"The Trump administration has failed so far to deliver on its affordability promises. Yet, in a recent Department of Defense video on X, Secretary Hegseth boasted that the administration’s $1.5 trillion proposed defense budget would “supercharge” the American economy. It’s not exactly a novel plan.
The secretary’s statement echoes a long-standing argument since the publishing of NSC-68 in 1950: More defense spending is good for the economy. Of course, as with all federal spending, defense budgets certainly do affect Americans—just not in the way Secretary Hegseth thinks.
Instead of boosting economic growth, increased defense spending stunts the US economy, wastes money, and raises costs for Americans.
True enough, defense spending can create jobs and contribute to the economy. But this misses a more fundamental question: Which type of federal spending is most beneficial for the economy? The federal government can spend and borrow only so much money, and there are only so many resources and workers to go around. Should scientists be hired for defense research or domestic manufacturing? Should land be used for missile production or building a school? With limited resources and people, policymakers need to know how to spend federal dollars efficiently to limit waste and bloat.
Herein lies the central problem with Hegseth’s argument: Of all federal outlays, defense spending creates the least number of jobs. And the reasoning is simple—it is a “parasitic output.” The finished products from defense spending—tanks, missiles, bullets, and so on—leave the market once they are made. When that $4 million Patriot missile is built, that’s it. That $4 million either sits in storage or explodes in combat. Parasitic output is accounted for as part of a country’s gross domestic product, which is why, among other reasons, measuring defense spending as a contribution to GDP is misleading.
Increased defense spending also weakens America’s manufacturing industry, an economic sector in rough shape these days. The workers, research, and capital that could’ve been used to strengthen domestic manufacturing are being used to make weapons. Yes, building new weapons may increase employment rates. But such an obsessive focus on defense production means missing out on the wider employment and economic benefits of manufacturing other products with higher returns on investment.
Additionally, increased defense spending puts upward pressure on inflation. As the federal government pumps more money into the economy with little return, inflation rises. To offset this, governments have three primary options: increase interest rates, raise taxes, or reduce spending in other sectors. All three options are politically unpopular.
Reducing defense spending is the logical position for policymakers to take. Reforming the weapon acquisition process and walking back US military commitments abroad, for instance, are compelling policy options. But bolder action is needed. A spending cap should be placed on the defense budget, which is in fact how these budgets were made prior to the 1960s. Such a cap would force the military to make use of set funds, laying down an imperative to spend efficiently.
Matching the defense budget to America’s national interests makes sense in theory. And indeed, this is what the current Planning, Programming, Budgeting, and Execution process aims to do. Yet, threat inflation regularly goads Congress into paying any price to safeguard against exaggerated threats.
Proponents of hiking the defense budget argue that proposals to reduce defense spending put money before national security and that less spending in a world characterized by risk is radical. But what is truly radical is the notion that the United States can sustain its exorbitant defense spending indefinitely. It’s also radical to suppose that there are no trade-offs with federal spending. And it is radical to separate economic conditions from national security.
If the Trump administration is serious about lowering costs for American families, it cannot pretend that defense spending is somehow exempt from basic economic realities. A larger Pentagon budget does not create prosperity out of thin air. Lawmakers will need to scrutinize defense spending more heavily if they hope to fix the country’s economic woes."
Friday, July 10, 2026
More Defense Spending Won’t Save the Economy
Single-payer health care systems are looking worse all the time
"That is the theme of my latest Free Press piece, here is one excerpt from it:
Government-run systems often (not always) do a perfectly fine job setting a broken arm or administering a long-standing, well-known medication. They do much less well when it comes to developing, financing, and delivering a new immunological approach to fighting cancer, personalized to your individual genome at a cost of hundreds of thousands of dollars. In our rapidly arriving biomedical future, innovation capacity will matter above all else. And though they may not see it today, the people with the most life ahead of them will reap nearly all of the benefits of a dynamic system, or suffer the consequences of a paralytic one.
