The title of Dan Wang’s book Breakneck focuses on the People’s Republic of China (PRC) specifically, but it is really about the self-conscious great-power rivalry between China’s Communist Party leaders and the United States. Along the way, we encounter all the popular points of controversy between the two great nations, covering everything from bullet trains, iPhone factories, and Trump tariffs to zero-COVID lockdowns, rare-earth mineral supply chains, and the demographic long tail of the One Child policy.

This isn’t just another case of two big nations clashing—as big nations tend to do from time to time. For finance analyst and university research fellow Dan Wang, the US and the PRC are uniquely paired in world affairs. In his introduction, he writes, “…no two peoples are more alike than Americans and Chinese,” citing their shared love of consumerism, pragmatic natures, and appreciation for technological progress.

Wang sees the US and PRC economies, in particular, as complements, which explains the rapid growth of trade between the two in the twenty-first century: “It is almost uncanny how much the United States and China have been complementary of each other.”

Yet at the same time, he says that, on a political level, “the two systems are a study in contrasts.” Fair enough, as they’re obviously very different. Yet in other passages, he frames the US and PRC systems as “inversions” of each other. This is seen in each society’s attitudes toward innovation and technology adoption, and to politics in general. It would take a sublime Confucian scholar to disentangle these contradictions. Perhaps the two nations are the phoenix and the dragon of world politics, the cobra and the mongoose, or simply each other’s evil twin.

Focusing on differences, Wang describes a Chinese government run by relentlessly practical but unsentimental engineers, who excel at building impressive infrastructure projects yet often disregard the negative impact on individual citizens. By contrast, America—the home of legal proceduralism and bureaucracy—has, in recent decades, erected a bewildering array of roadblocks to major projects, but does a much better job of recognizing and safeguarding individual rights.

This summary of strengths and weaknesses naturally suggests that each nation could benefit from borrowing elements of the other. The Chinese would be better off in certain ways by becoming more American, and vice versa. The first nation to adopt its counterpart’s advantages, Wang argues, will—like a comic book villain or mythic hero—bring balance to the force of good governance and “win” the twenty-first century.

It’s a reassuring prescription in a way, implying that there are no fundamental conflicts between the two nations that can’t be resolved through better understanding. Yet it contrasts sharply with the rhetoric coming out of both Beijing and Washington, D.C., where policy hawks from each country frame a twenty-first-century showdown that many fear could lead to war in the Taiwan Strait or elsewhere.

It also recalls the attitudes of some Western academics and center-left pundits during the Cold War, who assumed that the US and Soviet systems were similarly paired and would eventually converge in ways beneficial to both societies.

As late as 1988, for example, famed Affluent Society author John Kenneth Galbraith co-published a book with Marxist economist Stanislav Menshikov that imagined a future of increased trade and cooperation between the US and the USSR. They also, as Publisher’s Weekly put it at the time, “…criticize[d] establishment interests on both sides that seek to perpetuate the cold war.”

Galbraith and Menshikov were right that the Cold War would soon end—but not in a way that left the Soviets with a 50 percent stake in the world’s political future. If the collapse of the Soviet system—at a time when some Western economists were still predicting that the Warsaw Pact countries were on track to surpass the West economically—arrived so unexpectedly, one wonders what yet-unseen surprises the Chinese Communist Party has in store for the twenty-first century.

The Party, after all, has delivered plenty of dramatic—and mostly unpleasant—shocks to its own people over the decades. Wang takes deep dives into two of the most infamous: the One Child policy and the zero-COVID containment strategy. The former was certainly more horrific, although the latter’s impacts are far more recent and the responsibility of the current government, giving the pandemic lockdowns more resonance for younger Chinese citizens.

The PRC’s One Child policy was enforced, in successive iterations, from 1980 to 2015, and as a two- and three-child policy until 2021. The statistics, as Wang recounts them, are grim. In 1983, for example, the government sterilized 16 million women and aborted 14 million babies. Women who tried to resist were pressured, harassed, and sometimes even kidnapped by enforcement squads. Official propaganda claimed the procedures were voluntary, but in reality, they were the result of well-organized coercion: “…women [were] hauled before mass rallies and harangued into consenting to an abortion.”

