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Jack Solowey and Jennifer J. Schulp

After the Senate voted with bipartisan support last week to reject SAB 121, a Securities and Exchange Commission (SEC) accounting rule that would unduly hamstring the crypto industry, Sen. Cynthia Lummis (R‑WY) put it best: “Congress did a thing.”

Now make that two things. On Wednesday, May 22, the House passed the Financial Innovation and Technology for the 21st Century Act (FIT 21)—a first of its kind bill tackling some of digital assets’ most nettlesome policy questions. And again, with bipartisan support. While FIT 21 has only cleared one chamber of Congress, that in itself is a significant milestone when it comes to crypto legislation of this scope.

But Congress did something more than just advance two significant pieces of crypto legislation in the past two weeks; it took important steps toward reining in an administrative state that’s perpetrated a long train of abuses against American consumers and innovators. And, as Senator Lummis astutely observed after the SAB 121 vote, “That does not happen all that often. Especially with divided chambers.”

Crypto technology is a 21st‐​century embodiment of the concept of decentralized control, something that the American Founders built into the US Constitution in several ways. One was the separation of powers—the idea that each branch of government would have the legal means and institutional incentives to check the powers of the others. James Madison described such “separate and distinct exercise of the different powers of government” in Federalist No. 51 as “essential to the preservation of liberty.”

In hammering the American digital asset ecosystem with an aggressive crackdown—which it is no stretch to view as a de facto prohibition that goes beyond the scope of congressionally delegated authority—US regulators have usurped the role of the legislature and made a mockery of the separation of powers. But, in the past two weeks, Congress has begun to push back.

SAB 121 should be an easy case for congressional action, as it suffers from both substantive and procedural defects. On substance, it upended generally accepted practices by calling on asset custodians to treat client’s digital assets as liabilities on custodians’ own balance sheets. But as Chairman of the Federal Reserve Jerome Powell testified before the Senate in 2022, “Custody assets are off balance sheet. Have always been.” Reversing this standard practice would subject banks and other traditional custodians to increased costs when providing custody for digital assets. It’s not at all clear how making crypto custody prohibitively expensive would make crypto custodians or their clients any safer.

Perhaps even more gallingly, SAB 121 also departed from standard procedural practice. As SEC Commissioner Hester Peirce noted, “The SAB, as a staff statement, is not enforceable, but much of the language in the document reads as if it is.” It was no surprise then that the nonpartisan Government Accountability Office found that SAB 121 was tantamount to a rule requiring notice to Congress under the Congressional Review Act, which the SEC had failed to provide.

Fittingly from a Madisonian perspective, bipartisan votes in both houses of Congress disapproved SAB 121. (And President Biden would be wise to respect this disapproval by reversing course on his threatened veto of the resolution.)

Another important step toward reinvigorating the separation of powers was the House of Representatives passing FIT 21 by a vote of 279 to 136, with 208 Republicans and 71 Democrats in favor. The bill would address what we have referred to as the SEC’s “unsupervised dirty war on crypto.” In that campaign, the SEC has unilaterally asserted jurisdiction over essentially the entire crypto industry (“everything other than Bitcoin”); refused to provide clear pathways for crypto issuers and exchanges to register with the SEC; and, all the while, bludgeoned crypto projects with enforcement actions for failures to secure those very same, long‐​withheld registrations.

While the bill is not perfect—and important questions of interpretation and the shape of implementing regulations remain—FIT 21 would confront long‐​standing issues of SEC abuse. The bill proposes to cabin the SEC’s jurisdiction over crypto by clarifying that crypto tokens pertaining to blockchain networks that are functional (e.g., operational for transmitting value or participating in applications or governance) and decentralized (e.g., free from certain forms of unilateral control and gatekeeping, concentrations of ownership, and marketing efforts) are digital commodities, not securities subject to SEC jurisdiction. The bill provides explicit registration pathways for crypto exchanges, including interim registration options pending final rules. And it creates protections from regulatory intervention for critical decentralized finance activities, including developing software, operating or participating in crypto infrastructure, providing user interfaces to interact with a blockchain, and creating or maintaining a self‐​custody crypto wallet.

In a timely meditation on the nature of centralized control earlier this week, Martin Gurri wrote that today’s technocrats’ “dream is to turn the clock back to the day before the internet was invented,” before technology made it difficult to act on their belief that “every transaction demands their intervention.” One way to understand crypto is as a new era of the internet where ownership and control of digital property and services is placed in the hands of software developers and users at the local level.

It’s no surprise that such decentralization of governance—where users and innovators have a say in more of the rules—is threatening to the administrative state. But removing unchecked concentrations of power from unaccountable hands is nothing short of the American constitutional order. Congress asserting its proper role in our constitutional structure and taking steps to check the administrative state’s harassment of the developers and consumers of a user‐​driven technology is “a thing” Americans should see more of.

