment. He acknowledged, however, that inflation is still running above the Fed’s two-percent long-run target.

Echoing his remarks in May, Powell noted that the specter of new tariffs prompted an unusual surge in imports, which temporarily distorted first-quarter GDP measurement. Even so, he pointed to solid underlying demand: private domestic final purchases — which exclude net exports, inventory investment, and government spending — rose at a 2.5 percent annual rate. 

Powell noted that wage growth has continued to moderate while still outpacing inflation, and payrolls have increased over the past three months. The unemployment rate, he noted, remains low at 4.2 percent and has stayed within a narrow band for the past 12 months. Overall, Powell concluded that key indicators point to a labor market that is broadly in balance. 

Nonetheless, the summary of economic projections, also released Wednesday, indicates that the committee sees higher unemployment later this year. The median unemployment rate projection inched up to 4.5 percent from 4.4 percent in March, likely reflecting the committee’s concerns about slower economic growth in the second half of the year.

At the same time, Powell cautioned that surveys of households and businesses continue to reflect declining sentiment and heightened uncertainty, largely stemming from unresolved trade policy tensions. He noted that it remains unclear how these sentiments could influence future spending and investment. This concern can be seen in the committee’s projections of GDP growth. The median projection now puts real GDP growth at 1.4 percent in 2025, down from 1.7 percent in March and 2.1 percent in December.

On prices, Powell noted that both market- and survey-based measures of inflation expectations have edged up in recent months, with rising tariffs cited as the primary driver. But he emphasized that longer-run inflation expectations remain well anchored near the Fed’s two-percent target. Nonetheless, the median inflation projection for 2025 rose to 3.0 percent, up from 2.7 percent in March and 2.1 percent in December.

Powell noted that the effects of tariffs on inflation will depend on their ultimate level. He explained that although it now appears tariffs will be set lower than many had anticipated in April, this year’s increases are still likely to raise prices and slow economic activity.

Consistent with his remarks in May, Powell noted that any inflation brought on by the higher tariffs could be short-lived, amounting to a one-time shift in the overall level of prices, also warning that if prices do not respond quickly to the higher tariffs, the inflationary effect could prove more persistent. Whether that happens, he noted, will depend on the magnitude of the tariffs and the speed at which they pass through to prices. 

To prevent a one-time increase in the price level from turning into a broader inflation problem, Powell reiterated that the committee is fully committed to keeping the public’s long-run inflation expectations anchored at two percent. He explained that meeting this obligation could require placing greater emphasis on the price-stability side of the Fed’s mandate, noting that sustained price stability is essential for maintaining strong labor market conditions.

Powell again cautioned that ongoing uncertainty could create tension between the prongs of the Fed’s dual mandate: price stability and maximum employment. If such a conflict arises, he explained, the committee would assess how far inflation and unemployment are from their respective goals — and how long it might take for those gaps to close — before adjusting policy accordingly.

Despite holding the policy rate target steady, the median projection for the policy rate suggests the Fed is likely to begin cutting rates later this year. The median projection for the federal funds rate remained at 3.9 percent — 35 to 60 basis points lower than the current federal funds rate target.

Powell explained that Fed officials are wrapping up the five-year review of the Fed’s monetary policy framework. He reiterated that they remain committed to incorporating the lessons learned over the past five years. The review, Powell explained, should be completed later this summer, at which point the Fed will release an updated Statement on Longer-Run Goals and Monetary Policy Strategy.

Powell’s remarks during the Q&A shed further light on the Fed’s wait-and-see posture. He explained that while the committee expects the new tariffs to feed through to the price level, there is still uncertainty about the size and timing of that effect. Given the overall strength of the economy, he said, Fed officials have the flexibility to let events unfold before deciding whether a policy response is warranted.

Taken together, Powell’s remarks highlighted three key themes: inflation remains elevated, uncertainty surrounding tariffs is clouding the outlook, and the broader economy is strong enough to give the Fed room to wait. Rather than pre-committing to rate cuts, Powell emphasized the importance of letting the data guide decisions. The message was clear: the Fed is no longer operating under extraordinary forward guidance — it’s back to a more traditional, data-dependent approach.

The One Big Beautiful Bill Act (OBBBA), intended to lower the tax burden for Americans and thus to stimulate growth, contains one provision that has caused much alarm in Canada — potentially imposing a punishing tax on Canadians who invest in US companies. Canadian individuals and entities could face increased US withholding tax rates of 30 percent or more on US-source dividends, interest, royalties and capital gains on real estate. The financial implications are severe, conceivably gutting Canadian pension funds that are normally tax exempt.