Unsurprisingly, the policy was extremely unpopular among the women and families subjected to it, and the regime did little to blunt the pain it inflicted. “It didn’t help,” Wang dryly notes, “that the abortion posses literally carted off women in hog cages.”

The PRC’s COVID containment strategy was similarly authoritarian. Despite officials praising themselves for initially managing the pandemic well, by early 2022, rising infections were creating growing anxiety among Politburo members in Beijing. The government eventually imposed some of the largest forced quarantines in modern history, confining most of Shanghai’s population, for example, to their homes from March onward.

The lockdown lasted roughly five months—in a metro area of 25 million people, three times the size of New York City. Officials failed to ensure that residents could maintain reliable access to food and clean water. Chaos and panic were widespread, with many forced to adopt digital hunting and gathering as a full-time strategy to supplement the unpredictable and insufficient official provisions.

Wang quotes the unexpectedly poetic—and horrifying—propaganda broadcast throughout the city via drones: “Please comply with COVID restrictions. Control your soul’s desire for freedom,” the floating loudspeakers intoned.

Compared with scenes like that, the 3,000-page environmental impact statements and NIMBYism of US lawyerly society hardly seem so bad. Certainly, if most Americans had to choose between enduring the persistent defects of the United States and living under a system designed by the Chinese Communist Party, they would almost certainly opt for slow trains and the Bill of Rights.

Also, as Wang describes in a chapter on dissatisfied PRC expats, plenty of Chinese nationals with the money and initiative to leave have done so. Some of them, in line with popular narratives, have come to the US to get STEM doctorates and apply for H1B engineering jobs, but plenty have also become beach bums in Thailand or slam poets, democracy activists, and bookshop proprietors in global outposts.

Ultimately, Wang’s equal-but-opposite framework shows the limits of its evenhandedness. While understandably not wanting to depict his family’s home country as evil and vicious, it is difficult to “both sides” the human rights atrocities of something like the One Child policy. Are fast trains and tall bridges as admirable a civilizational achievement as respect for freedom of speech, religion, and the press? Should we pretend that the PRC could have had all of the former if they had brought themselves to embrace the latter?

More prosaically, the “each should be more like the other” framing muddies the question when it comes to issues like housing affordability and supply, which Breakneck repeatedly identifies as a problem in the US today. Wang argues that US institutions of government haven’t built enough.

“American cities have broadly failed to build adequate housing or infrastructure,” he writes. But in a market economy with robust property rights, it is not the government’s job to build housing—that’s what D.R. Horton, Pulte Homes, hundreds of smaller companies, and thousands of work crews are for. The problem is that major American cities have made it nearly impossible for the private sector to actually do its job.

Our problem is not, as many industrial policy proponents claim, a “lack of state capacity,” but precisely the opposite. We have empowered governmental institutions far beyond their constitutional limits with too much capacity for spending, debt, obstruction, and veto. We are being strangled and impoverished by the state capacity we have now. Making San Francisco and New York more like the land of ghost cities and abandoned theme parks will not be an improvement. Does anyone really believe that the most indebted nation in the history of the world is being chiefly held back because its government agencies aren’t able to borrow even more money and saddle future taxpayers with even more debt?

Granted, Wang generally does an admirable job of holding Americans’ feet to the fire with respect to our own problems around productivity and growth, which are significant. We would, after all, not want to end up like the CCP itself, which is notoriously bad at processing bad news and dealing with dissent, leading to consequences ranging from farcical to nightmarish.

We also wouldn’t want our industrial strength to decline so far that we end up like Europe, which Wang dismisses as a “mausoleum economy.” Americans, both as citizens and policymakers, will need to step up to compete with the machinations of the Communist mandarins in Beijing. We should, however, be careful not to copy their worst policies along the way.

On most days, America’s air traffic control system is invisible. The radar screens flicker, the controllers thread needles as planes approach and depart, and millions of passengers move through the sky supported by a grid they never see. We are reminded of its fragility only when something breaks.

