President Trump’s detractors and defenders alike have cast his federal foray into local law enforcement as a revival of “broken windows” policing. But while Americans quarrel over deploying federal troops in city streets, the president has been busy applying a different type of broken windows theory to our nation’s trade policy. 

In 1850, French satirist Frédéric Bastiat introduced – and promptly smashed – what economists call the “broken window fallacy.” Bastiat’s parable runs like this. Suppose a roving bandit smashes a shopkeeper’s window. The shopkeeper is devastated – this cruel deed will cost him $1,000. But the local mayor consoles him: “Don’t despair! This destruction creates work for our local glazier. Perhaps he’ll spend his earnings from this repair at the butcher’s, who’ll then patronize the brewer’s, who’ll then frequent the baker’s, and so on. Ultimately, Fortuna’s misfavor enriches our community!”

The mayor’s Panglossian outlook paints a pretty picture. But, as Bastiat notes, it’s wildly deceptive. Why? It focuses only on the “seen” – everyone who directly benefits from the damage: the glazier, the butcher, the brewer, the baker, and so on. This cleverly distracts us from seeing the “unseen” –  all the wealth that would’ve been created if not for this wanton act of vandalism. For had his window not been smashed, our shopkeeper could’ve spent his shekels on something else he’d surely value more than repairing a window. Perhaps he would’ve spent it on a new fireplace. This would create work for the mason. Perhaps the mason would’ve spent his earnings at the butcher’s, who’d then patronize the brewer, who’d then visit the baker, and so on. All told, society would be roughly $1,000 richer in this alternate reality. For our shopkeeper would have a new chimney and a perfectly good window.

Nearly 175 years later, Bastiat’s cautionary tale provides a window into the fallacy that lies at the heart of today’s trade war: the myth that destruction creates wealth – that breaking trade deals and global supply chains, like breaking windows, is a secret recipe for prosperity. 

Like the mayor in Bastiat’s tale, President Trump is a slick politician and a masterful spin artist. He’s exceptional at portraying his policy’s “success” by focusing our attention squarely on its visible beneficiaries. That’s why he often unveils his latest tariffs in made-for-TV spectacles where he’s encircled by jubilant workers at revived factories that directly benefit from his protectionist policies. 

Thankfully, Bastiat’s parable exposes this clever marketing ploy for what it is: cheap sophistry. For every reshored job and “Made in America” product comes at the hidden cost of whatever else we could’ve made with those resources (where that “whatever else” is something more valuable to the economy). These costs are, by definition, difficult to measure. And unlike a ribbon-cutting ceremony at a newly opened factory, they’re impossible to showcase. But they’re very real, and very damaging to the economy. The late Henry Hazlitt aptly distilled Bastiat’s insight in his classic work, Economics in One Lesson: the art of economics consists in looking beyond the immediate, visible benefits of a policy on one group to consider its long-run, “unseen” consequences on the entire economy. 

Keep your eyes peeled, and you’ll detect shards of this fallacy scattered all over the White House Rose Garden from the president’s “Liberation Day” extravaganza. You’ll also find it littered all over cable news. Indeed, viewing today’s headlines through Bastiat’s lens reveals that many of the president’s most cherished trade war “victories” are a mirage. 

In May, Trump’s Commerce Secretary Howard Lutnick vowed to stick it to China by bringing iPhone assembly jobs “back” to America. “The army of millions of human beings screwing in little screws to make iPhones, that kind of thing is going to come to America!” he gushed. 

Would this bolster our economy, as Trump and Lutnick argue? Quite the opposite. Hiring an “army of millions” of Americans to assemble iPhones means drawing them away from jobs we actually excel at, like designing iPhones, developing new software, and countless others. If a $25,000 job assembling iPhones replaces a $125,000 job designing them, America isn’t $25,000 richer – we’re $100,000 poorer. Dave Chappelle is right: Americans want to buy iPhones, not make them. 

In August, the president touted July’s tariff haul as a $30 billion windfall to our economy. To the untrained eye, this appears to be welcome news. But a messier image comes into focus when viewed through Bastiat’s lens. As any economist worth their salt can attest, tariffs are a tax borne by consumers in the form of higher prices. Higher prices mean consumers have less money to spend on other things, thus crowding out growth and destroying jobs in those sectors. That $30 billion in tariff revenue isn’t manna from heaven, as Trump often portrays it. It’s a hidden tax on US consumers. 

What about the raft of “trade agreements” and investment deals the president loves to flaunt? In July, Trump touted his agreement with the EU as “the biggest deal ever made.” The EU, Saudi Arabia, Japan, South Korea, and the UAE pledged to invest $750 billion, $600 billion, $550 billion, $350 billion, and $200 billion, respectively. Corporations have also joined in. In May, Nvidia pledged to invest $500 billion in domestic chip manufacturing. In August, Apple affirmed its $600 billion investment in America. Meta’s Mark Zuckerberg also vowed to invest $600 billion. 

