By David R Henderson. Excerpts:
"According to the OECD, 12 OECD countries had individual net wealth taxes in 1990, and all 12 were European countries. By 2017, only four OECD countries still had them"
"the likely reason is that they were losing some of their wealthiest residents to other countries that didn’t impose taxes on wealth."
"In September 2023, the Census Bureau added questions about AI to its Business Trends and Outlook Survey. Census asked hundreds of thousands of businesses whether they had used AI in the previous two weeks to produce goods and services. At that time, 3.7% said yes; by late 2025 the figure had reached about 10%. (In November 2025 Census broadened the question to ask about AI use in any business function, producing a jump in measured adoption to about 18%.)
Twice the Bureau has asked a key question:
In the last six months, how did the use of Artificial Intelligence affect this business’s total employment?
In Dec. 2023 to Feb 24, when ~5% of firms were using AI the answers were 2.8% increased, 2.6% decreased and 94.6% reported no change. Two years later, in the Nov 2025–Feb 2026 supplement, the answers were: 2.3% increased, 2.0% decreased, and 95.7% reported no change. The answers were similar by firm size.
Some sectors reported more action. Information is the one sector where fewer than 92% report no change. But overall, almost all firms report no change and of those reporting change it’s about evenly divided between increasing and decreasing employment.
The supplement also asked about tasks. Among firms using AI, 44% say it supplemented or enhanced work an employee already does. Ten percent say it performed a task an employee used to do. Eleven percent say it introduced a task no one had been doing.
Among those using generative AI, 85% of firms cited writing or editing documents and email as the biggest uses, half cite searching for information, 45% summarizing documents, and 13% coding. Sixty-four percent of adopters say they changed nothing about the business in order to use AI, 15% trained existing staff, another 15% built new workflows, and just over one percent hired anyone with AI skills.
Among firms where AI has taken over some employee tasks, the degree of substitution is growing. The share reporting that AI took over “a large number” of tasks rose from 2.4% to 7.1%, while the share reporting “a moderate number” rose from 13% to 22%. But this group is still small: only about a tenth of AI adopters, who themselves make up about a fifth of firms.
I have reported firm-weighted estimates but employment-weighting gives essentially the same result. Thus, we have unusually direct evidence from a very large sample, and it says that the overwhelming majority of firms using AI do not yet report any effect on total employment. Very consistent with what Tyler and I said in our talk to OpenAI."
"The standard argument for occupational licensing is that it keeps out low-quality providers. Existing evidence, however, does not support this claim; moreover,
licensing erects barriers that can restrict labor supply and worker mobility, with potentially far-reaching implications for wages, employment opportunities, and economic efficiency.
Indeed, new research suggests that
[c]ountries with higher licensing rates tend to have lower output per person, larger informal sectors, and lower scores on multiple dimensions of governance quality, including regulatory quality, rule of law, political stability, and control of corruption.
Licensing is not only a problem in advanced economies. Instead,
it appears to be a widespread labor market institution spanning countries with diverse legal systems, income levels, and regulatory traditions. […] Countries with lower income levels, weaker governance institutions, or larger informal sectors may adopt additional licensing requirements in an effort to improve quality, increase compliance, or formalize economic activity.
The research concludes that
[c]ountries with higher rates of occupational licensing tend to have lower output per person, larger informal sectors, and lower scores on multiple dimensions of governance quality."
By Aaron Brown. He teaches statistics at New York University and at the University of California at San Diego. Excerpts:
"Last October, The Wall Street Journal published an editorial titled "More Marijuana Users Are Crash Dummies."
"How much social and public-health damage will Americans suffer before doing a U-turn on marijuana promotion?" the editorial begins. "A new study finds that more than 40% of drivers who died in car accidents in one U.S. county over the last six years had elevated levels of the drug in their blood.
The "new study" they cited is available only as an abstract and a short press release describing a conference presentation of an unpublished report, with no supporting details. After the Journal editorial appeared, we made several attempts to speak with the lead author, Wright State University professor of surgery Akpofure P. Ekeh, to obtain a copy of the draft study and answer some basic questions. We were unable to reach him. A public information officer at the American College of Surgeons, where Ekeh is a member, told us via email that the study "is a research-in-progress, meaning there is not yet a complete study that I am able to provide.""
"The claim that 40 percent of deceased drivers had elevated levels of marijuana in their blood isn't trustworthy because THC testing is only ordered in some cases, presumably the ones when driver impairment is suspected."
"Drivers were likely tested because they were suspected of intoxication."
"Also, testing the blood of autopsied drivers doesn't mean they were high while driving. THC in the blood generally indicates that someone has used marijuana in the previous few days. Postmortem THC tests are particularly unreliable."
Another study from the Insurance Institute for Highway Safety did claim to show a difference between pre- and post-legalization of marijuana use by drivers by examining changes in accident rates in five Western states. It found that legalization was associated with a 2.3 percent increase in fatal crash rates.
Here's how the authors presented the data.
The blue dots represent seasonally adjusted monthly motor-vehicle fatalities before legalization, the orange dots represent those after legalization, and the dashed lines show the averages before and after legalization.
The three-year average traffic death rate in legalization states was 9.5 percent higher after legalization than before. The pattern was the same in the control states that did not legalize, but they had only a 6.5 percent increase. After some complex adjustments, the authors attributed a 2.3 percent increase to legalization. It looks like a big jump. But that's because the chart presented the data in a misleading way.
I recharted the data and, unlike the authors, I made it into a time series, accounting for changes in the rate of traffic deaths during the study period. This way, you can see the trends, which undercut the authors' thesis.
The blue dots represent seasonally adjusted monthly motor-vehicle fatalities before legalization, the orange dots represent those after legalization, and the dashed lines show the averages before and after legalization.