The most recent federal government shutdown provided just such a reminder. The system strained not because of storms or technological failure, but because Washington stopped paying its bills. Controllers continued working without pay, modernization projects halted, safety inspectors were furloughed, and as a result, flights were canceled. This was an institutional failure. If the skies darken whenever Congress deadlocks, the problem is not aviation, but governance.

The United States funds air traffic control (ATC) through the Airport and Airway Trust Fund, fed by ticket and fuel taxes that are, in principle, user fees. That mechanism should supply financial stability. But before they can be spent, those revenues must be appropriated by Congress. When Congress fails to act, the Trust Fund’s faucet dries up, and the system grinds to a halt. A national utility that controls a $6 trillion economy’s daily commerce becomes hostage to whatever unrelated issues are holding up the budget process.

The shutdown revealed something deeper than the usual political dysfunction: it suggests we’ve been using the wrong model entirely. Air traffic control is a safety-critical operation that should be financed continuously and governed predictably. Instead, America has fused operations, safety oversight, labor policies, and salaries into a single agency whose revenues can be cut off at the very moment they are most needed.

The remedy begins with a principle the country once understood instinctively: transportation infrastructure works best when those who use it fund it. The “user pays” principle is simple and elegant. Those who benefit directly from a service finance its operation and upkeep, ensuring that costs and benefits are internalized, that funding remains reliable, and that investment aligns with need rather than politics. This is not some neoliberal scheme to extract money from users, nor is it a novel idea—it’s how British turnpike trusts operated in Adam Smith’s era.

The local parishes, which had been charged with maintaining the King’s highways, could not or would not do so effectively. Parliament, therefore, authorized trusts to levy tolls and dedicate proceeds entirely to road repair. Smith defended this arrangement against those who preferred outright nationalization, pointing out how directly appropriate “tonnage” tolls were to the maintenance of wear and tear caused by the ton weights of wagons.

The same principle underpinned the early canal and port companies of the nineteenth century. Barges, shipowners, and traders paid for access, and revenues financed dredging, lock gates, and quay improvements. For decades, this was considered utterly normal. Infrastructure was an investment supported by the commerce that depended upon it. Nobel Laureate Ronald Coase pointed out how even the lighthouse system, an early precursor of ATC, often regarded as a classic example of a public good, was funded by user fees in England.

F.A. Hayek would have recognized this as part of a broader constitutional logic. The state need not build or operate infrastructure directly; its role is to define predictable and impartial rules for access and pricing. A network governed by clear rules and direct payment is far more stable than one funded at the whim of legislators. Rules, not appropriations, preserve steady service.

The same logic applies today to roads and highways. For most of the twentieth century, the gas tax approximated a user fee: heavier or more frequent drivers paid more into the system than lighter or occasional ones. The problem is that this mechanism is eroding. Vehicles are more fuel-efficient, and increasing numbers of electric vehicles contribute little or nothing. Highways’ needs remain while revenues atrophy. A direct user-based charge—such as a vehicle-miles-traveled or weight-distance formula—restores cost precision and allows infrastructure finance to track actual use.

It is therefore unsurprising that modern aviation already embodies user-pays. Airlines and passengers finance ATC through direct charges in nearly every advanced jurisdiction, because airspace management resembles a network utility: it requires constant capital renewal, highly trained operators, and continuous technological upgrades. The economic logic is the same as the turnpike: the party that benefits should fund the service.

In the United States, however, this sensible principle has been attached to a brittle institutional structure. User revenue flows into a trust fund, but it is filtered through political appropriation, undermining insulation, predictability, and financial continuity. The shutdown did not merely suspend paychecks; it suspended America’s ability to modernize its own airspace. Complex systems cannot survive on short-term appropriations—they must plan continuously and invest regularly, or stagnate.

International experience is instructive. Britain and Canada both restructured their ATC systems during the 1990s. Both embraced user funding and recognized the need for capital modernization outside annual appropriations. Yet their structural choices diverged sharply.