Section 899 of the OBBBA, passed by Congress last month and currently before the Senate, is expressly designed to hurt investors from countries that impose what the legislation terms “unfair” foreign taxes. The OBBBA defines these taxes as those which are exclusively or predominantly applicable to non-resident individuals and foreign corporations or partnerships because of the application of revenue thresholds or exemptions that ensure that substantially all residents other than foreign corporations and partnerships supplying comparable goods or services are excluded. This language could hardly be clearer; it is an obvious reference to Digital Services Taxes (DSTs).

Canada instigated its DST last year, purportedly to address the concern that the world’s biggest tech companies do not pay their fair share of tax because they are able to locate their head offices in low tax jurisdictions while serving clients around the world. Canada’s DST applies to large businesses, ostensibly foreign and domestic, that meet both of two revenue thresholds: total global revenue of €750 million or more in a fiscal year; and greater than CA$20 million in earnings in Canada in the calendar year. The tax applies at a rate of 3 percent on profits over CA$20 million.

The DST disproportionately impact US companies, an unfortunate, if not intentional, consequence of outcome-based equity-minded policymaking. The US launched a complaint against Canada’s DST last August via the United States Mexico Canada Agreement (USMCA), the Services chapter of which prohibits discrimination between foreign and local services or services suppliers.

While it is arguable that Canada’s DST is indeed discriminatory against US companies, Canada could seek to raise a USMCA complaint of its own against the OBBBA withholding tax. The USMCA’s Investment chapter prohibits discrimination against foreign investors, with investment broadly defined to include shares in US companies and various other assets which would probably be caught by the Section 899 withholding tax.

In other words, Canadian legislation that violates an international treaty will be countered by US legislation which is illegal under the same treaty. The situation does not inspire much confidence in the two countries’ respect for international law. The respective taxes are yet more levers in an age of brazen unilateralism, not to mention trade protectionism.

Investors from Canada are not the only targets of the OBBBA. Many countries impose DSTs,  using identical wording based on the OECD model. OBBBA Section 899 goes on to state that

The Secretary shall issue … regulations or other guidance which list the discriminatory foreign countries … in guidance, … update such guidance on a quarterly basis… [and] exercise the authority to provide exceptions [emphasis added].

This leaves the door open for the US to impose higher withholding taxes on investors from certain countries, much as President Trump has done with tariffs, or to exempt some countries entirely. The variable application of the measure could therefore function as “leverage” in the broader bilateral trade negotiations. It was reputed that the UK’s DST would be eliminated as part of the US-UK “deal” finalized last month, the details of which remain unclear; apparently, however, this was not the case. Exempting the UK from the “unfair taxes” designation might be one aspect of the arrangement.

Canada’s DST will almost certainly feature in the USMCA’s renegotiation next year. If it keeps the DST, Canada would need to seek an exemption from the withholding tax.

All countries imposing DSTs would be wise to abandon them, as they generate little in the way of revenue, apparently, the UK’s DST is expected to yield around £800m per year. DSTs are ultimately passed on to consumers anyway, hardly a sensible policy in an era of high inflation. It is difficult to resist the conclusion that DSTs are largely symbolic — designed to give the appearance of fairness or to convey a sense of distribution of wealth that still appeals to some segments of the electorate. Ultimately, they are anti-growth, operating as a drag on economic activity and innovation.

By pressuring foreign countries to ditch their DSTs via the threat of tax retaliation, the OBBBA could actually end up spurring growth beyond US borders.

On June 9, about 300 employees of the National Institutes of Health, representing all 27 NIH institutes, issued a letter they called the “Bethesda Declaration,” calling on NIH director Jay Bhattacharya, MD PhD, to reverse the Trump administration’s course on multiple initiatives. 

The declaration was explicitly inspired by the October 2020 “Great Barrington Declaration,” co-authored by Bhattacharya, an epidemiologist who was then a professor of health policy at Stanford. That declaration asked public health authorities to redirect anti-COVID efforts away from mandatory school and workplace closures, since children and healthy adults were at low risk of death, and focus efforts on the elderly and chronically ill. For voicing this perspective, its authors were blacklisted on Twitter (now X) and personally targeted for attack by federal health officials.

The authors of the Bethesda Declaration call on Bhattacharya to pay more than lip service to “establishing a culture of respect for free speech and dissent,” affirm that “dissent is the very essence of science,” and ensure that dissenting voices are “heard and allowed.” They accuse the Trump administration of politicizing research; cutting funding for research on health disparities, COVID immunization, health impacts of climate change, and the health needs of diverse populations; undermining global collaboration, peer review, and funding of indirect research costs; and firing essential NIH staff. 