The three-year average traffic death rate in legalization states was 9.5 percent higher after legalization than before. The pattern was the same in the control states that did not legalize, but they had only a 6.5 percent increase. After some complex adjustments, the authors attributed a 2.3 percent increase to legalization. It looks like a big jump. But that's because the chart presented the data in a misleading way.
I recharted the data and, unlike the authors, I made it into a time series, accounting for changes in the rate of traffic deaths during the study period. This way, you can see the trends, which undercut the authors' thesis.
The press release also had no mention of a control, so we have no idea if the drivers' THC-positive rate is higher or lower than for the general population. Scientific studies require a control. It also looked at one county in Ohio, covering data before and after marijuana was legalized there in 2023, and there was no significant change in the ratio of drivers with THC in their blood.
So the study, if it ever does appear, will have nothing to say on the impact of marijuana legalization on driving while high, and it won't present evidence that this practice is on the rise. That didn't stop The Wall Street Journal in its coverage of this yet-to-materialize study from claiming in its subhead that "high-on-pot drivers are contributing to more highway accident deaths."
The most explosive finding about the dangers of legal weed comes from a study by a team of Canadian researchers, who looked at emergency room records in Ontario before and after legalization took effect in October 2018. As CNN summarized it, the study found that "documented marijuana-related traffic accidents that required treatment in an emergency room rose 475% between 2010 and 2021."
Why is the 475 percent claim misleading? For starters, the news coverage didn't mention that we're talking about a very small number of people. During the period when marijuana was legalized and commercialized, 120,569 people showed up in Ontario emergency rooms due to traffic accidents. Just 125 people, or 0.1 percent of the total, "had documented cannabis involvement," according to the clinical judgment of the onsite medical team. Moreover, for every cannabis involvement patient, there were 18 with alcohol impairment. Of the people with cannabis involvement, 42 percent also had alcohol involvement. Cannabis alone does not seem to be the major intoxicant choice to impair driving.
The tally of 125 people over 20 months works out to about six people per month. Before legalization, there were two people per month showing up at emergency rooms with "cannabis involvement." That's a 200 percent increase, not a 475 percent increase. Why did the authors claim a 475 percent increase?
Marijuana legalization overlapped with the COVID-19 lockdowns. During the pandemic, people were driving much less, leading to a decline in total car accidents.
The authors wanted to adjust for this unusual situation, so they assumed that if people had been driving normally, there would have been many more marijuana-related accidents. That assumption, along with a few other adjustments, led them to raise the 200 percent increase to 475 percent.
This adjustment isn't valid. You can't compare COVID lockdown data with pre-COVID data because life was so abnormal. School closures in Ontario meant people were driving their kids to school less often, and many were working from home or were unemployed. Since most people who drive while high are less likely to do so while heading to work or taking their kids to school, you would expect an increase in the proportion of drivers on the road with marijuana in their system during the lockdowns, even if the absolute number stayed the same.
Another problem is that the 125 people counted by the researchers weren't necessarily high while driving. Just because they were classified as cannabis users in the E.R. doesn't mean they were under the influence at the time of the accident, or that marijuana caused them to crash their cars.
Some of those 125 people were passengers rather than drivers, which makes the inference that marijuana contributed to the crashes even more dubious. If someone who didn't use marijuana was giving a ride to a friend because he was too stoned to drive, and they still got into an accident, the passenger would have been counted as a patient with "documented cannabis involvement." That tells us nothing about whether marijuana legalization led to more traffic accidents.
Another problem with the dataset is that many of the people were counted because they admitted to the doctor at the E.R. that they were marijuana users. Patients would have been more willing to admit to their drug habit after legalization than before, which further biased the data.
by claims that legalization increases traffic accidents by 2.3 percent. Even if there were solid evidence for that claim, it's laughably inadequate to support a drug war."
Why did removing border fences in Gibraltar spark no migration crisis, while Ceuta's fortified perimeter failed?
By Daniel Sánchez-Piñol of The Independent Institute..
"Just days after Spain celebrated winning the FIFA World Cup, it found itself making international headlines for a very different reason. Tens of thousands of migrants crossed from Morocco into Ceuta—Spain’s small autonomous enclave on the North African coast—overwhelming local resources and sparking an immediate crisis.
The political reaction was immediate. Criticism focused almost exclusively on Spain’s failure to secure its border. Because many migrants had bypassed the perimeter by swimming around it, Spanish officials quickly announced plans to construct new maritime barriers. To much of the international community, the lesson seemed simple: if the border had taller fences on land, better barriers at sea, updated intel, tighter controls, and tougher enforcement, the tragedy could have been prevented.
Spain took the heat. But the debate largely ignored a more fundamental question: Why are tens of thousands of Moroccans willing to risk their lives simply to leave their country?
The answer lies a few miles away, on the other side of the Mediterranean.
Only days before the Ceuta crisis, Gibraltar, the British Overseas Territory bordering southern Spain, removed physical fence barriers separating the two jurisdictions. There was no migration crisis. No sudden wave of Spaniards poured into Gibraltar, nor did Gibraltarians rush into Spain. Daily life continued uninterrupted; crossing the border simply became faster and easier.
Why did one border descend into chaos while the other barely made news?
The answer lies in institutional convergence.
In the mid-twentieth century, Spain and Morocco were not dramatically different. Authoritarian regimes governed both and relied on protectionist policies, running economies that rewarded political connections over entrepreneurship. In the early 1950s, Spain’s income per person was roughly twice Morocco’s—a modest gap by modern standards.
Today, Spain’s GDP per capita is roughly four times higher than Morocco’s. Meanwhile, the economic gap between Spain and Gibraltar has narrowed dramatically. That divergence explains why one border facilitates routine commerce while the other attracts desperate migration.
