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Jennifer J. Schulp

Last week, the Securities and Exchange Commission (SEC) finalized new rules relating to special purpose acquisition companies (SPACs). SPACs are formed to raise money to complete a merger with a private company, which then assumes the SPAC’s place as a publicly traded company.

The SEC’s new rules unfairly impose higher burdens on SPACs than on traditional initial public offerings and, as SEC Commissioner Hester Peirce recognized, “will render SPACs a much less useful pathway for companies to enter the public markets.” That’s a harmful result for entrepreneurs and investors alike, both of whom suffer when options to access the public markets are limited.

These new SPAC rules are bad enough, but buried within the SEC’s rule release is guidance with a broader, and potentially more damaging, reach.

The SEC’s guidance interprets the Investment Company Act of 1940, which regulates companies that are primarily engaged in investing and whose own securities are offered to the public (like mutual funds). And the new interpretation makes SPACs—but not just SPACs—vulnerable to the SEC determinations that they are investment companies and should be regulated as such.

In the rulemaking process, the SEC grappled with how to treat SPACs under the Investment Company Act. The SEC’s concern was largely that “the longer a SPAC” operates before merging with a target company, “the more likely investors will come to view the SPAC as a fund‐​like investment.”

That premise is flawed, and as SEC commissioner Mark Uyeda explains, judging an entity’s investment company status by the length of time it has been operating is not the right test. In order to be an investment company, a securities issuer must be engaged “in the business of investing, reinvesting, or trading in securities.” While some SPACs might be using investor proceeds in that way, the fact that a SPAC hasn’t merged with a private company within a set period of time isn’t really relevant to that inquiry.

But the SEC nevertheless issued guidance suggesting that a SPAC that operates for a period of more than 12 or 18 months before completing a merger with a private company may be required to register as an investment company. That’s a problem for SPACs, which have often operated with deadlines of 18–24 months to complete their transactions.

The guidance, though, isn’t just a problem for SPACs. For example, a pharmaceutical company that raises money for research and development, manages that money with investments while building its business, and takes more than a year to bring a drug to market may be vulnerable under the SEC’s guidance. Such an arrangement isn’t uncommon for biotech companies. Indeed, pharmaceutical company Moderna, which went public in 2018, didn’t produce a market‐​ready vaccine until 2020. The same goes for other ventures—like air taxi or mining companies—that require a large infusion of capital for product development, as well as any company that temporarily receives investment income while building a product.

Such companies are not meant to fall within the bounds of the Investment Company Act. They aren’t mutual funds or the like, and those who invest in these companies aren’t looking to make gains based on the company’s investing skills. But the SEC’s guidance suggests that these companies, to be safe, may have to register as investment companies (or ensure that they take no more than a year to bring a product to market after raising money).

At best, investment company status is a distraction for a company; at worst, it’s a barrier to the company’s existence. Being a registered investment company is no small undertaking. Law and regulation specify the activities that an investment company can engage in, require initial and ongoing disclosures to investors, and contain requirements around how such companies are organized. Investment companies must abide by rules covering accounting methodologies, recordkeeping, and auditing, among other rules regarding the fiduciary duties that they owe to their investors.

Non‐​financial companies should be focused—both financially and operationally—on their products, not on complying with SEC investment company regulations. The SEC should not be affecting the production of goods and services by subjecting these companies to arbitrary timelines. And economic growth should not be slowed because entrepreneurs fear treading in this new minefield.

While guidance, which isn’t subject to notice and comment rulemaking, shouldn’t have the force of law, the SEC confirmed the Division of Enforcement would consult this guidance when analyzing whether a company is required to register as an investment company. With that in mind, it’s easy to see how many companies—SPAC and non-SPAC—will treat the specified time periods as “ironclad deadlines.”

While the broader set of new rules for SPACs are likely to put the nail in the SPAC coffin, this guidance is an unwelcome continuation of the SEC’s quest to broaden its regulatory reach by placing a host of non‐​financial companies at risk of regulation under the Investment Company Act.

Jennifer Huddleston

Keeping kids and teens safe online is a priority for many parents today. Unsurprisingly, Congress and many state legislatures have also been taking notice of these concerns.

However, a Senate Judiciary Committee hearing this week titled “Big Tech and Keeping Children Safe from Online Sexual Exploitation” showed that policy attempts to regulate online safety may be more about animosity towards tech companies than a productive conversation about a nuanced concern.

Being a parent in the digital age is a difficult task. The desire to improve child safety is often rooted in good intentions. However, focusing solely on the negative experiences and potential risks of young people online often overpowers the reality of the many positive experiences young people have had, from finding a supportive group for the LGBTQ community to using online platforms to become entrepreneurs. Just as the offline experience can vary for teenagers and families, so does the online experience.

While individual families may have many different and valid concerns for their child’s experiences online, these concerns are diverse and lack a single solution even within households. The result is that parents often need a variety of tools at all levels of their internet experience. The good news is that a wide variety of platforms, entrepreneurs, and civil society groups are responding to the demands of parents to help respond to a range of concerns they may have about their children’s online activities. These responses are both better able to fulfill an individual family’s needs and evolve with our ever‐​changing technology than would a static approach from a policy out of Congress.

As the hearing showed, the term “online safety” can mean many things. While the hearing title focused on a specific issue of youth online sexual exploitation, everything from the presence of illegal drugs online to public accounts for young creators to whether TikTok was “a tool of the Chinese Communist Party” came up. Trying to solve such diverse problems at a policy level is unlikely to solve all (or any) of these, and instead risks making the true bad actors even more difficult to find by pushing them further underground.

Furthermore, trying to control these many variables is likely to bring significant consequences for the speech and privacy of all users —not just young people or those engaging in problematic behavior.

Perhaps even more concerning is that many of these policy proposals would create more problems than they solve and eliminate beneficial uses of the internet. Social media is far more than just TikTok and Instagram. Poor definitions of what constitutes a social media platform or recommendation algorithm in legislation could target a variety of useful parental control tools and unexpected websites including user‐​generated book reviews on sites like Goodreads and local newspapers.

Age‐​verification‐​based proposals would require all users to put in more information and, depending on the specific proposal, including uploading their driver’s license to use the internet. The result would diminish the privacy of all users, requiring platforms to collect and store more sensitive user data.

