Investing

Jeffrey Miron

On February 1, 2025, the White House announced a series of aggressive tariffs against Canada, Mexico, and China (since adjusted in numerous ways). One ostensible justification for the tariffs is to combat fentanyl smuggling. According to the statement, Customs and Border Protection seized more than 21,000 pounds of fentanyl at American borders last year, a drug that contributes to over 75,000 overdose deaths annually.

This approach will fail; fentanyl smuggling occurs because fentanyl is illegal, and higher tariffs do nothing to reduce the incentives prohibition creates for illicit trade.

Prohibition also spreads violence and corruption, both domestically and in source countries. Underground markets also impede quality control because consumers must guess the potency or composition of the drugs they consume, quadrupling drug-related poisonings and increasing emergency room visits by 60 percent in destination countries. A legal market would reduce these risks dramatically.

In short, punitive tariffs are not a solution to the problem of fentanyl smuggling. Instead, the U.S. should legalize not just fentanyl but all drugs. This would eliminate the black market and its attendant adverse consequences.

This article appeared on Substack on March 26, 2025. Jonah Karafiol, a student at Harvard College, co-wrote this post.

Romina Boccia and Dominik Lett

The Department of Government Efficiency (DOGE) has encountered repeated legal setbacks as a result of its efforts to shrink the federal workforce, cut costs, and reshape the executive branch. Part of the challenge that the administration faces is a constitutional one—Congress, not the executive or judicial branches, is vested with the power of the purse. This means that congressional action is unavoidable if the administration wants to deliver substantial, lasting savings. 

To add legitimacy to DOGE’s efforts to cut spending and encourage Congress to take responsibility, the president should submit a rescissions package (or multiple) under the Impoundment Control Act that officially requests Congress to cancel certain spending.

Once a regular feature of the budget process, presidents across both parties used to routinely submit rescission packages to Congress, which recommended the cancellation of already appropriated spending. Reviving these rescission packages would be a return to responsible fiscal governance, realizing DOGE cost savings and ensuring courts do not roll back the administration’s actions.

Below, we detail the Impoundment Control Act (ICA) rescissions process, its historical track record, and the path forward.

Rescissions 101

Under the ICA, Congress established a special, expedited process to accelerate the cancellation of previously approved spending. This budget process, known as rescission, allows the president to propose cancelling specific spending by submitting a detailed request to Congress. This starts a 45-day shot clock, during which the president can legally pause congressionally approved spending, and the legislature considers the rescission request. Notably, this process only requires a simple majority in both chambers, bypassing the Senate filibuster. If approved and signed by the president, this spending is legally cancelled.

In prior decades, presidents and Congress used this presidentially initiated rescissions process, in combination with congressionally initiated rescissions, to achieve modest savings.

The Track Record on Presidential Rescissions

According to a Congressional Research Service (CRS) report, presidentially proposed rescissions were once a more common feature of the budget process but have since become less prevalent. That’s unfortunate given that lawmakers used to save taxpayers billions of dollars using the process. As the graph below shows, Congress and the president jointly cancelled roughly $152 billion in budget authority over three decades (1974—2003). These modest savings deserve recognition, in part because they demonstrate that Congress, together with the president, can actually cut spending if lawmakers put their minds to it.

While Presidents Ford and Carter both proposed a series of small rescissions, Reagan demonstrated that presidentially initiated rescissions were a viable mechanism to achieve major spending cuts. In 1981, Reagan requested $15 billion be rescinded—roughly a 4 percent cut to discretionary budget authority at the time. While Congress did not approve all his cuts, they did eventually enact nearly $15 billion in rescissions that year and approved another $5 billion in cuts in 1982.

In subsequent years, most rescissions were initiated by Congress rather than presidents. Granted, both Presidents George H.W. Bush and Clinton successfully leveraged presidentially proposed rescissions, and each oversaw the enactment of significant rescission packages during their administrations. Clinton, the last president to have a budget surplus in his administration, was also the last president to have a presidentially initiated rescission enacted. In total, Congress approved roughly $25 billion in presidential rescission requests across five administrations but enacted a much larger $152 billion in total rescissions across the same period.

It’s worth noting an important limitation built into the presidentially proposed rescissions process: the president can only request rescissions to discretionary spending. Because discretionary spending accounts for just over a quarter of all federal spending, it limits potential savings from pursuing rescissions. Still, with discretionary budget authority at $1.6 trillion per year and counting, neither the president nor Congress has any excuse to sidestep much-needed spending restraint, and ICA rescissions remain an important tool to bring rampant, wasteful spending under control.

Why Hasn’t Trump Proposed a Rescission?

Given the administration’s stated cost-cutting enthusiasm with DOGE and the OMB, it is surprising that the administration has not proposed an ICA rescission package. After all, it was the Trump administration in 2018 that proposed the first rescission package to Congress since Clinton, requesting $15 billion in cuts (just 1 percent of discretionary budget authority). While the House narrowly approved this proposal, it ultimately failed in the Senate, with two Republicans defecting. This failure might deter the administration today. If Congress didn’t have the appetite for cuts then, why try now? Additionally, there is reportedly some internal debate over the constitutionality of the ICA itself, likely reducing interest in the rescissions process.

Arguably, the current political landscape is more favorable for a presidential rescissions package than it was in 2018. The budget is bloated from a pandemic spending spree. Meanwhile, high bond yields, inflation, and DOGE have helped generate a national conversation about the need for spending cuts. While it is true that Republicans have a slimmer House majority, the most recent budget framework is evidence that the House is actively identifying spending cuts. And compared to 2018, Republicans have an extra two senators that could make a rescission package politically feasible.