Nicholas Anthony

Over a year ago, Rep. Tom Emmer (R‑MN) introduced a bill intended to prohibit the Federal Reserve from issuing a retail central bank digital currency (CBDC). Today, that bill finally made its way to the House floor where members voted to pass it to the Senate.

Why is Congress voting to restrict the powers of the Federal Reserve? As I explain in my new book, Digital Currency or Digital Control? Decoding CBDC and the Future of Money, CBDCs are not something that should be left to the discretion of unelected officials. Put simply, the costs outweigh the benefits. When it comes to CBDCs, promises of financial inclusion, faster payments, and strengthening the dollar fail to stand up to scrutiny. Yet, the risks to financial privacy, freedom, and markets are all too real.

Around the world, governments are pushing forward to enact greater controls and surveillance with CBDCs. Based on today’s events, it seems the United States is carving a different future. After decades of ever‐​increasing financial surveillance and control, that’s a welcome change of pace.

Norbert Michel

In recent years, national conservatives (natcons) have complained that a blind adherence to free‐​market philosophy has hollowed out the middle class and all but ruined America. To criticize financial markets, they adopted a term from decades past: financialization. According to proponents of financialization, many of whom are self‐​declared socialists, financialization represents some kind of overreliance on financial markets, resulting in too many resources being diverted from investments in the “real” economy.

For the next few weeks, Cato’s Center for Monetary and Financial Alternatives (CMFA) will post quotes from these critics—both old and new—on X and ask followers to vote whether they think the quote is from a natcon or a socialist. Twenty‐​four hours after each poll question is posted, @CatoCMFA will respond to its own post with the answer of who said it and whether the quote was from a socialist or a natcon. We hope you play!

Nicholas Anthony and Jeffrey A. Singer

America has increasingly moved in favor of legalizing cannabis consumption (Figure 1), but the shadow of prohibition still hangs over even the freest of states. One need only look to the financial system to see how heavy that shadow truly is. Despite states welcoming the cannabis industry with open arms, federally regulated financial institutions must stay an arm’s distance away.

This clash between federal and state laws has forced many businesses to operate on the fringe of the financial system, suffer an increased risk of robberies, and lose out on potential investments. Ultimately, these costs—costs created by the clash of federal and state laws—end up negatively affecting not only those who work in this industry but also their customers.

Banking Cannabis Will Get You High Compliance Costs

To be clear, existing laws do not ban financial institutions from servicing the cannabis industry. However, requirements under the Bank Secrecy Act regime do make it exceedingly costly to serve them. For example, financial institutions are required to file reports any time a customer’s activity is considered suspicious. Given cannabis remains illegal at the federal level, a bank could quickly see every activity as suspicious. One credit union reported filing 13,500 reports on 500 cannabis businesses over a two‐​year period.

These reports also involve far more than just highlighting a transaction for later review. The Financial Crimes Enforcement Network told financial institutions that their review process should include verifying business licenses, monitoring what goes on at the stores, and more. In short, under current law, banks and other financial institutions are largely required to act as drug enforcement investigators if they wish to work with the cannabis industry. And for many financial institutions, the cost of doing business here is simply too high.

A Real Problem for Employers, Employees, and Customers

Without access to banking services, many retail cannabis businesses must rely on doing all business in cash, including paying their employees. For employers, that means the already stressful process of filing payroll, paying out wages in a timely manner, and properly furnishing information to the Internal Revenue Service (IRS) involves additional accounting burdens. In fact, were dealing with the IRS not enough of a struggle normally, paying taxes in cash can seem nearly impossible. 

For employees, the process is even worse. Getting paid and working in a lucrative, cash‐​only business means employees incur a greater risk of getting robbed when working and while commuting. Unfortunately, these robberies have happened time and time again.

However, the problems created by the clash of federal and state laws do not end there. The current state of affairs also makes it difficult for cannabis businesses to access capital. For something as simple as a small business loan, cannabis businesses must often rely on private lending sources that demand high interest rates and challenging payment and repayment terms.

Finally, whether it be the time spent accounting for payroll, the preventive measures taken to prevent theft, or the roundabout methods to gain funding, all of these inefficiencies result in costs that get passed on to consumers in the form of higher prices. These factors combine to sustain and, in some cases, help fuel the cannabis black market. Consumers can often purchase cheaper and more readily available cannabis from underground dealers since those dealers do not take on the costs incurred by legal operations.

Yet, there may be a brighter future just over the horizon.

The SAFE Banking Act

When looking at the options on the table, Congress really has three solutions to choose from: revise the Bank Secrecy Act so that financial institutions are not deputized as law enforcement investigators in the first place, create an exemption for financial institutions working with the cannabis industry in legalized states so that they are no longer required to report cannabis‐​related activities, or legalize cannabis entirely so that the activities are no longer considered unlawful in any context.