The British model, NATS, is a regulated utility. It is nominally commercial, owned jointly by the government and a consortium of airlines, but its revenues, investment plans, and performance targets are controlled by the Civil Aviation Authority (CAA) through five-year regulatory cycles. Charges are set according to allowed revenue formulas, collected through EUROCONTROL, and periodically reviewed. The model provides transparency, enforces investment discipline, and ensures broad cost recovery from users. It is rule-based in the bureaucratic sense, with detailed performance targets and incentive structures.

Yet NATS has proven vulnerable to outside shocks. After 9/11, a sharp collapse in traffic revenue left NATS in severe financial trouble; the government had to step in with a loan. During COVID, traffic disappeared again, and the CAA allowed deferred cost recovery over a decade. The regulated model is stable under normal conditions but requires state liquidity and regulatory smoothing under stress. While it is rule-governed, it is not fully self-resilient.

The Canadian model, NAV CANADA, is more successful in this respect. Created in 1996 as a non-profit, non-share corporation, NAV CANADA is governed by its users: airlines, general aviation, employees, and public representatives. It cannot distribute profits and must reinvest surpluses or hold reserves. Revenue comes from direct user fees, with freedom to borrow for modernization. Crucially, safety regulation is separate. NAV CANADA operates the ATC system. Regulatory oversight is external and independent.

The results speak for themselves. NAV CANADA has weathered both 9/11 and COVID without taxpayer subsidy or shutdown. It has financed modernization internally, pioneered ADS-B satellite surveillance, and deployed remote tower technology. Operational priorities are driven by users who bear the costs directly; financing is continuous and project-driven rather than tied to appropriations. Accountability is internalized: the users who fund the system also help govern it.

Thus, the Canadian model embodies a more genuinely Hayekian rule structure than Britain’s. NATS operates within the modern British web of regulatory commands—price caps, performance metrics, and cost allowances. These are rules of administration rather than the rule of law. NAV CANADA, by contrast, functions under a few general, constitution-like constraints: it must recover its costs from users, consult stakeholders on rates, maintain safety standards, and refrain from distributing profit. Within that framework, local knowledge and operational judgment guide decisions. The structure limits discretion not by dictating outcomes but by securing responsibility.

Britain fell for the fatal conceit, trusting the regulator’s intelligence. Canada, by contrast, did the historically British thing: it trusted the rules of the game. In a national system operating in an international environment that demands constant reinvestment and rigorous safety discipline, the Canadian strategy has proven superior.

The US debate periodically revisits this question, and the shutdown has given it renewed urgency. The American ATC system is technologically capable, professionally run, and staffed by some of the world’s best controllers. Its weakness is governance: revenue collected at the point of use cannot be spent without Congressional consent, and the same agency that operates the system is also the safety regulator. That is a structural conflict: one side must prioritize continuous operations and efficiency; the other must enforce safety and compliance. Mixing the two guarantees that financial pressure becomes a safety problem, and vice versa. The tragic plane-helicopter collision at Reagan National earlier this year is an example.

The solution is surprisingly straightforward. Congress should legislate the separation of ATC operations from safety regulation, as recommended by Reason’s Bob Poole, and convert the operational system into an independent, non-profit ATC corporation modeled on NAV CANADA. This corporation would fund itself directly from user fees, reinvest surpluses, hold reserves, and be empowered to borrow for modernization. Safety regulation would remain a government agency function, where its independence could be fully exercised. The corporation would be insulated from revenue risk and political bargaining, but transparently accountable to its users through a stakeholder board.

The result would be safer skies because the rules are sharper. An external regulator can enforce safety standards without fear of conflicting priorities, while controllers and engineers can plan staffing, training, and technology on multi-decade horizons rather than budget cycles.

The political objection that “this is privatization”—with the implied accusation that it sells out the national interest to profit-seekers—misunderstands the point. NAV CANADA is not a private, for-profit enterprise. It is a public-interest, user-funded utility with no shareholders and no profit extraction. It has proven cheaper, safer, and more innovative precisely because it aligns control, cost, and accountability while insulating operations from political volatility, all within a framework of the rule of law.

