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Walter Olson

Under the Supreme Court’s commercial speech jurisprudence, businesspeople do not check their First Amendment rights at the gate when they enter the marketplace. In a significant application of this principle, a panel of the Ninth Circuit ruled in November that California may be barred from requiring businesses to “disclose” through labeling scientifically dubious and misleading allegations about their products. 

The case arose under California’s unique and burdensome Proposition 65, which I’ve written about many times. Prop 65 requires merchants to post warnings, on labels or public spaces at their business, against product exposures that could cause cancer or birth defects, a list that at various times has included such things as candles, fireplace logs, coffee, French fries, Christmas lights, hammers, billiard cue chalk, matches, grilled chicken, life‐​saving drugs, brass doorknobs, car exhaust in parking garages, and on and on. “Practically speaking,” the law firm Sidley has noted, “Prop 65 creates an ‘over‐​warning’ problem: The law requires warnings for so many products and situations that the warnings themselves become meaningless.” The law is jealously guarded, though, because most of the money from the resulting settlements goes to the lawyers, who form a potent Sacramento lobby against reform.

The dispute at hand arose because California law requires that a warning appear if a substance has appeared as probably cancer‐​causing on the list of the International Agency for the Research on Cancer (IARC), and that list includes the herbicide glyphosate, the subject of a huge volume of litigation in recent years. Significantly, both the federal EPA and California’s own environment agency have studied the issue and reached a different conclusion: glyphosate appears to be safe for humans. Agricultural groups sued to enjoin the state from enforcing the rule, resulting in the recent ruling in National Association of Wheat Growers v. Bonta.

The Supreme Court has laid out two levels of scrutiny for compelled commercial speech. The lower of the two levels, the so‐​called Zauderer standard, provides that when a required label or other speech is “purely factual and uncontroversial” in its content, it need only be “reasonably related” to a substantial government interest and not “unjustified or unduly burdensome.” That’s a concession to the large volume of relatively uncontroversial labeling on matters like weights and measures, ingredient lists, nutritional content, and so forth. Regulators usually win under that standard. In cases where the content of the compelled speech is controversial or not purely factual, however, intermediate level scrutiny applies (the so‐​called Central Hudson standard) in which case the rules must “directly advance” a “substantial” governmental interest, with the means chosen not being “more extensive than necessary.”

Two of the panel’s three judges found that glyphosate disclosure would inevitably flunk intermediate scrutiny; the district court had said that statements about glyphosate could not be deemed “factual” if they are false, nor would such publication advance a substantial governmental interest. On appeal, the dissenting judge on the panel would have sent the case back to see whether there might not be ways to couch a label carefully so as to fulfill the legal requirement without asserting anything non‐​factual.

National Association of Wheat Growers v. Bonta is unlikely to spell a revolution in regulation, so long as agencies pay attention to what is factual and what is not in the speech they require. The endless list of putative hazards under Prop 65, however, does include more than a few products and substances for which a court might find a required warning of cancer or birth defects to be absurdly misleading or non‐​factual. That’s yet another reason a rational California legislature would revisit, and roll back, this bad law.

Colleen Hroncich

Eric Eisenbrey was a middle school science teacher for 10 years, but he often felt like he couldn’t really help his students given the constraints of the system. So he decided to make a change. “I knew that education was my passion, so I wanted to make sure I found a way to keep working in education,” he says. Through his research, he found Microschool Builders, where he got the support to create Eyes and Brains STEM Center, a microschool in rural Elkins, West Virginia.

Earlier this year, Eric shared his story at a Cato Institute event, Showcasing Education Entrepreneurs. It’s a great example of how school choice programs can help bring educational options to rural and low‐​income areas.

When he first started looking into starting a microschool, “There was this concern of being in a lower socioeconomic area in West Virginia—that opening a micro school wouldn’t be affordable to families,” he explains. “It requires a good amount of funding to be able to have a school and be able to offer the materials and the supplies and the experience to students. But it just so happened that at the point that I was just working on launching my school, the state passed our ESA program, which is called Hope Scholarship. And with that passing in the state, it really gave me the opportunity to say, ‘OK, this is something I can do. This is a viable way of parents being able to sign their students up for the school and being able to have enough funding.’”