The SAFE Banking Act takes the middle path. By creating an exemption for the cannabis industry in states that have chosen legalization, the SAFE Banking Act would provide a safe harbor for financial institutions to serve the industry without the risk of drowning in compliance costs that result from the clash between federal and state cannabis laws. This approach would provide a dramatic improvement for the countless businesses trying to get their start, the employees entering this field, and the financial institutions trying to help them along the way.

It would also eliminate the advantage that underground cannabis dealers have over those in the legal market.

Romina Boccia and Dominik Lett

The United States has been experiencing remarkable economic growth, even as debt and deficits soar to unprecedented heights. The economy has benefitted from lower interest rate sensitivity in the market and fiscal and monetary tailwinds. These dual trends are largely temporary, hiding the fiscal drag beneath the surface.

The economic literature is clear that high and rising government debt‐​to‐​GDP slows growth. Over time, debt crowds out more productive investments, raises interest rates, and makes America more vulnerable to crises of all types. Should Congress fail to course‐​correct soon, America could suffer lower growth, economy‐​stifling interest rates, and elevated inflation, harming current and future generations.

Stimulus‐​Driven Growth May Be Short‐​Lived

In the wake of the COVID-19 pandemic, the US has experienced impressive economic growth. In 2021, annual real GDP rocketed up by 6 percent. In 2022 and 2023, the US enjoyed roughly pre‐​pandemic levels of growth. For context, the US economy grew by 2.5 percent annually in the five years preceding the pandemic. Internationally, the US recovery has outpaced its economic peers. At a recent American Enterprise Institute event, Federal Debt: The Baseline and Options for Reform, chief economists from JPMorgan, Mastercard, and Apollo pointed to a few reasons why the US economy has continued to surge ahead as debt and deficits reach new heights.

First, the economy has been bolstered by strong but temporary monetary and fiscal stimulus. In response to the pandemic, Congress enacted enormous fiscal stimulus, providing direct cash transfers to consumers, generous business loans, and temporary tax relief. This was followed by a series of large spending packages, including the CHIPS and Science Act (industrial policy), Infrastructure Investment and Jobs Act, and Inflation Reduction Act (energy subsidies, health care, and tax policy). Together, these three bills will raise deficits by nearly $1 trillion over the next ten years. Add that on top of the multi‐​trillion‐​dollar pandemic stimulus, and it is no surprise that higher inflation followed.

Likewise, the Federal Reserve initially pursued a loose, expansionary monetary policy in response to the pandemic economic downturn. The Fed pushed interest rates down and conducted large‐​scale quantitative easing to increase the money supply and to make borrowing cheaper. Despite the Fed later tightening interest rates to combat inflation, the economy has continued to surge ahead, partly carried by earlier fiscal and financial tailwinds.

The key observation here is that most, if not all, of the fiscal and financial tailwinds outlined above are temporary. Consumers have already spent the savings they built up over the pandemic. COVID‐​era subsidies have largely run out or are ending soon. Spending from bills with longer horizons, such as the CHIPS Act and the infrastructure bill, will wane over time, as will the associated temporary deficit‐​fueled economic stimulus, while taxpayers will be saddled with permanently higher debt costs.

Second, lower interest rate sensitivity from many consumers and businesses has played a major role in limiting the deleterious effects of a high debt and deficit environment that’s pushing up rates. On the consumer side, around 70 percent of household debt is held as housing or mortgage debt, with 15- and 30‐​year fixed mortgages insulated from interest rate fluctuations. Likewise, most of the total corporate bond market is in the form of medium‐ and long‐​term investment grade bonds, with maturity times in excess of two years.

Still, not all companies and consumers are insulated from higher interest rates. If you bought a new home or car, you would have to bear higher interest costs. The same goes for companies with high debt and low revenue, such as venture capital firms and technology companies, which have been more exposed in our present high‐​interest rate environment.

Consider also how the strong labor market has contributed to the post‐​pandemic boom. Most of the year‐​over‐​year gains have been in health care, government, and construction. Many of the job gains seen in health care and government have been with health practitioners and social workers. These growth areas are less capital intensive and, by extension, less interest rate sensitive. Construction, meanwhile, is an industry that tends to be more interest rate sensitive but has received ample subsidies through the $400 billion 2021 infrastructure bill. Much of this new spending is merely crowding out more productive private‐​sector investments over the long run. Even the recent trend of increased immigration, which has improved the labor outlook, could prove temporary depending on the outcome of the upcoming presidential election.

Fiscal Challenges Ahead

Meanwhile, the US faces a severe fiscal challenge. The US could be entering a new period of persistently elevated interest rates. Returning to the “free money era” of the 2010s seems increasingly unlikely, with the Congressional Budget Office projecting interest rates on 10‐​year Treasury notes to remain at or above 4 percent over the next 30 years. Those higher rates will significantly raise the cost of servicing the national debt, accelerating our fiscal decline (see the graph below). As new consumers and businesses enter the market and as existing loans are refinanced, high interest rates will exert increasing downward pressure on the economy, slowing growth and innovation.