The shutdown served as a warning: the American ATC system is too important to be turned off by legislative impasse. If one of the foundational rules of a free society is that those who use a service should pay for it, then the institutional flipside is that those who pay can keep it running. The classical liberal principle that served the turnpikes can serve the airways. And if we rebuild our transportation networks around users rather than appropriations, the only things left grounded in Washington will be Congressmen hiding in the cloakroom to avoid votes—not airplanes.

FLASHBACK:

December 2025 marks the official end of the largest cycle of quantitative tightening the Federal Reserve has ever undertaken.

From a peak of $8.93 trillion in June 2022, the Fed has allowed $2.4 trillion in maturing assets to roll off its balance sheet. But Chair Powell announced on December 10 that the Federal Open Market Committee (FOMC) has decided it must begin expanding its balance sheet again to maintain “ample reserves”—code for maximizing policy discretion and insulating itself from market forces.

Before the Global Financial Crisis (GFC), the Fed conducted monetary policy primarily through open market operations. Raising its target interest rate—the rate in the overnight interbank lending market—required the Fed to sell bonds from its balance sheet until the supply of reserves contracted enough to push up the federal funds rate (FFR). Conversely, lowering the target rate required purchasing bonds until reserves expanded sufficiently to pull the FFR down.

Another feature of this approach was that the Fed also “defended” its target against changes in market conditions. If demand for reserves (liquidity) increased in private markets, the Fed would respond by increasing the supply of reserves through additional bond purchases. In this framework, the Fed both engaged with and responded to private markets.

That changed after the GFC, when the Fed dramatically expanded its balance sheet, lowered its target rate to near zero, and began paying interest directly to banks on reserves held at the Fed. After 2008, interest rate targeting became largely a matter of adjusting the rates the Fed paid to banks and other counterparties, rather than buying or selling bonds in the open market.

This shift allowed the Fed to purchase bonds with relative impunity, since the interest rate it targeted was no longer directly constrained by reserve supply. The result was a series of bond-buying programs known as quantitative easing (QE). Several rounds of QE under former chair Ben Bernanke added trillions of dollars to the Fed’s balance sheet. By December 2019, the balance sheet stood at roughly $4.1 trillion, up from less than $1 trillion a decade earlier.

Under Chair Powell, however, the Fed added nearly $5 trillion more during and after the COVID-19 pandemic. The most recent round of belt-tightening was sorely needed, particularly given elevated inflation over the past four years. Even so, the current balance sheet—$6.539 trillion—is still $2.44 trillion larger (nearly 60 percent) than it was in December 2019. That amounts to an 8 percent annualized growth rate in the Fed’s balance sheet, compared with roughly 4 percent annualized inflation over the same period.

So $6.54 trillion is inadequate for “ample reserves”? Color me skeptical.

Yet the problems associated with monetary expansion remain. Prices are still rising at a 3 percent annual rate, well above the Fed’s stated 2 percent target. Other dynamics may therefore be influencing the Fed’s decision to restart QE while simultaneously lowering its target overnight rate.

The proposed $40 billion purchase in December will undo the last several months of tightening. Here is the pace at which the Fed’s quantitative tightening unfolded:

Still, there must be some explanation for the change in course. Perhaps, given the fracturing within the FOMC, we are witnessing a bit of old-fashioned horse trading.

President Trump has applied significant pressure on Powell and the FOMC to lower rates quickly. Powell and his colleagues have responded by reviving a form of monetary easing that does not require cutting the target federal funds rate. Reigniting QE appears to serve that purpose, allowing the Fed to ease policy while preserving at least a modicum of institutional self-respect rather than resorting to outright capitulation.

Powell also faces defections from both sides of the committee. Board member Stephen Miran favored a half-point cut, while Austan Goolsbee and Jeff Schmid voted to maintain the current target. (Somewhat ironically, three dissents played out in an almost identical fashion in September 2019, when James Bullard pushed for a half-point cut while Esther George and Eric Rosengren voted to hold the target rate steady.)