These headlines certainly seem propitious, even if these “commitments” are incredibly vague, and the numbers seemingly conjured out of thin air. (Lest we forget: what matters to the dealmaker-in-chief is eye-catching headlines, not empirical accuracy or sound economics.) But even if Trump’s tariffs succeed in reshoring some jobs, Bastiat’s question remains: at what cost? If other nations can manufacture iPhones and widgets more efficiently than we can, economics teaches us we’re better off importing those products. This frees our workers to specialize in higher-paying jobs they excel at – skilled craftsmen, artisans, high-skilled manufacturing, etc. – of which there’s no shortage.

Trump is a skilled promoter and a crafty marketer; he knows how to craft a compelling story. Credit where it’s due, he’s often not entirely wrong. Even his tallest tales are typically rooted in a seed of truth. Urban crime, though still fairly low by historical standards, remains inexcusably high. Foreign trade, though incredibly beneficial to our economy, does displace some domestic firms and workers. 

But he’s also a deft illusionist. Whether he’s defending his policies on crime or trade, he’s remarkably adept at drawing our attention where he wants. On crime, he tells harrowing tales of urban violence to justify federal incursions into local law enforcement. On trade, he hosts grand ribbon-cuttings at reopened factories in made-for-TV spectacles to justify taking autocratic control over trade policy. 

It’s brilliant retail politics, to be sure. That said, there’s a stark difference between broken windows policing and his broken windows trade policy. Although controversial, broken windows policing is eminently defensible. His broken windows trade policy, in contrast, is not. Economists are virtually united in condemning protectionism (with the notable exception of Peter Navarro and Ron Vara, but we repeat ourselves). They generally support free trade, only granting exceptions in rare, well-delineated circumstances.

To be clear, economists don’t claim free trade is a panacea. No profession is more fond of reminding people that every decision involves tradeoffs (hence Harry Truman’s Melvillian quest to find a “one-armed economist”). Are there tough tradeoffs that policymakers must weigh when conducting trade policy, like protecting crucial national security interests and fortifying strategically vital industries? Absolutely – though, to be fair, these concerns are often wildly overstated by lobbyists trying to hurt foreign competitors. Are there steps policymakers can take to make our economy more competitive? Sure – though, to be clear, we should start by slashing red tape, not clumsily cutting off trade. The Hippocratic Oath in medicine also applies to economic policy: “first, do no harm.” It’s one thing to attract investment with the carrot of simplifying taxes and surgically removing our most malignant policies. It’s quite another to compel it with the stick – nay, sledgehammer – of tariffs and trade barriers, with all their far-reaching negative consequences. One need not be a free trade absolutist to believe that we shouldn’t throw the baby out with the bathwater when it comes to trade. 

When it comes to trade policy, don’t fall for the president’s sleight of hand. Don’t get beguiled by propitious-sounding headlines or eye-popping investment figures. All this smoke and mirrors is a clever way for the president to distract Americans from the destructive effects of his trade war, as evidenced by the recent spate of weak jobs reports and anemic growth figures. Instead, heed Bastiat’s timeless wisdom: Behind every lofty tariff pronouncement lies a hidden cost. Like the politician in Bastiat’s tale, when Trump brags about “bringing back” jobs, all he’s really celebrating is a hefty bill for replacing windows he smashed with his tariffs. 

Despite all the sound and fury emanating from the White House, Bastiat’s lesson rings as true as ever. Destroying trade doesn’t create prosperity any more than smashing windows creates wealth.

Last month, we lamented California’s Frontier AI Act of 2025. The Act favors compliance over risk management, while shielding bureaucrats and lawmakers from responsibility. Mostly, it imposes top-down regulatory norms, instead of letting civil society and industry experts experiment and develop ethical standards from the bottom up.

Perhaps we could dismiss the Act as just another example of California’s interventionist penchant. But some American politicians and regulators are already calling for the Act to be a “template for harmonizing federal and state oversight.” The other source for that template would be the European Union (EU), so it’s worth keeping an eye on the regulations spewed out of Brussels.

The EU is already way ahead of California in imposing troubling, top-down regulation. Indeed, the EU Artificial Intelligence Act of 2024 follows the EU’s overall precautionary principle. As the EU Parliament’s internal think tank explains, “the precautionary principle enables decision-makers to adopt precautionary measures when scientific evidence about an environmental or human health hazard is uncertain and the stakes are high.” The precautionary principle gives immense power to the EU when it comes to regulating in the face of uncertainty — rather than allowing for experimentation with the guardrails of fines and tort law (as in the US). It stifles ethical learning and innovation. Because of the precautionary principle and associated regulation, the EU economy suffers from greater market concentration, higher regulatory compliance costs, and diminished innovation — compared to an environment that allows for experimentation and sensible risk management. It is small wonder that only four of the world’s top 50 tech companies are European.

From Stifled Innovation to Stifled Privacy

Along with the precautionary principle, the second driving force behind EU regulation is the advancement of rights — but cherry-picking from the EU Charter of Fundamental Rights of rights that often conflict with others. For example, the EU’s General Data Protection Regulation (GDPR) of 2016 was imposed with the idea of protecting a fundamental right to personal data protection (this is technically separate from the right to privacy, and gives the EU much more power to intervene — but that is the stuff of academic journals). The GDPR ended up curtailing the right to economic freedom.

