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.

Consider – as Wharton’s Brian Feinstein did in the WSJ – what Washington means by “small.” A homebuilder pulling in $45 million a year qualifies. So does a manufacturer with 1,500 employees. In the median industry, the revenue ceiling runs around $21 million; in some it reaches $47 million. That $45 million builder is larger than 99 percent of American firms with any employee other than the owner, and at construction’s typical margins, its proprietor clears roughly $2.7 million a year. This is not the plucky underdog of campaign ads. It’s a prosperous, established company collecting benefits that most Americans believe are going to the underdog.

And there is a lot to collect. I wrote about one of Feinstein’s studies a few months ago, that showed how much small businesses are receiving in various forms of corporate welfare. To get the answer, he combed the entire U.S. Code of Federal Regulations and counted more than 1,300 separate measures that hand small firms some advantage, like set-asides, subsidized credit, regulatory carve-outs, procedural rights. Over the last half-century, the small-business portion of the Code has grown about seven times faster than the rest of the Code.

Contracting preferences alone steer north of $170 billion a year toward firms that clear the “small” bar, chasing a statutory target of at least 23 percent of prime contract dollars. Small firms even get relief from certain civil-rights, food-safety, and hazardous-waste obligations.

This apparatus does real damage in three directions.

First, it taxes growth. When crossing a size line means forfeiting valuable exemptions and preferences, the rational move is not to cross it. That is exactly what the Feinstein data show: firms pile up just beneath their industry’s threshold in numbers that no natural process can explain. We have built a policy that pays companies to stay below an artificial threshold of size and revenue. In some cases, that means declining the 1,501st hire or leaving the profitable expansion on the table. A subsidy for smallness is a penalty on getting bigger and more efficient.

Second, the rest of us pay. Contracting preferences don’t produce better vendors; they require agencies to pass over more qualified bidders in favor of those that fit the definition. And, of course, taxpayers foot the bill when “small” businesses default on their government-guaranteed loans.

Third, it is cronyism and it unfair to all the small, no matter how one defines it, companies that don’t get a government leg up.

Defenders will fall back on the familiar catechism: small firms are the great job creators and innovators, so taxpayer help pays for itself. I’ve spent a good part of my career arguing this is a myth, and the evidence keeps cooperating. Job creation is a story about age, not size. New firms start small and, if they succeed, grow. That’s where the dynamism lives. Mature small firms are neither special job machines nor innovation hothouses: most never patent, fund research, or trademark a name, and the ones that do rarely stay small for long. Strip away the myth, and the case for favoring smallness collapses. (Note: I am also against favoring big firms.)

Which brings me back to the SBA and its enlarged loan guarantees. What market failure, exactly, is this agency correcting? The textbook answer is information asymmetry: lenders can’t always separate good borrowers from bad, so some worthy firms go unfunded. That might happen. However, unlike government bureaucrats, banks have the right incentives to figure it out so they don’t overlook potential borrowers that will make them money. This argument also ignores the fact that not every denial of a loan is a market failure. So here’s the question defenders never answer: granting that such “failure” sometimes occurs, what makes the SBA able to fix it?

To beat the market, you need corrective capacity, better information, superior incentives, a better way to screen, and a tool that changes what lenders can see. The SBA has none of these features. Its guarantee doesn’t find the good-but-overlooked borrower in the reject pile; it eats 75 to 85 percent of the loss on whoever clears an eligibility box written for political and definitional reasons, not to reveal who’s creditworthy. Worse, even granting actual market failure, the program doesn’t cure any of it and plausibly makes the allocation worse than the private baseline.

And the whole case for the SBA rests on a buried assumption: that a firm’s failure to raise capital proves that a good project was missed. Yet it proves no such thing. Not every project deserves funding, and the fact that not everyone can borrow is a feature of a working market, not a defect. Rationing is the market doing its job. Our private capital markets, the deepest on earth, spanning venture funds, private credit, community banks, angels, and crowdfunding, deploy trillions a year in search of anything viable. When a company with a credible plan and real collateral still can’t find a taker, the honest reading isn’t that thousands of profit-hungry investors missed it. It’s that the market returned an accurate verdict.

By design, the SBA then overrules that verdict. That’s not a hidden talent for spotting winners; it’s a mandate to bankroll the businesses the market already passed on. (The agency’s alleged low default rates look far less flattering measured honestly, by cohort.) And the most reliable beneficiaries aren’t the borrowers. Banks originate the paper, sell the guaranteed slice, and pocket the spread while taxpayers hold the risk. The Main Street story is the marketing. The banks are the customers.

Feinstein’s own fix is sensible as far as it goes: replace cliffs with ramps, so obligations phase in as a firm grows instead of dropping a trapdoor at employee number 1,501. I would go further. When a privilege can’t be justified on its merits, it shouldn’t exist for small firms or large ones. Deregulate for everyone, rather than granting some exemptions. And an agency whose core function is to lend where private markets won’t should be wound down, not handed a bigger checkbook on the Fourth of July.

My new research paper brings fresh evidence to that question using narrative fiscal consolidation data for 17 advanced economies from 1978 to 2016. The main result is straightforward: Spending-based consolidations are associated with better growth outcomes and better debt-reduction outcomes than tax-based consolidations. And I find no evidence that this composition effect depends on whether a country starts with low, moderate, or high levels of debt.

Prior literature

Much of the fiscal consolidation literature finds that spending-based adjustments tend to be more successful than tax-based adjustments. The late Alberto Alesina spent more than two decades exploring this question, arguing that the composition of fiscal adjustment matters for both economic performance and debt reduction.

Veronique de Rugy and I published a research paper in 2020 that focused on 26 democracies between 1995 and 2018. We found that spending-based fiscal adjustments are notably more successful at lowering debt levels than tax-based adjustments, with successful adjustments being about two-thirds spending and one-third tax. We also found that spending-based adjustments tend to cause only small economic contractions, not significantly different from zero, while tax-based adjustments cause deep and long-lasting recessions.

A widely cited 2014 paper found that consolidations slow economic growth regardless of composition. That finding has shaped much of the subsequent policy debate. But the underlying narrative dataset has since been revised. In 2024, the International Monetary Fund released an updated version of the Alesina-style narrative consolidation dataset, extending coverage to 17 countries and revising shock magnitudes throughout the sample.

I use that updated data to revisit the composition question.

Growth effects

First, I examine the growth effects of fiscal consolidation. In line with prior literature, a one-percentage-point-of-GDP fiscal consolidation, regardless of composition, reduces GDP growth by about 0.4 percentage points in the year it occurs.

But once consolidations are separated into tax increases and spending cuts, the difference is clear.

A one-point-of-GDP tax increase reduces GDP growth by 0.59 percentage points in the year it happens. A spending cut of the same size reduces growth only by about 0.29 percentage points. In other words, the immediate growth cost of tax-based consolidation is roughly twice as large as the cost of spending-based consolidation.

The gap widens over time, as figure 1 illustrates. Local projections out to five years show tax-based consolidations becoming increasingly costly: Cumulative growth losses reach nearly 3 percentage points after five years. Spending-based consolidations dip slightly at first, turn positive by year two, and reach a positive estimate of about 1.8 percentage points by year five.