Given that the Fed pays banks and other counterparties the lower end of its target interest rate range, lowering the FFR reduces their interest bill. During the recent cycle of tightening and rate increases from 0.25 to 0.5 percent to over 5 percent, that interest bill ran into the hundreds of billions of dollars. Though the Fed can create all the dollars it needs to make payments, from an accounting standpoint, it garnered huge operating losses and even larger balance sheet losses during the recent cycle.

Restarting quantitative easing (the purchase of short-term Treasury debt) will ease the federal government’s borrowing costs. As interest rates on newly issued short-term Treasurys decline, the alarming rise in federal interest payments—now over a trillion dollars a year—may begin to level off.

The government’s insatiable appetite for borrowing may also bolster the FOMC’s claim that its balance sheet, though far larger than in 2019, remains less than “ample.” The Fed’s floor system—setting target interest rates independently of bond purchases—rests on the existence of a massive supply of reserves. That supply keeps the effective market rate for borrowing reserves below the “floor” rate the Fed pays on reserves. After all, why would a bank lend reserves to another bank at 2 percent when the Fed will pay 3.5 percent?

But rapid growth in the demand for reserves—effectively, demand for borrowing—driven by persistent federal deficits will exert upward pressure on interest rates, potentially pushing them above the Fed’s target.

I am not sure that would be so bad, just as I am not sure inflation modestly below the Fed’s 2 percent target would be so bad either. Yet with a voracious Treasury needing to borrow trillions more each year, the FOMC appears to believe it is time to expand the balance sheet through QE once again. Chair Powell may hope to thread the needle among competing views within the committee, but the Fed’s current course looks uncomfortably close to capitulation to political pressure. If inflation remains at or above 3 percent over the next year, we will have our answer.

Language matters. Words have not only technical meanings; they also summon particular attitudes and impressions. And sometimes these attitudes and impressions differ significantly from the words’ technical meanings. 

In no domain of economic policy is the confusion created by the divergence of words’ technical meanings from the attitudes and impressions conveyed by those words greater than in the domain of trade policy.

Trade Deficit

The most obvious, commonly used confusing term is “trade deficit.” “Deficit” inherently sounds bad. Everyone instinctively resists being in any kind of “deficit.” But those of us who understand the technical definition of “trade deficit” know that this “deficit” is merely the result of an accounting convention by which inflows into a country of money are counted as “positive” while outflows of money are counted as “negative.” 

Yet as many economists, including the Nobel laureate Vernon Smith, have pointed out, if the convention were instead (as it could be) to count as a positive the monetary value of imports – and as a negative the monetary value of exports – then so-called “trade deficits” would instead be “trade surpluses.”

The words “trade surpluses,” alas, are more difficult to demagogue than are the words “trade deficits.”

Concessions

Another technical term that conveys a misleading impression is “concessions,” which means agreements by governments to lower their trade barriers in exchange for other governments agreeing to lower their barriers. 

As the excellent trade-policy scholar Daniel Griswold summarizes, in trade agreements, “exports are a benefit and imports a ‘concession.’” The technical term “concession” is thus used to describe those instances in which governments allow their citizens to trade more freely. Greater freedom of trade and the additional goods and services that it makes available are bizarrely rendered as costs – as burdens – that the people of the home country endure in order to obtain the benefit of greater ease of exporting.

Dumping

Yet another term that distorts understanding is “dumping.” To accuse foreigners of “dumping” goods on our market is to suggest that foreigners are harming us by discarding their trash on our shores or otherwise burying us in things that we’d prefer not to have. No sane person wants to be dumped upon!

This suggestion is completely mistaken. The great trade economist Douglas Irwin notes that “the government’s definition of ‘dumping’ is a lower price charged in the United States than in a foreign exporter’s home market.” And so what really occurs with so-called “dumping” is that the people of the home country are offered the opportunity to buy particular goods at prices lower than foreigners must pay. If the practice of charging differentially lower prices in the US was called not “dumping” but “competitive pricing” or “bargain pricing,” perhaps domestic firms would have less success at persuading the government to use regulations against “dumping” to secure protection from vigorous foreign competition.

There is, after all, no economic reason why any particular good should sell in one country at a price identical to its price in another country. 

