In fact, they already have. Earlier this year Senator Bernie Sanders and representative Ro Khanna introduced the Make Billionaires Pay Their Fair Share Act. The legislation would impose a 5 percent annual tax on the wealth of the nations 989 billionaires.

Punishing private wealth creation

The first thing to recognize, is that the billions of dollars in wealth held by the almost 1,000 billionaires in the U.S. isn’t cash that is being hoarded under a mattress waiting to be taxed. For instance, Elon Musk’s roughly $900 billion fortune is mostly stock held in SpaceX and Tesla.

What’s more, Musk’s personal fortune represents only about one-third of the combined value of the companies he has founded.

The remaining two-thirds is represented by factories, equipment, intellectual property, business assets, and claims held by other shareholders, including pension funds, mutual funds, and ordinary Americans who own shares directly or indirectly. The companies also employ tens of thousands of workers whose wages support household incomes and consumption.

For other billionaires, the share of wealth kept for themselves versus the share granted as value created for wider society is even larger than that of Musk. Mark Zuckerberg’s personal fortune represents about 13 percent of the market value of Meta. The other 87 percent is owned by shareholders, ordinary investors, or represented as data centers, servers, other productive assets, and nearly 79,000 employees.

In other words, the wealth of billionaires is a small share of the trillions of dollars in private wealth that they have created for millions of ordinary American’s. The free enterprise system rewards this kind of entrepreneurial activity and innovative behavior that in turn promotes productivity and growth. Removing these rewards by confiscating their personal assets and handing them over to the state would instead punish such activity.

A 5 percent wealth tax is a 99 percent income tax

The second thing to recognize is that the proposed 5 percent tax on wealth is a much larger tax on the returns of investments.

Consider the average market return over the 25 years between 2000 and 2025. Assuming dividends are reinvested, this comes out to 8.17 percent. With this return, the 5 percent wealth tax is a 61 percent tax on investment returns.

But we also have to account for the invisible tax that we all pay—inflation. Once inflation is factored in, market returns drop to 5.48 percent. At that level, the wealth tax is a 91 percent tax on investment returns. If we also assume that capital gains taxes are applied to dividends, then the after-tax return drops to just 5.05 percent. In this case, the wealth tax is effectively a 99 percent tax on investment income.

A 99 percent tax on investment income will have a significant impact on the incentives of investors. One of the incentives that will undoubtedly change is that people will take less risks. Low risk investments have lower rewards, and this will be felt by everyone, not just the billionaires that the policy targets.

Slower capital formation, weaker productivity, lower wages and fewer opportunities for workers and businesses affect all workers and consumers, not just wealthy ones.

We already have a wealth tax of sorts

As Stanford economist John Cochrane recently pointed out on his Substack, the U.S. already taxes wealth in certain circumstances. For example, the estate tax applies to the assets of the deceased when it is passed onto an heir.

Importantly, I should point out that a tax on the transfer of property is very different to a tax recurring tax on property ownership. The Supreme Court has also made a strong distinction between these types of taxes too, as it considers the estate tax an indirect excise tax on the transfer of property.

As Cochrane points out, the estate tax attracts a significant amount of perfectly legal avoidance. Although the tax applies at a much lower threshold than the proposed wealth tax, at $13.99 million, the Treasury estimates, that combined with gift tax receipts, the estate tax raised $29 billion in revenue in FY2025, or less than 0.1 percent of GDP.

Even a study published by supporters of a wealth tax found that the estate tax collects just 300-to-400ths of a percent annually of the Forbes 400 wealth.

The revenue gain is about $200 billion a year

So how much revenue do proponents of a wealth tax suggest it would raise if implemented in the U.S.?

French economists Emmanuel Saez and Gabriel Zucman estimate that a 5 percent wealth tax will raise $4.4 trillion over 10 years. To get this figure, they assume a tax evasion rate of 10 percent. This implies an elasticity of taxable wealth around -2. This assumption is significantly out-of-whack with the bulk of economic literature.

Evidence of savings effects based on Norwegian micro data estimate elasticities of taxable wealth around -7 under a comprehensive tax base. Similarly, evidence from Switzerland using cantonal variation finds that a one-percentage-point reduction in the wealth-tax rate increased reported taxable wealth by at least 43 percent after six years.

One 2021 journal article used rich administrative data from Colombia and a government-designed program for voluntary disclosures of hidden wealth to estimate the behavioral effects of wealth tax. The authors found that two-fifths (40%) of the wealthiest 0.01 percent evade taxes, with these evaders concealing one-third of their wealth offshore.

Using Danish administrative data, Jakobsen et al. find that reductions in the wealth tax increased taxable wealth by 31 percent among the very wealthy over eight years. Their estimates incorporate saving, portfolio and asset-composition responses, legal avoidance, and possible evasion of self-reported assets. The net-of-tax rate elasticity is therefore estimated at around -11.

With these estimates in mind, budget scoring organizations often use more realistic elasticity estimates that are more aligned with the economic literature. For example, the Tax Foundation models wealth tax proposals using a semi-elasticity assumption of -8, while Penn Wharton applies semi-elasticities of evasion and avoidance around -9.

If we replace the elasticity assumptions of Saez and Zucman with a more realistic semi-elasticity of around -8, then the revenue raised by the tax drops from $4.4 trillion to $3.3 trillion over 10 years. This isn’t an outlier assumption. In fact, Sanders and Warren used a 33% avoidance assumption in their 2020 wealth tax campaigns.

Factoring in baseline avoidance in the existing tax system and stronger behavioral responses, tax scholar Kyle Pomerleau applies an elasticity of -13. This results in a 10-year revenue yield of $2.3 trillion, or roughly half the Saez-Zucman figure. This amounts to a little over $200 billion a year in additional revenues, or about 10 percent of current deficits.

A high price for the U.S. economy

A 5 percent wealth tax isn’t just a tax on billionaires, it is a tax on investment, a tax on risk-taking, a tax on capital accumulation that drives productivity, higher wages, and job growth. The people who ultimately bear those costs would include workers, consumers, retirees, and the millions of ordinary Americans whose savings are invested in the companies billionaires helped build.

Wealth is not cash sitting idle in a bank account. It is the factories, companies, technologies, and investments that generate future income for millions of people. Taxing wealth at punitive rates may satisfy a desire to punish the rich, but it risks shrinking the very economic base from which future prosperity will come.

Let’s not tax away our productivity, innovation, and growth for the sake of political symbolism.

In a new NBER working paper, MIT economist Ricardo Caballero asks a different question: even if U.S. public debt remains safe and the government never defaults on its obligations, can issuing more of it still hurt the economy? His answer is yes, and we are nearly at the point whereby this starts to occur.

U.S. Debt as a Safe Asset

For years economists have highlighted how investors value the liquidity and safety of U.S. treasuries. The argument is that government bonds are not just IOU’s issued to fill budget gaps, but they are also the economies go-to safe asset.

For example, banks use treasuries as collateral and money managers use them as a savings vehicle. Based on these dynamics, proponents of the safe asset theory argue that issuing more debt makes people feel wealthier, which encourages them to spend more, driving demand higher. Under this model, as long as the government doesn’t go bankrupt, more debt equates to more economic stimulus.

Of course, anyone well versed in the Fiscal Theory of the Price Level (FTPL) would counter that the backing of newly issued debt matters just as much. If debt is issued without a credible commitment to future surpluses, then you don’t get stimulus, you get inflation.

If debt outpaces the public’s expectations of future fiscal discipline, the market will revalue those ‘safe assets’ down via inflation until the real value of the debt matches the real value of the government’s expected surpluses.

Safety Isn’t Free to Produce

Aside from the FTPL critique, this new NBER paper makes a more interesting observation. Government debt only stays liquid and tradeable because banks and bond dealers actively make markets in it. They do this by including it on their balance sheets, buying it from sellers, financing it, and re-selling large amounts of debt stock every time bonds mature.

All of this marketability requires bank balance sheet capacity, and balance sheet capacity is not infinite. It is capped by leverage and capital requirement regulations.

We can think of this as a grocery store shelf. The first units of debt are cheap to stock, but as the government continues to issue more debt relative to the size of the shelf (the financial systems ability to absorb it), dealers have to work harder to continue taking on greater risk to keep placing it, and they charge more for that higher risk.

These pressures on the financial system show up as a spread, which Caballero calls the Treasury absorption premium). Importantly, the government effectively pays for this premium spread even though the bond itself doesn’t stop being “safe”.

The Debt Laffer Curve

At low levels of debt, proponents of the safe asset theory argue that issuing more debt boosts the economy. However, as the debt grows larger relative to the financial system’s ability to absorb it, the cost of safety rises and eats into that positive effect. Eventually more debt issuance passes a point whereby more issuance makes demand worse, not better. This is the safe-debt Laffer curve.

Caballero attempts to measure this “cost of safety” for the U.S. treasury market using bond-swap spreads and inflation-protected bond pricing as his data.

He finds that between 2015 and 2026, the marginal cost of producing a safe treasury dollar has more than doubled from about 80 basis points (bps) to about 187 bps. For the positive wealth effect, he finds an extra dollar of safe debt of roughly 330 bps. The safe debt margin is, therefore, about 143 bps.

Based on 2026 Congressional Budget Office projections, Caballero estimates that this safe margin is shrinking by about 18 bps every year, and this rate of shrinkage will accelerate if debt grows faster than forecast. In other words, we are less than 8 years away from being on the wrong side of the debt Laffer curve.

An Important Caveat

There is an important caveat to Caballero’s framework. The peak of the safe-debt Laffer curve should not be interpreted as the point at which government debt first begins to harm economic growth. Traditional crowding-out effects can operate well before the financial system reaches its Treasury absorption limit. As government borrowing rises, it reduces national saving, puts upward pressure on borrowing costs, and diverts capital away from private investment.

In a recent study of the United States, I found that higher debt is associated with slower growth in the private capital stock, and that slower capital accumulation in turn reduces economic growth. In other words, government borrowing can already impose a supply-side cost by displacing productive private investment long before Caballero’s safe-asset margin reaches zero. His Laffer curve therefore identifies an additional constraint on debt issuance, not the first point at which debt becomes economically costly.

No Easy Fix

To remedy the problem of a shrinking safe debt margin, Caballero hints at loosening bank leverage and capital rules. This is a bad idea. The leverage ratio exists specifically to cap how much banks can hold using borrowed funds. Exempting government debt would let banks hold far more government debt without raising new capital—effectively a form of quantitative easing, just run through private bank balance sheets instead of the Federal Reserves.

Capital rules exist to keep banks solvent, not to subsidize the fiscal profligacy of Congress. Loosening these rules also concentrates interest rate risk onto banks at, as we saw in 2023, can be sunk by safe government bonds when rates move the wrong way.

Another problem with Caballero’s easy fix is that it overlooks the incentives problem. Politicians face a diffuse, delayed cost (a future banking shock) against a concentrated, immediate benefit (cheaper borrowing today). This is the classic asymmetry behind fiscal illusion. Importantly, the absorption premium is a price doing real work, signaling genuine scarcity. Suppressing that premium by regulatory fiat doesn’t remove that scarcity, it hides it and invites the “one exemption invites the next” ratchet regulators themselves have warned about.

There is No Free Lunch

The debate over government debt has mostly been “can we ever pay it back?” This paper says that’s not the only question worth asking, and it also quietly forecloses the easiest-looking answer. If loosening the rules that constrain banks just relocates the cost onto the banking system instead of removing it, then there’s no free lever left to pull.

Even a government that never misses a payment can, at some point, be asking the financial system to absorb more debt than it can comfortably supply, and when that happens, more borrowing doesn’t stimulate the economy, it drags on it. We just crossed $40 trillion in debt. On Caballero’s numbers, we only have a few more years to find out whether we’re already asking for more than the shelf can hold.

This gross figure includes approximately $7 trillion in intragovernmental debt, money the federal government technically owes to its own trust funds such as Social Security and Medicare. That internal ledger is likely to face massive pressures as major entitlement trust funds barrel toward depletion in 2032 and 2033, which could force abrupt structural adjustments.

Even so, economists typically look past this internal tally and focus heavily on debt held by the public (cash borrowed from outside investors and foreign governments), which now sits around 100% of GDP.

Last week, the Treasury Department reported that total federal debt had reached $40.047 trillion. Debt held by the public stood at roughly $32.3 trillion, approximately equal to the size of the U.S. economy. At the same time, the federal deficit is running at roughly 6% of GDP, and through the first 10 months of fiscal year 2026, the government has already accumulated a $1.8 trillion deficit.

Yet the day after the $40 trillion milestone, Treasury Secretary Scott Bessent offered a remarkably confident response:

“There’s nothing magic about the $40 trillion number,” Bessent said. “And we can grow our way out of that.”

There’s no magic bullet, either. Stronger economic growth is certainly desirable and would help our dire fiscal situation. But economic growth is not going to solve the underlying problem of out-of-control spending.

Importantly, the extent to which higher economic growth can help largely depends on what “grow our way out” actually means.

Growth will not make the debt disappear

First, we have to make a distinction between growing our way out of the debt in nominal terms (the total dollar amount owed) and reducing the debt-to-GDP ratio (debt as a share of the economy).

If the federal government continues to run a large deficit (a safe assumption based on history and projections), then the nominal debt will continue to rise. A $2 trillion deficit adds another $2 trillion to the debt regardless of whether real (inflation-adjusted) economic growth comes in at 2% or 6%.

To actually reduce the $40 trillion in dollar terms, policymakers would have to turn our persistent 6% deficit into a budget surplus.

Perhaps what Bessent meant was that we could “grow out of it” relative to the economy. While this goal is more plausible, it requires much more growth than the United States has historically delivered. Figure 1 below shows real growth rates since 1990, with a historical average annual growth rate of 2.5%.

Three scenarios illustrate the challenge. The current public debt ratio is around 100% of GDP, while budget deficits will consistently run at around 6% for the coming decade.

