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Adam N. Michel

At the end of 2017, Republicans cut the federal corporate tax rate from 35 percent to 21 percent as part of a larger package of tax cuts and reforms. Many Democrats—including Kamala Harris—and some Republicans want to raise the rate next year. Former President Donald Trump proposed further cutting the rate to 15 percent.

If taxes on businesses are primarily paid by their owners, corporate tax increases could be a way to raise revenue from higher-income Americans. However, if the economic cost of the tax is ultimately shifted to labor, raising the corporate tax will penalize workers, hurting lower-income Americans the most.

The best economic evidence suggests that workers pay more than half, and likely three-quarters, of the cost of the corporate tax. Thus, cutting business taxes is a tax cut for working Americans.

Why Workers Pay Most of the Corporate Tax

Who bears the ultimate economic cost of a tax is not always straightforward. Employer payroll taxes, for example, are paid to the government by the business, but most of the actual economic cost of the tax is borne by workers through lower wages. The ultimate burden of corporate income taxes also shifts from the entity that pays the government.

Only people can pay taxes, and for the purposes of economics, corporations are not people. In theory, the tax can be paid in one of three ways: by the firm’s owners through lower returns on their investments, consumers through higher prices, or workers through lower wages. The precise distribution of the corporate tax on these three categories is the subject of a long-running and evolving line of economic research.

In 1962, Arnold Harberger first described how, in a closed economy, the corporate tax reduces dividends and lowers investment returns, impacting capital owners the most. However, the results of the Harberger model were upended as globalization and capital mobility between countries increased in the following decades. As I explained in 2017:

In an open economy where capital can move abroad and the prices of goods are set competitively in the world market, the corporate tax has only one place to shift: to workers. When capital moves abroad, the domestic capital-to-labor ratio declines, slowing productivity and lowering wages. The global after-tax return to capital is largely unchanged, but because workers are generally not internationally mobile, wages remain depressed in the country with the higher corporate tax and lower levels of investment.

A related body of research on the relationship between capital and labor implies that when capital per worker rises by 1 percent, wages rise by the same amount or more. In a review of the empirical literature on the incidence of the corporate income tax, Steve Entin concludes, “These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.” No one study is perfect or perfectly applicable to the United States, but the sum of the empirical literature clearly concludes that workers bear a majority of the corporate tax.

Could Workers Pay More than 100 Percent of the Corporate Tax? 

The economic damage (what economists call the deadweight loss) of taxes is often larger than the tax revenue collected by the government. In addition to raising revenue, taxes also change behavior, incentivizing people to invest, save, and work less than they would have otherwise. Thus, the revenue raised by the corporate income tax—or any other tax—is a lower bound for the total economic cost of the tax.

Economists Christina and David Romer found that a $1 tax increase in the United States has historically decreased GDP by about $3. Entin notes that widely accepted estimates of labor’s share of output imply that labor pays about $2 of the total economic cost or 200 percent of the $1 tax increase. Corporate income taxes are even more economically damaging than the average result from Romer and Romer, which lumps many types of tax increases together.

If the corporate income tax’s economic cost is multiple times the tax’s revenue, labor can bear more than 100 percent of the revenue raised by the tax. Some studies have found that labor could bear as much as 400 percent of the revenue cost of the corporate income tax. When taxes are highly economically distortionary, there is no shortage of economic costs to be shared by all sectors of the economy.

Recent Empirical Estimates and the TCJA

Disentangling the economic effects of a specific policy change is always empirically challenging, which is why most studies aggregate the impact of multiple policy changes over time. The long-run economic effects of the 2017 Tax Cuts and Jobs Act (TCJA) were also confounded by concurrent deregulation, economic uncertainty from Trump’s trade policies, and the economic effects and policy response to the pandemic.

Attempting to tease out some of these different effects, two economic studies have used differences in how firms were impacted by the business tax cuts to estimate its short- and long-run effects. Using different methods, Patrick Kennedy et al. and Gabriel Chodorow-Reich et al. both find that the 2017 corporate tax cut resulted in a business investment bump that is in line with the previous literature. According to the authors, the Chodorow-Reich results imply a 0.9 percent long-run increase in GDP from the corporate tax cut and an increase in labor income of about $700 per employee (in 2017 dollars).

Kennedy et al. find a similar short-run increase in c‑corporation wages of about 1 percent compared to s‑corporations, with most of the gains accruing to higher-income employees. This relative wage response between firm types does not account for aggregate wage gains shared across the whole economy or the long-run wage response.

Less sophisticated economy-wide estimates show that average production and nonsupervisory workers—who tend not to be the highest-income employees—saw about $1,400 more in above-trend annualized earnings after 2017 and before the pandemic disruptions.

While short-run results are informative, the expected wage gains from corporate tax cuts are a longer-run phenomenon that results from the additional investment boosting workers’ productivity. Workers are more productive when they have more and newer tools to work with. The long-standing connection between investment, worker productivity, and pay means that the measured tax-cut-induced investment bump will continue to result in widely shared wage gains for years to come.

Economists will continue to debate the magnitude and distribution of investment, wage, and economic growth effects from tax cuts, but it is clear that tax cuts cause improvements in all three economic measures. The opposite is also true: tax increases will depress wage growth, investment, and the broader economy.

Gene Healy

The other week, I did some get-off-my lawn grumbling about “libertarians these days.” When Donald Trump came down that escalator, I suggested, he didn’t just scramble everyone else’s brain: he took up rent-free residence in the libertarian mind as well. One faction of the movement went hard-core #MAGA; another “shifted hard in the opposite direction: toward Blue-Team ‘mood affiliation.’” For lack of a better term, I called the latter tendency “Yard Sign Libertarianism,” after the “In This House We Believe…” lawn flair favored by forward-thinking urban gentry. More a “vibe shift” than a competing ideological framework, the new orientation tends to privilege style over substance and presupposes that “left-wing cultural sensibilities [are] an essential part of the libertarian package.”