Both parties to the dispute can agree on one thing: the NIH’s annual budget of about $50 billion makes it the world’s largest and most influential organization supporting biomedical research. To be sure, pharmaceutical firms and biomedical device manufacturers invest several times this amount in research each year, but their programs are more directly tied to future profit, while NIH can support investigations with no immediate prospects of generating revenue. Many such projects, including Watson and Crick’s discovery of the structure of DNA, have subsequently turned out to produce immense economic returns.

Yet Bhattacharya’s mission, as he conceives of it, extends far beyond cost reduction to the very ethos and culture of biomedical research. For one thing, he is focused on the contemporary “replicability crisis.” A 2016 paper published in Nature showed that more than 70 percent of over 1,500 researchers polled have been unable to reproduce the published results of another researcher. One well-known 2021 review of cancer biology research showed that among studies that had been repeated, the effect sizes were on average 85 percent smaller than what had been reported.

Bhattacharya means to combat this reproducibility crisis by reversing the current heavy bias against publishing replication studies. As things stand, biomedical journals are almost 10 times as likely to publish positive as negative results, meaning that any medical researcher who wants to get a doctorate, get published, and get funded needs to show that the therapy under investigation is effective. The culture of science must shift to recognize that studies that fail to replicate published results are as important a part of good scientific practice as positive ones. 

Bhattacharya himself incurred the wrath of leaders at NIH such as director Francis Collins, not only by co-authoring the Great Barrington Declaration but also by publishing results during the first months of the pandemic that showed that the prevalence of COVID infection was far higher than officials supposed (the Santa Clara study). The significance of this finding was this: calculations of mortality rates depend not just on numbers of deaths (the numerator) but also on numbers of cases of infections in the population (the denominator). Bhattacharya found estimates of the latter were systemically too low, which dramatically and incorrectly inflated COVID’s perceived lethality. 

For many, it is difficult to believe that published scientific results could be wrong. But as Bhattacharya’s colleague John Ioannidis has long argued, most findings are almost certainly wrong, due to biases built into research methodology that Bhattacharya aims to correct. This is not mainly fraud but unrecognized bias. For example, most studies have small sample sizes and low statistical power, data sets are routinely not shared, the culture of scientific publication and citation favors positive results, study results are not subjected to replication, and researchers are under tremendous pressure to “succeed.” 

The NIH has been perfectly designed to produce the results it is currently getting. What is it really good at? Keeping established researchers funded and ensuring that current research paradigms are carried forward into the future. To sit on a committee that evaluates research proposals, for example, scientists must be funded, which tends to reinforce current paradigms. Moreover, researchers must present preliminary data to show that their proposals are likely to produce positive results. Not surprisingly, the NIH culture makes it difficult for new researchers to secure funding to investigate new ideas. Likewise, it’s rare to receive funding for research that challenges or seeks to overturn NIH’s previously published findings. 

Bhattacharya also criticizes NIH’s current pattern of funding for indirect costs. While there are nearly 6,000 US colleges and universities, only a relatively small number – dozens – receive substantial amounts of NIH funding, often charging indirect costs rates of over 50 percent. Every $1 million of direct research funding needs to be accompanied by more than $500,000 of additional funding to cover costs such as facilities, maintenance, utilities, and support personnel. This concentrates research in relatively few centers, further reducing diversity among researchers, their investigations, and scientific ideas. 

The core question is this: what does the NIH, and more broadly speaking, the scientific enterprise, exist to do? Is its principal purpose to sustain funded researchers and their research programs? Or is it to promote discoveries that improve human health? If the latter is paramount, then the culture of the NIH must shift to put truth above success. What matters most is not how many grant dollars scientists garner, how many papers they publish, or how many awards they receive, but the degree to which they accurately illuminate what we really need to know. 

Much hangs on Bhattacharya’s response to the Bethesda Declaration. Will he engage in character assassination and retribution, seeking to silence or terminate those criticizing the administration’s policies? Or will he speak out and act on behalf of good science, a word with origins in the Latin root meaning “to know.” 

Science needs open and self-critical discussion that welcomes differing points of view, insists on the highest standards of evidence, shuns biases, and prizes the truth above all else. The NIH’s pursuit of knowledge has been ailing, and restoring it to good health will require strong medicine. 

One of the largest residential solar installers, Sunnova, went belly up on June 8. The company had over $10 billion in debt and a market cap of over a billion dollars less than a year ago. While aggressive spending on expansion and poor management account for some of Sunnova’s problems, they also faced significant policy headwinds: high interest rates, higher costs due to inflation, uncertainty and higher costs due to tariffs, and freezing of Inflation Reduction Act subsidies.