There is no time like the present to cut spending, and it helps to have an administration that throws its weight behind a spending cuts package. As Rollcall’s David Lerman has reported, legislators have expressed frustration about “being kept in the dark as departments and agencies fire workers.” A presidentially proposed rescission package could build political support for DOGE’s spending cuts and workforce reductions by bringing transparency to the current process, involving legislators directly, and pursuing cuts via a legal and lasting mechanism.

Optimistically, Elon Musk recently expressed openness to the idea of presidentially proposed rescissions during a lunch with Republican senators (it doesn’t appear Musk was aware of the ICA process prior to the lunch). As Sen. Rand Paul (R‑KY) rightly argued, the administration should consider clawing back hundreds of billions in already appropriated funds through rescissions, something that could “make those of us who are skeptical about reconciliation, adding to the debt, […] be a little bit more open to it if we’re actually going to … make the spending cuts real and permanent.”

The Path Forward

Moving forward, DOGE and the administration should actively collaborate with Congress and regularly submit rescission packages to cancel wasteful and inappropriate spending. The administration could break these rescission requests into multiple smaller packages, following the agency-by-agency approach of DOGE, or they could submit a single, comprehensive rescissions package covering a wide array of policy areas. Either approach could add pressure for Congress to rise to the occasion and govern responsibly, bringing transparency, legitimacy, and permanence to an executive cost-cutting process that has otherwise been characterized by its secrecy, chaos, and policy whiplash.

As Elon Musk has noted, the federal government is a “target-rich environment” for cuts. We agree. It’s now time to put pen to paper and codify those cuts into law. Rescission packages are just the tool to do so.

Walter Olson

On March 25, President Donald Trump published an executive order purporting to overhaul the nation’s election system. Among its contents: requiring voters who use the federal registration form to furnish documentary proof of citizenship, preparing the way for decertifying commonly used voting equipment, and nullifying state laws that accept as valid some military and other mailed ballots that arrive after Election Day. It directs the Department of Homeland Security, in tandem with the Department of Government Efficiency (DOGE), to use subpoenas if necessary to gain access to state voter registration lists and list maintenance methods and scrutinize each “for consistency with Federal requirements.” States would also be told to hand over what information they had about election law violations to the feds for use by the latter. Funding cutoffs are contemplated for states that don’t cooperate. 

We’ll see what the Constitution and the courts have to say about this. 

Under our American system, voting and voter registration are predominantly responsibilities of the states, with Congress constitutionally empowered to add some overlays through legislation of general applicability. A president cannot change those basics by putting out an executive order, nor may he commandeer the states, through funding blackmail or otherwise, into acting as instruments of his pleasure.

The so-called SAVE Act, which I wrote about last August, is a bill in Congress that would impose national standards of documentary proof of citizenship. While it has been a Republican priority, it’s widely agreed that the prospect of a Democratic filibuster makes it unlikely to pass Congress any time soon. It appears that Trump has decided he can achieve much of the same effect—together with that of other controversial measures with poor prospects in Congress—by simple decree. 

Of the various components of the order, there are some that I might agree would be good ideas if enacted by the appropriate authority, whether a state legislature or Congress, as the case may be. Others, not so much. But the substantive merits shouldn’t be at center stage here. 

New laws should be passed by lawmakers, not by decree, and across much of the order Trump is trying to usurp power not rightfully his. Moreover, the Supreme Court’s Spending Clause jurisprudence provides serious limits on Washington’s power to make states dance to its tune by attaching conditions to funding. Congress must have provided clear notice of the strings in question; the condition must be related to the underlying purpose of the spending (no cutting off grants for fighting street crime or wildfires to extract policy changes on, say, voter ID); the level of funding threat must not be serious enough to “coerce” the state; states and their agencies must not wind up “commandeered”; and so forth. Trump and his administration often act as if they had never heard of these constitutional constraints. 

The Framers took care to leave the administration of federal elections in state hands. There were no doubt several reasons why, but one was that they feared a strongman figure would try to seize general nationwide control over this vital power and subsequently keep himself and his followers in office. That’s one reason the federal government should be kept as much as possible at a distance from election administration and by no means allowed to insert itself deep into its workings by presidential decree. 

Tad DeHaven

American farmers are again facing significant losses from President Donald Trump’s quaint obsession with tariffs. Once again, American taxpayers may be forced to pay for the damage. 

In a social media post earlier this month, President Trump told “the Great Farmers of the United States” to “Have fun!” when the administration imposes more tariffs on April 2. The president of the American Soybean Association responded, “Farmers are frustrated. Tariffs are not something to take lightly and ‘have fun’ with.”

Indeed, soybean farmers were one of the biggest victims of Trump’s costly trade policies in his first term. Following retaliatory Chinese tariffs on American soybeans, exports to the soybean farmers’ largest foreign market dropped by 77 percent, according to the US Department of Agriculture. Of the $27 billion in total reduced US agriculture exports from mid-2018 to the end of 2019, soybeans represented 71 percent of the lost value.

While US soybean exports to China rebounded with a 2020 agreement between the two countries, American farmers’ share of the Chinese market has not recovered to pre-trade war levels. One reason is that Chinese importers can turn to Brazil and other countries.

With Trump back in the White House and his trade actions even more erratic and belligerent, foreign importers of US goods are seeking more dependable alternatives. Soybeans are just an example. Chinese importers are looking to South America as an alternative for chicken and pork and may turn to Australia for sorghum, barley, and wheat. It’s also not just Chinese importers. Other countries on Trump’s harassment list, including Canada and Mexico, are targeting US agricultural products for retaliatory tariffs and eyeing diversifying their sources of imports. 