Other proposals that would limit the use of algorithms could eliminate certain parental control features and positive recommendations or redirections as well as negative ones. Finally, calls to revoke Section 230 and “open the courtroom doors” would spur an onslaught of often unfounded litigation towards platforms, forcing them to dedicate less time to developing tools their users demand (such as those that assist in the youth online safety.) Without Section 230 protections, their limited time and resources would be spent in courts, and not dealing with the onslaught of content they must review in any given minute.

Each generation worries about if the kids in the next generation are okay, and many are concerned about the growing mental health issues among young people. However, we shouldn’t rush to blame technology without a thorough examination of a complicated issue. Rather than blame technology for our problems, we should look to empower and educate parents and young people alike on how to have a better online experience and equip them with the tools of what to do if or when they encounter such negative content.

Colleen Hroncich

When Latoya Nelson received an email from KaiPod Catalyst inviting her to open a microschool, she immediately deleted it. An experienced public school teacher who worked in emotional support classrooms, Latoya knew there was a better way to reach students. While she loved working with children, she was getting burned out from dealing with the lack of flexibility and autonomy she had in the classroom. But she didn’t know much about learning pods, microschools, or homeschooling.

She received another email from KaiPod that same day, so she opened it—and was amazed by what she read. “This is what I’ve always wanted. When I thought of owning a school, I thought of a charter or maybe even a daycare center. But I had never thought of it in this way,” she recalls. Then she realized the deadline to apply for the program was the next day. “So I hurried up and I just applied. And I was like, they’re probably not going to call me.”

She was wrong. “I got the call and then I had the interview,” she says. “I had to do the interview in my car. And I was drained. I got off super late and was trying to get my daughter from school. And I thought, ‘that did not go well.’”

She was wrong again. Latoya was accepted into the KaiPod Catalyst program and opened The Attuned Community School this year, giving her the chance to implement her own ideas about helping kids who faced trauma. In her previous position, she wasn’t allowed to do the things she says she knew that would work with them. And when she followed her instincts, she’d get criticized or punished for falling behind.

“I just knew I wasn’t serving the children properly,” she says. “And I knew that the trauma that they were facing was not just from home, that some of the things we did in school were traumatic to them as well. Even if it wasn’t a new trauma, we were kind of re‐​traumatizing them or placing them in a state where they felt like they had to fight or flight. And so I just was like, I can’t do this anymore.”

Things are different at The Attuned Community School. The day starts with a community circle where the students gather around to share things that are going on in their lives. “We really focus on building a community and making ourselves feel like a family,” Latoya says. And it’s working. A parent recently remarked that he loves to see how the older children just naturally help the younger children because they’re surrounded by such a community feel.

“I think for a lot of children that are in public school who are constantly the ones needing the support and needing the help to be in this setting and to be the person offering the help and offering the support, that does something to your confidence. And when you have confidence and you feel good about yourself and you feel trusted by the people around you, there is no pressure,” Latoya notes. “Or there’s a good pressure to want to do well but not pressure in a bad way. It’s more like I want to do this for my community. I want to do this for myself. There’s something intrinsic that’s being built there versus just working for a prize out of the prize box.”

For the first couple of months of the year, the students didn’t focus on traditional academic work. They were learning to be together and learning through regular life activities, like developing a budget, shopping for groceries, and preparing meals. They spent a lot of time outside reconnecting with nature, meditating, and learning outdoor skills. Then, when the parents brought in curriculum or Latoya introduced her supplemental materials, the kids were ready to learn because they’d had a chance to redefine what success looked like when they weren’t confined by external pacing guides or deadlines.

Now students focus on academics Monday through Thursday mornings. Parents can choose their own curriculum, and some are even in online public schools. Sometimes parents ask Latoya to help them develop a homeschooling plan. After lunch, they do enrichment activities. The students help decide what they want to dive into in the afternoons. “We did a study on human anatomy. We’ve done a study on marketing and budgeting. When it got super cold, everyone was very into snow. So we’ve been studying snowflakes and Arctic weather and Arctic animals,” Latoya explains.

They also have a lot of off‐​site activities. On Tuesdays, they all go horseback riding for equine therapy and learn things like how to groom the horse, how to take care of it, how to listen to its cues, and how to use commands. On Thursdays they go to forest school where they’re able to run free in the forest, climb trees, fish, and learn about local wildlife. And on Fridays they go to farm school with a local homesteader who teaches them how to grow and process their own foods. They’re also learning how to identify herbs and plants, including which ones are safe to eat, which ones offer medication, and which ones are healing to the body.

Latoya is very encouraging to other teachers who are considering starting out on their own. “I would say don’t let your fears get to you, especially if you’re leaving public school,” she says. “I work with a lot of teachers on the side, and a lot of them have their own things that they’re trying to process because they’ve been hurt, too, by a system that they love. They want to love and support children and they’ve been unable to do so. And so I would just say don’t let those doubts and fears get in your way. This is something completely different. Just take the time and really re‐​center yourself. Re‐​ground yourself. And re‐​program your idea of what school is and what school has to look like, because it doesn’t look the same for everybody. And that’s okay. That’s the great thing about education is that it’s not one‐​size‐​fits‐​all and we can do the things that work for everybody if we just trust ourselves.”

Alex Nowrasteh

The US Border Patrol has apprehended 342 illegal border crossers who were on the Terrorist Screening Dataset, also known as the terror watchlist, since 2017. Those numbers have shot up in recent years to 169 in FY2023 and 49 to date this fiscal year. This week, The Daily Caller reported that Border Patrol apprehended an al‐​Shabaab terrorist and released him into the United States in March 2023 after a mismatch on the watchlist. Later, the government discovered that he was on the watchlist, and Immigration and Customs Enforcement (ICE) arrested him within 48 hours. The Daily Caller’s headline was “ICE Confirms It Finally Nabbed Terrorist Allowed To Roam Free For Almost A Year.”

This story may develop further, or it may not. If it does, the following information will help you understand what’s happening. If the story doesn’t develop further, some of the points below will explain why.