Spain’s transformation was no accident. Its 180-degree pivot began when the United States and the broader Western alliance sought to integrate the nation into a liberal democratic order. Following the 1953 Pact of Madrid, international isolation began to end. Spain joined the United Nations in 1955, and the 1959 Stabilization Plan abandoned decades of autarky in favor of fiscal discipline, trade liberalization, foreign investment, and market competition. Following Franco’s death, the democratic transition and subsequent integration into the European Economic Community anchored Spain’s rule of law, curtailed rent-seeking, and solidified its market economy.
Morocco has undertaken economic and political reforms of its own, but structural barriers to opportunity persist. Centralized power, militarized state, corruption, and cronyism continue to constrain entrepreneurship and job creation. These institutional weaknesses help explain why so many Moroccans look abroad for a future.
The contrast offers a powerful lesson. Paradoxically, the most effective long-term policy against irregular migration is not an impenetrable wall, but the expansion of institutions that generate opportunity: secure property rights, competitive markets, and the rule of law.
That was once a central objective of Western policy. During the Cold War, the United States and Western Europe invested considerable diplomatic, economic, and political capital in helping nations like Spain converge toward liberal market democracies. Today, that vision has largely been set aside in favor of a narrower focus on controlling borders.
But borders do not exist in isolation. What matters is what lies on either side of them. When institutional and economic gaps are wide, migration pressures grow, and borders become harder to enforce. When those gaps narrow, borders become easier to secure because fewer people have reason to cross them illegally.
The West cannot fence its way out of a problem by treating symptoms instead of causes. Ceuta and Gibraltar show that the most important border is still the institutional one."
See Milton Friedman Lives! by Michael Munger. Excerpts:
"I think it is fair to divide the current anti-Friedman wave into three elements with one recurrent element.
Laissez-faire Is Obsolete
Vice President J.D. Vance and the broader national-conservative or “new right” movement voiced by Oren Cass (both Vance and Cass, by the way, have the same economics qualifications as Robert Reich) say that the idea of self-organizing commerce is “old-fashioned” and needs to be consigned to the scrap heap of history. In a , Vance argued that the Republican Party’s economic center of gravity has shifted “from Milton Friedman to Alexander Hamilton.” What he meant was that the “new” economic policy should predate the development of economic theory. The shift from laissez-faire toward economic nationalism, tariffs, and state-assisted industrial policy is far from new; it is, in fact, exactly the outdated mercantilist view that Adam Smith demolished in Wealth of Nations."
Business Profits
In 1970, Friedman published a now-famous The core claim was simply that shareholders’ goals are diverse and possibly contradictory. No single management strategy focused on social goals could possibly optimize that set of objectives. Consequently, the most responsible thing for business to do would be to pursue profit, honestly and within the law, and then let shareholders do with those profits as they will.
Bizarre distortions and outright misrepresentations of this simple argument have recently bubbled up from some deep, noisome pit. Examples include a November 2025 SAPIR Journal piece, “What Milton Friedman Got Wrong,” and constant refrains of scorn from such commenters as Nobel laureate Joseph Stiglitz to Salesforce C.E.O. Marc Benioff. Bizarrely, the Stigler Center, named after Friedman’s friend and intellectual supporter George Stigler, published an entirely incoherent set of comments in “.”
They blame Friedman’s essay for launching “shareholder primacy,” which is the doctrine that a corporation’s only social responsibility is profit maximization for shareholders, full stop. Critics argue this legitimized decades of short-termism, hostile takeovers, junk-bond financing, and disregard for employees, communities, and the environment. But this whole argument misreads (or I suspect, never read) the 1970 essay. Friedman never used the terms “shareholder value” or “shareholder primacy,” and he never implies that ethical constraints should be suspended. What he does claim is that managers should not impose their own ethical goals, which is a different proposition entirely. The shareholder-first ethos of the 1980s–90s arose instead from hostile-takeover pressure and executive stock-based compensation, not from Friedman’s essay itself.
Globalization and Deindustrialization
A cross-ideological populist coalition, ranging from economic-nationalist conservatives to progressive never-traders, draws (loosely) on academic work from labor economists David Autor, David Dorn, and Gordon Hanson (). It is true that Friedman was among the most prominent 20th-century advocates of unilateral free trade grounded in comparative advantage. Critics argue that the trade liberalization his ideas underwrote, especially normalizing trade with China (“permanent” normal trade relations in 2000, World Trade Organization membership from 2001), destroyed roughly 2.4 million U.S. manufacturing jobs between 1999 and 2011. The ripple effects contributed to the social and economic decline of manufacturing communities and fed today’s populism on both left and right.
To be honest, this is less a critique of a specific Friedman idea than an indictment of the free-trade consensus he symbolized. In the podcast series I did last summer and fall on the , I found it striking that the arguments that Smith considered, took apart, and corrected in his industrial policy and trade discussion are so resilient. But there is something different this time: the relationship among nations no longer satisfies liberalism’s (potentially) optimistic premises. If we are not at or considering war with another country, the argument for free trade is straightforwardly unilateral. But as , if one nation operates under liberal assumptions but another nation is trying to maximize relative gains for purposes of military dominance, then another world view may be necessary.
It is wrong to believe that Friedman did not understand that. Blaming Friedman for China is like blaming . Like Adam Smith, Friedman was analyzing a situation where people were trading for commercial reasons, and as equals. It is anachronistic to believe that Friedman, a thorough-going empirical realist, would not have recognized China’s profound exceptionalism.
The Recurring Refrain: Consorting with Dictators
In March 1975, Friedman spent two weeks in Chile; he met with dictator Augusto Pinochet exactly once, for forty-five minutes. Pinochet said little but asked Friedman to put his recommendations in writing. They had met at 5:30 p.m., the end of a long day, so it’s not surprising that Pinochet would ask such a thing.
