A debate is raging over housing policy. Many state lawmakers have proposed overriding local growth controls — land-use regulations on housing, such as restrictive zoning requirements — in order to let the free market solve the housing crunch. For example, starter home acts preempting large minimum lot regulations were proposed in Arizona, Minnesota, Texas, North Carolina, and New Hampshire this year.

By letting landowners build more homes on their property, these reforms should increase the supply of homes and reduce their cost.

This strategy has a lot of supporting evidence behind it. But it’s facing fierce pushback from local government officials and homeowners who don’t want development near their neighborhoods. Opponents’ rallying cry has been “local control!” Yes, overriding local rules does reduce local government power, but is that always a bad thing?

The Limits of Local Control

No one wants unlimited local control. The United States fought a Civil War partly over whether local control trumps natural and constitutional rights. Few Americans today would support repealing the Thirteenth Amendment and letting state and local governments decide whether to legalize slavery.

Private property rights are natural and constitutional rights just like the right to liberty in one’s person, recognized throughout recorded history. From the Eighth Commandment’s injunction, “Thou shalt not steal,” to the Magna Carta’s protections for “freeholders,” to the protections for private property in the United States Constitution’s Fifth Amendment, the right to acquire, possess, and use property, including land, has been a fundamental element of the Western ethical and constitutional tradition. 

Private rights over land use aren’t unqualified. If you use your land in a way that imposes significant, direct harm on others, the common law has always recognized a tort of nuisance. A complex body of law has developed to allocate, for example, rights to water that flows over one’s land, especially in arid regions.

Zoning: A Useful but Dangerous Invention

So what about zoning? In my AIER white paper, “Unbundling Zoning,” I review the origins of zoning and its pluses and minuses. Opponents of state housing supply legislation appear to be making a claim something like this: it doesn’t matter what the tradeoffs of zoning are, local governments have an unlimited right to use it. Is that plausible?

Imagine a local rule that bans a landowner from building on his property. Now imagine the town seizing that land instead without paying for it. Both actions could deprive the landowner of the value of his land. If you think the first is always okay, why not the second? The logic isn’t so different.

Consider a real example from my town in New Hampshire. A family bought a five and a half acre lot with an eye to subdividing it when they got close to retirement and building a house on it. It was a big part of their nest egg.

But in 2023, the town planning board proposed (PDF) increasing the minimum lot size where they live from two to three acres, making it illegal for them to subdivide. This move would have drastically reduced the value of their land and their nest egg. In New Hampshire towns, zoning amendments typically require an affirmative public vote, so a group of us got together and campaigned against the amendment, narrowly defeating it.

What would have been the difference between regulating away the use of half of their lot, along with most of its economic value, and simply expropriating it for town government and forcing it to remain vacant? The outcomes of both policies would have been exactly the same. The latter would have clearly violated the Fifth Amendment, but it’s not clear whether the former would have done so under current precedent (the Supreme Court’s regulatory takings jurisprudence is notoriously murky).

Growth-control zoning thus not only takes away from private owners many possible uses of their land, but it also inevitably takes away much of the value of undeveloped land. If you think that’s always justified, then it’s not clear how you could oppose the direct expropriation of land without compensation. And if you oppose expropriation, it’s not clear how you could support growth-control zoning, at least not without serious constraints on abuse.

Local Government Power Is Not Authentic Local Autonomy

Local governments are not voluntary, and they are not private associations. In the United States, they do not enjoy sovereignty and are creatures of state government (that is just as true for “home rule” states as for “Dillon rule” states, a distinction that is frequently overblown). State governments delegated them their zoning power, which in most states they did not have until the mid-1920s. Furthermore, growth-control zoning with strict residential density limits is even more recent, dating back at the earliest to the 1960s.

Growth-control zoning, then, is not an “organic” or “authentic” instrument of landowners in a town and does not approximate a private contract. It is a political tool used by some for their own ends, chiefly rent-seeking (stopping new homes from being built raises the value of existing ones under rising demand for housing), and suffers from the familiar problems of “tyranny of the majority” that we see with other government programs.

The near-term solution for the excesses of growth-control zoning is to place limits on it. Doing so places more power in the hands of individual landowners and thus represents an authentic decentralization of power. Nothing should prevent landowners from making private covenants with each other that limit their development rights. (A few progressive states are in fact overturning homeowners’ association rules, which is also a mistake.)

The long-term solution for growth-control zoning is to “unbundle” zoning by allowing private communities to opt out, allowing neighborhoods or streets to choose to allow more uses, and requiring compensation for major regulatory takings. These measures would truly represent a bottom-up kind of “local control,” not a mere reinforcement of municipal government power.

Real Local Control

In general, local government autonomy makes the most sense when citizens have meaningful choices among jurisdictions, creating a beneficial kind of competition that forces local governments to be efficient. Local autonomy over taxes and spending for local services, for example, makes a lot of sense. 

Local autonomy makes the least sense for regulatory policies over matters that cross local borders. Localities shouldn’t be able to regulate the transportation of firearms, for example, because it would be impossible for a traveler to comply with all the rules of the different jurisdictions along his route. Growth-control zoning has such external effects: the more one locality restricts housing, the more development gets pushed into nearby localities, perhaps incentivizing them to start restricting development too. Moreover, when the government takes the value of your land, choice and competition don’t help you: if you sell out and move away, you’ve still lost the value of your land.

The Bottom Line

Local control isn’t meaningless, but neither is it a blank check. When it comes to growth-control zoning that limits the supply of housing, states are right to step in to place limits on what localities can do to take away the rights of their own landowners and push development onto other localities. 

The ultimate standard of real local autonomy is whether it protects and promotes the ability of individuals to pursue their goals.

“An expert is one who knows more and more about less and less until he knows absolutely everything about nothing,” philosopher Nicholas Murray Butler once quipped. 

While the statement holds some truth, expertise undeniably shapes our modern world. Without specialists, many advancements we take for granted — medical breakthroughs, technological innovations — would not exist. Their deep knowledge and skills drive human progress.

Yet, the term “expert” has gained some negative connotations in recent years. Over the last five years, heated debates over misinformation and public policy have raised questions about who should speak on complex issues. Should only experts have a voice, or does this stifle broader discourse?

Humanity owes much to experts across fields, but blind trust in their views can be risky.

History shows mainstream expert opinions have sometimes been overturned through public debate and diverse perspectives. Just think about Galileo Galilei and how the experts of that time loudly refused to accept his observed truth that the Earth moves around the sun and not vice versa. Thus, while expertise is invaluable, overreliance on it can hinder societal growth.

At worst, it’s a danger to a free society.

Expertism And Its Virtues

Expertism has played a significant role in the world’s economic growth. Adam Smith, the founding father of modern economics, already showed that the division of labor benefits society. Instead of one person doing every step of the production cycle, leaving each step up to someone specializing in it can increase output per hour. Henry Ford used this concept when he introduced the moving assembly line. 

Virtually our whole economy relies on experts’ work, albeit in a practical rather than academic sense. Specialization frees up everyone’s time as opportunity costs fall. Specialization plays an even more critical role in a world with a growing complexity of goods and services. Imagine a broken car that needs to be repaired. You could spend months trying to acquire enough specialized knowledge and skill to fix it. Instead, it’s much easier to hand your car over to someone who has already specialized in doing it. A mechanic is an expert in repairing cars, so to speak. 

The same is true for human sciences, such as medicine. Choosing to see a doctor, and expect that he will be trustworthy as a result of his medical study and credentialling, may be necessary given all we know about the body, and a specialist doctor can both apply that knowledge and push forward our understandings of science. Individuals will not have the time or the knowledge to learn and keep current with all medicine when their profession is entirely different, so they rely on an expert. In that sense, expertism plays a significant role and is a primary contributor to the rise in wealth that our civilization experienced. 

Dangers of Expertise

Nevertheless, the increase in specialization and the containment of knowledge also have a darker side. Despite all the benefits of specialization, it can only thrive in a “free market of ideas,” where progress is guided by discussion, trial and error, and peer review. In cases such as the mechanic’s example, expertise can be judged by the outcome. 

But, a mechanic or a plumber would rarely describe himself as an “expert.” The more specialized the knowledge, the more fragmented it will be. People engaged in more abstract, theoretical fields are likelier to refer to themselves as “experts.”

Things get more complicated than engines and pipes, and humanity is immersed in more philosophical or theoretical concepts. The more complex, specialized, and theoretically expert a field becomes, the more it risks becoming an echo chamber. Sometime a field of expertise may become so complicated that no one outside the field can quantify the significance of its findings.

Expertism As A Self-Feeding Machine

When expertise is so detailed and complicated, hardly anyone outside can evaluate whether the work makes sense. Expertism can become self-justifying within an echo chamber.

Sabine Hossenfelder – a former physicist who became a publicly known figure because she quit academia and started a YouTube channel to study her interests – has become very critical of specific fields in physics because she argues that the study has no actual value in the real world. She once put some of her worries into words by publishing an article in “Nature Physics”. 