The monopoly system fought against the program, challenging it in court, which complicated things and caused a “rough start” in the first year. But Eric was able to launch with seven students last fall. “The kids are so excited to have this space where they’re able to really explore their passions,” he says. “My big focus is on showing students that the science, the engineering, the technology, the math, it all comes into play in any interest they have, anything they do. It’s all about that critical thinking.”

Eyes and Brains STEM Center uses mixed‐​age classrooms and a student‐​centered focus, and he takes a very individualized approach to evaluating where his students are in their learning journeys. “Even without standardized tests, I know what math skills my students are struggling with. I know what reading skills my students are struggling with. I know where there are gaps in their knowledge of history or science. And it’s different for each kid,” he says.

Eric realizes there’s going to be some pushback as new learning options like microschools spread because they aren’t standardized.

We want these hard, fast numbers. We want these labels. And we want to be able to say ‘This student’s an “A” student, this student’s a “B” student.’ But I want to be able to say this is this student, this is this individual. Because that’s what parents see. They see their kid. And parents are starting to realize that they want their students to be in a situation where their student is seen as their student. As this individual, not as the “A” student or “B” student or the kid that’s always getting in trouble just because they need out of their seat. And in the smaller school setting, in the microschools, we’re able to really see our students. We’re able to then personalize that growth.

From Eric’s perspective, one problem of the standardized approach in the school system is that the modifications students receive can hinder their development. He’s currently working with a child who is dyslexic. In a public school, the child would probably test all right because he’d have someone reading the passage and questions to him along with other modifications. But that wouldn’t be helping him actually become a better reader. “He loves getting new information, and not being able to read a text when it’s put in front of him is a barrier. It limits him from doing different things that other kids around him can do,” Eric explains. “In the microschool, I’m working with him as that individual student, looking at what it is specifically he needs and trying to meet those specific needs. He might not look like he’s doing as well compared to his peers. But I can see when the growth is happening.”

At the Cato event, an attendee asked if the panelists had any tips on how to get more mainstream acceptance of these alternative learning models. To Eric, parent education is key. Many parents still aren’t aware the Hope Scholarship exists. He runs after‐​school programs at his microschool, and often parents who come for those programs are surprised to learn there’s a full‐​time school option there for their children. Parents are used to education looking a certain way, so there’s often a need for “de‐​schooling” to help them understand it doesn’t have to be that way.

“Having been a public education teacher, I found that I had to de‐​school myself when I stepped out of the classroom,” he recalls. “I had to realize that it doesn’t have to be all the subjects broken up and we have to hit on these certain things in a certain amount of time. And really the parents that I have now, the big thing for them is that they’re seeing just how happy their students can be in a different environment where they have more freedom, where they have more choice, and where the education is tailored to them.”

Jeffrey Miron and Jacob Winter

An important strand of economic analysis suggests that nudges — non‐​coercive policies like providing relevant information or adjusting defaults — can significantly change economic behavior. This contrasts with traditional regulation and taxation, which are coercive in the sense of changing the prices or costs faced by economic agents.

According to proponents, nudges should be relatively acceptable to libertarians, precisely because they are non‐ or at least less coercive.

A key question, however, is whether nudges achieve their goals, and at what cost. On that score, the evidence is mixed. 

As one example, recent research (Cato Research Brief no. 374) conducted an experiment that encouraged customers to audit their water use (with the goal of reducing greenhouse gas emissions). The study concluded that audits reduce water use, but the reductions in emissions were small, so the program was not cost effective. Other research (Cato Research Brief no. 373) suggests that text messages to encourage a switch from coal to electric heating caused less rather than more use of electricity. New York City has mandated since 2008 that fast food restaurants display calorie information on menus; research has found no evidence that this policy has influenced calorie consumption or the frequency of visiting fast food restaurants.

To be sure, nudges sometimes work. Research has shown that take‐​up of retirement plans increases when employees are enrolled by default, even when opting out is trivial.

Overall, however, using nudges is harder than it looks. Meaningfully changing behavior (via taxation, regulation, mandates, or prohibitions) will likely generate unintended consequences. The research above “nudges” back against the claim that nudges can achieve substantial benefits at minimal cost by avoiding coercion.