Friedman did so about a month later, in an eight-point letter recommending sharp cuts to money-supply growth, spending cuts, and trade liberalization. It was the same style of advice he gave to many other governments. In fact, it was the exact same advice he gave on other trips at about the same time to the governments of Taiwan, Israel, Japan, West Germany, the U.K., Iceland, Estonia, about twenty other nations, and, importantly, China.
The Chile visit was a few weeks in 1975; the China engagement was deeper and longer, including two extended trips (1980, 1988) and a personal two-hour meeting with Zhao Ziyang in the Great Hall of the People. Yet “Friedman and Pinochet” is a stock phrase, while “Friedman and Zhao Ziyang” is not really a thing.
One must ask, though: which was the more authoritarian, murderous, repressive regime? If China was your answer, you are correct. Friedman was an enthusiastic proponent of the market order and honestly believed that it was better to live in a prosperous dictatorship than in a poor one. If either China’s or Chile’s dictators had asked about political freedom, Friedman would have advocated for individual rights and liberty. But that subject was not on the table. Instead, Friedman advised the Chinese, exactly as he had all the other nations he visited, on how to open their economy and increase commercial activity.
There is one more twist worth mentioning on this final point. It is true that because Chile adopted the recommendations of “los Chicagos,” especially Arnold Harberger, it became by far South America’s wealthiest large economy. They have universal health care and a pension system that provides a more robust social safety net than any of their neighbors, and the comparison is not close. That is because they immediately adopted Friedman’s recommendations for reforming their economy.
But China has also become wealthy. The open market resulted in an enormous increase in China’s prosperity. That is because China adopted, though belatedly, Friedman’s economic reform recommendations.
Friedman’s economic model has worked everywhere it has been tried. The idea that this history of consistent success is now outdated is at odds with both history and logic."
By DJ Hatch of CEI. Excerpt:
"Federal policy from the Biden administration’s CHIPS and Science Act to the current Trump administration’s trade policy demonstrates an overarching desire to reshore American semiconductor manufacturing. Putting aside any merits this form of industrial policy may have, successive presidential administrations have made clear their intentions to build upon and expand the productive and manufacturing capabilities of the US semiconductor industry. Unfortunately, the current administration’s trade policy undermines this goal.
Much of the relevant tariff regime relies on Section 232 of the Trade Expansion Act of 1962, which authorizes the Commerce Department to investigate whether imports of a given product threaten national security and empowers the president to impose tariffs in response. Crucially, Section 232 is an ongoing statutory authority rather than a one-time policy. The Trump administration has invoked it in separate proceedings covering different products, each with its own investigation and tariff schedule. Two of those proceedings have implications for American memory chip production, with one targeting semiconductors and the other targeting metals (such as steel, aluminum, and copper).
The rationale behind the semiconductor proclamation is what makes the tariffs on metals difficult to reconcile. The Commerce Department found that the United States manufactures only about 10 percent of the chips it needs and treated that dependence on foreign supply as a national security risk (the very risk reshoring is meant to address). Yet the same Section 232 authority, invoked against steel, aluminum, and copper, raises the cost of the domestic production that the semiconductor finding says the country needs.
Semiconductor fabrication plants (“fabs”) are particularly metal-intensive industrial structures, built with heavy steel frames, extensive copper wiring, and large cooling systems. Micron, the only major American manufacturer of memory chips, reports that its Idaho fab has a structural backbone framed with some 70,000 tons of steel. The recent Section 232 metals tariff raises the cost of that material across the board. As of April, those tariffs bite harder as the duties are now assessed on the full customs value of covered steel, aluminum, and copper articles and their derivatives, rather than only the value of the metal content. Thus, the tariff falls on fabricated components and finished structural inputs, not just raw metal. Even when sourcing domestic material, fab developers face inflated prices. Micron is building new DRAM fabs in Idaho and New York under precisely these conditions. If the goal is to expand domestic memory chip production, taxing the plants that produce those chips is counterproductive.
The tariff regime itself all but acknowledges the problem. The same proclamation carves out metal-intensive industrial and electrical-grid equipment, capping the combined duty on those goods at 15 percent through the end of 2027, well below the 50 and 25 percent rates that fall on other covered goods. It is hard to explain the existence of a special, lower tier for exactly the equipment a domestic buildout requires as anything other than a tacit admission that these tariffs raise the cost of building American industrial capacity.
Both the Biden and Trump administrations have made reshoring American chip production a national priority. But current trade policy runs counter to that goal. It raises the cost of building the fabs that reshoring requires, under the same statutory authority invoked to protect the industry (a contradiction the administration effectively concedes by capping the tariff on the equipment those fabs need). By taxing the construction needed to expand domestic memory chip production, this tariff regime delays the very supply increases needed to ease the shortage."
See Peter Navarro Is to Economics What Trofim Lysenko Is to Genetics by
"This letter was sent ten days ago to the New York Times; it was not published there.
Editor:
Trump administration trade official Peter Navarro’s attempt to justify the White House’s crackdown on transshipments fails on several counts (“It Was a Great Scam While It Lasted,” August 13). First, these transshipments are the inevitable result of a trade regime – such as Trump’s – that, by rejecting the largely uniform tariffs that arise under a policy of most-favored-nation status, imposes wildly different tariff rates across different countries.
Second, while Navarro is correct that transshipping reduces U.S. customs revenues, he neglects to mention that these revenues are paid overwhelmingly by Americans. His complaint about transshipping, therefore, is really a complaint that transshippers are successfully easing Americans’ tax burden.
Third, Navarro is also correct – trivially so – that all motors, pumps, and other goods that Americans import are goods that Americans don’t produce. Yet he’s incorrect to imply that this reality indicts U.S. trade. Trade of course allows us Americans to acquire these goods at costs lower than we’d incur were we to produce these goods ourselves. But by releasing resources in the U.S. from the production of the goods that we import, trade also allows us to produce other goods that, were we to import less, we’d be unable to produce. Like all protectionists, Navarro is utterly blind to the production and jobs that are made possible in the domestic economy only by trade."
