With 2026 marking the 250th anniversary of both the American Revolution and Adam Smith’s Wealth of Nations, it is worth remembering the role the East India Company played in both. It was the Company’s monopoly on legal tea imports to the colonies that helped spark the Boston Tea Party, and much of Book IV of Smith’s work is devoted to a devastating critique of the Company, particularly the perverse incentives created by its structure as a public-private hybrid.

This is not merely a historical curiosity in this semiquincentennial year. Today, public-private hybrid companies are a favored tool of industrial policy on both the nationalist right and the progressive left. Proponents argue that public ownership stakes in strategically important firms can harness private enterprise for public purposes. Whether it is the Trump administration’s equity stakes in firms such as Intel or Senator Sanders’s proposal for a public sovereign wealth fund to acquire 50 percent ownership of leading AI companies, the intent is the same. Yet Smith’s warnings about the East India Company should remind us that this arrangement is bad for commerce, bad for government, and bad for constitutional accountability.

“Sharing the Gains”

What Trump and Sanders have in common is that neither is calling for outright nationalization in the public interest (although Ezra Klein has done so, proposing a “public option” large language model). Instead, they favor different mechanisms for embedding public power within private enterprise. Both cloak the idea in the language of “sharing the gains,” but both are equally clear about the importance of state direction. Intel’s own press release described the equity stake as an $8.9 billion government investment tied to “key national priorities.” Sanders says his public ownership model would “give the public a direct role in determining the future of this technology.”

Smith’s indictment of the East India Company focused heavily on its role as the governing power over large parts of India. The Company possessed territorial authority, military power, the ability to raise taxes, and political protection at home. At the same time, it distorted trade, prices, and capital allocation throughout Britain. In many respects, the Company’s vices stemmed from its position as an arm of the British state.

Obviously, neither Intel nor AI companies possess territorial power, but the underlying confusion of roles is similar. While the firm remains formally private, its fortunes become politically significant to the state, which simultaneously acts as regulator, funder, and investor.

“A Strange Absurdity”

It is worth considering how the East India Company came to occupy such a position. Initially, it was genuinely a trading company, operating under an exclusive British government charter. Owing to the realities of the time, its operations came under threat from local powers, and it took steps to defend itself.

In what may be the clearest example of the principal-agent problem in history, its agent Robert Clive not only defeated local forces in the field but also extracted from the weakened Mughal sovereign formal authority to raise revenue, despite having no mandate from the Company’s directors to do so. Having secured what may be the greatest prize ever won by rent-seekers, the Company seemingly accepted its new role without hesitation and folded it into its corporate operations. As Smith observed, “Trade… they still consider as their principal business, and by a strange absurdity regard the character of the sovereign as but an appendix to that of the merchant.”

The result was that the Company entangled Britain in the government of India. By the 1770s, it had become, in modern parlance, too big to fail. Its bailout by the government in 1773 included the infamous Tea Act, which sought to facilitate repayment of its £1.4 million government loan by granting the Company a monopoly on selling its vast stockpile of tea in the American colonies without paying duty in Britain. This undercut colonial merchants and helped provoke the Boston Tea Party and everything that followed.

Alongside the Tea Act, Parliament passed the Regulating Act, which attempted to address corporate mismanagement by appointing a Governor-General of Bengal, Warren Hastings, who was tasked with maximizing revenue to help repay the loan. But this did not create clear accountability. It merely drew Parliament more deeply into the Company’s governance of India, culminating in the Burke-led impeachment of Hastings over abuses committed in the name of revenue, order, and imperial necessity. While this is an extreme example, it vividly illustrates the dangers that arise when government becomes too closely intertwined with a company deemed both too important to fail and essential to national priorities.

The distortions to commerce are also important, as America’s tea merchants discovered. Commerce depends on competition, consumer preferences, and clear price signals. State-backed ownership replaces or distorts all three with political priorities and bureaucratic selection. Favored firms attract capital not simply because they are productive, but because they enjoy political support.

Rival companies are no longer competing solely against another firm, but against the Pentagon, the Treasury Department, the Department of Commerce, and all the tools at those agencies’ disposal — not to mention the incentives facing industry regulators. This encourages management at both favored firms and their competitors to become more political and less focused on consumers.