The regional banking crisis that occurred last year, featuring Silicon Valley Bank, Signature Bank, and First Republic Bank, illustrates how rising interest rates are already placing pressure on the financial sector. In a new paper, the American Enterprise Institute’s Paul Kupiec warns that waning demand for commercial real estate and high interest rates have made it uneconomical to refinance some properties as existing loans mature, creating a potential for significant bank losses. In the worst case, he argues that we might face a sequel to the 1980s Savings and Loan Crisis and the 2008 Great Financial Crisis.

As the debt burden and interest costs rise, investors will likely become increasingly concerned about the government’s ability to service its debt without inflating away the value of its bonds. A sudden loss of confidence could cause a rapid and spiraling fiscal crisis, wherein bondholders lose confidence in US Treasuries and dump their holdings. Such a scenario could have severe and widespread negative consequences for US economic and national security.

Congress usually waits until the last minute to deal with inevitable issues, including the national debt. The temporary nature of recent economic tailwinds and interest rate insensitivity is another reason Congress should proactively pursue fiscal reforms. More responsible budgetary practices now, including reining in record‐​high deficits, can aid the Fed in its efforts to tame inflation by ensuring monetary and fiscal policy are working in tandem. It would also signal to markets that Congress is serious about tackling the long‐​term debt challenge, strengthening the norms that underlie the credibility of US Treasuries.

If Congress wishes to get America’s dire fiscal trajectory under control, it needs to start laying the groundwork now. Delaying responsible budget reform until a crisis is on our doorstep puts America’s economic and national security in jeopardy.

Walter Olson

In testimony before a House committee, a Republican witness recently cited as credible claims by researcher James Agresti that “10% to 27% of non‐​citizens are illegally registered to vote” and predicted that “about 5% to 13% of them will illegally vote in the 2024 presidential and congressional elections.” Speaking to New York Times reporter Minho Kim for an article published today, I stated,“These numbers simply aren’t believable… They aren’t consistent with what we know from the various other sources.”

For those who are coming in late, these startling estimates of the rate of illegal noncitizen voting can be traced to a 2020 paper by Agresti that in turn depended on a 2014 article by Jesse Richman et al., based on responses to the Cooperative Congressional Election Study (CCES) for the 2008 election. The Richman et al. paper came under intense critical scrutiny from, among others, Harvard’s Stephen Ansolabehere et al, writing under the auspices of the CCES itself, of which Ansolabehere is principal investigator (“Perils of Cherry Picking Low Frequency Events in Large Sample Surveys”) They wrote:

The advent of large sample surveys, such as the Cooperative Congressional Election Study (CCES), has opened the possibility of measuring very low frequency events, characteristics, and behaviors in the population. This is certainly a worthy objective, but researchers must use caution when studying low probability events and behaviors, such as non‐​citizenship rates and voting. Even very low‐​level measurement error can lead to classification and prediction errors and incorrect inferences in analyses.

This paper documents how low‐​level measurement error for survey questions generally agreed to be highly reliable can lead to large prediction errors in large sample surveys, such as the CCES. The example for this analysis is Richman, Chattha, and Earnest (2014), which presents a biased estimate of the rate at which non‐​citizens voted in recent elections. The results, we show, are completely accounted for by very low frequency measurement error; further, the likely percent of non‐​citizen voters in recent US elections is 0.

Zero, of course, functions here as a rounding number and not as an assertion that literally no noncitizens voted in 2008. It signifies simply that alternative rounding numbers, such as 5 or 3 or 1 percent, would likely be less accurate. (Maggie Koerth, writing at Five Thirty‐​Eight, describes the origins of the Richman et al paper, which didn’t begin as an effort to measure illegal voting at all; its authors appear to have been chagrined at the way it was pressed into service to fuel fraud narratives.)

More recently, Glenn Kessler of the Washington Post established through public records requests that in recent Arizona litigation in which Richman was granted access to state data, his resulting report embraced a drastically reduced estimate of noncitizen voting prevalence, most likely below a one percent noncitizen registration rate and half that for voting. (Agresti, seeking to rebut Kessler’s account, says Richman told him that as expert testimony his estimates in the Arizona case were couched to be robust to cross‐​examination.) Critics suggest those numbers are still too high, but at least we are now in the same ballpark, namely a range between one percent and zero.

So is the percentage of noncitizens who vote, or register to vote, nearer to one percent or to zero? I’ve already summarized some of the reasons to think zero is the closer of the two, including database checks, surveys of election administrators, statistical tests (do voting totals track the citizen‐​only voting‐​age population, or do they come in unaccountably higher?), the scanty harvest of investigations and prosecution, audits in various states, and so forth.