At the same time, American farmers staring down reduced access to foreign markets are also facing higher production costs due to the US tariffs on imported agricultural inputs. Steel and aluminum tariffs mean higher prices for farm equipment. Canada is by far the largest supplier of potash to the US, which means higher fertilizer prices.

Farmers getting squeezed on both ends of a renewed and potentially uglier trade war likely means taxpayers will get squeezed to help cover the consequences. The first Trump administration took $23 billion from taxpayers and gave it to farmers to compensate for their losses. In her January Senate confirmation hearing, Agriculture Secretary Brooke Rollins referenced the bailout, noting, “We are prepared to execute something similar … we can’t reinvent the wheel.”

While the administration is happy to provide farmers with another bailout following another self-inflicted gunshot to the economy, it’s already started handing out taxpayer money. Last week, Rollins used National Agriculture Day to announce the administration is issuing $10 billion in direct payments to farmers authorized by Congress in December. 

This is all occurring while the Trump administration is supposedly trying to downsize the federal government. However, eliminating “waste, fraud, and abuse” in government programs while simultaneously offering multi-billion dollar bailouts—all in the pursuit of economic autarky—will accomplish no such thing.

Looking for a good example of government waste, fraud, and abuse?

The time the Trump administration is spending upending global trade is a waste, the rationale for it is a fraud, and forcing taxpayers to cover the damage is downright abuse.

Alex Nowrasteh and Krit Chanwong

Ezra Klein recently interviewed David Shor, a data scientist at the Democratic consulting firm Blue Rose Research. Shor made two important immigrant-related points. First, the foreign-born share of the population in a county was highly correlated with a shift toward Trump. Second, Trump likely won the immigrant vote. Naturalized immigrants went from favoring Biden in 2020 by 27 points to favoring Trump by one point. 

This abrupt change destroys the common immigration-restrictionist argument that more open immigration policies will tilt the country leftward, an argument commonly made by Elon Musk that explains why he decided to support Trump in the 2024 election. 

Shor’s interview contains much evidence for his claims that complements data elsewhere. There is some evidence that demographics with higher immigrant shares shifted rightwards in 2024. CNN’s 2024 Election exit polls, for example, found that 46 percent of Hispanic voters cast their ballots for Trump, a 14 percent rightward shift from 2020. Asian voters also shifted rightwards: 40 percent of Asians voted for Trump in 2024, a six percent increase from 2020, cementing a reversal of the trend where pollsters identified increasing Democratic vote shares and identification among Asians. Moreover, The Economist found that the “foreign-born share of a county’s population explains half of the geographic variation in the electoral swing from 2020 to 2024.”

Here, we follow The Economist’s methodology by analyzing the relationship between variation in the foreign-born population of a county and increased support for Trump. However, we make two changes:

The Economist article was published nine days after the 2024 election and used demographic information from the Census Bureau’s 2022 5‑Year American Community Survey (ACS) data. We use more complete election data (compiled by Tony McGovern) and the more recent 2023 5‑Year ACS.
We excluded Alaska due to data limitations.

We go into greater detail on the relationship between the change in Trump’s support and the county-level foreign-born population share than The Economist and David Shor’s publicly shared slide deck. The figures below are not causal, and they merely show the relationship between the share of a county’s foreign-born population, the change in support for Trump from the 2020 election to 2024, and report the R‑squared that shows how much of the change in vote share can be explained by the foreign-born share of a county’s population. 

However, the progression of figures below gets more specific and, we hope, provides some evidence that changes in the immigrant voter share of a county’s population are likely driving much of the change in Trump’s vote share.

Figure 1 shows that the foreign-born share of a county’s population explains around 38.6 percent of Trump’s increased vote in 2024. These effects seemed to be nationwide, occurring in New York, New Jersey, Texas, Florida, Arizona, and elsewhere. However, Miami-Dade seems to be the best indication of this trend:  Trump was the first Republican to win in Miami-Dade County since 1998. This was likely, in no small part, due to his increased support from immigrant voters. 

This also shows that increased support for Trump in these counties was electorally somewhat inefficient because they didn’t flip these states except for probably Arizona, which wasn’t enough to change the outcome of the election anyway but merely ran up his popular vote totals in states he would win (Florida and Texas) or narrowed the margins in states that he had no hope of winning like New York. Trump’s victory in the swing states of Pennsylvania, Michigan, and Wisconsin was narrow. 

Figure 2 focuses on how the naturalized immigrant share of a county’s population is related to changes in the Trump vote share. Naturalized immigrants are those who have become citizens and can thus vote in presidential elections, so Figure 2 gets closer to estimating how immigrant voters may have directly changed county-level vote shares. Figure 2 finds trends identical to Figure 1: The percent naturalized citizens in an area explained 38.8 percent of the nation’s 2024 pro-Trump vote share. 

Which immigrant group most explains the country’s rightward shift in 2024? Figure 3 plots the Asian foreign-born population against increases in Trump’s 2024 vote share. Figure 4 reproduces Figure 3 but uses the Asian naturalized population instead of the Asian foreign-born population. There is a positive trend between the Asian foreign-born shares and increased 2024 Trump votes, but it’s slight and can only explain about 7 percent in both cases. In other words, the Asian immigrant population can’t explain much of the nationwide shift toward Trump. This is unsurprising as Asian immigrants are less than 4 percent of the American population. 