As Smith wrote, “Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place.” That concern applies directly to both the administration’s approach and Sanders’s proposal, each of which centers on government ownership stakes. When a company’s primary focus becomes satisfying its most important shareholder, it is necessarily less focused on serving its customers. The result is less innovation, weaker competition, and, in some cases, taxpayers ultimately footing the bill for failure. Where, one might ask, is the American tea industry today?

A Conflict of Interest

This arrangement is not just bad for the company and the consumer-citizen; it is also bad for government itself. The American constitutional system rests on the rule of law, separated powers, and laws of general applicability. Government is supposed to set the rules, not acquire a financial interest in particular market participants. Once it has a financial stake in the success of a company, its neutrality becomes suspect. A host of potential distortions emerge: favoritism, procurement bias, antitrust discretion, favorable export licensing, advantageous permitting, and selective enforcement.

That is not to say there is no case for these policies. China’s model creates real security risks that government has a duty to address. Semiconductors are strategically important, and domestic fabrication capacity does matter. The administration can also argue that it has taken only a passive stake, with no authority over Intel’s board.

However, the argument that the stake is passive rests on an illusion. Management generally wants to please shareholders, and it generally wants to please regulators. When the same institution serves as both shareholder and regulator, passivity becomes a legal fiction. The pressure does not have to be written into a stock agreement to be felt in the boardroom. Nor is there any guarantee that future governments will remain as passive. Elections have consequences.

The Perils of Nationalization

Sanders’s case is more direct. He argues that every citizen should benefit from the profits of AI companies, not just founders and investors — and especially not while workers bear the costs of job displacement. This is traditionally the argument advanced for outright nationalization, and Sanders’s proposal shares many of nationalization’s features. In many privatizations, governments retained special “golden shares” or large residual stakes, preserving political influence even after formal private ownership had begun. Over time, many such arrangements were curtailed, including in Europe, where they conflicted with the free movement of capital — an interesting example of the European Union’s liberalizing tendencies in its earlier years.

Otherwise, the same objections that apply to nationalization apply to Sanders’s proposal, and they are largely the ones outlined by Smith. The public-private firm suffers from distorted incentives, to the detriment of consumers, citizens, and innovation alike. Public ownership on that scale would make government both umpire and shareholder, with incumbents’ market positions treated as public assets.

Government is not without tools to secure its objectives even without owning part of a company. It generally possesses regulatory authority, can use procurement power to secure or stockpile critical supplies, and can fund research (preferably through prizes rather than grants, which share many of the problems associated with public ownership). Most importantly, it can establish general rules that foster competition while rewarding innovation.

Smith’s fundamental warning was that public power and private profit become dangerous when fused within the same corporate form. The East India Company began as a private corporation legitimately defending itself against predation by sovereign powers, but it ended as a sovereign power jealously defending its own privileges. Its officers could invoke the public interest while destroying rivals and exploiting the people of the American colonies to their breaking point.

America does not need its own version of the Company with better marketing.

Decades ago, in a British prison, Dr. Anthony Daniels heard a murderer explain how he came to be serving a life sentence. “It’s just my luck to be here on this charge,” the prisoner answered. He had served a dozen prior sentences. He carried the knife to the scene. He sought out the victim. Luck? 

Daniels worked for decades in prisons and poor neighborhoods of England. In his book Life at the Bottom, writing under his pen name Theodore Dalrymple, Daniels explores the responsibility-dodging mindsets of the British underclass. Dalrymple explains that prisoners commonly “describe themselves as the marionettes of happenstance.” 

One inmate told Dalrymple of an attack he had orchestrated, “‘The knife went in…” Dalrymple, with his characteristic wry wit, quipped, “The knife went in – unguided by human hand, apparently.”

A thief in prison for a spate of church robberies blamed churches “for the laxness of their security.” It was their laxness, not his criminal mindset, that “first caused and then reinforced his compulsion to steal from them.”

A car thief explained that his behavior was compulsive and that he was therefore not responsible for his actions. Responsibility, he argued, lay with those who had failed to properly treat him.

Dalrymple eventually viewed exposing this dishonesty and self-deception as an essential part of his work. He wrote, “When a man tells me, in explanation of his anti-social behavior, that he is easily led, I ask him whether he was ever easily led to study mathematics or the subjunctives of French verbs.”

Even criminals would sometimes confess to the absurdity of these beliefs, Dalrymple reports, but still found some psychological advantages to pretending.

Rob Henderson added some pointed commentary to the introduction for the twenty-fifth anniversary edition of Life at the Bottom. Henderson is known for his work on what he calls luxury beliefs, or “ideas and opinions that confer status on the upper class at very little cost, while often inflicting costs on the lower classes.” 