Now, thanks to a provocative piece from friend and former Catoite Jacob Grier, I’ve got a new excuse to grumble. The essay in question, “To My Fellow Libertarians: It’s Time to Embrace the Harris-Walz Ticket,” isn’t the “lesser of two evils,” suck-it-up-and-pull-the-lever approach libertarians typically adopt when faced with grim major-party choices. Instead, It’s a message of hope: there’s a Joy Train coming, libertarians, get on board:

“My libertarian friends, I’m telling you: It’s OK to get excited about a major party ticket. You should endorse Harris and Walz, not with reluctance but with genuine enthusiasm.”

Reluctance I can understand; but what’s the argument for enthusiasm? The case Grier makes is pot-forward and prog-friendly: Harris-Walz is the “first major party ticket ever to support legalizing cannabis”; they’re also dovish on crime, pro-abortion rights, and generally exhibit humane, pluralistic values. As libertarian nourishment goes, I find it more than a few crumbs short of the full brownie.

“The Democratic nominees offer quite a bit for libertarians to like,” Grier writes, starting with their position on pot. “Harris has become admirably liberal on cannabis,” and now supports federal legalization. This would be nice, but in terms of reducing federal oppression, it’s not exactly cause for excitement. “There are no individuals currently in federal prison solely for simple possession of marijuana,” a senior administration official admitted in October 2022, when President Biden issued a blanket pardon for pot-possession offenses. The War on Weed is mostly a state issue and even there hostilities have long been winding down.

Next, we hear that Harris’s running mate, Minnesota Governor Tim Walz, has “a solid record of criminal justice reform,” which includes “eliminating life-without-parole sentences for teenagers.” Once again, I’m underwhelmed. Is there some kind of libertarian first principle that says no act of aggression committed before the age of 18 can justify putting someone away for life? Does it extend to “beating and stabbing a 17-year-old girl to death with a screwdriver” or “stabbing a woman more than 100 times and killing a 10-year-old boy by hitting him with a TV”?

On abortion—another issue with no obvious libertarian answer—Grier writes that “even if [Harris’s] administration is unable to restore Roe, it can take significant steps to ensure access to abortion.” He links to a piece arguing that President Harris could issue (constitutionally dubious) executive orders promoting abortion access and, with the help of Congress, force dissenting taxpayers to fund it. If you’re pro-life—or if you generally oppose federal intervention in this area—this won’t move you.

The rest of the libertarian case for Kamala is a melange of Yard-Sign sentiments: Walz “seems to have some YIMBY cred,” and deserves praise for serving as faculty adviser to the gay-straight alliance at a Minnesota high school in the era of Don’t‑Ask-Don’t‑Tell, a “small act of human decency, but part of a larger arc demonstrating the triumph of liberal values.”

Okay, but Kindness Isn’t Everything when it comes to public policy. In this house, we believe in “a wise and frugal government, which shall restrain men from injuring one another, [and] shall leave them otherwise free to regulate their own pursuits of industry and improvement.” On that metric, the Harris-Walz ticket is truly dreadful, even grading on a politician’s curve.

As California’s junior senator, Harris racked up a 100 percent lifetime record on the AFL-CIO scorecard, a 4 percent rating from the Club for Growth, and an overall voting tally that makes her “the second-most liberal Democratic senator to serve in the Senate in the 21st century.” Her running mate had a disastrous fiscal record as governor of Minnesota, earning an “F” on Cato’s Governor’s Report Card.

The ticket is, moreover, godawful on free speech: In her 2020 bid, Harris pledged to hold social media companies “accountable for the hate infiltrating their platforms, because they have a responsibility to help fight against this threat to our democracy.” In office, the Biden-Harris administration engaged in a massive, covert effort to suppress core political speech, “from supporting a massive censorship system (described by a federal court as an ‘Orwellian Ministry of Truth’) to funding blacklisting operations targeting groups and individuals with opposing views.” They’re unrepentant and poised to do it again: Walz recently went on MSNBC to proclaim that “there’s no guarantee to free speech on misinformation or hate speech, and especially around our democracy.”

And if Harris and Walz are relatively dovish on the War on Drugs, maybe it’s because they’re channeling all their martial zeal into the War on Prices. The up-till-now policy-free campaign just unveiled its new centerpiece: price controls. The ticket promises to enact “the first-ever federal ban on price gouging on food and groceries,” enforced by the Federal Trade Commission. Oh, joy.

When it comes to the negative part of Grier’s case, his bill of particulars against Donald Trump, I don’t find much to quibble with. I spent the bulk of the 45th president’s tenure arguing that he should be impeached and removed from office—and, at the end, constitutionally disqualified from running again.

It’s depressing that we elected this sort of character in the first place and that we may be poised to do it again. It’s as dispiriting as hell that four years of liberal caterwauling about our near-miss with fascism didn’t lead to any sustained effort to “tyrant-proof” the presidency. And it’s beyond appalling that the best alternative to Trump 2.0 the Democrats could come up with is Kamala Harris: a thoroughgoing statist, crashing mediocrity, and someone who makes you marvel that in living memory, Americans actually worried that Dan Quayle was too big an airhead to be safely placed “a heartbeat away from the presidency.”

In the George W. Bush years, it used to irk me to no end when libertarians gave GOP candidates a pass on war and surveillance just for sounding the right notes on “big government.” Back then, I wrote a critique of fusionism warning that “habits of the mind developed during the long conservative-libertarian alliance may cloud libertarian thinking about how much common ground there is to our Right.” The latter-day trend toward Blue-Team “allyship” clearly presents similar dangers.

I’m not sure how I ended up becoming a “professional libertarian.” Quite plausibly, I should have done something else with my life. But looking back on what drew me down this path, I think it was a congenital affinity for “the first principle of libertarian social analysis”: skepticism toward power. Instead of joining a team, I liked the idea of (loosely) affiliating with people who didn’t care about politics and thought you should call things as you see them, without fear or favor. That is why I have zero interest in any version of libertarianism that reduces itself to an anti-Trump lifestyle brand.