Plenty of factors explain why a particular model of automobile might sell for less in the US than in the producer’s home market. American demand for that model might simply be lower—perhaps because tastes differ, or because the US retail market is more competitive and offers more alternatives. It’s also possible that auto retailing in the US faces fewer costly government rules than abroad.

Whatever the reason, when imports sell here at lower prices than they do elsewhere, Americans benefit. These lower prices are a gain, not a problem to be “protected” from. Yet by labeling the practice of selling exports at differentially lower prices as “dumping,” policymakers create an unjustified bias against foreign competition.

‘Made in’ Labels

“Made in China” — or Canada, Malaysia, Namibia, or anywhere else — is now a misleading label. In today’s global economy, most goods and services are produced with ideas and inputs drawn from dozens of different countries. As I wrote in this space a few months ago,

In today’s global economy, the great majority of the manufactured goods that you consume consist of parts and ideas from around the world, including the US. A “Made in” label on some good tells you only where that good’s final assembly occurred. Bath towels at Target labeled “Made in Turkey” might well be made of cotton grown in Texas, dyed with pigments from Germany, woven on a loom made in India, and shipped to the US on a freighter made in Korea that is carrying a shipping container manufactured in Denmark. That label would be more accurate if it instead read “Final Processing Done in Turkey” — or, more accurate still, “Made on Earth.”

Americans Trade With

As a linguistic shorthand, we often describe countries as exporting, importing, and trading. 

“Germany exported $1.5 trillion of goods last year.” 

“Ireland is among the world’s leading suppliers of pharmaceutical products.” 

“America trades with China.” 

“The Netherlands ran a trade surplus.” 

We know what these sentences mean: Individuals — alone or in voluntary groups called firms — in one country engage in commerce with individuals in another. But the aggregate outcomes of all this commerce are then described in ways that imply each country itself engaged in these transactions, as if the results reflect a conscious collective choice made by its people.

Because all international commerce is carried out by individuals, and because each individual believes he or she is made better off by each transaction voluntarily conducted with foreigners, it’s difficult to see how the overall outcome could be negative. Mistakes aside — and there’s no reason to think Americans make more errors than non-Americans — every commercial exchange with a foreigner yields a gain for the American involved. The sum of these gains cannot plausibly be a negative number.

Yet it’s an easy, if careless, step from portraying trade as something done by large collective entities to concluding that these entities make choices contrary to the interests of their own people. “America,” for instance, is said to buy such large quantities of imports that most Americans supposedly suffer as a result. Somehow, “America” is acting against Americans. But once we recall that importing is done not by “America” but by individual Americans, the idea that we suffer net losses from importing becomes absurd.

It’s trite but true that language matters and can mislead. Nowhere in economic policy is this more evident than in trade.

The Federal Reserve lowered the federal funds target range by 25 basis points on Wednesday—its third consecutive rate cut—to 3.5 to 3.75 percent. Markets had anticipated the decision for weeks, reflecting growing expectations that the Fed would respond to rising downside risks in the labor market. Three officials dissented: Governor Stephen Miran again favored a larger 50-basis-point cut, while Chicago and Kansas City Fed Presidents Austan Goolsbee and Jeffrey Schmid preferred to hold rates steady. Schmid’s dissent was his second in as many meetings.

Powell used his press conference to place the decision within the broader tensions facing the Fed’s dual mandate. He emphasized that “[c]onditions in the labor market appear to be gradually cooling, and inflation remains somewhat elevated.” He noted that the government shutdown restricted access to some data, but that the available evidence suggests the “outlook for employment and inflation has not changed much” since the Fed’s October meeting.

Still, Powell said the available indicators point to moderate economic growth, supported by solid consumer spending and continued business fixed investment. He noted that the temporary government shutdown likely slowed activity somewhat, but that this effect “should be mostly offset by higher growth” in the coming months. The updated Summary of Economic Projections reinforces that outlook, with the median projection for 2025 GDP growth rising modestly from 1.6 in September to 1.7 percent. 