In a YouTube video, she reveals that she received an email from another physicist who works in the field. He asked her to stop raising such questions because she would put the experts who work in the field at risk of losing their jobs if universities conclude that the money they spend on the subject leads nowhere. Although that’s very specific, it unveils one of the dangers when experts argue that other experts shouldn’t question their work, and further, the complexity of their work shields them from criticism from non-experts. 

Unsurprisingly, Hossenfelder received a lot of criticism from her academic peers, because she questions the necessity of things that some probably consider their “life work.” Her case proves that if someone questions the work of experts, even if as experts themselves, they immediately face a backlash.

But at least there’s a debate. More concerning is when experts collaborate with government authority to shut down debate. In such cases, relying on expertise can become dangerous.

The Danger of a Symbiosis of Expertism And Government 

One of the darkest examples in history where alleged expertism had disastrous consequences is the story of Trofim Lysenko. Lysenko, the son of a Ukrainian peasant, had a crude theory that completely abandoned the findings of genetics. Due to his ties to the Communist Party, however, and his argumentation that Mendelian genetics were a “Bourgeois theory,” he became the central figure in Soviet agriculture. 

Even though his theory deepened the 1932-1933 famine that killed seven million people, it remained dominant in the Soviet Union. Criticism of his views was suppressed. 

Only after Stalin’s death was Lysenko quietly sidelined from the Politburo and allowed to fade into irrelevance. It was exposed that most of his findings were manipulated and fabricated. Although some quietly criticized his theories, they remained dominant for decades because they were backed by government force. 

While Lysenko’s case is rather extreme, it shows how far the abandonment of discussion can go if governments feel it is necessary. More recent examples include critics of the response to the COVID-19 pandemic, who were shadow-banned on the web, discredited in the media, and sidelined from academic discussions. 

One of the most famous epidemiologists, John Ioannidis, was attacked by the media, politicians, and colleagues simply because he opposed the measures governments implemented and argued that the mortality of COVID-19 was lower than many purported.

Even though his criticism was purely scientific, he was quickly accused of being a “right-winger” and his work labeled as unscientific. 

Conclusion: Experts Are Great, But Public Questioning And Debate Are Necessary

Ideas and expert opinions are not dangerous as long as there’s free public discourse. In a free society, such ideas can be debated openly and accepted or dismissed. When debate and discourse are suppressed, expertise can become a form of despotism.

When no one is permitted to “question the experts,” the free market of ideas stultifies and we are actually prevented from acquiring additional knowledge. If history is a guide, primary sources of disinformation have been experts whom governments pushed forward to justify policy. The voices of critics were shut down and excluded, lest the public doubt the policy. 

In conclusion, expertism has many positives but also some potential negatives. It’s a primary source of human progress, as long claims can be questioned and argued about. Knowledge thrives when people are allowed to question dominant ideas and to look for better theories. And if debate isn’t allowed or is shut down, it’s a signal that something in the dominant view is deeply flawed, and unable to withstand criticism. 

Then, expertism becomes an appeal to authority. At worst, it can give rise to despotism.

The AIER Business Conditions Monthly indicators reflected a noticeable downshift in US economic momentum in March 2025. 

The Leading Indicator fell from 54 in February to 42 in March — a steep 12-point drop — marking the largest monthly decline in that series since April 2020 at the height of the pandemic shock. The Roughly Coincident Indicator slipped 17 points to a neutral 50, also the sharpest one-month decline since early 2020, erasing much of the modest strength seen in recent months. The Lagging Indicator dropped 33 points to a contractionary 42 — not only its largest monthly decline since May 2020 but also its first significant retreat since late 2023. 

Leading Indicator (42)

In March, the Leading Index fell to 42, with five of twelve components rising and seven declining, marking a broad-based weakening in forward-looking measures.

The biggest gain came from United States Heavy Trucks Sales SAAR, which jumped 42.3 percent, possibly due to fleet replacement activity or protectionist/regulatory anticipation. FINRA Customer Debit Balances in Margin Accounts rose 3.2 percent, suggesting increased investor risk appetite. Adjusted Retail & Food Services Sales Total SA climbed 1.5 percent, and US Average Weekly Hours All Employees Manufacturing SA rose 0.2 percent, pointing to some stability in labor demand. Conference Board US Leading Index Manuf New Orders Consumer Goods & Materials ticked up 0.1 percent, a modest positive for early-stage manufacturing.

Offsetting those gains were steep declines in University of Michigan Consumer Expectations Index, down 17.8 percent, and US New Privately Owned Housing Units Started by Structure Total SAAR, which fell 11.4 percent. The Conference Board US Leading Index Stock Prices 500 Common Stocks dropped 5.9 percent, mirroring volatility in equity markets, and the 1-to-10 year US Treasury spread remained sharply inverted at -4.1 percent. US Initial Jobless Claims SA fell 2.2 percent, while Inventory/Sales Ratio: Total Business slipped 0.7 percent, and Conference Board US Manufacturers New Orders Nondefense Capital Good Ex Aircraft declined 0.2 percent.

Roughly Coincident Indicator (50)

The Roughly Coincident Index came in at 50 in March, with three of six components rising and three declining, continuing the theme of mixed underlying performance.

Conference Board Coincident Personal Income Less Transfer Payments increased 0.7 percent, while US Labor Force Participation Rate SA and US Employees on Nonfarm Payrolls Total SA rose 0.2 percent and 0.1 percent, respectively — small but positive signals from the labor market. On the downside, US Industrial Production SA fell 0.3 percent, Conference Board Coincident Manufacturing and Trade Sales declined 0.6 percent, and Conference Board Consumer Confidence Present Situation SA 1985=100 dropped 2.7 percent, indicating rising consumer concerns.

Lagging Indicator (42)

The Lagging Index held at dropped to 42, with three components rising, one flat, and two declining.

Conference Board US Lagging Avg Duration of Unemployment jumped 7.0 percent, a notable signal of worsening conditions for job seekers. Conference Board US Lagging Commercial and Industrial Loans rose 0.3 percent, and US Manufacturing & Trade Inventories Total SA increased 0.1 percent, indicating marginal growth in business credit and stockpiles. US Commercial Paper Placed Top 30 Day Yield was unchanged.

On the downside, Census Bureau US Private Constructions Spending Nonresidential NSA fell 0.8 percent, while US CPI Urban Consumers Less Food & Energy YoY NSA dropped 9.7 percent, marking a sharp disinflation in core prices and raising fresh questions about demand-side weakness.

Taken together, the March 2025 Business Conditions Monthly numbers show a broad-based deterioration in US economic momentum, particularly in forward-looking and long-cycle measures. With the highest policy uncertainty on record (back to the start of the Baker, Bloom, and Davis measures in 1986), weakening consumer and business sentiment, and signs of capital expenditure pullback, the data suggest the US economy is entering a more vulnerable phase. While not yet contractionary in the aggregate, the rapid slowing underscores rising risks and a fading buffer against external shocks. With all three Business Conditions Monthly indicators registering meaningful declines, the March data present the clearest signal yet that the post-pandemic expansion is encountering genuine fatigue, and that downside risks are no longer hypothetical but visible across multiple timeframes.

DISCUSSION

April’s inflation data reveal a nuanced and still-developing picture of how tariff policy is shaping US consumer prices. Headline and core CPI both rose modestly, with monthly gains of 0.2 percent and 0.24 percent, respectively, but the composition of that inflation was notable. Core goods prices, particularly in tariff-exposed categories like furniture, electronics, and appliances, rose after months of deflation—indicating early signs of tariff pass-through. Yet broad-based disinflation in travel services, like airfare and hotel lodging, counterbalanced those gains, with nearly 40 percent of core categories posting price declines. Core services inflation did tick up, driven by medical services and rent, though much of it remains in line with pre-pandemic norms. Despite the small upside surprises, markets remained unconvinced that the Federal Reserve will act swiftly, with rate cut expectations only modestly affected. Analysts generally see the Fed holding firm until clearer evidence of persistent inflation emerges, particularly as future tariff rounds may yet push prices higher.

Producer price data, however, told a somewhat different story, as wholesale prices unexpectedly declined by 0.5 percent in April—the steepest drop in five years—suggesting many firms are still absorbing cost increases rather than passing them on. Core producer inflation, stripping out food and energy, also fell 0.4 percent, with margins narrowing across several wholesale sectors including machinery and auto distribution. This implies that while consumer-facing prices are firming in select goods categories, much of the pricing pressure is being contained at the corporate level. Companies are responding unevenly: some automakers are holding or cutting prices to maintain demand, while others, like Walmart, warn of upcoming hikes. The ability to pass on costs remains constrained, as shown by surveys indicating fewer than 20 percent of firms can fully offset a 10 percent increase in input costs. With consumer sentiment weak and retail sales barely rising, firms are balancing pricing power against demand fragility. Together, the CPI and PPI data suggest early signs of tariff pass-through are emerging but remain partial and uneven—limited for now by corporate margin compression and service-sector deflation. Whether these pressures accumulate into broader consumer inflation in the months ahead remains an open question the Fed is watching closely.