By the fifth year, the two paths are nearly 5 percentage points apart.

Importantly, it is worth noting that most of the spending estimates are not statistically significant, with the year-five estimate only marginally significant at the 10% level. So, I cannot confidently claim that spending-based adjustments are expansionary. What I can say is that the tax estimates are consistently negative and highly statistically significant at the 1% level. Tax-based consolidations are contractionary, and increasingly so over time.

Debt reduction

Growth is one thing, but the ultimate goal of fiscal consolidation is debt reduction.

Using a strict definition of success (debt-to-GDP falling at least 5 percentage points within three years), a one-point spending cut raises the odds of success by 11.1 percentage points. A one-point tax increase lowers the odds by 9.5 points, as shown in figure 2.

Scale that result to a typical 2-point-of-GDP consolidation against a baseline success rate of roughly 24%: Spending cuts raise the predicted probability of success to about 46%. Tax increases reduce it to about 5%.

The tool politicians often reach for to look fiscally serious—higher taxes, especially on the rich—is often the one that makes actual debt reduction less likely.

The obvious follow-up question is whether this result holds only when debt is already high, where credibility concerns might dominate. I test that directly by interacting consolidation type with both high-debt and low-debt regimes. The interactions are small and statistically insignificant. In other words, I find no evidence that the spending-versus-tax result depends on the starting debt level.

Why might spending cuts work better?

The leading explanation is credibility. Spending reforms may be viewed as more durable than tax increases. A future legislature can undo a tax increase with a single vote, while rebuilding a program that has already been cut is often harder. Spending restraint may therefore send a stronger signal of fiscal discipline.

Spending cuts may also crowd in private investment by reducing expectations of future taxation and shrinking the government’s claim on resources. Tax increases, by contrast, can discourage work, saving and investment while doing less to convince markets that the underlying spending path has changed.

Not all spending cuts are equal. The broader literature generally finds that cuts to transfers and government consumption are more successful than cuts to public investment, which can undermine the growth needed to reduce the debt ratio.

But the basic lesson is clear: If the goal is actually reducing debt while doing the least damage to growth, the evidence points toward spending restraint, not tax increases.

That said, improper payment data have its own flaws. Some high-risk programs do not report estimates at all, other reported estimates have been deemed unreliable by auditors, and the government’s own categories often tell policymakers little about where the errors actually occur.

My goal is not to dismiss improper payment data, but to interpret them correctly. Doing so requires looking beyond the headline estimates to how they are produced, what they exclude, and how they classify payment errors.

Self-Reporting

Each year, the Government Accountability Office (GAO) publishes a report on improper payments, noting the total improper payments made by the government in the previous year, the sources of improper payments, and various other aspects. While helpful, this seems to have created a misconception among some that GAO is the originator of these estimates.

It is not.

Improper payments are estimated by agencies and reported in their annual financial reports. These estimates are then published on a Treasury-run website, PaymentAccuracy.gov, prior to GAO’s report.

Statutes, such as the Payment Integrity Information Act of 2019 (PIIA), set payment integrity requirements, including for the estimation of improper payments. But the self-reported nature of improper payment data creates an inherent risk of underreporting. Agencies estimate their own error rates, often using sampling methodologies that vary across programs.

That alone increases the risk of measurement error. Self-reporting also creates an incentive concern. Agencies that report high improper payment rates may face reputational or political costs, while reductions in improper payments can be publicly presented as evidence of improved management. For example, in November 2024 Biden’s Office of Management and Budget (OMB) highlighted that the FY 2024 government-wide improper payment rate was the lowest in more than a decade, while a separate press release from Treasury touted an increase in prevented and recovered fraud and improper payments.

This does not prove that agencies intentionally understate improper payments. But it does mean that agency-produced estimates should be interpreted with appropriate caution. This limitation is partly mitigated by independent inspectors general (IGs), who report on agencies’ compliance with PIIA and on the reliability of agencies’ improper payment estimates.

But compliance with the PIIA and its legislative predecessors has been inconsistent.

Compliance Failures and Data Reliability

Major agencies frequently fail to meet statutory standards. Since 2011, the 24 agencies covered under the Chief Financial Officers (CFO) Act have averaged compliance rates of just 48 percent. The table below shows this compliance by agency since 2011.

Notably, four of those agencies—the Departments of Health and Human Services, Treasury, Agriculture, and Veterans Affairs—have not been compliant a single time. Six other agencies, including the Department of Defense, have been compliant just once or twice over the same period.

One particularly important aspect of noncompliance is the reliability and completeness of improper payment estimates. In FY 2024, eight agencies were flagged during their annual PIIA compliance audits for providing unreliable improper and unknown payment estimates.

The next table lists 26 programs with missing or unreliable improper and unknown payment estimates. Ten of these programs were deemed in their audits to be at risk of significant improper payments and therefore required to report improper payment estimates but did not. The remaining 16 reported estimates that auditors found unreliable for a variety of reasons. In total, these programs comprised more than $478 billion in federal spending, or more than 7 percent of spending in FY 2024.

That is not just a paperwork problem. Agencies can fail compliance for many reasons, including failure to publish corrective action plans, failure to meet reduction targets, or failure to report required payment integrity information. But missing or unreliable estimates go directly to the usefulness of the data itself.

Incompleteness

Beyond reporting and compliance issues, improper payment estimates are incomplete by design. Not all programs are required to report, and some high-risk programs fail to produce estimates, including those mentioned in the preceeding table.

Improper payments are required to be estimated only if a program has more than $10 million in outlays and that program has been determined to be at risk of having significant improper payments. This is determined through a risk assessment, conducted at least once every three years, to check if a program likely has either:

1. both 1.5% of its outlays are improper or unknown and it has at least $10 million in total improper payments, or

2. more than $100 million in improper payments, regardless of the combined improper-unknown payment rate.

Consequently, programs with outlays of $10 million or less are not required to conduct risk assessments. And programs that are expected to have up to, but not exceeding, $100 million in improper and unknown payments are not required to conduct a formal estimate so long as their combined improper-unknown payment rate is below 1.5%.

In some cases, agencies report that they are unable to estimate improper payments at all. The most notable example is Temporary Assistance for Needy Families (TANF)—a $16.5 billion welfare block grant to states created in President Clinton’s signature welfare reform package in 1996. The Department of Health and Human Services (HHS) provides the following reason for this problem:

Statutory limits prevent HHS from collecting the necessary data, as section 411 of the Social Security Act only permits specified data elements that exclude case and payment accuracy. In addition, section 417 restricts HHS from regulating states without express congressional authority. Until the law is amended to allow a national error rate, HHS cannot project when TANF will be able to provide such estimates.

Official Classifications Tell Us Too Little

We can draw several conclusions from improper payments data:

1. they are large and rising

2. they are mostly overpayments

3. they are primarily due to a failure to access existing and available data

4. they are almost universally classified by agencies as being outside of each agency’s power to control

5. they are concentrated in a handful of programs

But beyond whether agencies classify improper payments as within or outside their control, the data provide limited information about where the error occurred.