1. Growth reaches 3.9%: Under these conditions, real GDP must grow at about 3.9% every year, assuming 2% inflation, just to stabilize the debt at 100%. A growth rate of 3.9% would not reduce the debt ratio. This level of growth would merely stop it from going any higher. Excluding the COVID recovery year of 2021, this level of growth has only been achieved in five out of 35 years, and all in the mid-to-late 1990s boom.

2. Growth matches the historical average: If we instead grow at historical average rates of about 2.5%, and inflation runs at around 2.5%, then a persistent 6% deficit would push the debt ratio to roughly 107% over 10 years.

3. Growth reaches 4%: If by some miracle we achieved 4% real growth and maintained this growth rate every year for an entire decade, the debt ratio would fall from 100 to 96% of GDP. Unfortunately, the historical record gives little reason to assume that this is remotely likely.

Of course, this assumes no major economic crises, which have historically added about 20 percentage points to the debt ratio within just a few short years.

These projections may also be optimistic because higher debt reduces economic growth potential.

The arithmetic is even worse once interest is included

The arithmetic so far has been rose-tinted and generous because it treats the budget deficit as constant at roughly 6% of GDP.

That approach ignores the fact that the federal government now spends about $1 trillion a year on servicing the debt, and interest rates remain elevated, with the yield on 30-year Treasury bonds now well above 5%.

As the growth of public debt continues unabated, interest payments get even larger, which increases the size of budget deficits, which again increases the pace of growth in debt. This creates a dangerous feedback loop, whereby the prospect of growing our way out diminishes as the debt gets larger.

Growth is part of the solution, not the whole solution

Faster economic growth is an ambition that policymakers should aspire to achieve. The country desperately needs policies that make it easier to invest, innovate, and increase productivity. But this is an argument for more growth and fiscal prudence, not growth instead of fiscal prudence.

Real and persistent annual growth of 3% would certainly help in stabilizing the growing debt ratio, but to get the debt in a downward trajectory policymakers would also need to ensure that mandatory spending — programs funded automatically under existing law — does not grow faster than 3% per year.

Spending restraint is not the only option.

Another debt reduction option at policymakers’ discretion involves eliminating tax expenditures that serve as pure tax breaks for special interests. We compiled a list of 175 deductions, credits, exclusions, and exemptions in the federal tax code.

Policymakers could easily find between $300 billion and $400 billion in additional annual revenues by reforming and eliminating some of the tax code’s most economically distortive provisions — those that encourage inefficient economic decisions or favor special interests.. This would significantly improve the nation’s fiscal trajectory, while also working toward a tax system that is simpler, less distortive, and more conducive to economic prosperity.

Another fiscal benefit of simplifying the tax code is that it would shift the needle toward sustained 3% growth. As I previously argued in my research, moving toward a simplified flat tax system could add 0.4 to 0.8 additional percentage points of annual growth over 10–20 years.

Ultimately, the United States does not have a $40 trillion growth problem. It has a fiscal imbalance. Growth can make that imbalance easier to manage, but it cannot make arithmetic disappear.

The sooner policymakers recognize that distinction, the better.

Adjusting for inflation, the average yearly tuition and fees charged for full-time undergraduate students increased from about $6,000 in 1980 to over $20,000 by 2019, an increase of some 234 percent.

Figure 1 displays the trend of average tuition and fees since 1968. The data show that tuition rates, in real terms, were relatively affordable in the 1970’s by modern standards. Interestingly, the data also show that tuition costs have been in decline since 2019, falling for four consecutive years to about $18,000 by 2023.

Demographics are undoubtedly one factor that explains the downturn in tuition prices as the pool of available students shrinks, reducing demand for higher education. But the decisions of high school graduates also matter. Figure 2 below shows that after decades of a growing share of high school graduates enrolling in college, this trend has reversed since the late 2010’s.

In 2016, 70 percent of high school graduates enrolled in college, up from about 50 percent in the 1970’s and 1980’s. However, since 2018 this share has fallen for five consecutive years from 69 percent to just 61 percent in 2023, the lowest share since 1990.

Another potential factor behind an increasing share of high school graduates choosing not to go to college might be the flattening of the wage premium. As we have noted in prior research, in the 1980’s and 1990’s going to college paid an increasing return on investment compared to simply finishing high school. However, since the turn of the century that wage premium has flattened.

As figure 3 shows, going to college still rewards young workers with a roughly 60 percent wage premium compared to high school graduates, but over the past decade, this premium has not increased. If anything, its slightly lower now that it was a decade ago.

As for students’ financial aid, since 2010 the share of students receiving federal grants or taking out student loans both decreased from 48 percent and 50 percent respectively to 42 percent and 37 percent in 2023. Meanwhile, as figure 4 shows, the share of students receiving institutional aid and scholarships has increased significantly from 36 percent in 2010 to 55 percent in 2023.

However, federal grant aid only makes up a fraction of total federal and state government financial aid. Figure 5 shows federal grants, federal loans, state grants, and state loans going back to 1970, all the way up through 2024. In 2024, total government aid was roughly $173 billion. More than half of this government aid is federal loans, nearly a third is federal grants, while about 18 percent is state loans and grants combined.

Finally, with aid in mind, financial risk is another factor that prospective students must consider when deciding whether to invest in higher education. Figure 6 shows the rate of delinquency since 2010, which represents the share of student loans that are unpaid for more than 90 days. Historically, this rate fluctuated between 8 and 10 percent, before falling below one percent during the repayment freeze policy period of 2020-2024.

With the end of the repayment freeze policy in 2025, delinquency rates increased notably, before falling back down to their lowest level outside of the pandemic repayment freeze period, at just 7.4 percent as of Q2 2026.

On the other hand, the share of federally managed student loans in default (270+ days of non-payment over a lifecycle) has climbed to record highs in recent quarters. As figure 7 shows, the default rate on outstanding principal and interest balance of direct loans and ED-held FFEL program loans is now 20 percent, or 1-in-5 student loan borrowers.

For decades, colleges operated in an environment in which demand for higher education seemed almost inexhaustible. Enrollment was rising, the earnings premium from a degree was increasing, and expanding federal grants and subsidized student lending increased students’ purchasing power, allowing colleges to capture part of those subsidies through higher tuition. In effect, policies intended to make college more affordable helped weaken the price discipline that normally constrains sellers.

That environment is beginning to change. Colleges are competing for a smaller and increasingly price-conscious pool of students, while the economic payoff from a degree has stopped rising as it once did. The recent decline in tuition may therefore be an early sign that market discipline is returning to higher education. Policymakers should be careful not to reverse that adjustment by pouring still more taxpayer subsidies into the sector.

Decades of federal intervention have demonstrated the problem with trying to make college affordable by subsidizing demand: when government gives students more money to spend on higher education, colleges have less incentive to economize and more opportunity to raise prices. A better approach would be to reduce the federal government’s role in financing higher education and allow colleges to compete more directly for students on price and value.

Generally speaking, economists have an ambivalent attitude toward their predictive accuracy. Douglas Elmendorf, who once served as the director of the CBO, said, “The CBO was much more accurate than the guesswork by many individuals. [It] turned out to be not exactly right but much more right than most of the critics.” This is a bit of a compliment, but from the way it was phrased, it sounds as if he was giving the organization a C, or a C+. Certainly, Elmendorf wasn’t saying that the CBO is a paragon of predictive excellence.

Luckily, we don’t only have to rely on expert testimony when determining whether they are effective forecasters. Each year, the CBO releases a set of long-term projections, so to check their accuracy, we need only to look at their methodology (to ensure that it’s sound) and the general trajectory of their predictions. If they release a statement in 2025 saying that the economy will be perfect in 2055 but in 2026, they say that the economy will be ruined by 2056, it’s reasonable to assume that their models are, at the very least, unstable.

When reviewing the numbers, we unfortunately see exactly this. The following table shows their long-term projections for the debt-to-GDP ratio released between 2023 and 2026.

Base Year: 30-Year Debt-to-GDP ratio projection

2023: 181%

2024: 166%

2025: 156%

2026: 175%

It should be noted that initially the debt-to-GDP estimate in 2023 was 195% but was later lowered to 181%.

Of course, predictions are hard, and no one should expect CBO to be able to estimate precisely what the government will choose to spend money on ten years from now. It is strange, though, that their predictions vary so much year-over-year. To make matters worse, they don’t ever explain their methodology, so we are left to guess how they came to these conclusions without knowing whether or not they did something that actually makes sense.

Regardless of what they did, we can infer that their method was far too dependent on the initial state of the system. If the base year strongly affects the long-term fiscal outlook, then the model is weighing the base year far too highly. Using other information that they’ve presented on things like the 10-year fiscal projections, we can assume that they are linearly extrapolating the current year’s deficits, meaning that changes in discretionary spending in the current year have huge effects on long-term projections. A truly predictive model would take older information, condition current information on said information, and use that to produce forward-looking projections.

As it stands, this currently satisfies the requirements laid down in the CBIA of 1974. They provide the forecasting, as described. Legal requirements, however, don’t establish optimality. The point of predictions is to inform us about the future, so if they aren’t accomplishing this, then why would we waste our time and energy creating them?

To further highlight this point, we can compare the CBO’s projections to historical trends or even other predictive models. In this case, we are looking at the 10-year Treasury note yield instead of the long-term debt-to-GDP ratio.

From this chart, we can see that, as of recently, the CBO has underestimated the actual 10-year Treasury yield. Note that they are not the only organization that does this; plenty of other groups have similar, though certainly less inaccurate, estimates. Further, they’ve been known historically to instead overestimate these yields, and rather highly at that. It seems, then, that their projections are quite chaotic and almost random; this isn’t terribly shocking. Predictions, especially economic ones, are incredibly challenging, and by critiquing the CBO and its methods, I don’t mean to imply that they could easily implement one specific shift and everything would change.

The fundamental issue with the CBO is that their incentives don’t align with producing accurate projections. Instead of optimizing their methodologies to best respond to new leaps in data science and statistics, they focus on following through on the promises they’ve made to Congress through the establishment of their office. In this way, they are constrained by the law instead of being bolstered by it, and Congress has diminished its ability to understand macroeconomic trends.

One potential solution could be to introduce a private market incentive. One way to do this would be to have a competition each year to see who can produce the best predictions, and at the end of the year, the model with the least “loss,” or inaccuracy, would receive a cash prize. Since this is an objective metric of accuracy, it wouldn’t be subject to perverse incentives in the same way as today. Another important thing about this competition is that all of the models would be posted publicly for anyone to see, meaning that economists and data scientists could easily use and access the best predictive models for their work. In this way, the government could serve to bolster economic research instead of being something of a confounding factor as it is today.

In my previous post, I defined tax increment financing (TIF) and answered frequently asked questions about TIF. If you are unfamiliar with the policy, feel free to check out that piece first. In this post, I will use Iowa as a case study to examine one state’s TIF policy.

My critique of widespread TIF rests on three key arguments.

First, governments face an information problem. Local officials cannot reliably determine which projects would occur without subsidies or accurately predict future property value growth decades into the future. As a result, TIF often produces long-term debt obligations based on optimistic assumptions that may never materialize.

Second, TIF has expanded far beyond its original purpose. Rather than primarily financing public infrastructure that addresses genuine market failures, many TIF districts subsidize commercial buildings, residential developments, hotels, and other projects that private investors would ordinarily finance themselves. This broad use of subsidies increases the risk of political favoritism, rent-seeking, and the misallocation of taxpayer resources.

Third, TIF operates with insufficient transparency. Most states provide little or no comprehensive reporting on TIF districts, making it difficult for taxpayers, policymakers, and economists to evaluate whether projects satisfy statutory requirements or produce meaningful public benefits. Without reliable data, it is nearly impossible to measure TIF’s effectiveness or hold local governments accountable for diverting future property tax revenue.

Luckily for me, the state with the most TIF districts — a total of 4,260 urban renewal districts as of 2025 — is also one of the few that produces a comprehensive annual report. And while the Iowa 2025 Annual Urban Renewal Report is only 20 pages long, it contains statistics and admissions that paint a remarkably different picture of how TIF operates in practice.

TIF isn’t mostly funding infrastructure

TIF is supposed to work as a funding mechanism for public infrastructure that private companies would not provide. In Iowa, however, of $368.4 million in FY 2025 nonrebate TIF expenditures, only 44.3% went toward roads, bridges, and utilities. The remaining 55.7% financed other activities, including commercial buildings, industrial projects, property acquisition, recreation facilities, residential development, administrative expenses, and public buildings. This is shown in table 1 below.

These data undermine the argument that TIF primarily exists to finance public infrastructure that enables private investment. Rather than simply providing the infrastructure private developers need, TIF increasingly subsidizes the developments themselves. This distinction matters because infrastructure improvements are meant to help the public at large, making the use of tax revenue to finance them easier to justify. In contrast, subsidizing individual developments shifts the costs from developers and forces taxpayers to fund projects from which they may never benefit.

The debt is much larger than expected

Another notable finding in the report is the sheer level of outstanding TIF debt held by local governments. Table 2 shows that municipalities reported $4.681 billion in debt that they expect to repay with future TIF revenue — an amount equal to 9.8 years of current TIF property tax collections.

Included in the debt are over $600 million in interest payments. The fact that the policy creates billions of dollars in debt that rely on external forces such as economic stability and consistent growth undermines the claim that TIF is self-financing. If the future growth in property values that TIF depends on fails to materialize — which can happen for many reasons — those obligations become much more difficult to service.

And these debt obligations matter, because TIF districts are financed by capturing future growth in property tax revenue that would normally go to cities, counties, school districts, and other taxing jurisdictions. Until the debt is repaid, the incremental revenue will continue to be diverted to a special TIF fund rather than being available for public services.