This time, fundamental rights are being deployed to justify the EU’s fight against child sexual abuse. We all love fundamental rights, and we all hate child abuse. But, over the years, fundamental rights have been deployed as a blunt and powerful weapon to expand the EU’s regulatory powers. The proposed Child Sex Abuse regulation (CSA) is no exception. What is exceptional, is the extent of the intrusion: the EU is proposing to monitor communications among European citizens, lumping them all together as potential threats rather than as protected speech that enjoys a prima facie right to privacy.

As of 26 November 2025, the EU bureaucratic machine has been negotiating the details of the CSA. In the latest draft, mandatory scanning of private communications has thankfully been removed, at least formally. But there is a catch. Providers of hosting and interpersonal communication services must identify, analyze, and assess how their services might be used for online child sexual abuse, and then take “all reasonable mitigation measures.” Faced with such an open-ended mandate and the threat of liability, many providers may conclude that the safest — and most legally prudent — way to show they have complied with the EU directive is to deploy large-scale scanning of private communications.

The draft CSA insists that mitigation measures should, where possible, be limited to specific parts of the service or specific groups of users. But the incentive structure points in one direction. Widespread monitoring may end up as the only viable option for regulatory compliance. What is presented as voluntary today risks becoming a de facto obligation tomorrow.

In the words of Peter Hummelgaard, the Danish Minister of Justice: “Every year, millions of files are shared that depict the sexual abuse of children. And behind every single image and video, there is a child who has been subjected to the most horrific and terrible abuse. This is completely unacceptable.” No one disputes the gravity or turpitude of the problem. And yet, under this narrative, the telecommunications industry and European citizens are expected to absorb dangerous risk-mitigation measures that are likely to involve lost privacy for citizens and widespread monitoring powers for the state.

The cost, we are told, is nothing compared to the benefit. After all, who wouldn’t want to fight child sexual abuse? It’s high time to take a deep breath. Child abusers should be punished severely. This does not dispense a free society from respecting other core values.

But, wait. There’s more…

Widespread Monitoring? Well, Not Completely Widespread

Despite the moral imperative of protecting children — a moral imperative so compelling that the EU is willing to violate other core values to advance it — the proposed CSA act introduces a convenient exception. Anything falling under national security, and any electronic communication service that is not publicly available (i.e. available only to elected officials and bureaucrats) would remain entirely untouched. Private chats among citizens require scrutiny — but the conversations of those who claim to protect us are off limits.

As the good minister said, “behind every single image and video there is a child who has been subjected to the most horrific and terrible abuse.” If that is indeed true of every “single image and video,” why would it not also be true of the messages shielded by the CSA’s national security and non-public exceptions? Does the horror somehow dissipate when the users are politicians or bureaucrats? Is the unacceptable suddenly made acceptable when it concerns those who write the rules?

In the EU’s hierarchy of rights, protecting children trumps privacy. But protecting Eurocrats trumps protecting children. In the end, modern technology gives politicians unprecedented opportunities to monitor citizens, while exempting themselves from scrutiny.

There is no chatter yet — that we know of — about imposing similar measures in the US. But, from the wealth tax to AI regulation — and the very origins of the American administrative state — bad ideas from Europe have a nasty way of making their way across the Pond. 

The tragic assassination of Charlie Kirk has left a deep vacuum within the American right — one that various political actors are now attempting to fill. For roughly a decade, the mainstream media labeled anyone who opposed Big Government, collectivism, or high taxation as some kind of “far-right radical.” 

After years of misusing and diluting these labels, society now finds itself unable to distinguish genuine extremism from ordinary political dissent. This confusion has created the perfect environment for figures like Nick Fuentes to present themselves as merely “controversial conservatives,” when in reality their ideas sit entirely outside the American political tradition.

Fuentes began his career as yet another podcaster. His rhetorical skill is undeniable; it even earned him a seat at a dinner in Mar-a-Lago with President Trump and Kanye West shortly before he was banned from practically every major social-media platform. Even so, he eventually returned and now aspires to position himself as an ideological figure within the American right, despite the fact that his ideas cannot be placed within conservatism, or indeed any classical Republican ideology. 

In recent interviews and public appearances, Fuentes has openly expressed admiration for the communist dictator Joseph Stalin, describing him as a model of ruthless political efficiency: “Now that the dust has settled, can we admit that Stalin was a genius? Can we admit that Stalin was the most effective leader in history?” 

He has also made profoundly disturbing remarks such as: “Many women want to be raped… Many women really want a man to beat them.”

And he has declared openly and without hesitation: “Forget about liberty and safety. It’s about order… I don’t believe in the individual.”

Fuentes’s worldview places him far outside the American tradition, and to understand why, it is essential to revisit the core principles that defined American conservatism in the twentieth century.

Conservatism and the American Political Tradition

To situate Fuentes’s worldview in context, it is essential to revisit the core tenets of American conservatism as it developed in the twentieth century.

1. Individual Liberty as a First Principle

From Barry Goldwater’s The Conscience of a Conservative (1960) to Ronald Reagan’s landmark speeches, the conservative movement has consistently rejected the subordination of the individual to the state. Natural rights, as articulated in the Declaration of Independence, are inalienable and derived from the Creator — not from government authority. American conservatism is built upon the idea that the individual precedes the state, not the other way around.