That is also why it seems to me that, when confronted with a choice between two people who have absolutely no business being president, it’s perfectly okay not to vote. And yet, If you’re convinced one of these lessers is so evil that you need to vote as a matter of self-defense, more power to you.

But, as a libertarian, I can’t fathom approaching the task with genuine enthusiasm for either major-party choice—especially this year. The case for being a “double hater” has never been so easily made. But don’t just hate the players—hate the game.

Clark Packard, Scott Lincicome, and Alfredo Carrillo Obregon

During a campaign stop in Wilkes-Barre, Pennsylvania, over the weekend (Aug. 17–18), former President Donald Trump told the audience that “a tariff is a tax on a foreign country. A lot of people like to say it’s a tax on us. No, […] it’s a tax that doesn’t affect our country.” The statement is consistent with his repeated assertions throughout his presidency, during which he levied heavy tariffs on imported solar products, washing machines, steel, aluminum, and about 70 percent of all products from China.

Despite the former president’s claims to the contrary, however, there is overwhelming evidence that Americans bore the brunt of his tariffs—and would do so again if he is reelected and fulfills his campaign pledge to impose more aggressive protectionism.

As the chart below makes clear, more than a dozen academic studies by university economists, think tanks, and government agencies have examined the tariffs that the Trump administration imposed (and, unfortunately, that the Biden administration has mostly maintained). Their conclusions are clear and consistent: American consumers (both firms and individuals), not foreigners, paid for—and continue to pay for—the tariffs.

Economists Mary Amiti, Stephen J. Redding, and David E. Weinstein, for instance, estimate that the tariffs increased costs for average American households by about $830 per year, accounting for direct costs and efficiency losses. These and other economists find other tariff-related harms and net costs for the US economy overall.

Estimates of the pain vary depending on what aspect of the Trump tariffs was studied, but it is clear that Americans faced significant losses from the tariffs (and inevitable foreign retaliation), including higher tax burdens and prices, loss in wages and employment, reduced consumption, decreased investment, a decline in exports, and overall aggregate welfare.

Anecdotal evidence from Americans directly hurt by the tariffs supports the empirical studies summarized above. As part of the statutorily mandated review process of the Trump administration’s tariffs on imports from China, interested parties were able to submit comments about the tariffs to the US Trade Representative. Nearly 1,500 comments were submitted, most from affected American firms. As we noted at the time, respondents documented many of the real-world harms—higher costs for American companies, less investment in workers and capital—caused by the tariffs.

None of this is surprising—or, at least, it shouldn’t be. As the Tax Foundation’s Erica York wrote in an excellent essay for Cato’s Defending Globalization series, both economic theory and practice—as demonstrated in the interactive decision tree below—teach that unless foreign sellers deliberately lower their prices (and thus, render a tariff ineffective for protectionist purposes), the importers and exporters of the country that imposes the tariff end up paying its cost. In the case of the Trump-era tariffs, the outcome was clear: Americans paid the tab.

The Trump campaign surely believes tariffs and protectionism are a winning message, but there’s reason to be skeptical. A recent Cato Institute survey found that a mere 1 percent of Americans said that trade and globalization are a top three issue for them, and large majorities worried about and were unwilling to pay for tariffs’ costs, including higher prices or lost jobs. No wonder that Trump pretends those harms don’t exist.

Peter Van Doren

Soon-to-be Democratic presidential nominee Kamala Harris announced a proposal to empower the federal government to ban corporate price gouging in grocery prices. Historically, politicians often float price control proposals when prices of energy or housing increase. Groceries are a new addition to the list.

Earlier this year Cato published a book about price controls edited by my colleague Ryan Bourne. While it does not include a chapter on grocery price controls because of the lack of historical precedent, it does contain a chapter entitled “Greed and Corporate Concentration Have Not Caused Inflation.”

The good news, in this case, is that reaction to the grocery price control proposal in both the New York Times and the Washington Post included criticism of the proposal before anyone at Cato had blogged about it.

An economist quoted in the Times article said, “If prices are rising on average over time and profit margins expand, that might look like price gouging, but it’s actually indicative of a broad increase in demand. Such broad increases tend to be the result of expansionary monetary or fiscal policy—or both.”

The title of Catherine Rampell’s column in the Post is quite blunt: “When your opponent calls you ‘communist,’ maybe don’t propose price controls?” In the column she says, “It’s hard to exaggerate how bad this policy is.”

In my chapter in Ryan’s book, I concluded that the 1970s experience with energy price controls was so negative that congressional responses to constituent anger about energy prices in the last twenty years have consisted of calls for the FTC to investigate the usual suspects rather than actual price controls. Senator Elizabeth Warren’s current Senate proposal goes further. It would empower the FTC to investigate not just the usual suspects but ban any “grossly excessive price.”

The bad news is that Harris’s proposal suggests memories of the chaos created by 1970s oil and gas price controls may be fading. The good news is that the media have not forgotten.

David Inserra

This past weekend (Aug. 17–18), X announced it would close its local offices in Brazil in response to the judiciary’s continued censorial demands. This unprecedented action puts X at direct odds with Justice Alexandre de Moraes of the Brazilian Supreme Federal Court and Superior Electoral Court, who demanded that X comply with his secret censorship orders or else he would jail X’s local staff.

This incident shows how increasing regulation and censorship abroad are negatively affecting Americans and US businesses.

The last time tensions flared between Moraes and X was in April when journalists revealed the vast judicial efforts to investigate, censor, and prosecute social media users for statements critical of the Brazilian government. Citing the need to defend democracy and stop misinformation, these orders were often secret and included high-profile speakers, such as sitting members of Brazil’s National Congress. Other reporting from across the political spectrum questioned Moraes’ arresting of individuals for the wrong political opinions, sometimes without trials. X argued that these orders were illegal under Brazil’s constitution and its Marco Civil da Internet, a law similar to the US’ Section 230 of the Communications Act, which provides platforms with civil liability protection from user-generated content.

