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Clark Packard

Since the late 1970s, when Chinese president Deng Xiaoping initiated some market‐​oriented liberalization, the country has been on an upward economic trajectory. As documented by my colleague Jim Dorn in a recent essay for Cato’s Defending Globalization project, these reforms yielded substantial dividends. It is estimated that nearly 800 million Chinese were lifted out of extreme poverty since 1980, coinciding with the onset of these reforms.

In recent years, particularly under the leadership of Xi Jinping, China has pivoted away from the market‐​oriented policies that catapulted it to prosperity and global influence.

Today, the prevailing consensus within Washington policy circles is that China is an economic juggernaut poised to surpass the United States as the world’s leading economy in the near future. Proponents contend that Beijing’s reembrace of heavy industrial policy, coupled with the abandonment of market liberalization, has energized the Chinese economy.

However, the actual reality departs from the proponents’ simplistic narrative, as I argue in my new essay for Cato’s Defending Globalization project.

Indeed, China confronts an array of short‐ and long‐​term economic challenges.

Short‐​Term Headwinds

Today China grapples with several immediate challenges that are almost certain to exert downward pressure on its economy in the coming years. Xi Jinping has rapidly moved the country in an illiberal direction. The once‐​dynamic and thriving tech sector has been stymied by Xi Jinping’s embrace of Maoist socialism. China has cracked down on educational platforms, and its general aversion to private sector enterprises continues to exacerbate youth unemployment, which is estimated to have exceeded 20 percent.

China’s real estate sector is overinflated, and property developers are failing to deliver promised residential units, leading to a widespread middle‐​class boycott of mortgage payments in 2022. Major Chinese property developer Evergrande defaulted on its debt in late 2021 and then filed for bankruptcy in August.

Earlier this week, the largest Chinese property developer, Country Garden, warned that “it doesn’t expect to be able to repay all of its U.S. dollar bonds and other offshore debts,” according to the Wall Street Journal. This is a worrying sign about Beijing’s ability to stabilize the country’s beleaguered housing market. Meanwhile, local governments, reliant on land sales to fund public services, are increasingly grappling with constrained budgets.

China’s handling of the COVID-19 pandemic has been fraught with difficulties, and the nation’s increasing dependence on forced labor and repression in the Xinjiang region has drawn international condemnation. Additionally, Beijing has reneged on its “One Country, Two Systems” commitment to Hong Kong, effectively annexing it in 2020 with the passage of the national security law. Today Beijing’s galloping illiberalism has rendered the country less attractive for foreign investment.

Long‐​Term Headwinds

While the short‐​term challenges may be surmountable with different policies, the long‐​term headwinds pose more formidable and enduring obstacles.

First, China is facing a rapidly aging population and a diminishing workforce, which will dampen economic output, stifle innovation, and strain government services. The United Nations recently projected that India will overtake China as the world’s most populous country in 2023. Notably, China’s aging population is an accelerating phenomenon, as highlighted by a Foreign Affairs article that observed, “In 1978, the average median age of a Chinese citizen was 21.5 years. By 2021, it had risen to 38.4, surpassing the United States.” China’s fertility rate has plummeted to 1.15 births per woman, well below the replacement rate of 2.1 births per woman.

Furthermore, China is witnessing an exodus of talent as young, highly educated individuals seek opportunities abroad. Take artificial intelligence (AI), where a significant proportion of top‐​tier AI researchers globally obtained their undergraduate degrees in China. However, the majority do not remain in China, with 56 percent choosing the United States as their preferred destination.

Reasons for this exodus, as explained by a report from the Paulson Institute at the University of Chicago, include the “relatively relaxed and innovative scientific research environment” in the United States compared to China, China’s “authoritarian political system and restricted freedom,” and various impediments such as “language barriers, pervasive internet censorship, and environmental quality.”

Additionally, China’s workforce productivity is not expanding at the same robust pace as it has in the past. The period following Deng’s reforms witnessed a rapid surge in productivity growth, largely attributable to catch‐​up growth due to China’s low starting point. Today, mounting evidence suggests that productivity growth is slowing, or perhaps even reversing, representing a more pronounced decline compared to global productivity trends.

Demographic shifts and brain drain certainly play a role in this phenomenon, but China’s growing reliance on top‐​down central planning and industrial policy also contribute. According to a 2022 paper from the International Monetary Fund, state‐​owned enterprises (SOEs) are estimated to be 20 percent less productive than their private sector counterparts in the same industry. This contrasts with the period of reform between 1998 and 2005, which fostered significant private sector entrepreneurship, as detailed in a recent blog post.

Collectively, the economic reforms that China undertook from the late 1970s to 2012 propelled the nation to increasing wealth and improved living standards for the average citizen. In recent years, however, the country has veered toward illiberalism, characterized by heavy‐​handed state intervention and repressive human rights practices. These policies are beginning to manifest in economic data; for instance, foreign direct investment (FDI) in China has dwindled from around 4 percent of China’s GDP in 2011 to approximately 1 percent today. As economist Noah Smith has noted, FDI from G7 countries declined from $35.4 billion in 2014 to $16.3 billion in 2020.

For policymakers in Beijing seeking to rejuvenate the economy, a return to the market‐​oriented reforms of the past is the key to future growth.

