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Scott Lincicome

The Economic Report of the President (ERP), released annually by the Council of Economic Advisers, is always full of useful and interesting data, and the just‐​published 2024 edition is certainly no exception. The new ERP’s international trade chapter is particularly noteworthy, given the increasing hostility to open trade and investment in Washington and the often‐​erroneous protectionist narratives used to support it. In a welcome development, the ERP thoroughly punctures several of these narratives by summarizing what the actual economics literature says about international trade and investment in the United States today, mostly in line with (and in one case even citing) the essays we’ve published over the last year as part of Cato’s ongoing Defending Globalization project.

Below are ERP excerpts supporting six important trade and investment facts, with sources in parentheses and bolded emphasis mine.

Fact 1: Tariffs and trade agreements don’t drive the US trade deficit.

U.S. Trade Deficits Are Driven by Aggregate Saving and Investment Patterns

Trade deficits can elicit negative attention if the presumption is that the GDP accounting identity (where negative net exports—exports minus imports—are subtracted from GDP) describes the totality of the relationship between trade and growth. Trade deficits are also sometimes associated with import competition, which has historically generated concentrated employment losses for certain groups of workers. However, the connections between trade deficits, economic growth, and employment are closely tied to broader macroeconomic conditions.  For example, when an economy is operating at full employment, a rising trade deficit can be a pressure‐​release valve, providing needed supplies of imported goods and services that help prevent overheating (Baker 2014). Moreover, imports complement domestic spending on American goods and services, so that their negative accounting impact on GDP is partially offset by the domestic value added generated, along with downward pressure on inflation. Trade, including via higher imports, can also boost the productivity of importing firms and the broader economy by supporting higher growth (CEA 2015a). Data support this view; the U.S. trade deficit tends to be countercyclical and is largest during periods of strong GDP growth because the same drivers of increased domestic demand (including savings and investment rates) also tend to fuel increased import demand (CEA 2015b).…

Overall trade balances. The fundamental drivers of a country’s overall trade balance are its relative saving and investment rates—both public and private (Ghosh and Ramakrishnan 2024). Countries with lower domestic saving than domestic investment (likely as a result of low domestic saving rates, high domestic investment rates due to attractive economic opportunities, or a combination of the two) tend to run trade deficits and accompanying current account deficits (where the current account balance is defined as the trade balance plus net foreign investment income plus net transfer payments from foreign income sources like worker remittances and foreign aid). The trade balance typically accounts for the bulk of the current account balance and is highly correlated with it, so, for expositional simplicity, we focus on the trade balance. Trade deficits are necessarily matched by capital and financial account surpluses (the net inflows of foreign lending necessary to finance the trade deficit)—as is the case with the United States. 

Fact 2: Foreign direct investment (FDI) is good; the United States is the world’s FDI leader; and there’s been no “giant sucking sound” of capital leaving the country.

The United States Leads in Global FDI Flows

The United States is the largest source of and destination for FDI flows globally. Over 20 percent of both U.S. FDI inflows and outflows in 2022 were targeted at cross‐​border manufacturing investments (OECD 2023b; BEA 2023b). In addition to providing another source of financing for domestic investments, FDI tends to increase wages and productivity in target firms (Hale and Xu 2016) and can also generate positive spillovers across U.S. firms within an industry (Keller and Yeaple 2009). Reflecting long‐​standing trends, the large majority of U.S. FDI flows are either destined for or originate from the country’s closest trading partners. For example, in 2022, Canada and countries in Europe accounted for 79 percent of inward U.S. FDI flows and 65 percent of outward U.S. FDI flows (BEA 2023c).

Fact 3: Imports (and exports) benefit U.S. manufacturers, especially multinationals.

Multinational firms—themselves fueled by the information and communications revolution—have been particularly adept at taking advantage of cross‐​border input cost differentials. By establishing foreign affiliates through FDI, these firms can mediate trade with both foreign subsidiaries (within‐​firm trade) and unaffiliated firms (arm’s‑length trade) within [global value chains] (OECD 2018). Multinational firms accounted for, respectively, 65 percent and 60 percent of U.S. goods exports and imports on average between 1997 and 2017 (Kamal, McCloskey, and Ouyang 2022). And within‐​firm trade accounts for a large share of multinationals’ total trade flows: In 2022, one third (33.7 percent) of U.S. exports and almost half (46.6 percent) of U.S. imports by value were between multinational parent firms and their affiliates or related parties (U.S. Census Bureau 2022). The growth of trade within multinational firms (i.e., flows between parents and affiliates) underscores the highly fragmented nature of production.

Global supply chains’ prevalence in U.S. production can also be observed in the high share of intermediate goods or imported input trade in the United States (figure 5–10). Industrial supplies (e.g., lumber and steelmaking materials) and capital goods (e.g., drilling equipment)—typically, inputs into final goods—are highly positively correlated with [global value chain] trade and accounted on average for over half of imports between 1992 and 2022 (Hummels, Ishii, and Yi 2001; Baldwin and López‐​González 2014). The import share of industrial materials grew more than that of any other product group between 1992 through the onset of the global financial crisis in 2008, showcasing how multinationals’ FDI and the establishment of GVC linkages can support greater trade flows.

Fact 4: Imports (including ones from China) also benefit American consumers, especially poorer ones.

Import competition from China was also accompanied by a substantial fall in U.S. consumer prices, with disproportionate benefits accruing to low‐ and middle‐​income households because they have higher shares of tradable goods like food and apparel in their consumption baskets (Fajgelbaum and Khandelwal 2016; Russ, Shambaugh, and Furman 2017). Causal estimates suggest that a 1‑percentage‐​point increase in Chinese import penetration led to a decline in consumer price inflation of 1 to 2 percentage points—largely reflecting indirect pro‐​competitive cost effects, where greater foreign competition induces domestic firms to lower markups and thus further drives down prices (Jaravel and Sager 2019). Considering the modeled impact of increased Chinese import penetration across U.S. geographic regions, Galle, Rodríguez‐​Clare, and Yi (2023) find that almost 90 percent of the U.S. population saw an increase in purchasing power, with those regions that saw purchasing power losses being spatially correlated with regions that also saw a loss in manufacturing employment from the China shock.