The “outside agency control” label collapses very different problems into a single category. Some improper payments occur because beneficiaries or third parties fail to provide accurate or timely information. Others arise because states fail to verify eligibility information. Still others occur because the relevant data needed to verify eligibility do not exist or cannot be accessed. Treating all of these as simply outside agency control tells policymakers too little about the nature of the problem or the types of reforms that might address it.

An Alternative Way to Classify Improper Payments

The categories below are my attempt to reclassify the causes of improper payments by who or what is responsible, using the agencies’ own descriptions as the underlying basis:

1. agency noncompliance

2. when the required data or information to verify eligibility do not exist

3. state noncompliance

4. noncompliance by nongovernment entity or beneficiary

Examples of these alternative primary causes of improper payments are shown in the next table. The subsequent table lists each reporting program, along with its alternative primary cause and total programmatic overpayments.

$67.2 billion, or 44%, of all overpayments in FY 2025 were associated with programs whose primary reported cause of improper payments was noncompliance by a nongovernment entity or beneficiary. Examples of this include individuals failing to update income information for eligibility of federal programs and insufficient documentation from healthcare or insurance providers.

$47.3 billion, or 31%, of all overpayments were associated with programs in which state noncompliance was the primary reported cause. Examples include states failing to obtain, document, or verify eligibility information.

$28.2 billion, or 18%, of overpayments were associated with programs in which the inexistence of data was the primary reported cause of improper payments. This predominantly occurred with a handful of tax credits.

And $10.5 billion, or 7%, of overpayments were associated with programs in which agency noncompliance was the primary reported cause. These include administrative or procedural errors, such as failing to update information, verify eligibility, or acceptance of unacceptable documentation.

Conclusion

Improper payment data remain a better starting point than broad claims about “waste, fraud, and abuse.” But they are not perfect. They are agency-produced estimates, subject to reporting thresholds, audit findings, missing data, and classification choices that can obscure where payment errors originate.

The data are most useful when they are used to ask better questions rather than provide definitive answers. Why are estimates missing for some programs? Which reported estimates are reliable? Who actually failed to comply, and what information was unavailable? Those questions are ultimately more useful for designing reforms than the government-wide improper payment total alone.

In a new policy brief I examine the large differences in domestic migration patterns across states between 2018 and 2023 and evaluate a range of possible factors that play a role in those patterns, including tax burden, housing supply, broad economic freedom, labor market freedom, partisan preferences, cost of living, government size, population density, climate, and housing prices. Multiple years of data provide a more reliable picture of migration trends than single-year observations do, while a five-year lookback includes pre-pandemic, pandemic-era, and post-pandemic migration patterns.

The results suggest that over the five-year period, interstate migration in the United States has not been driven primarily by cost of living or climate, as commonly assumed. Instead, the data point to a different conclusion: Americans are systematically moving to states with lower tax burdens, more flexible housing supply, and more economic freedom, suggesting that policy choices play a central role in shaping where people choose to live. States seeking to sustain population growth need to maintain competitive tax structures and allow housing supply to expand in response to demand.

Domestic Migration Patterns Across States

The migration patterns observed during the five-year period between 2018 and 2023 raise important questions about why some states consistently gained residents while others lost them. On net, Florida gained the most movers (+911,422), while California lost the most (−1,263,365).

The data charts below show net migration flows and subsequent income flows for Florida and California. In Florida, 29 percent of the net migration gain was from high earners who made up 79 percent of the total income gain for the state during that 5-year period. For California, about 19 percent of those leaving the state were high earners, but those high earning migrations made up 64 percent of income leaving the state.

Higher-population states would naturally be expected to lose or gain the most individuals. To account for this, a better way to measure the net movement of people between states is to measure the movement of people as a share of the state population. Figure 2 shows the net migration rate—this is the number of individuals moving per 1,000 residents in the state they are moving to or from.

In this case, the states with the highest positive migration rates are Idaho (+63.1), South Carolina (+53.6), Delaware (+42.5), Montana (+42.4), and Florida (+39.7). Meanwhile, the states with the highest negative migration rates are New York (−52.9), Alaska (−37.3), Illinois (−34.0), California (−32.2), and Hawaii (−30.2).

Taken together, these patterns suggest that interstate migration is not occurring randomly or evenly across the country. Some states are consistently attracting new residents, while others are steadily losing population.

Comparing the Correlates of Migration

The standard story is that people leave expensive places such as California or New York and move to cheaper ones in the South and Mountain West. Another explanation is that people are chasing sunshine, too (hence big net gains in the Sunbelt region).

To test this theory, I used state-level net interstate migration data covering all 50 states from 2018 to 2023 and examined a range of possible factors including tax burden, housing supply, broad economic freedom, labor market freedom, partisan preferences, cost of living, government size, population density, climate, and housing prices. Examining each individually and one at a time produces a clear ranking of the factors most strongly associated with interstate migration. These regressions should be interpreted as descriptive rather than causal. Many of these factors are closely related and tend to be jointly determined with migration. The goal is to identify broad patterns rather than isolate precise causal effects.

One important caveat is that the migration data span a period that includes the COVID-19 pandemic and the associated surge in remote work and geographic mobility. These developments likely amplified interstate migration flows. The current analysis, however, compares differences across states rather than changes within states over time. To the extent that the pandemic shock affected states unevenly, those effects are likely captured by the same structural factors examined in this analysis.

Which Factors Matter Most?

Across all specifications, tax burden is the most powerful and robust predictor of migration. States with lower taxes attract more people. That result holds even when controlling for housing permit issuance rates, climate, population density, and cost of living.

The mechanisms behind this relationship are relatively straightforward. Tax policy directly affects after-tax income. For mobile households, particularly higher earners and business owners, even modest differences in state tax burdens can translate into meaningful differences in take-home pay over time. This creates a persistent incentive to relocate toward lower-tax states, especially when those differences compound year after year. States with larger government sectors tend to experience more out-migration than states with leaner government sectors. The effect of government size, however, is smaller and less robust than that of tax burden. The broader “economic freedom” effect turns out to be largely a tax effect. Once the components are separated, labor market freedom and government size also play a role, albeit a smaller one.

But tax burden is not the whole story. The variable of housing permit rates, which affect housing supply, shows up consistently as well. In the strongest model, permits are not just positive, but statistically significant. Housing supply determines whether a state can accommodate new residents without sharply increasing costs. In states where construction is constrained by zoning rules, permitting delays, or regulatory barriers, increases in demand tend to show up as higher prices rather than more housing. This supply constraint limits in-migration and can push existing residents out. By contrast, states with more flexible housing supply can absorb population inflows more easily, keeping costs lower and enabling continued growth.

Importantly, housing supply is not independent of the tax burden variable. States with more favorable tax and regulatory environments are also more likely to permit new construction, suggesting these factors reinforce each other rather than operate in isolation. This combination both attracts new residents and sustains those inflows over time.

Cost of living and migration

The relationship among housing supply, tax policy, and migration also helps explain why commonly cited factors such as cost of living or house prices lose significance in the multivariate analysis. High prices are often the result of underlying policy constraints, particularly limited housing supply and higher tax burdens, rather than independent drivers of migration decisions. Cost of living, measured using the BEA’s regional price parity index, is negatively associated with migration, as expected, but the relationship is not statistically significant. The same is true of population density. Even partisan preferences, proxied by 2024 vote margins, have no independent explanatory power.