Adam N. Michel

The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit—equivalent to a cash payment of up to $26,000 per employee—for businesses and nonprofits with significant pandemic‐​related revenue declines or shuttered by government orders. The payments were intended to reward companies for keeping employees during the COVID-19 pandemic.

Since passage, the fiscal cost of the credit has ballooned to more than $230 billion, three times the original estimate. Over three‐​quarters of that cost is likely a windfall to business owners and tax preparers.

The ERTC was created in the CARES Act and subsequently expanded as part of the 2021 appropriations, expanded again in the American Rescue Plan Act of 2021, and partially clawed back in the Infrastructure Investment and Jobs Act.

Since then, there has been in‐​depth reporting, a congressional hearing, and successive IRS guidance highlighting the many problems with the program. In September, the IRS announced it would stop processing new ERTC claims and increase audits following more than a year of repeated warnings to taxpayers against claiming inflated credits. The ERTC was the first entry in the IRS’s annual Dirty Dozen list of tax scams.

In a recent story following the IRS’s crackdown, the Wall Street Journal detailed the rise and fall of third‐​party ERTC processing firms that have engaged in extensive marketing campaigns, aggressive (possibly fraudulent) credit claiming, and exploitative contingency arrangements in which some third‐​party processors receive up to 25 percent of the credit.

It’s easy to find stories of businesses needing ERTC funds to stay open. These are the stories Congress reacted to when struggling businesses in their districts were waiting on delayed tax refunds.

However, the majority of the ERTC spending looks to have been a windfall to businesses that did not need the funds to retain employees through the pandemic. What doesn’t make the headlines are the thousands of businesses for which the payments are “icing on the cake,” as one accountant put it, “cash they can claim because they qualify,” as opposed to because they needed the cash to retain employees.

The Joint Committee on Taxation initially estimated that the ERTC would cost about $77 billion after the successive legislative changes. Using early filing statistics through the 2021 tax season, a U.S. Treasury economist estimated the credit cost $99 billion (a highly uncertain figure given processing delays). Of that figure, about half of the total credit (about $50 billion) was estimated to come from amended returns—whereby taxpayers claim the credit retroactively after they filed their original return.

As of September 2023, the IRS had paid out more than $230 billion in credits, the steep increase largely due to a flood of amended returns. The Congressional Budget Office pointed to the unexpected surge in credits as one factor for this year’s lower‐​than‐​expected tax revenues.

The large number of third‐​party ERTC processors submitting amended returns is economically damning. For the subsidy to have the intended effect of keeping employees on the payroll who would have otherwise been laid off, the taxpayer must know about the credit and change their behavior during the pandemic closures. There is no employment incentive for taxpayers who submit claims on amended returns upon advice from third‐​party consultants years after the pandemic ended.

If the credit did not change behavior, it is simply a windfall.

If we generously assume that all of the JCT’s initially estimated $77 billion went to keep employees on the payroll during the pandemic, we can conclude that the remaining $153 billion of ERTC spending was likely a windfall to business owners and third‐​party processors who saw an opportunity to exploit the program’s complexity and lenient rules.

Extrapolating from the other estimate’s $50 billion in claims not submitted on amended returns through the end of the 2021 filling season (and assuming subsequent payments were made to amended returns), as much as $181 billion or 78 percent of the $230 billion in ERTC spending to date has been a windfall to businesses. By one estimate, nearly half of any windfall to business owners is captured by individuals with incomes above $250,000.

Some may argue that the ERTC funds were, in some cases, used for productive ends, such as to pay out employee bonuses or expand businesses to meet post‐​pandemic demand. While this is invariably true, it is an argument for lower taxes for all businesses and not just for those who could exploit the arcana of a poorly designed and haphazardly administered tax credit.

Since it created the ERTC, Congress has added dozens of new tax credit schemes worth trillions of dollars to incentivize everything from computer chip manufacturing to hydrogen fuels. We cannot predict how each new credit will unravel, but Congress should expect similar types of grift, fraud, ballooning costs, and other unintended consequences.

The core lesson policymakers should learn from the mistakes of the ERTC is that the tax code and the IRS are not well‐​equipped to distribute targeted subsidies. As a matter of economic planning, industrial policy by tax credit is just as economically flawed as industrial policy by any other means. Tax credits for every social and economic ill is a recipe for fiscal ruin and economic malaise.

Romina Boccia and Dominik Lett

On April 10, 2023, Congress terminated the three‐​year‐​long COVID-19 national emergency—one of the most expensive emergency declarations ever at more than $7 trillion in spending, as reported by the Committee for a Responsible Federal Budget and the Heritage Foundation. Whenever such emergency declarations occur, the president is required by law to submit spending reports to Congress. With respect to the COVID-19 spending, President Biden apparently has not done so.

Based on press releases, letters to the administration, and congressional floor speeches, the administration has reportedly failed to follow the law. Failure to report emergency expenditures undermines transparency and accountability. This needs to change.

The National Emergencies Act (NEA), enacted in 1976, exists to limit the executive’s emergency powers. It requires the president to submit a spending summary for each ongoing national emergency to Congress every six months. The president must also send a final total ninety days after an emergency declaration ends. NEA expenditure reports are supposed to encompass any spending that is “directly attributable” to a national emergency declaration.