Differences in the Hispanic foreign-born population across the counties can explain much more of the variation in changes in Trump support. Figures 5 and 6 plot the Hispanic foreign-born and Hispanic naturalized population with increases in Trump votes in 2024. The trend is quite positive in both cases. Interestingly, Miami-Dade is below the countrywide trendline as Trump increased his advantage in Miami-Dade County by only 9.29 percent. If Miami-Dade followed countrywide trends here, Trump would have increased his advantage in Miami-Dade by 12 to 12.5 percent. Quite significantly, the Hispanic foreign-born share and the Hispanic naturalized share of the population explained 42 to 43 percent of the variation in Trump’s increased vote share in 2024. 

The results we found are consistent with other sources, which find that Trump’s greater vote share in 2024 was significantly aided by increased support from Hispanic voters, many of whom are immigrants. Florida, New York, New Jersey, Texas, and Arizona best exemplify this trend. Of those states, only Arizona likely flipped from Biden to Trump due to the shift in Hispanic votes.

Figure 7 shows that Trump improved his 2020 margin in every county in Florida. Yet there were only three counties (Osceola, Hendry, and Miami-Dade) where he improved his margins by more than seven percent. Hispanic immigrants were at least 20 percent of the population in these counties. This surge in Hispanic support in Florida allowed Trump to improve his margins of victory by almost nine percent statewide. 

Figure 8 plots Trump’s improved margins by county in New York. He improved his margins everywhere in New York, but by more than 10 percent in only Queens County and Bronx County, where Hispanic immigrants made up more than 16 percent of the population.

Figure 9 plots Donald Trump’s improved margins by county in New Jersey. Here, Donald Trump was able to improve his 2020 margins by increasing his Hispanic support in counties near New York City. This was especially true in Passaic and Hudson counties, where Hispanic immigrants made up approximately a quarter of the population. 

Figure 10 plots Donald Trump’s improved margins by county in Texas. Here, Trump was able to improve his 2020 margins in border counties with a high share of Hispanic immigrants. In Maverick and Laredo Counties, where approximately 30 percent of the population are Hispanic immigrants, Trump was able to improve his vote share by more than 10 percent. 

Figure 11 plots Trump’s improved margins by county in Arizona. Unlike the other states examined here, Arizona was a swing state in 2024. Trump’s performance in Arizona significantly improved in heavily Hispanic counties like Yuma (7.5 percent) and Santa Cruz (8.6 percent). This surge in Hispanic support for Trump is likely why he was able to decisively defeat Kamala Harris by more than five percentage points in Arizona. 

Figure 12 plots the percentage of (all) foreign-born naturalized citizens by the year they gained their citizenship with increased Trump vote share in 2024. There is some evidence that the longer the naturalized immigrant share of the population spent in the United States, the higher their county’s vote share increase for Trump in 2024. The percent share of citizens naturalized from 1995 to 2014 explains slightly more variation in Trump’s 2024 increased vote share than the percent share of citizens naturalized after 2015, but not by much.

The major missing variable in our above analysis was education. Political sorting into different political parties by education levels is happening across the country and it would have been best to see if this trend also holds for immigrants. It likely does because Hispanics typically have less education than Asians and became much more Republican, but we can’t say for certain using the ACS datasets we accessed. Census microdata would have allowed us to look at education levels by foreign-born, ethnicity, and naturalization on the county level, but we leave that analysis to others.

An alternative hypothesis is that the presence of many immigrants in a county prompted native-born Americans to become more nativist and vote for Trump in the 2024 election in greater numbers. This would be consistent with a localized immigrant backlash theory that has some support but doesn’t hold up under scrutiny in many cases.

Some political partisans argue that the bipartisan Immigration Act of 1965 was a long-term Democratic plot to help their political party, even though politicians and political parties rarely think beyond the next election. The Republican Party in California likely sabotaged itself for an entire generation in California by supporting a harsh immigration enforcement proposition in 1994, but that seemed to be unique to California in that year. Meanwhile, then-governor George W. Bush doubled his party’s vote share among Hispanic voters beginning in 1994. 

However, policy is downstream from politics and the actual important metric we care about. It matters not which political party liberalizes the economy, cuts taxes, and protects our constitutional rights but that those actions be taken. The general effect of immigration on economic and political institutions is either positive or neutral, with few academics saying otherwise and none getting their work through peer review—as flawed of a process as that is.

Regardless, much of the growth in support for the political party that wants to reduce legal immigration comes from the voting habits of immigrants and their descendants. Incidentally, the GOP is also perceived as more supportive of free markets, even if that conclusion is justifiably much weaker than in years past. “Demographics is political destiny,” their line of thinking goes. As the 2024 election shows, politics and policy are less likely to be downstream of demographics than we’ve been told. 

Colin Grabow

Since 2016, American liquified natural gas (LNG) has been exported to at least 40 countries. One place it hasn’t been sent, however, is Puerto Rico. Shipping the fuel in bulk from the US mainland to the Caribbean island has been rendered impossible due to the Jones Act, the 1920 law that restricts domestic waterborne transportation to vessels that are built and registered in the United States.

The problem for Puerto Rico (as well as New England, and possibly Alaska and Hawaii too) is that none of the world’s more than 600 LNG tankers comply with the protectionist shipping law. As a result, LNG cannot be transported by water from US export terminals to those parts of the US that consume natural gas.

Until now.

Last week, shipping firm Crowley announced that a French-built LNG tanker it recently purchased will begin supplying American natural gas to the US territory. Named American Energy, it is allowed to operate thanks to a Jones Act loophole that permits foreign-built tankers to transport LNG to Puerto Rico (sorry, New England) provided they are American-flagged, crewed, owned, and—this is a big one—constructed before the measure was passed in October 1996. 

After years of essentially being embargoed, the island can finally access American natural gas.