The migration patterns from 2018 to 2023 are not primarily about sunshine or sticker prices. They reflect something deeper: how states structure their economies. Lower-tax states with more flexible housing supply are gaining population, while higher-tax states with constrained supply are losing it. Everything else—climate, politics, even cost of living—is secondary.

The standard narrative focuses on affordability and climate. But the data point elsewhere: toward tax policy and housing supply. That story is less simple, but it is more accurate and ultimately more useful for understanding where Americans are going and why.

Policy Implications

The results suggest several implications for state policymakers.

First, tax policy plays a central role in shaping migration patterns. States with higher tax burdens risk losing residents, particularly higher-income and more mobile households, to lower-tax jurisdictions. Efforts to raise revenue through higher marginal tax rates may therefore face important tradeoffs, including the gradual erosion of the tax base over time.

Second, housing supply constraints significantly limit a state’s ability to attract and retain residents. Restrictive zoning laws, lengthy permitting processes, and other regulatory barriers not only raise housing costs, but also reduce in-migration by preventing supply from responding to demand. States that want to accommodate population growth must ensure that housing markets can expand accordingly.

More broadly, the findings suggest that attracting and retaining residents depends less on geographic advantages than on policy choices. States that prioritize competitive tax structures and allow housing supply to respond to demand are more likely to experience sustained population growth.

Each of those claims rests on assumptions that the evidence does not support.

The Profit Margin Myth

The most common argument for government grocery stores is that they’ll be cheaper because they won’t have to satisfy shareholders. The logic sounds plausible until you look at how razor thin grocery store profit margins actually are.

Grocery stores, on average, operate on net profit margins of about 1–2% after taxes. During the pandemic, when supply chains were a mess and demand was unusual, margins briefly hit 3%. These are not the fat profits of a cartel; they are the thin margins of an intensely competitive industry. Of those profits, roughly 35–40% is returned to shareholders in the form of dividends. The rest is reinvested into operations, capital expenditures, expansion, and debt reduction.

There is no pot of shareholder gold waiting to be redirected to lower prices. The grocery market is competitive precisely because margins are so thin. Eliminating the profit motive doesn’t magically make groceries cheaper, it removes the incentive to operate efficiently in the first place.

The Affordability Myth

The second premise, that groceries are increasingly unaffordable, fares no better when you look at the historical data.

In 1930, Americans spent 21% of their disposable income on groceries. By 1960, that figure had dropped to 14%. By 1990, it was 7%. Today, Americans spend less than 5% of their disposable income on food at home. Whatever legitimate concerns exist about food prices, and the recent inflationary episode was genuinely painful, the long-run trend is unambiguously in one direction. Groceries have become dramatically more affordable relative to income over the course of living memory.

Food Deserts and The Nutrition Gap

This brings us to the central claim: that government grocery stores will address food deserts and improve nutrition in low-income communities.

A quick look at the proposed East Harlem location reveals 45 supermarkets and grocery stores within a 35-minute walk (Google Maps, Amanda Macias). If that qualifies as a food desert, the term has been stretched well past the point of usefulness.

But let’s set the definition aside and take the underlying question seriously: does building new grocery stores in low-income communities actually improve nutrition? The literature here is remarkably consistent, and the answer is no.

A 2013 study in California analyzed data from nearly 98,000 adults and found that the number and type of food outlets within walking distance were not strongly associated with dietary intake, BMI, or obesity. A 2014 study evaluated the impact of a new supermarket opening in a Philadelphia community designated a food desert under the Pennsylvania Fresh Food Financing Initiative. The result? No meaningful changes in fruit and vegetable intake or body mass index.

New York City too offers some evidence on this question. A 2017 difference-in-difference study compared two South Bronx neighborhoods, one of which received a new supermarket through tax and zoning incentives. The authors found that the new supermarket “did not result in substantial or broad changes in purchasing patterns or nutritional quality of food consumed.” A 2025 study of a new supermarket opening in a Los Angeles public housing neighborhood found no statistically significant differences in dietary outcomes.

The National Picture

These aren’t cherry-picked local studies. The most comprehensive analysis of this question, a 2019 study published in The Quarterly Journal of Economics, tracked 700,000 households and scanner data from over 42,000 stores across a 13-year period. The authors found no detectable increase in healthy purchases following supermarket entry, even two years after opening. This held in food deserts specifically.

Crucially, the study also tested the obvious alternative explanations. Lower-income households often work long hours, which might favor convenient, shelf-stable, or processed foods. The authors control for this. It doesn’t change the result. When lower-income households experience the same prices for produce as higher-income neighborhoods, consumption barely moves. When stores in lower-income neighborhoods take on similar characteristics to those in higher-income neighborhoods, the effect is again negligible.

The only factor that closes the nutritional gap, in a statistically and economically meaningful way, is when lower-income households have the same preferences for healthy food as higher-income households.

Supply Isn’t the Problem

That finding is the key one. The gap in nutritional outcomes between income groups is not a supply problem. It is a demand problem. And the strongest predictors of that demand gap, according to the same research, are years of education and nutrition knowledge, not employment status, not weekly hours worked, and certainly not the distance to the nearest supermarket.

This is uncomfortable, because supply problems are easy to solve with government programs. You can build a store. You can open a clinic. You can draw a policy on a map. Demand problems, reflected in differences in education, knowledge, and preference formation, are harder, slower, and less photogenic.

But discomfort with the answer is not a reason to pretend the question has a different one. The literature is clear. Building a government-run grocery store in East Harlem will not close the nutritional gap between low-income and high-income households. It will cost taxpayers money to operate at a loss, compete with the 45 nearby stores that already exist, and leave the actual drivers of nutritional inequality untouched.

If policymakers nevertheless believe that some neighborhoods lack adequate grocery access, the first step should be to remove the regulatory barriers that discourage private supermarkets, neighborhood grocers, and specialty food retailers from entering those markets. Liberalizing zoning, streamlining permitting, and eliminating unnecessary parking requirements would make it easier for entrepreneurs to expand grocery access without requiring taxpayers to own and operate grocery stores.

The evidence also suggests that nutrition knowledge and consumer preferences matter far more than the location or ownership of grocery stores. If improving diets is the objective, policymakers should devote more attention to understanding how nutrition knowledge and healthy eating habits can be strengthened, rather than assuming that changing who owns the supermarket will change what people choose to buy.

Ultimately, the long-run solution to food affordability has never been government ownership of grocery stores. It has been economic growth, rising productivity, and competition. Those forces have reduced the share of household budgets devoted to groceries from more than one-fifth a century ago to less than five percent today. History suggests they remain a far more promising path to improving living standards than asking government to become America’s next grocery chain.

Zohran Mamdani won the New York City mayorship by promising relief to those struggling. His platform was that of free childcare, free and faster buses, state-owned grocery stores, rent freezes and subsidized affordable housing. In May he congratulated himself for balancing the budget, despite the reality that he has only kicked the can down the road and increased the burden on future taxpayers.[CB1] Aside from this questionable victory, throughout his first six months in office he has struggled to get his plans in motion as his utopian vision collides with legal, financial and practical barriers. He promises that funding is to come—in vague terms—from the pockets of the rich, which has ensured that his base of support has remained strong since January, sitting at 40% as of April.