This article appeared on Substack on March 28, 2024.

Marc Joffe

Jokes about the abundance of “ambulance chasers” aside, the fact is that some parts of America face a shortage of lawyers rather than the surplus that those critical of the profession might expect. Although New York City and Washington, DC, have a high concentration of lawyers, nearly 1,300 counties across the country have less than one lawyer per thousand residents, according to a 2020 American Bar Association report. So‐​called legal deserts are especially common in rural areas, where children and less affluent adults may find it difficult or impossible to secure representation.

Given the high costs of law school and passing the bar examination, it is unsurprising that relatively few attorneys are available to advocate for those unable to pay substantial fees. States could alleviate the shortage by providing alternative paths for individuals to begin practicing law in underserved communities.

The ideal reform would be the most radical one: dropping state attorney licensing regulations and allowing private organizations to help clients identify qualified lawyers. Although that idea is not yet on the table, incremental reforms are on the menu.

Several states have considered changing their bar exams or even replacing them with experiential alternatives. One state that is far along in the reform process is Oregon, whose Supreme Court conceptually approved two alternative licensing pathways. One alternative, the Supervised Practice Portfolio Examination, will allow candidates to perform an apprenticeship after graduating from law school and then submit a portfolio of their work to the state’s Board of Bar Examiners (BBX). A second alternative, the Oregon Experiential Portfolio Pathway, will incorporate case experience in the second and third years of law school from which students could create a portfolio for BBX review.

On March 15, Washington State’s Supreme Court decided to implement a similar reform, conceptually approving licensing pathways based on apprenticeships and portfolios of work performed during law school. The court also endorsed improved interstate reciprocity, allowing lawyers licensed in other states to be admitted to the Washington State Bar Association after only one year of practice as opposed to the three years required under current rules.

New Hampshire pioneered alternative licensing pathways for lawyers albeit at a relatively small scale. The University of New Hampshire’s Franklin Pierce School of Law has offered an experiential alternative to the bar exam since 2005. An independent evaluation found that new lawyers licensed through this pathway, known as the Daniel Webster Scholar Honors Program, outperformed counterparts who became lawyers by passing the bar exam. Performance was assessed through standardized client interviews.

In Wisconsin, juris doctor graduates of the University of Wisconsin Law School and Marquette University Law School can begin practicing without taking the bar exam under the state’s diploma privilege. About a dozen states offered diploma privileges in the late 19th century, but most of these were withdrawn after the American Bar Association and the Association of American Law Schools condemned the practice. Utah temporarily implemented a diploma privilege in 2020, when the COVID-19 pandemic temporarily complicated the administration of bar exams.

Today, several other states are evaluating alternative law license pathways including California, Massachusetts, and New York. The California Supreme Court is considering a bar association proposal to begin a pilot program under which candidates could become licensed after 700–1,000 hours of supervised practice rather than passing an exam.

Although these reforms are welcome, more aggressive changes should be possible given the emergence of artificial intelligence (AI), which will be able to help paralegals perform basic lawyering functions such as writing and reviewing contracts. Although the full promise of AI in the legal profession has yet to be realized, it is close enough to make one wonder whether we should be expecting so many aspiring lawyers to spend three years and hundreds of thousands of dollars on law school and exam preparation.

In the United States, individuals have the option to represent themselves in court or may obtain free representation through public defenders. But it is often said that a defendant representing himself has a fool for a client, and public defenders are often severely overworked, handling up to 350 cases at once. The availability of more attorneys who can demonstrate an ability to serve clients effectively will enable more Americans, especially those in rural areas, to obtain quality representation. States should consider the models being developed in Washington and Oregon as well as more radical reforms to attorney licensing.

Robert A. Levy

Competition is an essential ingredient of capitalism. Accordingly, when a corporation appears to have acquired sufficient market dominance to discourage competitors, it’s tempting to ask the government to remedy the problem by enforcing antitrust laws. That temptation should be resisted, except to redress monopoly power that the government itself has created.

I’ve published several variations on this critique—mostly in connection with the antitrust case against Microsoft during the so‐​called browser wars. Today, the critique bears repeating, as the Justice Department pursues its ill‐​advised crusade against Apple—for the benefit of competitors at the expense of consumers.