Many TIF districts are based on 20–30-year debt payment schedules. The report states that “local governments reported 940 separate general obligation bond debts, with debt payments totaling $2.690 billion with the longest payment schedule extending through FY 2050.” Decades-long debt repayments that rely on property value growth in order to be repaid are vulnerable to several extrinsic circumstances. Economic downturns, natural disasters, or simply slower-than-expected economic growth can all leave districts financially underwater. This is why debt financing is the riskiest way to implement TIF.

By allowing municipalities to borrow against uncertain future property tax growth, debt-financing TIF encourages both local governments and developers to pursue projects they might not otherwise undertake while shifting much of the financial risk onto taxpayers.

Debt financing, however, is not the only way TIF districts are funded. Under a pay-as-you-go TIF arrangement, local governments do not issue bonds or make large upfront payments to developers. Instead, developers typically finance the project themselves and are reimbursed over time as the project generates new property tax increment.

This approach avoids public borrowing while still redirecting future property tax growth to the project rather than to general government purposes during the life of the TIF district. While this method encourages more responsibility, it still imposes a burden on other local taxing jurisdictions.

Proponents argue that TIF does not harm public services because cities, counties, and school districts continue to receive property taxes on the original, or “base,” value of the property. Since these governments operated before the TIF district was created, the argument goes, they can continue operating with that same revenue while the incremental tax growth pays for redevelopment.

But this overlooks the very premise of TIF.

If the policy succeeds in attracting new residents, businesses, and investment, it also increases demand for public services. More homes and businesses require additional police and fire protection, road maintenance, inspections, and other local services. Yet the additional property tax revenue generated by that growth is diverted into the TIF fund rather than flowing to the governments responsible for providing those services.

As a result, local governments face higher service demands without receiving the corresponding increase in tax revenue until the TIF obligations are retired. Meanwhile, municipalities continue adding new TIF obligations before existing ones have expired.

This is reflected in the figure below. The debt payment schedule is set decades out with no indication that additional debt will not just pile onto the existing billions.

California dealt with a similar problem after 50 years of widespread TIF policy. In 2012, the state was facing a major debt crisis caused in part by tens of billions of dollars in outstanding TIF debt and obligations. To alleviate some of this debt, Governor Jerry Brown chose to dissolve the program.

California has since resumed TIF policy, but in a much more restricted way that disallows any funding diversion from school districts. If Iowa doesn’t change course and rein in TIF spending, it will likely reach a breaking point like California’s, in which they have the default on their books.

Iowa can’t fully account for its TIF districts

Continuing further into the Iowa report, there is a section labeled “Identified Problems with the Reporting Process.” This section highlights one of the biggest problems associated with TIF across the country: the complete lack of transparency.

The section begins by noting that some local governments do not submit their required annual TIF reports on time. Some didn’t even submit one at all. And of those that did submit reports, many failed to adhere to the designation requirements set by law.

Local governments are required to report whether each TIF district was created based on findings of slum conditions, blight, economic development, or some combination of those purposes. This is shown in the figure above. Yet 35.9% of Iowa’s TIF districts failed to report any designation in the statewide database. Those undesignated districts nevertheless accounted for approximately $4.0 billion in TIF increment value during FY 2025. While this does not necessarily mean the districts were created unlawfully, it prevents taxpayers from verifying whether the statutory basis for the districts was properly established.

If Iowa is transparent, what are the other 47 states hiding?

This lack of transparency and compliance is troubling, but Iowa is still ahead of most states. At least it publishes a statewide report that makes these shortcomings visible. In contrast, 47 states (excluding Iowa, Nebraska, and Alaska) provide no comparable statewide urban renewal or TIF report, leaving taxpayers, researchers, and policymakers with little ability to evaluate how TIF is being used or whether local governments are complying with state law.

We should demand transparency if only because it is the law. But there are also plenty of practical reasons why more transparency will help both sides of the TIF debate.

Having clear reports that allow us to analyze the effectiveness of TIF in both intrastate and interstate contexts would help policymakers better understand the implications of tax increment financing. Without complete reporting, taxpayers cannot determine whether TIF districts satisfy statutory eligibility requirements, whether promised public benefits materialized, or whether governments are complying with legal restrictions on TIF use.

Iowa deserves credit for publishing one of the nation’s most comprehensive TIF databases. Ironically, that transparency also shows how difficult it is to monitor the program. If one of the country’s best reporting systems still reveals billions of dollars in outstanding debt, widespread reporting deficiencies, and extensive use of TIF beyond traditional infrastructure, taxpayers should question what remains hidden in the dozens of states that provide no comparable statewide reporting at all.

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Originally created during the fallout of the Great Depression, the farm bill (officially the Agricultural Adjustment Act of 1933) was intended to provide financial support to poor farmers and struggling agricultural workers. Over the decades, the nature of the farm bill has evolved into a mega spending bill giving handouts to wealthy landowners, breaking down economic dynamism in the agricultural industry and expanding food assistance programs in ways that weaken work incentives and encourage dependence on government support.

In its February 2026 baseline projection, the Congressional Budget Office (CBO) estimated a mandatory spending baseline of around $1.4 trillion in farm subsidies and food stamp costs for the coming decade (2027-36).

Farm Subsidies

The scale of the federal crop insurance program has more than doubled in its coverage of acres over the past decade and a half. At the same time, commodity program subsidies make up more than 10 percent of total farm bill funding. Combined, farmers will receive around $300 billion in federal government subsidies in the coming decade.

Source: US Department of Agriculture

While in 1960, the average household income of a farmer was 35% lower than the national average household income, by 1990 it had reached parity, and by 2024 the average farm household income was 32% higher than the national average household income. As of 2024, average farm household income was almost $160,000.

Despite this, policymakers often claim that farm subsidies go toward alleviating rural poverty. In reality, it is the largest and wealthiest farms that benefit most from billions of dollars in federal subsidies. According to the 2022 Census of Agriculture, only 19% of the value of farm subsidies goes to small farms (with sales of less than $100,000), while 58% of the value of subsidies goes to large farms (sales of $500,000 or more).

The average small farm recipient received an average annual government payment of $5,651, while the average large farm recipient received an average annual government payment of $60,592. This data hardly paints the picture of a subsidy program targeting the most vulnerable farmers.

In addition to the regressive nature of farm subsidies, financing crop production and subsidized crop insurance dissuades farmers from making decisions to improve market efficiency. Instead, federal subsidies lead to overproduction, distorted land use and inflated land prices.

Subsidies may also increase the cost of food because they act as nontariff barriers to agricultural products from overseas. As Montana State University economist Vincent Smith explains, “By subsidizing crop insurance, taxpayers are encouraging farmers to work less efficiently, produce fewer crops, and make smaller contributions to the overall productivity of the U.S. economy.”

SNAP Program Funding

Farm subsidies aside, by far the largest and burgeoning portion of the farm bill is the nutrition title of the bill, which includes nutrition assistance to low-income households through the Supplemental Nutrition Assistance Program (SNAP). This portion of the farm bill comprises 72% of total spending, or nearly $1 trillion in total outlays over 2027-36.

When the SNAP program was first expanded nationally in the early 1970s, there were around 4 million SNAP recipients, or about 1 in 50 Americans. Today there are over 37 million SNAP receipts, or about 1 in 9 Americans. The 9-fold increase in beneficiaries wasn’t driven by a surge in poverty; in fact, the poverty rate in recent years has been notably lower than that of the early 1970s.

Notably, the SNAP program expanded significantly during the COVID-19 pandemic in 2020, and enrollment remained very elevated at about 43 million participants through 2024. This was largely driven by the waiving of work-training requirements and significant increases in benefit generosity under the Biden administration.

In an effort to constrain the excessive growth of the SNAP program, policymakers enacted reforms within the OBBBA in 2025 that place some of the funding responsibilities on state governments. Historically, SNAP benefit costs were fully funded by the federal government, while administrative costs were split evenly between states and the federal government. Beginning in 2027, states will be responsible for 75 percent of administrative costs, with the federal government covering only 25 percent.

More importantly, for the first time in the program’s history, states will also share direct responsibility for benefit costs themselves. Under the new structure, states will cover between 5 and 15 percent of benefit costs depending on their payment error rates. States with high erroneous payment rates will pay more, while states with lower error rates will pay less.

Under the previous structure, states faced weak incentives to aggressively reduce payment errors because the federal government absorbed nearly the entire cost of mistakes. The new system introduces real fiscal consequences for poor administration.

Policymakers Must Not Backslide on SNAP Cost Sharing Reform

Unsurprisingly, state policymakers are resisting SNAP cost-sharing requirements. The latest draft of the farm bill would postpone SNAP cost-sharing requirements until fiscal year 2029 in order to secure additional farm subsidies. Earlier this month, Senate Democrats rejected this proposal, instead demanding these changes be delayed to fiscal year 2030. This would push the timeline back to October 2029, which happens to be post-Presidential election, and a new administration could repeal the requirements before they take effect.

As the Cato Institute’s Romia Boccia puts it, “Once Congress establishes a precedent for delaying accountability, it becomes easier to delay it again, or for a future Congress to abandon the measure altogether.” She further adds that backsliding “would effectively hand a future Democratic administration a window to repeal the requirements before they take effect.”

A Better Path Forward

As I noted the last time policymakers were debating the farm bill in 2022:

True food security and abundance is not likely to come from endless expansions of government welfare programs. Rather, it will be achieved through innovations in agricultural technology. The adoption of vertical farming—the practice of growing crops in vertically stacked layers—would lower transportation costs, reduce carbon emissions and increase the freshness of our food. The development of genetically modified foods would engineer more nutritious foods at lower prices than traditional methods of livestock farming.

Achieving abundance through innovation will also involve moving away from the old model of subsidizing big agribusiness. Policymakers should look to New Zealand for inspiration. In 1984, the government of New Zealand (a country four times as dependent on farming as the U.S.) ended all farm subsidies. The result was a significant increase in productivity, earnings and output. Land use in New Zealand was diversified, the quality of produce improved and food costs decreased.

Once market signals were allowed to operate unfettered, farmers in New Zealand realized that lands formerly used for sheep grazing, farmers were paid a subsidy per head of sheep, were better suited for growing grapes. This led to the launch of the very lucrative New Zealand wine industry.

As the farm bill debate returns in September, policymakers should use this time to reevaluate the costs, regressive nature and market-distorting effects of this old, outdated model. That means resisting efforts to shower large agribusinesses with still more subsidies, preserving the new fiscal accountability built into SNAP, and beginning the longer-term process of unwinding federal interference in agricultural markets. The lesson from New Zealand is that agriculture does not need government protection from market forces to thrive. Quite the opposite: competition, innovation and market discipline are what allow farmers, and consumers, to prosper.

The farm bill was created to address the economic conditions of the 1930s. Nearly a century later, Congress should stop treating those emergency interventions as permanent features of the American economy.

Under current law, when the Social Security and Medicare Part A (hospital insurance) trust funds run dry in the early 2030s, benefits are supposed to be cut automatically so they match the revenue raised for the programs. That fiscal cliff doesn’t exist for other parts of Medicare. Parts B and D, which cover physician services and drugs, draw about three-quarters of their funding from general revenue rather than a trust fund, and they have no depletion date to force a conversation about reforms.

You wouldn’t know that the “do nothing approach” to Medicare and Social Security insolvency is a set of benefit cuts by reviewing CBO projections. Congress directed the scoring agency to ignore current law and instead assume that the gap between payroll taxes collected, and benefits will be borrowed to pay all benefits. Under that scenario, CBO tells us, debt to GDP will grow from 100.6 percent to 175.1 percent in 30 years. Brookings Institution’s Jessica Riedl calculated that this is $138 trillion in new debt interest included, through 2056. And it arrives just as debt held by the public passes its World War II record relative to the economy.

Yet, CBO projects that inflation stays at the Fed’s 2 percent target as debt explodes.

I don’t think that’s what happens. If Congress decides to borrow the entire difference between benefits and payroll tax revenue when the trust funds dry up, then Congress would be committing to piling on more borrowing on top of the already-large projected debt from Medicare Parts B and D. The reason I think this could be a fiscal inflection point is that if a number that large ($138 trillion in borrowing over 30 years) won’t move Congress to meet the fiscal cliff of 2032 with reform rather than borrowing, then Congress has made its choice clear to everyone: the surpluses needed to back the debt are not coming. That decision could trigger a repricing of the debt, with the price level rising so the real value of the debt matches the smaller stream of surpluses people now expect. It happens through inflation, and because it runs on expectations of the fiscal path, not on the act of borrowing, it can arrive very suddenly and long before the last dollar is borrowed.

Here is something to think about. When that happens, the Fed may not be able to help when inflation emerges. The textbook says higher rates cool inflation, but that rests on an assumption no one states: that fiscal policy tightens alongside. Absent that, every hike enlarges the government’s interest bill, and with no surpluses behind it, that larger bill is met with fresh borrowing, i.e., more nominal debt, feeding the inflation fire the hike was meant to put out.

That continues until the fiscal authorities implement austerity.

But what are the political incentives for that to happen? It’s unclear to me. On one hand, the fiscal cost of higher interest rates and higher interest payments is real. The political cost of inflation is real too. On the other hand, the same incentives that got us in this mess in the first place (politicians want to be reelected, and the sure way to get the most committed voters to vote for you is to promise not to touch Social Security and Medicare) are still in play. Also, seniors may be less affected by inflation than others because their benefits are adjusted for inflation. Finally, with a debt as high as ours and the maturity of our debt so short, the scale of the fiscal adjustments needs to be quite large, larger than I can expect any group of politicians on the right or the left to have the courage to implement. This is why I have a hard time seeing the mechanism that forces fiscal adjustments.

You see the same thing playing out in the fiscal consolidation literature. A study by AEI scholars back in the day showed that although we know which types of fiscal adjustments lower the debt-to-GDP ratio (mostly through spending), 80 percent of the adjustments implemented failed to reduce it. The same interest groups that got a country into a fiscal mess prevent the right type of adjustments from being implemented.