The Federal Reserve’s preferred inflation metric, the personal consumption expenditures (PCE) price index, was flat in April, marking the first time in nearly a year that monthly price growth completely stalled. Core PCE — which excludes food and energy and is more closely watched by policymakers — was also unchanged, the weakest print in almost five years. While this suggests inflation may be cooling in aggregate, the data follows a first quarter in which core PCE still rose at an annualized 3.5 percent rate, its fastest pace in a year. The figures reflect a pre-tariff snapshot of the economy, which was already decelerating due to a surge in imports and softer consumption. As such, the April stagnation in PCE likely represents a temporary reprieve. Economists warn that the cumulative impact of President Trump’s sweeping tariffs, many of which are just beginning to filter through supply chains, may reignite inflationary pressures while also weighing on demand. This scenario could complicate the Fed’s dual mandate, forcing a tradeoff between stabilizing prices and sustaining employment — a dilemma that suggests interest rates will remain on hold until more data comes in.

Indeed, a wide range of regional and sectoral price metrics are flashing signs of renewed inflationary pressure. The ISM manufacturing and services prices indexes surged in April to 69.8 and 65.1, respectively — the highest levels in well over a year. Data from S&P Global confirmed that both goods producers and service firms raised output prices at the fastest pace since early 2023. Multiple regional Federal Reserve banks also reported widespread price increases: the Kansas City Fed’s manufacturing “prices received” index nearly doubled, while the Dallas Fed and Philadelphia Fed showed similar momentum in both manufacturing and services. Although a few pockets — such as New York and Philadelphia services — saw slight easing, the vast majority of indicators point to intensifying pricing behavior across the economy. These gains may not yet be fully captured in headline inflation figures like PCE or CPI but suggest upstream cost pressures are building. If these regional and sectoral trends persist, they are likely to show up more clearly in broader inflation data in the coming months, reinforcing the Fed’s current reluctance to lower interest rates and heightening the risk of a more entrenched inflation regime.

Those rising price pressures and broadening business uncertainty tied to evolving US trade policy are additionally being captured in manufacturing and services surveys. The ISM Manufacturing PMI slipped to 48.7, deepening a current contraction trend, but the underlying dynamics are more telling: supplier deliveries slowed, input costs accelerated, and export orders dropped sharply amid tariff-related disruptions. Manufacturers reported elevated logistics complexity and an urgent need to rebuild inventories, while facing difficulty passing on rising costs to end users in a cooling demand environment. On the services side, activity expanded more than expected, with the ISM index rising to 51.6, but the prices-paid component surged to 65.1 — the highest since 2022 — reflecting widespread cost increases across sectors like health care and utilities. Survey respondents noted a mix of pre-tariff buying (especially in autos), efforts to shift sourcing domestically, and concern that smaller firms may not remain competitive under the new cost structures. Employment trends remained weak in both sectors, with continued hiring freezes tied to financial uncertainty. Taken together, the data suggest inflationary momentum may be building in specific supply chains even as aggregate demand softens — a dynamic that could complicate monetary policy in the months ahead.

The US Bureau of Labor Statistics data release covering April 2025 came in stronger than expected, with payrolls rising by 177,000, the unemployment rate steady at 4.2 percent, and labor force participation ticking up to 62.6 percent. Gains were concentrated in education, health services, and trade and transportation, bolstered by temperate weather and lingering effects from stimulus programs. The observed strength, however, likely represents the final pre-shock snapshot before the economic impact of President Trump’s “Liberation Day” tariffs begin to impact labor markets. 

Early signs of damage are already emerging, with manufacturing and retail trade both shedding jobs, and average hourly earnings growing only 0.2 percent: a sign that wage growth is stalling. Importantly. The timing of the April report excluded the sharp post-tariff decline in freight traffic and tourism activity, which are likely to weigh heavily on May and June data, particularly in leisure, hospitality, and construction. As tariffs raise uncertainty and operating costs, employers are likely to slow hiring and potentially freeze wages in the most exposed sectors. Despite strong headline figures, financial markets are treating April’s data as backward-looking and await clearer signals on the full employment impact of ongoing trade disruptions.

Consumer and business sentiment across the US is deteriorating. The University of Michigan’s consumer sentiment index fell in early May to 50.8, just above its all-time low, as nearly three-quarters of respondents spontaneously cited tariffs, reflecting anxiety that crosses political lines. Inflation expectations surged, with consumers now anticipating 7.3 percent price growth over the next year—the highest since 1981—even though actual price data have not borne out such dramatic increases. Meanwhile, the National Federation of Independent Business reported a fourth consecutive monthly decline in small business optimism, driven by sharply falling expectations for sales and business conditions. The share of owners planning capital investment and raising compensation plummeted to multi-year lows, highlighting growing reticence to invest in expansion. Though labor demand remains relatively strong, confidence among entrepreneurs is sliding at the fastest pace since the Covid pandemic, signaling that uncertainty around tariffs and tax policy is weighing heavily on forward planning. Both consumers and businesses appear to be reacting more to perceived instability than to realized economic deterioration—yet if confidence continues to erode, that perception could become a self-fulfilling drag on growth.

US retail sales growth slowed sharply in April, reinforcing the broader narrative of waning consumer confidence and growing caution amid trade uncertainty. The 0.1 percent monthly gain in headline sales, a dramatic pullback from March’s 1.7 percent surge, was driven by declines in car sales, sporting goods, apparel, and other tariff-exposed categories—suggesting consumers may have front-loaded purchases in anticipation of price hikes before stepping back. Notably, “control group” sales, which feed directly into GDP estimates, fell 0.2 percent, raising concerns about a weak start to second-quarter growth. These figures come alongside a historic drop in consumer sentiment, with inflation expectations at multi-decade highs and confidence in future financial conditions near record lows, amplifying the risk that even temporary trade relief won’t reverse deteriorating sentiment. Small businesses are echoing this concern, with falling sales expectations and dimmed capital spending plans, despite stable labor market conditions. Executive commentary from firms like Walmart, Energizer, and Nu Skin underscores a shared anxiety about tariff-driven inflation and its drag on demand, even if actual price pass-through remains modest for now.

Productivity data from the first quarter of the year painted a soft picture, with nonfarm business labor productivity declining at an annualized rate of 0.8 percent (largely the result of output contracting 0.3 percent while hours worked rose 0.6 percent). Hourly compensation, meanwhile, increased by 4.8 percent, pushing unit labor costs up by 5.7 percent, a sharp acceleration from the previous quarter. The divergence between wage growth and productivity suggests rising cost pressures for firms, which may translate into inflation if businesses pass those costs on to consumers rather than absorbing them. (Of note, however, is that quarterly productivity figures are often volatile and subject to later revision; for that reason, Federal Reserve policymakers are likely to treat this particular data point cautiously.) 

Much of the weak output is believed to stem from temporary distortions in trade flows related to unpredictable and rapidly shifting tariff policies rather than signaling a structural slowdown in business activity at this point. Indeed, the Fed has characterized recent economic conditions as “solid” and attributed the disappointing first-quarter GDP figures to transitory movements in net exports. Nonetheless, the data underscore an important tension that may build in importance over the coming months: if wages continue to rise faster than productivity for a sustained period, inflationary risks could build—even in an otherwise stable economic backdrop.

At the May 6-7 FOMC meeting, the Federal Reserve held interest rates steady at 4.25 to 4.5 percent, citing rising uncertainty about the economic outlook and the dual risks of elevated inflation and growing unemployment. Chair Jerome Powell emphasized the Fed’s readiness for multiple scenarios but refrained from committing to any near-term rate cuts, signaling a more reactive stance in the face of unpredictable trade and fiscal policy. As often occurs owing to the existence of the dual mandate, the Fed faces a dilemma: the inflationary effects of tariffs may require tighter policy just as economic activity and employment are at risk of contracting and weakening, respectively. Many analysts now expect the Fed to wait until late in the third quarter before easing, seeking additional clarity on how tariffs impact prices, supply chains, and business investment. Although recent labor data has been resilient, it has not yet captured the lagged effects of trade disruptions. The cautious tone has shifted the burden of clarity onto the administration, with July’s tariff pause deadline and forthcoming inflation data likely to shape the Fed’s next move. While market expectations lean toward a July cut, the US central bank appears more likely to delay until conditions clearly deteriorate—potentially setting the stage for sharper, more decisive action later.

US Treasury bond markets have been signaling alarm regarding widening US fiscal imbalances, and the Moody’s downgrade of America’s credit rating reflected that anxiety. The ratings agency cited a persistent surge in debt and deficits—now approaching 100 percent of GDP—and warned that absent meaningful reforms the rising cost of borrowing would undermine fiscal sustainability. Investors pushed 30-year Treasury yields above 5 percent, with shorter-term securities also yielding over 4 percent, reflecting a clear and growing premium to hold US debt amid mounting uncertainty. The scale of the challenge is striking: US public debt has ballooned from $10 trillion in 2007 to over $36 trillion today, with interest payments projected to run between $1T and $1.2T in 2025. US Treasury Secretary Scott Bessent has acknowledged that the current path is unsustainable, yet the administration continues to rely on short-term borrowing, increasing rollover risk in future debt-ceiling showdowns. Markets may now, as they have in the past, ultimately force fiscal discipline—especially if long-term rates stay elevated. While the US still benefits from deep capital markets and strong demand for short-term bills, rising interest costs and political gridlock are quickly eroding the fiscal flexibility that once underpinned, and indeed underwrote, American economic dominance.