Most people on the terror watchlist are not terrorists. The terror watchlist contains known terrorists, suspected terrorists who “engaged in conduct constituting, in preparation for, in aid of, or related to terrorism and/​or terrorist activities based on an articulable and reasonable suspicion,” and individuals included without an articulable and reasonable suspicion who are included on the list to “support immigration and border screening.” You should be concerned about people on the terrorist watchlist, but you should not immediately assume that they are terrorists planning a domestic attack.
Individuals on the watchlist who crossed the border illegally have never committed an attack domestically, let alone killed or injured anyone in such an attack. There is a chance that this could always happen, of course, but it’s important to remember what we know.
As far as I can tell, an individual on the watchlist who crossed the border illegally has never been prosecuted for planning a domestic attack or for carrying one out. I’ve looked at thousands of court documents, asked reporters who follow this issue closely, and asked government officials, and we have come up with no examples. There is a chance that this could happen, but if the watch‐​listed individual recently arrested by ICE is prosecuted for planning a domestic attack, then he’ll be the first.
The watch‐​listed individual that ICE arrested probably won’t be prosecuted, and there’s a good chance we won’t read any more information about him because he’ll be removed from the United States. Prosecutors would love to prosecute this watch‐​listed individual for a terrorism or terrorism‐​related offense—it would make his or her legal career. If there is some evidence of actual terrorist activity, then this watch‐​listed person will be prosecuted. We’ll find out much more in that case.
Customs and Border Protection has released individuals before who were on the watchlist that ICE then later apprehended.

Inclusion on the terror watchlist is a good enough reason to be barred from entering the United States. The watchlist isn’t very meaningful and includes primarily people who are not terrorists, but inclusion on it is still good enough to be removed. This recently arrested individual should never have been allowed into the country, and he should be removed, assuming he is not a terrorist planning an attack on US soil. If he is a terrorist or was planning an attack or another crime, then he should be prosecuted, convicted, incarcerated, and removed from the United States.

As I’ve testified and written about before, the threat of terrorists entering illegally along the southwest border and planning or committing a domestic attack is minor, but it is not zero. To be clear: It is possible that a terrorist could enter the United States illegally across the US‐​Mexico border to commit an attack. Illegal immigrant terrorists have been convicted of planning domestic attacks before.

Nine foreign‐​born terrorists entered the United States illegally from 1975 to 2023. Three entered illegally by crossing the US‐​Mexico border in 1984 when they were young children. The three Duka brothers were arrested almost 23 years later, in 2007, while plotting to attack Fort Dix, New Jersey. Of the other illegal immigrant terrorists, five illegally crossed the US‐​Canada border, and one was a stowaway on a ship. Still, the threat is small and manageable. Government agencies along the border and elsewhere should watch for the possibility even if it is unlikely. Also, they should make sure their security efforts pass a cost‐​benefit test.

Jeffrey A. Singer

In March 2020, as the COVID-19 pandemic made it more difficult for people with opioid use disorder (OUD) to access daily methadone treatment at federally‐​approved opioid treatment programs (OTPs), the Substance Abuse and Mental Health Services Administration (SAMHSA) temporarily liberalized methadone take‐​home rules for OTPs, and allowed “stable” patients to take home up to a 28‐​day supply. SAMHSA also allowed patients to visit clinicians via telehealth, rather than in‐​person, to obtain buprenorphine treatment for OUD. The program was a success. Follow‐​up studies found the policy improved patient compliance and did not cause buprenorphine or methadone diversion into the black market.

In November 2021, SAHHSA announced it was extending the policy. Then, in December 2022, SAHHSA issued a Notice of Proposed Rulemaking, announcing its intention to make the policy permanent and asking interested parties to comment. I submitted this comment.

Yesterday, the Department of Health and Human Services announced SAMHSA’s eased rules are finally permanent.

Anything that makes it easier to get access to medications to treat opioid use disorder is a welcome change. Unfortunately, in another example of cops practicing medicine, the Drug Enforcement Administration is working against that goal by requiring people who want to use telehealth to access buprenorphine to see a clinician in person within 30 days to renew their buprenorphine prescriptions. This means if the patient can’t get an office appointment with the provider within 30 days, the buprenorphine treatment abruptly ends. It takes an average of 26 days to get a new appointment with a primary care provider, so there is no guarantee a new buprenorphine patient can get an appointment within the 30‐​day window. It might be even more difficult in rural or other areas with primary care provider shortages.

Even without the DEA’s interference, this new rule change is “small ball.” As Sofia Hamilton and I wrote in a recent Cato briefing paper, a more effective way to improve access to methadone treatment is by enabling primary care clinicians to prescribe it to treat patients with opioid use disorder in their offices. Clinicians in the US were doing so before 1972. Clinicians in the UK, Canada, and Australia have continued to treat their office‐​based patients with methadone for over 50 years.

The Modernizing Opioid Treatment Access Act (MOTAA), introduced in the US Senate by Senator Edward Markey (D‑MA) and co‐​sponsored by Senators Rand Paul (R‑KY), Bernie Sanders (I‑VT), Mike Braun (R‑IN), Cory Booker (D‑NJ), and Maggie Hassan (D‑NH), would expand access to methadone treatment for people with opioid use disorder (OUD) by allowing board‐​certified addiction specialists to prescribe methadone to patients in their offices or clinics.

As I wrote here, the MOTAA doesn’t go far enough. Even assuming they were all accepting new patients, there are not nearly enough board‐​certified addiction specialists to meet the needs of people with OUD. However, MOTAA takes a much bigger step to improve access to methadone treatment than SAMHSA does in its revised policy. MOTAA is the first serious attempt in many years to remove unnecessary government barriers to methadone treatment. The bill also helps to destigmatize people with OUD by treating them as suffering from a medical condition.

Reacting to the new permanently liberalized SAMHSA policy in a press release, Senator Markey stated:

“Ultimately, tethering methadone exclusively to opioid treatment programs is less about access, or health and safety, but about control, and for many investors in those programs, it is about profit. The longer we leave this antiquated system in place, the more lives we lose. We must put people first, unwind outdated laws, and treat methadone like the life‐​saving medication it is…”

I couldn’t agree more.

Nicholas Anthony

Former President Donald Trump made headlines when he spoke out against the creation of a U.S. central bank digital currency, or CBDC. Yet, he’s not alone in taking this stance.

The news of Trump’s stance broke on January 17 when he announced in New Hampshire that “I am also making another promise to protect Americans from government tyranny. As your president, I will never allow the creation of a central bank digital currency.”

