US president renews attack on Jay Powell and says borrowing costs should fall to 1%

US president says he will set a new tariff on imports from the country within a week

Also in today’s newsletter, US Treasury calls on Congress to scrap foreign revenge tax in Trump bill, and the private equity-insurance nexus

May reading flips cumulative growth for this year to a 1.1 per cent decline

Calls for European governments to repatriate the bullion they store in the US are a sign of something bigger

A cost of living crisis and social unrest are throwing the strongman leader’s plan to stay in power into jeopardy

Also in this newsletter: a new factory for Jaguar Land Rover, and an Indian in space after 40 years

Scott Bessent says deal with G7 would stop global minimum taxes from applying to American companies

My winter read this year was Natsume Sōseki’s 1906 satirical novel I am a Cat (original title: Wagahai wa Neko de Aru).  The novel is told from the perspective of an unnamed cat and contains vignettes of its observations of its master Mr Sneaze (Sōseki’s conception of himself), Mrs Sneaze (his wife), and several of Mr Sneaze’s companions: Waverhouse, Coldmoon, Beauchamp, and Singleman in Meiji Era Japan.  This post is not meant to be an in-depth analysis of the themes of the novel; this is neither the time nor place for it.  Rather, I wish to highlight some elements I found intriguing and how they relate to the modern American world.

But first, a little background:

The Meiji Era was one of turbulence in Japan.  In February 1867, Prince Mutshito ascended to the throne and became emperor of Japan.  For more than two centuries, Japan’s emperor was a nominal title; in reality, the country was ruled by the shōgun and some 300 feudal lords known as daimyo, a period known as the Tokugawa Shogunate (1603-1868).  However, after Commodore Matthew Perry forcibly opened Japan to trade in 1853, Western influences began to enter this isolated culture, putting pressure on the shōgun to modernize.  Eventually, the pressure became too much; on November 9, 1867, shōgun Tokugawa Toshinobu resigned. A new government was formed under Emperor Mutshito (posthumously known as Emperor Meiji) on January 3, 1868. 

Mutshito ushered in many reforms such as abolishing class privileges, creating an elected advisory body called the Diet (the Diet was based on British Parliament, but had little true power—the Emperor had final say in everything), further opening to international trade, and so on.  Furthermore, Japan had just won a decisive victory over Russia in the Russo-Japanese War, spurring national pride among the Japanese.  The Meiji Era had rapid social, cultural, political, and economic changes.

It is during this turbulence that I Am A Cat was written.  And, among the different characters (and even the cat itself), we see anxieties, hopes, and concerns.  This is especially true in Volume III, which contains many interesting discussions.  For example, at one point in observing what we now call the “principal-agent problem,” the cat observes:

Similarly, public officials are servants of the people and can reasonably be regarded as agents to whom the people have entrusted certain powers to be exercised on the people’s behalf in the running of public affairs.  But as these officials grow accustomed to their daily control of affairs, they begin to acquire delusions of grandeur, act as though the authority they exercise was in fact their own and treat the people as though the people had no say in the matter (pg 361 of the Kindle Edition).

Other times, in a paragraph that sounds a lot like Adam Smith’s parable of the poor man’s son, they worry about how commercial values (what is called “modern man”) could affect people’s characters, as demonstrated by Mr. Sneaze:

Modern man, even in his deepest slumber, never stops thinking about what will bring him profit, or even more worrying, loss…Modern man is jittery and sneaky.  Morning, noon, and night he sneaks and jitters and knows no peace.  Not one single moment’s peace until the cold gave takes him.  That’s the condition to which our so-called civilization has brought us.  And what a mess it is (pg 440).  

(Note the loss-aversion in this concern, too.)

Changing social powers (as observed by Singelman):

“There, you see how times have changed.  Not so long ago the power of those in authority was unlimited.  Then came a time when there were certain things which even they could not demand.  But nowadays there are strict limits upon the power of peers and even ministers to compel the individual…Our fathers would be astonished to see how things which the authorities clearly want done, and have ordered should be done, nevertheless remain undone (pg 450).”

And, again channelling Adam Smith, the duality of man to both want freedom and to dominate:

Obviously, each individual grew a little stronger by reason of this new individuality.  But, of course, precisely because everyone had grown stronger, everyone had also grown weaker than their fellow-individuals…Everyone, naturally, likes to be strong, and no one, naturally, likes to be weak (pg 452).