At the time, Elon Musk had threatened to refuse to follow such orders but later acquiesced, seemingly recognizing that it would put X employees in danger. This is a position that some other tech companies find themselves in as well and most appear to be complying with such government orders.

But now X is prepared to stand its ground. Over the past few days, Moraes issued yet more secret orders—this time to censor popular accounts including another current member of Congress, and to turn over user data on not only Brazilians but also residents of Argentina and the United States. X refused to comply.

Given that such refusal has already put X at significant risk of growing fines and imprisonment of their personnel, it is possible that the decision to close the local office will lead to even more drastic government threats and penalties. Beyond censoring and jailing political dissidents, Moraes has previously suspended the encrypted communications app, Telegram, for its refusal to take down and turn over information on accounts belonging to Bolsonaro activists. Rumble stopped providing its services to Brazil at the end of 2023 in response to similar judicial orders, largely from Moraes. Trying to shut down X might not be much of a stretch for Moraes.

While only time will tell what comes next, the Brazilian government and judiciary’s increasingly common use of censorship to “protect democracy” is itself a threat to democracy. And its continued overreach may eventually push even more tech companies to decide that they, too, need to protect themselves from the Brazilian authorities.

Unfortunately, Brazil isn’t alone. Other democratic nations, including Canada, Australia, and especially the EU, are considering or have already passed internet speech regulations that are being used to threaten social media companies to comply with various censorial threats. Known as the “Brussels effect” because of the EU’s vast regulatory pressures on tech companies, such regulations not only suppress domestic speech in these countries but are increasingly impacting the speech and success of Americans and US companies.

Americans should be thankful that our First Amendment protects us from such blatant censorship, but we must not be complacent. We must affirm the importance of free expression, reject giving governments around the world the power to censor non-violent speech, and encourage our government to be more vocal in its defense of Americans and American companies facing censorial and abusive regulation abroad.

Ryan Bourne

Note: This is an excerpt from my book The War on Prices.

High inflation and supply shocks in certain sectors since 2021 have helped revive the policy allure of price controls. After all, if rising prices are a problem, why not simply ban businesses from increasing them, particularly in “essential” sectors that are crucial to the well-being of the poor?

Governments have been interfering with prices for over 4,000 years. Economists overwhelmingly reject the theory that a general system of price controls (as in the 1940s and 1970s) can mitigate inflation, at least without serious harm. But a time of rapidly rising prices has nevertheless seen an increased interest in market-specific price controls, purportedly to help those struggling most with rising living costs.

In Europe, that took the form of capping the price of domestic energy and, in some countries, food prices. Here in the United States, we have seen a fresh outbreak in rent control proposals. But, in truth, there are many individual sectors in which the federal, state, and local governments have controlled or continue to control market prices already, often bringing substantial economic harm.

What Are Market Prices?

Few elements of economics are as fundamental as the concept of prices. At its crudest, a price is just the monetary value assigned to a product or service by whoever sets it. A market price is more interesting: it’s the amount of money that a buyer pays a seller in open exchange for a good or service.

Market prices are broadly determined by the supply and demand for the product in question—that is, they reflect the intersection of consumers’ preferences and willingness to pay with producers’ costs and willingness to supply. This distinguishes them from administered prices—those that are decreed by some authority, such as the government, or (theoretically) a monopoly with pricing power.

A lot of public discussion of prices takes place as if all prices are administered prices, in the sense of businesses having free rein to set them at whatever level they wish. In the real world, market prices rise and fall because of shifts in supply and demand. Firms can only profitably charge prices that (a) consumers are willing to pay and (b) competitors (current or potential) cannot easily undercut. A company may notionally set its own prices, but in anything other than the immediate term, the price it can sustainably charge is dictated by these broader forces.

Yet rather than see prices as the outcome of an ongoing market process, it’s common for the public to recoil at high prices, blaming them on market actors and appealing to governments to control them. Public opinion often casts prices as roadblocks to people’s dreams, deeming them “unreasonable” or “excessive.” Consider wanting to rent a decent house in a safe Northern Virginia neighborhood. It’s easy to label current rents as “ridiculous” and call for government intervention to cap them to make renting more affordable.

The perception of individual prices as “unfair” emerges partly from the very nature of market trades. Transactions occur when they benefit both parties—when the buyer values the product more than the money parted with, and the seller appreciates the cash more than the product relinquished. Each party to the transaction usually receives a surplus.

The consumer’s surplus is the difference between the maximum the buyer would be willing to pay and what the buyer ends up paying. The producer’s surplus is the difference between the sale price and the minimum the seller would be willing to accept. The fact that both parties consider themselves better off means that, technically, the seller would also be willing to accept a slightly lower price, and the buyer a slightly higher price, than agreed. Both sides can thus feel they have sacrificed a bit more than they really needed to, even if each is better off overall.

What Economic Role Do Prices Play?

Market prices are crucial to solving “the economic problem.” That is, they help us decide how to most effectively allocate scarce resources in a world of unlimited wants and needs.

Consider the myriad resources out there: my labor, copper, orange farms in Florida, homes in Milwaukee, tickets for a Taylor Swift concert, hospital beds, semiconductor factories, Walt Disney World hotels, and any other product or service you can think of. We could combine or use the labor, capital, land, and entrepreneurs available in trillions of different ways. We could, theoretically, place me in a hospital tomorrow to undergo coronary artery bypass surgery, surrounded by my Cato colleagues cosplaying doctors and nurses, under the management of Sen. Bernie Sanders (I‑VT). The results would be disastrous.

Without resorting to random resource allocation, we need a more refined mechanism. For a time in the 20th century, “central planning” was considered the silver bullet. Governments would assess societal needs, and experts would coordinate who does what and how.

Historical experiments like the Soviet Union demonstrated the disastrous inadequacy of this approach. Germany’s split into a democratic capitalist state in the West and a communist one in the East provide a perfect example. Around the time of Germany’s reunification, gross domestic product per capita in East Germany was less than half the level of that in West Germany.