Some succeed obviously, and I am not saying the US won’t be one of these countries, but I am not holding my breath.

What about more Fed independence? There’s no historical case of a central bank forcing fiscal adjustment. Volcker is the closest example, and even Volcker repeatedly told Congress that monetary policy alone couldn’t control inflation. The fiscal adjustment came voluntarily, with Reagan-administration political support, not through monetary coercion. TEFRA, among other things, and the 1983 Social Security reform were instrumental in getting markets to treat the US regime as one that would eventually run surpluses to back its debt, and that belief did the work.

What about having a monetary rule to force fiscal discipline? Again, the mechanism assumes the fiscal side yields under monetary pressure. Not a given in my opinion. The scenario everyone’s worried about is one where the fiscal side won’t/can’t yield. Against a driver who’s removed his own steering wheel, tying your hands to yours doesn’t force a swerve; it commits you both to the crash. Remember that if the central bank raises rates sharply when inflation rises, accelerating debt growth, which drives inflation higher if no fiscal adjustments take place, prompting another hike.

All this is to say that when you hear politicians promise that they will not cut any entitlement benefits, remember that they could be making a promise no one will like: the promise to deliver inflation sooner than you think.

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That is not a good number. Employment growth has undoubtedly been slow in recent months, and downward revisions to previous estimates suggest that the labor market has been weaker than we initially thought. There is a good chance we will hear much more about revisions in the coming weeks, particularly when the annual benchmark revision covering April 2025 through March 2026 is released later this month.

Those benchmark revisions can be quite substantial. Last year, the annual benchmark revision reduced estimated payroll gains by 911,000 jobs. The year before that, payroll employment was revised down by another 818,000.

So, skepticism about the monthly payroll numbers is warranted, but skepticism is not the same thing as panic. Much of the commentary surrounding the labor market has drifted toward the idea that conditions are deteriorating rapidly. The broader data do not support that conclusion, at least not yet.

Start with the unemployment rate. At 4.1 percent, unemployment remains low by almost any reasonable historical comparison. The average unemployment rate from 2015 through 2026 is roughly 4.6 percent. Going back to 1995, the average is about 5.5 percent.

Perhaps that comparison is unfair because it includes major recessions. Even if we remove 2009, 2010, 2011, and 2020, years heavily affected by the Great Recession and the pandemic, the average is still around 5 percent. Today’s unemployment rate of 4.1 percent does not signal a labor market in crisis.

There is also an important wrinkle in July’s employment decline. The largest one-month reduction came from government employment, where payrolls fell sharply because local government employment declined by 57,000.

Much of that appears to have come from teachers leaving payrolls during the summer months. Teachers typically tend to get laid over the summer break months. That is hardly evidence of a sudden collapse in underlying labor demand. If anything, it raises another question about how well seasonal adjustment is capturing unusually large changes in education employment. Perhaps this will be revised in future reports.

Federal employment is a separate story. Federal government employment has fallen by roughly 326,000 workers over the past 18 months as the administration has pursued reductions in the federal workforce. Yet private employment has increased by roughly 877,000 workers over the same period. That works out to just under 50,000 additional private-sector jobs per month.

The ADP payroll data tell a similar story. In the year from June 2025 through June 2026, private nonfarm employment increased by approximately 743,000 jobs, or around 62,000 per month. Again, those are not spectacular numbers, but they are also not recession numbers.

Measures of labor market slack provide another useful reality check. In July, fewer than 7 million unemployed workers were actively looking for work. In June, employers reported almost 7.4 million job openings. In other words, there were still more available jobs than unemployed people looking for work.

The labor market has cooled considerably from the extraordinary conditions of 2021-2023 when employers were desperate for workers and job openings were running at historically unusual levels. But moving away from an overheated labor market is not the same thing as falling into an economic downturn.

There is, however, one part of the report that deserves considerably more attention. Labor force participation has fallen to 61.4 percent, its lowest level outside the pandemic disruption in roughly half a century. That is a much more troubling development.

Before the pandemic, female labor force participation was around 58 percent. It is now roughly 56.4 percent. Male participation has declined from about 69.2 percent to 66.8 percent.

The encouraging news is that prime-age participation remains relatively strong and is slightly above its pre-pandemic level. The deterioration in labor force participation is concentrated much more heavily among older Americans.

Among workers age 55 and older, labor force participation stood at roughly 40.3 percent before the pandemic. By early 2025, it had fallen to around 38.4 percent. As of July, it is only 36.9 percent. That is a major change, and it illustrates why focusing entirely on monthly payroll gains and losses can obscure the more interesting economic story.

The United States does not currently appear to have a massive shortage of jobs. Unemployment is low, job openings remain elevated relative to the number of unemployed workers, and the private sector is still adding workers. What we increasingly have is a shortage of people participating in the labor market.

Some of that reflects demographics. An aging population will naturally push aggregate participation lower as more Americans enter retirement. But the magnitude of the decline among older workers raises important questions about retirement incentives, health, disability programs, taxes, savings, and whether the pandemic permanently altered work decisions for millions of Americans.

Those questions matter much more for long-run economic growth than whether payroll employment rose or fell by 20,000 jobs in a particular month.

As they explain, SpaceX’s approach was to replace the aerospace industry’s traditional effort to eliminate uncertainty through years of analysis with a rapid cycle of building, testing, failing, and correcting. Musk’s engineers produced relatively inexpensive prototypes, pushed them until they broke, and treated each explosion not as a scandal or failure but as sources of information about where their models had been wrong.

The first three Falcon 1 launches failed for three different reasons; each failure identified a specific problem that could be corrected. The fourth launch succeeded. This pattern became institutionalized in Musk’s operating “Algorithm”: question every requirement, eliminate unnecessary parts and processes, simplify what remains, accelerate the cycle, and automate only at the end. The objective isn’t failure for its own sake, but to make experimentation cheap and frequent enough that reality can expose errors faster than committees and computer models ever could.

They then explain what was so innovative about it and why it worked so well:

“The reason this works better than the alternative is because you cannot think your way to perfect solutions for problems you do not fully understand. Reality is the only adequate validator, and the trick is making it cheap enough to consult often.”

As I read, it occurred to me that this might also be the best argument for permissionless innovation. My friend Adam Thierer at R street defines permissionless innovation the following way: “[It] refers to the idea that experimentation with new technologies and innovations should generally be permitted by default and that prior restraints on creative activities should be avoided except in those cases where clear and immediate harm is evident.” In other words, permissionless innovation accepts that theoretical prediction is a poor substitute for actual discovery. When we don’t fully understand a technology – and we almost never do – the smartest approach is to let people experiment, learn from reality, and respond to actual harms rather than imagined ones.

By contrast, precautionary principle asks us to predict the future and remove all the risks a new technology or innovation presents, before allowing it to take place. In other words, new innovations should be curbed or even forbidden until they are proven safe, Thierer explains.

History is full of technologies that looked dangerous before they transformed the world for the better. Automobiles, airplanes, the internet, smartphones, even electricity all generated fear. Had regulators insisted on solving every conceivable problem before allowing widespread adoption, many of these innovations would have been delayed by years, perhaps decades. Instead, we discovered the real problems – as opposed to the many imagined ones – through experience and developed solutions along the way.

AI is the latest example. And as always, many people are worried and would like to limit future harm that could come from it. I take it to be the spirit of a recent public letter called We Must Act Now. The signers warn that AI could transform the economy over the next decade and, therefore, argues that “economists, policymakers and technology leaders must act now... to build the incentives, guardrails, and institutions needed to steer AI in a direction that complements humans and benefits society.”

This is precisely where the letter loses me. It’s not that I believe that AI poses no risks. I am sure it does. But the extremely vague statement opens the door to the precautionary principal approach to regulating AI. It doesn’t come out and say it but I think that left in the hands of politicians and bureaucrats what we will get is an approach to acting now that treats the whole exercise as if we already know enough about those risks to begin designing the institutions and regulations that will govern them.

Over At The Geek Way, Andrew McAfee explained why he didn’t sign the open letter and then proposed a subtle but profound revision. Instead of calling for policymakers to build new guardrails and institutions today, he suggests this instead:

3. So economists, policymakers and technology leaders must act now to understand the economics of transformative AI, and to build the capabilities needed to respond quickly and effectively to the challenges it will bring.

I would be tempted to sign that version (though I actually don’t sign joint letters).

Notice the difference. It doesn’t presume we know the right rules today. It prepares us to respond when experience teaches us what actual problems are. As McAffee writes:

I hope the below resonates with people who believe that even as powerful as AI is, it doesn’t yet require us to turn away from permissionless innovation and economic freedom and embrace higher levels of upstream governance and dirigisme.

This is also why recent reports showing frontier AI models exhibiting sophisticated hacking capabilities are not an argument for the precautionary-principle approach to regulating AI or for signing the We Must Act Now statement. If anything, they illustrate why the better approach is permissionless innovation.

Indeed, the debate here isn’t regulation versus no regulation. It’s about when regulation should occur. Before these capabilities (and harmful behavior) were observed, policymakers could only speculate about the risks. But with actual experience, we have concrete evidence of potential problems. That changes the conversation but also identifies a real risk to focus on and gives it priority.

The first line of defense should be the developers themselves, who have every incentive to make their models safer, and are already investing heavily in doing so. But if experience ultimately shows that existing laws and private incentives are insufficient, then you have a case for targeted rules addressing this specific, demonstrated risk.

It’s evidence-based governance. We learn first, and only then ask whether new rules are needed.

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So let’s retire this straw man. The honest liberal claim about doux commerce has always been the modest one: trade makes belligerent conflict less likely. When two countries do business, war becomes more expensive for both. If war erupts, investments will become stranded, supply chains will be broken, customers will be lost, and uncertainty will intensify. To avoid these economic difficulties, exporters lobby their own governments to keep the peace. And today – with so many imports being inputs used in domestic production – importers join exporters in this lobbying effort.

The doux commerce effect is real.

Here’s the part protectionists will have to deal with eventually. You don’t need the strong version of the doux commerce thesis to see that if you value peace, protectionism isn’t the way to. The recent revival of protectionism is building hostility between nations who were once our closest, friendly trading partners.

For months now, the president has used his tariffs in both the conventional protectionist way and as an instrument of geopolitical coercion. This hasn’t just imposed costs on American consumers and the producers who import their inputs while propping up select industries. It has also imposed a steep political cost. Tariffs are an invitation to grievance. They turn ordinary commercial spats into matters of national pride, contest over sovereignty, and hand belligerent politicians abroad a reason to make an example of us. Every trade deficit gets reframed as a robbery, every international transaction as a con, when in fact a U.S. trade deficit is just foreigners investing heavily in the U.S. (i.e. a capital-account surplus). Nobody is being shortchanged; both parties walk away with something of greater value. That is the point of the transaction. But if you treat every partner as a mark to be wrung out and reduce everything to a ledger, as president Trump and his acolytes have done, you forfeit more than efficiency. You lose the goodwill that has been the unquantifiable asset prompting other nations to invest in our firms and adopt our ways.

Worse, sustained conflict among allies weakens the credibility and cohesion of the Western alliance, creating openings for China and Russia and increasing the risk of miscalculation. The danger is not that tariffs will themselves cause a war with Denmark, but that coercing friends will fracture the alliances meant to deter wars with actual adversaries.

Consider Canada, a country posing no plausible military threat to the United States. It shares the world’s longest peaceful border with us, and its friendship with Americans was safely taken for granted for generations. Yet in a few months, the Trump administration’s tariff policy has managed to get Canadians booing our national anthem, pulling American bourbon off store shelves, canceling their American vacations, and cutting cross-border travel by roughly a quarter. As it is today, Ottawa is deliberately learning how to depend on us less, including by unwisely turning to China. And Canada’s new government intentionally and in reaction to Trump’s policies “took an historic step” to deepen its security ties with Europe and started shopping elsewhere for the weapons it used to buy from us.

Across the Atlantic, the same worldview produces the same result. European governments, never shy about complaining, especially when a Republican president is in office, have moved past complaining into something more durable: the settled conviction that the United States might not be a reliable partner. When Washington wanted airspace and bases for operations against Iran, several European governments initially said no. “Strategic autonomy,” once dismissed as French vanity, is now a serious continental project: buy fewer American weapons, build domestic defense capacity, reduce exposure to American pressure. Trump complains that our allies lean on us too heavily and then hands them every reason to stop. He might well get his wish, and he will not like it.

Obviously, Europe and Canada still cooperate with the U.S., but this cooperation seems to be born of necessity rather than any warm feeling. They oblige because they are as yet without an alternative to American military might. Some would say their own poor domestic policies will see to it that they never build one. Still, to rest a friendship on such an unstable footing is dangerous.

It was never the case that free trade was guaranteed to stave off war, though critics were ever ready to leap from the fact that commerce cannot stop every dispute to the absurdity that it does nothing of the sort. Protectionism is now lending credence to the doux commerce thesis from the other direction. It may not be sending armies over the border, but it is already sowing the mistrust and the drive for independence that are the prelude to them, among nations that had good reason to be our friends before the recent wave of American protectionism set in.

The first claim by FS comes in their opening sentence:

“The last generation has witnessed an epochal decline in real interest rates in the United States and around the world despite large buildups of government debt.”

The authors then demonstrate this in a table, noting that “table 1 illustrates U.S. ten-year indexed bond yields declined by more than 4 percentage points”. Below you can see the table that they refer to.

Now that we have a little over 5 years of additional data, we can add 2026 data to table 1. Below is the updated table 1, which shows that real interest rates have re-escalated in recent years, back to 2.4% as of July. The generational “epochal” decline in interest rates doesn’t seem to have persisted as most economists had forecasted it would. Perhaps the near zero interest rates in 2020 were not reflective of a broader trend but were instead the result of the broader COVID pandemic effects of the time combined with zero interest rates policy (ZIRP) and quantitative easing by the Federal Reserve.