A major impediment to holding the executive accountable for ignoring emergency spending reporting requirements is that these reports are not easy to trace. NEA spending reports are not typically published online and the few that are lack detail as shown by this compilation of Treasury Department emergency expenditure reports. Greater transparency is essential in policing executive emergency spending abuses. Congress should revise NEA expenditure reporting rules to ensure they are as comprehensive as practicable and easily accessible to both legislators and the public.

Follow the Money

Emergency spending reporting requirements are intended to shed light on how taxpayer dollars are used during emergencies. Yet, the current system is convoluted. No centralized repository exists for NEA expenditure reports, and the executive can choose to whom in Congress to submit them, often leading to inaccessible records. Full‐​text versions of these reports are usually confined to internal congressional committee records.

For these reasons, the public usually only hears about major executive emergency abuses, such as President Trump’s border wall funding and President Biden’s student loan cancellations. The public is left in the dark about more insidious executive emergency spending abuse. This obscures the full scope of emergency spending.

On the heels of one of the most wasteful emergency spending splurges in U.S. history, legislators and the public should demand greater accountability from the executive by requiring more detailed and transparent emergency spending reporting.

Congress could amend the Congressionally Mandated Reports Act to make NEA reports available online. This would make the reports easy to locate for researchers and legislators, aiding Congress and the public in holding the executive accountable. Moreover, Congress could further define the format and content of NEA expenditure reports to add additional accounting details (something already done for some types of disaster assistance).

Senator Roger Marshall (R‑KS) and Representative Paul Gosar (R‑AZ) recently introduced the National Emergency Expenditure Reporting Transparency Act in the Senate and House, respectively. It would amend the Federal Funding Accountability and Transparency Act to include future NEA expenditure reports. Doing so would allow concerned legislators and members of the public to easily search for NEA‐​related funds.

The Bigger Issue

Emergency spending abuse goes hand in hand with expansive emergency powers. For decades, Congress has delegated away an array of emergency powers to the president. The progressive Brennan Center identifies more than 135 statutory powers that may become available when a president declares a national emergency. Thanks in part due to never‐​ending NEA declarations, Americans now live in a constant state of emergency.

As Cato’s Gene Healy explains, “emergency rule is a bipartisan temptation.” In 2018, President Trump invoked emergency powers to divert nearly $4 billion in military construction funds for a border wall against Congress’ wishes. As Trump himself noted, “I didn’t need to do this, but I’d rather do it much faster.”

President Biden similarly used emergency powers late last year in an attempt to cancel $430 billion in student loan debt. The Supreme Court shot down Biden’s scheme but didn’t stop Trump’s border funding.

Congress should rein in emergency spending powers instead of relying on the Supreme Court to police an overeager executive. The ARTICLE ONE Act would be a great start. The bill overhauls the NEA framework by having presidential emergency declarations automatically expire unless Congress affirmatively extends them.

As it stands, the emergency “state of exception” has become the norm. Congress should amend the NEA, the Congressionally Mandated Reports Act, and/​or the Federal Funding Accountability and Transparency Act to require easily accessible and detailed accounts of emergency expenditures. One key step toward limiting abuse of emergency spending powers is for legislators and the public to better understand the full size and scope of emergency spending.

Congress should hold the executive accountable. They can start by requiring stricter reporting about executive emergency expenditures.

Vanessa Brown Calder

This week, Claudia Goldin, the Henry Lee Professor of Economics at Harvard University, was announced as the 2023 Nobel Prize winner. Goldin’s work spans a variety of topics, including women’s labor force participation and economic history, education, immigration, and technological change. But among the myriad topics she is known for, one notable issue is the gender pay gap.

Goldin has applied an economist’s empirical eye and a balanced approach to her research on the pay gap, alongside an unusual humility regarding policy recommendations. In the process, she has brought various essential insights about the causes and implications of the gap to light.

Goldin’s work on the gender pay gap began decades ago. In her landmark book Understanding the Gender Gap: An Economic History of American Women, Goldin examined men’s and women’s labor market outcomes and argued that the historical persistence of wage and job level disparity could not be attributed solely to sex discrimination or underlying structural factors in the labor market.

In line with this, her later work finds measurable differences in experience and labor market behavior that result in pay gaps between men and women. In Dynamics of the Gender Gap for Young Professionals in the Financial and Corporate Sectors, Goldin and coauthors compare elite masters of business administration graduates and find that male and female MBAs earn almost identical following graduation. However, motherhood precipitates career interruptions, reductions in hours, and increasing preferences for flexibility that help explain the widening gender gap for female MBAs compared to male MBAs.

This conclusion comports with subsequent research confirming that motherhood and its attendant labor market changes are an important explanation for the pay gap more generally.

In A Grand Gender Convergence: Its Last Chapter, Goldin summarizes her extensive work on the pay gap and highlights certain noteworthy findings: the gender gap tends to widen as individuals age, it varies considerably by occupation, and non‐​linear returns to hours worked in certain professions drive the gap. She suggests that government intervention does not provide an easy answer to the pay gap, but instead that private firms should reduce the cost of flexibility for workers, as firms in sectors like healthcare, banking, and real estate have already done.

These insights are important. For instance, if inherent discrimination or bias against women causes the pay gap, we would expect women to be paid comparatively less throughout their working lives. However, Goldin finds that the gap grows with age, which suggests that sexism is not a significant driver. Moreover, Goldin’s finding that many jobs pay a premium for longer and more continuous hours, with greater round‐​the‐​clock availability, helps to explain why the gap grows following motherhood: mothers find it more challenging to be available in those roles or choose different opportunities.