Trump later credited former candidate Vivek Ramaswamy—who spoke out against CBDCs throughout much of his campaign—for alerting him to the risks of CBDCs. In fact, former candidate Ron DeSantis also made opposition to CBDCs part of his campaign. Prior to running for president, DeSantis, as the governor of Florida, went so far as to ban Americans from being able to use a CBDC in the state of Florida.

Yet, Republicans have not been the only source of opposition in the 2024 election campaign. Independent, and former Democrat, candidate Robert F. Kennedy Jr. openly opposed CBDCs because of how much power they could give governments and how governments have abused their powers in the past.

Where Does Biden Stand in the CBDC Debate?

President Joe Biden, on the other hand, has been silent on the issue as of late, but that wasn’t always the case.

In March of 2022, President Biden issued Executive Order 14067 to place “the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” In September 2022, the White House said that the reports issued under Executive Order 14067 “encourage the Federal Reserve to continue its ongoing CBDC research, experimentation, and evaluation and call for the creation of a Treasury‐​led interagency working group to support the Federal Reserve’s efforts.”

The Biden administration also announced that it had “developed policy objectives for a US CBDC, which reflect the federal government’s priorities.” Going further, the Biden administration published a technical evaluation for a potential US CBDC.

However, the Biden administration has largely gone quiet since the campaign cycle kicked off. For example, in August 2023, a White House official told Bloomberg that National Economic Council Director Lael Brainard “has no position on a potential digital currency.” Yet as Bloomberg’s Christopher Condon correctly pointed out, this response was strange given Brainard had been the leading proponent of CBDCs at the Federal Reserve for years before being picked by President Biden to join the National Economic Council as his advisor.

One explanation for this distancing may be because, as POLITICO’s Victoria Guida noted, “The prospect of a [CBDC] has become increasingly politically toxic.” So it may be that President Biden has temporarily backed off the issue in recognition that it would be damaging at the polls as more Americans become aware of the issue. Or, perhaps he has since recognized the risks of CBDCs.

If it is the case that the Biden administration has come to recognize that the risks of CBDCs outweigh any purported benefits, it should speak out sooner rather than later.

Conclusion

Monetary and financial policy doesn’t usually make its way to the presidential debate stage, but the issue of a US CBDC is something that moderators should bring up. CBDCs pose a fundamental threat to Americans’ privacy and freedom. They deserve to know if, and how, the next president plans to mess with their money.

Adam N. Michel

A recent proposal by Andrew Biggs and Alicia Munnell suggests repealing the tax exemption for employer‐​sponsored retirement plans and IRAs and using the new revenue to address the majority of Social Security’s long‐​term funding gap. The authors’ argument rests on their conclusion that the almost $190 billion annual tax increase on Americans’ retirement savings would not meaningfully change individuals’ incentive to save.

There are many reasons to object to the Biggs‐​Munnell analysis, its impact on Social Security, and the implications for the federal budget. However, the crux of their argument—that tax‐​advantaged retirement accounts “do little to increase retirement saving”—is an overconfident misinterpretation of the academic literature that does not acknowledge the broader economic benefits of private saving.

The overwhelming evidence is that tax‐​advantaged accounts significantly increase private savings. Over time, even small increases in private savings can contribute to a larger capital stock, additional labor supply, and a bigger economy. The private benefits to additional saving, combined with the broader economic benefits, outweigh any temporary government losses, even if the lower revenue does not induce a one‐​for‐​one increase in private savings.

The balance of the evidence suggests that raiding Americans’ private retirement savings to prop up Social Security would significantly reduce private retirement savings and slow capital accumulation necessary to sustain a growing economy.

Saving in Theory

The US income tax levies multiple layers of tax on an individual’s savings. Wages are first taxed by the income and payroll taxes. The return on any income saved is then taxed again through taxes on corporate income, dividends, capital gains, and transfers at death. These taxes on investment returns reduce the after‐​tax value of delaying current consumption for future consumption.

Tax‐​advantaged saving accounts, such as 401(k)s and IRAs, reduce some of the income tax system’s savings penalty by eliminating capital gains and dividend taxes on funds invested for retirement. By raising after‐​tax returns, tax‐​advantaged accounts could reduce personal savings by allowing people to consume the same amount in retirement at a lower savings rate (called the income effect), or the accounts could induce additional savings and less pre‐​retirement consumption to take advantage of the larger returns (substitution effect). Empirical estimates of these effects attempt to measure how much 401(k) balances represent “new savings,” as opposed to simply transfers of assets that would have been saved regardless of the tax benefit.

The empirical measurement of the personal savings response is only one part of the analysis. Policymakers should also care about a tax’s total economic cost or deadweight loss. Taxes on investment returns do not have to affect current savings to reduce future consumption. An individual’s well‐​being is not determined by their savings per se but by the consumption the savings afford them. If the income and substitution effects cancel out and savings remain unchanged, a tax on capital gains that lowers a saver’s after‐​tax return still mechanically reduces future consumption and thus has a deadweight cost.

Harvard economist Martin Feldstein explains that without changing personal savings, such taxes on capital can also reduce “labor supply broadly defined, including not only the number of hours worked but, more importantly, the incentive to acquire human capital, the choice of occupation, and the amount of effort.” By reducing lifetime consumption, capital taxes can have significant economic costs without a measurable effect on the amount saved. In other words, even if the observed effect of 401(k) accounts is as small as critics claim, repealing the tax treatment would be economically damaging.

Complicating matters further, tax‐​advantaged accounts with contribution limits only change marginal decisions for savers who save less than the annual account limits and would otherwise face capital gains taxes.[1] The first capital gains income threshold kicks in at $47,025 in 2024 for single taxpayers ($94,050 for married filing jointly). According to Vanguard account date, only 15 percent of Americans hit their contribution limits in 2022. At least one‐​third, and likely many more, of Vanguard participants who are subject to the capital gains tax contribute less than the annual maximum and thus benefit from the marginal saving incentive. If policymakers are worried about diminished marginal investment incentives, the solution is simple: eliminate contribution limits.