The results, showing that trade with China has benefited most Americans’ purchasing power, are consistent with a larger body of evidence on the benefits from trade with all countries—again, with disproportionate benefits accruing to lower‐​income households.35 For example, the average U.S. household has been shown to gain 8 percent in purchasing power from trade compared with a counterfactual autarky (Fajgelbaum and Khandelwal 2016).36 However, the lowest‐​income U.S. households gain the most, at 69 percent (figure 5–13).

fn. 35: There is also a literature documenting welfare increases due to greater access to varieties of goods through trade (e.g., Broda and Weinstein 2006; Melitz and Trefler 2012).

Fact 5: China—and Permanent Normal Trade Relations, in particular—didn’t cause most U.S. manufacturing job‐​losses, even during the “China Shock.”

Close to a fifth (16 percent) of the decline in manufacturing employment between 2000 and 2007 has been attributed to the rise in import competition from China (Caliendo, Dvorkin, and Parro 2019). Firms that reorganized activities away from the production of machinery, electronics, or transportation equipment and toward wholesale, professional services (including research and development), and management drove almost a third of the negative manufacturing employment decline between 1990 and 2015 (Bloom et al. 2019). Several factors have been analyzed to understand the surge in U.S. imports from China during this period, including the United States granting China permanent normal trade relations in 2000, China’s accession to the World Trade Organization in 2001, reduced trade and investment policy uncertainty associated with these policy actions, and China’s own trade and domestic reforms (e.g., tariff reductions and privatizations) (Lincicome and Anand 2023).

(For those interested, my Cato essay cited in the ERP excerpt above finds that, based on various economic studies, China’s own market‐​based reforms likely drove around two‐​thirds of the “China Shock,” with U.S. trade liberalization accounting for the rest.)

Fact 6: Today, U.S. companies engaged in trade are huge job creators.

[Global value chains] have created strong interconnections between exporting and importing—which are often performed by the same firms. Among goods traders, averaged over the period 1992–2021, firms that both export and import goods account for a plurality of total U.S. private sector employment (36 percent), followed by firms that only export goods (8 percent) and firms that only import goods (6 percent) (figure 5–16). The majority of employment at goods traders is by large firms (defined as those employing 500 or more workers); in contrast, the majority of employment at nontraders is by small firms (those employing fewer than 500 workers). Nevertheless, small firms directly engaged in the goods trade account for almost 10 percent of national employment.…

Goods traders’ contribution to net job creation has grown over recent years: During the 2001–7 period, goods traders accounted for only 10 percent of total net job creation; but between 2008 and 2019, that figure rose to 60 percent. Overall, goods traders were responsible for almost 40 percent of net job creation in the U.S. economy between 1992 and 2019 (Handley, Kamal, and Ouyang 2021).38 These statistics underscore the changing nature of the U.S. production landscape, where both exports and imports support domestic jobs.

fn. 38: Handley, Kamal, and Ouyang (2021) document that vast majority of goods‐​traders’ contribution to net job creation is driven by the opening of new establishments, particularly, in services‐​providing sectors like wholesale, retail, business and professional services. These patterns hint at the complementarity between manufacturing and services activities as well as the sectoral diversity in job creation tied to trade participation.

In Washington today, the unfortunate consensus among many politicians and pundits is that trade and globalization have been an unmitigated disaster for America and the working class, regardless of the actual facts. It’s good to see that White House economists aren’t buying into this new consensus, though it’d of course be even better if their views were more reflected in U.S. policy too.

For more trade and globalization facts, check out the Defending Globalization essays here.

Colleen Hroncich

“Every student deserves that,” Walt Tracy thought when he saw a credit recovery program that was providing individualized learning plans for students after COVID-19 interrupted their education. He and his wife Angela had long been drawn towards education and mentorship, but it was seeing individualized learning in action that propelled them to start UrbaNeXt. “We’re a nonprofit that seeks to partner with churches serving primarily under‐​resourced communities to offer a microschool as an extension of their community outreach,” he explains.

“So many of these pastors will say, ‘I’ve always wanted to do a school, but it’s hard. It requires expertise. It requires resources to do all of that,’” says Walt. That’s where UrbaNeXt comes in, working behind the scenes to operate the school on behalf of the church, including employing teachers and paying for the curriculum. “You won’t usually see the UrbaNeXt name out there. We brand it to something meaningful to the church and the community in that particular site,” he continues.

This year, UrbaNeXt has one location in operation: the Fred L. Shuttlesworth Christian Academy. Walt says it’s a great example of how they partner with the local church community. The church that sponsors the school is the Greater New Light Baptist Church in Avondale. It was started by Fred L. Shuttlesworth, a minister who was heavily involved in the civil rights movement and a close colleague of Dr. Martin Luther King, Jr. So, the community named the school in his honor.

Fortunately, Walt lives in Cincinnati, Ohio, where the EdChoice scholarship is available for private school tuition. The Fred L. Shuttlesworth Christian Academy opened as a pilot school using private donor money while UrbaNeXt worked to get approved to accept the scholarships. “It took a year and a half to get through the eligibility process, so this is our first school year of operation under the EdChoice program. But now, having qualified for that, they allow us to add new campuses much more easily than that first campus,” Walt explains. Because of the scholarship program, churches can operate the microschools tuition‐​free.

Walt says they’re talking to several other churches about opening microschools. “Our dream would be to have lots of microschools rather than a big 2,000-person high school or something,” he says. “I think a lot of what our parents value is the size, the closeness, the kind of safety, if you will, that comes with that.” Summit Christian School located in New Prospect Baptist Church in Cincinnati, has cleared the regulatory hurdles and been approved to open this fall. There is a third campus that is currently working on its educational occupancy permit, which is needed before it can accept the EdChoice scholarships.

“We’re using a digital curriculum, but it’s within a brick‐​and‐​mortar facility. They come in every day. Our teachers are really kind of counselors and coaches, if you will, because we’re relying on the curriculum to do much of the instruction,” Walt explains. “Our teachers follow the ‘guide by the side’ idea. They’re mentoring and, in our case, from a Christian school standpoint, we really look at it as discipling. They help goal set, encourage, remove barriers—that’s really the role that they play with their students.”