"It’s not just the Democratic Socialists who believe in “taxing the hell out of millionaires.” The belief that Washington can finance itself by taxing a relatively small group of wealthy Americans has become increasingly mainstream and bipartisan.
Senators Elizabeth Warren (D‑MA) and Bernie Moreno (R‑OH) propose removing the Social Security payroll tax cap, subjecting earnings above $184,500 to the 12.4 percent combined employer-employee payroll tax. Senators Chris Van Hollen (D‑MD) and Cory Booker (D‑NJ) each propose exempting more wages from income taxes at the bottom while raising taxes on higher earners. President Trump has pursued a similar strategy of expanding tax exemptions, while President Joe Biden and Vice President Kamala Harris both pledged not to raise taxes on anyone earning less than $400,000.
Each approach shifts more of the tax burden toward the top. One problem with this approach is that there are not enough high-income Americans to finance the current federal budget deficit, let alone fund additional spending or tax cuts.
One simple way to illustrate the mathematical impossibility of raising taxes only on rich people is to ask an intentionally extreme question: How much income is actually left to tax at the top? Not as much as popular proposals usually assume.
Using IRS data, the post below shows an upper bound for income-tax increases on high earners. In 2023, if the government had confiscated every dollar earned over half a million dollars, it still would have run a budget deficit.What’s left to tax?
Using IRS data from the 2023 tax year (the most recent available), we can illustrate the difficulty of raising a lot more revenue from a narrow segment of the population.
In 2023, taxpayers filed 161 million individual income tax returns, reporting $15.3 trillion in adjusted gross income (AGI). AGI includes wages, capital gains, personal business income, and other forms of income, minus adjustments for things like student loan interest and retirement contributions.
The IRS reports this information by different income groups, separating taxpayers into buckets with AGIs above and below $200,000, $500,000, $1 million, and $10 million, among others. Table 1 shows the total AGI and income taxes paid, including federal taxes and an estimate of state-level taxes, by each group.
In 2023, taxpayers earning over $1 million reported $2.5 trillion in total AGI and paid $747 billion in federal and state income taxes. To estimate state income taxes, we apply average rates by income group from the Institute on Taxation and Economic Policy. The 799,094 tax returns in the $1 million+ group accounted for 0.5 percent of all returns and paid an average federal and state income tax rate of 29.5 percent.
In theory, Congress could devise a way to reach every dollar of untaxed millionaire income. But most proposals to raise taxes on high earners instead start by increasing marginal tax rates. Under a graduated income tax, a higher rate imposed above $1 million applies only to income exceeding that threshold, which exempts the taxpayer’s first $1 million from additional taxes.
The IRS data show that for the $1‑million-and-above group, there is $1.7 trillion in AGI above the threshold. Applying the group’s average tax rate implies they have already paid roughly $512 billion in taxes on their above-threshold income. That leaves $1.2 trillion after taxes.
If Congress confiscated every one of the remaining $1.2 trillion after-tax dollars earned above $1 million, the resulting revenue would have fallen nearly $600 billion short of covering the cost of the 2023 $1.8 trillion calendar-year deficit. Dropping the taxable income threshold to $500,000 would also have fallen just short of covering the same year’s deficit. And these estimates make the wildly unrealistic assumption that a 100 percent marginal tax rate would have no behavioral or other economic effects.
Figure 1 extends the improbable assumption over 10 years, assuming that high-income Americans would continue to earn income when facing 100 percent income tax rates. It adjusts the 2023 data by projected income and household growth to show untaxed income over the next 10 years. Confiscating all income earned over $1 million would cover only about 80 percent of the Congressional Budget Office’s (CBO) projected $24.4 trillion federal deficit over the same period.
The Committee for a Responsible Federal Budget produces a more realistic projection of future deficits that assumes Congress extends many expiring tax and spending programs (which the CBO is required to assume are not renewed). At the more likely deficit figure of $29.4 trillion, even lowering the income threshold to $500,000 does not cover the next decade’s budget shortfall.
Lowering the taxable income threshold further to $200,000 expands the pool of untaxed income, but it does not make confiscatory tax rates economically plausible.
Common sense and economic incentives make clear that Congress cannot raise marginal income tax rates anywhere close to 100 percent and expect taxpayers to continue earning and reporting the same income. A recent report by economists at the Joint Committee on Taxation estimates that combined state and federal income tax rates are already near their revenue-maximizing level. Raising top income tax rates further would result in revenue gains of about 0.1 percent of GDP, equivalent to at most $400 billion over the next decade.
Conclusion
Taxing incomes at 100 percent marginal rates is not a realistic policy proposal. Taxes significantly higher than what we have today would radically change how much people work, invest, and realize as income, as well as how much income they report to the government. The point of this exercise is to show that “just tax the rich” proposals fail, even under arithmetic that is the most favorable possible."
Occupational licensing raises costs and limits mobility without improving safety.
"Last week, an article in Governing noted that despite years of reform efforts, roughly one in five jobs in the United States requires government permission in the form of occupational licensing. In a world that is more potentially mobile and flexible than ever, licensing requirements can keep people fixed in place or pose high barriers to entering new trades and professions. The Archbridge Institute's 2026 State Occupational Licensing Index reveals which states are most burdensome, and which make it relatively easy to earn a living.
22 Percent of Americans Need Licenses To Work
"Too often, the occupational licensure laws on the books do not reflect the world we actually live in," Alanna Wilson cautioned in Governing. "American workers wishing to launch a career, build their own business or re-enter the workforce in one of 102 lower-income occupations must on average give up nearly a year to education and on-the-job training, pass at least one exam and pay nearly $300 in fees."