Without constant vigilance by the Justice Department and the Federal Trade Commission, so the argument goes, large corporations would ruthlessly destroy their smaller rivals and raise prices and profits at consumers’ expense. When mega‐​companies grab market share, the need for vigorous antitrust enforcement seems obvious. And yet, there’s a dark side to antitrust. The laws, in the words of former Federal Reserve chairman Alan Greenspan, are a “jumble of economic irrationality and ignorance.”

First, antitrust debases the idea of private property, transforming it into something that effectively belongs to the public, to be designed by government officials and sold on terms congenial to corporate rivals who are bent on the market leader’s demise. Some advocates of the free market endorse that process, despite the destructive implications of stripping private property of its protection against confiscation. If new technology is to be declared public property, future technology will not materialize. If technology is to be proprietary, then it must not be expropriated. Once expropriation becomes the remedy of choice, the goose is unlikely to continue laying golden eggs.

The principles are these: No one other than the owner has a right to the technology he created. Consumers can’t demand that a product be provided at a specified price or with specified features. Competitors aren’t entitled to share in the product’s advantages. By demanding that one company’s creation be exploited for the benefit of competitors, or even consumers, government is flouting core principles of free markets and individual liberty.

Second, antitrust laws are fluid, nonobjective, and often retroactive. Because of murky statutes and conflicting case law, companies never can be quite sure what constitutes permissible behavior. Conduct that is otherwise legal somehow morphs into an antitrust violation. Normal business practices—price discounts, product improvements, exclusive contracting—become violations of law. When they’re not accused of monopoly price gouging for charging too much, companies are accused of predatory pricing for charging too little, or collusion for charging the same.

Third, antitrust is based on a static view of the market. In real markets, sellers seek to carve out mini‐​monopolies. Profits from market power are the engine that drives the economy. So, what might happen in a utopian, perfectly competitive environment is irrelevant to the question whether government intervention is necessary or appropriate. The proper comparison is with the marketplace that will evolve if the antitrust laws, by punishing success, eliminate incentives for new and improved products. Markets move faster than antitrust laws could ever move. Consumers rule, not producers. And consumers can unseat any product and any company no matter how powerful and entrenched. Just ask WordPerfect or Lotus or Polaroid.

Fourth, antitrust remedies are designed by bureaucrats who don’t understand how markets work. Economic losses from excessive regulation can do great damage to producers and consumers. But government moves forward in the name of correcting market imperfections, apparently without considering the consequences of government intervention. Proponents of antitrust tell us that government planners know which products should be withdrawn from the market, no matter what consumers actually prefer. The problem with that argument is that it leads directly to paternalism, to the idea than an elite corps of experts knows our interests better than we do—and can regulate our affairs to satisfy those interests better than the market does.

The real issue is not whether one product is better than another but who gets to decide—consumers, declaring their preferences by purchases in the market or specialists at the Justice Department or the Federal Trade Commission rating the merits of various goods and services. When we permit government to make such decisions for us, and we allow those decisions to trump the subjective choices of consumers, we abandon any pretense of a free market. In the process, we reduce consumer choice to a formalistic appraisal centering on technical features alone, notwithstanding that products are also desired for quality, price, service, convenience, and a host of other variables.

Fifth, antitrust law is wielded by business rivals and their allies in the political arena. Instead of focusing on new and better products, disgruntled rivals try to exploit the law—consorting with members of Congress, their staffers, antitrust officials, and the best lobbying and public relations firms that money can buy. Soon enough, the targeted company responds in kind—using political influence to bring down competitors. That agenda will destroy what it sets out to protect. Politicians are mostly order takers. Therefore, we’ll get the kind of government we ask for—including oppressive regulation. Citizens who are troubled by huge corporations dominating private markets should be even more concerned if those same corporations decide that political clout better serves their interest—politicizing competition to advance the private interests of favored competitors.