Beyond the digital curriculum, the schools have several offerings for students. As a Christ‐​centered school, they have daily devotionals and weekly extended Bible programs. There’s a lot of emphasis on ‘calling readiness.’ “We believe for each of these young people that God has called them to a particular purpose and a way to serve in his Kingdom. We want to have them explore what that would be, so a kind of career exploration,” Walt explains. “And, as they advance age‐​wise, job readiness skills and some vocational assessments. And then we have speakers come in from different industry areas and just kind of talk about what they do, what is their industry, what’s their career look like.”

Walt says they’re seeing amazing results already with the individualized learning approach. “We’ve seen examples of kids coming in literally two grade levels behind and within a year getting on grade level,” he says. That success and his visionary approach resulted in UrbaNeXt being named a quarterfinalist in last year’s Yass Prize.

For others who are interested in doing something similar, Walt encourages them to go for it. With UrbaNeXt, he hopes to simplify the process as much as possible—to essentially make it a turnkey operation for a church that’s interested in starting a school. He wants to help more schools get off the ground in the Cincinnati area, then elsewhere in Ohio, and then possibly beyond, especially in other states with robust school choice programs. Because, as he sees it, every child deserves an individualized education.

James A. Dorn

Today the world is on a pure fiat money standard. Unlike the classical gold standard, there is no mechanism for maintaining long‐​run price stability. Once the inflation genie is out of the bottle, the central bank may be able to tame inflation, but returning to the pre‐​inflation price level is not a viable option. Therefore, it is essential that the monetary powers of central banks be strictly limited and that there be a clear separation of monetary and fiscal policy so that the central bank is unable to monetize government debt.

The challenge is to enforce a monetary rule that anchors the long‐​run price level and avoids excess or deficient monetary growth. That is a difficult task because politicians are typically myopic. They tend to think in terms of policies that have immediate results rather than what needs to be done to achieve long‐​run prosperity. Argentina is a prominent case: it was once one of the wealthiest nations in the world and now is plagued by hyperinflation and a 57.4 percent poverty rate.

Argentina’s Monetary Mischief

In 2023, Argentina reached an inflation rate of 211 percent, the highest since the early 1990s. That rate continues to increase as people flee the peso for the US dollar, and the central bank finances profligate government spending. Argentina’s new president, Javier Milei, has called for cutting government spending and dollarizing the economy to end the hyperinflation and restore economic growth. But his policies face political headwinds from opposition parties.

Argentina’s crisis reinforces the lesson that if a central bank becomes politicized—and lacks a guiding principle—public trust in the currency will evaporate. It also debunks the myth that money growth is immaterial in determining inflation (i.e., a sustained increase in the level of money prices). Obviously, people could not bid up prices in general if they did not have the money to do so. And only the central bank has the power to create money out of thin air and get it into circulation by buying government debt.

Figures 1 and 2 illustrate the close relationship between money and inflation in Argentina: when there is persistent growth of money above the growth of real output, inflation will inevitably follow.

The root cause of Argentina’s hyperinflation is excess money growth brought about by the central bank’s accommodation of fiscal profligacy. In effect, politicians have captured the central bank for their own benefit while others bear the cost of higher inflation. Provincial governments spend freely and run deficits knowing that the Central Bank of the Argentine Republic (BCRA) will finance them. The same is true of the federal government.

In response to COVID-19, President Alberto Fernández dramatically increased spending. As a result, the year‐​over‐​year money supply growth increased nearly 50 percent during the first half of 2020. To counter the inflationary impact of the stimulus spending, the BCRA established the Leliq facility that drained liquidity from the financial system by selling short‐​term securities into the market. The problem, however, is that as the Leliqs matured, the BCRA had to either raise interest rates to encourage banks to buy more of them or print pesos to redeem them and face even higher inflation. The BCRA did both, as Walter Bianchi reported for Reuters in July 2020. President Milei recognizes the inflation risk the Leliq system poses, and his minister of economy, Luis Caputo, is addressing it.

With inflation skyrocketing, it has become embedded in the public psyche. The widespread expectation of future inflation has destroyed any credibility the BCRA may have had. Consequently, the demand for pesos has fallen sharply, which is to say monetary velocity has increased, further increasing the rate of inflation. That is why Milei wants to abolish the central bank and dollarize the economy.

Main Lesson from the Crisis: Money Matters

The main lesson from the Argentine experience is that money matters in determining the price level and its path. Under a fiat money regime, a purely discretionary central bank—subject to political pressure to monetize government debt—is likely to inflate and thereby erode the purchasing power of money. While short‐​run changes in the price level can be caused by supply‐​side shocks, the long‐​run value of money is primarily determined by changes in the demand for and supply of money. Only by keeping the supply of money in line with demand for cash balances can the central bank achieve long‐​run price stability and retain public trust in the currency.

Milei’s Dollarization Proposal: A Caveat

President Milei’s call for dollarization to anchor the peso means putting Argentine monetary policy in the hands of the US Federal Reserve. However, the Fed also operates under a fiat money standard and lacks a monetary rule to guide its behavior. Of course, the US dollar is a trusted reserve currency, and there is a credible line between fiscal and monetary policy, but that line is still open to political manipulation. The US government faces large and growing deficits, with an increasing risk of being monetized. So while replacing the peso with the dollar makes sense, it does not remove the threat of future inflation—albeit in single rather than triple digits.

In conclusion, both Argentina and the United States need fiscal rectitude and a rules‐​based monetary policy aimed at long‐​run price stability. Debunking the myth that money is immaterial in determining inflation is the first step toward a more rational monetary policy.

Thomas A. Berry

Federal law is full of deadlines. But in federal court, most deadlines are flexible. Courts can usually extend a deadline when there is a compelling reason to do so—a grace period known as “equitable tolling.” In the rare cases where a deadline is instead inflexible and ineligible for “equitable tolling,” courts are prevented from extending that deadline no matter how compelling the argument might be that an extension would be in the interests of justice. Because the consequences of an inflexible deadline are so harsh, the US Supreme Court has repeatedly held that statutory deadlines in the federal court system are presumptively flexible and subject to equitable tolling unless there is clear congressional intent to make them inflexible.