Henderson grew up in impoverished foster homes. He recalls being “mystified to hear elite university students deride marriage, family stability, personal responsibility, self-control — the very norms that had fueled their rise” and his own ascent out of poverty.

Henderson explains, “Clear moral norms and the expectation that adults will behave responsibly are not mere bourgeois niceties. They are the minimum conditions for ordinary people to build decent lives.”

People who flout these conditions in favor of luxury beliefs “trade stability for fleeting pleasures.” In the absence of a culture that expects and socially rewards responsibility, people don’t seem to discover these virtues on their own. But pointing this out to people, Henderson writes, and emphatically defending some actions as “better, more worthwhile, or more moral than others” may garner a label of “reactionary outcast.” 

Henderson wants us to realize that when people refuse to judge behavior, those in the underclass often suffer the consequences, while wealthier groups have enough stability and margin to avoid the negative impacts of their luxury beliefs. 

We might think we have little in common with the prisoners Dalrymple studied. But many of us are beholden to only slightly better-polished versions of these same views.

Born a slave, the Stoic philosopher Epictetus begins his classic Handbook: “Some things are up to us, and some are not.” Epictetus continued, “Up to us are judgment, inclination, desire, aversion — in short, whatever is our own doing.” By assigning control over improving these to someone outside ourselves, we give up both responsibility and hope. What lies within our control is relatively unhindered. What lies beyond our control is fragile, dependent, easily obstructed, and ultimately not truly ours.

In what is “up to us,” we can choose virtue. We get up in the morning, show up to work on time, take care of our bodies, and nurture our loved ones. We strive to be good colleagues and neighbors. Importantly, we take responsibility for cultivating our minds, preparing them for the pursuit of liberty, guarding against the endless rabbit holes of mob psychosis that rob us of the ability to live as free people.

By comparison, many outcomes — whether we get a promotion, whether our neighbors like us, or whether our marriage works out — may not be within our control. Yet, none of the vagaries of life subtract from our duty to own up to that which is our responsibility.

Taking responsibility has nothing to do with controlling outcomes. If we believe otherwise, we will waste our energy, or as Epictetus put it, “you’ll be obstructed, dejected, and troubled, and you’ll blame both gods and men.” We should care about outcomes while understanding that we do not control them. 

Indeed, like Dalrymple’s criminals, when we blame others for things that were our responsibility, we will be “dejected and troubled.” We will behave as victims, sure our troubles are caused by others. When we believe or act as if we cannot control things over which we clearly have a choice, we might even narrate our excuses, justifying our behavior and further undermining our ability to make responsible choices in the future.

Our excuses are mostly lies. A billiard ball does not manage its self-image after being struck. The individual who insists he was pushed by circumstance is, in the same breath, demonstrating the agency he denies. 

The next time you feel wronged by another person — perhaps a rude colleague, an inconsiderate driver, a partner who spoke sharply — notice how immediately and confidently you assign them agency, fully assuming they made a choice to behave so. Then ask yourself whether you grant yourself the same standard in the moments you have been the rude colleague, the inconsiderate driver, or the partner who spoke sharply.

Listen for this contradiction in your own thinking. The moment you find yourself constructing an account of why something was beyond your control, ask what kind of person is doing the construction — a victim of happenstance, or a free person building a meaningful life?

Online reactions to Alexandria Ocasio-Cortez’s recent comments that “you can never earn a billion dollars” reveals something more significant than the usual furor over one viral soundbite.

The terse turn of phrase encapsulates how democratic socialists communicate about wealth, capitalism, and inequality. Politically, it taps into real frustrations many younger Americans feel: rising rent, student debt, inflation, stagnant affordability, and growing distrust in institutions. But those who posit redistribution as the solution must first shift an entire economic mindset. To plant the seeds of resentment, it isn’t enough to acknowledge that billionaires became wealthy. The goal is to persuade young people that wealth can only be gained by either exploitation or redistribution.

This insidious-but-powerful worldview follows three steps — a pattern designed to convince younger generations that wealth is not truly earned, but taken from someone else.

Step 1: Convince Gen Z That the American Dream Is Dead

Younger generations may already be inclined to see the economic system as fundamentally stacked against them. Take Cristian Spariosu, for example — a former Trump-supporting Republican who now identifies as an independent socialist. “I was a huge believer in the American Dream throughout my life, and now I just think it’s a rigged system and the rich don’t pay their fair share,” Spariosu told The Times of London. “A lot of people feel hopeless about affording a house and having a family. The American Dream: a lot of us think it’s dead.”