Sixth, barriers to entry are created by government, not private businesses. Under antitrust law, the proper test for government intervention is whether barriers to entry foreclose meaningful competition. But what is a “barrier”? When a company advertises, lowers prices, improves quality, adds features, or offers better service, it discourages rivals. But it cannot bar them. True barriers arise from government misbehavior, not private power—from special‐​interest legislation or a misconceived regulatory regimen that protects existing producers from competition. When government grants targeted tax benefits, subsidies, insurance guarantees, and loans, or enacts tariffs and quotas to protect domestic companies from foreign rivals, that creates the same anti‐​competitive environment that the antitrust laws were meant to foreclose. That’s how barriers to competition are born and nurtured at public expense. The obvious answer, which has little to do with antitrust, is for government to stop creating those barriers to begin with.

Seventh, antitrust will inevitably be used by unprincipled politicians as a political bludgeon. Too often, the executive branch has exploited the antitrust laws to force conformity by “uncooperative” companies. Remember when President Nixon used the threat of an antitrust suit against the three major TV networks to extort more favorable media coverage. On a widely publicized tape, Nixon told his aide, Chuck Colson, “Our gain is more important than the economic gain. We don’t give a goddamn about the economic gain. Our game here is solely political.” If Nixon were the only culprit, that would be bad enough. But today’s crusade against Apple suggests that the Biden administration seeks political dividends by attacking a huge and immensely rich corporation, notwithstanding the economic toll. The lesson is clear: the threat of abusive public power is far larger than the threat of private market power.

More than two centuries ago, in the Wealth of Nations, Adam Smith observed that “People of the same trade seldom meet together … but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.” Coming from the father of laissez faire, that warning has often been cited by antitrust proponents to justify all manner of interventionist mischief. Those same proponents, whether carelessly or deviously, rarely mention Smith’s next sentence: “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.”

David Boaz

Ideological labels are challenging. They change over time. They often originate as terms of abuse for one’s opponents. The proto‐​liberal Levellers in the mid‐​1600s got their name from critics who accused them of wanting to “level” society, rather than simply to establish equal rights. Both “Whig” and “Tory” were originally used to criticize their opponents in the late 17th century. These days, what do conservatives want to conserve? Are liberals still liberal?

Still, labels are a way of making sense of the political world. And we should use them as carefully and accurately as we can. One linguistic confusion that’s been bothering me lately is the increasing use of “far right” in the mainstream media to refer to people with very different views. In a letter to the editor of the Washington Post, I urged journalists to recognize the stark differences between libertarians and the “far right”:

Post reporters frequently use the term “far right.” But I wonder whether they might be more discriminating.

Take the Nov. 26 news article “Dutch vote shows far right rising, transforming Europe.” It called both Argentine President‐​elect Javier Milei and Dutch Party for Freedom leader Geert Wilders “far right.” But Milei is a free‐​trader who wants to downsize a bloated Peronist government that has brought Argentina 80 years of economic decline. He wants to legalize organ markets and supports same‐​sex marriage. True, he’s antiabortion, but it’s not exactly extreme to hold a position that almost half of Americans hold (if you include both no abortions and some restrictions). Meanwhile, Wilders’s party says this: “The Netherlands is not an Islamic country: no Islamic schools, Qurans or mosques.” He has shown no interest in smaller government. In fact, given what I can see, I might call Milei liberal and Wilders illiberal. Are those candidates and parties really the same movement?

The Post has sophisticated readers. They can make distinctions if reporters will lay them out. It seems facile to lump every challenge to the social democratic establishment as “far right.”

For more on these issues, see “A New, Old Challenge: Global Anti‐​Libertarianism” and “Rejecting Equality Means Rejecting Libertarianism.”

Jeffrey A. Singer

This week, Idaho’s Republican Governor Brad Little signed HB 617 into law. The bill repeals Idaho’s five‐​year‐​old law that permits harm reduction organizations to operate syringe services programs (SSPs), also called “needle exchange” programs. Idaho becomes the first state to retrogress from the growing trend among US jurisdictions to embrace harm reduction. Lawmakers cited concerns that SSPs enable people to use illicit drugs and grumbled that there is not enough evidence SSPs entice people with substance use disorder to enter rehab programs.

Of course, advocates of SSPs never touted them as a means of bringing people into addiction rehab programs. While people operating SSPs often connect their clients to rehab and other social services, their raison d’être has always been to reduce the spread of HIV, hepatitis, and other infections. On that, SSPs have an outstanding record. In addition to distributing clean syringes, SSPs also hand out bleach and other materials for users to clean their equipment and, in recent years, began giving out the opioid overdose antidote naloxone. By getting more naloxone into users’ hands, SSPs will hopefully help reduce overdose deaths.