2. Skepticism Toward Concentrated Power

William F. Buckley Jr. and the early National Review intellectuals positioned conservatism as an explicit counterweight to centralized control — whether communist, fascist, or bureaucratic. American conservatism is fundamentally distrustful of authoritarianism, regardless of ideological coloration. Any project that seeks to grant the state sweeping authority over society contradicts the ethos of the movement.

3. Constitutionalism and Limited Government

The Constitution begins with “We the People,” anchoring the legitimacy of government in popular consent. Its structure — federalism, separation of powers, and the Bill of Rights — was designed precisely to prevent the emergence of the all-powerful state Fuentes openly admires. The Constitution is not simply a legal document but the embodiment of the American suspicion of concentrated power and the celebration of individual autonomy.

Fuentes’s statements therefore place him outside this tradition. Admiration for Stalin, calls to abandon individual rights, and proposals to merge extreme left and right movements around illiberal ends are not deviations from conservatism — they are direct rejections of it.

The Constitution: Pillar of the American Way

Few historical documents have shaped a civilization as decisively as the Constitution of the United States. The American right, with all its internal debates and disagreements, continues to defend its principles in broad outline: political power emanating from the people; resistance to Big Government; and the protection of individual liberties. 

The Constitution’s architecture reflects an abiding commitment to individualism and an aversion to the tyrannical tendency inherent in unchecked state power. The first ten amendments explicitly enumerate what the government cannot do: it cannot silence speech, cannot restrict the press, cannot prohibit the free exercise of religion, cannot disarm citizens, cannot imprison them without due process, cannot seize their property arbitrarily, and cannot impose cruel or unusual punishments. These prohibitions were designed precisely to prevent the emergence of an all-powerful state claiming authority over the conscience, autonomy, and dignity of the individual.

Fuentes, however, does not believe in this tradition. He rejects individual autonomy and, despite claiming to be “a Christian,” does not treat rights as endowed by the Creator but as instruments to be granted or withdrawn by an authoritarian ruler imposing “order.” In other words, his worldview is not merely non-conservative; it stands in direct opposition to the constitutional foundations that define American political life.

The Problem of Empty Labels

One of the central problems in contemporary political discourse is that extremist labels have become empty from overuse. For years, commentators have called anyone who criticized socialism or Big Government a “fascist,” a practice that has left society unable to recognize actual authoritarianism when it appears. Yet Fuentes fits that description literally, not metaphorically. He is a conspiracy theorist, a neo-Nazi, and a white supremacist who believes in authoritarian state control, collectivism, and the suppression of individual and market freedoms. 

In one of his appearances, he even proposed a pact between the far left and far right under shared illiberal objectives: “The left has to give up immigration; the right has to give up on the free market.”

His appeal thrives in a cultural landscape where many young men feel alienated and stripped of meaning. They also don’t feel welcomed by mainstream institutions. After years of being branded racists or Nazis for trivial reasons, they no longer trust the moral judgments of the culture around them. As a result, they become desensitized to legitimate warnings about extremism and more willing to follow anyone who claims to speak for them. This makes them prime targets for demagogues — con men and would-be authoritarians — who offer them a ready-made identity built on grievance and a sense of belonging grounded in resentment.

There is no American conservative doctrine — historically or presently — that calls for abolishing natural rights, dismantling individualism, or submitting the population to state control. Nor has the classical American tradition been rooted in racial identity rather than ideas. 

The United States was founded on the belief that all who are willing to work, contribute, embrace the culture, and honor the American tradition can belong, regardless of creed or race. Fuentes seeks to redefine American belonging on illiberal, identitarian, and authoritarian terms, a vision incompatible with both conservatism and the founding principles of the republic.

A Warning About the Present Moment

Perhaps one could simply note that Fuentes openly admires Joseph Stalin, architect of one of the deadliest totalitarian regimes in human history, and leave it at that. But the reality is that thousands of Americans are being radicalized daily by figures like Fuentes — individuals who, instead of appreciating the privilege of having been born in the most prosperous nation on earth, seem determined to undermine it from within, dividing the population, degrading public discourse, and empowering America’s adversaries. 

The American tradition does not silence dissent; it confronts it with arguments and moral clarity. If Fuentes wishes to pursue an illiberal political movement, he is free to do so. But no one should mistake his project for conservatism or for any authentic expression of the American right. His admiration for Stalin, his rejection of individual rights, and his calls to fuse the extreme left and right around authoritarian objectives are not expressions of the conservative tradition — they are categorical repudiations of it.

On almost every page of The Socialist Calculation Debate and the Relevance of Economic Knowledge, I found myself thinking, “I can’t believe a monograph like this still needs to be written in the year 2025,” but here we are. 

A self-described “democratic socialist” has just been elected mayor of arguably the world’s most important city. The Trump administration is buying ownership stakes in large corporations, which leaves me wondering what Republicans who ran against socialism believe “socialism” is. But maybe I shouldn’t be surprised: the right has long embraced border socialism. Why not take increasing control over the material and intellectual means of production?

Peter J. Boettke, Rosolino A. Candela, and Tegan L. Truitt explain in a welcome and important contribution to the Cambridge “Elements” series, launched by Cambridge University Press to disseminate focused scholarly works that are a little too long to be journal articles and a little too short to be books (I reviewed Austrian Perspectives on Entrepreneurship, Strategy, and Organization for AIER in 2021). 