Thirty years ago, it was often debated whether the Canadian or British healthcare systems were better than what we have in the U.S. After all, they offered a kind of guaranteed access to health services. The details could differ, but often the healthcare had no upfront price or only a low user fee. In America, in contrast, healthcare was more expensive, there were many millions of uninsured people, and dealing with sometimes rapacious insurers and hospitals could involve significant emotional trauma.
But over time the British and Canadian systems look worse and worse. The queues and rationing have increased, as giving healthcare away for free makes it hard to satisfy demands in a timely manner. In Canada, for instance, the median wait time has risen from 9.3 weeks in the early 1990s to 28.6 weeks today. In the British National Health Service, only 65.3 percent of patients start treatment within 18 weeks.
Worse yet, both of those systems are undercapitalized. In Britain, healthcare is badly understaffed and underfunded. Yet the country already has high taxes, high debt, and slow economic growth, so it is not clear where the new money will come from to recapitalize the system.
And this sentence:
This entire dynamic will be intensified as the pace of medical innovation picks up.
Your life may depend on it."
High-ability individuals move in response to tax rates
See Taxation and International Migration of Superstars: Evidence from the European Football Market.
"We analyze the effects of top tax rates on international migration of football players in 14 European countries since 1985. Both country case studies and multinomial regressions show evidence of strong mobility responses to tax rates, with an elasticity of the number of foreign (domestic) players to the net-of-tax rate around one (around 0.15). We also find evidence of sorting effects (low taxes attract high- ability players who displace low-ability players) and displacement effects (low taxes on foreigners displace domestic players). Those results can be rationalized in a simple model of migration and taxa- tion with rigid labor demand."
Thursday, July 9, 2026
Robert Reich's CEO Pay Chart Is Wrong. Here's the Real Math.
The former U.S. labor secretary presents economic data in deceptive ways.
"Robert Reich, an emeritus professor at the University of California, Berkeley, and a former U.S. labor secretary, makes popular economics videos arguing that the U.S. economy is rigged against workers.
One of his recent pieces caught my eye because it makes heavy use of numbers and charts. The video is a great example of how to misuse economic data to support a preconceived narrative—in this case, a fairy-tale account of evil CEOs stealing wealth from their employees.
At the outset of the video, Reich presents a chart showing that in 2024 the "typical worker" earned $36.49 per hour, while CEOs made—"ready for this?" Reich asks viewers—$431.80!
There are lots of problems with this chart, starting with the fact that it's labeled "CEO Salaries," but that's not what the $431.80 figure represents. Though he rarely sources his work, Reich's chart matches data from a report by the Economic Policy Institute (EPI), which measures what the leaders of the largest 350 public corporations in America earn, not all CEOs.
There are about 4,000 publicly traded corporations headquartered in the U.S., and even more privately held companies. They all have CEOs. Reich has cherry-picked the wealthiest and most successful faces in the crowd. This is like measuring what the highest-paid actors earn, setting aside all the struggling performers waiting tables, and claiming that acting is the world's most lucrative profession.
If you broaden the lens to include CEOs at ordinary-sized companies, Bureau of Labor Statistics (BLS) data show their pay looks a lot like that of other professionals: Median CEOs make about $200,000 a year, and their pay is growing at about the same pace as everyone else's.
Another problem is that the $431.80 is compensation realized in 2024. Most of it came from stock options granted for performance in previous years. In the prior five years, stock prices had roughly doubled, allowing CEOs to cash in compensation from past years. It's a lot of money, but perhaps not out of proportion to five years of service steering the world's largest and most successful businesses through the pandemic and doubling shareholder wealth. And only the CEOs who survived the turmoil and delivered the doublings were around to collect it. In a down year for the stock market, you might see compensation drop by 80 percent.
The CEOs of the largest American companies have seen their compensation grow at an extraordinary pace, but that's because the businesses they run have grown so large. A highly regarded paper by economists Xavier Gabaix and Augustin Landier, "Why Has CEO Pay Increased So Much?" showed that CEO compensation should scale with firm size, and that this effect explains the entire rise in CEO pay.