In her most recent book, Career and Family: Women’s Century‐​Long Journey toward Equity, Goldin describes the trade‐​offs men and women make as they confront the reality of non‐​linear returns to hours worked. The subsequent decision to specialize in career or family to maximize family income means sacrificing time with family or sacrificing career advancement opportunities at a real cost to both parties. She suggests that the adoption of remote and flexible work policies during the pandemic provides some reason for optimism.

Despite the overheated political rhetoric on the pay gap, Goldin remains interested in drawing careful insights from the data. Indeed, subsequent economic research has drawn similar conclusions.

A forthcoming chapter on the gender pay gap in a new Cato Institute book, The War on Prices, also cites Goldin’s work. It concludes that the gender pay gap is not primarily the result of workplace discrimination but is driven by the way men and women combine professional and personal obligations, among other factors.

Therefore, the pay gap is more complex—and not as easy to modify or as obviously problematic—as a superficial reading indicates. In this area and others, Goldin’s insights are to thank for bringing greater clarity to a salient topic.

James A. Dorn

China’s strong economic growth following its shift from state‐​led development (central planning) to marketization in 1978, and its drive to join the World Trade Organization (WTO), are testaments to the idea that widening the range of choices open to people—via internal and external trade—is a winning strategy. This blog post draws on my essay, “China’s Post‐​1978 Economic Development and Entry into the Global Trading System,” which is part of Cato’s Defending Globalization series.

From Plan to Market

Under Mao Zedong, private property was outlawed, private entrepreneurs and landlords were treated as criminals, and Soviet‐​style central planning dominated economic life. Industrial policy and central planning under Mao proved to be a massive failure; they did not bring about sustainable economic growth or widespread prosperity.

Deng Xiaoping recognized the failure of state‐​led development. He took a pragmatic approach to reform. If open markets could help improve life for the Chinese people, then it made sense to try that option—even in a socialist state. His mindset was that, “It doesn’t matter if a cat is black or white, as long as it catches mice.” The Chinese Communist Party’s (CCP’s) primary focus became economic development rather than class struggle.

The impetus for marketization came from those who were harmed the most under Mao’s disastrous policies—namely, people in rural households who had been forced into communes and suffered from the Great Famine. Some farmers began to contract with local authorities to gain rights to lease land from the collective and sell produce in private markets once official quotas were met. As the informal contracting system gained popularity, it was eventually sanctioned by officials. In 1982, Deng recognized the new institutional arrangement and labeled it, “the household production responsibility system.” See Kate Xiao Zhou, How the Farmers Changed China: Power of the People (1996: 3–4).

The essence of the household responsibility system, as Zhou points out in her book, is that it arose spontaneously as farmers sought to gain autonomy in their everyday lives and improve their standard of living. When farmers became richer, they began to create township and village enterprises (TVEs). While some of the TVEs were associated with collectives, the most dynamic ones were de facto privately owned. In 1978, at the beginning of the reform movement, there were no legally registered private TVEs, but by 1985 there were 10 million (Huang 2012: 154).

As individuals “jumped into the sea of private enterprise,” the nonstate sector grew, and market pricing spread. At the beginning of 1978, prior to the development of a market economy, most prices were still either guided or fixed by the state. However, by 1999, 95 percent of retail commodity prices, 83 percent of agricultural commodity prices, and 86 percent of producer goods prices were set by the market, not the plan (Lardy 2002: 24–25).

In October 1987, the CCP officially recognized the role of private enterprises in spurring development—referring to them as a “supplement” to the “socialist economy.” The following year, that recognition was reflected by amending the Constitution of the People’s Republic of China (see Zhang 2015: 17).

Top‐​down privatization was not the path to marketization in China. Rather, as Barry Naughton points out in Growing Out of the Plan: Chinese Economic Reform, 1978–1993 (1995: 8–9), China grew out of the plan by allowing development of the nonstate sector. In 1984, top officials agreed to keep planned output targets fixed along with resources allocated to the planned sector of the economy. As productivity in the market‐​oriented sector grew, the contribution of the plan to national output declined.

It is striking that in 1978, state‐​owned enterprises (SOEs) accounted for nearly 80 percent of gross industrial output, but by 2016, their share had declined to 20 percent (Lardy 2018: 333).

After mass protests erupted in Tiananmen Square during the spring of 1989, the reform movement stalled. Economic growth slowed until 1992, when Deng took his famous Southern Tour of the special economic zones (SEZs), which he helped establish in the early 1980s. Deng’s main message on his tour was that, “It doesn’t matter if policies are labeled socialist or capitalist, so long as they foster development” (see Naughton 2007: 99).

Opening to the Outside World

Prior to joining the WTO in 2001, China unilaterally liberalized its foreign‐​trade sector (see Drysdale and Hardwick 2018). Domestic prices became more market‐​oriented as firms were subject to foreign competition and the international price system. Resources were more efficiently allocated, and more open markets meant the Chinese people could benefit from both greater consumption opportunities and the exchange of ideas.