Mamdani has made some progress toward his promises, but this shouldn’t be seen as a good thing: The results of many of his policies will be counterproductive. He is setting a dangerous precedent by combatting problems with redistribution rather than promotion of growth. For example, the financial sector generates the largest part of NYC’s GDP and should be appreciated; instead, a socialist mayor is pushing a program of punitive taxation that may disincentivize future investment and reduce the desirability of the city as a place for entrepreneurs to settle.

Paying for Progressive Promises

Mamdani’s revenue calculations fail at every level. He asserts that targeted taxation of the “ultra-wealthy” will raise sufficient revenue to cover all his programs, but this is unlikely given an array of rate-based, administrative, and political barriers. First, the combined top marginal tax rate in NYC is 55.6%, already among the highest in the nation. Punitive increases to the tax burden of the top 1% will deteriorate the city’s relationship with its elite and risk capital flight by creating an atmosphere increasingly hostile to entrepreneurship and investment. Not only is this a risk to the fiscal health of the financial capital of the U.S., but the one tax Mamdani actually got passed is likely to raise a trivial sum, making it ineffective even in the short run. Indeed, the pied-a-terre tax, recently passed by state lawmakers, applies only to second homes valued at $1 million or more, and experts expect it to raise a modest $500 million.

This lackluster return is in large part due to administrative flaws in the pied-a-terre tax. CNBC reported that the city’s property assessment and valuation system is ineffective, giving estimates of “10% or less of the true market value,” which could leave large amounts of revenue uncaptured. David Schleicher, a professor of property and urban law at Yale University, suggested that on the numbers alone, New York’s wealthy have little to fear from the tax as enacted—though the psychological shift caused by the changing tone in policy shouldn’t be overlooked. A more accurate tax assessment could cause this critical tax base to take off to new jurisdictions.

Mamdani is vocal about his desire to target the rich, and policies like this evidence his sincerity. No doubt New York’s wealthiest will resent the arbitrary punishment of having their assets subject to harsher laws. Capital flight should be a large concern for NYC, especially given that in fiscal year 2027, the personal income tax share will reach almost 70% of New York State’s total revenue, a historic high. Income tax revenue is disproportionately provided by the top earners, so the effect under these circumstances will be harder hitting.

In the end, Mamdani’s ambitions are coming into conflict with the realities of his actual political power. Local governments within New York State have relatively far-reaching powers to self-determine under Article IX of the NY constitution. But they do not have the authority to increase taxes past a threshold without state approval, and Governor Kathy Hochul has a strong political incentive to hold off on tax hikes as she runs for reelection. The most likely result of Mamdani’s lack of foresight is compromise and backtracking in the coming months.

Mayor Mamdani’s fiscal troubles are also not over. It is true that he has closed the $12 billion budget deficit that he inherited from the previous administration. His methods for doing so, however, should be reason for concern, not applause. The website for the Office of the Mayor explains that a combined $2.97 billion was rescued through “aggressive savings” and “addressing systemic inefficiencies.” But the largest proportion of those “savings” comes from nearly $8 billion in state assistance over two years provided by Governor Hochul, and $1.64 billion from altering the debt payment schedules for pensions. The one-time measures and short-term pension savings that comprise the state bailout will only “delay addressing the deeper structural imbalances in the city’s budget” and get worse year on year, says New York Comptroller Mark Levine.

The total cost of the city’s pension debt will grow because of the extension of the amortization timeline from 2032 to 2037, likely adding billions to taxpayers’ overall burden over time. Deferring pension contributions is effectively borrowing from the taxpayers of the future, who obviously can’t voice their displeasure in the present. Knowing that spending cuts and broad-based taxes are unpopular, Mamdani was able to acquire the state aid he needed because it was mutually beneficial for him and Governor Hochul. She needs the support of Mamdani’s base in her upcoming reelection. The mayor was effective in his control of the narrative and fortunate that New York State is in its strongest fiscal position in 50 years, but his balancing of the budget is far from the resounding success it has been framed as.

Free Childcare

Mamdani has promised a large and expanding program of free childcare. It is doubtful that this program will be financially viable because a free product attracts theoretically unlimited demand and because he is limited in avenues for procuring the necessary funding. Mamdani leaned on Governor Hochul to make the politically popular decision to provide funding, which she did, assigning $1.2 billion for 2,000 free spots of childcare for two-year-olds and promising funding the first two years of the program. This initial funding could be considered a success but is a drop in the bucket in making the program universal.

Mamdani’s goal is to grow the program to 12,000 children by the fall of 2027 and to reach full universality within four years. The Fiscal Policy Institute estimates the new cost of providing universal childcare to children ages two and younger is $2.5 billion at current compensation rates. Importantly, the origins of the funding after the first two years are concerningly unclear, and the projections for cost will immediately be wrong once the program is launched. Once the price signal disappears, families who currently use informal arrangements, relatives and lower-cost options will rationally switch to the free government provision. The future of the program is perpetual underfunding and struggle to close the gap in childcare that it has permanently widened.

State-Run Grocery Stores

Mamdani’s next well-intentioned but inchoate plan is to open five state-run grocery stores to reduce the cost of healthy food, starting with one in East Harlem and one in the Bronx. The effects of this intervention will be small but negative, counterintuitively hurting affordability. Those tasked with running the stores will have their rents and products subsidized, and thus they will lack the mechanism that forces businesses to be wary of their costs. This waste [CB2] will be shouldered by the taxpayer.

Furthermore, the state lacks knowledge that successful grocery chains utilize, from supply-chain management and marketing to optimal pricing and store location. As a result, the first location is set to cost $30 million, far above what an industry leader would spend on opening a branch. The mayor really should have learned from the Sun Fresh grocery store in Kansas City which bled $18 million of public funding since 2015 and still could not be propped up indefinitely, closing in 2025. Sun Fresh illustrates how a subsidized business with socialized losses is doomed to fail.

On top of this, there is the looming problem of limited funding being stretched too thin. A significant $70 million was set aside for this project, and $40 million is predicted to be the cost of just the first two locations—capping the realistic delivery at two stores, not five. Finally, publicly owned stores do not exist in a vacuum; they undercut other supermarkets, the majority of which already operate with razor-thin profit margins. In other words, they threaten the very community-owned grocers which serve New York City neighborhoods. Concerned Chairman of the Multicultural Business Coalition Frank Garcia told news outlets that “The Koreans, the Latinos, the Jewish community [and] our Arab counterparts are against this plan of the mayor” and that they are seriously considering legal action. If other businesses are forced out of the market and then the state options fail—which they will—the public will be left worse off.

Rents and Buses

Enacting rent freezes is one of Mayor Mamdani’s most iconic and vote-winning policy proposals. The City’s Rent Guidelines Board has now carried out his vision, voting 7-1 on the evening of June 25 to freeze rents on one- and two-year leases for NYC’s 1 million rent-regulated apartments. The board, with two-thirds of its members appointed by Mamdani, has essentially ruled in favor of worsening the housing crisis. The economic consensus is that applying price caps is misguided and often results in undesired effects, including higher rents for uncontrolled units, lower mobility and reduced residential construction. A meta-analysis of 112 empirical studies on the effects of rent controls by Konstantin A. Kholodilin illustrates this, as shown in the figure below.