This belief, often repeated by media voices, is both persuasive and damaging. When people repeatedly hear that no matter how hard they work, they will never truly get ahead — that the system is built to keep them behind — hopelessness gets reinforced. High housing costs, rising grocery prices, and crushing student debt are real frustrations, and political messaging can tap into that reality. But when frustration hinges on the belief that upward mobility is no longer possible, ambition can slowly shift into despair and resentment.

Why take risks? Why build? Why create? Why pursue hard work, entrepreneurship, or long-term wealth if the game is rigged? That hopeless mindset creates fertile ground for redistributive politics. If enough people begin to believe the American Dream is dead, then taking more from those at the top can start to feel not just justified, but like the only path left.

Step 2: Convince Them Wealth Is Not Created — It’s Taken

Once hopelessness takes root, the next step is to convince young people that wealth is a fixed pie — not created, just redistributed. 

If every gain made by billionaires automatically costs everyone else, success itself becomes evidence that someone else was exploited. Jeff Bezos’s billions must rely on underpaying or taking advantage of employees. Steve Jobs’ enormous wealth must indicate he didn’t pay workers enough, or cheated his customers. In this worldview, wealth is not created — it is taken.

But that is a deeply flawed understanding of how wealth is often created in a market economy.

Under capitalism, wealth is created when people build something valuable enough that millions voluntarily choose to buy — because they were convinced it was worth giving up their money for. No one has been forced to buy from Amazon, or purchase an iPhone, or subscribe to Netflix. Each company, and its leaders, had to compete. Each create and markets products that consumers choose over countless alternatives. Wealth accrues to those who provide value.

Customers voluntarily exchange their money only when they value what they buy more than the money they spent. That is the key component democratic socialists and other critics of capitalism often overlook: in a voluntary exchange, both sides are made better off in their own estimation. And along the way, billion-dollar ideas generate new jobs, services, economic opportunity, and even infrastructure for millions of other people — think of all the small vendors who rely on Amazon’s website, warehouses, trucks, and employees. In the skewed zero-sum story, profit is framed as exploitative. But profit is often evidence that someone had an idea, took a risk, invested time and money, and built something millions of people freely valued enough to buy.

Step 3: Convince Them to Punish Success

Once wealth is viewed as something taken rather than earned or built, redistribution can be framed as a moral necessity, a righting of injustice.

The phrase “fair share” is powerful political language, shifting the conversation away from economics and into morality. The questions of how wealth is created and how to get more of it fall away. The question becomes: Is it fair that billionaires should have so much when others are struggling?

And that question creates the deeper shift. Voters driven by moral fairness don’t ask whether a policy makes people better off, encourages growth, rewards investment, or creates broader opportunity. Society’s focus turns away from how we empower more people to rise, build wealth, execute new ideas, and improve their own circumstances. Instead, the goal becomes redistributing existing wealth rather than creating the conditions for more people to build wealth for themselves.

Gen Z, Beware: Bad Beliefs Become Bad Policy

The dangerous, compelling message being fed to younger generations follows a powerful three-step progression: 1) advancement is hopeless, 2) wealth is stolen rather than built, and 3)  fairness requires punishing success. Once people begin to adopt this three-part framing, their ideas of productive economic policy become warped. Young people increasingly favor policies that aggressively target private wealth in the name of fairness, seeking to redistribute existing wealth. In doing so, the same policies discourage future investment, suppress job creation, and limit the growth that could spread new wealth around. 

But redistribution cannot build businesses, drive innovation, create products, or generate long-term prosperity. A government focused on managing inequality, rather than creating opportunity, slowly begins to prioritize dividing wealth over growing it.

An entire generation taught to view wealth, profit, and success with resentment rather than aspiration will increasingly hand power to politicians who attack success as inherently exploitative. The economics of young adulthood are changing fast, and they have every right to be frustrated with the options they face. But they’re being deliberately misled about wealth and growth by those who would rather convince them to take what they think they deserve from the successful than create something valuable themselves.

Gen Z deserves better than a worldview built on resentment. They deserve a vision of the future that encourages them to build, create, take risks, solve problems, and believe their lives can improve through their own effort and ingenuity. Because the future doesn’t belong to the people arguing over who deserves someone else’s success. It belongs to the people creating the next success story.