The authors emphasize a point that Austrian economists have reiterated for decades, but that does not seem to have made its way into the mainstream literature. The “calculation problem” is not a computational problem. It’s an epistemic problem. It isn’t that it was too hard to gather the necessary data and do the required calculations in 1920 (when Ludwig von Mises published “Economic Calculation in the Socialist Commonwealth”) or 1945 (when F.A. Hayek wrote “The Use of Knowledge in Society”) or 1985 (when Don Lavoie published Rivalry and Central Planning: The socialist calculation debate reconsidered). Nor was it difficult in December 2022, when generative AI was in its infancy and I introduced a Southern Economic Journal symposium on the 100th anniversary of “Economic Calculation in the Socialist Commonwealth” and the 75th anniversary edition of “The Use of Knowledge in Society” with an article titled “Economic planning must be polycentric, not monocentric.” The problem is that the data don’t exist unless the means of production are bought and sold in free markets – which means that modern technosocialists enamored with generative AI as the technology that will finally solve the calculation problem are missing the point. Oskar Lange called the market a “computing device of the pre-electronic age,” but he is making a category mistake. The market is much more than this.

How do we know? Prices aren’t just what we get when we crunch numbers correctly. They embody the judgments people make in real time in response to real tradeoffs and genuine uncertainty. To borrow a phrase from Deirdre McCloskey, prices are conjective: they represent a social consensus emerging from shared bets on what something is worth given Hayek’s “particular circumstances of time and place.” And yet they confront us as immutable and seemingly objective facts about the social world. Collard greens were $3.99, and ham hocks were $6.06 at Publix earlier this afternoon, representing not an objective fact about the universe but our best guess at a social consensus about all the ways people could use those collard greens and ham hocks a few days before Thanksgiving. With market prices, the people who run Publix can ex ante estimate whether they can buy collard greens and ham hocks and then sell them at a markup sufficient to turn a profit. They can also ex post evaluate their ex ante estimates and learn whether they have wasted resources. 

Importantly, prices are not just “data.” They are conjectures about value that resolve the problem of economic rivalry, which Lavoie defined in Rivalry and Central Planning as “the clash of human purposes.” Those human purposes “clash” because people have fundamentally different ideas about what it means to live well, and they converse about it by “higgling and bargaining” in the marketplace. The process itself generates knowledge that cannot otherwise exist. Economic knowledge cannot be stored in spreadsheets and processed by supercomputers. Entrepreneurial judgment has no algorithmic substitute. Economic knowledge, to borrow from James M. Buchanan’s classic essay, is defined in the process of its emergence.

Their analysis, though brief, is historically rich, as they describe how liberal politics and classical and neoclassical economics emerged side by side. Thinkers from Smith through Mill (and beyond) understood that markets are embedded in a social, cultural, and legal milieu of property, contract, and consent that makes voluntary exchange – and meaningful economic knowledge – possible. It is rooted in the most fundamental of liberal rights: the right to say “no, thank you.”

The Socialist Calculation Debate and the Relevance of Economic Knowledge gives added depth to the history of economic thought over the last century by exploring how the themes in the calculation debate appear in Ronald Coase’s work on transaction costs originating in his classic article “The Nature of the Firm,” the UCLA property rights school, and public choice. Drawing on the economists Ennio Piano and Louis Rouanet, they explain that the choice between managerial hierarchies and spot markets is a kind of economic calculation that entrepreneurs and managers cannot do without private property and the possibility of exchange.

So why does socialism still attract enthusiastic adherents, especially among educated elites one might think would know better? As Boettke et al. argue, socialism survives in part because these educated elites have not actually grappled with Mises’s economic calculation argument and mistakenly believe that it is a computational problem. However, knowledge does not just exist “out there” waiting to be found and analyzed. It emerges in exchange itself.

It also survives because people have redefined it — not as “common ownership and control of the means of production,” but as “a set of egalitarian, redistributive normative commitments.” For the true believer, socialism’s desirability isn’t a hypothesis we can test with theoretical or empirical inquiry. It’s an axiom that produces a series of “if only” statements that commit what the philosopher, Adam Smith scholar, and The End of Socialism author James R. Otteson calls the “nice if” fallacy. If only people were better. It would be nice if everyone had better, cheaper health care. If only they weren’t so rich. And so on. Boettke, Candela, and Truitt remind us that these hopes and ifs, no matter how nice, keep running aground on the fact that central planning creates Planned Chaos.

Until very recently, the Federal Reserve had been ratcheting up bank regulations. Economists generally agree that excessive bank regulation dissuades banks from extending credit for some productive projects. In a recent speech, Fed Governor Stephen Miran points to another problem with excessive regulation. In brief, “regulations enacted to shore up financial stability have constrained the Fed’s control over some elements of monetary policy transmission and the size of the balance sheet.” He refers to such a situation as regulatory dominance, since monetary policy takes a back seat to the regulatory framework.

Miran has a point. But the problem is even bigger than he suggests. The entire post-2008 system of monetary control is not just misguided, but likely illegal. Congress has known this for seventeen years, and has not done a thing about it. Without concerted action by legislators, monetary policy will remain activist and the balance sheet bloated.