The final theoretical challenge is that reducing taxes on retirement savings comes at a fiscal cost to the government, which could offset the gains from increased personal savings. In the absence of other changes, the lower tax revenue requires additional government borrowing. The savings literature often assumes that any increase in private savings is offset by the government’s dissaving, which crowds out domestic investment. While this assumption is partly true, in an open economy with easy access to global credit markets, a significant share of federal debt is financed with international investment and thus does not crowd out domestic investment. In a fully open economy, a decrease in the after‐​tax return for domestic savers would also not significantly affect the capital stock but would increase domestic ownership of US assets. While the degree of domestic investment crowd out and international capital openness are the subject of ongoing debate, simply comparing tax expenditure costs with increases in private savings is not sufficient to learn anything meaningful about how tax‐​advantaged accounts affect national or net savings.

Empirical literature shows significant increases in personal saving

The empirical literature is plagued with theoretical, methodological, and data issues that leave most research summaries to conclude there is no consensus on the impact of tax‐​advantaged accounts on national savings. Despite the surface‐​level disagreements, the literature clearly shows that tax‐​advantaged accounts increase personal savings. Modeling suggests that tax‐​advantaged accounts can also contribute to a larger capital stock over time. However, the way in which the results are extended to measure the effects on national savings is not informative for policymaking because the increase in private savings is not directly comparable to official expenditure estimates. 

In the 1990s, two groups of authors published a series of papers that used different econometric approaches and assumptions to estimate the savings effect of 401(k) and IRA contributions. The two methods came to conflicting results, finding under one specification that the accounts had “not stimulated private savings” and the other concluding that “most 401(k) contributions represent net new saving.” A robust academic debate on the topic continues to this day.

More recent research by Alexander Gelber looks at how individuals change their savings after becoming newly eligible for a 401(k), after completing a year at a new employer. Some of the results are imprecise, but using a within‐​individual change helps control for unobserved differences between savers. Gelber finds that 401(k) eligibility results in a net increase in savings, raising 401(k) balances “substantially,” with no significant decreases in other financial assets. Looking at a much narrower cohort of only college and university professor behavior, David Card and Michael Ransom report that about 30 percent of supplemental savings in tax‐​deferred plans could represent new personal savings. Framing additional retirement contributions as provided by the employer significantly increases the personal savings rate, and as much as 70 percent of account balances represent new savings.

Harvard economist Daniel Benjamin improves on research from the 1990s with a better matching technique to control for unobserved characteristics, estimating that roughly one‐​quarter of 401(k) balances represent new national savings. A second quarter represents tax savings. Combined, Benjamin’s estimates imply that about half of 401(k) balances are new private savings.

In their summary of the literature, Biggs and Munnell rely on a study using Danish data by Raj Chetty and four co‐​authors, claiming the results “have been well received and broadly accepted.” As Joshua Rauh and Stan Veuger recently pointed out, it is unclear if Denmark’s more rigid, government‐​mandated retirement system and the observed change in the relative value of different account types provides a useful analogy to the US system or a policy that eliminates retirement accounts altogether. In other words, it’s doubtful that the findings in Denmark are generalizable to the United States. Still, the paper’s results confirm that tax‐​advantaged accounts can substantially increase personal savings.

The Chetty et al. results primarily investigate how nontax factors that make savings easier can increase savings by focusing on active vs. passive savers. They find that about 80 percent of the increase in employer retirement contributions are new personal savings, and about 10 percent (and as much as 50 percent) of individual retirement contributions are new personal savings. Only after accounting for the fiscal cost of the savings accounts do the researchers conclude that tax‐​advantaged account balances are about 1 percent (and as much as 10 percent) new national savings.[2]

Even small increases in total savings compound over time. Eric Egen, Willam Gale, and John Karl Scholz—whose empirical work is generally cited to argue that tax‐​advantaged accounts only induce a small savings response—model the long‐​run effects of retirement savings accounts on national savings rates. Their results show that 401(k)s can increase the long‐​term national savings rate by between 8 percent and 17 percent, and other accounts, such as IRAs, can increase it further.

Synthesizing available evidence in the mid‐​1990s, Glenn Hubbard and Jonathan Skinner similarly concluded that a “conservative estimate of the effect of IRAs on personal saving” shows that 26 cents of every dollar of IRA contributions represent new savings. They suspect the true effect “is actually somewhat larger.” Hubbard and Skinner then show that “even for quite conservative measures of the saving effects of IRAs or 401(k)s…the incremental gains in capital accumulation per dollar of lost revenue are generally large.” After acknowledging the strong assumptions necessary for multi‐​decade models, one summary of these results from the Federal Reserve Bank of New York concluded that the estimates imply retirement accounts “would eventually increase the capital stock $4 and $16, respectively, for every dollar increase in the government debt.”

While beyond the scope of this brief literature review, it is worth noting that related bodies of economic research generally find large positive economic effects when taxes on capital income are reduced through other mechanisms, such as lower headline capital gains and corporate income taxes.

Tax‐​advantaged savings accounts increase personal savings and can contribute to a larger capital stock, which increases the productive economy’s size and in turn can also increase tax revenues.

A note on tax expenditures

The overwhelming finding in the savings literature is that tax‐​advantaged accounts increase private savings. Thus, their effect on national savings turns on the definition of tax expenditure and estimates of the revenue reduction from the preferential tax treatment. The tax expenditure estimates used by most of the literature, including Biggs and Munnell, omit any additional tax revenue from a larger economy and more fundamentally rely on a biased definition of the tax expenditures.

In 1995, Feldstein modeled the effect of tax‐​advantaged accounts on total government revenues after accounting for higher corporate tax revenues from the additional personal investment in retirement accounts. The modeling is subject to debated assumptions—including the degree of openness to international capital—but Feldstein concludes that “the increase in corporate tax collections will eventually outweigh the loss of personal tax revenue regardless of the [models] parameter values.” His preferred specification shows that the additional corporate tax revenue makes up about two‐​thirds of the decline in personal income tax revenue within ten years. If the higher after‐​tax rate of return on savings induces additional labor supply and work effort, there should also be an increase in income and payroll tax revenue. These effects do not need to be as large as Feldstein claimed or make up all the lost revenue to make 401(k)-type accounts a net‐​benefit to saving.