I could quote this book at length, but I have already gone on too long and not gotten to my point.

The point I have is that, in reading foreign literature (and interacting with foreign culture more broadly), we see the universality of humanity.  We have the same concerns.  We have the same pleasures.  We have the same goals in life.  True, arbitrary lines and languages separate us.  Geography can influence culture and so on.  But it is not, as the nationalists frequently argue, that we are just too different to interact.  Foreign interactions help us see our common humanity.  This, in turn, helps us sympathize with foreigners and break down the so-called “friend-enemy distinction.”  

(0 COMMENTS)

People occasionally ask me how my views on economics differ from those of John Cochrane. In a recent Cochrane post on Fed independence, I found a paragraph that nicely illustrates how our views differ:

Congress also gave the Fed limited tools. The Fed can only buy and sell securities and set interest rates. The Fed cannot directly print money and send it to people or businesses, nor can it confiscate money. Doing so is far more powerful for controlling inflation than moving overnight interest rates, but only a politically accountable agency can tax or spend. Similarly, labor taxes, labor regulations, and the disincentives of social programs have far more effect on employment than the overnight federal funds rate, but the Fed cannot touch them. Even within its inflation and employment mandate, the Fed is forbidden the most powerful tools.

There are very few economists whose opinions more closely align with my own views than John Cochrane, especially on questions of government economic policy.  But this paragraph illustrates one essential difference—we have a radically different conception of the nature of monetary policy. Cochrane makes two empirical claims, both of which I reject:

“Helicopter drops” are far more inflationary than open market purchases. Regulation has a much bigger impact on employment than monetary policy. 

A “helicopter drop” is the term used for a combined fiscal/monetary injection.  Thus, the Fed could create $100 billion and give the money to the public.  In contrast, a $100 billion open market purchase (OMP) involves the Fed swapping one asset (base money) for an equal value of another asset (Treasury securities.) 

Cochrane believes that if we “print money and send it to people” the effects are far more inflationary than a simple OMP of the same quantity of base money. A combined fiscal/monetary injection can be broken down into two separate steps.  The Fed could do a $100 billion OMP, and the Treasury could simultaneously send out $100 billion to the public in tax rebates.  Unless I’m mistaken, Cochrane is implicitly claiming that the fiscal part of that combined action is far more inflationary than the monetary portion of the policy. (This is an implication of the Fiscal Theory of the Price Level.)

To make things simple, go back to the pre-2008 monetary regime, and assume a 10% exogenous, permanent increase in the monetary base, done through an open market purchase.  I claim that this would have boosted the price level by 10% more than a counterfactual policy path that did not include the 10% base increase.  If this policy were combined with an equalvalent fiscal stimulus—say a tax rebate—I claim the effect would have been only slightly more inflationary.  Maybe 10.5% or 11% inflation, rather than 10% with the simple open market purchase.  Cochrane would presumably argue that the combined fiscal/monetary injection would have been far more inflationary than the simple OMP. 

[By the way, I believe my argument also applies to the post-2008 abundant reserve system, but it’s easier to see my point when we consider the simpler pre-2008 system, where 98% of the monetary base was currency.  As an aside, Cochrane frames the discussion in terms of interest rates (which is the conventional view), but I don’t believe that interest rates tell us anything useful about why an exogenous and permanent 10% rise in the base causes a 10% rise in the price level.]

Why is the injection of currency so inflationary?  The public mostly cares about real cash balances.  If you inject more currency into the economy, it doesn’t make the public magically wish to hold larger real cash balances.  Instead, the public tries to get rid of excess cash balances, and in doing so, forces prices up by 10%.  At that point, real cash balances are back to their desired level.

I also differ with Cochrane on the question of employment.  In my view, many of the biggest declines in employment have been caused by tight money policies, including 1929–32, 1981–82 and 2008–09.  This is not to suggest that labor market regulations are unimportant.  Indeed, on questions such as minimum wage laws, unemployment compensation and high implicit marginal tax rates resulting from poverty programs, my views align more with Cochrane than with mainstream economists.  So I’m not entirely unsympathetic to the point he’s trying to make here—I just think he’s underrating monetary policy.