No Rhyme or Reason to Licensing Requirements
According to Archbridge's report, the five most burdensome states in the union are Oregon, Texas, Tennessee, Arkansas, and New Jersey. The five states that put the fewest bureaucratic hurdles in the way of work are Missouri, Kansas, New York, Indiana, and Colorado.
As the report points out, medical doctors are licensed in every state. Nail technicians, for unclear reasons, also need licenses in every state. Most regulated jobs, like the electricians and nutritionists mentioned above, are licensed in some states but not others. Master gas fitters face barriers of some kind in 44 states, including licensing requirements in 11. Dental radiographers face similar burdens in 33 states. Security guards are licensed in half of states, as are fuel piping contractors. Medical assistants and animal breeders are licensed in 10 states. Mold remediation workers need licenses only in Texas.
In other words, while some heavily regulated jobs arguably pose safety concerns, others that might raise similar issues are intermittently licensed. That offers an opportunity to assess whether licensing offers benefits.
'Occupational Licensing Does Not Improve Public Health'
"A broad ideological spectrum of analysts and economists mostly agrees—occupational licensing does not improve public health in any scientifically rigorous or statistically significant manner," Spence Purnell, then of the Reason Foundation, which publishes Reason, wrote in 2018. He added that a study of dental hygienists found "the stricter the licensing requirements, the poorer the health outcomes. The study found this is because the more stringent regulations led to higher prices, which led to low income-earners foregoing routine dental work, which eventually led to more oral diseases, more pain and more costs to the patients."
Rather than safety worries, the 2025 Minneapolis Fed report observed that state licensing requirements seem driven by the policies of neighboring states, lobbying by professional associations for barriers to entry, and competition for jobs from immigrants. "Licensing disproportionately reduces employment of foreign-born workers," researchers found.
Instead of benefits, licensing requirements raise costs to consumers by limiting competition: "Shifting an occupation from unlicensed to licensed reduces employment in the licensed occupation by 29 percent," according to Chris Edwards of the Cato Institute. "Such barriers also discourage hiring across state lines, and thus limit workers' interstate mobility."
While, as the Minneapolis Fed cautioned, eliminating licensing requirements is very rare, states have moved to recognize other states' licenses. "As of 2026, 28 states have adopted some form of universal licensing recognition—the same as last year," according to Archbridge. "Universal" recognition isn't always universal—some states specify that the licenses they recognize be subject to "substantially similar" rules as those issued locally, while others recognize only the licenses of state residents. But 11 states earn Archbridge's gold medal for universally recognizing occupational licenses without restrictions.
Universal license recognition isn't an entirely satisfactory substitute for eliminating requirements that people get government permission to work.
But eliminating licensing would be a difficult ask of lawmakers who sold the public on the idea that pointless and expensive burdens improve public safety. In that sense, universal recognition is a positive reform to regulations that hurdles in the way of jobs of prosperity."
By John H. Cochrane. Excerpts:
"If you invest an extra dollar today, how much extra do you get in a year? A 5% wealth tax drags down the rate of return by 5 percentage points. If you earn 10% on your investments, but then pay a 5% wealth tax, you only get a 5% after-tax rate of return. Starting from a 10% return, a 5% wealth tax is the same as a 50% tax on interest, dividends, and capital gains."
"The wealth tax applies on top of corporate taxes, property taxes, and taxes on dividends, interest, and capital gains. Inflation acts as another wealth tax, running 3% a year now. My guesstimate is that the government takes all the return and more."
"Should they (billionaires) bet the farm on a new venture, investing time and effort as well as their money? Should young Elon Musk take his $175 million PayPal payout and retire on it, or plow it all into electric cars and rockets? We often think of saving vs. consumption here, but I think we underestimate the disincentive to take risk and invest effort that comes from progressive taxation. If the government taxes away the upside to investing, people take less risk."
"Billionaires do not have a pot of gold that can be costlessly handed out. Billionaires’ wealth stays re-invested in companies. Redirecting their wealth to social spending lowers national investment and raises national consumption, dollar for dollar. That’s not even hidden; it’s the point. But less investment mechanically means less capital for the future, fewer businesses, less productivity, lower wages."
"less investment also drives up interest rates as people with profitable ventures look for investors. Companies could finance investment with foreign money, but that raises the trade deficit"
"Structuring businesses to avoid taxes rather than generate profit might be the most insidious effect of high taxation."
"We have a wealth tax, the estate tax. It tries to charge 40% of wealth once in a generation, or about 1% a year. (You pay double if you pass it to grandkids, so really about once every 30 years.) The estate tax attracts a beehive of perfectly legal avoidance. (Avoidance, not evasion. “Tough enforcement” and audits do nothing here.) Though the estate tax applies above a lowly $11 million, the CBO reports that it yields only $18 billion, or 0.1 percent of GDP. A recent study—by wealth tax backers—reports that the estate tax collects only three to four hundredths of a percent (0.03%–0.04%) annually of the Forbes 400 wealth, not 1% or so."
[the bill] includes “a $3,000 direct payment to every man, woman and child living in a household making $150,000 or less.” $1.1 trillion for Medicaid and Obamacare subsidies. Free dental, vision and hearing. $856 billion of government-provided homes to “abolish homelessness.” A childcare entitlement. A minimum salary for teachers. And so on. This is proudly a bill to turn investment into consumption."
"Free market wealth did not install Putin, nor did it create US crony capitalism under the regulatory state."
"What’s the right question? There is only one question — long run growth. Redistributing Rockefeller’s wealth would not have made your family better off. We’re all immensely better off because of long-run growth. Even if your concern is entirely at the lower end of the economic spectrum, long-run growth is the question. Ask of any policy, what does this do to long-run growth? For the wealth tax, not much!"