Lastly, the definition of tax expenditure matters when thinking about budget deficits. Tax expenditure lists must first pick a reference tax base from which to measure any deviations. By using an income tax base that implicitly assumes capital income should be taxed at a higher rate than wage income, government scorekeepers bias the way researchers and policymakers think about revenue loss. If measured from a tax base that treats current and future consumption equally, 401(k)s and other similar accounts would not be counted as a tax expenditure. Instead, the tax on capital gains would be a negative tax expenditure, bringing in additional revenue beyond what the normal tax base would collect.

While some may consider the definition of tax expenditure to be a semantic point, it should make policymakers searching for additional revenue consider how language and modeling decisions distort policy choices. For policymakers looking to increase revenue, hundreds of billions of dollars of true tax loopholes could be eliminated with smaller deadweight costs than raising taxes on savers. However, any transfer of income from individuals to the government through higher taxes is, at best, zero‐​sum. In the case of retirement savings, the government has clearly demonstrated that private savers are better stewards of their money than Congress.

Conclusion

None of this analysis denies that the Social Security system is in crisis. The trust fund will become insolvent in less than a decade, and the typical newly‐​retired beneficiary will face automatic benefit cuts of around $17,000 in 2033. The proposal from Biggs and Munnell is correct that Social Security is in dire need of reformers with the courage to make difficult tradeoffs that can ensure America’s current and future retirees don’t face indiscriminate benefit cuts as a result of congressional inaction. However, increasing taxes to prop up the current broken Social Security system at the expense of economic growth should be avoided. Increasing taxes that directly reduce personal savings and undermine the private alternative to the broken government‐​run system would be particularly destructive to America’s future retirees.

[1] Individuals with annual savings above the combined tax‐​advantaged account threshold have no substitution effect but still face an income effect. Americans with no annual savings or assets face a positive substitution effect but no income effect. Net debtors and individuals whose net present value of future income is greater than current assets benefit from mutually reinforcing income and substitution effects that increase savings.

[2] Chetty et al. do not observe investment changes in some durables, such as cars. This could be a significant omission given that Gelber finds car values fall substantially in response to 401(k) eligibility.

James A. Dorn

In an effort to improve China’s growth prospects, the People’s Bank of China (PBOC) is cutting banks’ reserve requirements to free up funds for lending. PBOC Governor Pan Gongsheng, who takes his marching orders from the State Council, plans to lower reserve requirements against bank deposits beginning February 5, which would free up nearly 1 trillion yuan (about $139 billion) for new lending aimed at shoring up housing and stock markets. Trying to prop up housing and stock prices, however, cannot solve China’s fundamental problem: too much government and too little freedom.

The Source of China’s Troubles

Since Xi Jinping took over in 2012, China has backtracked on market‐​oriented reforms and further suppressed individual freedom. In November 2013, the Central Committee of the Chinese Communist Party (CCP) adopted a roadmap for deepening reform at its Third Plenum. One of the key provisions of that roadmap was to make the market a “decisive” factor in allocating resources. But that promise was never fulfilled as Xi consolidated his power and reverted to industrial policy and state‐​led development.

Although the Central Committee paid lip service to the market, it had no firm commitment to establish a true free market, because its monopoly on power would be threatened. Thus, its “Decision … on Some Major Issues Concerning Comprehensively Deepening the Reform,” immediately makes it clear that, “To deepen the reform comprehensively, we must hold high the great banner of socialism with Chinese characteristics.”

Xi Jinping, as the paramount ruler, does not want what Milton Friedman (1990: 125) called “free private markets,” bounded by a genuine rule of law that protects persons and property. He does not trust social and economic order to emerge from a decentralized, market system based on private property and freedom of choice. What he wants is a vaguely defined “socialist market economy”—with a “socialist rule of law”— in which individuals are subservient to the state. Yet, as Wu Jinglian, one of China’s leading reformers, has argued, “Only by matching the rule of law with the market economy can we achieve total success.”

Xi Jinping’s pivot from marketization to industrial policy assumes state‐​financed infrastructure spending is the path to long‐​run growth. Yet, as Zhang Jun, dean of Fudan University’s School of Economics, warns:

The crux of the problem is not whether to further stimulate infrastructure investment by releasing more liquidity, but rather about concentrating on enhancing China’s potential growth rate trend. Significant improvements are needed in this area. Looking ahead, if China’s policies do not prioritize addressing systemic issues and increasingly rely on marketization to rectify inefficiencies in capital distribution, the persistent problems of investment waste and misallocation will continue to trouble its economy. Without these reforms, stabilizing the potential growth rate will remain challenging.

In sum, embracing state‐​financed industrial policies, which focus on fixed‐​asset investment at the expense of private‐​sector growth, jeopardizes long‐​run productivity as well as freedom for the Chinese people (see Sternberg 2024). The latter is especially harmed by Xi’s crackdown on a free market in ideas.

China Needs a Free Market for Ideas

In 2012, Ronald Coase and Ning Wang introduced the term “market for ideas” (sixian shichang) to the Chinese. They argued:

The lack of a free market for ideas … has become the most restrictive bottleneck in China’s economic and social development. Ever since the start of economic reform, the Chinese government has been persistently calling for the “emancipation of the mind,” but nothing is more effective than an active market for ideas in freeing people’s minds [Coase and Wang 2012: 199].

Zhang Weiying, a leading reformer, also has emphasized the importance of developing a free market for ideas if China is to become more market‐​oriented and realize its full potential. According to Zhang, “If people are not allowed to freely debate how to reform the political system, then it will be impossible to develop the right ideas” needed to implement and improve the Third Plenum’s roadmap.

The value of free speech is that it allows people to improve institutions by pointing out weaknesses, which can then lead to improvements. As Eswar Prasad, former head of the IMF’s China division, notes, “Transparency of public institutions, the right to free expression, and an unfettered media are all necessary for building confidence. They do this not by emphasizing strengths, but by making weaknesses and faults in the system obvious” (Prasad 2017: 156).

China’s Challenge

Blogger Noah Smith nicely captured the essence of China’s ills when he wrote:

China’s government, especially under Xi Jinping, is obsessed with controlling everything the Chinese people do. This limits the greatness of the Chinese nation, because any nation’s greatness is ultimately generated by the independent and spontaneous efforts of its people.