Why do most economists differ from me on monetary policy?  I suspect it is mostly related to the identification problem.  If you define monetary policy as actual movements in the money supply or actual movements in interest rates, then there is not much evidence that monetary policy plays a big role in employment fluctuations or inflation shocks.  In many cases, actual movements in money and interest rates represent endogenous responses to economic conditions.  In my view, it is more useful to think of monetary policy in terms of something like the consensus market forecast of NGDP growth.  By that metric, monetary policy is exceedingly important.

Of course, my definition only makes sense if you think the Fed can control NGDP expectations through open market operations.  I believe they can, whereas Cochrane seems to be skeptical.  My two most recent books provide an explanation for how I’ve arrived at this approach to monetary economics.

(5 COMMENTS)

This month marks 20 years since the U.S. Supreme Court ruling in Kelo v. City of New London. This 5-4 ruling upheld the Court’s rational basis deference to legislatures in determining whether economic development (jobs, tax revenue, etc.) satisfies “public use”, even when the government conveys the seized property to other private parties.

Although Kelo was pretty controversial at the time, interest in it has naturally waned over the years. Under this diminishing spotlight, governments have gotten ever more creative in the ways they exercise eminent domain.

In Richmond, California, for example, the city tried to seize upside down mortgages to protect residents from foreclosure. In Atlantic City, eminent domain has been used without specific plans for how the seized properties would be used. In Minnesota, when an elderly woman fell behind on her property taxes, the county seized her condo, sold it, settled the tax bill, and kept the proceeds. And in my home state of North Carolina, dozens of homes and a local church were seized to make way for a new electric vehicle assembly plant, only for the company (Vinfast, headquartered in Vietnam) to back down by delaying construction for years.

These kinds of cases count as abuse of eminent domain power. Not only do these “Grasping Hand” abuses waste taxpayer dollars and valuable resources, but they needlessly violate fundamental, constitutionally protected rights to property.

Yet economists have shown that eminent domain does have its legitimate uses. Namely, economic development takings can promote the public interest (economic efficiency) when used against strategic holdouts standing opportunistically in the way of development.

Herein lies a classic question that Kelo raises. How can takings powers be regulated to avoid abuse, while still preserving eminent domain’s legitimate uses? Clearly leaving things up to legislative majorities is not the answer — it’s actually the reason for the abuses in the first place. Instead, better regulation of government regulators can help. 

In a new paper* forthcoming at the Review of Law & Economics, co-authors Justin Pace and Jon Murphy and I dig into the long-term dynamics of how to regulate eminent domain authorities. The first thing is to recognize that government officials, even those with the best intentions, will devise ways around existing eminent domain restrictions. Following the financial regulation and campaign finance literatures, we call this loophole mining. It becomes especially powerful over time as the public spotlight on abuse wanes. Second, loophole mining necessitates ongoing adjustments to eminent domain restrictions. So, when looking at the long-term dynamics of the problem, the effectiveness of restrictions depends not only on their initial design but also on ongoing vigilance against regulators’ becoming overly creative in satisfying the rational basis test. 

This makes for a complicated dynamic policy dilemma. Tighter restrictions may beget more creative forms of loophole-mining and necessitate ongoing regulatory adjustments, creating a cycle of regulation and circumvention. Much simpler, and arguably more efficient as well, would be for the Court to abandon its rational basis deference and instead close the door to takings for economic development. 

Closing the Kelo loophole amounts to saying yes to holdout problems. Of course, central planners and development authorities would howl and double-down on claims that eminent domain is critical for economic development. But in fact, a large body of literature shows that developers are pretty effective at handling holdouts even without resorting to eminent domain. 

Better for the law to let entrepreneurs deal with holdouts than to keep encouraging governments to hone their loophole mining skills. After 20 years, it’s past time to revisit Kelo.

 

* “The Long-Term Impact of Kelo v. City of New London: Comparing State Legislative and Judicial Responses” and is available for PDF download here.

 

Edward J. Lopez, is Professor of Economics at Western Carolina University, Executive Director of the Public Choice Society, and author of numerous articles and books including Madmen, Intellectuals, and Academic Scribblers.

(8 COMMENTS)

A recent paper from the Center for Immigration Studies suggests that the answer is yes:

We preliminarily estimate that the number of illegal immigrants has fallen by one million since the start of the year, perhaps due to their leaving in response to President Trump’s election and stepped-up enforcement efforts. But it is important to note that these findings come with important caveats.