Today, Nvidia's market cap alone is more than two and a half times the entire S&P 500's market cap when it was created in 1957, adjusted for inflation. Comparing CEO pay at the largest firms in 1968 vs. what they make today is like equating the director of a late-night commercial for a personal injury law firm to the director of a Hollywood blockbuster. Nvidia CEO Jensen Huang impacts more economic value in an afternoon in 2026 than James Roche did as the CEO of General Motors in all of 1968.
The same compensation explosion has occurred across every winner-take-all field, affecting top athletes, movie stars, and best-selling authors. The highest NBA salary in 1968 was Wilt Chamberlain's $250,000-a-year deal with the Lakers, and the team also agreed to cover his taxes. Chamberlain's salary alone works out to roughly $2.2 million in today's dollars. Compare that to Steph Curry's record-setting $62.6 million pay package in the upcoming NBA season.
Yet Reich claims that "the system is rigged." Is the NBA also rigged in favor of Curry? Against whom?
Reich has more evidence that the economy is rigged against workers. He presents another chart showing, in his words, that "big corporations chronically underpay workers compared to the workers' productivity on the job. Productivity, that is, the value of their output, has soared and resulted in record corporate profits."
The source of Reich's chart, which shows the productivity-pay gap, was once again the EPI, which compares workers' earnings over time to the productivity of the U.S. economy.
The measure they used for worker pay doesn't include all employees. It's just "nonsupervisory workers," so it excludes management. The EPI says that it uses this dataset because it represents "the typical worker," or "roughly 80% of the U.S. workforce." The purpose of the chart, they explain, is to answer "a crucial question: Do typical workers in the United States share in the benefits of economic growth?"
The problem is that the EPI is drawing on an untrustworthy dataset. In 2005, the BLS published a note in the Federal Register repudiating its measure of nonsupervisory workers' earnings, stating that it had "limited value."
The agency also noted that the distinction between a "supervisory" and "nonsupervisory worker" was "not meaningful to survey respondents" and "that it is not possible to tabulate their payroll records" to reflect this distinction.
In 2003, Patricia Getz, who was in charge of employment statistics at the BLS, noted that "records are not kept for these groupings of workers," so employers weren't filling out this portion of the survey.
And this series only counts regular paychecks. Bonuses, profit sharing, and stock grants, which represent how a growing share of American workers are paid over the exact period this chart covers, are excluded entirely.
The BLS sought to discontinue this data series altogether in favor of the all-employee series. In the end, it continued to collect and publish data on nonsupervisory workers, but the poor data quality renders this chart essentially worthless.
The wage measure favored by the BLS tracks compensation for all employees at all levels, not only because this is a more trustworthy dataset, but on the logical assumption that a company's gains in productivity reflect the combined efforts of all employees, including its officers and supervisors.
Reich also cites gross productivity before depreciation. Consider an Uber driver whose passengers pay $85,000 over a year, of which $30,000 goes toward expenses such as gas, insurance, and fees. The driver's gross productivity is $55,000. But her car might have depreciated $15,000, so the net productivity is $40,000. That $15,000 wasn't stolen from her paycheck by a greedy CEO; it's a true loss in economic value.
This matters because over the period Reich discusses, corporate assets shifted from slow-depreciation assets such as steel mills to faster-depreciating assets such as computers and software. Depreciation has risen from 12 percent of national income to 17 percent. Reich is counting that 5 percent difference as stolen from workers, but in fact, it disappeared.
Regardless, if we use the data favored by the BLS and compare all worker compensation to productivity, the divergence between pay and productivity disappears.
Reich's theory that workers are getting shafted has a third component: He claims that CEOs are "siphoning" profits into stock buybacks to boost their own compensation.
"Stock buybacks," he claims, "reduce the number of shares available for investors to purchase, which drives up the value of the remaining shares. Just simple supply and demand."