Contra SSP critics, there is no evidence that SSPs enable illicit drug use. But think about it: Do SSP critics truly believe that thousands of people have been pining to inject heroin or fentanyl that they can easily access on the black market, but the only thing stopping them is that they don’t know where to obtain a clean syringe?

SSPs’ record of reducing the spread of HIV, hepatitis, and other deadly infections is so impressive that the Centers for Disease Control and Prevention, the surgeons general of the Trump and Biden administrations, the National Institute on Drug Abuse, the Substance Abuse and Mental Health Services Administration, the White House Office of National Drug Control Policy, the World Health Organization, the American Public Health Association, the American Medical Association, and the American Society of Addiction Medicine all endorse SSPs and urge lawmakers to remove legal obstacles preventing harm reduction organizations from operating them.

A 2022 Cato policy analysis explained how state‐​level drug paraphernalia laws provide major obstacles to SSPs and other harm reduction strategies. Until last year, Alaska was the only state never to have enacted drug paraphernalia laws. Minnesota repealed its drug paraphernalia laws last May.

Substance use disorder is a major problem in Canada, Australia, the UK, and Europe. Yet overdose rates in the US dwarf those in the rest of the developed world. A major reason is that the rest of the developed world has embraced harm‐​reduction strategies for decades while lawmakers in the US are only recently beginning to appreciate them. Sadly, Idaho’s lawmakers are not among them.

By recriminalizing SSPs, Idaho lawmakers appear to prioritize preventing people from using illicit drugs over preventing them from dying due to illicit drug use. That places abstinence over the preservation of life.

Chris Edwards

In his State of the Union speech on March 7, President Biden complained about corporate tax breaks and argued that corporations should pay their fair share:

“I want to talk about the future of possibilities that we can build together — a future where the days of trickle‐​down economics are over and the wealthy and the biggest corporations no longer get all the tax breaks.” [1:01]
“It’s my goal to cut the federal deficit another $3 trillion by making big corporations and the very wealthy finally beginning to pay their fair share.” [1:13]
“The way to make the tax code fair is to make big corporations and the very wealthy begin to pay their share.” [1:15]

That is what President Biden said, but he is a hypocrite. He signed into law three massive bills handing out hundreds of billions of dollars of narrow tax breaks and spending subsidies to big corporations. It is the biggest gusher of corporate welfare ever.

Biden elaborated in his speech, “I also want to end tax breaks for Big Pharma, Big Oil….” But he has given huge tax breaks and spending subsidies to Big Semiconductor, Big Wind, Big Solar, Big Battery, Big Automaker, Big Utility, and so on.

Rather than trickle‐​down economics, this is a Niagara Falls of subsidies flooding from Washington to the president’s favored industries and corporations.

Biden signed the Infrastructure Investment and Jobs Act of 2021, which increased federal subsidies by $548 billion. Tens of billions of dollars were handed out to railroads, electric utilities, broadband companies, the EV industry, and others.

Biden signed the CHIPs and Science Act of 2022, which included $54 billion in subsidies, including $39 billion going to semiconductor companies.

Biden signed the Inflation Reduction Act of 2022, which handed out $868 billion in energy subsidies, most of it to big corporations, including automakers, utilities, manufacturers, and hydrogen producers. Adam Michel finds that Biden’s energy tax subsidies could top $1.8 trillion.

Biden rails against big corporations, but he has given them colossal subsidies.

Travis Fisher looks at Biden’s energy subsidies here.

Nicholas Anthony

Federal Reserve Chair Jerome Powell was recently questioned over growing concerns that a US central bank digital currency, or CBDC, might be launched in the near future. Central banks around the world are leading the charge for CBDCs, so it came as a welcome surprise for many when Chair Powell said, “We’re nowhere near recommending or adopting a [CBDC].”

Still, there are several open questions that need to be addressed.

Is the Fed Working on a CBDC?