The major cause of China’s ills is not the lack of liquidity to bail out socialist markets. Rather, it is the lack of a culture that supports freedom and limited government under a genuine rule of law that protects persons and property, including a free market for ideas. Pushing state‐​led development while constraining the private sector and the market for ideas will only increase the power of the state and reduce individual freedom.

Pumping up money and credit to “stabilize” housing and stock markets is not a panacea for achieving free private markets, in which individuals can expand their range of choices through mutually beneficial voluntary exchanges. China’s nonstate sector has been the engine of prosperity since Deng Xiaoping launched the reform movement in 1978. Marketization can again be successful if Xi Jinping allows markets to play a “decisive role” in shaping China’s future. But those markets will have to rest on secure property rights and a free market for ideas—both of which pose a serious threat to the CCP’s monopoly on power.

Walter Olson

The group Protect Democracy has just published a 90‐​page report (“The Authoritarian Playbook for 2025”) laying out six areas to watch should a restored Donald Trump decide to push the limits of current presidential authority in pursuit of strongman governance of the Orban or Erdogan sort. The six are: 1) misuse of presidential pardon powers, specifically when lawbreaking has been committed in the political interests of the president and his allies; 2) law enforcement investigations of opponents; 3) regulatory retaliation against those not in political step with the authorities; 4) federal law enforcement overreach, and steps toward consolidation of a domestic federal police force; 5) domestic deployment of the military, with or without the invocation of the Insurrection Act; and 6) legal and street‐​based resistance to leaving office after failing to win re‐​election.

Over the years Cato has been a voice, at times a lonely one, warning of dangers in each of these areas. In the first five, abuses have occurred through multiple presidencies and at times at multiple levels of government— as with, for example, regulatory retaliation against political foes. (On number six, resistance to leaving office after electoral defeat, Trump’s offenses really do appear to put him in a class by himself in modern America.)

To sample just one item from the Protect Democracy list, misuse of the presidential pardon power, Cato senior vice president Gene Healy wrote about Trump’s end‐​of‐​term pardon spree, his earlier pardon of “unrepentant, serial abuser of power” Joe Arpaio, the pardon of presidential crony Roger Stone in between, and the vexed issue of presidential self‐​pardon. The posts also cite the notorious pardon records of Bill Clinton and Richard Nixon in their day.

Were I to nominate a seventh entry to the already useful compilation here, it might be abuse of the array of dangerous emergency powers available to the president.

Travis Fisher

On January 26, the Biden administration announced it would pause new approvals of liquefied natural gas (LNG) exports. The official news followed several leaked stories—including one prominent article by The New York Times—that triggered criticism from LNG supporters and praise from climate activists.

The announcement appears to be a concession to the “keep it in the ground” movement and the 65 federal lawmakers who asked for the policy change in November 2023. However, some pragmatic progressives see the pause as misguided: “The urgency of the energy transition cannot excuse counterproductive purity tests,” wrote Elan Sykes and Neel Brown of the Progressive Policy Institute.

From the libertarian perspective, the pause is unwise energy policy, an encroachment on free trade, and a continuation of the Biden administration’s use of uncertainty as a political weapon against energy suppliers. Let’s dig in.

What Is Changing, Exactly?

LNG is the liquefied version of natural gas (mostly methane, CH4). Shippers cool the gas to approximately negative 260 degrees Fahrenheit to make it a liquid that is portable via tanker ships. International trade in LNG has spiked in part because of the abundant natural gas resources in the United States, which were enabled by technological improvements in unconventional production from shale formations.

The United States did not export significant quantities of LNG until about 2015, so one might say the industry is in uncharted waters. The aggressive growth in LNG exports (particularly relative to historic levels of imports) can be seen in the graph below.

(Source.)

Although the large quantities of exports are new, the legal apparatus is not. Specifically, under the Natural Gas Act (NGA), the Department of Energy (DOE) must approve any import or export of natural gas. Congress passed the NGA in 1938, so the statute predates the organization of the DOE itself, which was formed by Congress in 1977 by the DOE Organization Act.

Before the DOE was established the responsibilities in this section of the NGA were carried out by the Federal Power Commission (renamed in 1977 to the Federal Energy Regulatory Commission or FERC). Now the two agencies each regulate different parts of the LNG industry. DOE explains their roles as follows:

The NGA directs DOE to evaluate applications to export LNG to non‐​FTA [Free Trade Agreement] countries. … Typically, the Federal Energy Regulatory Commission (FERC) has jurisdiction over the siting, construction, and operation of LNG export facilities in the US In these cases, FERC leads the environmental impact assessments of proposed projects consistent with the National Environmental Policy Act, and DOE is typically a cooperating agency as part of these reviews. Obtaining a DOE authorization to export LNG to non‐​FTA countries is an important step for most projects in their path toward financing and construction.

The Biden administration said the DOE will now scrutinize applications to export LNG through the lens of climate change and other factors in determining whether additional US LNG exports are in the public interest. The White House stated:

The current economic and environmental analyses DOE uses to underpin its LNG export authorizations are roughly five years old and no longer adequately account for considerations like potential energy cost increases for American consumers and manufacturers beyond current authorizations or the latest assessment of the impact of greenhouse gas emissions. Today, we have an evolving understanding of the market need for LNG, the long‐​term supply of LNG, and the perilous impacts of methane on our planet.

The DOE has never denied an LNG export application, so this is a big shift in public policy.

Who Carries the Burden of Proof?

The rise of low‐​cost natural gas production in the United States—combined with high prices and resource constraints in other parts of the world—means US producers can profitably refrigerate, ship, and deliver gas to other countries. In contrast to other energy resources that require mandates and subsidies, LNG exports merely require approval from the federal government. All the government has to do is get out of the way.

The text of the NGA establishes approval as the default position. The statute says the DOE “shall” issue an order approving a project “unless, after opportunity for hearing, it finds that the proposed exportation or importation will not be consistent with the public interest.” Hence a pause to further consider new factors is the wrong posture—LNG approvals should continue until and unless DOE makes a new finding that LNG exports are inconsistent with the public interest. Ideally, of course, the government shouldn’t have the power to bar energy exports in peacetime.

There is a case to be made on either side of the climate debate regarding LNG.

Supporters of LNG exports cite the lower CO2 emissions of natural gas combustion over coal. By exporting natural gas and displacing the use of coal globally, the argument goes, the United States can help other countries reduce their CO2 emissions. We have certainly seen coal‐​to‐​gas switching bring down emissions in the United States.