It’s about time—the de facto prohibition on purchasing US LNG has long been a costly headache for Puerto Rico. In 2019, the Puerto Rico Electric Power Authority’s (PREPA) CEO told Congress that the inability to source LNG from the US mainland meant hundreds of millions of dollars in lost savings (an amount later clarified at $300 million annually). This helps explain why Puerto Rico’s government in late 2018 requested a ten-year waiver of the Jones Act (ultimately denied) for LNG shipments.

With US LNG off-limits, Puerto Rico has been forced to obtain the fuel in recent years from more distant sources such as Spain, Oman, Norway, and Nigeria. 

Although some of that may now be in the rearview mirror with attendant cost savings, Puerto Rico’s Jones Act loophole isn’t exactly an optimal solution.

For starters, the steam-powered American Energy is old (by necessity, to comply with the loophole’s provisions). Built in 1994, the vessel is one of only 13 actively trading LNG tankers globally age 30 or older. Even significantly younger LNG tankers are being sold for scrap due to their lack of competitiveness. 

For added perspective, a 2013 Government Accountability Office report highlighted PREPA officials’ concern at the time about the efficiency and safety of using sixteen-year-old tankers. And now Puerto Rico must rely on a ship that turns 31 in August.

That American Energy is US-flagged will further reduce its benefit to Puerto Rico, as such ships are over four times costlier to operate than internationally flagged vessels. 

Puerto Rico deserves to be served by efficient, modern vessels instead of a costly one that, in more normal circumstances, would be a prime candidate for scrapping.

But let’s focus on the bright side. Crowley’s LNG tanker demonstrates the gains that can be realized when Americans are provided even a partial reprieve from the Jones Act. In this case, merely exempting LNG shipments from the law’s requirement that vessels be domestically built has enabled energy to flow from the US mainland to Puerto Rico and provided employment for US mariners. 

It’s a win-win.

Congress and the Trump administration should ponder what other efficient domestic supply chains can be unlocked when onerous maritime protectionism is pared back. 

Romina Boccia and Ivane Nachkebia

The Republican section of the 2025 Joint Economic Committee (JEC) report presents a crucial analysis of America’s fiscal trajectory—at a time when Congress is contemplating making the budget situation even worse. The report evaluates President Joe Biden’s 2025 Economic Report and offers an alternative vision for fiscal policy, focused on reining in spending rather than tax increases. Notably, the JEC’s report draws extensively from research by Cato scholars and our allies, reinforcing its arguments on the dangers of runaway entitlement spending, the misuse of emergency spending designations, and the benefits of pro-growth tax reform.

The JEC acknowledges that the rising debt and persistent deficits are the result of runaway government spending, not insufficient revenues, as tax receipts have remained stable over time. It specifically identifies spending on entitlement programs as the primary driver of the deteriorating fiscal outlook, noting that costs have grown dramatically due to unsustainable benefit design coupled with an aging population.

Rep. David Schweikert (R‑AZ), the chairman of the committee, sets the tone of the report with a powerful statement:

[T]he prosperity of our nation is on borrowed time. Now, as every dollar that Congress votes on is borrowed, we must exercise the intellectual resolve to confront the looming fiscal crisis. Stopping excessive spending is necessary to ensure future generations of Americans are not burdened by our current excess.

We applaud Rep. Schweikert’s leadership in producing a report backed by hard data that doesn’t shy away from highlighting the sobering fiscal reality of the nation. We are especially proud to see that our research—alongside that of our Cato colleagues—helped inform the committee’s work on the report, particularly on the issue of unsustainable spending. Below, we walk through the report’s major fiscal takeaways and the specific Cato research that supports them.

Washington’s Spending Problem

The JEC report attributes most of the growth in federal spending to increases in mandatory spending, while discretionary spending has declined as a share of the total over time (see Figure 1–4). However, the JEC acknowledges that discretionary spending has increased in nominal terms, partly due to “emergency spending when there is no real ‘emergency.’” Here, the report cites a paper by Dominik Lett and me, in which we estimate that Congress has designated $12 trillion as emergency spending over the past 30 years and highlight examples of improper designations.

Going into specifics on mandatory spending, the report explains that Social Security has deviated from its original goal of preventing old-age poverty, to providing large benefits to wealthy retirees. To this point, the JEC cites my blog on the excessive Social Security benefits received by high earners and references a proposal highlighted in a piece by the Manhattan Institute’s Jessica Riedl to discontinue cost-of-living adjustments (COLAs) for such retirees.

Furthermore, the JEC stresses that Social Security trust fund surpluses weren’t saved for paying benefits but were instead spent on financing federal deficits. “It is important to remember that programs like Social Security are a pay-as-you-go system, closer to a Ponzi scheme than a retirement savings program,” states the report and references my blog on the topic. The JEC also emphasizes that when Social Security runs a cash-flow shortfall and taps into its trust funds, it increases federal debt held by the public (see Figure 1–16), a point I’ve made at length.

On the revenue side, the report warns against misguided proposals like introducing a value-added tax (VAT) and instead provides a better alternative: reducing tax expenditures and closing loopholes in the tax code. As Cato’s Adam Michel explains in his paper on pro-growth tax reform (which the JEC references): “Congress has added hundreds of credits, deductions, preferences, and other loopholes that provide trillions of dollars in subsidies to politically favored industries and move millions of Americans entirely off the tax rolls.”

The JEC also cites an article by Cato’s Chris Edwards, Citizens Against Government Waste’s President Tom Schatz, and me, where we proposed pairing President Trump’s first-term corporate tax cuts with cuts in corporate welfare, including eliminating distortionary farm and renewable energy subsidies.