A key reason for this is that no planner can harness the knowledge necessary to effectively allocate goods and services to their highest-value uses. Would my next-door neighbor be most effective as a medic, an economist, or a plumber? Should the local factory make cars or aircraft parts? How about the farm: Would the land be better deployed for a housing project? What is the most effective way for managers to motivate an individual worker? This information is not just dispersed and difficult to gather, but often tacit, rooted in instinctive or particular knowledge and experience.

Unlike a central planner, a market economy, through its price mechanism, can harness this knowledge. That is because all that knowledge is expressed in decisions that are driving supply and demand and thus prices. Prices are therefore crucial in coordinating our activity toward productive ends. They help communicate vast amounts of information from millions and millions of transactions, which then helps guide our plans toward acts that add value for others.

How does this work? Market prices encourage us to use resources more efficiently by providing people with signals about which plans they should undertake without the need for costly information gathering.

Prices capture the relative scarcity of different goods based on today’s context-specific conditions and communicate that information to everyone else. You don’t need to know that baby formula prices are rising because of a temporary factory closure. The higher price alone tells you it’s not the best time to make bulk purchases of baby formula, helping ration goods for those who value them most. Similarly, unaffected producers can see from the higher price that it’s more profitable to run overtime, fire up spare capacity, or run down inventories to provide more baby formula to the market now. The price increase therefore encourages an expansion of the quantity supplied, shifting us toward an efficient allocation of resources. Market prices thus help align the interests of buyers and sellers.

As George Mason University economist Alex Tabarrok puts it, “Prices are a signal wrapped up in an incentive.” That phrase captures prices’ dual economic role. Price movements provide information (the “signal”) about the broad state of the market that helps producers and consumers reassess their plans. Rising prices show that a good has seen either increased demand (perhaps because a substitute product has seen its price rise) or a fall in supply (perhaps because of a shortage of inputs or a natural disaster). Crucially, such movements provide an “incentive” that encourages buyers and sellers to use the scarce resource efficiently.

Not all market prices will be “correct” at any given time. In a market economy, we are all constantly involved in the trial-and-error process of trying to make better decisions. For companies, that means making myriad decisions at all times: Should we reorganize that team? Run a different advertising campaign? Sell those two products bundled together? Abandon this line of production entirely?

But prices themselves provide a crucial feedback mechanism for improving decisionmaking. That’s because the wisdom of past decisions can be assessed by using prices to compute revenues that we can then compare with costs of production (also prices) to examine profit and loss. This profit and loss information provides evidence on whether the new good, or the new management technique, or whatever else has been tested, generates net value.

If a healthy profit results from a new form of product, it signals to other entrepreneurs “more of this please,” attracting them into the market to offer similar goods at a higher quality or lower price. This ongoing process is what drives societal improvements in how we use resources, making us richer.

Market prices are thus crucial to economic well-being in three respects:

• They help guide us in what we should do given the everchanging realities around us and our own preferences.

• When we do act, they help generate profit-and-loss information, which allows us to evaluate whether our decisions were good ones.

• Price movements, and then profit and loss, encourage experiments, entrepreneurialism, and market discoveries of better ways of doing things over time.

Market prices are therefore a crucial driver not just of economic efficiency, but of entrepreneurial economic growth.

What Are Price Controls?

Price controls are government-enforced restrictions on the rates sellers can charge for their goods or services. These rules often come dressed as two principal characters: price ceilings and price floors.

A price ceiling is a legally mandated maximum price that can be charged for a good or service. We are interested in price ceilings when they bind—that is, when they hold the legal price below the natural market price. Rent control in cities like New York serves as a classic case, where annual rent increases are kept in check with the aim of safeguarding affordable housing for the less affluent.

A price floor, on the other hand, is a legally set minimum price. It binds when set above the equilibrium market price. Minimum wage laws serve as an example. The federal government and many states and localities set a minimum hourly wage rate that employers can pay workers, notionally to eliminate exploitation and to protect poor families’ living standards.

In truth, however, governments impose many other forms of price controls. These include bans on money transactions (a zero-dollar price control, as for kidney donations), regulations on differential pricing for diverse customers (as with health care premiums), constraints on specific fees or price structures (see President Joe Biden’s “junk fees” agenda), and legal repercussions for rapid price hikes during emergencies (anti-price-gouging laws).

What Are the Major Effects of Price Controls?

Following the same reasoning for why market prices encourage economic efficiency, implementing government price controls tends to discourage it. By setting a mandated price that ill reflects market supply-and-demand realities, price controls usually provide faulty information to producers and consumers about a product’s relative scarcity. This, in turn, affects our production and consumption decisions, which deviate from those seen under markets with freely floating prices. 

Crucially, putting a government floor or ceiling on prices eliminates mutually beneficial trades. It stops (at least legally) people from trading with others at a price that both would accept—a price that is indicative of both sides considering themselves better off.

An example helps illuminate this effect. Suppose the federal government imposed a crude price ceiling that said no landlords across the United States could increase rents for five years (see Figure P2.1a).

The price of rental housing would be fixed below market rates. At that lower price, more people would seek rental accommodation than before—there would be an increase in the quantity demanded. But at the same time, landlords would now have less of an incentive to make their housing available for rent relative to, say, selling for owner occupation, living in it themselves, or selling the land for some other use.

The quantity of rentable accommodation supplied would fall. As Figure P2.1a shows, the primary impact would be an acute shortage of rental accommodation caused by that supply-and-demand mismatch.

That means there would be potential tenants out there wishing to rent, and willing to pay the price landlords would demand, but who could not form that agreement legally because of the price ceiling.

This destroys value, even before we think about the longer-term perverse incentives that a sustained period of below-market rents would cause for the provision of new supply.

Price floors create the opposite problem but are similarly inefficient in competitive markets (Figure P2.1b). Fixing a price above the market rate reduces the quantity demanded, but it expands sellers’ willingness to supply. So you end up with a surplus of the good. Some sellers who would be willing to sell at a lower price are legally unable to do so, despite there clearly being willing buyers at the lower price. This, again, destroys economic welfare.