Following their claim that low interest rates were the new normal, FS then went on to make a second claim:

“countries may be less constrained by fiscal space because fiscal expansions themselves can improve fiscal sustainability by raising GDP more than they raise debt and interest payments.”

Given that we just lived through a natural experiment with the COVID downturn and subsequent fiscal response, we can test this theory. Did the $5 trillion fiscal expansion of the early 2020’s “improve fiscal sustainability by raising GDP more than they raise debt and interest payments”?

Evidently not. The debt ratio is more than 20 percentage points higher today than pre-stimulus, while the cost of servicing the debt as a share of GDP is double what it was pre-stimulus. In fact, the only reason the debt was relatively stable in the 2021-23 period was due to the fact that a large portion of the debt stock was inflated away as excessive stimulus triggered the highest levels of inflation in four decades.

While on the topic of soaring inflation, this brings me a third claim made by FS:

“A clear downward trend in longer term real rates antedates the 2008 financial crisis and has continued since it was substantially resolved. The observations that the trend has been equally pronounced in long- and short-term real rates, has lasted over 30 years and has coincided with constant or slightly declining rather than increasing inflation and inflation expectations suggest that it is a real rather than a monetary phenomenon.”

This claim is largely true. Inflation and interest rates had both broadly fallen between the 1980’s and 2020. However, this doesn’t mean that the future will be like the past. But also, the historical decline in interest rates narrative typically cherry picks a starting date somewhere between 1980 and 1985. The chart below shows a longer-term view of long-terms rates using the Jordà-Schularick-Taylor database, which tracks back to 1870.

The period between 1965 and 1990 was dominated by high levels of inflation. This period is the anomaly of the 156 years observed in the above chart. During the 95 years up until 1965, interest rates averaged about 3.5 percent, and since the turn of the 21^st century, they’ve also average about 3.5 percent. Economists that use the anomalous period of high inflation as a starting point to argue that interest rates have been falling for decades just need to take a step back and review the longer-term data.

FS also noted that since the Great Financia Crisis (GFC), the federal funds rate had been at the lower zero lower (ZLB) bound 59 percent of the time. They then note:

“As we write, options markets suggest that five years out there is a 72 percent chance that nominal rates will be at their current level of effectively zero or even negative.”

In actual fact, 5 years after FS wrote this paper, the federal funds rate was around 3.9 percent—not effectively zero and not negative. Since the GFC, the federal funds rate has now been at the ZLB about 48 percent of the time.

Why does all of this matter?

Well, it matters because these predictions about low interest rates and where interest rates were heading based on past trends led FS to make three bold conclusions, that inspired fiscal policy decisions in the 2020-2021 era. These three conclusions were that (1) fiscal policy must play a critical role, (2) fiscal sustainability cannot be assessed by traditional debt-to-GDP ratios, and (3) public investments pay for themselves.

This was the economic consensus of the moment, corroborated by other academics such as Olivier Blanchard, and carried forward in policy decisions by public figures such as Treasury Janet Yellen and the Biden Administration more broadly. These ideas grounded in the belief that low interest rates were here to stay were the fuel that fired up the great inflation of 2021 and 2022 through massive unfunded stimulus including the 2021 American Rescue Plan Act.

At her confirmation hearing before the U.S. Senate Committee on Finance in January 2021, then Treasury Secretary nominee, Janet Yellen, noted that: “with interest rates at historic lows, the smartest thing we can do is act big”.

The lesson here isn’t that FS were reckless, it’s that a specific, historically contingent window got mistaken for a permanent structural shift. Three decades of falling rates looks a lot less like an “epochal” law of economics once you set it against a century and a half of data showing rates gravitating back toward historical norms.

That distinction mattered enormously, because the moment economists declared debt-to-GDP obsolete, the argument stopped being academic and became the intellectual permission slip for trillions of dollars in unfunded stimulus. The bill for that miscalculation didn’t arrive as a debt crisis, it arrived as the highest inflation in forty years, paid disproportionately by the households the stimulus was supposed to help.

It’s worth remembering this now that many of those same voices are rediscovering their concern for the debt. The framework didn’t fail because the math changed, it failed because the math was wrong, and the people now sounding the alarm are often the ones who spent it into existence.

Tax Increment Financing (TIF) is one of the most widely used local economic development tools in the United States—with over 10,000 active TIF districts across 49 states—yet it receives surprisingly little public attention. TIF is used as a financing mechanism to help provide public infrastructure and incentivize the redevelopment of declining downtowns, aging shopping centers, and economically blighted areas in general. In hopes of bringing more attention to this widely used but little understood policy, this guide explains what TIF is, how it works, the main arguments for it, and why the policy has garnered many critics.

What Is TIF?

Tax Increment Financing (TIF) was first authorized in California in 1952 as a redevelopment financing tool designed to encourage investment in economically distressed or blighted areas, such as abandoned factories or dilapidated housing. The idea was straightforward: Use increases in property tax revenue generated by the redeveloped property over time to help pay for the costs of redevelopment today.

Mechanically, a city or county establishes a TIF district by designating a specific geographic area for redevelopment. At the time the district is created, the existing level of property tax revenue it generates becomes the “base” value. The base property tax revenue continues flowing to the existing taxing jurisdictions, while any increase in property tax revenue—the tax increment—is redirected to repay the debt incurred to finance the redevelopment.

Because those incremental tax revenues would otherwise have been available to schools, counties, libraries, fire districts, or other local governments once property values increased, critics point out that TIF diverts revenue away from public services.

TIF is authorized under state law, so every state has its own rules governing how the program operates. Individual state statutes differ on issues such as how long districts may remain in place, whether eminent domain may be used, and what types of projects may receive TIF funding. Arizona is the only state without a traditional TIF statute after its own version of the redevelopment financing mechanism was ruled unconstitutional.

How Does TIF Work?

An example helps illustrate the basic concept.

Suppose an abandoned factory currently generates $100,000 per year in property taxes. After the factory is redeveloped into a mixed-use commercial property, annual property tax collections rise to $400,000. The original $100,000 continues flowing to the existing taxing jurisdictions, while the additional $300,000—the tax increment—is redirected to finance redevelopment costs within the TIF district.

Municipalities generally finance TIF projects in one of three ways. Which one of them is used depends on multiple factors such as the local municipalities’ rules, the tolerance for risk, and the individual states’ TIF statute. The three methods are as follows:

Debt-financed TIF districts are the most common. This financing method involves issuing municipal bonds to provide developers with funding upfront. The city issues bonds backed by anticipated future tax increments and uses the proceeds to finance redevelopment. Once the project begins, tax increments go toward repaying the debt. This approach allows large projects to begin immediately but exposes local governments to financial risk if future property tax growth falls short of projections. If the TIF district doesn’t generate enough revenue to repay the initial debt, it is called an underwater TIF.

Pay-as-you-go TIFs are less risky because redevelopment occurs first. Rather than borrowing against future revenues, the municipality reimburses the developer over time using tax increments as they are collected. Note that states and municipalities have different stipulations on what specific costs TIF money can be used for.

Tax-rebate TIFs, which are used much less frequently, require property owners to pay their taxes normally before the municipality rebates the incremental portion back to the developer. In practice, this arrangement resembles a property tax abatement more than a traditional TIF. The main difference between this and a pay-as-you-go TIF is that the local government doesn’t require the same oversight of how the increments are spent.

Who Actually Pays for TIFs?

Existing property owners within a TIF district continue paying the same property tax rates they otherwise would have. TIF does not involve directly increasing tax rates. Instead, the expectation is that redevelopment will increase property values and, in doing so, property tax revenues.

Rather than flowing to schools or other local governments, the incremental tax revenue is redirected toward redevelopment costs within the district. In the case of debt-financed TIF districts, the increment goes toward repaying incurred bond debt.

What Can TIF Money Be Used For?

As the previous paragraphs have suggested, a recurring theme with TIF is state variation. Most states restrict TIF revenues to public infrastructure projects such as roads, water systems, sewer lines, and sidewalks. Other states permit TIF revenues to finance certain private development costs as well.

In both cases, instead of requiring a developer to pay for the necessary infrastructure improvements that accompany a large project, TIF subsidizes these costs. As a result, developers bear fewer redevelopment costs while future property tax growth is redirected away from other local taxing jurisdictions. In cases of true economic blight, this may be a necessary tradeoff to create real growth opportunities. But the reality is that there are many examples of TIF districts in areas that are far from blighted—areas that have been experiencing consistent property value growth.

Which States Use TIF the Most?

Although TIF is a state-level policy, the Midwest is a relative hotspot for TIF districts. There are some theories for why this is the case, such as the region’s older industrial infrastructure, strict state laws that give municipalities localized control, and a heavy reliance on local property taxes to fund urban renewal. However, a current and comprehensive study is necessary to discern the real drivers of TIF adoption. Beyond the two available state reports from Iowa and Nebraska, comparing TIF use across states becomes difficult.

According to the most recent available state report, Iowa has approximately 4,194 TIF districts. This is by far the largest number of any state. In that same report, Iowa local governments reported a total of $4.68 billion in outstanding debt that they expect to repay with future TIF revenue.

The lack of transparency surrounding TIF is one of the major criticisms the policy faces at the local level. When a sizeable portion of future property taxes that would otherwise go to schools and public services is diverted, taxpayers understandably want to know where it is being spent. Unfortunately, reporting requirements vary widely across states, making it difficult for taxpayers to determine exactly how TIF revenues are being spent.

What Are the Main Arguments for TIF?

• Correcting Market Failures: Some areas remain underdeveloped because redevelopment costs exceed expected private returns. Contaminated land, demolition costs, and infrastructure requirements can all limit private demand for development. Government subsidies may help bridge that financing gap.

• Meeting the “But For” Requirement: This is the idea that if it weren’t for the government subsidy, the project would never happen. Many state statutes require municipalities to make this finding before approving a TIF district.

• Self-Financing Economic Development: Supporters argue that TIF is essentially free because it does not raise taxes. Instead, it redirects future tax growth that they argue would not exist without redevelopment.

• Promoting Redevelopment and Equity: TIF can direct investment toward neighborhoods suffering from decades of disinvestment. Areas that have been historically blighted, for whatever reason, can be given a fair shot at redevelopment.

What Are the Main Criticisms of TIF?

• Difficulty Verifying the “But-For” Requirement: Verifying that development would not take place but for subsidies is extremely difficult because governments cannot directly observe what would have happened in the absence of the subsidy.

• Encouraging Cronyism and Political Favoritism: Critics argue that TIF can encourage rent-seeking by giving developers an incentive to lobby local officials for subsidies rather than competing on market fundamentals.

• Failing to Materialize or Cover Costs: If local governments use municipal bonds to finance TIF districts, there is a chance the bonds will fail to generate sufficient tax increments to repay the debt. TIFs that do not raise the necessary tax revenue to repay their debt are called underwater TIFs.

• Diverting Tax Revenue That Would Have Been Generated Anyway: When TIFs are used in areas that are not truly blighted, TIF captures tax increments that would have occurred anyway, effectively pulling funding from public services for unjustified reasons.

• Displacing Rather Than Creating Economic Activity: This is a major criticism of retail-based TIFs. If TIF is used to fund a new mall in one area of town, nearby shopping centers may see lower demand at their own stores. Consumer spending is often shifted rather than expanded, with online shopping also creating constant competition. All of this leads to a cannibalization effect in which little or no new economic activity is created and instead is shifted from other areas at taxpayers’ expense.

In my next article, I’ll examine Iowa’s FY25 annual urban renewal reports to see whether TIF is achieving its original goals of revitalizing blighted areas, self-financing, and correcting market failures.

Each proposal is being presented as a way to relieve pressure on struggling households. Taken together, however, they raise a more fundamental question: How will Burnham pay for them?

Scrapping the previous government’s digital identification program may finance the initial energy measure (plus this Starmer policy was asinine). It will not, however, finance a permanent expansion of the British state. Public ownership, subsidized transport, new housing programs and expanded social services all carry substantial costs extending well beyond a single budget year.

Burnham has said his government will remain within Britain’s fiscal framework. Under the stability rule, the current budget must be on course to reach balance or surplus by 2029–30. Under the investment rule, public sector net financial debt must be falling as a share of GDP in the same year.

These rules are supposed to impose a limit on political ambition. But Burnham has also spoken about using the “flexibility” available within them, language that investors understandably interpret as a search for additional borrowing room. Following his inaugural speech, the ten-year gilt yield reportedly rose by 11 basis points to around 5.04 percent, even as other major bond markets were comparatively stable.

That reaction should not be dismissed as the grumbling of financiers. The gilt market is one of the most important cost-of-living institutions in Britain.

Bond markets are already voting on Andy Burnham’s spending ambitions. Since it became clear he would be the next prime minister, ten-year gilt yields have risen roughly a third of a percentage point, the market’s way of pricing in more borrowing, more debt issuance and less fiscal discipline.

That matters well beyond Westminster. Twenty years of Bank of England data show that when gilt yields rise, five-year mortgage rates follow, at about three-quarters of the move, typically within a year. A full one-point rise in yields (plausible if spending promises keep piling up) would push mortgage rates up roughly 0.75 points, adding around £100 a month to a typical UK mortgage and closer to £170 a month for a mortgage on a detached house.

A prime minister promising to cut the cost of living can undo that promise with a single fiscally reckless budget. The bond market already has Burnham’s number.

The consequences extend beyond mortgages. Gilt yields help determine borrowing costs throughout the economy. Higher government borrowing costs feed into business loans, commercial property finance and the rates faced by households refinancing existing debt. They also raise the government’s own interest bill, leaving less money available for public services or requiring still more taxes and borrowing.

This creates a fiscal trap. Burnham can announce subsidies intended to lower visible prices, but if investors conclude that those subsidies are not credibly financed, the resulting rise in interest rates can increase households’ much larger housing and credit costs.