A federal statute sets a 60‐​day deadline to ask a federal court to review certain types of agency decisions made within the Department of Transportation. A Georgia business suffered an unfavorable decision from the department, but more than 60 days later, the business learned that the agency official who decided its case had been improperly appointed. The business promptly petitioned for judicial review after learning of this appointment problem. And normally, the business would have had a good case for equitable tolling. Although the business did not petition for review within 60 days, that is because the government was not forthcoming about the appointment defect, a defect of which the government was aware when the decision was handed down.

But the US Court of Appeals for the Eleventh Circuit held that the 60‐​day deadline was not subject to equitable tolling and could not be extended. The Eleventh Circuit did not base this decision on the statute itself. The statutory text did not explicitly forbid equitable tolling, which would normally mean that the presumption in favor of equitable tolling applied. Instead, the Eleventh Circuit looked to a rule of appellate procedure that had been set by the Supreme Court, not by Congress. That judge‐​made rule states that a “court may not extend the time to file,” among other things, “a petition to … review an order of an administrative agency … unless specifically authorized by law.”

Now the Georgia business has petitioned the Supreme Court to review its case and decide whether this judge‐​made rule forbids equitable tolling for every statutory deadline to review agency action. And Cato has joined an amicus brief filed by the National Federation of Independent Business Small Business Legal Center, Buckeye Institute, and Institute for Hazardous Materials Packaging and Certification Testing in support of that petition.

In our brief, we argue that equitable tolling is presumptively available unless there is clear congressional intent to make a deadline inflexible. No such congressional intent is present here, because the rule relied on by the Eleventh Circuit was issued by the Supreme Court, not by Congress. In any event, we argue that the statute at issue should be read to permit equitable tolling based on the background presumption in favor of tolling and thus that equitable tolling is indeed “specifically authorized by law” for the purpose of this judge‐​made rule.

Further, we argue that interpreting this judge‐​made rule to prevent equitable tolling would be unlawful, because the Supreme Court has been granted the authority to issue rules only if they do not eliminate substantive rights. As we explain, the right to judicial review of an agency adjudication is a right protected by the Constitution’s due process clause. Eliminating equitable tolling would eliminate this due process right in many cases such as this one, which means eliminating equitable tolling is beyond the scope of the Supreme Court’s powers.

Finally, our brief notes that a rule forbidding equitable tolling would give agencies a perverse incentive to conceal legal defects in an adjudication until the statutory deadline to petition for review has passed. This case illustrates the problem—the government was not candid with the Georgia business about the appointment problem despite being aware of it. That meant the business did not learn of the problem until more than 60 days had passed after the decision. That is exactly the type of government behavior that warrants equitable tolling. A rule forbidding equitable tolling would perversely reward the government for engaging in bad behavior.

The Supreme Court should take this case, reverse the Eleventh Circuit, and make clear that deadlines to review agency decisions are presumptively subject to equitable tolling, just like any other statutory court deadline.

Nicholas Anthony

Financial freedom is under fire. Policies like the Digital Asset Anti‐​Money Laundering Act, the Credit Card Competition Act, the Consumer Financial Protection Bureau’s slew of price controls, and Basel III reforms are designed to increase financial surveillance, dictate prices, and tell businesses how to operate. To make matters worse, some of these policies are already projected to cost financial institutions billions of dollars per year (Table 1).

Yet, it can be difficult to recognize what is taking place when the attacks are scattered and often hidden in the weeds of legislative text, dense regulations, and specialized jargon. Therefore, let’s take a brief look at some of the things that have been put on the table as of late to see how policymakers are seeking to restrict the market and expand the government within the realm of monetary and financial policy.

6050I Reporting

From the Infrastructure Investment and Jobs Act of 2021, a new surveillance regime began (but was temporarily paused) at the start of 2024 that requires transactions of $10,000 or more in cryptocurrency to be reported (along with personal information) to the government within 15 days of the transaction under 26 U.S.C. § 6050I. Failure to file, incorrect information, or missing information may result in a $25,000 fine or five years in prison.

Basel III Endgame

Basel III Endgame refers to a proposal from the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency that calls for US financial institutions to increase the amount of capital on their balance sheets—removing that capital from profitable uses. As Norbert Michel has warned, the “new requirements will impose higher costs on these banks and possibly put them at a disadvantage to foreign‐​based banks.”

Capping Credit Card Interest Rates Act

The Capping Credit Card Interest Rates Act, if enacted, would establish an 18 percent interest rate cap on credit cards. In other words, the bill would establish price controls for credit cards. As Norbert Michel warned, “Regardless of the politics, price controls are harmful policies that tend to hurt the people they’re supposedly designed to help. Credit markets are not an exception to this rule.”

Central Bank Digital Currency (CBDC)

According to the Human Rights Foundation’s CBDC Tracker, 11 countries and the 8 islands in the Eastern Caribbean Currency Union have launched CBDCs; 37 countries and Hong Kong have CBDC pilot programs; and 65 countries, 2 currency unions, and Macao are researching CBDCs. The United States is currently in the pilot phase. Despite governments pushing forward, CBDCs risk threatening financial privacy, freedom, and markets.

Credit Card Competition Act

The Credit Card Competition Act, if enacted, would give the Federal Reserve the power to blacklist companies from the payments sector, impose price controls on transaction fees, and decide what services credit card networks could provide. In other words, it effectively calls for central planning and price controls in credit markets rather than letting competition among issuers determine the best outcome.

Credit Card Late Fee Price Controls

As part of the Biden administration’s “war on junk fees,” the Consumer Financial Protection Bureau (CFPB) issued new regulations to restrict fees charged for late credit card payments from a maximum of $25 on the first late payment and $35 for subsequent late payments to just $8. Furthermore, the CFPB called for the removal of inflation adjustments so that the fees effectively become $0 over time.

Crypto Asset National Security Enhancement and Enforcement (CANSEE) Act

The CANSEE Act, if enacted, would broadly define terms to create sweeping surveillance, potentially violate the First Amendment, and give the Treasury the authority to effectively prohibit cryptocurrency use in the United States. Combating financial crimes does pose a challenge, but sacrificing the constitutional rights that the United States was built upon is no solution.