In the chapter on industrial policy, the report highlights a study by Cato’s Travis Fisher and Joshua Loucks, which estimates the 10-year cost of the Inflation Reduction Act (IRA) subsidies could exceed $1 trillion. As Fisher and Loucks write, “Rather than expanding the trillions in subsidies given to politically well-connected energy companies, Congress should make it a priority to repeal these measures as part of a broader attempt to simplify the tax code and rein in spending as America’s debt crisis deepens.”

At Fiscal Crossroads: Key Policy Actions for Congress

The JEC report should serve as a wake-up call for lawmakers to take decisive action on four critical fiscal deadlines in 2025. The looming debt limit deadline, the expiration of individual provisions of the Tax Cuts and Jobs Act (TCJA), discretionary spending caps, and Obamacare subsidies all require a responsible fiscal strategy to avoid further weakening the nation’s finances and significantly increasing the risk of a debt crisis. Congress should:

Pair any debt limit increase with spending reforms to put the budget on a sustainable path. Primary budget balance (excluding interest costs) or stabilizing debt-to-GDP at 100 percent are good targets. Congress should aim for $9 trillion in net 10-year savings to stabilize the debt. Given the political gridlock on entitlement reform, an independent fiscal commission could help advance economically necessary solutions that are politically difficult.
Extend expiring provisions of the TCJA in a deficit-neutral framework. Currently, neither the House nor Senate budget resolutions are remotely close to this target. The House at least instructed respective committees to identify $2 trillion in partial offsets, though it falls short of the $4.5 trillion in revenue reductions from extending the 2017 tax cuts. The Senate, on the other hand, is pushing for the least fiscally responsible option, a “current policy baseline” that wishes the deficit impact of extending expiring tax cuts away.

Congress should reject the current policy baseline gimmick and seize significant and overdue savings, including by going after “low-hanging tax code spending [that should be] cut.” Lawmakers should follow the JEC’s recommendation and eliminate tax expenditures, such as the open-ended and unsustainable Biden-era IRA subsidies, to ensure that pro-growth tax cuts fully achieve their potential without adding to the federal debt.
Reduce and limit discretionary spending. Congress should return discretionary spending to pre-pandemic levels (adjusted for inflation) and enact new spending limits that grow no faster than 2 percent annually. Congress should further ensure these caps are not undermined by budgetary gimmicks, such as the abuse of emergency spending, a common practice highlighted in the JEC report.
Allow expanded Obamacare subsidies to expire in 2025. These subsidies, extended under the IRA, resulted in $20 billion per year in enrollment fraud, according to the Paragon Institute. Making them permanent would add $335 billion to deficits over the next 10 years. Letting these subsidies expire would ease the strain of health care spending on the budget while also reducing government intervention in health care markets, which is driving up costs without improving health care quality.

The JEC report is a valuable and timely analysis that accurately pinpoints the root causes of America’s fiscal problems and puts forward prudent solutions. At a time when runaway spending and rising debt threaten fiscal and economic stability, the JEC report stands out as a serious, data-driven effort to chart a responsible fiscal path.

Read the full report here

Walter Olson

The Trump administration’s assault on lawyers that represent its perceived adversaries has so far targeted by decree three major firms and quickly taken down one of them, the venerable Paul, Weiss. (Earlier posts in this series here, here, and here.) With a presidential memorandum published March 22, it has now abruptly expanded to a more general scheme of penalties against opposing law firms that take legal positions that it regards as baseless, vexatious, or unreasonable across the range of courtroom disputes in which the federal government is a party.

Unless stopped by the courts or by some sort of pushback from civil society, the policies outlined in this memo will in short order endanger the health of an independent bar willing to stand up vigorously to the federal government. 

The new memo spends a while complaining that lawyers who battle the feds in court have at times taken unfounded, baseless, or vexatious positions. Such behavior is nothing novel, which is why there are longstanding rules that provide for the identification and deterrence of lawyerly misconduct of this sort, above all through what is known as Rule 11 of the Federal Rules of Civil Procedure. 

As one who has made something of a specialty over many years of writing about lawyering gone wrong, I’ve long been among those who thought there was a good case for a stronger sanctions regime. If you casually browsed the first part of the memo, you might mistake it for just such a proposal to give judges broader power to sanction lawyers under Rule 11, no matter their cause or client.

But that’s not what it does—not at all. 

The whole idea of the memo is to take away from the courts the role of assessing whether lawyers who battle Trump’s actions have misbehaved and, if so, what penalty, if any, should be levied. Instead, it asserts an arbitrary and peremptory power in the executive to decide for itself what counts as misconduct by opposing lawyers and penalize it through any or all of the peremptory sanctions that make up the first revenge decrees. These include firm-wide withdrawal of security clearances and contractor penalties calculated to induce large business clients to jump ship from a sanctioned firm. Other sanctions from the first three orders, such as forbidding lawyers from entering federal buildings or speaking to federal employees, do not come in for specific mention but are implicitly included in catchall language authorizing other sanctions as convenient. 

They assert a right to levy these sanctions for improper litigation whether or not their own Department of Justice saw fit to ask a court to levy sanctions at the time, and indeed even if they did ask and a judge refused. They assert a right to sanction the opposing lawyers even in cases where those lawyers won outright on the matter that was being contested. 

It’s not going to matter what the judges think or what they rule. That’s the whole idea. 

Sanctions are a crucial tool for judges to have in reserve to enforce decent behavior in the courtroom. But only a fool or aspiring tyrant would propose leaving the determination of guilt and penalty to the discretion of the state as the opposing party.