Bending the Rules

When Congress expanded the Fed’s authority to pay interest on reserves in October 2008, the law was clear. Section 19(b)(12) of the Federal Reserve Act said the interest rate the Fed pays on reserves cannot “exceed the general level of short-term interest rates.” This wasn’t some throwaway line. Congress meant what it said: interest on reserves was supposed to eliminate the implicit tax that had previously existed on reserve balances. It was not supposed to subsidize reserve holding, let alone revolutionize the monetary policy operating framework.

But the Fed had bigger plans. Facing an explosion of emergency lending, officials decided to pay banks more than comparable market rates, such as Treasury yields. This kept banks from lending out their excess reserves, which would have caused inflation.

As George Selgin documented in his book Floored!, the Fed’s creative solution was to reinterpret the statute. Officials decided that “rates on obligations with maturities of no more than one year,” including the primary credit rate, counted as short-term interest rates. The primary credit rate is an administered rate set by the Fed. In other words, the Fed is following the letter of the law (if not the spirit) provided the rate it pays on reserves is less than the rate it charges on loans.

Ignore the fact that obligations with maturities of not more than one year may have greater duration risk (and hence, should generally command a higher interest rate) than an overnight loan, which is effectively what the Fed gets when it pays interest on reserves. The Fed can set its primary credit rate as high as it wants! Again, it is an administered rate, not a market rate. If the primary credit rate determines the upper bound on the interest rate the Fed can pay on reserves and the Fed can set the primary credit rate as high as it wants, then there is no binding constraint on the rate the Fed can pay on reserves. That’s a clear subversion of Congressional intent.

As Milton Friedman remarked, “Nothing is as permanent as a temporary government program.” What started as an emergency measure has lasted nearly two decades. Paying a premium rate of interest on reserves fundamentally changed American monetary policy. Instead of carefully managing scarce reserves through open market operations, the Fed now floods the system with reserves and controls rates by paying banks to keep them idle.

To put it bluntly: to prevent emergency lending from depreciating the dollar, the Fed broke the law by deliberately paying a premium rate on reserves. It ignored Congress’s judgment and substituted its own.

Back to Miran

As Miran explains, excessive regulations boost demand for reserves. Banks worried about heightened scrutiny “can raise demand for bank reserves above and beyond what’s required” in order to assure bank regulators that the bank is safe and sound. Those reserves are necessarily supplied by the Fed. Our central bank currently holds a $6.6 trillion balance sheet and pays roughly $200 billion annually to banks — with megabanks and foreign institutions reaping the lion’s share.

But here’s what Miran gets wrong: regulatory reform treats the symptom, not the disease. Even with lighter regulations, the Fed would still be operating in a floor system, where it pays banks a premium to hold reserves. And that framework may have no legal basis whatsoever.

Congress Shrugs

The floor system isn’t a secret. The Fed operates it openly. Economists regularly debate its merits. Miran just gave a whole speech about its implications. Yet Congress has done nothing. It has neither authorized nor prohibited the Fed’s activities. All the public has gotten is occasional pointed questions at hearings, followed by studied inaction.

Miran himself notes that “several times now, the Senate has debated whether the Fed ought to be stripped of its statutory authority to pay [interest on reserve balances].” Sadly, this is concern without consequence. Congress’s oversight failure borders on dereliction of duty. If Congress thinks the floor system is good policy, write it into law. Remove the “not to exceed” language. Give the Fed explicit authority to use interest on reserves as its main policy tool.

If, on the other hand, Congress thinks the Fed exceeded its authority, do something about it. Restore the statutory limit. Require a return to traditional open market operations. Make clear that emergency measures don’t automatically become permanent powers.

This matters for more than legal niceties. If we’re serious about constitutional government and the rule of law, Congress can’t just shrug when agencies rewrite their mandates. The Fed isn’t special. The complexity of monetary policy doesn’t exempt it from following the law. And seventeen years of “everybody knows” doesn’t make an illegal system legal.

Conclusion

Miran is right to worry about regulatory dominance of the Fed’s balance sheet. But the real problem isn’t regulations forcing banks to demand more reserves — it’s that the entire system enabling those dynamics was never supposed to exist. Regulatory reform is certainly warranted. But it won’t fix the fundamental problem. We need legal fixes to target monetary policy directly.

Congress must explicitly authorize what the Fed has been doing, or require it to stop. Anything less is an abdication of its constitutional responsibility — and a betrayal of the principle that in America, no institution is above the law.

In the modern world, prices always seem to be rising. With the exception of technology and maybe a few other industries, no one wonders whether prices will rise. The only question is how much they will go up.

But in recent years, the housing market has been challenging this trend. Believe it or not, average rental rates are actually going down. “October 2025 marks the 27th straight month of year-over-year rent decline for 0-2 bedroom properties,” notes a recent report from Realtor.com. “…Asking rents dipped by $29, or -1.7 percent, year-over-year.”

“The median asking rent in the 50 largest metros registered at $1,696, $63 (-3.6 percent) lower than its August 2022 peak,” the report continues. True, we are still above pre-pandemic levels, but the fact that rents are lower than they were three years ago is still something to celebrate. The report also notes that rents are down across all size categories, including studio, 1-bedroom, and 2-bedroom units.