Over more than four decades, the dominant driver of worsening US fiscal sustainability has not been entitlement growth or tax cuts, but economic shocks—especially recessions and financial crises. The federal debt-to-GDP ratio has quadrupled since 1980, rising from 25 percent to nearly 100 percent, with more than half of that increase attributable to the 2008 financial crisis and the COVID-19 pandemic alone. While spending on Social Security and Medicare has grown steadily, it has largely followed or even fallen below Congressional Budget Office projections. The 2017 Tax Cuts and Jobs Act contributed modestly—adding at most 6 percentage points to the debt ratio—while the Biden administration’s stimulus, infrastructure, and climate bills, along with student-loan forgiveness efforts, are now contributing to rising deficits through surging interest payments. Notably, the Department of Government Efficiency (DOGE), led by Elon Musk, has achieved $160 billion in estimated annual savings, mostly by cutting grants and programs in USAID and HHS, though these reductions are only loosely correlated with actual budgetary weight. The clear takeaway is that recessions—not baseline spending—are the main accelerants of debt accumulation. With recession risks rising again, the administration’s top priority for preserving fiscal health must be to avoid triggering another major downturn.

The US economy is facing a confluence of overlapping risks: trade-related uncertainty, fragile inflation dynamics, and tightening fiscal constraints amid political acrimony. While headline inflation remains moderate, tariff-sensitive goods categories are beginning to show early signs of price pass-through, even as services like travel and lodging continue to exert disinflationary pressure. Producer price data suggest many businesses are still absorbing higher input costs, but this margin compression is not sustainable indefinitely, especially with labor productivity falling and unit labor costs rising over 5 percent. Consumer and business sentiment has slumped in ways rarely seen outside of recessions, with inflation expectations surging and confidence in future economic conditions approaching crisis-era lows. Retail sales growth has slowed sharply, hinting that recent consumption strength may be fading just as the impact of tariffs on freight, hiring, and prices begins to intensify. 

The Federal Reserve faces a policy dilemma: raising rates risks undercutting an already-fragile recovery, while cutting prematurely could stoke inflation if tariffs and wage gains continue to push prices higher. Complicating matters further, America’s ballooning debt load and growing reliance on short-term financing have triggered a bond market backlash and a Moody’s downgrade, all while fiscal space to respond to a downturn is rapidly evaporating. Taken together, these conditions suggest the economy has entered a critical inflection point, with policymakers walking a narrowing tightrope between managing inflation, supporting growth, and preserving long-term fiscal credibility all in as uncertain an environment as has been seen in many decades. Heading into the second half of 2025 growth risks are skewed to the downside. Strong caution is warranted.

LEADING INDICATORS

ROUGHLY COINCIDENT INDICATORS

LAGGING INDICATORS

CAPITAL MARKET PERFORMANCE 

An important discussion is playing out on the political right regarding strategies and tactics for engaging society. A recent exchange between Chris Rufo and Jonah Goldberg, among others, discussed whether conservatives should adopt ideas and tactics from collectivist activists like Antonio Gramsci and Saul Alinsky. Rufo said:

The Right is learning new political tactics [from Gramsci]. We are not going to indulge the fantasies of the ‘classical liberals’ who forfeited all of the institutions. We’re going to fight tooth and nail to recapture the regime and entrench our ideas in the public sphere. Get ready.

Goldberg, however, worries that adopting the tactics of the “enemy” could very easily corrupt those who do so. He dubs these tactics “illiberal” and argues that conservative classical liberals should not use them. Rufo, on the other hand, argues that these tactics are successful and not adopting them dooms one’s movement and ideas to irrelevance.

Though the debate can be somewhat esoteric at times, it has important social ramifications. In fact, we are living through significant political realignment around just these issues. The resurgent political right around the world, perhaps epitomized by Trump and the MAGA movement, appears to be remaking how politics and conservatism look. And this has changed many of the Right’s tactics.

One contested issue involves debate over the definition and status of “classical liberalism.” Rufo says that the “classical liberal” approach to politics is outdated and ineffective. While that sounds like a  critique of classical liberalism as a philosophy, Rufo seems to mean that those who called themselves “classical liberals” in the second half of the twentieth century would be better characterized as “civil libertarians” focused on neutrality in the public square:

they are inventing a ‘classical liberalism’ that’s actually postwar libertarianism; the founding fathers were much more ‘illiberal’ on the question of the state, education, religion, and public values.

Rufo claims this emphasis on neutrality was not a conservative value and was only a minor value in classical liberalism itself. And it rendered the political Right less effective in resisting or reversing advances by the Left.

Gramsci is an extremely controversial figure. He was an avowed communist and an important architect of the cultural Marxist school of thought developed in the Frankfurt School and disseminated throughout the American academy — Marcuse, Foucault, Horkheimer, Fromm, Freire, Bell, and others. The social and political goals of Gramsci and the cultural Marxists are deeply antithetical to conservative and classical liberal goals and ideals.

Yet in some ways, Gramsci’s idea that culture matters more than politics matches what conservatives like Russell Kirk have argued at length. Another conservative commentator, Andrew Breitbart, famously said, “Politics is downstream of culture.” This idea of culture driving politics has also been advocated by modern Christian philosophers like James Davison Hunter and Peter Leithart. 

Another well-known activist thinker on the political Left was Saul Alinsky. His Rules for Radicals has served as a playbook for cultural and social activists who wanted to transform, disrupt, or even overturn the existing social and political order. Alinsky, like Gramsci, was an avid collectivist who wanted to destroy capitalism, property, and conservative traditions and values. But folks like Rufo argue that people on the Right can adopt parts of Alinsky’s playbook to advance conservative ends in the face of an increasingly collectivist establishment.

Jonah Goldberg describes watching as “many on the right went from demonizing Saul Alinsky to respecting, to outright envying and wanting to emulate him. Many of those people stopped being conservative or classically liberal in the process.”

He also worries that “Adopting illiberal means to achieve liberal or even just “good” ends” tends to develop into “illiberal ends in the hearts of the people employing them.” Afterall, “Imposing your ideas through raw power is already pretty illiberal and leftist sounding.” Finally, “If our ‘team’ gains power but turns its back on free speech, freedom of association, free markets, due process, individual rights etc. there’s nothing to celebrate.”

To summarize Goldberg’s concerns, he sees classical liberalism as a distinct philosophy that is an important part of conservatism. He associates the distinctiveness of classical liberalism (liberal values) with values like: “free speech, freedom of association, free markets, due process, [and] individual rights.” Finally, Goldberg suggests that people on the Right have abandoned these principles when they adopted “illiberal” tactics advocated by the likes of Gramsci and Alinsky.

I doubt Rufo would disagree with the claim that some “illiberalism” has crept into corners of the Right. And he would likely agree that the growth of this illiberalism is bad. But I expect he differs from Goldberg in 1) Why this illiberalism has crept in and 2) Whether all Gramsci/Alinsky’s tactics are inherently illiberal.

No doubt some of Alinsky’s (and Gramsci’s) tactics are off-limits to conservative classical liberals. It would be tough to argue that conservatives should destroy property, for example, as a method of strengthening property rights. It would also be hard to argue that conservatives should engage in lawless acts to strengthen the rule of law. The means and ends in these cases seem antithetical. Goldberg worries about these “illiberal” methods — and not without reason!

The troubling rise of antisemitism and Nazi sympathies among members of the Alt-Right is downright alarming. So is the increasingly cavalier attitude among many on the Right about due process, legal precedent, and the rule of law. Increasing segments of the Right seem to be becoming reactionaries, rather than principled conservative classical liberals.

Several thinkers, including Jordan Peterson, have sounded the alarm on the extremism and radicalism showing up on the fringes of the right. Phil Magness compares this moment to a similar dynamic in the early conservative movement, when Bill Buckley and other conservative thinkers had to purge antisemitism by rejecting folks like the John Birch Society from conservative ranks. A similar house-cleaning needs to happen today.

But how much does this relate to the tactics argument? Are unsavory people — grifters and opportunists rather than true intellectuals and thinkers — being fostered by “illiberal” tactics? Or are they being drawn to ascendant cultural and political power? I don’t know the contours of the Alt-Right well enough to say for sure — though I think the power and influence grift seems more likely.

But Rufo marshals good arguments for a more activist, as opposed to purely intellectual, approach to the culture wars and to US politics. No one can doubt the efficiency of his work reforming several academic and educational institutions. Similarly, Robby Starbuck has pushed tremendous change in corporate America through more activist engagement and social pressure. 

Recent political issues abound. States have taken extensive action against financial firms over ESG. They have also reformed school curricula and regulated library books. Leaders on the right have called for boycotts, tax code engineering, and mass social media mobilization. And the administration has engaged in blatant extortion of large law firms. These approaches differ from the editorial and commentary roles taken by myself and many others in the conservative classical liberal tradition.

It may not be a choice between commentary or activism. Research and commentary can lay groundwork for public pressure campaigns. Clarity of values and purpose can help provide direction to activism. But what does activism provide commentators? Perhaps it challenges a certain amount of naivety or passivity when it comes to political power and cultural influence. It also creates tension and conflict, especially when activists move away from or challenge conservative classical liberal values and ideas.