The memo also says the Department of Justice will report supposed frivolous filings to the lawyers’ bar associations, as well as endeavor to tag senior partners with responsibility for the misconduct of junior partners. Some of this is not inconsistent with current practice. But the first carries the important practical menace of making life hot for small legal practices comprising one or a few lawyers that may escape the deterrent effects of lost security clearances and contractor work that loom large for BigLaw firms. 

There are other differences to note between stepped-up demands for conventional Rule 11 sanctions and what the memo does. In an ordinary courtroom setting, if one side escalates by filing hardball sanctions motions, the other side can often respond in kind. For example, onlookers have more than once wondered whether the positions pressed by Department of Justice lawyers during the past two months might not open them to sanctions motions. Usually, mutual forbearance reigns.

But the new memo is set up to enable after-the-fact taking of revenge long after a case is won or lost. Forget finality and repose! No statute of limitations here. It proposes to start by looking back eight years for supposed misconduct, long enough to settle every grudge from the first Trump administration. Judges, of course, might take a dim view if you asked to reopen a case that settled or otherwise concluded years ago to complain of opposing lawyer conduct that was well known and documented at the time. 

It is especially disturbing that the memo names election law as a target of particular interest. The first three revenge decrees targeted lawyers for representing those involved either in campaigns—a topic distinct from elections as such—or in the prosecutions of Trump. But election law is peculiarly relevant to the question of whether after Election Day a governing party will accept the verdict of voters who have turned against it, or will instead seek to bend laws to remain in office. Only the full and fearless airing of the arguments opposed to the incumbent regime can assure public liberty. 

As of this writing, one well-known law firm—Keker, Van Nest & Peters—has stepped up to defend the profession’s independence, though it is not itself directly targeted. Its statement, from John Keker, Robert Van Nest, Elliot Peters, Laurie Carr Mims, and the partnership, reads as follows. 

Trump’s new Executive Order underscores how far removed this President, Attorney General and Administration are from our nation’s Constitution and bedrock values. Our liberties depend on lawyers’ willingness to represent unpopular people and causes, including in matters adverse to the Federal Government. An attack on lawyers who perform this work is inexcusable and despicable. Our profession owes every client zealous legal representation without fear of retribution, regardless of their political affiliation or ability to pay. We encourage law firm leaders to sign on to an amicus effort in support of Perkins Coie’s challenge to the Administration’s executive order targeting the firm, and to resist the Administration’s erosion of the rule of law.

That leaves dozens upon dozens of other Big Law firms around the country that have not yet joined to raise their voices in protest or been heard in any way. The hour grows late. 

Norbert Michel and Jai Kedia

There has scarcely been a week since President Donald Trump took office when tariffs have not been debated in the domestic and international media. In a recent addition to this debate, Fox Business aired a segment calling the Fed’s recent decision to keep its rate target steady a sign that Wall Street and all the president’s critics are mistaken to be worried about tariffs.

The editorial is a good starting point to unpack several things that are wrong with the way the president’s defenders justify his tariff proposals. First, it’s strange to credit the rate decision and defend tariffs. Among the many reasons Chair Jerome Powell gave for the pause in rate cuts is the fear of inflation induced through tariffs. Second, Larry Kudlow’s defense of tariffs uses an unrealistic hypothetical:

If the price of a washing machine goes up because of a tariff, and a family goes out and buys the machine anyway at the higher price, that means they have less money to spend on other items.

The washing machine price will go up, but some other price or prices will go down. It might mean that family won’t buy a television set, or a computer, or something else. So, one price goes up, families have less to spend on another good, and that other price goes down.

But the overall consumer price index of 80,000 items does not change. That’s what makes it transitory.

Note that the hypothetical itself implicitly concedes that American consumers will be hurt by tariffs as they will have to forsake goods purchases that could have been made in the absence of trade restrictions. That problem aside, if Trump’s tariff proposals singled out just one or two individual goods, this hypothetical may have been a valid example of the administration’s (still bad) policies.

However, the tariffs currently in place are broad, country-wide tariffs on several major trading partners. And the coming addition of so-called reciprocal tariffs will be just as broad, if not broader. Under such conditions, tariffs do not simply alter a few relative prices as Mr. Kudlow claims because the prices of virtually all goods simultaneously increase, resulting in inflation. Of course, this inflation may still be “transitory” since it could just be a one-time increase in the price level, but how short-lived the increase is really doesn’t matter—the increase could be large, and it will negatively affect the real economy.

Tariff defenders are wrong on the economics of tariffs, but this Fox Business editorial also misses the mark on the nature of money and price interactions. To defend tariffs, Mr. Kudlow resorts to an oft-used but ill-understood tactic of claiming that nothing other than the increased supply of dollars can cause inflation. So, according to this view, it must be the Fed—the agency responsible for “printing” dollars—that causes all inflation. Mr. Kudlow claims:

The only way an individual price can lead to higher overall inflation is if the Fed turns on the printing press, or if the federal government goes on a spending binge. If that were the case, then overall inflation will go up, whether there are tariffs or not, because inflation is fundamentally a monetary problem.