Much more might be added along the same lines. In Ohio, the secretary of state announced in 2017 that a total of 821 non‐​citizens were found to have registered in the state over the previous five years, 126 of whom actually voted. That’s among an electorate of roughly 8 million. (Seven years later, a new probe has found another 137 registrations.) The recent Republican House witness cited numbers from suburban DC’s immigrant‐​heavy Fairfax County, Virginia, in which, he said, 278 noncitizen registrants had been identified of whom 117 had actually voted.

For purposes of comparison, the county had an estimated 342,000 immigrant residents around that time (not all of whom were of voting age, of course.) Numbers from jury selection—courts, of course, regularly use voter registration rolls as a basis to issue summonses for jury service, and when you show up for that duty you will be asked whether you’re a citizen—yield numbers not generally inconsistent.

Ironically, noncitizens in America show very little propensity to register or vote even in the handful of progressive jurisdictions that have given them the franchise in races for local offices, such as city council and school board. In the 2019 San Francisco school board race a grand total of two noncitizens are reported to have participated, and the numbers aren’t that much higher among municipalities in Vermont and Maryland (62 voters in Burlington, Vermont; 72 in Takoma Park, Maryland). If any sampling of noncitizens should be favorably disposed toward use of the ballot box it should be that in Washington, DC, which abounds in educated persons born overseas who have lived in the US for many years—think World Bank economists. But Kim reports that of the roughly 15 percent of DC’s 700,000 residents who are foreign‐​born, only around 500 noncitizens had registered to vote as of Monday, according to data provided by the District of Columbia Board of Elections.

One might almost conclude that the progressive push for noncitizen local suffrage is more about the symbolic gesture than anything else. Against that symbolic gesture must be weighed the very real costs of worsening current social divisions and providing a giant opening for the alarmist theorizing already rampant on these topics.

David Kemp

The Environmental Protection Agency (EPA) recently finalized a rule imposing new carbon dioxide emissions controls on fossil fuel power plants. The rule requires that all coal power plants and newly built natural gas combined cycle operating at least 40 percent of the time reduce their emissions by at least 90 percent. The reductions are based on the EPA’s determination that Carbon Capture and Sequestration (CCS) technology is the “best system of emission reduction” in spite of the fact that CCS is not in widespread use and has not been demonstrated to be economically viable.

Unsurprisingly, the EPA’s analysis of the rule finds that the benefits of reduced greenhouse gas emissions and conventional air pollution drastically outweigh the costs of compliance and that the rule will have a negligible impact on retail electricity prices. However, a deeper examination of the assumptions underlying their analysis suggests that the new rule is another example of a consistent feature of environmental regulation: “policy beyond capability.”

As Peter Van Doren has argued, “The history of environmental regulation consists of ambitious, unrealistic goals followed by missed deadlines and lack of enforcement.” Earlier this spring, I argued that the EPA’s new vehicle emissions standards and plans to transition away from fossil fuels demonstrate the principle. It seems that the EPA’s recent regulations frequently imagine a rosy future where emissions targets are easily achieved without full consideration of our ability to reach those goals.

The new power plant rule further demonstrates the EPA’s extreme optimism. For one example, the rule’s Regulatory Impact Analysis (RIA) includes projections of the growth of variable renewable energy (VRE) that don’t seem to fully account for the considerable technical obstacles to their widespread deployment. As shown in Table 1, last year solar and wind constituted 21 percent of total US generating capacity and provided 14 percent of total generation. The baseline model used by the EPA (i.e., their model before the impacts of the rule are considered), which includes subsidies from the Inflation Reduction Act, estimates that solar and wind power will be nearly 60 percent of installed capacity and provide more than 70 percent of the total electricity generated in 2045.

Is this likely to happen? It is impossible to know, but the fact that there are significant technical challenges involved in the widescale deployment of VRE implies that skepticism is warranted. The largest of these challenges is that VRE is intermittent and non‐​dispatchable (i.e., it is only available when the sun is shining or the wind is blowing).

This creates a paradox where, though the marginal costs of VRE electricity are essentially zero, the costs of electricity from a grid with a high percentage of renewable power are actually higher. As Paul Bonifas and Tim Considine explained in the Winter 2022–2023 issue of Regulation:

As VRE penetration levels rise, their value to the system declines. Developed countries like the United States require power night and day, all year round. Because VRE sources depend on weather and time of day, they do not have the ability to dispatch their power on demand. Instead, they depend on dispatchable power plants on the grid to function as a de facto battery, balancing electricity supply and demand when the VREs fall short. When the sun is shining and the wind is blowing, dispatchable power plants reduce their electricity output to keep supply and demand in balance. During times of no sun and low wind, dispatchable power plants increase their output to cover for the lack of VRE power. Therefore, as VRE penetration levels rise, the dispatchable plants sit increasingly idle, yet they must still be available to provide 24/7 power. This “double building” of VREs is a main reason why electricity costs increase with VRE penetration levels.