When testifying before the Senate Banking Committee, Chair Powell said, “We’re nowhere near recommending or adopting a [CBDC] but … the thought was that the government could create a digital form of money that people could then transfer among themselves.” Powell went on to say, “Now, of course, that raises a concern that if that were a government account, then the government would see all your transactions.” He then said that is not something “we would stand for or do or propose here in the United States”—a questionable statement given the surveillance under the Bank Secrecy Act regime, but a welcome one.

Clarifying his stance further, Powell added, “If we were ever to do something like this—and we’re a very long way from even thinking about it—we would do this through the banking system.” In other words, Chair Powell was careful to note that if the Federal Reserve moves forward with a CBDC, it would do so with what it calls an intermediated model (more on that below).

Shortly after the hearing, Representative Tom Emmer (R‑MN) argued that it’s hard to take some of these statements at face value. For example, Representative Emmer pointed out that officials from the Federal Reserve had recently informed congressional staffers that a CBDC was a key duty of the central bank and that the Federal Reserve was hiring positions related to CBDC development.

Likewise, the Human Rights Foundation’s CBDC Tracker shows that the Federal Reserve has been conducting studies, experiments, and pilots for years to research and develop a CBDC. The Federal Reserve even announced its Technology Lab was “expanding experimentation” with CBDCs (among other things).

Reinventing the dollar system is no small feat, but it’s easy to see why many people couldn’t help but be confused by the suggestion that the Federal Reserve has done next to nothing or is nowhere near “even thinking about it.”

A few days later, Punchbowl’s Brenden Pederson asked Chair Powell at a press conference to explain what exactly the Federal Reserve is doing as far as developing a CBDC goes. Chair Powell replied,

What we are doing—and I think what every major central bank is doing—is we’re trying to stay in the frontiers of what’s going on in digital finance. … [A CBDC] has applications in wholesale finance [and] in the payment system. To serve the public … we need to be knowledgeable about all that. So we actually do have people trying to understand things. But it’s wrong to say that we’re working on a CBDC and then we’ve secretly got a lab here where we’ve got one and we’re just going to spring it on Congress at the right moment. We don’t.

It is fair to say that the Federal Reserve has not been secretly working on these issues given its announcements and publications on the issue. However, the experiences during both the pandemic and the global financial crisis are clear evidence that the Federal Reserve can take unprecedented actions and do so rapidly.

Whose Authority is it Anyway?

During the Senate Banking Committee hearing, the question of authority came up as well. Senator Cynthia Lummis (R‑WY) asked, “Do you still agree that the Federal Reserve cannot introduce a US central bank digital currency without congressional authorization?” Chair Powell replied, “Yes, I do.”

However, when responding to Pederson at the press conference, Chair Powell gave a slightly different answer, saying, “It would take legislation by Congress, signed by the president to give us the ability to do what we think of as a CBDC, which is really a retail CBDC with the public” (emphasis added).

This hedging is important. It’s quite similar to when he said last year that there are “potential forms of a wholesale CBDC” where the authority is unclear. But it’s also important given the Federal Reserve prefers what’s called an intermediated CBDC.

The problem stems from the distinction between the different forms a CBDC can take. Generally, discussions of CBDCs refer to the retail model as a direct CBDC. In this model, people have accounts with the central bank and the central bank directly manages their use of a CBDC. However, in its 2022 CBDC report, the Federal Reserve focused on an intermediated, or indirect, model where the CBDC is still used by individuals but the accounts are managed by third parties (e.g., banks and credit unions).

From a citizen’s perspective, the difference between a retail CBDC and an intermediated CBDC is not critical. Both models involve a CBDC that would ultimately be used by the general public. The problem is that the intermediated model presents a unique issue in the United States. The Federal Reserve Act prohibits the Federal Reserve from offering accounts to individuals (i.e., what occurs with a retail CBDC provided directly to individuals). In contrast, an intermediated CBDC would get around this requirement because third parties would maintain the accounts on behalf of the Federal Reserve. In fact, the Federal Reserve even said as much in its CBDC report,

The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals… Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments… Although commercial banks and nonbanks would offer services to individuals to manage their CBDC holdings and payments, the CBDC itself would be a liability of the Federal Reserve. 