Opponents of LNG exports, however, argue that the energy required to cool and transport natural gas—not to mention leakage of uncombusted methane, itself a potent greenhouse gas—makes it little better for climate change than burning coal.

The Administration’s Action is Arbitrary and Capricious

As experts debate the net impact of natural gas exports on factors like global climate change, the structure of the NGA indicates that approvals should move forward while the DOE deliberates. In July 2023, the DOE rejected a petition by environmental groups to do precisely what it now accepts—to undertake a blanket review of its LNG policy.

In fact, the DOE’s rejection notes in the first sentence of the document that the Administrative Procedure Act (APA) provides that each agency “shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.” The DOE’s new policy of a “pause” runs afoul of the APA and deprives interested parties the ability to challenge it before it goes into effect.

The new stated policy of a pause is especially capricious—meaning impulsive or unpredictable—given how the DOE responded to the environmental petitioners just six months ago:

After carefully considering Petitioners’ request, DOE is denying the Rulemaking Petition. As discussed below, DOE has reasonably exercised its discretion to implement its LNG export program through a combined approach of individual adjudications and export‐​focused regulatory actions, rather than a single rulemaking of broad applicability. DOE‘s existing LNG export regulatory program is responsive to Petitioners’ principal concerns—namely because, since 2013, DOE has, in fact, established a decision‐​making process under NGA section 3(a) that “respond[s] to the complex issues raised by LNG export and appropriately serve[s] the Natural Gas Act,” as Petitioners request. (emphasis in original)

How can the DOE now claim that it does not need to go through a formal rulemaking process in reversing course and implementing a new LNG approval regime? Even the environmental groups that want the DOE to shut down LNG exports should agree that their petition for a new rulemaking was the appropriate vehicle for enacting new policy.

Further, in the event of an administrative policy change at DOE that rises to the level of national significance—I think an indefinite LNG export pause qualifies—the Supreme Court’s “Major Questions Doctrine” should come into play. As the Congressional Review Service summarized the doctrine, “if an agency seeks to decide an issue of major national significance, its action must be supported by clear congressional authorization.” (emphasis in original) Did Congress give the DOE clear authorization to deny LNG export applications based on the factors DOE now finds important?

Political Uncertainty as Punishment

We have already seen the playbook of capricious policy in action. In February 2022, FERC issued new policy statements “providing guidance for future consideration of natural gas projects by the Commission.” The policy change—which suggested that an unspecified level of climate mitigation would be necessary to serve the public interest and receive FERC approval of gas pipeline projects—injected enormous uncertainty into the pipeline approval process.

The concept of the February 2022 policy statement was also the subject of a series of rebuttals (prebuttals?) by Commissioner Bernard McNamee, who argued forcefully beginning in 2019 that “the commission does not have the authority under the NGA or [the National Environmental Policy Act] to deny a pipeline certificate application based on the environmental effects of the upstream production or downstream use of natural gas nor does the commission have the authority to unilaterally establish measures to mitigate” emissions.

Ultimately, FERC withdrew its proposal after receiving blistering blowback from members of the Senate Energy and Natural Resources Committee (ENR). Senator Joe Manchin (D‑WV), ENR chairman, said FERC was “constructing additional road blocks that further delay building out the energy infrastructure our country desperately needs.” Delay is the practical impact of political uncertainty.

The Environmental Protection Agency (EPA) appears to be using the same strategy. Last year, the EPA proposed in its power plant rulemaking to mandate two unproven technologies—green hydrogen and carbon capture—for new or reconstructed power plants to meet greenhouse gas emission targets. The EPA proposed that “affected sources that commenced construction or reconstruction after May 23, 2023” would need to meet the requirements of the final rule.

The electricity generation industry remains in the middle of the uncertainty caused by the EPA’s unworkable proposal. For any new or reconstructed natural gas‐​fired power plant (affected source) subject to EPA’s new standard, a company can construct the unit today and be held—at some future date—to a standard that does not yet exist and may be impossible.

Given the recent track records at DOE, FERC, and EPA, crippling uncertainty is beginning to look like the aim of energy policy rather than an unfortunate side effect.

LNG Export Pause Offers a Lesson in Economic Thinking

The White House listed “potential energy cost increases for American consumers and manufacturers” as one justification for the LNG pause. It is true that, in the very short term, an announcement that the federal government will forcibly restrict the export of natural gas would likely cause its domestic price to fall. But, as French economist Frederic Bastiat implored, we should attempt to foresee long‐​term impacts. Bastiat wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Restricting the sale of LNG abroad would send ripple effects up the supply chain, blunting incentives to explore for more natural gas and to produce what’s already been found. Advocates of thwarting the global natural gas trade—and of hoarding domestic natural gas—are focused on temporary, short‐​term impacts to commodity prices and ignoring long‐​term impacts to natural gas supply infrastructure.

Whose Gas Is It Anyway?

Economics aside, what business does the federal government have in dictating the direction of an industry that delivers a product that so many people find valuable? Advances in directional drilling and hydraulic fracturing technology (commonly referred to as “fracking”) allowed American firms to produce astonishing amounts of useful energy from hydrocarbons trapped over a mile deep in rock formations. (Turn useless, 6,000-foot-deep rock into electricity? Yes, please.)

People here and abroad want to use that energy. Natural gas is a valuable resource—we use it not just to fuel power plants but to cook food, heat homes, and fabricate a dizzying array of plastics, fibers, and even medicines. Natural gas liquids like propane and ethane are especially useful as a material feedstock but also have energy‐​related applications.

The DOE, EPA, and FERC may try to stifle the progress of the natural gas industry in the name of climate change (or industry protectionism), but the demand for energy will always be there. Globally, energy consumption continues to increase, as shown below.

(Source.)

The challenge to meet growing demand should be exciting because energy consumption reflects the increasing living standards of countless millions (hopefully billions) across the globe. The US Energy Information Administration stated in its 2023 International Energy Outlook: “as incomes and population rise over time, energy consumption increases as more people can afford to drive, use commercial services, demand goods, and control building temperatures.”

For the hundreds of millions of people worldwide who still lack access to electricity, LNG exports could be the difference between dark and light.