Nonstate enterprises were the driving force in foreign trade. As trading rights were expanded, the number of domestic firms engaged in foreign trade increased from 12 in 1978 to more than 5,000 a decade later. By 2001, the number of domestic firms engaged in foreign trade reached 35,000 (Lardy 2002: 41). After accession to the WTO, the general tariff level fell to 9.8 percent in 2007, compared to 16.4 percent in 2000 (Wang, Fan, and Zhu 2007: 35). Marketization reached new levels and the foreign trade share of GDP accelerated. Today, China is the world’s largest trading nation.

Although much progress has been made in integrating China into the global economy, much remains to be done (see Packard 2023). The lack of an independent judiciary; overreliance on SOEs, which are about 20 percent less productive than private‐​sector firms (IMF Staff Report 2021: 12); financial repression; and abusive practices, such as cyberhacking into commercial networks and repression of free speech, threaten future progress.

Conclusion

China became an economic powerhouse by opening its markets, recognizing the nonstate sector, and allowing individuals to lift themselves out of poverty. Attempts at industrial policy, under the State‐​Owned Assets Supervision and Administration Commission, failed (Lardy 2018: 335–36). The lesson for China is to continue on the path of marketization and liberalization, not to revert to destructive state control and repression.

China can learn from its own history as well as from the West that economic and social harmony cannot be imposed from above. The challenge is to allow a free market for ideas, as well as for trade in goods and services, by institutional reform that protects both economic and personal freedom.

Anastasia P. Boden

It’s the most wonderful time of the year! Last week, on the first Monday in October, the Supreme Court reconvened for a brand new term. It’s slated to be another big one—with cases involving guns, regulation of social media platforms, and several doctrines that have enabled our behemoth administrative state. Here’s a quick recap of the Court’s first week back and the first three oral arguments of the year.

The Court first heard oral arguments in Pulsifer v. United States, which involved a question only the government could love: whether “and” means “or.” In 2018, Congress passed the First Step Act to reduce judges’ reliance on mandatory minimum sentences, which are known to result in arbitrary and unfair punishment. The Act allows judges to depart from minimums when the defendant does not have (A) more than four criminal history points, (B) a certain kind of prior offense, “and” (C) a second kind of offense.

Pulsifer pleaded guilty to distributing at least 50 grams of meth and is therefore subject to a mandatory minimum of fifteen years in prison unless he qualifies for a departure from the minimum. He had more than four criminal history points, had a prior offense under (B), but had not been convicted of an offense under (C). His attorneys argued that he qualified for departure because he did not have (A), (B), and (C). The government, however, argued that “and” means “or,” and a defendant does not qualify for departure from the minimums if he or she has (A), or (B), or (C).

It’s true, of course, that words must be read in context and there really are times when “and” is meant to indicate “or.” As Justice Kagan noted during the argument, if your doctor tells you that, to get a blood test, you should not “eat food, drink any liquids, and smoke,” you would know that your doctor means you should not eat food, drink liquids, or smoke. In that case, what your doctor is trying to communicate by selecting the word “and” is that you should not eat food, you should not drink any liquids, and you should not smoke.

Here, Justice Kagan observed, there’s some reason to think Congress meant “or” when it said “and.” For example, it would be bizarre for Congress to think it’s more disqualifying to have A, B, & C than to have several B offenses, which are more serious. It would also mean that defendants would prefer to be convicted of a higher point crime under (B) than be convicted of a lower point crime under (C), if doing so allowed them to qualify for departure from the minimums. But as Pulsifer’s attorney argued, the justices aren’t permitted to overturn laws merely because they think them odd.

The government argued that judges must assume Congress is an “intelligent drafter” of laws, and an intelligent Congress would have meant “or.” But, of course, Congress very often writes arbitrary, if not irrational, statutes all the time. And as Justice Gorsuch noted, Pulsifer’s interpretation may be odd, but it’s not absurd. Justice Gorsuch also noted that the government didn’t adopt this reading of the statute until late in litigation, casting doubt on its authenticity.

Justice Kagan and Justice Jackson both appeared to have little sympathy for the government’s invitation to deviate from the ordinary meaning of the text. Justice Kagan said that where there’s two permissible interpretations and “where liberty is on the line,” she’d interpret the statute in a way that favors the accused. Similarly, Justice Jackson noted that this was a criminal statute “with huge implications,” and so where there are two textually grammatically possible readings, that should weigh against the government.

While Justices Kagan and Jackson found the case’s criminal context important, there’s good reason to extend the same principles to other enforcement actions. Administrative proceedings, for example, can have tremendous consequences for people’s livelihoods. The Court is slated to hear at least one case involving deference to administrative agencies’ interpretations of law this term. Hopefully, judicial independence and a presumption of liberty will reappear in that context as well.

The second case to be heard, Consumer Financial Protection Bureau (CFPB) v. Consumer Financial Services Association, is one of several cases the Court has taken up this term that has the potential to roll back the sprawling administrative state. But if oral argument is any guide, this challenge won’t be successful.

In 2010, Congress created the CFPB through the Dodd‐​Frank Act and authorized it to enforce a new prohibition on “any unfair, deceptive, or abusive act or practice.” To make CFPB “independent,” Congress allowed it to choose its own annual funding in perpetuity subject to a $750 million cap, with unspent funds rolled over each year.

Unlike most other agencies, which are subject to an annual appropriations process, the CFPB director simply requests whatever amount he or she believes is “reasonably necessary.” And even then, the director doesn’t ask Congress, but instead requests money from the Federal Reserve (which is itself outside the normal appropriations process).