This is an elementary accounting error. Take a $10 billion market-cap company with 100 million shares trading at $100 each. It decides to do a 10 percent buyback, spending $1 billion to buy 10 million shares for $100 each. The $1 billion cash it spends makes it a $9 billion company. It now has 90 million shares outstanding. The stock price is the same $100 per share outstanding.
Of course, in real life, things are not so neat. Investors tend to take a buyback announcement as good news; the insiders think the stock is undervalued, and bid the price up a few percent. There are other cases where investors take the opposite view: The buyback is a sign the company has no better use of its cash and is fading. But the point is it's not "simple supply and demand"; it's a signal that might or might not help the stock price.
Moreover, Reich misunderstands the purpose of a stock buyback. Companies have two ways of transferring profits to their shareholders: They can pay a dividend or they can do a buyback. The economic effect is the same.
Reich sees buybacks as a way of diverting profits to themselves rather than sharing them with their workers. "Corporations and their CEOs are instead siphoning them off into stock buybacks," he says.
They're not "siphoning" money. They're paying out profits to their owners. All investors, even greedy ones, are entitled to a share of the earnings of the companies they own. That's the deal. And without it, nobody would invest in the first place.
"Stock buybacks used to be considered illegal stock manipulation until Ronald Reagan came along," Reich says. "CEOs can now effectively give themselves a raise while workers get the shaft."
Stock buybacks were never "considered illegal stock manipulation." In 1982, the SEC clarified a gray area, simplifying the legal treatment of stock buybacks and making it easier for companies to use them as an alternative to paying dividends.
Reich claims that stock buybacks are worse than paying dividends because they're a way for CEOs to enrich themselves. "These rising share prices bump up CEO pay because increasingly part of their compensation is in shares of stock," he says.
The problem with this theory is that boards of directors, not CEOs, decide whether to pursue stock buybacks. These are the same directors who negotiate CEO compensation. Buybacks are an item on the negotiation checklist, like benefits and contract length, not something CEOs sneak in afterward to inflate their earnings.
What's the evidence on how buybacks affect CEO compensation? A study in the Journal of Accounting and Economics found the relationship between buybacks and CEO compensation was spurious. Research by a compensation consulting firm that examined S&P 500 buybacks from 2018 to 2021 found the same picture from inside the boardroom: Pay packages rest on multiple performance metrics, and the companies making the largest buybacks adjust their incentive targets to cancel out the share-count effect.
So what does Reich conclude from all of this misinformation and misconceived data? That we need a slew of policies to rein in American capitalism. He says we should "raise the federal minimum wage," "strengthen labor unions," "use antitrust laws to break up big corporate monopolies," "raise taxes on corporations," and "ban stock buybacks."
Apart from his misinformed discussion of stock buybacks, Reich doesn't address those issues in his video. Instead, all he's done is cherry-pick the compensation of the top CEOs in America and use a faulty data series to claim the economy is rigged against workers.
The charts and numbers we use to argue about important questions in public life are too often presented in deceptive ways. It doesn't get much more deceptive than this video."
Friedman on Immigration: Setting the Record Straight
"Even people who are otherwise enthusiastic about a free market in labor can get cold feet about immigration once redistribution enters the picture. Some are fond of quoting Milton Friedman, who famously (or infamously) said:
“It’s just obvious you can’t have free immigration and a welfare state.”
On this view, immigration is fine under fully free market institutions, but in the actual world with its abundant government-provided benefits, immigration restrictions are justified to protect taxpayers from the added expense that could arise if immigrants consume these benefits. But this conclusion is too quick, and even Friedman’s position is more nuanced than people on both sides of the immigration debate tend to realize.
An initial point, though: the concern about the fiscal cost of immigration is overstated. For one reason, in the United States, most welfare spending goes to the very young or the very old. Immigrants, by contrast, are disproportionately of working age.