How does this play out in practice? One of the most famous examples is the California Independent System Operator (CAISO) “duck curve.” In California, which has very high solar penetration, much of the supply during the day comes from solar energy. As shown in Figure 1, the “duck curve” charts the electricity demand minus electricity supplied by solar and wind power, known as “net load”, on March 31 in 2015, 2020, and 2024 (the duck curve is most apparent in the spring when the discrepancy between the minimum and peak energy demand is highest).

Electricity demand begins to increase in the afternoon and peaks in the evening, coinciding with the time when the sun sets and solar energy declines. To satisfy the demand fossil fuel generators need to come on line and ramp up their output. As the figure shows, the amount of renewables on the California grid has grown over time, the duck curve has deepened, and the amount of electricity needed to make up for the decline in solar power has increased. On March 31 of this year, for example, the system had to ramp up 13.6 GW of electricity during the three hours between 4:35 p.m. and 7:35 p.m. (more than 60 percent of the total 22.6 GW of electricity demanded at 7:35).

Along with the increased cost, the effects of the duck curve also undermine the environmental benefits of renewables. In traditional, non‐​renewable electricity grids, baseload (i.e., the minimum amount of electricity constantly demanded) has traditionally been served by generators with low marginal operating costs (often coal and nuclear power plants). More recently, low natural gas prices and increasing power plant efficiency have allowed natural gas combined cycle (NGCC) generators—power plants that both burn gas to power a combustion turbine and use the waste heat to create steam to power a steam turbine—to operate in a baseload role. Meanwhile, more flexible, but less efficient and higher emitting, power plants with higher marginal costs increase and decrease their output to follow changes in electricity demand. These “intermediate” and “peak” load plants have typically been natural gas combustion turbine (CT) plants.

The increased penetration of renewables has displaced traditional baseload generators and made them uneconomical while requiring increased use of flexible CT plants to ramp up when renewable energy is declining. The result has been a delay in the environmental benefits of increased use of renewables. Through the day, the carbon emissions of California’s electricity have become more volatile as zero‐​carbon solar energy is replaced by higher‐​emitting CT power plants, but overall the positive environmental effects of renewable power have been offset by the negative effects of increased use of combustion turbines. Figure 2 shows the carbon intensity (the emissions per kWh of electricity generated) in California compared to the increased proportion of wind and solar. While carbon intensity was declining from 2014 to 2016, between 2017 and 2022 the carbon intensity was stagnant. During that period, the proportion of VRE continued to grow from 18 percent to 27 percent of total generation.

The technical problems of the “duck curve” may be solved by increased energy storage capacity that can provide flexible power output to replace gas generators. In recent years California regulators have required utilities to build a large amount of batteries that will allow California’s electricity carbon intensity to decline further. It’s hard to say whether these projects have been cost‐​effective, and one report suggests that the batteries built between 2017 and 2021 came at a large cost to California rate‐​payers. Recent estimates of the cost of batteries find that they are becoming more competitive with fossil fuel generators (especially when investment subsidies provided by the Inflation Reduction Act are included). And Texas, with a much freer electricity market, has seen a recent increase in battery investment, though there are still outstanding questions about whether a large amount of energy storage will be economical in the long term.

Overall though, the EPA doesn’t seem to fully grapple with these questions, or other similar questions about how renewables require increased investment in transmission or new technology to contend with problems that arise when solar and wind generators are added to electricity grids designed around turbine‐​driven electricity generators. By using a baseline projection of the future energy mix that already assumes a substantial increase in renewable energy, the EPA conveniently finds that the impacts of the new rule are minimal. This is hard to imagine, however, when you consider that baseload NGCC power plants, which even before the rule are being squeezed out by renewable energy in restructured markets, will face new emissions controls that, as CCS technology is largely untested, may prove costly.

Furthermore, the rule imposes emissions controls on new NGCC depending on their availability. Natural gas power plants that will operate more than 40 percent of the time will be required to reduce their emissions, while those that operate less will not. This adds additional incentives for utilities to build and operate more combustion turbines. And the EPA’s projections for future energy storage are likely too low to avoid the “duck curve” problems seen in California on a much larger scale. For example, the EPA’s model estimates that there will be 176 GW of energy storage capacity in 2045 along with the more than 70 percent of generation provided by wind and solar. The National Renewable Energy Laboratory’s study on the impacts of the deployment of energy storage estimates that, under their reference case, around 50 percent of wind and solar generation would optimally have 213 GW of battery capacity. They find that lower amounts of storage have higher costs and emissions.

The technical obstacles to electric grids with a large proportion of variable renewable energy are likely surmountable, and there are already examples of innovations allowing smaller grids with large amounts of solar and wind energy to operate smoothly. But the hopeful future that the EPA describes where we transition to renewable energy with only minimal costs omits the engineering, resources, and time required to overcome those challenges.

Good policy transparently evaluates both benefits and costs and acknowledges areas where there is considerable uncertainty. The EPA’s analysis of the new rule instead layers its conclusions in unnecessary complexity, ignores substantial unknowns, and relies on optimistic assumptions to minimize the estimated economic damages. Until we have an analysis that fully assesses the impacts of the rule, and seriously considers the possibility that the rule might not pass a cost‐​benefit test, the rule should be withdrawn.