Congress also made CFPB’s director unremovable by the president except for cause. But the Supreme Court invalidated that limitation a few terms ago on the basis that it violated the president’s power to remove officers. In other words, the Court recognized that the Bureau had gotten a little too independent.

The plaintiffs in this case similarly argue that it’s funding mechanism has made it too independent. They sued to challenge CFPB’s payday lending rule, which bans lenders from making preauthorized attempts to collect loan payments after two consecutive denials based on insufficient funds. They say allowing CFPB to choose its funding subject to only an illusory cap, in perpetuity, violates the Appropriations Clause. That provision requires all appropriations to come from Congress and plays an important role in keeping unelected bureaucrats accountable to elected officials.

Arguing for the CFPB, Solicitor General Elizabeth Prelogar made the case that CFPB’s structure is grounded in constitutional text and practice. When the Founders wanted to limit Congress’s appropriations authority, she said, they did so explicitly—as they did in the case of the Army Appropriations Clause (which limits appropriations to a two‐​year duration). And since the founding, Congress has funded agencies through standing appropriations that give agencies significant discretion over how much money they use. The CFPB’s funding structure, she said, is not materially different.

This broad interpretation of the Appropriations Clause caused Justice Thomas to ask whether there are any limits on how Congress can appropriate funds. The Solicitor General answered that Congress must provide funding for specific purposes from specific sources and it cannot give away its authority entirely, by say, giving a quadrillion dollars to the president to use as he likes.

Prelogar’s heavy reliance on historical practice might have been a consequence of the Court’s recent ruling in New York Pistol Association v. Bruen. In that case, the Court ruled that restrictions on the Second Amendment will only be upheld if an analogous law existed at the time the Amendment was passed. But as Justice Kagan noted, there’s no exact historical analogue to the way Congress has funded CFPB. She therefore asked whether it’s more important that the Court find a historical analogue or that it extrapolates principles from the examples it can find. That’s a question the Court will continue to grapple with as it builds on Bruen.

I’ve argued before that the Court has become too reliant on historical practice. After all, the Constitution enshrines principles, not practices. Practices can inform the meaning of certain words or phrases in the Constitution, but they should not be considered determinative of whether a modern practice is constitutional.

Arguing for the challengers, former Solicitor General Noel Francisco made the case that in funding CFPB, Congress has effectively given away its appropriations power entirely, since the cap is so high that CFPB essentially gets to pick its own budget. Justice Kagan responded that perhaps the fact that CFPB hasn’t met its spending cap suggests that it should be doing more.

The most interesting part of the argument was an exchange between Francisco and Justice Jackson, who asked him where in the Constitution’s text he derived his suggested limits on the appropriations power. Justice Jackson has been said to employ “Progressive Originalism” when interpreting the Constitution, and it will be interesting to see how she develops this methodology as a challenge to the Originalism employed by some of the other justices.

All of the justices seemed to agree there must be some limits to Congress’s ability to delegate away its appropriations power, but most appeared to believe CFPB hadn’t crossed them. So while the case is yet another example of the continuous erosion of the separation of powers and Congress’s propensity to give its power away to unelected, unaccountable agency bureaucrats, it seems unlikely the Court will deem CFPB’s funding mechanism unconstitutional.

The last case the Court heard in its first week back involves the perennial question of “standing,” or what kind of injury a plaintiff must sustain before bringing a lawsuit. Standing disputes take up a surprising amount of lawyers’ time, especially when it comes to constitutional lawsuits, in which government attorneys try to avoid defending laws on the merits and instead get cases dismissed based on procedural technicalities.

In Acheson Hotels v. Laufer, the plaintiff was a woman who surfed hotel websites to see whether they provided disability access information, even though she had no intention of visiting the hotels. “Disability testing” has become something of a cottage industry, with plaintiffs suing hotels for violations of the Americans with Disabilities Act and then settling the lawsuit despite having no interest in visiting the location, and thus no possibility of experiencing disability discrimination. The lower courts ruled that Laufer had standing to sue the hotel, but after the Supreme Court agreed to take up the case, Laufer dismissed her claims against the hotel and argued the Court should deem the case moot. In fact, by the time of oral argument, the case was (in the words of Justice Kagan) “dead, dead, dead.” The hotel had changed hands, its website was fully compliant, and the plaintiff had dismissed her case.

That meant that much of the oral argument centered around whether the Court should still decide the standing question. While several justices suggested the lawsuit was moot, Chief Justice Roberts observed that courts generally must determine whether the plaintiff has standing to bring a claim before determining whether that claim has become moot, and thus there’s nothing odd about taking up the question now.

Justices Thomas and Jackson questioned whether it might be “easier” to just dismiss the case as moot, vacate the court decision below, and wait for a live case to come back to the court at a later time, but Justice Barrett noted that such a path would require more resources in the long run, since it would require entirely new (and duplicative) briefing at a later date. The Chief Justice also noted that a case might never come back to the Court, since a plaintiff could follow the same course of action as Laufer and dismiss his or her claim any time a defendant successfully appealed to the Supreme Court.

After discussing mootness, the Court moved on to whether Laufer had sustained an injury sufficient to bring a lawsuit, asking both attorneys several hypothetical questions related to whether a plaintiff would have standing to sue if they were mere bystanders of racial discrimination.