Findings:

Based on the CPS, published figures from the Bureau of Labor Statistics show that the number of foreign-born individuals in the labor force declined by 601,000 from January to May 2025. Our analysis of the raw data shows the total foreign-born population, both in and out of the labor force, declined 957,000 from January to May 2025. This is one of the largest declines over a 4-month period in the foreign-born in the last three decades, but it is not unprecedented. The decline was entirely among non-citizens. The number of naturalized U.S. citizens in the data did not fall from January to May of this year. Our preliminary estimate is that there are 14.8 million illegal immigrants in the country in May 2025, one million fewer than we estimated in January of this year.

But the authors include some important caveats:

There are important caveats about all of these numbers: 1) Though the decline in non-citizens is statistically significant, the decline in the total foreign-born is not. 2) Given recent stepped-up enforcement efforts, it is possible that the decline was due, at least in part, to a greater reluctance by immigrants to participate in the survey or to identify as foreign-born rather than an actual falloff in their numbers. 3) Finally, some of the administrative data necessary to estimate illegal immigrants is not yet available, making our estimate for May only preliminary.

Even supporters of the administration’s deportation policy seem to acknowledge that these figures could only be explained by self-deportation, as the figures on official deportations are far too low to significantly impact the total stock of undocumented immigrants.

I looked at a bunch of labor market time series, and saw absolutely no evidence of mass self-deportation.  Indeed, the labor force has grown at an unusually rapid pace of 1.6% over the past year:

This monthly survey data is relatively noisy, so I also looked at the monthly payroll employment data, which is considered more reliable.  Job growth during 2025 continues at a rate of more than 100,000/month, which is consistent with a strong economy.  If a million immigrants had self-deported, you would expect a sharp decline in total employment.

I suppose it is theoretically possible that a million unemployed domestic workers rushed in replace farmworkers and maids that self-deported, but the unemployment rate actually edged up from 4.0% to 4.2% between January and May 2025.

The most plausible explanation for the survey results is that undocumented immigrants are becoming ever more wary of responding to government surveys.

(2 COMMENTS)

Humans have a tendency to obey political authorities even when it may not seem in each individual’s self-interest to do so. Nationalism is a modern manifestation of this phenomenon. After the US government’s strike on nuclear facilities of the Iranian government, there is little doubt that nationalism or tribalism will lead a large number of Americans and Iranians to rally behind their supreme leaders more blindly.

In his book On Power (Du Pouvoir), Bertrand de Jouvenel wrote that “the essential reason for obedience is that it has become a habit of the species” (“On obéit essentiellement parce que c’est une habitude de l’espèce”). There may be evolutionary roots to this submissiveness. Because of the problem of collective action (in the Olsonian sense of “coordinated group action,” not in the sense of decisions imposed by political authorities), an individual often has an interest to play dove before a ruler or ruling group committed to play hawk (see my short explanation of the Hawk-Dove game). Nationalist propaganda adds more motivation for citizens to obey, as does ignorance of basic economics.

Classical liberals and libertarians are the only ones to share James Buchanan’s “faith” in a society where all can be equally free. This hope finds rational foundations in theories of spontaneous order.

What happened on June 21 was not literally “a US strike on Iran” or “America’s strike on Iran,” as everybody repeats, but a strike of the US government on the assets of the Iranian government—including possibly on its claimed human assets, what is called collateral damage. Linguistic shortcuts and the need or habit of economizing on words (in newspaper headlines, for example) should not blind us to the reality that social and political phenomena result from the preferences and actions of individuals. Whatever one thinks of war events and developments, one must beware of synecdoche and other linguistic shortcuts that, reinforced by government propaganda, easily lead to confusing individuals with the groups they “belong” to and the latter’s rulers.

The function of political hyperbole is typically to promote the subjects’ obedience, not to limit the rulers’ power. The general issue of the limits of government power is, of course, a complex question. I have regularly discussed it on this blog, notably with reference to the economic and philosophical theories of James Buchanan and Anthony de Jasay.

The particular problem of nuclear weapons is that their victims are essentially indiscriminate. They give monstrous blackmail power to their possessors. “If you don’t submit, I’ll hurt your subjects (even if the fallout could hurt mine too).” In my view, the principle of preventing bad actors from having nuclear weapons is defendable.

(24 COMMENTS)