The creation of these shortages and surpluses is the most obvious consequence of crude price controls in competitive markets. Yet there are many more subtle effects and adjustments to their imposition, especially when policymakers preempt the likelihood of shortages or surpluses by allowing exemptions or carveouts from the laws.

First, price controls can lead to the seller or buyer adjusting the quality of the controlled product or service, or else using other offsetting fees or compensation to protect their interests. Fixing rents below market rates, for example, can lead to landlords skimping on renovation or upkeep and thus allowing the apartment’s quality to decline to reflect its new price. Setting a minimum wage above the market pay rate can likewise lead an employer to adjust other nonwage benefits or the quality of the work environment to save money to offset the cost of the higher hourly wage rate. Mandating a below-market price can similarly lead to imaginative new fees or charges such that the effective price consumers face is essentially unchanged.

Second, price controls are often associated with new, intrusive means of allocating goods or services. If goods aren’t rationed by price, they must be rationed by first-come, first-served lines, by explicit rationing (e.g., one purchase per customer per visit), by more extensive consumer searching for the product, or through favoritism or nepotism.

A lot of these means of allocation are socially wasteful, replacing market prices with extra search or time costs for customers that nobody captures. There are no guarantees that allocating goods this way will benefit the poor, in whose name many price controls are implemented.

For example, rent controls can lead to situations where wealthier individuals end up benefiting from reduced rents, while poorer individuals struggle to find available housing because of the resulting shortage. In markets with shortages, some buyers will inevitably be willing to pay more than the price cap, and some sellers will risk breaking the law to make a larger profit by selling above it. 

Secondary illicit markets thus develop to help mitigate shortages or surpluses, but they bring crime and underground activity, with all their attendant costs. Third, price controls can have ripple effects in other parts of the economy. For instance, those renters lucky enough to benefit from rent control policies face large financial disincentives against moving to better job opportunities and facing market rents again. This can lead to workers staying in jobs, areas, and apartments ill-suited to their needs, but better suited to others’ needs, harming broader productivity.

A price control on oil might likewise create shortages, leading to interruptions in steel production and thus delaying a range of construction and manufacturing projects. Interfering with the price system can therefore lead to broader discoordination across the economy.

Fourth, by artificially lowering potential returns, price controls can reduce the incentive for businesses to invest in new technologies or processes, slowing economic progress. Imagine that we capped home-use water prices, for example, but underlying market prices were rising as the population grew in the western United States, increasing water demand. This price control would reduce the incentive over time to invest in the exploration of new water sources or technologies to help conserve water, even though both reactions to higher prices could eventually have produced innovative breakthroughs that helped lower long-run market water prices by increasing supply or reducing demand.

Price controls can therefore become near-permanent features in a market, as their existence reduces the incentives to deliver entrepreneurial actions to lower costs and prices. In fact, price controls replace the market process with the political process, with vested interests lobbying governments for price controls’ continuation or expansion.

What Do Economists Think about Price Controls?

Economists generally oppose price controls because of all the misallocations and negative consequences outlined herein.

Economists agree that economy-wide price controls are not a credible means of curing inflation. In January 2022, a survey of top economists by the University of Chicago Booth School of Business (now the Clark Center Forum of the Kent A. Clark Center for Global Markets) asked whether 1970s-style price controls could successfully reduce U.S. inflation over the next year. Weighed by respondents’ confidence levels, 65 percent disagreed, 11 percent were uncertain, and 24 percent agreed. Even those who thought banning price hikes could reduce short-term measured inflation qualified their answers by saying that price controls would nevertheless produce negative consequences and so should be avoided. Economist David Autor summed up this sentiment by writing, “Price controls can of course control prices—but they’re a terrible idea!”

The microeconomic case for price controls in individual markets gets similarly weak support from economists. Since 2012, large majorities of the Chicago Booth survey cohort have provided answers that indicate the downsides of rent control and their opposition to anti-price-gouging legislation, for example.

Overall, it’s clear that economists usually oppose price controls because price controls reduce efficiency, while often not delivering the promised benefits to those they are designed to help. Politicians and the public tend to push price controls in the name of helping the poor. Economists would instead advocate for policies that expand the supply of essential goods and services, lowering their market price to customers. If certain households still find themselves in need, economists argue that it’s better to transfer cash assistance to them directly through the tax-and-welfare system, while preserving market prices to better coordinate economic activity.

Yet despite all this, in the United States, the federal, state, and local governments have controlled, and continue to control, prices across numerous individual sectors. 

Jeffrey Miron

Politicians on both sides of the aisle, and much popular opinion, believe the government should subsidize having children. The latest such salvos come from Republican vice-presidential candidate JD Vance and Democratic presidential candidate Kamala Harris; both recently endorsed major hikes in the child tax credit (CTC).

Recent Cato blogs by Adam Michel, Vanessa Calder, and Ryan Bourne explain in detail why the CTC is a misguided policy. In brief, having children is a private choice about how to spend one’s time and money, so policy should not intervene barring a compelling case that population growth generates beneficial spillovers. Such an effect is possible (more people might mean more innovation, which then gets shared widely), but harmful spillovers are just as plausible (crowding, pollution, GHG emissions).

At the same time, policy should not raise the costs of having children (e.g., via overregulation of child care or land use). The only role for government is to get out of the way.

This article appeared on Substack on August 19, 2024.

Jennifer Huddleston

While Congress debates what, if any, actions are needed around artificial intelligence (AI), many states have passed or considered their own legislation. This did not start in 2024, but it certainly accelerated, with at least 40 states considering AI legislation. Such a trend is not unique to AI, but certain actions at a state level could be particularly disruptive to the development of this technology. In some cases, states could also show the many beneficial applications of the technology, well beyond popular services such as ChatGPT.