Adam N. Michel

I recently testified before the Senate Finance Committee on the importance of personal savings and how poorly designed tax systems and social welfare programs keep many Americans from putting money away for the future. I highlighted universal savings accounts (USAs) as one important reform to help more Americans save for their own priorities.

You can read my full testimony here and watch it here.

The government shouldn’t subsidize or penalize savings. Responding to market incentives, individuals and businesses know best how much to save and invest when government policy doesn’t get in the way. What follows is an expansion of my comments on universal savings accounts as one way to reduce the government’s distortion of personal savings.

Traditional income tax systems encourage consumption over saving by assessing multiple layers of tax on interest and investment returns. Wages are first taxed by income and payroll taxes. Any saved income that increases in value is often taxed again by levies on interest, capital gains, dividends, and transfers at death. The corporate income tax adds another layer of tax on income earned from corporate equity investments. All these taxes reduce market incentives to save.

One way the tax code reduces the income tax systems’ built‐​in bias against saving is through qualified savings accounts, such as employer‐​administered 401(k) retirement accounts, Individual Retirement Accounts (IRAs), and 529 Plan education savings accounts. Qualified accounts remove individual‐​level taxes on investments by allowing taxpayers to contribute tax‐​deferred income (traditional accounts) or after‐​tax income (Roth accounts) without any other taxes owed.

Table 1 shows an illustrative example of how the tax code can penalize savers. Tom and Dan are both 30 years old, in the 24 percent income tax bracket, and want to save $5,000 this year. Tom deposits $5,000 directly into his traditional 401(k) and receives a corresponding income tax deduction, saving him $1,200 in taxes this year. Dan also saved $5,000 of pre‐​tax income this year but did not deposit it in a qualified savings account and paid $1,200 of income tax on his saved income. If Dan and Tom both earn the same 7 percent rate of return for 30 years, Tom will pay about $9,800 in taxes when he withdraws the savings, leaving him with $31,000. Dan only pays $4,600 in capital gains taxes when he sells his assets, but because his original seed money was smaller, he is left with $26,400 in after‐​tax savings ($4,700 less than Tom). Tom’s marginal effective tax rate is 24 percent, and Dan’s is 35 percent.

Without qualified accounts, the income tax system increases the tax rate on Dan’s savings, discouraging him from setting money aside for the future. All else being equal, Dan will save less for retirement than Tom, and the broader economy will be poorer due to Dan’s missing contribution to the capital stock. Without protections from investment taxes, the same is true for other types of non‐​retirement savings.

Universal Savings Accounts Expand Access

The existing qualified accounts shield taxpayers from double taxation, but they also come with income and contribution limits, age restrictions, employer requirements, required minimum distributions, and restrictions on what and when the savings can be spent. These rules are enforced with additional tax penalties and regulatory hurdles designed to increase the cost of accessing the savings for non‐​qualified expenses. The complexity of this existing system and penalties for mistakes discourage uptake, especially among young and low‐​income savers for whom liquidity is most important.

To fix this problem, Congress could create a universal savings account that would function similarly to retirement accounts—income saved in the account would only be taxed once—but without restrictions on who can contribute, on what the funds can be used for, or when they can be spent. Similar accounts have been set up in Canada, the United Kingdom, and South Africa, where they are wildly popular, have increased personal savings, and are used by people at every income level.

Cato’s Chris Edwards has been promoting the idea of USAs for some time. Writing with Ernest Christian in 2002, he laid out the case for an unrestricted universal savings account, and then in 2017, with Ryan Bourne, explained how such accounts were successful at promoting saving in Canada and the United Kingdom. In 2020, 40 percent of Canadian households contributed to a Canadian tax‐​free savings account (TFSA)—almost 60 percent own a TFSA—and 51 percent of TFSA account holders earned less than Canadian $50,000 (about US $37,000).

In two recent pieces, the Tax Foundation has updated the case for USAs by looking at the most recent Canadian and UK data. Willliam McBride concludes that “Canada’s tax‐​free savings accounts are a huge success,” and Garett Watson explains how the UK’s “individual savings accounts” should be a model for US policymakers “looking to encourage greater saving and financial security, particularly among low‐ and moderate‐​income households.” Following this advice, the Heritage Foundation and the Republican Study Committee include universal savings accounts in their annual budget blueprints. 

When economists and policymakers determine that an activity, like saving, is important, they tend to want to subsidize more of it. Instead of subsidizing personal savings, Congress should work to reduce existing disincentives to save in the tax code and other government programs. Universal savings accounts would encourage additional savings by reducing existing impediments to putting money away for all Americans.

Jeffrey Miron

The state of New York legalized recreational marijuana in 2021. Recent estimates, however, count 2,000 unlicensed vendors and only 100 licensed ones. 