Looking ahead, the median GDP projection for 2026 rose more sharply, increasing to 2.3 percent from 1.8 percent in the September projections. Powell acknowledged the size of the revision when asked about it at the press conference, pointing to continued resilience in consumer spending and a pickup in business investment tied to data centers and artificial intelligence. He added that a similar upgrade in growth expectations has also appeared among private-sector forecasters, suggesting a broader reassessment of the medium-term outlook rather than a shift unique to the Fed.

Powell said the available evidence points to a softening labor market, noting that “layoffs and hiring remain low” and that perceptions of job availability and hiring difficulty continue to decline. As in recent meetings, he partly attributed the slowdown to “a decline in the growth of the labor force, due to lower immigration and labor force participation,” while noting that weakening labor demand is also playing a role. Still, the median unemployment projections for 2025 and 2026 were unchanged from September.

Powell acknowledged that inflation “remains somewhat elevated,” but said the government shutdown has limited the flow of new price data since the October meeting. At that point, the Fed had seen goods inflation pick up—likely reflecting tariffs—even as services inflation continued to ease. He added that “[n]ear-term measures of inflation expectations have declined from their peaks earlier this year” and that longer-term expectations still align with the Fed’s two percent goal. The Fed’s median inflation projection now stands at 2.9 percent for 2025 and 2.4 percent for 2026, both slightly lower than in September.

Powell said the Fed faces “a challenging situation,” with “risks to inflation…tilted to the upside and risks to employment to the downside.” He reiterated that the inflationary effects of tariffs should be temporary, describing them as “effectively a one-time shift in the price level,” and stressed that the Fed must ensure that this does not “become an ongoing inflation problem.” Because downside risks to employment have risen, he said, the balance of risks has shifted toward the employment side of the mandate—a shift he said justified lowering the policy rate.

Powell said the 75 basis points of easing over the past three meetings “should help stabilize the labor market while allowing inflation to resume its downward trend toward 2 percent once the effects of tariffs have passed through.” He added that the current stance of policy is “within a range of plausible estimates of neutral.” The newest projections put the policy rate at 3.4 percent at the end of 2026 and 3.1 percent at the end of 2027—unchanged from September. Even so, Powell stressed that the projections are not a plan, reiterating that policy “is not on a preset course.”

Beyond the stance of policy, Powell outlined several steps affecting the implementation framework. Alongside the rate cut, he announced that the Fed will “initiate purchases of shorter-term Treasury securities for the sole purpose of maintaining an ample supply of reserves over time.” He said the move responds to “continued tightening in money market interest rates relative to” the Fed’s administered rates. Such purchases, he explained, help keep the policy rate “within its target range” and accommodate the rising demand for liquidity that comes with economic growth. Powell stressed that the purchases are purely technical, though the return to balance-sheet expansion is likely to renew debate over its broader implications for monetary policy and government debt.

Powell explained that under the current framework, “the federal funds rate and other short-term interest rates are primarily controlled by the setting of our administered rates rather than day-to-day discretionary interventions in money markets.” Standing repurchase agreement operations are a key part of that framework, helping to keep the federal funds rate “within its target range” even when liquidity pressures rise. To ensure they can continue to operate effectively, the Fed eliminated the aggregate limit on their use. While not entirely new, Powell’s emphasis on administered rates—and the decision to remove limits on standing repo operations—highlighted the extent to which rate control now relies on policy-set prices rather than market clearing, raising broader questions about the future role of the federal funds rate itself.

Taken together, Powell’s remarks highlighted the inherent difficulty of balancing inflation and employment under the current mandate. The Fed continues to wrestle with competing risks on both sides of that mandate. Importantly, this tension is not imposed by external forces but created by the mandate itself, which compels policymakers to weigh higher prices against lower employment rather than focus on the underlying drivers of each. A nominal GDP target would avoid this conflict. By stabilizing aggregate demand, the Fed would allow prices and employment to adjust naturally, eliminating the need for continual fine-tuning and removing the artificial tradeoff between inflation and unemployment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From Stifled Innovation to Stifled Privacy

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

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

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

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

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

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

But, wait. There’s more…

Widespread Monitoring? Well, Not Completely Widespread

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

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

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

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