Eventually, Burnham must reconcile his ambitions with the fiscal rules. There are only three broad possibilities: faster economic growth, higher taxes or lower spending.

Faster growth would be the least painful solution, but it cannot simply be assumed into existence. Policies that enlarge the state, weaken investment incentives or create uncertainty over future taxation may leave the economy less capable of growing out of its debt burden.

That leaves taxes and spending.

My recent research, using narrative fiscal-consolidation data covering 17 advanced economies between 1978 and 2016, shows that the choice between them matters enormously. Tax-based adjustment significantly harm economic growth, and after five years, tax-based consolidations are associated with cumulative growth losses approaching three percentage points.

The debt results are even more striking. A spending cut equal to one percent of GDP raises the probability of reducing the debt ratio by at least five percentage points within three years by approximately 11 percentage points. A tax increase of the same size lowers the probability of success by around 9.5 points.

The implication is uncomfortable for a Labour government with an expansive domestic agenda. Complying with the fiscal rules on paper through tax increases may not produce durable debt reduction. Higher taxes can weaken work, saving and investment while allowing the underlying spending trajectory to continue.

Spending restraint, by contrast, can signal that the government has permanently altered that trajectory. It can reduce expectations of future taxation, make room for private investment and convince bondholders that fiscal discipline will survive beyond the next forecast.

Not every spending cut is equally desirable. The evidence generally favors restraining transfers and government consumption rather than sacrificing productive public investment. But the broader conclusion is difficult to avoid: A government cannot credibly promise every new program, preserve every existing one and expect financial markets to finance the difference cheaply.

Burnham wants to be remembered as the prime minister who brought down the cost of living. Whether he succeeds may depend less on the subsidies he announces than on the spending promises he is willing to abandon.

The gilt market will be watching.

As total debt held by the public approached $32 trillion in the third quarter of fiscal year 2026, it would be valuable for policymakers to take stock of the nation’s balance sheet. Nine months into FY 2026, U.S. debt held by the public is $31.68 trillion. This amount is an increase of $2.68 trillion from the same time last year, or an increase of roughly $16,600 per federal taxpayer.

After stabilizing briefly in April, public debt accelerated upwards in May and June, approaching $32 trillion, as figure 1 illustrates. As a share of GDP, the public debt ratio is 99 percent. This is close to record levels (the highest level was in 1946 at 106%), while the Congressional Budget Office forecasts our debt trajectory will reach a record high within the next three years.

At this level of public debt, the U.S. economy forgoes about 0.8 percentage points in potential economic growth, based on a synthesis of nearly 200 estimates in the empirical literature. In other words, real economic growth in 2026 would be about 3 percent rather than the forecasted 2.2 percent if our debt ratio were stable at 75% of GDP, as it was in 2019.

Nine months into the fiscal year, the federal government has spent a total of $5.52 trillion, while bringing in a total of $4.15 trillion in receipts, according to the latest Monthly Treasury Statement. Federal revenues are slightly higher than last year, but spending is also higher than in prior years. As a result, the budget deficit for the first nine months of FY 2026 is already $1.37 trillion. As figure 2 shows, this nine-month budget deficit is slightly larger than prior year’s.

Interest Rates and Interest Payments

One major federal outlay that has played a key role in driving spending levels higher in recent years is the growing burden of federal interest payments on the debt. Over the past 12 months, the average interest rate on U.S. government debt as a share of GDP has hovered around 3.3 percent. This rate is significantly higher than the 2000-2021 average of 1.76 percent, as shown in figure 3. As both the public debt ratio and the interest rate on U.S. Treasurys move higher, interest expenses crowd out a larger share of the federal budget, leaving less revenue to be distributed to other policy goals and programs. The larger budget deficit also crowds out economic growth by reducing private savings and investment.

As Treasury yields remain stubbornly high, interest payments continue their upward trajectory, resulting in a larger share of federal revenues being spent on servicing the debt. Figure 4 shows that, year to date, almost 20 cents of every dollar of tax revenues collected was spent on servicing the debt. This proportion is similar to the prior two years, but notably larger than in 2023 and more than double the share of revenues spent on interest in 2022.

Maturity Structure of Public Debt

The maturity structure of public debt is a critical indicator of fiscal risk, revealing how soon the government must refinance its obligations and how vulnerable it is to changes in interest rates. The U.S. debt maturity structure is relatively short-term, meaning most of the debt is regularly rolled over into short-to-medium-term Treasuries. Figure 5 shows the average maturity of public debt over time since 2000. Historically, the average maturity of U.S. public debt is 64 months or roughly 5 years, fluctuating between a low of 49 months and a high of 75 months. Looking at the most recent quarterly data (Apr-Jun), the average debt maturity is 71 months, or just under 6 years—similar to the last quarter.

Looking at the distribution of public debt by different maturities, we can see that 33 percent of all public debt matures within 1 year or less, while another 35 percent matures within 1 to 5 years. Figure 6 reveals that the debt maturity distribution has changed very little over time, with about 70 percent of debt consistently maturing within 5 years. The share of public debt with a maturity of more than 10 years has increased slightly, while the share with maturity between 5 and 10 years has decreased slightly over time.

Using the latest data from the Monthly Statement of the Public Debt (MSPD), we can see that in the coming quarter (Jul-Sep), the Treasury will roll over a little more than $5.65 trillion in maturing Treasurys, or roughly 18 percent of all public debt. The fact that almost one-fifth of the entire debt stock gets rolled over in a single quarter demonstrates just how short-term the maturity structure of U.S. public debt is. Rapid and persistent increases in interest rates can have serious adverse consequences for federal budget sustainability—a risk that becomes more significant as the debt stock continues to grow.

Who Holds Public Debt?

Understanding who holds the U.S. public debt reveals not only the financial structure behind government borrowing, but also the potential economic and geopolitical vulnerabilities tied to our fiscal position. Up through the Great Financial Crisis, the dominant purchaser of U.S. Treasurys was foreign investors (foreign governments, central banks and foreign financial institutions). Between 2008 and 2015 about half of U.S. public debt was held by these foreign investors. For the past decade, however, the share of public debt held by foreign investors has declined, with foreign investors now holding less than 30% of public debt. Figure 7 shows the change in who holds U.S. public debt over the past 26 years, focusing on the four largest purchasers.

Notably, mutual funds now hold about 17 percent of treasuries—up from 10 percent 3 years ago. Also of note, the Federal Reserve restarted quantitative easing (QE) in December—buying $40 billion of U.S. short-term Treasury debt every month. Since resuming QE, the Federal Reserve has absorbed about a third of the value of all newly issued debt during that period.

As of the latest Treasury Bulletin data (June report), foreign investors held 30 percent of U.S. public debt. Other major holders include the Federal Reserve with 14 percent, mutual funds with 17 percent, and money markets with 11 percent. While state and local governments and depository institutions hold about 5 percent and 7 percent respectively. The pie chart (figure 8) breaks down the holdings of U.S. public debt.

The U.S. Balance Sheet Is Structurally Vulnerable

As policymakers push through another spending bill with no pay-fors, the federal government now finds itself navigating a precarious fiscal landscape—marked by historically high debt levels, growing interest costs and a heavy reliance on short-term refinancing. Modest growth in revenues remain insufficient to close the widening gap between spending and receipts. With nearly one-fifth of public debt maturing in the next quarter alone, and interest payments claiming a growing share of the federal budget, the structural vulnerabilities of the U.S. balance sheet are becoming more difficult to ignore.

To monitor the fiscal outlook in real time, I’ll be updating “The Quarterly Ledger” series every quarter. Each edition will track key changes in the federal balance sheet, including public debt levels, budget deficits, interest payments and different measures of sustainability. Follow along for ongoing analysis and data-driven insights into the nation’s evolving fiscal position. You can read last quarter’s update here.

A recent poll reveals 89% of seniors want to tax younger generations to pay for the social security shortfall doomed for 2032. This generational dispute is much the same in Japan too, where senior protestors with pensions in mind have hit the streets with a message to Takaichi’s administration: “Don’t lower the VAT rate!”.

Social security or pensions, both nations elders look to the government and its modes of taxation to deal with the existential crisis their nation’s debt has laid stage for.

Japan’s fertility rate seems to be all the talk in the mainstream; but surprisingly has one of the highest fertility rates in all of East Asia at 1.15. On the other end of the spectrum, the United States has a fertility rate of 1.54, but it too has dropped over 20% in the past two decades. While the U.S. does not carry the same existential danger as Japan, both countries reveal that government programs become political and increasingly difficult to cut. Thus, they are both holding onto the same problem: supporting entitlement payments.

The consequences

Outside of the looming entitlement payment issue, the $/JPY relationship is worth discussion.

Geopolitically the U.S.-Japan relationship wants to counter China, so beefing up Japan’s domestic industry via cheaper exports raises revenues and profits for Japanese domestic industries. This increase of revenue can help explain why the Nikkei is at an all time high after 30 years of a slow rebuild. Though how long that will last is up for debate.

The Quiet Implosion of Japan

Robin J Brooks recently wrote about Japan’s foreign exchange (FX) issue in regards to the recent $/JPY exchange rate hitting 160. Critics may point to this graph and argue that ‘nothing ever happens’ because of a constant intervention threat from Japan’s government.

That intervention threat being the Bank of Japan capping bond yields to keep interest rates low for years.

But, because the artificially low interest rates fail to reflect the sentiments of the market, investors sell Yen as opposed to bonds. These interventions for supporting the depreciation pressure on Yen, as Brooks points out, might be precarious: “[the interventions] treat the symptom (Yen deprecation) and not the disease (too much debt)”. The worry is that interventions will become decreasingly effective over time and markets will ignore it entirely.

The graph from Robin above shows how the Yen averaged to the G10 (not just the Dollar) has failed to keep up with other 30 year bonds. He further wrote, “The fact that the rate differential keeps rising, i.e. Japan’s yields are going up vis-à-vis everyone else, and the best the Yen can manage is to tread water is a warning that Japan is in a very tricky spot”.

If we take it that the Yen will continue to depreciate, another important question to look into is how this may play with the United States.

How the $/JPY exchange rate affects the bond market

As touched on earlier, the Japan-U.S. relationship is real. Japan is the largest foreign holder of treasuries at $1.21 trillion, and one method of Yen depreciation intervention is to sell off these assets and buy back Yen with the dollar to strengthen it. If Yen continues to depreciate, renewed intervention becomes likely and to what extent depends on how uncertain markets view Yen. In 2024 for example, Japan sold roughly $95 billion of U.S. financial assets. If this number grows considerably higher in future selloffs — and it just might if the Yen continues to depreciate — we will see a higher supply of treasury bonds in the U.S. market, and when bond prices fall, yields rise. Higher yields means higher costs of borrowing, and an even larger interest payment on fiscal debt for both countries.

The Weakening of a Fragile Fiscal Position in The U.S.

One U.S. fiscal experiment can be found in Illinois. With a budget over $55.9 billion and an additional $800 million increase in taxes, what distortions may arise?

One particular distortion can stem from Japan.

Many states like Illinois often issue municipal bonds as opposed to treasuries. Yet, the municipal bond yield is closely tied to treasury bonds. As you may imagine, this is problematic.

For example: Japan sells dollar assets (most likely treasuries, Japan’s largest holding by far) → Treasury prices face pressure → Treasury yields rise → muni yields rise too → Illinois borrows at higher rates → Illinois pays more.

This is not speculation either. A Goldman Sachs report noted: “Munis underperformed Treasuries across the curve in March as heavy supply and renewed inflation concerns pressured valuations.”

What does this mean for Illinois? Well, The Illinois Policy Institute (IPI) reported, “Despite lawmakers’ claims of budget cuts, the 2027 budget will begin $700 million higher than the fiscal 2026 budget. Governor Pritzker has grown Illinois’ budget by $16 billion and enacted at least 57 tax increases that cumulatively have cost taxpayers more than $77 billion.”

All of this spending can have major implications if things remain the same — but things never do as the ancients teach us. If Japan (or other forces for that matter) inadvertently raise the yield of treasuries, it will spillover in states like Illinois already facing immense fiscal pressure.

Illinois plans roughly $3.2 billion in FY2027 bond sales, so a one-percentage-point increase in borrowing costs would add about $32 million in annual interest on that new debt alone. The larger problem is what this means in context. Illinois also carries roughly $143.5 billion in unfunded pension liabilities, with its pension systems less than half funded. If the pension gap were hypothetically treated like market debt, a one percentage point increase would represent about $1.4 billion in additional annual cost. While higher interest rates do not reprice that entire pension shortfall like a floating loan, they do make the state’s fiscal tradeoff harder: every additional dollar spent servicing new debt is a dollar unavailable for pensions or services.

Japan-related Treasury selling would not be the root cause of Illinois’ fiscal stress, but it could worsen the environment in which Illinois borrows as illustrated above. Put eloquently by Desmond Lachman at AEI, “Japan’s bond market woes might shine unwanted attention on America’s unsustainable public finances and on Trump’s relentless efforts to undermine Federal Reserve independence”.

Moreover, how will Illinois continue to pay for all of the borrowing? Their population and economy is shrinking.

Illinois’ Entitlement Issue & Decreasing Population

Illinois is not only a sharp example of bond market risk, but entitlement risk too. As mentioned, they have over $143.5 billion in pension debt and actuaries say the state needs to contribute at least $17 billion to truly fund the systems. They had a shortfall of more than $5 billion this year as well noted by the IPI, which means Illinois’ finances are almost certain to continue to deteriorate and put even more pressure on state spending in future years.

Pew found that from 2010-2025, Illinois’ population ranked 49th out of 50 states on a migration metric, and actually had a loss of 0.07% over those 18 years. Additionally, they are one of just three states expected to experience major depopulation within the next 30 years. How could this be?

Tax.

More specifically, 95% of people who left Illinois reported doing so because of taxes and stagnant economic growth. An additional 800$ million taxes in 2027’s budget doesn’t seem logical if the goal is to grow the population, a population needed to service the massive $143.5 billion pension debt.