Why did legalization not eliminate the underground market? 

One problem is that New York’s policy change did not eliminate the federal ban on marijuana, which has two important consequences. State‐​legalized marijuana sellers cannot access the federally regulated banking system, and such sellers cannot deduct from revenue the costs of producing a federally illegal product. Thus, even without state prohibition, marijuana sellers face strong incentives to remain underground.

A second impediment is that New York has been slow at licensing legal marijuana retailers, with 30 people assigned to review about 7,000 applications. Additionally, a dispensary license in New York costs $7,000, plus $4,500 for a cannabis delivery license. 

The third factor is the state’s 13 percent tax on retail sales, which again advantages black market sales. 

To address this issue, Gov. Kathy Hochul announced an overhaul of New York’s legal cannabis program, granting authorities the power to speed up licensing and shut down local marijuana vendors. Faster licensing makes sense; shutting down underground vendors does not.

Instead, policy should allow the entire market to move above ground by reducing costly and time‐​consuming regulation. These include requirements on environmental impact, store security, and record‐​keeping, among others. By so doing, while expanding licensing and lowering the tax rate, the state can move most of the market above ground. This will plausibly raise tax revenue, by applying a lower rate to a much larger base.

Colin Grabow

Some members of Congress believe that US servicemembers suffer from an excess of choice in the boots they use—and they’ve got the solution.

Last month saw the introduction of the Better Outfitting Our Troops (BOOTS) Act, a bill that would prohibit servicemembers from using “optional boots” manufactured outside the United States or without US materials. While presented as a means of ensuring footwear quality, the legislation appears more concerned with the welfare of US bootmakers—and one manufacturer in particular—than those in uniform.

A comfortable pair of boots is essential for members of the armed forces. But those issued by the military are not necessarily the best fit for each person’s feet. To accommodate individual needs (for example, those with wider feet), the military permits the use of so‐​called “optional boots” (defined on page 122 here) purchased from retailers that meet military specifications. It’s an approach that enables those in the armed forces to find the best‐​fitting footwear while ensuring that standards are met.

That ability to find comfortable footwear, however, would become more difficult if the BOOTS Act is passed.

Introduced by Representatives Nikki Budzinski (D‑IL), Mike Bost (R‑IL), and Rick Crawford (R‑AR), the bill restricts optional boots to those manufactured in the United States with domestic materials and components. Although the legislation’s sponsors claim the measure seeks to promote safety, it’s unclear how reducing servicemembers’ options in selecting footwear advances that goal. Indeed, the opposite seems a more likely outcome.

So why was the bill written? A press release announcing the BOOTS Act holds some clues.

Beyond emphasizing safety, the announcement warns that foreign manufacturers have “taken over the market for Army soldier footwear” (“taking over a market” is protectionist‐​speak for providing a valued good or service at an affordable price). The BOOTS Act’s passage, it adds, would “support domestic military footwear production at places like the Belleville Shoe Manufacturing Company”—a manufacturer with facilities in or near the bill’s sponsor’s districts.

It’s difficult not to conclude that driving business to the company, one highly reliant on government contracts touted by Bost and Budzinski, is a primary motivation for the bill. Even, it seems, if that means members of the armed services are left with fewer choices in critical footwear—choices they like as evidenced by the fact that manufacturers not compliant with the BOOTS Act dominate the market.

Although the BOOTS Act’s fate is uncertain, its passage would be only the latest example of Congress engaging in self‐​serving protectionism at the military’s expense.

The 2017 National Defense Authorization Act (NDAA), for example, reduced servicemembers’ choice of athletic shoes by requiring that such footwear be American‐​made. With the military providing $180 million in allowances for those in uniform to buy athletic shoes between 2002 and 2014, firms positioned to meet the restrictions were elated. Shoe manufacturer New Balance said the new rules could increase its annual sales by 250,000 sneakers—not a bad return on the firm’s $500,000 lobbying push for the change.

As with the BOOTS Act, the bill was championed by members of Congress whose districts included companies that stood to gain from the change. Such considerations trumped the fact that Department of Defense officials had previously argued servicemembers should have a variety of brands to choose from to find the most appropriate shoes.

Similarly, the 2020 NDAA mandated that the military purchase 100 percent domestically produced stainless steel flatware. Unsurprisingly, the language was championed by a member of Congress whose district was home to the only manufacturer able to meet the new requirements.

The benefit to companies that produce goods compliant with such protectionism is obvious. The upside to the military from reduced choice and competition, however, is less apparent.

Indeed, former Rep. Mac Thornberry (R‑TX)—ranking member on the House Armed Services Committee when the flatware restriction was added—blasted the measure for its lack of a national security justification and hurting US troops.

Yet the language passed.

Congress has repeatedly given greater weight to the desires of special interests than the military’s needs when evaluating protectionist measures. Let’s hope it doesn’t make the same mistake again with the BOOTS Act.