An Overview of AI Legislation at a State Level in 2024

As of August 2024, 31 states have passed some form of AI legislation. However, what AI legislation seeks to regulate varies widely among the states. For example, at least 22 have passed laws regulating the use of deepfake images, usually in the scope of sexual or election-related deepfakes, while 11 states have passed laws requiring that corporations disclose the use of AI or collection of data for AI model training in some contexts. States are also exploring how the government can use AI. Concerningly, Colorado has passed a significant regulatory regime for many aspects of AI, while California continues to consider such a regime.

Some states are pursuing a less regulatory approach to AI regulation. For example, 22 states have passed laws creating some form of a task force or advisory council to study how state agencies can use (or regulate) AI. Others are focused on ensuring civil liberties are protected in the AI age, such as the 12 states that have passed laws restricting law enforcement from using facial recognition technology or other AI-assisted algorithms.

Of course, not all state legislation fits these models, and some states have focused on specific aspects, such as personal image more generally (for example, the Ensuring Likeness Voice and Image Security Act in Tennessee) or AI deployment in certain contexts.

State AI Regulations Focused on Election-Related Use

Many lawmakers are concerned about potential misinformation on social media or deepfakes of candidates that they feel will be amplified given the access to AI technology. As a result, some have sought to pass state laws regulating deepfakes depicting political candidates or using AI to generate or spread misinformation related to elections. There is some variance. For example, some states ban such acts altogether, while others only require a disclaimer of AI use. But for the most part, existing state law is fairly consistent about the harms that legislators are trying to address and would likely be sufficient to address harmful-use cases.

The list of states that have passed such laws is long and includes both red and blue states. Alabama, Arizona, California, Florida, Idaho, Indiana, Michigan, Minnesota, Mississippi, New Mexico, New York, Oregon, Texas, Utah, Washington, and Wisconsin have all passed election-related AI legislation. 

While these laws may be well-intentioned to ensure the public has reliable election information, they can have serious consequences, particularly for speech. Severely restricting the use of AI, even if only within the election context, risks violating our First Amendment rights. For example, even something that may appear simple—like a ban on the use of AI in election media—can have far-reaching consequences. Does this mean that a candidate can’t use an AI-generated image in the background of an ad? Would it be illegal for a junior staffer to use ChatGPT to help write a press release? Without proper guidance, even the simplest of state laws will be overbroad and impact the legitimate and beneficial use of this technology.

Furthermore, such laws may not even be necessary. There is no denying some of the dangerous things that AI has been used for, including potentially in an election context, but research suggests that the threat from AI may be overblown. AI might be able to generate content faster than a human, but that doesn’t mean it does a better job of creating fakes. Additionally, tech companies are very good at spotting and removing deepfakes.

Model Level AI Regulation: A Concerning and Disruptive Patchwork

Perhaps the most potentially disruptive state-level attempts at AI regulation seek to regulate AI comprehensively or at the model level. The most notable examples of such an approach are legislation passed in Colorado and the proposal in California’s SB 1047. As with many issues in technology, AI is likely to be interstate or not clearly defined by a location within a certain state’s borders.

The concerning consequences of such an approach are explored more thoroughly in the Cato blog “Words to Fear: I’m From the State Government, and I’m Here to Help with AI Risk.” As stated in that piece, “This shortsighted regulatory playbook—constraining business models, burdening developers with responsibility for downstream risks, and targeting technologies instead of harms—is being employed all too often at the state level. After all, SB 1047 is a notorious vehicle for all three, making open-source AI development a compliance risk by requiring developers to lock down their models against certain downstream modifications, as well as targeting technical sophistication, not merely specific threats.”

State-level legislation like this risks an effect where the most restrictive policies become de facto federal policy that could have an impact well beyond state borders. Even when such regulations target deployment rather than development, they can still result in similar impacts or in citizens losing out on beneficial technologies available to others.

Where States Are Acting as Appropriate Laboratories: Civil Liberty Protection, Government Applications, and AI Studies

There are some cases where states may have the opportunity to act as laboratories of democracy and determine how certain AI questions might be resolved. These situations will be intrastate and are mostly related to opportunities to either restrain state power and preserve civil liberties or to provide positive-use cases for AI technology within state governments. Similarly, state legislatures, like the federal government, have an opportunity to examine how existing regulations may prevent beneficial AI development and deployment.

The list of states that have established task forces to study the proper way to regulate AI includes Alabama, California, Colorado, Connecticut, Florida, Illinois, Indiana, Louisiana, Maryland, Massachusetts, New Jersey, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin.

There are some things states could consider in their examination of AI and its impact. State-level policy could focus on clarifying when the government or law enforcement can use AI as a way of resolving civil liberties concerns without having significant extraterritorial effects. This is like how restrictions on government access to data without a warrant can improve privacy concerns without the spillover effects of many data privacy laws or clarity around the deployment of facial recognition technology. This could also provide models of what laws work best and when there may need to be further consideration, such as warrant requirements for the use of certain technologies versus flat-out moratoriums or what consent looks like for the use of mandatory data.

Similarly, states have an opportunity to consider potential positive AI use in their own governments. This could include tools that help provide constituent services or improve efficiency that saves costs within government. Again, this could provide positive examples for other governments and positive interactions with the technology for consumers.

Finally, as with the federal government, states should consider if there are elements of their regulatory code that make the development of AI harder than it should be. This could include consideration of everything from existing tech policy regulations, such as data privacy, to more general regulations, such as occupational licensing requirements. AI could also provide opportunities for states to consider implementing sandboxing or other soft-law approaches for AI applications, such as driverless cars or AI-based advice in currently regulated fields.

Conclusion: What Comes Next, and What Does It Mean for AI Development?

As the United States considers what framework to potentially pursue for AI at a federal level, states have already undertaken significant legislation. In some cases, without strong federal preemption, these laws could significantly disrupt the development and deployment of AI technologies. There are, however, opportunities for states to consider only intrastate applications as they relate to ensuring civil liberties or restricting or embracing the government’s use of AI. What seems certain is that states will continue to consider a wide range of policies that could impact this important technology.