As of June, Free and faster buses have been limited to pilot programs for lack of funding.

Effects of rent control according to empirical studies

Notes: From left to right, the bars show findings of a negative effect, no effect, or a positive effect. Gray shading indicates unpublished studies.

Conclusion

Young, educated New Yorkers came out in droves to vote for Mamdani. His zero-sum, “me-first,” us versus them socialism appeals to the disillusioned but is economically unsound. His “achievements” will be a drop in the bucket for the issues they seek to address. Two thousand free childcare spots do little to cover the needs of the 500,000 under-fives in NYC. Five (or, more likely, two) government-subsidized grocery stores will have a negligible effect in a city that has 24,000. If Mamdani does scale his operation up, it will run into the financial and legal issues discussed above. He can pursue socialism more aggressively, incur the economic consequences and conservative backlash and alienate the already divided moderates, as was the case with David Dinkins’s policies in the early 1990s. Or he can continue to celebrate his inconsequential successes without ever breaking the indomitable capitalist spirit of New York City.

There is another big problem for Warren and Moreno. A few sentences after proposing to uncap the tax, Moreno and Warren say it’s essential to “safeguard Social Security’s earned-benefit structure.” The earned benefit part is an argument we always hear when anyone ever evokes making reforms to the insolvent program. It goes something like this: “Oh but I have paid into the system, and I have earned my benefits so you can’t touch them.” And in fact, Warren and Moreno use that rhetorical tool to at the beginning of their piece:

“Social Security is a core component of our nation’s promise — a covenant between the federal government and Americans who pay into it throughout their working years so they can retire with dignity.”

But here is the thing. They obviously don’t realize that earned benefit argument is precisely why the cap exists in the first place. As Ponnuru explain in the Washington the cap is here to keep benefits related to contributions. In other words, lifting the cap would partially sever the earned benefit intent of Social Security and turn it more into a general welfare program rather than an earned benefit. Indeed, their plan, by design, doesn’t credit the newly taxed earnings with any new benefit, which is precisely how it raises money. This fence that Democrats have erected for forty years around any conversation about the spending side of Social Security, such as raising the retirement age, means-testing benefits for high earners, slowing the COLA formula, adjusting the bend points, would go away if your lift the cap.

But if “earned benefit” is a real principle and not just an applause line, why does it only bind in one direction? They’re willing to sever the link between what someone pays and what they get back, the instant severing it raises revenue. The same senators who’d tell you a means-tested benefit cut breaks a sacred promise are asking a software engineer making $400,000 to pay tax on income that will never come back to her as a benefit and calling that preserving the structure.

You can’t have it both ways, and a serious reform conversation has to pick one. Either the earned-benefit structure is real, in which case it constrains the tax side exactly as much as the benefit side. Or it isn’t really a binding principle and then drop the act.

While this proposal would raise additional revenue for the program, the Social Security Administration’s own estimates show that it would not come close to solving the program’s long-term $29 trillion solvency challenge.

According to the 2026 Social Security Trustees Report, the program faces a 75-year actuarial deficit equal to 4.42 percent of taxable payroll. The report also projects an annual deficit in the 75th year of the projection period equal to 6.57 percent of taxable payroll. These figures illustrate that Social Security’s financing problem is not merely a short-term cash-flow issue but a persistent and growing imbalance between promised benefits and projected revenues.

The SSA’s Office of the Chief Actuary estimates that completely eliminating the taxable maximum beginning in 2026 and applying the full 12.4 percent payroll tax to all earnings—without providing additional benefits on those earnings—would improve the program’s actuarial balance by 2.55 percent of taxable payroll. On the surface, that appears substantial. However, when compared to the updated 2026 Trustees Report projections, the reform would eliminate only about 58 percent of the 75-year actuarial deficit. Even after imposing Social Security taxes on all earnings, the program would still face a remaining actuarial shortfall of approximately 1.87 percent of taxable payroll.

The picture is similar when examining the program’s long-run annual deficit. The proposal improves the annual balance in the 75th year by 2.6 percent of payroll. Yet the projected 2100 deficit is 6.57 percent of payroll. As a result, roughly 60 percent of the long-run financing gap would remain even after eliminating the taxable maximum.

Let’s look at the numbers:

· The Social Security shortfall is projected to be 1.5% of GDP on a permanent basis (reaching 2.2% of GDP by 2100).

· Eliminating the tax cap without increasing the benefits paid to high earners would raise less than 0.9% of GDP.

· In short: you’d solve a little over half of the problem.

Even with this bold policy change, the system would still be running a deficit.

There is another reason claims about “saving Social Security” through payroll tax increases should be viewed with caution. Much of the public discussion focuses on extending the life of the Social Security trust fund. Yet the trust fund itself contains no real economic resources available to pay future benefits. It is essentially an accounting record of past payroll tax surpluses that were spent elsewhere in the federal budget.

What matters economically is Social Security’s annual cash flow. Every dollar of benefits paid in 2030, 2040, or 2050 must ultimately come from taxes collected in those years, borrowing, or other federal revenues. The existence of a trust fund does not reduce the burden on future taxpayers. Rather, it serves as a legal mechanism allowing Social Security to run cash deficits for a period of time before automatic benefit reductions occur.

From this perspective, eliminating the taxable maximum looks less transformative than its advocates suggest. While the policy would improve Social Security’s finances, it would not fundamentally alter the program’s long-run trajectory. According to Social Security’s actuaries, lifting the cap might delay the program’s cash-flow deficits for a few years before deficits reemerge and begin growing once again.

More broadly, Social Security’s challenges reflect a demographic reality that tax increases alone cannot solve. An aging population means that a shrinking share of workers must finance benefits for a growing number of retirees. Raising taxes on high earners may postpone difficult choices, but it does not eliminate the underlying mismatch between promised benefits and the resources available to fund them.

The proposal also depends on breaking the link between what people pay into the system and what they get out of it. That’s a major shift in the nature of Social Security from a contributory program to something more like a welfare benefit. If we lift the tax cap but not the benefit cap, we’re asking top earners to subsidize the system without receiving additional benefits. That change in design would be both politically and philosophically contentious.

There is also reason to believe that the SSA’s estimates may overstate the revenue that could ultimately be collected from eliminating the taxable maximum. The actuarial projections largely assume that taxpayers continue working, investing, and reporting income much as they do today. In reality, significantly higher marginal tax rates tend to alter behavior.

What’s more, the projections by the trustees report are likely too optimistic. As Ramesh Ponnuru pointed out in the Washington Post: “They assume Americans will have more babies in the coming decades than either the Census Bureau or the Congressional Budget Office does, which would help Social Security’s finances.”

Consider a high-income earner in California. Such an individual may already face a 37 percent federal income tax rate, a 12.3 percent California income tax, the state’s additional 1 percent mental health services tax on very high incomes, the 2.35 percent Medicare payroll tax rate that applies to high earners (including the Additional Medicare Tax), and the 3.8 percent Net Investment Income Tax.