The Trump Administration’s initial demand for renegotiating the United States-Mexico-Canada Agreement (USMCA) includes an opening position that vehicles covered by the deal be composed of at least 50 percent American-made components, in terms of dollar value. It’s a revealing concession, because if the goal is truly to manufacture everything in America, the threshold would be 100 percent, not 50 percent. As it turns out, executive orders cannot unwind a global economy. 

The White House’s concession should jump-start a more honest accounting of what their tariffs actually are: a consumption tax, paid by American households, spread across nearly every goods-producing sector in the economy. 

At the auto dealership, Anderson Economic Group estimated that for a domestically assembled vehicle, the combined effect of steel and aluminum input tariffs and the 25-percent tariff on imported parts adds $2,500 to $4,500 to the sticker price of a new vehicle. 

For a fully imported car, S&P Global Mobility put the figure as high as $12,000. The National Automobile Dealers Association estimated an average increase of $3,000 to $4,000 across the new-car market. This is the inevitable result of taxing the steel used for every brake rotor, exhaust system, and engine block assembled in the United States.

A transmission set at $2,000 wholesale faces $500 in new tariff costs. An engine block at $5,000 will have $1,250 tacked on top. 

The recreational vehicle industry is facing a similar reckoning. Elkhart County, Indiana, which produces roughly 80 percent of the global RV supply, is structurally dependent on steel and aluminum. An average travel trailer uses well over a thousand pounds of steel and hundreds of pounds of aluminum. And because of that, the industry warns that prices could rise by more than 25 percent. 

Thor Industries, the world’s largest RV manufacturer, reported a 470-basis-point compression in gross profit margins and a 25-percent drop in North American shipments in its most recent quarter, attributing it directly to “rising material costs brought on by tariff and inflationary pressures.” Those costs, of course, don’t disappear. Americans feel the pain when those costs show up in high vehicle prices or in layoffs in Indiana.

Tariffs also reach the grocery aisle. Steel and aluminum tariffs are estimated to increase the cost of canned food by 15 to 20 percent, and the same trend hits the beer fridge. The Beer Institute has documented that aluminum is the single largest input cost in American brewing. The US beverage industry paid more than $1.7 billion in excess costs through 2023 from Section 232 tariffs alone — and that was before the 2025 escalation. 

Appliances face the same ugly math. 

In June 2025, the administration explicitly extended Section 232 to cover the steel content of dishwashers, refrigerators, washing machines, dryers, and stoves. The USITC’s 2023 study documented near-complete pass-through of Section 232 costs to consumers in the first year, meaning the $30 to $100 in added materials costs per appliance is not absorbed by manufacturers and is paid for by consumers. 

The Tax Foundation estimates that Section 232 tariffs now cost the average American household $600 to $700 per year, which is a heavy burden for lower-income households.

Supporters of these tariffs argue that the short-term pain is worth the long-term gain of rebuilding American industrial capacity. That instinct and desire to want more things made in America is understandable. But the 50-percent domestic-content threshold proposal in the USMCA talks undermines the argument. The administration is not claiming it can onshore all of it. Instead, it claims it can tax its way to onshoring some of it, while passing the cost of the rest on to every American who buys a car, opens a refrigerator, or cracks a beer.

There is a better framework, and President Trump already negotiated it. 

The United States-Mexico-Canada Agreement, concluded in his first term, established 75 percent regional value content requirements for automobiles, created enforceable rules of origin, and opened Canadian and Mexican markets to American exporters. It was a strong deal that incentivized North American production without taxing American consumers on every can of soup or appliance on the showroom floor.

The president should be enthusiastically defending the USMCA. If the goal is to build more cars in North America with American steel, the trade agreement he signed is a good instrument to achieve that.

Tariffs that acknowledge, in their own threshold language, that integrated supply chains cannot be fully onshored are not a serious manufacturing policy. They are a consumption tax in disguise — and American families are the ones paying for it.

For many, economic growth and environmental protection exist in direct tension. People with this belief generate policy proposals to permit growth while protecting the environment. For others, the tension is irremediable — they believe growth necessarily destroys. For these zealots, degrowth is the only way. For both groups, liberalizing the economy — allowing for more economic growth — carries at least a risk of environmental degradation.