Conclusion

Chair Powell expressed a bit of frustration when he was questioned about CBDCs at the press conference. If he would like to avoid future frustrations, there is a simple remedy. As I recommended last year, the Federal Reserve should issue a statement addressing where things currently stand. In particular, the statement should answer the following questions:

Considering the Federal Reserve’s existing work on CBDCs, what specific criteria are the Federal Reserve seeking that would influence it to make an official decision on whether it would or would not recommend launching a US CBDC?
Does the Federal Reserve believe it has the authority to issue:
 (A) a retail CBDC?
 (B) an intermediated CBDC?
 (C) a wholesale CBDC?

Addressing these questions and committing to not issuing any type of CBDC without authorizing legislation from Congress would go a long way to clear any remaining confusion.

Patrick G. Eddington

I’ve been in Washington over 30 years, but sometimes even I can be stunned by the short memories and shortsightedness of members of the Fourth Estate. Today’s example is the editorial board of the venerable (and usually pretty sane) Wall Street Journal.

The ostensible topic of their latest pronouncement (paywall) was the recent terrorist attack in Moscow, which appears to have been the work of violent Salafist terrorists. After offering some fairly standard pre‐​Trump era Establishment fare on the need for still more US military action in the Islamic world, the WSJ ed board ended its piece by stating,

The ISIS comeback also argues for the House to overcome its disagreements and reauthorize Section 702 authority to surveil foreign communications even if it accidentally catches some Americans in the sweep. The House Intelligence bill contains enough safeguards without adding bureaucratic and political obstacles to rapid surveillance of real threats. Americans don’t want another attack on U.S. soil like last week’s horror show in Moscow.

Item 1: The Foreign Intelligence Surveillance Act (FISA) Section 702 telecommunications intercept program does not “accidentally” sweep up the communications of US persons with no connection to criminal activity. The very structure and operational characteristics of both the 702 program and the global telecommunications system guarantee that the emails, text messages, and the like of innocent Americans are inevitably captured and stored in a vast database for years. It is a database that agents of the Federal Bureau of Investigation (FBI) have repeatedly been found to have used to conduct warrantless digital fishing expeditions on Americans not wanted for any crime.

That means that the communications of Journal reporters (especially those traveling to or reporting from overseas) are very likely getting swept up via the 702 program. The same thing is almost certainly happening to the digital letters to the editor or op‐​eds submitted to the Journal by Americans overseas or who visit the Journal’s website to read its news coverage, etc. All of that, and literally millions of communications of other Americans are available for perusal by FBI agents with access to the 702 database. To be a cheerleader for a surveillance program that’s likely collecting the communications of its reporters and readers is probably not what those reporters or readers view as a legitimate government function or use of their taxpayer dollars.

Item 2: Multiple bills have been introduced to impose an actual warrant requirement for any federal law enforcement access to that stored data, but the most recent one introduced is a bipartisan Senate bill that, while not going as far as many privacy and civil liberties advocates would like, would be a vast improvement over where we are now with the 702 program. The House Intelligence Committee bill championed by the WSJ ed board would, if enacted, largely be another classic example of the old Capitol Hill game of “Let’s not but say we did” when it comes to surveillance reform. The Journal ed board seems not to recognize that the House and Senate Intelligence Committees have long been “organizationally captured” by the various intelligence and law enforcement entities they were created to oversee in 1978. Both committees are cheerleaders for mass surveillance, not our protectors from it.

Item 3: The Journal ed board is engaged in a form of magical thinking with respect to mass surveillance. No mass surveillance program has ever stopped a terrorist attack on America. That was the case with the 702 program’s progenitor, the infamous STELLAR WIND program. It was also the case with the PATRIOT Act’s Section 215 telephone metadata mass surveillance program. And while the FBI and the Office of the Director of National Intelligence (ODNI) continue to make incredible claims about the program’s effectiveness, the actual FBI internal audits of the 702 program have never been released. Cato is trying to remedy that information deficit via a Freedom of Information Act (FOIA) lawsuit currently before D.C. Circuit Judge Tanya Chutkan.

The WSJ ed board could’ve enlightened its readers with all of these publicly available, sourced facts. Instead, it chose to fearmonger in favor of a program that is not and never has been Fourth Amendment compliant in the way the Founders intended, a program that almost certainly sweeps up the communications of its own reporters, editors, and readers. How the mighty have fallen.