Setting that point aside, Friedman’s own view wasn’t that immigration as such is harmful. He argued that legal immigration is the problem, precisely because it allows immigrants to access government benefits. By contrast, he thought illegal immigration was beneficial. As he put it: “It’s a good thing for the illegal immigrants. It’s a good thing for the United States. It’s a good thing for the citizens of the country. But it’s only good so long as it’s illegal.” Friedman’s reasoning was that illegal immigration enables mutually beneficial market exchange while limiting immigrants’ access to government benefits.
Now, many fiscal conservatives balk at Friedman’s recommendation—namely, if the overconsumption of government resources is the problem with lawful immigration, the solution is to encourage people to break the law. I understand this reaction, but I admit I don’t share it. In my view, whether it’s okay for someone to do something doesn’t depend on whether lawmakers give them written permission. For instance, did you know that it’s against the law to drive on Cape Cod’s National Seashore’s beach if there’s not a tire-pressure gauge in your car? Nevertheless, I have no moral objection if you drive on the beach gaugelessly. Regardless of whether government officials approve, this is just a peaceful activity that doesn’t violate anyone’s rights.
Maybe you disagree with me. Still, as others have suggested, there’s another way to accommodate Friedman’s general idea: admit immigrants as lawful permanent residents but restrict their access to certain government resources. Economists sometimes call this a “keyhole solution”—if the problem is immigrants’ consumption of benefits, then design a policy that narrowly targets that problem rather than restricts their freedom to immigrate entirely.
The main objection to this sort of policy seems to be moral rather than economic. Indeed, Friedman himself was asked about it and he replied that he found the proposal unappealing partly because it’s not “desirable to have two classes of citizens in a society.” That’s a good point. It’s unfair for a government to give some citizens taxpayer-financed benefits but not others. If two people live, work, and pay taxes within a country, government officials should treat them equally, which involves giving them both equal access to government resources.
Notice, though, that a policy of immigration restriction also treats citizens and prospective immigrants differently—it gives citizens, but not immigrants, access to domestic labor markets, private associations, educational opportunities, and more. Consequently, a principle of equal treatment actually seems to imply open borders. Given that Friedman rejects this option, the task becomes that of identifying the second-best solution. (Also, it’s not clear that Friedman can square his objection to keyhole solutions with his endorsement of illegal immigration, which would presumably also create two classes in a society.)
Why think that a policy of open immigration with restricted access to benefits is better than outright exclusion? The reason, in brief, is that admission with conditions treats prospective immigrants better than exclusion. A policy of open immigration with restricted benefits at least gives people the option to move, and it’s hard to see how giving someone a new option could make them worse off.
Here’s an analogy. Suppose John is entering the job market. One employer offers him a job with health insurance and a retirement plan. The next day, he receives another offer—this one comes with no benefits, but a much higher salary. Even if you think he should take the first job, it seems perfectly permissible to offer him the second. John is no worse off for having another option. If he doesn’t want to take it, he can simply decline it. And if he does prefer higher pay without benefits, he’s clearly better off for having the option.
John’s case is analogous to the case of a prospective immigrant who expects to earn significantly more by moving to a country where her access to government benefits is limited. If she prefers having access to a wider range of government-provided benefits in her current country to having higher earnings but fewer benefits in a new country, she can decline to move; in this case, she is no worse off for having the option. But if she prefers higher earnings with fewer benefits, the option makes her better off. Just as it’s permissible—indeed, probably good—to offer John the extra option, so too is it permissible to offer prospective immigrants the extra option.
It’s also worth highlighting another important aspect of restricting immigrants’ access to benefits rather than restricting their movement entirely. Admitting immigrants as lawful permanent residents removes the threat of deportation, among other consequences, that accompanies undocumented entry into a country. Even if you agree with Friedman (as I do) that the keyhole solution of admitting immigrants with reduced access to benefits isn’t totally fair, it’s still more fair than denying prospective immigrants the option of safely moving at all."