Naturally, this change is not uniform across the US. Some areas are seeing bigger drops in rental rates, while others are seeing smaller drops or even increases. In a September article, Realtor.com highlighted three metros that are seeing the biggest declines. 

“Rents in Las Vegas (-13.6 percent), Atlanta (-13.6 percent), and Austin, TX (-13.4 percent), are seeing the largest price cuts from their peaks, highlighting prime opportunities in these markets,” writes Joy Dumandan. She notes that median rents in these cities in August were $1,443, $1,572, and $1,436, respectively, dropping from peaks of $1,671, $1,820, and $1,659, respectively. The peaks for these cities, as with most of the US rental market, were set between 2021 and 2022.

Economist Jiayi Xu offered an explanation for these trends. 

“Las Vegas, Austin, and Atlanta saw the largest rent declines from their peaks due to rapid rent growth during the pandemic, when many people moved to warm Sun Belt areas, creating a high starting point for corrections,” she said. “Migration trends have slowed, and significant new multifamily supply has increased options for renters, exerting downward pressure on prices,” she continued. “Combined, these factors have pushed rents down more sharply than in other markets.”

Xu’s comment about “significant new multifamily supply” is key. Like all prices, rents are ultimately determined by supply and demand. If cities build more housing, economic reasoning says that this will put downward pressure on the cost of housing.

If this is correct, then we would expect that the cities with the biggest price drops would also be among the cities that are building the most housing. As it happens, that’s exactly what we’re seeing.

Austin and Atlanta provide especially good case studies.

Austin, Texas

An August report from RentCafe looked at new apartment construction in 2025 across the US and identified the places that are building the most units. The South overall had a strong showing, accounting for 52.5 percent of the 506,353 units that are expected to be opened nationwide by the end of the year. Within the South, Texas is experiencing some of the biggest housing growth, fueled especially by growth in Austin.

The report presented a ranking of the US cities that are building the most housing this year, as well as a separate ranking for US metros. Austin took the top spot in the country on the city level, with an estimated 15,195 units expected to be completed this year. Austin came third in the country on the metro level with 26,715 units expected to be built, behind Dallas (28,958) and New York City (30,023).

The impetus for all this building is an influx of demand. “From 2020 to 2024, Austin’s population grew by 10.9 percent, making it the fastest-growing large metro in the US,” the report notes. What’s crazy is that, despite this surge in demand, rental prices in Austin are still seeing big drops. 

This suggests Austin is building so fast that its supply growth is well outpacing its demand growth.

Atlanta, Georgia

Atlanta is another city where nation-leading rent reductions are being accompanied by nation-leading supply growth. Atlanta came sixth in the country on RentCafe’s list of cities, with 6,359 new units expected to be completed this year. The Atlanta metro area took fifth place on the metros list, with 17,512 units expected.

Atlanta’s recent supply growth is no accident; it’s the result of a deliberate decision on the part of the city to make building more housing a priority. In May 2022, a few months after assuming office, Mayor Andre Dickens created the Affordable Housing Strike Force, bringing together a wide variety of stakeholders with the aim of finding innovative solutions to the housing issue. “Housing is foundational to a community’s health, and simply put, Atlanta doesn’t have enough of it,” he said. The goal was to build or preserve 20,000 units of affordable housing by 2030.

Atlanta has made significant strides with this approach, partly thanks to some creative maneuvering. In one story highlighted by Realtor.com, the city realized it was using a valuable 10-acre lot to store new trash cans, which could easily be stored elsewhere. They decided to move the cans so that the land could be redeveloped. “It’s not the highest and best use of the land,” said Josh Humphries, the mayor’s senior policy adviser on housing.

Realtor.com also pointed to a story where “a downtown fire department that desperately needed a renovation agreed for the city to build 30 stories of housing units above it in exchange for the rehab.”

According to recent studies, Atlanta is making good progress toward its goal. Referring to the 20,000-unit target, a November report from JPMorgan Chase notes that “In less than four years, over 12,000 units have been completed, with funding secured for thousands more.”

The Manufacture of Scarcity

The cities of Austin and Atlanta show us the real-world impact of economics. It’s easy to think of supply and demand as concepts that only live in economics textbooks, but the truth is that they are all around us, shaping the prices we pay for the things we need — and hence, the cost of living. If we want housing prices to come down, adding more supply needs to be a big part of that conversation.

How can we add more supply? One of the best ways is deregulation. As economist Bryan Caplan explains in his recent illustrated book Build, Baby, Build, the main reason housing is so expensive is because of manufactured scarcity — restrictions on the supply of housing created by government regulations. 

“Housing prices stay high in desirable areas,” Caplan writes, “because most governments strictly regulate new construction.”

Caplan anticipates a common reaction: “Sounds more like Right Wing Ideology 101 to me.” This is understandable, but Caplan stresses that housing deregulation is a bipartisan issue that even non-right-wingers should be able to champion. He points to progressive thinkers like Paul Krugman, Obama-advisor Jason Furman, and Matt Yglesias as people whose left-wing credentials are not in doubt, yet who acknowledge that strict regulation really is a big part of America’s housing problem.