Cryptocurrency Broker Reporting

The Internal Revenue Service (IRS) proposed new surveillance requirements for cryptocurrency users under the Infrastructure Investment and Jobs Act of 2021. Simply put, the proposal would require a sweeping surveillance program, set a huge burden on small businesses, and put cryptocurrency at a disadvantage when used for payments. The IRS estimates this requirement would result in Americans filing eight billion new returns if the proposal is enacted.

Digital Asset Anti‐​Money Laundering Act

The Digital Asset Anti‐​Money Laundering Act, if enacted, would establish sweeping surveillance over Americans using cryptocurrency. The bill calls for self‐​hosted wallets, miners, validators, and network participants to be classified as money service businesses. The bill would also prohibit banks from using mixers or handling cryptocurrencies that have been run through mixers in the past. Finally, the bill would require new surveillance to cover the use of cryptocurrency ATMs.

Nonsufficient Funds Fee Price Controls

As part of the Biden administration’s “war on junk fees,” the CFPB proposed banning banks from charging nonsufficient fund fees for debit, ATM, and peer‐​to‐​peer payments that are immediately declined. The CFPB openly acknowledged that these fees are rare but argued that it needed to proactively ban the practice in case banks turn to the fees in the future.

Operation Choke Point 2.0

Like how the original operation under the Obama administration was used to pressure politically controversial businesses, many worried that the Biden administration was doing the same to target cryptocurrency—a sort of Operation Choke Point 2.0. As Nic Carter documented at the time, government officials were increasingly pressuring banks for any involvement with cryptocurrency. If nothing else, the experience showcased the vast discretionary powers that regulators wield.

Overdraft Fee Price Controls

As part of the Biden administration’s “war on junk fees,” the CFPB proposed new regulations to restrict the fees charged when people overdraft their accounts. The proposal seemingly ignores that overdraft protection is optional and that competition has improved these services (and reduced fees) over time. As with the CFPB’s other price controls, these restrictions are likely to result in a reduction of financial services.

Politically Driven Financial Surveillance

Concerns have emerged that the Financial Crimes Enforcement Network, or FinCEN, has been using politically charged terms to drive financial surveillance. Suspected terms include “MAGA,” “Trump,” and the like. In February 2024, the Department of the Treasury denied using keywords to target individuals but confirmed that banks were instructed to review payments for messages including political terms to search for individuals that participated in the January 6, 2021, capital riot.

The Treasury’s Financial Surveillance Request

The Treasury Department reportedly asked Congress to introduce legislation to (among other things) designate decentralized finance service providers, noncustodial wallet providers, cryptocurrency miners, and validators as “financial institutions” under the Bank Secrecy Act. As Jennifer Schulp and Jack Solowey warned in their analysis of the proposal, “Such unworkable compliance requirements would amount to de facto bans on US crypto activity.”

Conclusion

This list is not exhaustive, but these examples should provide a better sense of just what is at stake and why it’s important to be vigilant—even in one of the freest countries in the world. It may not always be obvious, but Americans’ financial privacy and financial freedom are regularly under fire.

Romina Boccia and Dominik Lett

The Congressional Budget Office’s (CBO) latest 30‐​year budget projections forecast rising debt, deficits, and interest costs, which will undermine US investment and economic growth and hurt American incomes. Rising spending on old‐​age entitlement programs, primarily Medicare and Social Security, is mostly to blame. Legislators must act to achieve a sustainable budget policy and avert a future fiscal catastrophe.

The CBO warns that “mounting debt would slow economic growth, push up interest payments to foreign holders of US debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices.” Lawmakers should heed the CBO’s warnings and adopt a credible fiscal plan that will stabilize the debt. Annual spending is projected to grow from more than $6 trillion to $23 trillion (before adjusting for inflation) over the next 30 years. Without fiscal reforms, the government will accumulate $113 trillion in additional debt and end 2054 with debt at 166 percent of gross domestic product (GDP). To avoid more painful and likely more chaotic austerity in the future, policymakers should correct course by restraining entitlement spending growth today.

Debt Grows to 166 Percent of GDP by 2054

Key highlights from the CBO’s 30‐​year forecast report show that US debt is expected to exceed the record high in 2028 and keep climbing (Figure 1).

As a percentage of the country’s yearly economic output, federal public debt (the debt borrowed from credit markets) is currently 99 percent of GDP—about $103,000 for every person in America. In just four years (2028), public debt is projected to surpass its all‐​time World War II high of 106 percent. By 2034 (10 years from now), public debt will reach 116 percent of GDP. By 2054 (30 years from now), public debt is projected to reach 166 percent of GDP. Such high debt levels have never before been recorded in US history.

Interest Costs More than Double to 6.3 Percent of GDP by 2054

Between 2024 and 2054, interest costs are projected to grow from 3.1 percent to 6.3 percent of GDP. Interest costs grow faster than every other major budget category. By 2044, net interest payments will be larger than all discretionary spending combined. In other words, interest costs will exceed combined government spending on defense, education, transportation, agriculture, energy, and more. For these projections, the CBO assumes an average 4.2 percent interest rate on 10‐​year Treasury notes—the projected rate for 2024 is 4.6 percent. Were interest rates just one point higher than projected in 2054, interest costs that year would rise to 7.7 percent of GDP—an increase of $1.2 trillion for that year.

Entitlement Spending Drives Unsustainable Growth in Federal Debt

Between 2024 and 2054, total federal spending will increase from 23.1 percent to 27.3 percent of GDP. That’s nearly one‐​third higher than the 50‐​year historical spending average (21 percent of GDP), spanning 1974–2023. Major entitlements, like Social Security and Medicare, are almost entirely responsible for non​interest spending growth. In 2024, Social Security’s and Medicare’s combined contribution to the deficit was 2.2 percent of GDP. By 2054, their annual deficit contribution will be 5 percent of GDP. That means spending on Social Security and Medicare will account for nearly 60 percent of the total deficit in 2054 (assuming additional borrowing past trust fund exhaustion and no other policy changes).