Justice Jackson, for example, compared Laufer to someone who sees a sign on the door of a restaurant across the street indicating it discriminates, but who never intends to frequent that restaurant. Laufer’s attorney responded that going to the website was not the equivalent of looking at the sign, but instead the equivalent of going to the restaurant and actually being subject to discrimination. In her view, going to the website inflicted a “dignitary harm,” because it deprived Laufer of information “for a reason that conveys that [she has] inferior status in society.” But as Justice Kavanaugh pointed out, all observers of the website are treated the same. The discriminatory treatment doesn’t happen until a person actually gets to the hotel.

It would, at least on the front end, be easier for the Court to kick the can down the road by calling this case moot. The safe bet is that’s exactly what it will do. But at some point the Court will have to clean up standing doctrine, which has become unmoored from the text of the Constitution and is inconsistently applied. At times, courts have applied standing principles too loosely, allowing uninjured plaintiffs to secure huge settlements from innocent businesses. At other times, courts have applied standing too strictly, succumbing to government attorneys’ gamesmanship and kicking civil rights plaintiffs out of courts. Standing doctrine needs a serious clean‐​up, but this likely won’t be the case to do it.

The coming weeks will see increasingly consequential cases. If last week was this much fun with cases involving semantics and standing, we anxiously await the rest of the term.

Jeffrey A. Singer

The New York Times reports today about a flood of illicit e‑cigarettes arriving from China “in Barbiecore colors and fruit, ice cream and slushy flavors,” accounting for a “major share of the estimated $5.5 billion e‑cigarette market in the United States.” This “never‐​ending influx of vapes” comes despite the Food and Drug Administration authorizing only a handful of e‑cigarettes for sale to persons over age 21.

The Times reports that many of these vapes contain 5,000 or more puffs per device and have nicotine levels that sometimes exceed those in tobacco cigarettes. Many are being sold in convenience stores even though the FDA has sent them warning letters threatening store owners with fines as high as $19,000 per violation.

The goal of policymakers and the FDA was to curtail the use of flavored vapes. Many states and some cities have enacted bans on in‐​store and/​or online sales of flavored vapes.

According to the CDC, these prohibitionist efforts have backfired, resulting in a surge in flavored vape sales, from 11 million per month in early 2020 to 18 million per month in June 2023.

The Times reports that seven years since Congress granted the FDA regulatory authority over e‑cigarettes in 2016, 40 percent of e‑cigarette users are 25 or younger. And while the FDA has authorized only a couple of dozen e‑cigarette products, vapers find access to more than 2,000 of them. The Times article states:

There are few places where the problem feels more pressing than in high school bathrooms, where students crowd the stalls between classes to get a nicotine fix.

Nevertheless, teen vaping rates have fallen from their peak of 28 percent in 2019 to roughly 14 percent in 2022.

The failure of e‑cigarette prohibition was predictable—as is the advent of more potent and puff‐​packed forms of nicotine vapes now sold on the black market. Though prohibitionists never seem to learn, the “iron law of prohibition” is inescapable. A variant of what economists call the “Alchian‐​Allen Effect,” put simply, the iron law states, “the harder the law enforcement, the harder the drug.”

Prohibition incentivizes purveyors of prohibited substances to find more potent forms of the banned substance so it can be smuggled in smaller sizes and subdivided into more units to sell. During alcohol prohibition, for instance, bootleggers smuggled whiskey and other hard liquors, not beer or wine.

The iron law of prohibition is why cannabis THC concentration has grown over the years. It is what brought crack cocaine into the cocaine market. And it made fentanyl replace heroin as the primary cause of overdose deaths in the United States.

In the 21st century, law enforcement’s crackdown on diverted prescription opioids (the drug of choice for nonmedical users at the time) led to their replacement with heroin. By 2012, heroin dealers began adding the synthetic opioid fentanyl to heroin so they could smuggle it in smaller sizes and subdivide it into more units to sell. By 2016, fentanyl‐​related deaths eclipsed deaths from heroin and diverted prescription pain pills. By 2017, fentanyl was found in more than 50 percent of opioid‐​related overdose deaths. By 2022, it was involved in roughly 90 percent of deaths.

Policymakers are now discovering that tobacco and e‑cigarette bans are not exempt from the iron law. Whether these prohibitionists reverse course before causing more harm remains to be seen.

Chris Edwards

The federal government’s debt is massive and growing rapidly. How massive? Federal debt held by the public of $28.5 trillion is eight times larger than the combined debt of all state and local governments of $3.3 trillion.

Not only is state and local debt much smaller, but the states have more justification for accumulating debt than the federal government. That is because a larger share of state‐​local spending is for capital investment, which is partly financed by debt. State‐​local debt is matched by large holdings of return‐​producing assets such as highways.

By contrast, federal debt generally funds consumption—such as entitlement programs—not capital investment. And while federal borrowing during crises and recessions is reasonable, the debt should be paid back when the economy is growing.

The chart below compares federal debt as a percent of U.S. gross domestic product to the state‐​local debt of each state as a percent of state GDP. Federal debt of 98 percent in 2023 compares to the simple average of state‐​local debt of 13 percent. (The state ratios are from Census data for 2021, but total state‐​local debt has changed little since then).