Rents coming down is not just a happy stroke of luck. It is a policy choice, one that is available to every municipality and township in the country. There is no economic mystery to be solved. We know what works. The only question is whether we care enough about the cost of housing to administer the treatment that will cure the disease.

Federal Reserve policymakers are expected to trim their interest rate target by a quarter percentage point at this week’s meeting, lowering the range to 3.5–3.75 percent. On its face, that might seem like a standard adjustment. The Fed reduced rates by a similar 25 basis points at its previous two policy meetings. Yet this one stands out, not because of the size of the move, but because of the unusually visible division among policymakers.

Fed officials appear more divided than at any time in recent history. Some are increasingly uneasy about a cooling labor market, while others remain focused on inflation that has not yet returned to the Fed’s two-percent goal. What makes this disagreement noteworthy is the fact that both sides can plausibly claim the data is on their side.

The latest Monetary Policy Report, released by AIER’s Sound Money Project this week, shows that the leading monetary policy rules offer support for both sides of the debate. The rules point to a fairly wide range for the Fed’s interest rate target — from roughly 3.65 to 4.25 percent. That spread is large enough to give both camps reasonable footing.

In short, the disagreement is unusual, but appropriate.

Why Are Officials Split?

Much of the division simply reflects what each side chooses to prioritize. Officials inclined to ease point to softer hiring, shorter workweeks, and early signs that wage growth is losing steam – developments that normally justify lower rates. Those more hesitant to cut focus on inflation, which, while lower than its peak, remains stubbornly above the Fed’s 2 percent goal.

While both groups are drawing from the same information, they are weighing the risks differently. And because the economy itself is sending mixed signals, the monetary policy rules – designed to translate economic fundamentals into rate guidance – can be viewed as supporting either camp.

What the Rules Say

Monetary policy rules offer a disciplined way to evaluate economic conditions without putting too much weight on sentiment or narrative. Right now, they broadly mirror the debate unfolding inside the Fed’s rate-setting committee.

Taylor Rules

Economists have proposed many rules for setting monetary policy. The most familiar is the Taylor Rule, which suggests that the Fed should adjust interest rates when inflation deviates from target or real economic activity deviates from its long-run potential. When inflation runs above target, the rule prescribes higher interest rates to cool demand and contain prices. When output or employment fall below potential, it recommends lower rates to support growth.   

The original Taylor Rule calls for a rate in the current target range, close to 3.9 percent, which would argue for no cut at the upcoming meeting.

But monetary policy often needs to act preemptively in anticipation of future developments, and the original Taylor Rule is necessarily backward-looking. Economists can account for this by including forward-looking, forecasted data in the rule. The Fed also prefers to minimize interest rate volatility, which can destabilize expectations and credit markets. By accounting for the most recent Fed policy rate, the Taylor Rule can also smooth out interest rate changes.

A modified Taylor Rule, which incorporates future projections and smooths out short-term movements, recommends a higher interest rate target, in the range of 4.0 to 4.25 percent. The higher recommendation is due to forecasters anticipating an uptick in inflation in the coming quarter.

NGDP Targeting Rules

In a healthy economic environment, the total amount of money spent by consumers, businesses, and the government should grow at a steady and predictable pace. Total spending is commonly captured through nominal gross domestic product (NGDP). NGDP targeting rules imply that the Fed should lower interest rates to stimulate spending when NGDP is below target, or raise rates to slow down spending when NGDP is above target. A rule that targets a level of overall spending –  such as $30 trillion, the current size of spending in the US economy – is called an NGDP level target. A rule that targets a growth rate – like four percent a year, the typical growth of the US economy – is called an NGDP growth rate target. 

An NGDP level target supports the expected rate cut, prescribing a target of 3.65 percent. An NGDP growth rate rule prescribes a slightly higher recommendation of 4.1 percent. The higher recommendation is due to relatively strong NGDP growth in the most recently available second quarter data. The NGDP level rule, on the other hand, takes into account previous quarters of weaker growth – such as the first quarter of 2025 – which suggest that lower rates are needed.

Taking the rules together, they support either a steady stance or a modest cut. The important point is that the rules themselves reflect the tensions within the data, which is why both camps within the Fed can point to them with some justification.

Why This Matters

The current disagreement among policymakers might look worrisome at first glance, but it should actually be read as a sign that officials are taking both sides of the Fed’s mandate seriously. It means that no single narrative — whether focused on inflation, recession risks, or labor market strength — is dominating the discussion. The groupthink that was complicit in previous policy errors — like responding too slowly to the post-pandemic inflation surge – is reassuringly absent.

It is also a reminder of the value of rule-based policy. The past several years showed how trouble can arise when policy deviates too far from rule-based benchmarks. Today, the gap between the Fed’s actions and the major monetary rules has narrowed considerably.

Looking Ahead

A rate cut by the Fed this week is defensible. But the broader story is the division within the committee itself. A split Fed is not a dysfunctional Fed; it reflects an economy that is delivering mixed signals and policymakers who are responding to those signals rather than forcing a narrative onto them.

For 2026, the guiding principle should be straightforward: further easing requires evidence. Growth, unemployment, and inflation should determine the path forward.

A steadier, more rule-guided Fed is exactly what the economy needs, especially at a moment when clarity is in short supply.