That challenging understandably breeds suspicion. In the world of economics, the nationalism of the New Right creates significant conflict. Folks at American Compass, for example, do not simply take harder activist lines in politics. They seem to be rejecting conservative classical liberal ideas altogether in favor of corporatist and collectivist ideals, though with a more traditionalist flavor than the cultural Marxists. Their attempts to grasp and pull the levers of political and economic power cannot fit with a philosophy that such levers should not be used for any political ends, right or left.

Furthermore, we see substantive disagreements about how the economy and private enterprise work exist. The Trump administration approach to tariffs is exhibit number one. Are “illiberal” tactics like tariffs leading to “illiberal” policies like economic protectionism, or vice versa? Activists understandably favor narratives that require more activism. Job loss and factory closures due to decades of imprudent open trade policies would require political and legal activism to reverse. 

I tend to agree with Rufo’s assessment that “liberal/illiberal” is not always a helpful distinction, or at least not a complete one, for assessing strategies for cultural engagement. Certainly some types of activism promoted by Gramsci and Alinsky are deeply illiberal: destroying property, ignoring or flouting legitimate law and legal institutions, and unethical behavior like lying. Such activism should be shunned. 

But these are not the sum total of the tactics Rufo thinks we can glean from these thinkers. Others include direct confrontation, public/social censure and pressure campaigns, and legitimate legal “purging” of collectivist ideologues and institutions:

the founders employed virtually all of the Alinsky/Gramsci tactics. Samuel Adams, whom Jefferson believed to be the father of the Revolution, developed a playbook that mobilized a counter-elite, produced propaganda, sieged institutions, changed the system of values, and established a new cultural hegemony, or “common sense.” The ideas of John Adams and Thomas Jefferson were only possible because of the tactics of Samuel Adams. Gramsci is useful to the extent that he provides an analysis not at the human scale of the founding — Boston, pop. 15,000 — but at the industrial scale of modernity.

As Rufo puts it, “I am not talking about ‘imposing [my] ideas through raw power.’ Everything I do is geared towards winning public opinion and working through democratic institutions. And for that matter, Gramsci’s whole point is that you can’t impose your ideas through raw power.” Many of the American founders, he argued, were strategic, even Machiavellian, political activists. 

They recognized that they needed cultural and social influence to foster political and legal change. They went to work with a zeal to reform or subvert existing institutions to pave the way for the Declaration of Independence and, later, the Constitution. This was not always a clean, polite, philosophical exercise. There was passion, vitriol, and realpolitik involved. Rufo claims that: 

Burnham — the most successful anti-communist intellectual of the twentieth century — studied directly under Trotsky, learned from his enemies on the Left, and believed that Machiavellian politics was an essential tradition. 

So what guardrails prevented this aggressive activism during the American Revolution from spiraling into abusive tyranny like the French Revolution did? Again, conservatives like Russell Kirk, Alexis de Tocqueville, and Edmund Burke have insight here. They argue we need tradition, moral imagination, classical and Christian virtues, and civic institutions to provide direction for social change and to constrain cultural and political activism.

At the end of the day, we may not be able to arrive at a perfect reconciliation between high-minded ideals and commentary with more nitty-gritty activism. How much political power can be used without comprising the ideals and character of those who wield it? Perhaps the conversation and tension will have a salutary effect on both ends of the spectrum — at least as long as people in both camps engage in good faith conversation and debate. 

After all, Rufo claims he wants similar things to Goldberg: “I would dramatically increase ‘free speech, freedom of association, free markets, due process, individual rights’ — all of which have been severely limited by the Left over the past 100 years.”

On the other hand, perhaps it is more important than ever to distinguish between legal exercises of power to scale back the Left’s cultural and social hegemony and the lawless power grabs. Again, the Trump administration provides ample examples of both categories.

• Legal: Removing DEI from government; banning biological men in women’s sports; robust civil rights enforcement
• Illegal: Ignoring due process (illegal immigrants and Harvard’s tax-exempt status); flouting court orders; extorting political “enemies” (especially law firms); arbitrary special interest favors (tariff levels and exemptions)

Tension and disagreement will continue over whether some policies limit, or even violate, certain procedural values to enhance greater freedom and flourishing. On prudential grounds, conservative classical liberals may disagree about the “terms of engagement.” Perhaps we need more activism now to change the political and cultural game to the more neutral and polite terms civil libertarians want. 

But we need to avoid becoming an alternate version of the ideology we reject.

Recent polling reveals a startling development: one in four young people has a positive view of communism as an economic system. 

One in four is, by chance, around the same percentage of Cambodians who were murdered by the Khmer Rouge government’s policies of political torture, arbitrary execution, forced labor, mass resettlement, and brutal, intentional starvation in the 1970s. Between two and three million people were killed in just three years under a “political experiment” run by young people who were, unbelievable as it may seem, convinced they were remaking the country into a peaceful, egalitarian utopia. 

When Saloth Sâr was born on May 19, exactly 100 years ago today, there was nothing in his infant heart or essential genetics that predestined him to become one of the most feared tyrants of the twentieth century. By all accounts, he seems to have been a gentle and clever child with refined manners, well-liked by schoolmates and teachers. His family farm was rural but successful, and he enjoyed a privileged education under the French colonialists who then ruled his native Cambodia. His academic pursuits eventually took him to Paris on an academic scholarship. While there, he encountered the French Communist Party and Marxist-Leninist revolutionaries. 

Saloth Sâr, like many idealistic students at Harvard or Yale, saw Western capitalism as a corrosive force. He believed it was stripping Asian peasants of their nobility and moral worth. He and his friends wanted to create a new national identity and trigger a “Year Zero” event, after which all people would be equal and the needs of the poor and weak would be addressed. 

This was 1959: world wars and colonialism had torn Asia apart. Saloth believed the Cambodian people deserved better than to be a puppet state of Japan or Vietnam, or a bombing buffer zone for western militaries. He had returned home to work as a teacher, and was emulating his fellow Marxist and Chinese neighbor, Mao Zedong, when he helped formalize the Communist Party of Kampuchea.   

He became convinced that to return people to their natural innocence and equality, his society must be purged of the corrupting influences of banks, factories, hospitals, universities, and other modern influences. Anyone who was highly educated (besides his inner circle, of course) and anyone who chose to live in a city or practice a profession, clearly thought he was too good to be a subsistence farmer. Saloth Sar and his friends saw it as their responsibility to punish and reeducate such people to usher in an agrarian golden age of egalitarianism.

Only after returning to Cambodia would he take on the name by which he is now known, though culturally, it is a placeholding non-name, akin to Jane Doe, John Q. Public, or Joe Schmoe: Pol Pot. 

The Communist Party of Kampuchea (the name for Cambodia in Pol Pot’s native Khmer language) would become known to the rest of the world as the Khmer Rouge, a horrifically murderous regime that massacred millions. But it didn’t begin that way. 

The mild-mannered farmer’s son fell in love with a political vision of his country and his people, and he believed in that vision so fiercely that he would destroy both trying to perfect it.

To label Pol Pot and his close cohort as murderous psychopaths risks, as biographer Philip Short wrote, “obscuring a reality that was at once more banal and far more sinister.”  

Calling what happened in Cambodia “genocide” also risks obscuring the banality of that violence and the twisted idealism of the communist cause. Pol Pot had no interest in ending the genetic legacy of the Khmer people; on the contrary, he saw himself as perfecting his beloved people, purging only those who would undermine the revolution or were insufficiently committed to the future, perfect society. As the communist regime failed (as all communist regimes do), the search for scapegoats and traitors turned more and more people into acceptable sacrifices for the greater good. 

And Pol Pot could not have done such horrors alone. Thousands of people helped him. Once the vision of a perfect, Communist Kampuchea took hold, many people — even as they who saw their own families murdered, their children kidnapped, their homes burned, their friends exiled, their cities emptied — would continue to believe in the dewy, sepia-tone vision that had begun germinating in intellectual salons in Paris. The intellectuals who survived defended their participation in the communist “political experiment” that made them literal slaves to the state.

Even as the Khmer Rouge abolished the notion of the family and made children into Party property, some believed. When peasants were stripped of clothing and forced into shapeless uniforms, and city dwellers were pushed onto collective farms and then onto killing fields, many believed it was for the best, a necessary sacrifice for a glorious future. Like the young Saloth Sâr, they subscribed to an unconstrained vision in which society and human nature itself could be remade by the sheer force of political will. Individual lives were nothing to a totalitarian strong man who possessed the nerve to do what must be done.

“To keep you is no benefit,” went the Khmer Rogue slogan, “to destroy you is no loss.” 

The very ideas of freedom, individuality, creativity, intellectual self-betterment — they had become anathema to being a good Cambodian. Freiderich Hayek wrote in The Road to Serfdom, “If the feeling of oppression in totalitarian countries is in general much less acute than most people in liberal countries imagine, this is because the totalitarian governments succeed to a high degree in making people think as they want them to.” Pol Pot had made his communist fever dream into every Cambodian’s living nightmare. 