In recent work with Justin Callais and Alicia Plemmons, published in Structural Change and Economic Dynamics, we show that there is no reason to worry. We used 49 cases of sustained economic liberalization since 1970 and measured their effects on outcomes such as death rates from air pollution, total greenhouse gas emissions, as well as emissions per capita and per dollar of economic output. In this context, liberalization refers to the adoption of policies that promote international trade, secure property rights, and lessen fiscal and regulatory burdens.

Comparing with similar countries that did not liberalize, we found that while GDP per capita increased 16 percent within ten years for liberalizers, environmental outcomes did not deteriorate. In fact, we found that death rates from air pollution declined modestly, while there were no effects of liberalization on total greenhouse emissions. Moreover, post-2000 liberalizers actually showed signs of lower emissions per dollar of economic activity and capita.

In other words, pro-growth policies are not in tension with environmental preservation. Why would that be the case? In short, the policies themselves help the environment.

One way economic activity affects nature is through the channel most people have in mind when they argue that economic growth harms the environment: scale. As economic activity expands, the use of resources and the production of waste can increase as well. More economic activity means more pollution. However, three other forces work in the background to counteract this effect. The first is that we also tend to substitute across sectors of economic activity as we grow. Nations move from industrial sectors to service sectors. The second is through the role of innovation. Economic growth requires productivity growth, and that only comes from using fewer resources (energy, water, natural resources, labor, capital) to generate more value for consumers. As a result, technologies also mitigate the scaling-up effect. The third is that, as people grow richer, they are willing to pay more for “environmental” goods and services, including investing in efforts to restore and preserve nature.

Together these factors give rise to what is known as the Environmental Kuznets Curve (EKC), named in honor of Simon Kuznets — a Nobel laureate in economics. It posits a relatively simple relationship whereby environmental degradation initially rises as economies grow and industrialize, but eventually declines once societies become wealthier. As incomes increase, demand for environmental quality rises while technological innovation reduces pollution intensity.

But here is the kicker that explains exactly why we should want liberalization to get both growth and environmental improvements: the shape of the curve depends on the institutions that generate economic growth. Growth achieved under secure property rights, open markets, limited regulatory burdens and the rule of law tends to reach the turning point sooner and at lower levels of pollution. In other words, the peak of the EKC happens at a lower income and at a lower level of degradation. Moving towards such institutions is what liberalization is!

That lower and earlier peak occurs because markets are not lawless without government regulations or interventions. Secure property rights end up dealing with problems of nuisance (such as air or water pollution), trespass, negligence (think oil spills), and create liability. Enforcement of property rights gives rise to non-legislative forces that push individuals and firms to internalize the costs of pollution they impose on others. Those who are injured (or whose properties are damaged) by pollution, contamination, or other hazards seek compensation or injunctions, forcing polluters to internalize costs that would otherwise be shifted onto third parties. Anticipating liabilities (either through suits or through insurance premiums being increased), polluters adjust before lawyers get involved. The process is also highly decentralized and lends itself to experimentation (on a case-by-case basis) such that it is thus far more effective than command-and-control regulations that mandate or prohibit certain behaviors.

The security of property rights also generates incentives to innovate. Inventors and entrepreneurs — since they can safely appropriate the gains of their efforts — are motivated by the lure of profits to develop and deploy new technologies that use fewer resources. Moreover, open markets allow prices to convey information about the scarcity of resources and signal the need for conservation and/or encourage the search for substitutes. Consumers can also signal their discontent with environmental quality of goods and threaten firms with their wallets in ways that force the latter to adjust their practices. Finally, open markets mean that production can specialize where it is most effective such that we use less land, less energy, and fewer resources for the same output.

In other words, economic liberalization has a virtue that many overlook: incentive alignment! It aligns the pursuit of self-interest by investors, entrepreneurs, workers, and consumers with environmental preservation. To be sure, the alignment is not perfect. Some regulations or environmental policies might play a complementary role. But the incentive alignment is a strong force explaining why there is a strong relationship between economic freedom (a proxy for the degree of economic liberalization) and environmental preservation. It is that very alignment that causes the EKC to peak at a lower and earlier point.

Preservation or growth is a false choice. The same institutions that generate prosperity (property rights, open markets, and economic freedom) also encourage innovation, conservation, and better environmental outcomes. We should want more of them. We should want, for the sake of the environment, more liberalization!

The Federal Open Market Committee is widely expected to leave its policy rate unchanged this week, with the CME Group FedWatch tool implying a 98 percent probability that the federal funds rate will remain within its current range of 3.5 to 3.75 percent. 