Likewise, the Illinois Policy Institute found that: “since 2018, Illinois’ economy has grown just 7.4% – among the slowest of any state. In that same time, the state budget has grown over 36%, nearly five times faster than the economy. The U.S. economy has grown 18%, 2.5 times faster than Illinois’. To put that in perspective, that comes out to an average of less than 1% each year.

Taxes…

it seems Illinois illustrates the defects of Japan and the U.S. federal government’s cautionary tales in practice. As the state with the highest combined state and local taxes in all of the U.S., they spend over 30% of tax revenue alone on mandatory goods like state pensions and healthcare.

Japan’s population declines 0.75% each year and Illinois similarly declines 0.67%. Even more worrying, Illinois’ loss is voluntary and 60% of those who choose to leave are high net worth individuals — just about the last thing a state with high debt and stagnation needs.

Additionally, Jack Salmon points out that Illinois lost 429,034 residents over 5 years, which amounts to roughly $42 billion in income that state policymakers can no longer tax (over 2/3 of that income is from high earners).

At The Federal Scale

Replace Illinois’ 57% of pension to debt ratio with the federal governments 53% of social security / medicare / healthcare ratio and we find a similar issue with a familiar problem: entitlements. Perhaps a way to solve this issue is more taxes, and many argue that this should come from the wealthy.

But as the top 5% net worth individuals of the U.S. account for 60% of taxes, it seems in theory problematic to add more taxes on top of this minority. And in real life too, we see why this theory is true. Recall from earlier, 95% of illinoians left due to tax. And if you think it’s just Illinois where higher taxes encourage migration…

Millionaires are fleeing London, leaving Norway for Sweden (a country that removed wealth tax in 2006 after realizing the consequences of overtaxation), and South Korea’s wealthy too are leaving for Singapore and Hong Kong. Many more examples could be illustrated.

We see the effects of overbearing taxes in Europe, Asia, and domestically, too. Perhaps a lesson could be learned from Illinois for the rest of the states.

Conclusion

Japan is not an outlier so much as a warning. An aging population and falling fertility have left the country increasingly dependent on debt to sustain entitlement promises. The United States is not yet in Japan’s position, but it is moving in the same direction. Illinois shows what that trajectory looks like inside America: high taxes, large pension obligations, population decline, and shrinking fiscal flexibility.

With the largest budget reform in Japan since 1945 being passed a few weeks ago to target utilities, spending is in full action and the consequences are real. While many issues from zombie companies to stagnating growth exist, utility subsidies deserve more attention. Firstly, excessive utility subsidies obscure price signals and disincentivize renewable energy, which has materialized through the lack of EVs and reliance on foreign energy in Japan. Secondly, utility subsidies corrupt foundational government procedures as observed from a weakening parliamentary, an unprecedented budget reform, and accusations of fraud.

Why Utilities?

Japan not only pays on average 72% more per kWh of electricity compared to the U.S., but a staggering 294% more compared to neighboring Asian countries. There is a wide breadth of factors under the umbrella of imports that contribute to this high cost, but the one I want to highlight today is weak yen — an emergence of Japan’s high debt.

As explored in Part I, one reason for a weaker yen is that Japan distorted price signals through artificially setting the inflation rate via purchasing government bonds, but this led skeptical investors to otherwise sell yen instead of bonds. This resulted in weaker purchasing power for the Japanese, and with no choice but to import a necessary good like electricity, the costs of importation are compounded.

Subsidies Create Subsidies

On May 26, the Takaichi administration decided to use $3.12 billion from reserve funds for electricity and gas bill subsidies. Then, June 5th, approved a supplementary budget of an additional $20 billion for further utility subsidies and to ease the woes of high living costs. Before that, a staggering $77 billion in utility subsidies was allocated in various forms from 2022-2025.

Additionally, a research project by Michiyo Miyamoto and Sam Reynolds found that Japan’s extensive subsidies have obscured its energy markets and led to minimal investment in alternative means to energy besides fossil fuels.

One would imagine that Japan would be on the frontier of development because cars are one of Japan’s biggest exports, but the opposite is true.

“Japan’s failure to keep pace with the global electric vehicle (EV) trends undermines its decarbonization efforts and risks eroding the global competitiveness of its automotive industry, which accounts for over 17% of the country’s total exports.”

In 2023, China overtook Japan as the world’s largest car exporter due largely to higher shipments of Chinese EVs.

Moreover, subsidies divert capital to governments preferred firms and industries, and often away from more productive uses that would otherwise be determined by the market. Jack Salmon wrote about this issue in the U.S. context, “By favoring renewable energy through subsidies and tax incentives, the IRA has diverted capital away from nonrenewable energy, distorting investment patterns and likely contributing to a national shortage of natural gas turbines.”

If Japan continues to subsidize importing electricity among other utilities, they will fall further behind in one of their most prominent industries, weaken innovation, redirect capital to government-backed institutions, and deal with another unintended consequence: a stronger government.

Centralization Breeds Centralization

Another fault of the enormous spending is a growing concern in Japanese media that fiscal policy and its democratic foundation is eroding. Ohinata put it well in Asahi Shimbun,

“not only has the principle of balanced budgeting been jeopardized, but even the fundamental principle of modern parliaments—that members of parliament, as representatives of the people, decide how the budget is spent—has become precarious.” (translated from Japanese)

From this quote we see there are two problems.

(1) the principle of budgeting is jeopardized

(2) the foundation of the parliament is precarious

For (1), According to Article 4 of Japan’s “Public Finance Act”, the government may not run budget deficits. Funny enough as it sounds, it’s true, and they get around it by issuing “construction bonds”. This specific bond, through many loopholes, can be used for practically any good. It’s like having a corporate credit card designed for travel, and in the rare case, loosely defined “emergencies”. (We can imagine where most of the spending comes from). This explains why Japan was able to invest plentifully in construction as observed from the asset price bubble, and why they are still able to take out massive debt today for other purposes.

Regarding (2), Takaichi’s decision to take out more debt on May 26th and June 5th amassing over $23.12 billion dollars was highly unusual. The first was done without discussion and ignored proper parliamentary deliberation. Then, a few days later, the second budget reform was announced and in the words of Japan’s finance minister, Katayama,

“is clearly the biggest overhaul since the end of the war.” — “That’s the level of commitment we are bringing to it” (Business Times).

With over 270% of GDP in liabilities, Japan should be the first country to speak of budget reforms in unprecedented terms. Yet, the extraordinariness here unfortunately lies in more, not less government spending.

Fraud & Opportunities For Cheating

The LDP (Liberal Democratic Party) in Japan announced today that they are proposing a review of the budget reform, Chairman Kobayashi reasoning that:

The proposal points out that subsidies and funds have “an unclear flow, making them susceptible to skimming and fraud,” and calls for improved transparency. As specific targets for review, it cites subsidies to support the introduction of solar power panels and electric vehicles, which are heavily reliant on China. (Translated from Japanese)

Today we found out that the largest budget reform in history in Japan may have fraud and cheating opportunities. The sky too is blue.

On a serious note, this is not the first time subsidies were abused. During COVID, the Japanese government gave out employment adjustment subsidies which prompted individuals and crime syndicates to steal from the government, ranging from dummy companies to faking hotel stays. Of the 6 trillion yen given out (to just companies alone) only 13.5 billion has been identified as fraudulent. That is 0.225%. To assume significantly more has been unrightly captured I hope is not a controversial claim.

The LDP is rightly concerned about opportunities for fraud to take place, but they also bring up a point I mentioned earlier: Japan is falling behind in renewable energy. While subsidizing renewables instead of fossil fuels may be a better version of a wrong approach, it’s nonetheless a step in the right direction and a recognition of the fact that Japan needs to incentivize its energy producers and automakers better.

The Caveat — Japanese Should Freeze and Overheat?

Some may argue that without subsidies, poorer Japanese citizens would freeze in the wintertime; and in summer, much like the terrible consequence of high energy costs found in Europe, die from heat strokes. Instead, a step in the right direction would be to support low income households while removing subsidies for energy companies and most individuals. After all, the subsidy for households comes out to roughly $12 a month, while the median Japanese family makes 30,000$ a year. We are talking about the equivalent of eating out for dinner.

Further, Japan maintains a relatively narrow income gap, where differences between the lowest income quartile and the median is only 1.3-1.5x. The subsidies seem most dire for those who earn less, but most of the those who earn less are part time workers and people early in their career — as to be expected in a more homogenous population like Japan or the Nordic countries. Perhaps a case could be made to offer subsidies for the poorest demographics or particular areas hit hardest by electricity demands, and only a fraction of the money being spent would be needed in that case.

Again, arguing over which subsidy is better is analogous to debating if alchemy or magic is superior. In the end, nothing is free. Subsidies are a symptom of disease, and that disease is debt.

The Two Take Aways:

(1) Excessive utility subsidies obscure price signals and disincentivize renewable energy. There is no incentive for innovation, as Japanese energy companies enjoy the benefits they receive from government funds. Consequently, Japan stays complacent in a loop where once the subsidy runs dry, they are without an option but yet another new subsidy. This new subsidization contributes to a higher debt, further weakening the yen, resulting in lower purchasing power that raises utility prices. It’s similar to filling a leaking boat with ballast to keep it stable. the weight keeps it upright temporarily, but sits lower in the water with every addition, making the next leak even more troubling.

(2) Utility subsidies create a feedback loop that expands government power. As government becomes more centralized, it relies increasingly on subsidies, which support government-backed firms and industries and further consolidate state authority. Despite promises of lowering Japan’s debt in Takaichi’s campaign, they have continued to spend tens of billions of dollars on subsidies, approve changes unprecedented since wartime Japan, and weakened the deliberation process that keeps radical change from taking place. Not only that, but as seen from past government failures, people take advantage of subsidies — and they take advantage of them hard. There will more than likely be fraud with this budget reform, and many will get rich off the expense of others.

Ice Cream Cartels and MMT’s Japanese Illusion

MMT economists often point to Japan’s debt as evidence that a country can avoid a fiscal crisis despite carrying a high debt burden, provided that the debt is properly managed. However, Japan has not escaped the consequences of its debt: it obscures the crisis through exports, hides it behind illiquid assets, shifts fiscal risk into foreign-exchange markets, and, of all things, incentivizes the formation of an ice cream cartel that fixes prices.

Is the debt questionable?

Particular economists when asked about Japan’s debt may give answers within a Modern Monetary Theory (MMT) framework, proposing that Japan cannot default as they print their own currency. In other words, the Bank of Japan (BOJ) is the biggest buyer of Japanese government issued bonds and becomes both the debtor and debt collector. The logical implication is that the best thing Japan could do would be to increase their borrowing and encourage consumption so long as inflation remains low.

Japan certainly does one of those things in plenty, borrowing, but has both a demographic that ranks among one of the highest saving populations in the world and within the last 10 years has doubled the VAT rate from 5% to 10%. Struggling with that lack of stimulus, Japan has tried to artificially trigger activity in three different phases from 1991-2024, but each time was woefully executed.

What then followed was Prime Minister Takaichi’s election in 2025 where she has continued to spend in grandiose ways unseen since Imperial Japan in 1945. Looking to the Cabinet Office figures, it puts gross liabilities at a staggering 270% over GDP.

Many will say this isn’t as it seems though, because Japan owns considerable assets totaling 193% of GDP. An argument according to an article by Yili Chien, Wenxin Du, and Hanno Lustig, follows that Japan’s net debt is but a modest 77% of GDP in 2024. Of that figure, 88% is domestic, and of the domestic portion, 56% is held in the public sector. They argue that this gives Japan a highly leveraged Sovereign Wealth Fund (SWF) financed from cheap domestic borrowing, and such shields itself from foreign creditors. But, because most of the assets are borrowed money, the structure is fundamentally sensitive to changes in interest rates.

Interest Rates Are Up

The BoJ has held its rate near 0% for decades, but since 2024 has been steadily increasing it and amid turmoil surrounding the unpredictable Iran war, the BoJ chief has recently raised this rate to 1% in June. Consequently, the SWF’s balance sheet will face costs in the form of devalued assets, a significant part of the debt’s neutralizer. Moreover, because higher interest rates paradoxically weaken the yen due to the carry trade unwinding, Japanese consumers have to pay more for goods — and the government does too.

The Yen carry trade’s precariousness

Looking to Hanno Lustig, he wrote on Two Cents that “the result is a classic carry trade, just executed by a sovereign. Borrow at the short end of the curve at rates the BoJ controls. Invest at the long end — and in global equity markets, adding a currency carry trade, funded in yen. Pocket the spread” This was visualized via the graph below:

In an ideal world, the carry trade works – but things are never ideal. As Japanese 10-year bond yields continue to rise, so too does government funding costs.

And the yields are rising.

Trading Economics

Higher yields translate to higher interest rates, which means that a large share of Japan’s assets — Foreign based (primarily U.S.) — will become less valuable. This matters because whenever Japan’s government intervenes in supporting a weakening yen, they have to sell assets to then buy back yen with a stronger currency. But, because the assets they are selling are worth less than if the yields had not risen, a risk for realizing losses emerges. In essence, Japan’s foreign exchange defense grows weaker as the assets they might sell lose value.

The Pushback

MMT enthusiasts from Stephanie Kelton to Warren Mosler recently dismissed Japan’s debt by penning, “Japan is not trapped by its debt; it is choosing an interest-rate policy that weakens the yen and adds income”.

This idea of a weak yen being advantageous was then popularized by Joeri Schasfoort’s video on “Money and Macro” posted a few weeks ago, amassing over 250k views. Yet, in his conclusion he looks to Japan’s aging population and argues that while things currently are bearable, as Japan grows older and begins to spend more, inflation will inevitably rise. But, importantly, he hints that things are fine now.