Money was abolished. Mass communication—radio, newspapers, even public gatherings—was eliminated. Private travel was banned, cutting people off from one another completely.

Religious practices, including Buddhism, were banned. The Khmer Rouge controlled all sources of information, and few could resist the ideological narrative of government power being used to reorder humanity for its own benefit. Those who tried to resist were imprisoned, tortured, disappeared, or executed. To keep you is no benefit. To destroy you is no loss.

In the intellectual echo-chamber of Marxist universities, a toxic narrative of “us” vs “them,” and a hideous pretense of knowledge reigned, then, as now. Young Saloth Sar, with his refined manners and his imperfect French and his engineering scholarship, almost certainly didn’t envision becoming one of history’s greatest murderers. He was the victim of an unconstrained vision, and corrupted by undisputed power. He fooled himself with a beautiful lie, and in his conviction to enact it, came to see human beings as disposable.

“Our policy was to provide an affluent life for the people,” Pol Pot explained in an interview with journalists after he was deposed. “There were mistakes made in carrying it out.”

Hundreds of millions more faced starvation in the years that followed Pol Pot’s fall, most of them already-starving peasants reliant on an agricultural daydream, ravaged by war and incompetence.

One architect of the Khmer killing fields, Khieu Samphan said, returning to the capital 20 years after the slaughter: “I would like to say sorry to the people. Please forget the past and please be sorry for me.” Such was the recompense for a terroristic regime, what The Guardian called, “a four year reign of homicidal terror that, even in a century featuring such butchers as Stalin, Hitler, and Mao, was almost too shocking to believe.”

But the world didn’t just look away. Many around the world, experimenting with mid-century Marxism, wanted to believe in Pol Pot’s vision for Cambodia, too. Western powers, already exhausted by proxy wars in South East Asia, watched with indifference. And western journalists, many of whom were Marxists themselves, reported glowingly of Pol Pot’s “experiments.”

“It remains a mystery to me that we could have been so fooled,” wrote Gunnar Bergström, a Swedish journalist who took a propaganda tour in 1978. He said, in a later apology, “we were fooled by the smiles, but maybe most of all by our own Mao-glasses.”

In The Road to Serfdom, Hayek reassured readers that the intellectuals and central planners of our acquaintance “would recoil if they became convinced that the realization of their program would mean the destruction of freedom.” But Saloth Sar is one poignant reminder that few leaders can be stopped, or will stop themselves, from imposing their tyrannical will “for our own good.” And that too many of us will be willing to look away.

Radicals and revolutionaries might capture the hearts of young people, but they cannot be allowed to capture centralized power. Only a respect for the individual and a respect for civil liberties can shield us from the “good intentions” of idealistic social planners with all their devastating, murderous, totalitarian consequences. 

The latest data from the Bureau of Labor Statistics confirm that the Federal Reserve has made a lot of progress on inflation. The Consumer Price Index (CPI) grew 2.3 percent over the past year. It has grown at an annualized rate of just 1.6 percent over the past three months. Despite this progress, however, Fed officials voted to hold the federal funds rate target range at 4.25 to 4.5 percent last week. 

When will the Fed begin cutting interest rates — and how far will rates fall this year? The short answers are “not soon” and “not much.”

The Fed is currently in a holding pattern, awaiting further clarity on the fallout from President Trump’s trade war. On the one hand, lower inflation readings would seem to warrant a lower interest rate target. Recall that the real (inflation-adjusted) federal funds rate target is equal to the nominal target set by the Fed minus expected inflation. 

To the extent that they coincide with lower inflation expectations, lower inflation readings result in a passive tightening of monetary policy as they push the real federal funds rate target up. To prevent policy from tightening further in the face of falling inflation, the Fed must lower its federal funds rate target.

On the other hand, Fed officials are worried that higher tariff rates introduced by the Trump administration might unanchor inflation expectations. Fed Chair Jerome Powell summarized the anticipated effects of higher tariff rates at the post-meeting press conference last week:

If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment. The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and ultimately on keeping longer term inflation expectations well-anchored.

Powell made it clear that the Fed’s “obligation is to keep longer term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”

The tariffs are, in effect, an adverse supply shock, similar to the adverse supply shock caused by COVID-19 in 2020. The Fed could not prevent the disease from spreading or rescind stay-at-home orders in 2020. It cannot repair supply chains disrupted by higher tariff rates today. The best it can do is look through the adverse supply shock and keep nominal spending on a stable trajectory. Its failure to do this beginning in 2021 resulted in above-target inflation. The Fed does not want to repeat that mistake.

Here’s the problem: although disinflation warrants reducing the federal funds rate target, that move could be misconstrued as an attempt to offset the decline in economic growth associated with the higher tariff rates. If the public expects the Fed to deliver an expansionary monetary policy in response to the adverse supply shock, inflation expectations will rise and potentially become unanchored. To avoid that, the Fed is holding its federal funds rate target steady for now and assuring the public that it will not attempt to offset a tariff-induced contraction.

How long will the Fed maintain its holding pattern? Prior to last week’s meeting (and Powell’s commentary), markets expected the Fed would likely cut its federal funds rate target in July. On May 6, 2025, the CME Group reported futures markets were pricing in a 77.7 percent chance that the federal funds rate target would be at or below 4.25 percent following the July meeting. 

Now, it reports the odds at just 36.8 percent.

More likely, the Fed will begin cutting interest rates in September. The CME Group now reports 74.5 percent odds that the federal funds rate target will be lower following the September meeting.

Back in March, the median Federal Open Market Committee member projected that the federal funds rate would fall 50 basis points by the end of this year. That still looks likely. 

According to the CME Group, there is currently a 22.8 percent chance that the federal funds rate target is 25 basis points lower following the December meeting; a 38.0 percent chance it is 50 basis points lower; and a 26.7 percent chance it is 75 basis points lower. All told, the futures market is pricing in a 72.3 percent chance the Fed’s target rate is lower by at least 50 basis points by the end of the year. FOMC members will submit revised projections in June.

Ultimately, the Fed’s interest rate decisions will depend on the incoming data — and the clarity those data bring. 

“For the time being,” Powell said last week, the Fed is “well positioned to wait for greater clarity before considering any adjustments to our policy stance.”

Several weeks ago we asked Starbucks, at its annual meeting, about whether this shift away from straws actually created value for shareholders. Their response? “We have not disclosed the financial impact of strawless lids.”

The fundamental question we were asking was about the sustainability assumption: that you can go green and make green at the same time. That you can save the planet by recycling more, while not affecting your shareholder return. And now, one of the biggest brands in the world is making it clear: we won’t even tell our own shareholders whether the sustainability assumption is true. Go away.

Several years ago, the coffee giant made a bid to phase out their routine usage of plastic straws in favor of strawless lids. The rationale? As per Starbucks, “sustainability.” And yet the result, at least immediately, was anything but. Analysis from Reason Magazine’s Christian Britschgi revealed that the ‘strawless’ replacement actually used more plastic than the straw/lid combo, and Starbucks only fixed the problem years later — already evidence in favor of its sustainability strategy being more vibes than sound business analysis.

As it happens, that’s an industry-wide problem.

The narrative on plastic use is ingrained deep within the corporate psyche. 72% of the top 300 companies in the world have made commitments to reduce plastic use, with many setting specific targets for reducing plastic waste in their production chains. From tech giants like Google to food producers like Mars Inc, recyclable/reusable plastic is an issue that the world’s largest companies are hell-bent on opining on and making commitments to “fix.” But are their solutions working — even by their own standards? 

The Half-Truth of Biodegradable Plastics

Let’s take biodegradable plastic — plastic that presumably breaks down to its base components more quickly than traditional plastic options. Major brands have tested the concept, including producers like McDonald’s and PepsiCo. And yet, what’s the basic assumption behind biodegradable plastic? That the material will actually degrade faster in the environment. As per one analysis, “Biodegradable plastics decompose in environments such as soil or water, or in compost. In other words, creating an environment conducive to microbial activity is crucial for plastics to decompose effectively.”

Yep. We knew that. And yet, here’s a 2015 report from the United Nations Environment Programme: “some plastics labelled as ‘biodegradable’ require the conditions that typically occur in industrial compositing units, with prolonged temperatures of above 50°C, to be completely broken down. Such conditions are rarely if ever met in the marine environment.” So… the key assumption behind biodegradable plastics (aka their biodegradability) is precisely the assumption that has yet to be proven.

131st Time’s the Charm for Reusable Shopping Bags

Let’s take another example: reusable shopping bags.

Retailers like IKEA, Whole Foods, and Patagonia have either outright banned plastic bags or taken significant steps to encourage customers towards using reusable bags made out of materials like cotton. The assumption here: the reusable bag has less of an environmental footprint than the plastic bag. And yet the reusable bag strategy is fraught with problems. For one, many of the alternatives are made out of biodegradable materials (see above discussion about some of them only degrade if consistently kept above 120 degrees Fahrenheit which, surprise surprise, doesn’t consistently happen in nature). For another, the amount of times you have to reuse a bag to offset the environmental impact is astronomical — one UK analysis from the Environment Agency found that “cotton bags should be reused at least… 131 times respectively to ensure that they have lower global warming potential than conventional carrier bags that are not reused.” One hundred and thirty-one times just to break even.