At best, this passage is an incomplete assessment of Milton Friedman’s famous adage that inflation is always and everywhere a monetary phenomenon. But that misuse is nothing new, with the COVID-19-related inflation providing many recent examples. Many such critics draw spurious correlation from the quantity theory of money that provides the famous equation of exchange:

Price level (P) x Real output (Y) = Money supply (M) x Velocity of money (V)

On the surface, prices and money are proportionally related in the “PY=MV” equation. But that is only a cursory explanation. Of course, if Mr. Kudlow’s statements were true, real money balances—the money supply divided by the aggregate price level—would be a relatively flat line. This is because any increase in M (the numerator) would be met by a corresponding increase of P (the denominator), keeping the overall fraction approximately constant over time. Fed data show it is not. The direct relationship between M and P, hypothesized by many monetarists, rests on two assumptions—that the velocity of money (V) is constant and M has no effect on Y. The former is no longer true, and the latter is only true in the long run, not over the near term in which tariffs could affect the economy. Additionally, with several financial innovations since the monetarist school first proposed this model, it has become increasingly harder to classify “money” and easily define a “correct” measure of M.

In the business cycle sense of inflation, Friedman’s quote is best understood to imply that inflation is the result of a discrepancy between the uses and availability of money—too much money chasing too few goods. Of course, the Fed printing dollars and handing them out can result in too much money. But that’s not what the Fed does. Moreover, “too much” money could result from a shortage of goods caused by tariffs, as Mr. Kudlow’s hypothetical itself admits. In fact, as Cato research has shown, the majority of inflation away from its trend is caused by supply shocks, such as a reduction in supply caused by a tariff increase.

Again, flooding currency into circulation is not how the Fed conducts monetary policy. Through most of the past few decades, the Fed has relied on an indirect monetary mechanism, trying to influence the rate at which banks borrow reserves from each other and make loans in the private sector. The Fed did change its operating framework during the 2008 financial crisis, but it still tries to affect the real economy by influencing short-term borrowing costs. It is also true that Congress can go on a “spending binge,” and the Fed can help make that easier. But it’s a stretch to place all the blame on the Fed for that kind of policy or any inflation that results. 

For months, folks in the media have debated the merits of Trump’s policies, most of which are based on the idea that middle-class Americans saw their income crater because of the free trade of goods and labor. But that story is dead wrong—middle-class Americans, and lower-income Americans saw solid income growth during the past several decades. And the justification for the president’s trade policies keeps getting stranger by the day and moving further away from anything recognizable as economics.

The truth is tariffs result in higher prices and fewer goods available for sale in the United States. The higher and more widespread the tariffs, the bigger the reduction in goods and the larger the price increases. These tariffs are a recipe for making Americans worse off, and the president’s defenders should leave the Fed out of it.

Chris Edwards

President Trump’s policy actions are causing concerns that he may push the economy into recession. An Associated Press news piece led with, “With his flurry of tariffs, government layoffs and spending freezes, there are growing worries President Donald Trump may be doing more to harm the U.S. economy than to fix it.”

Trump’s tariff wars could indeed tank the economy. But cutting the government will support growth by reducing the distortions created by federal programs. Some federal programs aim to solve real market failures, but most simply reallocate taxpayers’ resources based on political whims and lobbying pressures.

There are two sides to the inefficiency of federal spending. Spending is funded by taxes, which distort the working, investing, and entrepreneurial choices of individuals and businesses. Each additional dollar in income taxes causes about 40 to 50 cents of damage to the private sector beyond the tax amount itself. That damage is called deadweight loss. Republicans seem to understand this side of the fiscal equation, and they push to cut taxes.

However, many Republicans do not seem to understand that the spending itself causes distortions and deadweight losses. Government bureaucracies waste resources, and the subsidy programs they run induce unproductive responses by individuals and businesses. Most federal programs are not worth the cost, as discussed in this study. 

As a result of such taxing and spending inefficiencies, pursuing goals through the government is a “leaky bucket.” Former Council of Economic Advisers Chair Michael Boskin described the problem:

The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar.

Thus, the taxes to fund a one-dollar program might cost the private economy $1.50, and the program might produce benefits of $0.50. That creates a cost-benefit ratio of 3‑to‑1.

Economics professor Edgar Browning came to similar conclusions in his book on the economics of government, Stealing from Each Other. Looking at the effects of federal taxing and spending, he estimated that “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”

The figure illustrates the idea with a hypothetical business subsidy program. Extracting taxes to fund the $100 million program costs the private economy $150 million. The government bureaucracy consumes $10 million, and then the $90 million in subsidies creates net benefits of just $50 million. What happens to the other $40 million? Perhaps $5 million is lost on private-sector paperwork, $10 million is lost in fraud and errors, $10 million is lost in costly regulations, and $15 million is lost from political misallocations. Since the program costs three times more than the benefits, it should be repealed.

A subsidy project in New York State illustrates the inefficiency. The state spent $959 million to build a solar panel manufacturing plant for Tesla in Buffalo. Alas, they misjudged the market for the panels, and since 2015 the plant has been only partly filled. A state comptroller’s audit “found just 54 cents of economic benefit for every subsidy dollar spent on the factory.” That 54 cents of benefits combined with the tax damage from funding the plant results in a cost-benefit ratio of about 3‑to‑1.

We do not know exactly how leaky the bucket is for each federal program, but we do know that the overall bucket gets leakier as the government grows larger, as explained in this study. One reason is that deadweight losses from taxation rise more than proportionally as tax rates rise. If government spending is financed by debt, it just defers the tax damage.

A second reason the bucket gets leakier is that the marginal value of spending declines as the government grows larger. If we assume that the government does the important things first, additional activities are of lower value.

A third reason is that members of Congress have less time to investigate and prune inefficient programs as the government grows larger. Most members have no idea of the details of the government’s vast $750 billion procurement budget, and they are likely unfamiliar with most of the government’s 2,400 subsidy programs. The federal government is far too large to manage efficiently.

Congress should cut low-value spending in every federal department. That would reduce dangerously high deficits and allow resources to flow back to the private sector and boost growth.

For more on this topic, see here, here, here, and here.