"Eh, only in the short run:
We study the causal impacts of income on a rich array of employment outcomes, leveraging an experiment in which 1,000 low-income individuals were randomized into receiving $1,000 per month unconditionally for three years, with a control group of 2,000 participants receiving $50/month. We gather detailed survey data, administrative records, and data from a mobile phone app. The transfer caused total individual income excluding the transfers to fall by about $1,900/year relative to the control group and a 4.2 percentage point decrease in labor market participation. Participants reduced their work hours as a result of the transfers by 1-2 hours/week and participants’ partners reduced their work hours by a comparable amount. Among other categories of time use, the greatest increase generated by the transfer was in time spent on leisure. Despite asking detailed questions about amenities, we find no impact on quality of employment, and our confidence intervals can rule out even small improvements. Treated participants broadly increase expenditures, led by spending on non-durable goods and services, with smaller increases in spending on durable goods and human capital. We observe no significant effects on degree attainment, though the magnitudes of the estimated effects generally appear larger among younger participants. Measures of subjective well-being are higher among treated participants in the first year of the transfers but then revert to control group levels. Overall, our results suggest a moderate labor supply effect that does not appear offset by other productive activities.
That is from the QJE by Eva Vivalt, Elizabeth Rhodes, Alexander Bartik, David Broockman, Patrick Krause, and Sarah Miller. Via Matt Yglesias."
There’s a senselessness to Europe’s attempt to manage wine supply and dictate prices that echoes the New Deal’s effort to alleviate poverty by destroying millions of pigs.
"In the spring of 1933, American farmers pleaded for help from their newly elected president, Franklin Roosevelt. Hog prices were at record lows, and the farmers wanted the government to do something.
Not one to let a crisis go to waste, FDR took action. Agriculture Secretary Henry Wallace was tasked with arranging the slaughter of millions of pigs in an effort to raise hog prices. Farmers who participated in the federal government’s hog program — later dubbed by economists “the porcine slaughter of the innocents” — were compensated. Their animals were turned into “inedible meat and bone meal,” courtesy of US taxpayers, even as hunger in America hit record highs.
A country destroying its own food during a depression might sound like economic madness, and it is — but we are once again watching governments ramp up policies that pay farmers to destroy food.
It’s no secret that European vineyards have been disappearing for years. The trend is starkest in Pyrénées-Orientales in southern France: that region “lost nearly half its vines” between 2000 and 2020, The Economist recently reported. Limited access to water and rising energy costs played a role. But vineyards have vanished with increasing speed in recent years, thanks to government policies.
In 2024, the French government revived a familiar tactic: paying farmers to rip out their vines. Under this national program, farmers can receive roughly €4,000 (about $4,600) for every hectare they remove. If lawmakers aimed to see the country produce less wine and hasten the disappearance of vineyards, that’s what they got.
France typically produces well over 40 million hectoliters of wine annually, but in 2025 it produced just 36 million, according to the French Ministry of Agriculture. Meanwhile, growers in the Languedoc-Roussillon region saw a surge in vines removed last year — roughly 15,000 hectares, an area approaching the size of Washington, D.C., according to The Economist.
Many might assume climate concerns drove France’s policy, but the primary reason resembles the catalyst for FDR’s “porcine slaughter of the innocents”: oversupply.
Global trends show fewer people drinking alcohol, especially Gen Z. Wine has taken a particularly hard hit, even in France, where red wine consumption recently reached an all-time low. French lawmakers say their policy is designed to “rescue” the wine industry from what the ministry described as excessive output.
To the average person, paying vineyard owners to destroy their vines likely looks crazy — but in Europe, it’s business as usual.
For years, the European Union has attempted to micromanage wine production through various incentives, including direct payments to farmers to remove vines. A European Parliament report found that the EU’s 2008 wine reform set an aggressive target: removal of 175,000 hectares with commitments to not replant. (Actual removal totaled 160,550 hectares.)
Now it appears Brussels is intent on ramping up its policy. The EU’s most recent Wine Package will, among other measures, make it easier for countries to make direct payments to farmers to destroy their vines.
“…new rules on State aid would allow Member States to use national financing not only for distillation of surplus wine,” the package reads, “but also for green harvesting (the total destruction or removal of grapes while still in their immature stage) and grubbing up (complete elimination of all vine stocks) of vineyards.”
There’s a certain irony in the policy.
For decades, the EU subsidized wine production, resulting in surplusses critics dubbed “wine lakes.” Now Brussels wants to ratchet up efforts to rip out vines — to curb the very surplus that bureaucrats helped create.
There’s a senselessness to Europe’s approach that matches New Deal efforts to alleviate poverty by destroying millions of pigs. At least some New Dealers eventually learned their interventionist policies were failing.
“We are spending more money than we have ever spent before and it does not work,” United States Secretary of the Treasury Henry Morgenthau Jr. admitted to Congress in 1939. “I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises.”
Morgenthau learned the hard way that trying to engineer a market economy from Washington — through spending, controls, and heavy-handed intervention — produced results far different from those promised.
We can only hope lawmakers in Europe eventually learn the same lesson.
Markets aren’t perfect, but they aggregate information from millions of buyers and sellers far better than bureaucrats, who can’t seem to decide whether to subsidize vineyards to boost production or destroy them to raise prices.
These contradictions will do long-term harm to vineyards. That’s a shame. A world with less wine is a less happy world."
Calls for wealth redistribution rest on a faulty premise about inequality
"Summary: Widespread claims of rapidly worsening global inequality are unsupported by the evidence. Long-term data show significant declines in inequality across income, health, education, and other important metrics, largely driven by rising prosperity in poorer countries. Popular policy proposals to address inequality, such as wealth taxes and expanded foreign aid, are misguided and dangerous. Policies that sustain economic growth and market stability are better guarantors of progress.