This is the Moment to Question ‘Sustainability’

What’s the next move? As ESG, DEI, and the corporate activist agendas that accompany them fall out of favor, true believers in sustainability could bother to make a serious business case for why actually reducing plastic (and not just saying you’re doing it) creates brand value for its owners, the shareholders. Or (and this is more likely) they’ll make the moral argument: that the ineffective policies and questionable-at-best impacts of the corporate sustainability obsession were justified because… wait for it… they were trying to do the right thing.

Do DEI programs actually help — or are they often designed to make consultants money as opposed to fix prejudice? Does ExxonMobil really need to do less business in oil and gas — or did a bunch of activists just make that up? Many of the questions that ESG and DEI-aligned activists consider asked and answered are, in fact, just loudly stated claims that almost no one has the guts to seriously challenge — claims that corporate engagement firms like us, as advocates of markets and fiduciary duty, have a responsibility to be questioning. And maybe the biggest claim that deserves questioning is this one: are corporate ‘sustainability’ practices actually…. Sustainable?

Life is full of moments in life where we realize: I’ve always assumed that was true — but is it? 

Asking a simple question about the structure of a business can be the difference between investing in a successful start-up and sinking thousands into a scam. Asking a simple question about the details of a story you’ve been told can reveal a web of dishonesty. It’s an unfortunate reality that many dysfunctional systems, from the scam to the cult to Ponzi scheme, operate on premises that were never true, but that people just assumed to be so.

All things come with tradeoffs, a simple reality that sustainability experts understand. You can ban plastic straws, but paper ones come with their own cost, including environmental ones. 

University of Michigan researchers recently examined the trend of sustainability-minded consumers from single-use plastics to reusable products, such as bamboo drinking straws. Remember the assumption: that sustainable products, with enough use, have less environmental impact than disposable ones. The UM researchers, however, found that some products, like beeswax wrap (an alternative to plastic wrap), silicone bags, and bamboo drinking straws never end up being better on environmental impacts like energy usage and water consumption. UM environmental engineer Shelie Miller summed up the study’s findings: “Don’t always assume that reusable is the best option,” Miller said. “Some reusable alternatives never break even because it takes more energy, and generates more greenhouse gas emissions, to wash them than it takes to make the single-use plastic item.” It’s the assumption game — and far too many corporations banked on that assumption because a loud cadre of activists told them they shouldn’t question it.

The best time to question the fundamental assumptions of the sustainability narrative was years ago, before corporate policies started being made in its image. The second-best time is now. And when the only answer we consistently get to these questions is diversion and secrecy…maybe the scrutiny’s overdue.

In July 1959, at the American National Exhibition in Moscow’s Sokolniki Park, Vice President Richard Nixon stepped into a model suburban kitchen and found himself in a now-famous impromptu exchange with Soviet Premier Nikita Khrushchev. 

Known as the “Kitchen Debate,” the moment became emblematic of Cold War tensions — not over missiles or military power, but over washing machines, color televisions, and the promise of frozen orange juice. Nixon used the showroom kitchen to champion the market economy, arguing that capitalism’s genius lay in offering ordinary citizens a growing array of affordable comforts. Khrushchev scoffed, calling it all frivolous and morally hollow compared to the Soviet system, which he claimed prioritized basic needs over material excess. Once widely known, the moment remains etched in Cold War history — not least because of Nixon’s later, troubled exit from the presidency.

While that Cold War moment became cultural shorthand for the difference between liberal economic systems and centrally planned ones, echoes of Khrushchev’s arguments are now emerging from unexpected places — including the highest levels of the US government, where the President recently suggested that American children might need to “be happy with two dolls instead of 30” if tariffs raise the prices of toys. 

“We used to make toys in this country,” he added, implying that curbing imports and reducing consumption are necessary sacrifices for revitalizing US industry.

That shift in rhetoric — from abundance to austerity, from choice to control — deserves far closer scrutiny than it has been given. Within the last two months, US Treasury Secretary Scott Bessent expressed the view that affordability is not part of the American project. This new twist, that Americans should embrace fewer goods in the name of national policy, may sound like hard-nosed industrial strategy, but it’s simply protectionism repackaged as virtue. 

Philosophically, it expresses a form of economic collectivism that runs contrary to the very system that made American kitchens, stores, and lives the envy of the world.

The Illusion of National Self-Reliance

Tariffs are taxes. They’re imposed not on foreign producers, as political rhetoric commonly suggests, but on American consumers and firms that buy imported goods. If the US government raises tariffs on toys, the cost doesn’t fall on a factory owner in Shenzhen: it falls on the American parent buying a birthday present at Target, as well as wholesalers and retailers managing slimmer margins.

Tariffs are often justified as tools to protect domestic jobs or rebuild domestic industries. But the track record is dismal. When tariffs raise prices, consumers reallocate spending away from more efficient producers toward less efficient ones. That may benefit a few politically favored sectors in the short term, but it leaves the broader economy poorer and less dynamic over time. Moreover, modern supply chains are by their very nature deeply globalized. 

Domestic industries rely on imported components, materials, and equipment. Tariffs intended to “help American factories” often end up increasing their input costs, undercutting competitiveness, and reducing innovation. A policy meant to create jobs instead destroys them. 

The 2002 Bush steel tariffs depict that trade-off starkly:

President George W. Bush imposed tariffs on a variety of steel products beginning in March 2002 and lasting for three years and one day. The rates ranged from 8 percent to 30 percent on certain steel product imports from all countries except Canada, Israel, Jordan, and Mexico. These tariffs affected products used by US steel-consuming manufacturers, including: producers of fabricated metal, machinery, equipment, transportation equipment, and parts; chemical manufacturers; petroleum refiners and contractors; tire manufacturers; and nonresidential construction companies. This definition of steel consumers is conservative, as many other industries are also consumers of steel.

The vast majority of the manufacturers that use steel in their business processes are small businesses. Ninety-eight percent of the 193,000 US firms in steel-consuming sectors, at the time of the Bush steel tariffs, employed less than 500 workers, according to the above study. The effects of higher steel prices, largely a result of the steel tariffs, led to a loss of nearly 200,000 jobs in the steel-consuming sector, a loss larger than the total employment of 187,500 in the steel-producing sector at the time.

Thus, a policy intended to protect steel jobs ended up causing larger job losses in downstream industries and made goods less affordable across the board.

From Industrial Policy to Collective Sacrifice

At its core, the recent wave of protectionism is not about efficiency or economic growth. It’s about national control — about engineering particular outcomes, even if they come at the expense of consumer welfare, business autonomy, and global integration. That’s where the comparison to Khrushchev becomes more than rhetorical.

When a political leader tells citizens they should be content with fewer toys, fewer choices, or less convenience — all in the service of a broader policy agenda — we are no longer in the realm of market economics. We are in the realm of planned outcomes and collective sacrifice. And that is the operating system of command economies: individual preferences and price signals are subordinate to political imperatives.

Of course, the modern American version doesn’t come wrapped in socialist slogans. It comes in the language of economic nationalism and reindustrialization. But the mechanism is the same: centralized decisions about what gets produced, what gets consumed, and terms upon which who is allowed to benefit.

The Forgotten Lessons of Choice

Two levels of irony are at work. In 1959, Khrushchev argued that the US emphasis on choice was wasteful. Nixon countered that it was the essence of freedom. Today, some voices on the American right and even some libertarians are repeating Khrushchev’s mistake — dismissing the vast benefits of variety, innovation, and consumer sovereignty as frivolous. 

Even more ironic are messages from the current US President encouraging asceticism, coming as they do from a man evincing a high degree of comfort, indeed an affinity, for spirited decadence.

Market economies are not about “30 dolls” versus “two dolls.” They are about letting individuals decide what they want, what they value, and what they’re willing to pay for. They are about discovery, experimentation, and progress. They are feedback between producers and consumers, sent through the price system, profit margins, and competitive jostling; not uniformity and constraint.

Policies that limit choice, raise prices, and redistribute economic control to political authorities are neither a reinvention of the market or a novel rejiggering of it. They are its repudiation. Pursued far enough, they risk reviving not the glory days of American manufacturing, but the gray sameness of the planned economy Nixon once stood against — kitchen after kitchen, refrigerator by refrigerator, and toy by toy.

Before I review The Quantity Theory of Money: A New Restatement (PDF) chapter-by-chapter, allow me to put things into context. Tim Congdon is the deepest thinker in this field and one with enormous experience as a banker with real skin in the game. If that weren’t enough, he started his career as an economics journalist at The Times in the 1970s. In short, unlike most economic writing, his book is readable. Following his work at The Times, he founded Lombard Street Research, when I first became acquainted with him. At the time, I was strategizing and trading at Friedberg Mercantile Group, a broker-dealer in Toronto, where I am currently chairman emeritus. He kept me well-supplied with his writings, and I gave them my most careful and anxious attention. Why? Because his forecasts were usually right — and often very contrary to the consensus.