Those familiar with this space may remember Solyndra, a failed solar company that had received a $500 million loan from the federal government. Some people point to a $3 billion loan guarantee with Sunnova under the Biden administration as a larger version of Solyndra. This is incorrect.

A loan guarantee differs from a loan. The guarantor agrees to make up the difference of what a defaulting borrower agreed to pay and what they actually paid. Furthermore, the $3 billion loan guarantee was for consumer loans to install solar panels, not loans made directly to Sunnova itself. Finally, less than $50 million in loans were made under this loan guarantee program before the Trump administration cancelled it last month. This means, at least at the federal level, that the Solyndra bankruptcy cost taxpayers at least ten times more.

Besides the federal loan guarantee, the Sunnova bankruptcy highlights many of the distortions that governments have created in solar energy. But it is also personal: I installed solar panels on my house in New Jersey using Sunnova and can speak to how government incentives affected my decision.

The solar panel array Sunnova sold me had a sticker price of about $20,000. I estimate it saved me $80 to $120 per month on my electricity bill. So let’s call it $1200/year in energy savings. That’s a 6 percent return on investment. Not bad, but not great either — especially given the significant outlay required up front — and the fact that the panels depreciate over time. But when you incorporate federal and state subsidies, installing solar panels became a no-brainer.

At the time, the federal government was offering a 30 percent tax credit on solar panels. In effect, this reduced the price from $20,000 to $14,000. The rate of return from my $1200 in annual savings jumped to 8.6 percent. Then the state subsidy kicked in.

Some states engage in a practice called net metering where utilities must pay owners of solar energy for any electricity they put back on the grid. There are many complications and problems with this method that we need not worry about here. In my case, NJ required energy producers to “buy” solar power generation. Every additional thousand kilowatts of energy my solar panels generated, for my own benefit mind you, I could also generate something called an SREC (Solar Renewable Energy Certificate) and sell it on an exchange.

The price of SRECs ranged from about $200 to $240 while I owned the system and my system would generate 2-3 SRECS per year. So call that roughly $500/year in additional direct payments to me, the owner of the solar panels, and my rate of return rises to 12 percent — not a bad deal. So I, and thousands of others, bought solar panels.

And that’s the calculation with just two subsidies. Based on the time, location, and nature of the purchase, there are dozens of other forms of subsidies for solar panels. Which brings us back to the Sunnova bankruptcy and the state of solar power in the US.

Solar energy has become an enormous industry over the last decade. Part of this is due to rapidly improving technology and significant versatility. Improving technology has led to solar panels with higher efficiency and lower production costs. There are also solar panels being developed that can capture sunlight from both sides. Improvements in materials like organic photovoltaics and ultra-thin silicon are leading to thin, bendable, and lightweight solar modules that can be integrated into various surfaces — including windows and facades — as transparent solar panels become a reality.

The economic question, though, is not only about how impressive solar technology is, but whether the cost of producing, installing, and maintaining solar panels can be justified based on their direct benefits to consumers. Environmental activists and opportunistic politicians and the solar lobby obscured the answer to this question by asserting massive indirect benefits for the climate from solar energy and subsidizing solar installation at every opportunity they could find — which leads to my story.

Solar power (and wind power for that matter) has several major problems as a large-scale source of electricity for the grid. The most important problem is its intermittent nature. Solar panels don’t generate electricity at night. Nor do they generate much when it is cloudy. Furthermore, power generation is unreliable — it changes over seasons and can’t be dialed up or dialed down based on people’s demand for electricity — such as during severe weather events. The main way to deal with this problem entails massive energy storage (in effect, giant batteries) that are prohibitively expensive to build at scale.

Another oft-overlooked problem is the cost of transmission. The best locations for solar power installations are not necessarily near places with high demand for electricity. In fact, cities with high demand for electricity also have much higher opportunity costs for land than rural areas. But building transmission lines is expensive and not usually factored into the cost/benefit analysis of solar installations because regulators require utility companies (really their rate payers) to foot the bill of building transmission lines.

The explosion of solar energy has been driven by heavy government subsidization around the world. As those subsidies dry up or are cut off, such as with the current administration’s freezing of Inflation Reduction Act funds or the Big Beautiful Bill’s aggressive retiring of renewable energy subsidies, the cost/benefit calculus for solar changes, too. There will still be a market for solar energy without subsidies. It will just be much smaller. If that’s the case, we can expect stormy skies ahead for solar companies of all stripes. Sunnova’s bankruptcy is likely the beginning, rather than the end, of solar investors’ troubles.