Eliminating the Social Security taxable maximum would add another 6.2 (or up to 12.4) percentage points to labor income above the current cap. The result would be a combined marginal tax burden exceeding 60 percent on some forms of earned income in states like California. Similarly, in New York City, with state and local taxes included, the top rate would be 64.1 percent.

A large body of research finds that high-income taxpayers respond to higher marginal tax rates by reducing taxable income through changes in work effort, compensation structure, timing of income, tax planning, and other legal forms of avoidance. This does not mean that higher tax rates raise no revenue, but it does mean that the revenue gains are often smaller than simple “static” calculations suggest. Consequently, the actual improvement in Social Security’s finances could be less than the SSA’s mechanical estimates imply.

Even if policymakers were willing to impose such large tax increases on a relatively small group of taxpayers, doing so would not resolve the broader fiscal challenge. Medicare’s long-term financing shortfall is even larger than Social Security’s. If lawmakers rely primarily on ever-higher taxes on top earners to close Social Security’s gap, they may find that the same tax base is expected to finance Medicare’s growing obligations as well.

Moreover, the United States already relies heavily on high-income households to finance the federal government. According to IRS data, the top 10 percent of earners pay more than 70 percent of all federal income taxes, while the bottom half of tax filers pay only a small fraction of total income tax revenue. Many lower-income households receive refundable tax credits that reduce their effective federal income tax burden to zero or below. Reasonable people can disagree about the ideal degree of tax progressivity, but it is difficult to argue that the United States finances its government primarily on the backs of low-income households.

Ultimately, eliminating the taxable maximum would be one of the largest tax increases available within the Social Security system, yet it would still leave a substantial portion of the program’s long-term financing gap unresolved. That reality underscores the scale of the challenge and suggests that durable reform will require more than simply taxing high earners at higher rates.

It is often thought that a recession is formally defined as a period of consecutive quarters of GDP decline. This is a myth. It would be nice, perhaps, to have such a clean definition, but it strangely isn’t being used for official classification. So, what is our metric? Since a recession is meant to communicate that the economy is struggling, it stands to reason that the definition would properly account for this.

There is currently no consistent objective measure of a recession. The NBER defines a recession as a period of significant decline in economic activity that is spread across the economy and lasts more than a few months. This is, unfortunately, a bit less quantitative than most people might expect. The standards change over time, and the people who consider what should be introduced to the models change as well. In one year of analysis, non-farm payroll employment might be emphasized, and in another, it could be real income less transfers. Notably, though, these are not holistic, not standardized, and could be reasonably interpreted as being vibes-based.

But what if there was a way to take all of the data we have on historical recessions, standardize the methods they used to determine that these were recessionary periods, and somehow apply this to 2023-2025? What would we find?

Using a model known as a random forest, it is possible to do exactly that. A random forest is a machine learning model designed to do something known as “classification.” This means that you can give it an input data set, and it can determine which category the output dataset should fall into. For our purposes, the random forest is able to take the FRED-MD dataset, which can be found here, and predict, using NBER recession data found here, the probability that there will be a recession within the next twelve months for any given month.

Note for interpretability: this is describing the model’s estimated probability that, given your current month, a recession will occur within the next 12 months; it says nothing about the severity of said recession.

At a glance, this might be compelling enough to determine that 2023-2025 was recessionary. A skeptic might be unconvinced of these data, though. Of course, this one model may not be perfectly accurate, and there is some degree of noise in it. Also, an inquisitive reader might question how the model was trained, citing that this could be the reason for whatever spike we see from 2023 to 2025. These questions are easily resolved, however. For the first point, we can run many different types of models in something called an ensemble, all working on the same classification problem but using slightly different methods. This can be thought of as a sort of “second opinion” on the data. The ensemble data can be seen below, and shows an even starker view of recession probabilities. (For those interested in the technical side of things, see the GitHub repository for this project, which will be linked at the bottom of the post.)

As for the other point, the model is trained on data provided by the NBER’s classification of a recession. In that case, shouldn’t this period be classified as a false positive instead of being evidence that the NBER made a mistake? Why should I trust the NBER in all other cases EXCEPT for the 2023-2025 interval?

The purpose of the model is essentially to determine whether or not the Vibecession should have been classified as a recession according to how we have historically classified them. The model serves as this basis and attempts to provide a more stable framework for recession analysis than the one the NBER is currently using. The model then finds it likely that from 2023-2025, the NBER deviated from its typical recession classification method and provided us with a different analysis than we might have otherwise expected.

Why did this happen? There are many reasons why the NBER might not declare a recession, but it stems a lot from the behavior of certain indicators. One of these is the labor market, which can be understood in part through unemployment statistics. Economists can talk about job growth, show that the labor market isn’t hurting, and see this as a sign that the economy might not be taking as much of a hit as people think. See below, where high unemployment clearly coincides with officially declared recessions.

In this case, if you were to only analyze the labor market, you would find that 2024 wasn’t a recession. Furthermore, if you were to take this and use it as an indicator for official recessions, it would seem to outperform both the random forest and the ensemble I presented above. Of course, any single indicator is not enough to determine whether or not we are in a recession. Unemployment could be produced as a function of a myriad other variables, correlating with a recession in the way that these input variables for recessions and unemployment tend to be correlated.

So, what do I propose? Clearly, the economy has been hurting recently. Whether you want to label that a recession or not is up to you, but if we neglect to recognize a hurting economy as recessionary, then the term loses meaning. People want a standard metric for recessions: ask almost anyone who might know how a recession is determined. They will tell you that it is two quarters of consecutive GDP decline. At the very least, if the NBER were using this metric, the public could better understand what a recession was. But as it stands, where there is no standard, no metric other than the consensus of economists who are frankly giving just as much onus to vibes as the common man, there is less of a reason to trust the experts. And when the public loses faith in economists, economic arguments hold less and less weight.

I am not claiming that this random forest I presented is perfect or that it should be the standard for recession classifications: what I am saying, though, is that this is a step in the right direction. With machine learning models, we can better understand and analyze data, frame problems in a more empirical way to better determine what exactly economic pain is, and create a framework that can better reflect common consensus when it comes to recessions. More so, I want to move in the direction of having a recession classification framework that is consistent, quantitative, and easily understood.

Here is a link to the model and the data I used, in case you wish to replicate my results.

But buried in the text of a proposed constitutional amendment is something far more consequential: a tax structure that could make it harder for ordinary employees to take equity in startups, discourage founders from building in California, and ultimately do little to solve the healthcare funding problems it was supposedly designed to fix.

The measure is being sold as a one-time tax on extreme wealth. The reality is much messier.

California’s Billionaire Tax Isn’t Really About Billionaires

The 2026 Billionaire Tax Act, a California ballot initiative promoted by the Service Employees International Union–United Healthcare Workers (SEIU–UHW), seeks to tax billionaire net worth rather than income. As written, the measure would amend California’s constitution by removing the state’s existing cap on taxes on intangible personal property. Supporters argue that the tax is necessary to address a large shortfall in funding for healthcare programs.

The act claims that this will be a “one time” tax. But as my colleague Veronique de Rugy has pointed out, a billionaire tax like this won’t address the core issues at the heart of California’s healthcare funding problems: the core issue of state hospitals providing services via Medi-Cal, California’s Medicaid Program, to middle-class Californians and illegal aliens — both groups that shouldn’t qualify for assistance under the program. The factors driving the shortfall are structural, and a tax on wealth cannot address them.