During the Thatcher years, when monetarism was introduced to the United Kingdom, Congdon was at the center of things as a high-profile monetarist and forecaster, and one of the Chancellor of the Exchequer’s “Wise Men.” Finally, it was Congdon’s work, particularly Money in a Free Society — a book which I spent several weeks in Paris studying and corresponding with Congdon on — that incited my transition from a recipient to a supplier of monetary research.

Today, I have the privilege to serve on the Academic Advisory Council of the Institute of International Monetary Research at the University of Buckingham, which Congdon founded in 2009.

In the first half of the book — namely, Chapters 1 through 6 — Congdon lays out his restatement of the quantity theory of money, how he arrived at it, and the related consequences of that restatement. He delineates how changes in the stock of broad money are transmitted through asset prices, the real economy, and the price level.

Perhaps the most important contribution of these chapters is Congdon’s analysis of how changes in the stock of money affect variable-income assets — such as real estate and equities — differently than fixed-income assets (bonds). In Congdon’s view, variable-income assets are the best measure of households’ preferences — who in his terms are the “ultimate wealth-holders” — rather than the fixed-income markets dominated by institutional investors. In fact, when we make the reasonable assumption that the incomes paid on variable-income assets are a constant ratio of GDP, Congdon’s “proportionality postulate” — or the idea that changes in the quantity of money and nominal GDP are equi-proportionate in monetary equilibrium — is clearly a useful tool in explaining how changes in monetary policy are transmitted to those asset prices.  

Using empirical data, Congdon goes even further to assert that the relationship between money growth and fixed-income asset yields is dominated by variable-income assets, and contends that Keynes’ development of the problematic liquidity preference theory of the rate of interest influenced Paul Samuelson into bamboozling “three generations of economists into believing that bond yields held the key to understanding macroeconomic instability.” His conclusion rings true in an era dominated by direct central bank manipulation of bond yields. Contrary to the view of every “Dick, Tom, and Harry,” monetary policy is not about interest rates; rather, it is about changes in the money supply, broadly measured. And when it comes to the money supply, Congdon is clearly a broad-money, not a narrow-money, monetarist.

Another invaluable nugget in these chapters is Congdon’s exposition on credit counterparts analysis, which explains changes in the money supply as a function of changes in the composition of banks’ assets. Indeed, Congdon is one of the few who recognizes the importance of credit counterparts analysis — and knows how to do it.

In Chapter 7, Congdon analyzes the empirical evidence for his restatement of the quantity theory. Indeed, he finds that the evidence is “overwhelmingly” in favor of the quantity theory. Most interestingly, however, he finds that in the United States and G20 countries, households’ money typically increases slightly faster than households’ income, which violates the proportionality postulate. Here he conjectures that this is because, as economies develop, the frequency of financial transactions (and hence, the need for money) grows more rapidly than incomes. I look forward to Congdon developing this causal mechanism in further articles and books.

In Chapters 8 and 9, Congdon examines the evidence for the quantity theory, particularly during the COVID-19 pandemic, in the United States and United Kingdom, respectively. In my opinion, the most interesting parts of these chapters are his comments on the two countries’ central banks; namely, the fact that both the Federal Reserve and the Bank of England lack a coherent theory of national income determination — or at the very least, neglect the quantity of money.

Notably, he highlights the fact that the Bank of England used large relative price changes (read: not inflation) during the pandemic as an excuse to ignore the absolute price level (read: actual inflation). Congdon concludes that central banks are using the wrong model, the three-equation New-Keynesian Model, which has been popularized over the last three decades and does not include a monetary aggregate. Indeed, central banks have shoved the quantity theory aside.

Chapter 10 is a comparison of Milton Friedman’s quantity theory with the author’s restatement. It makes clear that Congdon’s restatement of the quantity theory is a necessary update for the twenty-first century. Congdon is quite right to alter the quantity theory to accommodate the new — and (in some cases) innovative — ways that money is created in a modern economy, as opposed to 1956, when Friedman published his own restatement.

In Friedman’s view, the supply of money is determined by a “money multiplier” applied to the monetary base, while Congdon allows the money supply to be determined by demand for credit, which comports with the fact that commercial banks create the vast supply of money in modern economies through their lending. He also makes the crucial point that broad measures of money must be used to make the quantity theory work. Indeed, this approach allows for a singular account of the transmission mechanism to be proffered. 

In Chapter 11, Congdon wraps up his treatise by recalling Keynes. Did Keynes really hate the quantity theory? Congdon answers that question in the negative. This section is crucial in order to place Congdon’s work — and that of other quantity-theory adherents — in the context of the history of economic thought.

Anyone interested in national income determination, asset markets, real economic activity, or inflation would be well-advised to study The Quantity Theory of Money: A New Restatement carefully. Indeed, this book is required reading for all of my students. 

It’s clear from his book that Congdon not only knows more about the quantity theory than most monetarists, but also possesses a deeper understanding of Keynes than most Keynesians.

The Constitution, or at least talking about the Constitution, is typically a centerpiece in many contemporary political discussions. This is especially true in the past few years, and in recent months it is not uncommon to see many wringing their hands that the US is undergoing what they call a constitutional crisis due to Donald Trump’s return to the presidency.

I would contend that we are indeed in the midst of a constitutional crisis, but not the kind that leftist pundits are discussing in the media.

Ultimately, there are always two constitutions that govern a society. There is the formal constitution, either a specific written document or a body of norms and traditions, and there is the informal, or rather, internal, constitution that governs the hearts of the people that make up said society.

The framework of the American Constitution, with its attempt to establish checks and balances and a system of decentralized federalism, is no doubt a solid work of applied political theory that attempts to establish an institutional environment conducive to an free, yet orderly, society.

But this institutional environment can only do so much. In the end, a constitution can only govern a people who themselves have established within themselves a constitutional disposition.

By constitutional disposition, I do not mean that one reveres and seeks to uphold the formal constitution. In the same way that a formal constitution seeks to establish limits on what the government is able to do, a constitutional disposition seeks to restrain and subdue man’s lower nature and supplant it with man’s higher nature. 

This necessity of inner control is not always popular. It has been in vogue for the past 200 years to assert that the fundamental nature of man is good and pure, it has merely been corrupted by society or capitalism, or whatever else people tend to disfavor at the moment. Jean Jacques Rousseau, the French Enlightenment philosopher and intellectual father of the French Revolution, is the most influential of these thinkers in the modern age, though similar strains of thought can be found at various times in history all around the world.

For Rousseau, man in the state of nature is good but he has been corrupted by society. This is the logic behind his widely shared quote “Man is born free, but everywhere he is in chains”. This is the freedom of the “noble savage”. Rousseau sought to reclaim this freedom for man by rejecting limits and restraints and leaving man’s raw will unchecked.

Rousseau himself exemplified this in his personal life, notably chucking all his unfortunate children into horrible eighteenth century orphanages so that they would not interfere with his dissolute life. Children, family, marriage, norms, and customs are all the shackles holding him back from his innate goodness, don’t ya know?

In contrast to this Rousseauian spirit, there exists a much older and universally held understanding of morality. Under this older way of thinking, morality essentially boils down to the personal struggle to establish an inner check on one’s base appetites and desires, and, through long struggle, to elevate one’s higher nature. It is upon this self-discipline that all of civilization rests.

This mastery of one’s base appetites through inner moral struggle is an essential part of Plato’s Just Man, Aristotle’s Spoudaios, Confucius’ Junzi, and Stoic, as well as much early Christian, thought.

It is this self-mastery that forms a constitutional personality. Such a disposition helps to maintain and even spread order throughout all of society. Without such order, life in a free society is impossible, as disorder prompts instead the rule of the jungle and, in turn, efforts to restore order at any cost.

Unfortunately, the inner check is out, and Rousseauiann ”freedom” is in, these days. 

While most people are unlikely to know much about Rousseau, his spirit lives on, seemingly more and more, in American culture today. The ethos of “if it feels good, do it” or “what’s the harm, I’m not hurting anyone” has become second nature to us.

Such an ethos is not conducive to the constitutional governance of society. It is little wonder that our formal constitution is feeling the strain of the present political era; it is bearing a load that it was never meant to handle.

The inner constitution is not a matter of grand legal battles in the Supreme Court. It is ultimately a battle for the disposition of one’s soul and is manifested in the small episodes of daily life that on their own seem to be insignificant, but when accumulated, come to shape who we are and the overall effect we have on the world.

Returning one’s shopping cart to the cart return, not spitting gum on the sidewalk, and not littering are, in the grand scheme of things, not significant events in the great arc of human history. But these small choices become habits that form our personality and our interactions with all of society. Few people control immense levers of government power, but through ordered living in our personal lives, which is the only thing truly under our control, we not only rightly order ourselves, but in doing so help to spread ripples of order to the people whose lives intersect with ours.

This understanding of order dates back millennia, but so too does the understanding that without order, of one kind or another, social life is impossible. If order is not maintained from within, through the inner check on one’s base appetites, then it will inevitably be established from without via physical force. When this happens we can say goodbye to the cherished traditional rights and liberties that we have enjoyed here in America.

The future of America will not ultimately be decided by our formal constitution, important though it may be, but by the small choices each of us make every day that is writing, unseen in the depths of our hearts, our internal constitution that governs our daily lives.