At the last FOMC meeting in April, there was a reasonable case for remaining patient and keeping policy steady. A negative supply shock stemming from conflict in the Middle East had pushed inflation higher, but monetary rules based on nominal spending suggested that policy was broadly in the right place. Nearly two months later, that case has weakened. Inflation has continued to accelerate, supply disruptions have lingered longer than many expected, and even some of the rules that previously supported holding steady are now tilting toward tighter monetary policy.

What the Rules Suggest

The latest Monetary Rules Report from AIER’s Sound Money Project shows that the Fed’s current policy rate falls below the range recommended by leading monetary rules. Eleven of the twelve estimates in the Report indicate that the Fed should raise its policy rate at the upcoming meeting.

The Taylor Rule is the most commonly referenced monetary policy rule. It says that the Fed should set interest rates higher when inflation runs above two percent and lower when economic activity or employment fall below sustainable levels. Using the most recent data available, the original version of the rule points to a federal funds rate of 5.91 percent, suggesting that current policy is far too accommodative. A modified version that minimizes interest rate volatility and accounts for forecasts of future inflation implies a policy rate of 4.11 percent. Even that more tempered version points to a 25- to 50-basis-point increase at the upcoming meeting.

Rules based on nominal GDP, or total dollar spending in the economy, suggest rates somewhat closer to the current 3.5 to 3.75 percent range. In April, those rules offered the strongest case for holding policy constant because overall spending in the economy still appeared close to trend. With first-quarter nominal GDP growth coming in over five percent and forecasts of second-quarter growth remaining strong, that argument has weakened. A nominal GDP growth rule now points to a 3.86 percent policy rate and therefore suggests a quarter-point hike at the upcoming meeting. A nominal GDP level rule implies a 3.69 percent policy rate and is the only estimate in the Report consistent with keeping policy unchanged.

A New Regime at the Fed

This week’s meeting marks a shift to a new regime at the Fed, as Kevin Warsh takes over as chair. Warsh appears to have won President Trump’s backing in part by arguing that interest rates can fall as AI-driven productivity gains lower prices and strengthen the economy. Whatever room there may be for that argument in the future, it does not seem to fit the current environment. As a result, the administration’s preferred path of lower rates appears to be on hold. 

The transition to new leadership comes at an interesting time, however, as a broader split inside the Fed is becoming more visible: members of the Board of Governors, led by Warsh, appear more reluctant to contemplate tighter policy than regional Federal Reserve bank presidents, whose recent comments align more closely with the monetary rules. 

As a group, the governors at the Board in DC have shown little appetite for raising rates in the foreseeable future. Michelle Bowman has said that she still sees the next move in the federal funds rate as more likely to be a cut than a hike, though she has acknowledged that persistently higher oil prices could shift the balance of risks. Christopher Waller has moved away from an outright easing bias, saying that a rate cut is no more likely than a rate increase, but he has also made clear that he does not think rate hikes should be under consideration in the near future. Jerome Powell, who remains on the Board for now, has not publicly commented on the stance of policy since his final press conference as Chair, but his April remarks also leaned toward easing rather than tightening.

Recent actions and comments from the regional bank presidents, on the other hand, have turned increasingly hawkish. At the April FOMC meeting, three of the four rotating presidents dissented, opposing the inclusion of an easing bias in the FOMC statement. Since then, Cleveland Fed president Beth Hammack has warned about the growing risks of persistently elevated inflation and argued that monetary policy may not be sufficiently restrictive to bring inflation back to two percent. Kansas City Fed president Jeffrey Schmid has raised the possibility that the Fed may need to increase rates by a quarter point or two to tamp inflation down. A majority of the regional bank presidents may still be comfortable holding rates steady this week, but they also seem open to hiking sooner rather than later. In that sense, the regional Federal Reserve bank presidents are more closely aligned with the monetary rules than the Board of Governors.

Echoes of 2021?

Coming out of the pandemic, consumer price inflation surpassed four percent for the first time in April 2021. The FOMC statement from that month infamously justified keeping the federal funds rate at zero by noting that the rise in inflation largely reflected “transitory” factors. At the time, the monetary rules recommended that the Fed raise its policy rate to at least one percent. But it would take eleven more months — and inflation surging above eight percent as measured by CPI — before the Fed finally began lifting the federal funds rate above zero.