These projections are in line with findings from the latest Financial Report of the United States Government, which estimates that over the next 75 years, Medicare and Social Security funding shortfalls comprise 100 percent of the government’s total unfunded obligation (present value costs minus dedicated revenues).

Obvious solutions to restrain excess entitlement spending growth include reducing retirement and health care subsidies for wealthier individuals, adjusting eligibility ages for old‐​age entitlements with improvements in health and lifespan, and preserving current benefits by adjusting for inflation while stopping excess benefit growth.

Social Security’s Old‐​Age and Survivors Insurance (OASI) and Medicare’s Part A Hospital Insurance (HI) trust funds—which are more akin to financial ledgers than funds with real assets—are both projected to exhaust their borrowing authority within the next 10 years. Medicare’s HI trust fund will be depleted by 2035 (other estimates place the exhaustion date at 2031). For Social Security’s OASI, scheduled benefits can continue uninterrupted up to 2033. After borrowing authority is exhausted, Medicare and Social Security benefits would be indiscriminately cut by 11 percent and 23 percent, respectively, if Congress fails to act. Waiting until the 11th hour will leave legislators with few options to avoid steep benefit cuts and harmful tax increases.

CBO’s Optimistic Assumptions Fail to Capture the True Extent of Debt Problem

It must be noted that the CBO projections are based on several unrealistic assumptions. For example, the agency projects substantial revenue increases once the 2017 Tax Cuts and Jobs Act provisions expire in 2025. Yet, as Cato’s Adam Michel writes: “There is broad bipartisan support to extend about three‐​quarters of the tax cuts.” Moreover, the CBO projects deficit cuts due to the discretionary spending caps established in the Fiscal Responsibility Act. In addition to assuming that lawmakers will stick to these spending limits, the CBO does not consider various budgetary gimmicks agreed to outside this legislation. The CBO also cannot predict the effects of potential future emergency spending bills, such as the pending supplemental Ukraine‐​border security deal. Nevertheless, even with these overly optimistic projections, the federal debt is still expected to exceed historical highs within this decade.

Congress and the President Must Work Together to Stabilize Spending and Debt

More than $8 trillion in savings will be necessary to stabilize the debt over the next 10 years. Cato’s Chris Edwards suggests that significant entitlement reforms and a reduction in federal spending dedicated to state and local activities would address the debt problem. Reducing the growth of Medicare and Medicaid spending, adjusting Social Security benefit indexing, and cutting non‐​Medicaid aid to states by half over 10 years could stabilize the debt at 100 percent of GDP by 2033.

However, political considerations over entitlement changes and how these will play out electorally have delayed inevitable reforms for far too long. Americans in and near retirement age are the most active at the voting booth, and they also stand to be hurt the most should Congress allow indiscriminate benefit cuts to take place over the next 10 years.

Despite the CBO’s concerning long‐​term outlook, there are encouraging developments in the US fiscal landscape. The Fiscal Commission Act, which recently passed the House Budget Committee, aims to stabilize the debt over 15 years and address the insolvency of Medicare and Social Security’s trust funds. However, the current approach has certain shortcomings, such as including only elected officials as voting members on the commission and requiring an affirmative vote before proposals can go into effect.

The most promising approach would be a Base Realignment and Closure (BRAC)‐​like fiscal commission to empower an independent body of experts to put forth policies to stabilize the federal debt. A well‐​designed commission would be composed of independent experts with diverse viewpoints who are tasked with a clear goal, such as stabilizing the public debt at no more than 100 percent of GDP over the next 10 years, and whose recommendations would be self‐​executing in Congress through a similar fast‐​track mechanism that allowed the BRAC commission to be successful. A BRAC process could overcome political gridlock by providing legislators with cover from delegating entitlement reform to outside experts.

If policymakers continue to put serious fiscal reform on the back burner, the severity and scope of necessary reforms will grow. High and rising debt causes a significant drag on the economy and threatens America’s fiscal and economic future. Delay is costly and risky. Congress and the president should act soon.

Marc Joffe and Jeffrey A. Singer

How often do people have to leave work early for a medical appointment and wait for an hour for the doctor to perform a simple test and prescribe a routine medication that they knew in advance would happen? Like a routine urinary tract infection? Or a strep throat? Imagine if they could stop off at their local pharmacy on the way home from work, ask the pharmacist to perform the simple test, and prescribe the medication for the routine condition. There are several jurisdictions—including three states—where this convenience and accessibility is a reality.

Our new policy briefing paper, Let Pharmacists Prescribe, explores a reform that would improve the quality of US healthcare while partially addressing the shortage of primary care physicians. We propose that states allow pharmacists to leverage their education and experience to safely prescribe a wider range of medications to their customers.

The traditional arrangement under which physicians prescribe and pharmacists dispense has already been breached throughout the United States. During the COVID-19 pandemic, the federal government authorized pharmacists to dispense Paxlovid without a prescription on the grounds that patients needed to start taking the anti‐​viral medication soon after being diagnosed, so there was no time to wait for a doctor’s visit. States have also reached a similar conclusion about Naloxone (marketed as Narcan), which reverses the effects of opioid overdose if administered quickly. Several states authorize pharmacists to prescribe birth control pills and HIV prevention.

But shouldn’t a policy that works for COVID-19, drug overdoses, birth control, and HIV prophylaxis be applicable to other conditions?

In our paper, we consider the cases of Alberta, Ontario, and Queensland (Australia), all of which have extended pharmacist prescribing to more than a dozen common conditions. In the first six months of 2023 alone, Ontario pharmacists wrote over 250,000 prescriptions.

Among US states, Idaho has taken the lead in broadening pharmacist prescribing, specifying four general categories under which they may prescribe. Subsequently, Montana and Colorado enacted similar legislation.

When considering prescribing a medication, physicians often consult with pharmacists about interactions with drugs the patient is already taking. Pharmacists are well qualified to address such inquiries because they interact with a large number of patients and most receive as much classroom training as physicians.

States should eliminate unnecessary requirements for people to see doctors to make simple diagnoses and prescribe medicines. Patients should be allowed to go directly to the pharmacy, freeing up physicians for higher priorities and removing a hurdle for patients seeking relief.