If California’s healthcare spending commitments are unsustainable, the solution must involve reforming those commitments, not simply searching for a new source of tax revenue. The California state government would be better served to more carefully monitor Medi-Cal program participants to ensure that only the poorest Californians – the group originally intended to receive benefits – exclusively qualify. My colleague Jack Salmon points out that in 2015 there were roughly 12 million people on Medi-Cal. Today that figure is about 15 million people or roughly 4-in-10 Californians (a generous figure that includes Medicare claimants). Alternatively, the California state government needs to face some credible commitment that the funding for the Medi-Cali program provided via the California taxpayer can’t exceed the total revenue collected. Jack points out that “California doesn’t actually need new revenue to address the gap that would remain after accepting the OBBBA’s eligibility defaults.” And whether either of those options work, the Federal government could do its part to withhold funds typically dispersed as a match to state Medicaid funds.

One Provision Deserves Particular Attention

The measure states: “For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer’s percentage of the overall voting or other direct control rights.”

It further provides:

“Notwithstanding any other provisions of the Constitution, the Act provides for taxation on all forms of personal and wealth, whether tangible or intangible, and allows for the classification of personal property and wealth for differential taxation or for exemption, for the purpose of imposing the on-time tax on the wealth of California billionaires. Personal property and wealth that is so taxed includes, but is not limited to, shares of capital stock, bonds or other evidences of indebtedness, and any legal or equitable interest therein.”

Provisions like this are significant for targeting wealth in forms like capital stock and intangible assets. Targeting intangible assets like equity endanger innovation as equity is typically included in compensation packages. Equity compensation awards individuals for the risk they take by giving them a stake in the company they work for. It aligns incentives towards shared goals of company growth regardless of the ultimate outcome -- whether that’s going public and seeking greater capital investment or seeking an acquirer. Taxes like these distort these incentives and inhibit productive potential as employers think twice about equity awards if employees demand higher salaries in anticipation of wealth taxes like this. This slows innovation. This slows economic growth.

Why Compensation Matters

Startup founders are often compensated through equity in the companies they build. This usually takes the form of Class A or Class B shares, which carry voting privileges not afforded to holders of other classes of equity. These are called super-voting shares.

Under California’s proposed billionaire tax, equity held by founders and their employees would be taxed because it would fall within the measure’s definition of “capital stock” and other intangible assets. Recent analysis by the Tax Foundation illustrates the potential burden for six of the top tech founders. While some have expressed no issue with the measure, it is clear they don’t speak for everyone.

One such dissenter is Google co-founder Sergey Brin, whose family sought refuge from the Soviet Union. In an interview with The New York Times, he offered perhaps the strongest public language against the proposal: “I fled socialism with my family in 1979 and know the devastating, oppressive society it created in the Soviet Union. I don’t want California to end up in the same place.”

Brin’s rebuke is born out of concern for a place of great affection and deep understanding of what it takes for young people to succeed and innovation to advance. He doesn’t point to the hardship of the rich under Socialism, but all people. A policy like this has far reaching consequences beyond billionaires as their middle class employees shoulder burdens they can’t bear.

Equity Isn’t Cash

It should also be said that not every founder is a billionaire with spare cash to plug the crater of fiscal irresponsibility created by the state of California.

Taxing equity assumes that shares are liquid enough to generate the cash necessary to pay the tax. In many cases they are not. Taxing equity would be catastrophic, especially for the middle class involved in new ventures.

The Billionaire Tax Hurts the Middle Class

There are a few reasons for this. One is that it’s bad for talent recruitment.

Founders are not the only ones who are awarded equity as a part of their compensation packages: Non-founder employees pour their lives into the companies they work for, devote their time and talents to building something new that takes long nights, weekends and bends intellectual capacity well beyond the average worker (and as an average worker, there’s nothing wrong with being average!). Their passion powers their work.

One such example of innovative companies making average and often unsuspecting employees millionaires is Space X, which went public late last week. The tough, risky, and innovative work of Founders who have the need and capacity to employ large groups of people with necessary skills enables people like Juan Hernandez, a welder at Space X, to become a millionaire when the company went public. While Space X isn’t headquartered in California, Elon Musk’s other companies once called The Golden State home. It’s painful to imagine all the other people like Juan who are in California and are hampered in their ability to build generational wealth because irresponsible bureaucrats refuse to reign in reckless healthcare spending. Innovation and the strength of American capital markets work together to make the American dream a reality for everyday people regardless of where one starts out. It’s important that the American people aren’t penalized for simply participating in our markets.

Taxing equity in this manner gives innovators pause when deciding to start a new venture and adds friction to a potential employee’s decision to join a new venture in a way that shouldn’t be a second thought. Withholding the capacity for a share in the project they’re responsible for building drives high value talent away from ambitious projects and stalls economic growth.

The other reason this supposed billionaire tax will likely fall on middle-class workers is that ultra-high-net-worth and high-net-worth individuals possess the capacity to not only move their money but move themselves and their productive efforts to other places entirely.

We have repeated evidence to suggest that efforts like these in other blue states drive out the state’s tax base. My colleague Jack Salmon has pointed out the track record of such policies and the impact here.

Moving to different states or countries affords founders and potential employees more amenable environments that allow businesses to not only select their compensation arrangements to attract top talent, but to avoid uncertain and volatile business environments that endanger aspects of their core business (i.e. any kind of regulation on energy, environmental usage, etc.).

We’ve Seen This Before

This isn’t the first time our nation has flirted with a tax proposal targeting high earners.

The Affordable Care Act of 2010 included a provision for a 3.8% net investment income tax (called the ACA surcharge tax). This tax broadly applied to filers with incomes of $200,000 for single filers, or $250,000 for couples filing jointly. This tax included unearned income including investment income such as taxable interest income, dividends, realized capital gains, nonqualified annuities, rents, royalties, passive income from business activities, and undistributed net investment income from a trust or estate.

Worse yet, like the ACA Surcharge Tax, this proposed tax isn’t inflation adjusted either. In the case of the ACA Surcharge Tax, that means that eventually, middle-class people — people intended to have been excluded from the burden — will end up paying it. Jack Salmon discusses this in depth here.

The Billionaire Tax Can’t Solve the Spending Problem

The truth is this: When government projects promise services funded by other people’s money, the spigot of taxpayer funding can’t stop. And what starts as a promise of a running faucet can quickly become a firehose when programs lack accountability and core issues are never addressed.

That is exactly the challenge California faces today. Continuing to tax average earners will not solve the state’s healthcare funding shortfall, and dreaming up new taxes targeting billionaires — a category too broad to avoid — is likely to hamper economic growth. California’s proposed billionaire tax risks discouraging investment, entrepreneurship, and innovation: the very activities that generate economic growth and prosperity. This is true for individuals, the state of California, and as the popularity of taxes like this grow, the nation more broadly.

Innovation and the ability to take risks and receive one’s due reward for such risk taking is integral to the American spirit and to an American growth strategy. So-called billionaire taxes endanger the progress that grows the economy for everyone and enables irresponsible government spending.