Both the MMT crowd and Schasfoort look to a weak yen as beneficial for gains in exports and use it to sidestep what one might call a debt crisis. The logic is simple: Japan chooses this policy, generates more revenue through foreign demand for cheaper domestic goods, and has the agency to sell their assets if need be.

Debunking The Claims

1. Japan does not choose this policy. Rates were cut to zero because deflation was problematic, resulting in a weak yen as byproduct. It was not to design an elegant export strategy. Additionally, as those very rates begin to suddenly rise, so too does the yen weaken from a depreciation of foreign assets.

2. Relying on exports creates imbalances in other means, notably imports and domestic commerce. This creates costs for households as Japan imports most of its electricity and food. In an effort to mitigate the loss, the government has to take out even more debt on subsidies for utilities via taxes. This is a consequence happening now, which pushes back against Schasfoort’s idea that things are fine so long as inflation stays low. Moreover, Japanese ministers could learn from reading the research of Alberto Alesina on fiscal consolidation. Spending cuts, not tax increases, are most successful at reducing public debt over time. Additionally to that point, Jack Salmon recently published a paper writing:

“a one-percentage-point spending-based consolidation increases the probability of success by 11.1 percentage points, while a tax-based consolidation of equal magnitude reduces the probability by 9.5 percentage points.”

3. Higher yields means higher costs of borrowing, and an even larger interest payment on fiscal debt. Japan spends 40% of its tax revenue on debt interest, up 7% alone from rising interests rates in the past year. As Jack Salmon observed,

In its FY2025 budget, Japan spent roughly 33 cents of every tax dollar just servicing its debt. That was before yields on 10-year bonds roughly doubled to more recent levels […] In upcoming budgets, that figure is likely to creep toward 40 cents on the dollar. This is a remarkable constraint on fiscal policy for a country that supposedly “proved” debt doesn’t matter.

4. Japan does not have agency. I.e., it cannot up and sell much of anything. Most assets are tied to pensions which aren’t able to be sold en masse and are time constrained. I.e., the assets are structurally illiquid. Lastly, in all of this, there is an assumption that enough buyers exist for the 193% GDP valuation and will pay that current valuation before market absorption capacity lowers prices.

5. MMT may work in certain respects, but it doesn’t come without costs. Borrowing from Robin J Brooks to push back against the MMT argument, he wrote,

Japan’s 30-year yield is basically the same as Germany, which has much lower public debt. That’s a sign that fiscal risk premia in the bond market are being artificially suppressed via ongoing Bank of Japan bond purchases. However, these yield caps don’t cause the fiscal risk premium to disappear. It just manifests in foreign exchange markets, dragging down the Yen.

In other words, Japan’s fiscal risk premia should be significantly higher. But, because the BoJ distorts price signals from consistently buying JGBs and flooding the market overtime artificially lowering interest rates, investors instead sell Yen which weakens the value. In essence, Japan does not choose to weaken their currency; rather it is a consequence of nervous investors who recognize the problems of Japan’s debt.

Ice Cream Cartels & Inflation

To round things off with point 6, Pete Earle at The Freeman recently wrote:

For years, yen weakness failed to translate cleanly into domestic inflation because firms absorbed cost increases internally rather than fully passing them on to consumers. That pass-through has increased more recently, but even that change has occurred gradually and reluctantly

Pete’s focus was on how monetary and fiscal policy can shape a country’s norms and behaviors, and this quote maps perfectly onto an unexpected topic in Japan: Ice cream cartels.

Japan’s Fair Trade Commission (JFTC) recently raided six major ice cream manufacturers on suspicions of price fixing from 2022-2025. Instead of internally absorbing costs like they had done for decades, ice cream manufacturers allegedly took advantage of sudden inflation: collectively raising prices and blaming the increase on inflation. This is another unintended consequence of Japan’s debt: prices have been deflated so long through the BoJ’s suppression of rates that sudden inflation incentivized price coordination as opposed to market competition.

Debt Debunked: The Part I Conclusion

There are three ideas I want to leave you with today when considering Japan’s debt:

(1) High debt can’t come without tangible consequences

(2) Excessive utility subsidies, a weakening yen, inefficient tax expenditures, and for the love of all things, ice cream cartels, are current consequence of Japan’s debt

(3) Nothing is free, especially debt

Thank you for your time. I hope you may agree with the importance of this issue and that Japan does not coast in a calm sea of fiscal ingenuity. If you disagree though, please feel free to comment and I will promptly reply.

As the Washington Post editorial board pointed out this week, the President’s defense supplemental request contains a roughly $1 billion bailout for the pension fund of Delphi Automotive, an auto-parts maker spun out of General Motors in 1999 that went bankrupt in 2005 amid accounting scandals, having failed to properly fund its own workers’ pensions.

Note where this bailout sits: not in a standalone pension bill that would have to survive a vote on its merits but folded into must-pass defense legislation. That placement is no accident. It is how you move a domestic giveaway that could not pass in daylight.

And this bailout is outrageous enough that one understands that legislators would want to sneak it in. Here are the gist of the story as explained by the Post. Federal law requires employers to fund their pension promises and to insure them through the Pension Benefit Guaranty Corporation in case they don’t. The Post notes that roughly 3 percent of single-employer plans across the PBGC’s half-century need to draw on that insurance. In these instances, the PBGC takes over the benefit payments up to a cap. The Post explains:

In 2009, when Delphi’s plan entered trusteeship, it was $54,000 — about $85,000 in today’s money.

This cap is high, and it reflects how well funded the PBGC’s single-employer insurance fund is, even absent taxpayer support. Only workers with exceptionally generous pensions, or workers who retired early, might not receive the full benefits they expected. Such employees likely have substantial retirement savings of their own, on top of the Social Security benefits the government already provides…

About three-quarters of the Delphi plan’s roughly 20,000 members have seen zero reduction in benefits under PBGC trusteeship. Of the ones who have seen reductions — roughly the richest quarter of members — most are still receiving over 80 percent of what they expected.

And this is why politicians and the administration are hiding this bailout into the defense bill. These great populists are asking taxpayers to shoulder the cost of Delphi’s salaried most well-off former employees. These are not retirees on the edge of hardship.

And here is the kicker. When government hands out a government granted privilege, in this case a bailout, it is because those asking for cash are well connected and organized. These former Delphi’s employees are surely well organized. They have hired lawyers and spent years and millions lobbying for taxpayers to pay for their employers’ failure. They took their case through the federal courts, lost at the district level, and lost again on appeal in 2020. Having failed in court, they now want Congress to override the law specifically for them. That is the whole play.

Even if you set the unfairness aside, the bailout is bad news. The benefit cap exists precisely to keep employers on the hook for their own promises. Remove it, and you tell every plan sponsor that underfunding carries no downside, because retirees get made whole by someone else even after the courts rule against them. Imagine the bad incentive structure this sets.

That means this won’t be a onetime thing contrary to the claim made by those supporting the bailout. An analysis of PBGC data by Advancing American Freedom looks at what that means:

Delphi’s salaried pension plan is just one of 5,181 plans terminated by the PBGC, which also insures about 22,000 ongoing pension plans covering 19.4 million pensioners.

• A bailout for one PBGC-terminated plan¹would create pressure to bail out any of the other 5,180 terminated plans, or any of the 23,000 ongoing plans that have $2.9 trillion in total liabilities.

• The 5,700 Delphi workers are not unique; more than 187,000 similarly situated individuals have experienced similar pension reductions when their plans were terminated and trusteed by the PBGC.

• Applying the same ratio of the Delphi plan’s initial insured PBGC claims to PBGC’s estimated cost of covering 100 percent of uninsured benefits, a bailout of all single-employer pensions terminated by the PBGC since 2000 would cost more than $10 billion and would set the precedent that PBGC will cover $276 billion in unfunded pension liabilities held by ongoing pension plans.

If Congress cannot reject a bailout that the courts already rejected, that rewards corporate irresponsibility, and that pays comfortable retirees at poorer workers’ expense, then Congress cannot say no to anything. The structural deficit is not a mystery of arithmetic. It is a series of choices exactly like this one, and if one of the easiest possible “no” votes looks like a coin flip, that tells you everything about the harder ones ahead like reforming Social Security and Medicare.

In a Mercatus review of 80 empirical studies published between 2010 and 2025, I found that high and rising public debt is consistently associated with slower economic growth. The central estimate across studies suggests that each additional percentage point of debt-to-GDP reduces economic growth by about 3.3 basis points.

So, the real puzzle is not whether debt matters. Most of the evidence says it does.

The puzzle is why a smaller group of studies, especially those finding no clear relationship between debt and growth, receives such disproportionate attention from those who want to understate the costs of borrowing. These studies are politically convenient. If debt has no measurable effect on growth, then there is no need to confront tradeoffs. Expansive spending plans can be presented as painless. New programs can be financed through borrowing rather than taxes. The bill can be pushed into the future, while the benefits are enjoyed today.

But the “no effect” conclusion usually rests on a misleading empirical setup.

In my latest policy brief, I use quarterly U.S. data from 1975 through 2025 to show why simple regressions can fail to detect the growth costs of debt. The problem is not that debt has no effect. The problem is that conventional total-effect regressions often combine several channels that move in opposite directions.

Debt-financed spending can raise measured GDP in the short run. Government outlays enter aggregate demand directly, so borrowing to spend more can temporarily boost output. But over time, public debt can also suppress private capital formation. When government borrowing absorbs resources that would otherwise flow into productive private investment, the economy accumulates less capital. Less capital means lower productivity, weaker wage growth, and slower long-run output growth.

Put both effects into the same regression, and they can cancel each other out. The result is a coefficient near zero, not because debt is harmless, but because the regression is measuring the net of a short-run demand boost and a long-run supply-side cost.

That is the key distinction. The right question is not merely whether debt and GDP growth are correlated in the aggregate. The right question is whether debt damages growth through identifiable economic channels.

And the answer is yes.

The first channel is capital accumulation. In the brief, I examine the relationship between federal debt held by the public as a share of GDP and the growth rate of the private nonresidential capital stock. This is a better measure than quarterly investment flows, which are noisy and volatile. Capital goods are durable. Their contribution to output unfolds over years. A factory, machine, or logistics network does not raise productivity for only one quarter. It adds to the economy’s productive capacity over time.

Using the capital stock measure, I find that a one percentage point increase in debt-to-GDP reduces annual private capital stock growth by roughly 0.12 to 0.15 percentage points, depending on the lag specification. This relationship remains statistically strong after controlling for inflation, unemployment, real yields, monetary policy, foreign demand for Treasurys, and other macroeconomic conditions.

The second link is that capital stock growth predicts GDP growth. This is exactly what economic theory would lead us to expect. Economies grow richer when workers have more and better capital to work with. Investment flows bounce around from quarter to quarter, but the accumulated capital stock is what drives productive capacity.

Combining these two links gives the full channel: higher debt suppresses capital accumulation, and weaker capital accumulation suppresses growth. The mediation analysis in the brief confirms this indirect effect. The estimated negative effect is about -0.04 percentage points of GDP growth for every one percentage point increase in debt-to-GDP, with bootstrap confidence intervals entirely below zero.

That effect may sound modest, but growth effects compound. A small annual drag becomes a large loss over decades. And unlike a temporary stimulus effect which fades in time, a smaller capital stock represents a persistent reduction in the economy’s productive base.

The second major channel concerns interest rates.

The conventional crowding-out story is straightforward: higher government borrowing competes with private borrowers, pushes up yields, raises the cost of capital, and reduces investment. Critics of this view point to the post-2008 period and say: debt soared, yet interest rates stayed low. Therefore, they argue that the old fiscal constraints no longer apply.

But that argument ignores the Federal Reserve.

My brief finds that the Fed’s balance sheet suppressed the interest-rate transmission mechanism during the very period when debt was rising fastest. When the Fed holds less than about 14 percent of outstanding Treasurys, higher debt raises real yields in the conventional way. Once the Fed’s holdings exceed that threshold, the debt-yield relationship disappears and can even invert. During the post-2008 and post-2020 quantitative easing episodes, the Fed crossed that threshold.

In other words, the interest-rate channel did not vanish because debt stopped mattering. It was muted because the Fed was absorbing Treasury supply.

This distinction matters enormously. Low Treasury yields during the QE era do not prove that borrowing was costless. They show that the central bank was intervening in the market for government debt. But the Fed cannot conjure real resources into existence. Suppressing yields does not eliminate scarcity. It does not erase opportunity costs. And it does not guarantee that private capital formation remains unharmed.

Crowding out can occur through balance sheet allocation, credit channels, risk premia, and expectations of future taxation. Even when interest rates are low, financial institutions still decide whether to hold government securities or extend private credit. Firms still decide whether future tax burdens make long-term investment less attractive. Resources still have to be allocated between politically directed spending and market-tested capital formation.

That is why the absence of visible rate crowding out is not the same thing as the absence of crowding out.

The broader lesson is simple: debt is not free merely because some regressions fail to find a statistically significant total effect. The literature finds that high debt slows growth, and my latest brief helps explain the mechanism. Debt harms long-run growth by suppressing private capital accumulation. That damage is easy to miss when short-run demand effects and Fed balance sheet expansion are masking the underlying channel.

This is especially relevant now. Federal debt held by the public is about 100 percent of GDP, well above the threshold range identified in much of the empirical literature. If the Fed ends its balance sheet expansion and its Treasury share moves back toward pre-QE levels, the conventional interest-rate channel may reassert itself. That would add to the rate crowding out on top of the capital accumulation channel already visible in the data.

The fiscal debate should therefore move beyond the comforting claim that “we borrowed more and nothing bad happened.” Something did happen. The damage was simply slower, less visible, and partly obscured by monetary policy.

Debt-financed spending can make today’s GDP numbers look better. But the bill arrives through a smaller capital stock, weaker productivity growth, and lower future living standards.

Debt does matter. And pretending otherwise is granting permission to politicians to spend now and leave the costs to everyone else later.