Chris Edwards

The federal low‐​income housing tax credit (LIHTC) is an awful program for the reasons discussed in this 2017 study. I’ve recently focused—here, here, and here—on the ungodly complexity of the LIHTC, which benefits no one except the lawyers.

Complexity is one reason for the high costs of apartment buildings developed with LIHTC subsidies. The Wall Street Journal recently examined the high costs of subsidized housing, as excepted below.

The issue is salient because the tax bill before Congress would expand the LIHTC, and there is bipartisan support for new subsidies based on the LIHTC’s critically flawed approach. Expanding housing tax credits would be the opposite of “evidence‐​based policymaking.”

Here is the Wall Street Journal:

State and local governments in California have committed tens of billions of dollars to build more affordable housing. A new complex for some of the neediest low‐​income people doesn’t use any of it.

By forgoing government assistance and the many regulations and requirements that come with it, SDS Capital Group said the 49‐​unit apartment building it is financing in South Los Angeles will cost about $291,000 a unit to build.

The roughly 4,500 apartments for low‐​income people that have been built with funding from a $1.2 billion bond measure L.A. voters approved in 2016 have cost an average of $600,000 each.

Across California, efforts to address the homelessness crisis by building more affordable housing with government money have been plagued by sky‐​high costs. A recent report commissioned by the city of San Jose found affordable‐​housing projects that received tax credits [i.e. LIHTCs] cost an average of around $939,000 a unit to build there last year.

… “We believe there’s a different way than using government money, which really becomes slow and arduous and increases cost,” said Deborah La Franchi, chief executive of SDS.

… Publicly funded affordable housing must typically be built with labor agreements that dictate construction wages and working conditions, as well as energy‐​efficiency standards. Funding often comes from a variety of agencies, each of which has its own set of approvals and regulations that can slow construction and add to costs.

With private financing, “You’re cutting out millions of dollars just in soft costs,” said David Grunwald, an executive at RMG Housing, which is developing the SDS fund’s projects.

… Green Development Co., a housing developer, is planning four unsubsidized affordable apartment buildings in Los Angeles, primarily for people with incomes no higher than 80% of the local median … “The return gets better, and the project provides more housing as well,” said Slocum, who expects the cost per unit of his planned projects to average $222,000.

… The most significant impact private affordable‐​housing builders could have, some advocates agree, is to demonstrate how much cheaper construction can be.

Jennifer Hark Dietz, chief executive of the nonprofit housing developer PATH, said she is hopeful the private‐​equity model will inspire governments to simplify requirements and bring costs down. Her organization is currently working on a project in the Bay Area that blends private‐​equity funding with public subsidies. “I don’t think any of us want to be doing it the way that it has been done,” she said.

People in the industry know that government subsidies generate complexity and high costs. To me, the solution for affordable housing is local deregulation and property tax cuts for apartment buildings, not federal subsidies.

Peter Goettler

I’m excited to announce that today Cato launches its new quarterly magazine Free Society.

Free Society will replace our long‐​running bimonthly Cato Policy Report and our quarterly publications Cato’s Letter and Cato Quarterly. But it will do much more than that.

It will offer a broad scope of content, including in‐​depth policy research, interviews with leading thinkers, stories from the victims of an ever‐​growing state, insightful commentary on current events from a libertarian perspective, and news of Cato’s activities and impact.

The world is grappling with a host of complex challenges, many driven by the erosion of individual rights and the expansion of government power. The Cato Institute remains committed to providing the intellectual ammunition needed to win the battle for human liberty, both practically and morally. I believe you will find that passion for freedom on every page of Free Society.

To give you an idea of the type of material you can expect in Free Society, here’s a sampling of pieces from the inaugural issue in addition to a full report on Cato’s work and initiatives.

Cato senior fellow Johan Norberg asks the question: “What is the state of human freedom?” While the answer isn’t completely certain—we have recently seen both setbacks and gains for liberty around the world—I think the piece ultimately will leave you with well‐​founded optimism.

We also explore the state of educational freedom in the United States through the lens of two families—one in Arizona and one in Kentucky—who fought for the right to choose the best education for their children. Cato has been instrumental in the battle for school choice and the explosion of different learning options following the pandemic, but we must keep this momentum going until every American has the “freedom to learn.”

An investigative piece sheds light on an awful case of eminent domain unfolding in North Carolina, where policymakers are subsidizing the construction of a $4 billion factory by the Vietnamese electric vehicle (EV) startup VinFast. While residents are left in the dark about precisely when they’ll lose their homes and properties—and whether the economic promise of the deal will even materialize—news of the car company’s shoddy products is spreading widely.

Finally, Bridget McCormack, the president and CEO of the American Arbitration Association and former chief justice of the Michigan Supreme Court, discusses working to free people who have been wrongly convicted of crimes, the problems with many sentencing guidelines, and why we need to reduce barriers to entry in the legal profession.

Free Society will bring you thought‐​provoking insights into the most pressing issues of the day from Cato’s unique view of the world—one that is informed by thinkers from America’s founding (and before) to F. A. Hayek, Milton Friedman, Robert Nozick, and current scholars at the forefront of advancing individual liberty, free markets, and peace. We hope you will join us as a regular reader and share your thoughts on what you find most valuable in the magazine and what you would like to see us cover in the future.

Travis Fisher

Tomorrow, the Senate Committee on Energy and Natural Resources (ENR) will hold a confirmation hearing for three new nominees to the Federal Energy Regulatory Commission (FERC)—David Rosner, Lindsay See, and Judy Chang. If confirmed, these nominees would represent a majority of votes on the five‐​commissioner panel and help shape the future of electricity and natural gas regulation in America.

The best (read: least bad) option from a libertarian perspective is for the future commissioners to uphold FERC’s organic statutes. In these statutes from the 1930s—the Federal Power Act (FPA) and the Natural Gas Act (NGA)—Congress has already answered the major policy questions that have plagued FERC in recent years, including the question of whether FERC should continue to approve natural gas pipelines despite their greenhouse gas (GHG) emissions (so long as there are willing natural gas customers, the answer is yes).