Also consider that most state‐​local debt consists of “revenue bonds,” which will be paid back from revenues for facilities such as utilities, colleges, and hospitals. “General obligation” bonds backed by taxes account for a minority of state‐​local debt. Thus, not only is state‐​local debt much smaller than federal debt, but less than half of it will be paid back by taxes.

For these reasons, federal debt is a far larger threat to taxpayers, young people, and the economy than state‐​local debt. Whether for reasons of political culture or lack of constitutional or statutory rules, federal policymakers have been much more fiscally irresponsible than their state‐​local peers.

That said, there is substantial variation between the states. States such as Wyoming, Idaho, and North Carolina show that modern governments can be run using very little debt. Policymakers in Kentucky, Hawaii, and New York should learn fiscal lessons from these low‐​debt states—and so should the federal government.

Note: I have argued that state and local governments should keep debt to an absolute minimum. They should use taxes or other current charges to fund infrastructure, or they should privatize it. Krit Chanwong contributed to this post.

Scott Lincicome

As I mentioned last month, Cato’s Defending Globalization project will publish new content every other week throughout the fall and into 2024. Today we’ve published three new essays:

Globalization: A race to the bottom – or to the top?, by Johan Norberg, debunks the myth that expanded trade and investment have caused a “race to the bottom” in which countries progressively lower their labor and environmental standards to attract global capital.
China’s Post‐​1978 Economic Development and Entry into the Global Trading System, by Jim Dorn, traces how China’s market‐​oriented reforms fueled the nation’s breathtaking economic growth since the 1980s.
China’s Economic Headwinds, by Clark Packard, explains how China began moving away from markets in the 2000s and today faces serious economic challenges (many of its own making).

These essays join the eleven others that we’ve already published on the main Defending Globalization project page. Be sure to check it all out, and stay tuned for more to come. 

Andrew C. Forrester

Around the time that Cato published my estimates that the Middle Eastern or North African (MENA) population is around 3.8 million in 2021, the US Census Bureau found similar results from the 2020 enumeration that counted 3.5 million MENA people. Census’ numbers come from detailed responses to the 2020 Census race question, which allowed respondents to write‐​in additional detail about their background (such as “Lebanese” or “Egyptian”) along with their race.

With the detailed race data from the 2020 Census enumeration available, we therefore have a direct source of data on the MENA population to evaluate the quality of Cato’s estimates of the MENA population, which were based on survey data from the American Community Survey (ACS). The recent Cato estimates hold up extremely well next to the Census estimates, but I want to explain some of the differences.

Using data from the Demographic and Housing Characteristics‑A (DHC‑A) data file, I compare the 2020 enumeration results with my data tabulated using the 2021 American Community Survey (ACS) from IPUMS. The DHC‑A file provides population data broken down by detailed age, sex, and race. The detailed breakdowns include MENA both “alone” and “alone or in any combination.” Since these two data points cover slightly different populations, there are a few caveats to note before I compare the Cato survey estimates with the enumeration.

The key distinction between the two measures is that they serve as upper and lower bounds for the MENA population. “MENA alone” measures the fewest number of people who identified as MENA in the enumeration and covers those who responded “White only” and wrote in a MENA background. Since respondents could select more than one race, a more comprehensive count is “MENA alone or in combination,” which adds individuals who reported a MENA background in addition to another race.

For my analyses, I used both birthplace and country of birth to identify the MENA population in the ACS. This means that my measure of the MENA population covers anyone in the ACS who reported a MENA background. Accordingly, this concept aligns more closely with the “MENA alone or in any combination” definition. I therefore opt to compare my survey‐​based estimates with “MENA alone or in any combination” to match each definition as closely as possible. To compare the 2020 enumeration with the ACS estimates, I overlay the age and sex distributions from each dataset in the two following plots.

Figure 1 overlays the age distribution between my ACS‐​based data and the 2020 enumeration results, capturing the share each age group makes up of the total MENA population. While the age distributions are visually similar, the survey‐​based estimates from the 2021 ACS showed a slightly older MENA population when identified as MENA alone or in any combination.

Figure 2 breaks down the age distribution down further by sex. Notably, the ACS‐​based estimates show that both men and women in the MENA population tend to be older than those counted in the 2020 enumeration. This is especially true for young men in their 30’s, who represent a larger share of the MENA population compared to the 2020 enumeration.

One remaining question is whether the two age distributions are statistically different. Running a rudimentary Kolmogorov‐​Smirnov test, I find that there is no statistically significant difference between the MENA age distribution from the ACS compared to the 2020 enumeration (p = 0.78). Despite the 2020 showing a slightly younger MENA population, the difference isn’t significant when spread across age and sex.

Despite the slight differences in the age distribution, it’s comforting to see that the Cato survey‐​based estimates are very close to the 2020 enumeration results. Since retiring the “long‐​form” census, the ACS is the most comprehensive source of demographic and social information available. It’s therefore reassuring that the methods are at least sound regardless of whether the government should create such a new racial category. The high quality of Cato’s survey‐​based estimates also likely confirms my general finding that MENA Americans are highly educated and have high incomes.

For those interested in more information and data, be sure to check out the recent Cato briefing paper, other Cato analyses of MENA and the proposed changes to race and ethnicity data collection, and the US Census Bureau’s analysis. All codes for this analysis are available on GitHub.