Today, John Cochrane explains how the counterintuitive realities of interest rates and inflation present a policy pickle for the voting members of the Federal Reserve; Jon Hartley explores the economic signals sent by the California Democratic Party in officially endorsing the billionaire wealth tax ballot measure; H.R. McMaster speaks with a former prime minister of Iraq about challenges and opportunities facing a new government in that nation; and Bill Whalen writes about the “team player” of the American Revolutionary era, statesman and soldier John Dickinson.
Answering Challenges to Advanced Economies
“Inflation is stubbornly high,” Senior Fellow John H. Cochrane writes at his Substack, adding that the Federal Reserve under Kevin Warsh is considering whether to raise interest rates in response. Cochrane’s post summarizes what economic theory has to say to the question, How does raising interest rates affect inflation? His answer may appear counterintuitive to those acquainted with the standard view: “In the long run, higher interest rates raise inflation,” he writes. “And, conversely, lower interest rates lower inflation. Here you might say I have gone off my rocker, but you’d be wrong.” Cochrane explains how the standard view focuses on the short run, where he agrees that “higher interest rates drive inflation down.” But, he says, “the economy eventually becomes stable and neutral in a long enough run, and higher interest rates eventually raise inflation.” In Cochrane’s view, this complicates the job currently before Warsh’s Fed, as raising rates to tame inflation short-term “would inevitably raise even further the baseline inflation that we are seeing now when the long run kicks in again.” Truly controlling inflation would require “better fiscal policy,” Cochrane concludes. Read more here.
California Policy & Politics
“The California Democratic Party has endorsed Proposition 40, the proposed billionaire wealth tax,” Policy Fellow Jon Hartley writes at the California Post. Divisions within the party over this endorsement, including the opposition of Governor Newsom and the Democratic nominee to replace him, Xavier Becerra, signal internal party disagreement “over whether California can continue treating a remarkably small group of entrepreneurs and investors as an inexhaustible source of revenue.” Citing the research of fellow Hoover scholars Joshua Rauh and Benjamin Jaros, Hartley writes that “a policy advertised as raising money could ultimately leave California’s finances worse off.” Hartley argues that “tax policy should ultimately be judged by how people dynamically respond to it, and how economic behavior gets distorted,” adding that “California has already watched a remarkable number of entrepreneurs and businesses leave the state.” Given the endorsement, Hartley concludes that the Democratic Party in the state does not understand the risks posed to California’s prosperity by this “economically damaging” measure. Read more here.
The Middle East
In the latest episode of Today's Battlegrounds, Senior Fellow H.R. McMaster speaks with former Prime Minister of Iraq Haider al Abadi about the future of US–Iraq relations as a new government endeavors to strengthen Iraqi sovereignty, fight corruption, improve security, recover from a regional war, and diversify its economy.
The Big Idea: Iraq has been a critical US partner in the fight against al-Qaeda and ISIS, even as it grapples with the challenges of balancing relations with other regional powers, and the need to strengthen state institutions while preserving Iraqi independence. Watch or listen here.
Freedom Frequency
John Dickinson, active during three key stages of the American Revolution as a veteran of both combat and debate, is a lesser-remembered founder who helped develop the intellectual structure of independence, writes Bill Whalen for the Founders & Fellows series. Dickinson was a voice for tax fairness, engaging with Britain on this score long before Jefferson did. Dickinson, despite this complaint, was hesitant at first about breaking from Britain, Whalen says, but when provoked he took up the fight in Washington’s army. And then, in the Constitutional Convention of 1787, Dickinson helped pass the compromise that created proportional representation in the House and equal representation in the Senate for each state. He also stumped for women’s rights and an end to slavery, Whalen adds. When Dickinson died, Jefferson lauded him as “one of the great worthies of the Revolution.” Read more here.
In this week’s Grumpy Economist Weekly Rant, John H. Cochrane examines California Governor Gavin Newsom’s executive order on artificial intelligence and its focus on the prospect of widespread AI-induced unemployment. The order calls for expanded safety-net programs, subsidized employment, worker training, collective bargaining, public-private partnerships, and government support for employee-owned companies. Cochrane argues that these proposals apply familiar political remedies to a problem that remains largely hypothetical. Technological innovation has repeatedly changed the nature of work without producing permanent mass unemployment, Cochrane says, while California’s existing employment challenges have little to do with AI. Rather than allow consumers, workers, investors, and companies to shape technological adoption through voluntary choices, the order defines public participation primarily through government direction, taxation, and compulsion, Cochrane warns. Watch or read more here.
Technology Policy
Semiconductors are essential to technologies ranging from smartphones and artificial intelligence to satellites and advanced weapons systems. Yet the concentration of advanced chip manufacturing in Taiwan leaves the global supply chain vulnerable to geopolitical disruption.
The Big Idea: For America, securing chip supplies will require investment in domestic manufacturing, continued advances in chip design and computing efficiency, and a coordinated effort to develop and retain semiconductor talent. Watch here.
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