Based on my reading of the FPA and NGA, Congress dictated that (1) electricity should be reliable and available at just and reasonable rates, and (2) supplying natural gas to American consumers is in the public interest. These two statutes are complementary—without abundant natural gas, electricity will be unreliable, and electric rates will cease to be just and reasonable. The free market could do this on its own without federal regulation, but so long as public utility regulation exists, these organic statutes can be a bulwark against activist agencies.

To be clear, Congress—not to mention state governments across the country—can and should do more to free energy policy in the United States. Today’s energy policy is far from ideal, particularly from the free‐​market perspective. Still, administrative agencies like FERC should avoid overstepping their statutory bounds and subjecting energy markets to unnecessary intervention and political uncertainty. Paraphrasing Hippocrates, FERC nominees should “first, do no harm.”

Abundant Natural Gas and the “Public Interest”

The purpose of the NGA is to promote natural gas delivery to consumers. NGA section 1(a) states that “the business of transporting and selling natural gas for ultimate distribution to the public is affected with a public interest, and that Federal regulation in matters relating to the transportation of natural gas and the sale thereof in interstate and foreign commerce is necessary in the public interest.” The opening line of Section 1(a) refers to a Federal Trade Commission Report finding that federal regulation should ensure an adequate natural gas supply at fair, nondiscriminatory prices.

The existence of the terms “public interest” and “public convenience and necessity” in the NGA does not give FERC license to redefine those terms on a whim. However, that is precisely what FERC attempted to do just two years ago. In February 2022, FERC issued two related policy statements that dramatically departed from decades of natural gas permitting policy (an Updated Policy Statement on Certification of New Interstate Natural Gas Facilities and an Interim GHG Policy Statement).

A major policy change was the redefinition of the term “public interest” to reflect the climate focus of the chairman at the time. In other words, because the chairman deemed climate change an “existential threat” (his words), any definition of the public interest should surely include it.

Other commissioners vehemently disagreed. Quoting NAACP v. FPC, former Commissioner James Danly wrote in his dissent, “‘public convenience and necessity’ means ‘a charge to promote the orderly production of plentiful supplies of electric energy and natural gas at just and reasonable rates.’” Senators agreed with Danly. The new policies were so far off base that, once confronted by Senate Energy and Natural Resources Committee members, FERC withdrew the policy statements and labeled them as “drafts.”

The February 2022 policy statements could be reinstated at any time. However, such uncertain policies reduce the development of natural gas infrastructure. When FERC withholds, slows, or redefines key terms in reviewing proposed natural gas pipeline projects, it contravenes its congressional mandate to ensure plentiful gas supplies at a reasonable cost. It also undermines the very markets it was created to protect (even though such protection is unnecessary and, indeed, often undermined by regulators). In contrast, by allowing natural gas to compete against other energy sources on its merits, FERC can help ensure that markets and consumer choice drive America’s energy future.

Gas‐​Electric Nexus: A Reliable, Affordable Grid Requires Abundant Natural Gas

FERC’s statutory responsibility for grid reliability was reinforced by Congress in the Energy Policy Act of 2005, which added a new Section 215 to the Federal Power Act to bolster FERC’s ability to improve grid reliability in the wake of the August 2003 blackout. Section 215 requires FERC to certify an Electric Reliability Organization (ERO) that creates mandatory reliability standards. FERC selected the North American Electric Reliability Corporation (NERC) as the ERO.

NERC repeatedly has observed that “[w]ith increasing levels of variable renewable generation in the resource mix, there is a growing need to have resources available that can be reliably called upon on short notice to balance electricity supply and demand if shortfall conditions occur.” Last year, as a result of the policy‐​driven expansion of intermittent renewables in the United States, NERC in 2023 identified energy policy as a top risk to electric reliability.

Given FERC’s statutory duty to protect grid reliability under the FPA, it should promote a robust natural gas infrastructure and avoid contributing to the reliability risks identified by NERC. Natural gas infrastructure is not only supported by the plain text of the NGA, it is a prerequisite for the reliable electricity at just and reasonable rates demanded by the FPA.

Under the FPA, FERC has a dual mandate to ensure just and reasonable rates in addition to reliability. To put it bluntly, restrictions on natural gas supply will raise electricity prices for consumers in America. The following graph from the 2017 Department of Energy Staff Report to the Secretary on Electricity Markets and Reliability illustrates the historical trend:

(Source.)

Wholesale electricity prices closely track natural gas prices. And as one might expect, regional electricity prices track even more closely with regional natural gas hub prices. Consumers benefit from the unrestricted flow of resources, including natural gas, and abundant natural gas significantly reduces the wholesale cost of electricity relative to supply‐​constrained areas.

Major Question: Will SCOTUS Make FERC Textualist Again?

On June 30, 2022, the Supreme Court ruling in West Virginia v. EPA applied the Major Questions Doctrine to the EPA, finding that the agency lacked clear direction from Congress to issue its Clean Power Plan. The Supreme Court ruling was a shot across the bow of administrative agencies and suggested that the trend of agencies deciding major public policy questions on their own was coming to an end.

As discussed above, on February 18, 2022, FERC attempted to decide a major policy question when it reimagined the statutory meaning of the “public interest” under the NGA. As another example, the FERC homepage reads in prominent type “Shaping the Grid of the Future.” This proactive posture is inappropriate for a creature of statute that Congress never tasked with shaping anything.

Others have taken notice. In 2022, American Enterprise Institute scholar Ben Zycher described FERC’s recent actions as “increasingly ad hoc, ill‐​defined, politicized, driven by decision criteria far outside FERC’s actual areas of expertise, and certain to display shifting standards over time.”

Perhaps the most critical policy question before FERC is whether to attempt—once again—to give itself climate authorities Congress never granted. Commissioner Mark Christie noted in his dissent against the now‐​draft policy statements that there is no textual support in the NGA for FERC to deny a pipeline application due to potential upstream and downstream GHG emissions.

Commissioner Christie wrote: “Whether this Commission can reject a certificate based on a GHG analysis—a certificate that otherwise would be approved under the NGA—is undeniably a major question of public policy. It will have enormous implications for the lives of everyone in this country, given the inseparability of energy security from economic security.”

Cato intern Zoe Galinsky contributed to this article.