As AI continues to develop and become more integrated into our everyday lives, hopefully, some of the techno-panic will fade. Disruption and uncertainty often create such fears, and AI is not the first technology to do so. Policymakers, however, should not seek to regulate merely because of fear or uncertainty but only when there is a true need to prevent harm not already addressed. When acting, such policy should be narrowly tailored to address the harm while also considering important trade-offs to other values, such as speech and innovation.

Adi Kumar contributed to this blog.

Norbert Michel and Jerome Famularo

Last week, Senator Elizabeth Warren (D‑MA) went on X to promote her latest housing reform plan. She claimed the United States has a shortage of seven million homes and then discussed ways to subsidize demand, a surefire way to make shortages worse.

That’s bad enough, but then she asked her X followers, “You ever wonder how your grandparents bought a home for 7 raspberries, but you can’t afford a one bedroom apartment?”

We know that politicians exaggerate. It’s just what they do. And this claim that everything is so unaffordable compared with when your grandparents were your age has been a favorite populist talking point for decades. Still, though Warren may have been joking about the raspberries, her example shows how far off these kinds of claims really are—she’s off by almost a factor of one million, depending on exactly whose grandparents we’re talking about.

As the chart in this post shows, between 1963 and 2023 the average house in the United States never cost less than three million raspberries. So a bit more than seven. (We dug up some old raspberry data from the state of Washington, made a few assumptions, including one about the weight of the typical raspberry, and then compared the average raspberry price with the annual median US house price.)

Yes, the typical American house now costs almost six million raspberries, whereas it cost only about four million in the early 1960s. But the data do not display a steadily increasing trend, and those older houses were only about 300 square feet per person, three times less than today’s 924 square feet. And those houses were likely to have asbestos roofs, lead pipes, and no Wi-Fi.

Americans are generally not buying the same houses that they were in the 1960s. And that’s partly because income growth for the typical American has been strong. Regardless, the homeownership rate—though it increased (because of awful federal policies) in the run-up to the 2008 financial crisis—has hovered around 65 percent for decades, even as the population grew by more than 150 million people.

No matter which fruit politicians want to price homes in, it’s simply not the case that everyone is worse off now than their grandparents. And if Congress really wants to do something about housing affordability, they’ll get rid of all the federal policies that subsidize demand. Sooner rather than later would be great.

Walter Olson

If Donald Trump loses the 2024 election, it is a given that he will once again claim that he was cheated and should be inaugurated as the legitimate new president. What happens next?

As we recall from 2020, in the weeks following the election, local officials in each state proceed with the certification and reporting of results, and state officials certify the resulting slate of electoral votes and send it to Washington, DC, where a congressional joint session counts them under what will be an improved process specified by the Electoral Count Reform Act of 2022. Meanwhile, dozens of lawsuits are likely to go forward, and—if 2020 is any model, which is a big if—the courts will handle them speedily and credibly.

It’s unlikely to go as smoothly as that this time, but our mood should be one of watchful concern, not panic. 

The alarm of the moment is over whether local officials will refuse to certify the results under pressure from local #StopTheSteal believers. Recently, three commissioners in Reno, Nevada, initially declined to certify the results of a primary election recount on dubious grounds. Two of the three backed down following “guidance from the district attorney’s and attorney general’s offices that certifying the vote was a mandatory ministerial function, and that [they] could otherwise face criminal prosecution.”

So that’s the first point of reference: Ordinarily, these officials’ duty to certify and report is ministerial, as was Vice President Mike Pence’s duty on January 6, and allows for no policy discretion. Trump allies have filed some lawsuits claiming such a right to exercise discretion, but they are likely to fail. (None of this means that the reported outcome of a race can’t be challenged, only that such a challenge needs to go forward in a different forum, such as a court.)

During all of this, local officials inclined to shirk ministerial duties are likely to face a broader public campaign than last time arguing that the election outcome was rigged and illegitimate. The Washington Post quoted a project director at one large Trump-allied nonprofit as saying, “As things stand right now, there’s a zero percent chance of a free and fair election. I’m formally accusing the Biden administration of creating the conditions that most reasonable policymakers and officials cannot in good conscience certify an election.”

Much recent commentary has taken an alarmist tone, particularly about a rules change adopted by the Georgia state election board purporting to authorize local election board members to exercise “reasonable inquiry” before certifying a result.

In a post on Election Law Blog, Derek Muller of Notre Dame Law School dissents from this tone. He sees the new Georgia rules as “a cause of some mild concern … but nothing particularly significant, and certainly nothing likely to affect the results of the election in any formal way.”

To begin, the state board didn’t alter or enlarge the powers of local officials because it has no power to do so: “The Georgia election code already defines what election officials may do.” Whatever rhetoric may be in the air about “reasonable inquiry,” the code gives county election boards precious little scope to investigate questions of tabulation beyond, say, whether a row of numbers adds up. It also specifies the Georgia certification deadline, November 12. Courts have also generally assumed that election boards cannot use administrative means to change or nullify election officials’ responsibilities under enacted law.

None of this is meant to defend the Georgia changes: As Muller says, it’s “certainly not a good thing” and could engender public confusion or distrust to introduce an ambiguity that some locals could seize on as an excuse for delay or noncompliance (which, to be sure, they could have tried even without such an excuse).

What the rules probably don’t do is give courts any legitimate reason to countenance delay in reporting Georgia election results. In other words, though it may send a bad signal, this rules change isn’t the most significant practical hazard on the road ahead.

If the danger posed by recalcitrant county boards is not quite as formidable as some fear, what kinds of hazards to a lawful count are currently being underrated? I can think of at least two. The first would be physical interference with the movement of persons or official documents to keep the process from hitting its necessary deadlines. Such interference might be accomplished by mobs, single desperados, or even the use of deception. The second danger would be rogue behavior by a highly placed official necessary to the process, such as a secretary of state. Note that both of these methods were attempted, though without success, in the January 6 plot.

For now, I would still side with veteran GOP election lawyer Ben Ginsberg, quoted in the New York Times last month as still being confident “that the system had enough checks and balances to hold.”