With inflation in May surpassing four percent for the first time in three years, even as Fed officials speculate about the “temporary” effects of supply disruptions, the parallel with 2021’s is difficult to ignore. While it is unlikely that inflation surges back toward its nine-percent post-pandemic peak, there is a real risk that it remains stuck near its current level for an extended period, if monetary policy stays overly accommodative. 

In 2021, policymakers ignored the guidance of monetary rules and placed too much weight on the hope that supply-side disruptions would fade on their own. The regional bank presidents seem more concerned than the Board of Governors about repeating that mistake. The lesson all central bankers should have learned is that attributing rising inflation entirely to supply-side disruptions, while overlooking demand-side pressures, can carry significant costs. At this week’s meeting, Fed officials ought to be asking whether continued patience is still consistent with the data. The monetary rules suggest that patience should be running out. 

In chapter 10 of The Wealth of Nations, Adam Smith dissected the symbiotic relationship between economic inequality and political intervention in the economy. While unhindered competition typically drives markets toward equilibrium — balancing supply and demand to yield maximum efficiency — Smith never indulged in utopian fantasies. He acknowledged that wages diverge from perfect equilibrium because inherent occupational traits dictate labor dynamics:

…the agreeableness or disagreeableness…the easiness and cheapness, or the difficulty and expense of learning…the constancy or inconstancy of employment…the small or great trust which must be reposed…[and] the probability or improbability of success in them.

Modern welfare economists label market imperfections in a system of liberty and free competition “market failure.” Then they weaponize the study of market failures to justify sweeping state interventions. Those who claim Smith would condone these interventions are wrong; he explicitly warned that state distortions trigger far more severe systemic damage.

Rather than seeing market imperfection as a reason for government action, Smith championed natural liberty and he opposed most government interventions in the economy. Although market failures were real, Smith thought that policy restrictions were nearly always worse (inefficient). They were the far greater threat to prosperity and to human flourishing. For example, he explains how the policies of Europe contributed to inequality: 

Such are the inequalities in the whole of the advantages and disadvantages of the different employments of labor and stock, which the defect of any of the three requisites above-mentioned must occasion, even where there is the most perfect liberty. But the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance.

It does this chiefly in the three following ways. First, by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them; secondly, by increasing it in others beyond what it naturally would be; and, thirdly, by obstructing the free circulation of labor and stock, both from employment to employment and from place to place.

The institutional failures Smith excoriated — supply restrictions, state-sponsored overproduction, and laws penalizing poor workers — remain rampant today. Modern government intervention sabotages efficiency through the exact same three channels.

In the United States, protectionist state power insulates incumbent industries from new competitors. Certificate-of-need laws permit existing hospitals to block the entry of new medical competitors. Exclusionary municipal zoning laws choke housing construction. Restrictive occupational licensing rules shackle professions ranging from hair stylists and plumbers to medical doctors.

As Smith observed, the state triggers massive inequalities by “restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them.”

When the state uses “bounties” or subsidies to pick winners and losers, it forces capital into politically favored sectors. These subsidies bloat costs in higher education, housing, and healthcare, or they massively overbuild such that the marginal costs become far greater than the marginal benefits, clogging markets with excess solar panels, electric vehicles, and agricultural surpluses. By distorting market processes, the state binds the invisible hand, preventing prices, profits, and losses from coordinating beneficial social outcomes.

Finally, Smith heavily criticized Europe’s old “poor laws” for restricting worker mobility. Modern states enforce similarly destructive boundaries through social safety nets. Punitive “benefits cliffs” abruptly strip assistance the moment a recipient increases their earnings, discouraging lower-skilled individuals who attempt to work and improve their condition.

Furthermore, credentialing and occupational licensing cartels artificially inflate the cost of entering the workforce, snatching opportunity from the very people who need it most. Not only is this inefficient, Smith also argues it is unjust:

The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.

In case after case, these aspiring central planners worsen conditions for ordinary people while lining the pockets of politically connected corporations. Modern state interventions are not merely economically paralyzing — they are flagrantly unjust. State actors violate the basic rights of poor laborers, earning the deep moral disapprobation that Smith leveled against the state over two centuries ago.

Misguided policy interventions consistently shackle liberty, distort market signals, and enrich vocal special interests at the expense of the public good. Smith fiercely condemned the overweening conceit of politicians who believe they can manipulate society the way a hand directs pieces on a chessboard.

Two and a half centuries later, Smith’s insights remain a vital diagnostic tool for modern economic malpractice.