Anthropic CEO Dario Amodei called for far higher taxation in a recent blog entry, arguing that current wealth concentration is higher than that of the Gilded Age and is about to get worse globally. The chart-topping singer Billie Eilish implored billionaires to give away their money, while New York City mayor Zohran Mamdani has gone further, opining, “I don’t think we should have billionaires” because we live in “a moment of such inequality.” If anything is having a moment, it is the conviction that inequality has grown urgent enough to justify a muscular policy response.
But the facts don’t support this. Not only has global income inequality fallen over the long run — contrary to the popular narrative — but inequality has also declined in education, health, and a host of other areas. The world is now more equal across a range of factors, from lifespan and childhood survival to internet access and schooling. The more broadly one examines inequality, the more encouraging the data appear. It turns out that even the shock of COVID-19 failed to erase decades of progress toward a wealthier and more equal world.
Indeed, the data show a pronounced decline in global inequality over the past few decades, driven largely by rising prosperity in poorer countries. During the pandemic years of 2020 and 2021, progress slowed sharply. Some indicators stalled and a few modestly worsened. But the gains accumulated before the crisis were not undone.
In short, the damage to human well-being was more limited than many feared.
Another recent analysis published in The Economist finds that global inequality in consumption spending is falling. In 2000, the richest 10% of humanity spent 40 times more than the poorest 50%. In 2025, they spent around 18 times more. Using data from World Data Lab, they find that the poorest 50% now out-consume the richest 1%, breaking from past trends.
Yet many think that only large-scale redistribution can stop runaway worldwide inequality. Figures as diverse as Amodei, Eilish, and Mamdani are far from alone in embracing this view. Over the past few years, calls for a worldwide wealth tax, a vast increase in foreign aid spending, and other unprecedented measures are gaining steam across academia, non-profits, the press, and international organizations like the United Nations.
That conclusion is premature. Getting the facts straight is essential, because misunderstanding global inequality can push policymakers toward harmful solutions.
The record on foreign aid is far less encouraging than its advocates suggest: decades of evidence show that aid frequently fails to deliver sustained development and bears no reliable relationship to long-term economic growth. Worse, the fixation on ever larger aid flows often crowds out the harder work of domestic reform. In some cases, foreign aid has been shown to weaken political institutions, entrench bad governance, and slow the process of democratization.
Wealth taxes have their own problems, from high administrative costs and enforcement challenges to low revenue production and invasion of financial privacy. These problems help explain why so many of the countries that have implemented wealth taxes in the past — such as France, Germany, and Sweden— later abolished the tax. Perhaps the worst of all, by discouraging risk-taking, wealth taxes suppress investment and growth, effects that would be felt in both rich and poor countries and would likely prove especially damaging to development in the world’s poorest economies.
Recent work on multidimensional inequality suggests that the world has not been drifting toward ever greater gaps, but that the rich and the poor have been converging in material comfort. Calls for global wealth taxes or massive new aid programs often rest on the assumption that international trade and economic freedom have failed to deliver broadly shared gains. Yet the long-term evidence suggests the opposite.
The pandemic offers two lessons here: First, it highlights just how sensitive progress is to disruptions in markets. It depends on conditions that allow growth to occur and persist, including functioning markets and stable institutions. Many of the proposed policy solutions risk undermining that progress.
The second lesson is that while the pandemic represented a hurdle in the path of progress, the long-term trend toward lower global inequality is holding strong.
Alarmist narratives shape public opinion and encourage policymakers to pursue sweeping interventions that may do more harm than good. A clearer view of the data counsels caution rather than panic."
"The rebalancing debate has sparked renewed interest in Japan’s experience since the 1980s. Some argue that this is a cautionary tale, exemplifying the dangers of reorienting economies through currency appreciation (People’s Daily, 2010). They claim that the appreciation of the yen after the Plaza Accord forced the authorities to introduce an offsetting macroeconomic stimulus, which then led to an extraordinary asset price boom followed by an extraordinarily painful bust. Japan was one of the world’s fastest-growing economies for three decades but has averaged only 1.1 percent real GDP growth since 1990, while prices have steadily declined. Consequently, the size of Japan’s economy today is about the same as in the early 1990s. The sequence of events is clear and striking. But there are reasons to doubt that it was truly inevitable, whether the Plaza Accord was really the direct cause of Japan’s “Lost Decades.”
What Happened?
The events began in September 1985, when delegates from the G5 countries met at the Plaza Hotel in New York, declared the U.S. dollar overvalued, and announced a plan to correct the situation.1 The essence of the plan was that the main current account surplus countries (Japan and Germany) would boost domestic demand and appreciate their currencies. In effect, this agreement marked a major change in policy regime: the Federal Reserve was signaling that after a long and successful fight against inflation, it was now prepared to ease policies, allow the dollar to decline, and focus more on growth. This signal was backed by coordinated currency market intervention and a steady reduction in U.S. short-term rates. Accordingly, it triggered an exceptionally large appreciation of the yen, amounting to 46 percent against the dollar and 30 percent in real effective terms by the end of 1986. (The deutsche mark appreciated similarly.) As a result, Japan’s export and GDP growth essentially halted in the first half of 1986. With the economy in recession and the exchange rate appreciating rapidly, the authorities were under considerable pressure to respond. They did so by introducing a sizable macroeconomic stimulus. Policy interest rates were reduced by about 3 percentage points, a stance that was sustained until 1989. A large fiscal package was introduced in 1987, even though a vigorous recovery had already started in the second half of 1986. By 1987, Japan’s output was booming, but so were credit growth and asset prices, with stock and urban land prices tripling from 1985 to 1989. Then, in January 1990, the stock price bubble burst. Share prices lost a third of their value within a year, and two decades of dismal economic performance followed (Figure 1.4.1). Today, nominal stock and land prices are back at their early 1980s levels, one- quarter to one-third of their previous peaks.
The critical question is whether this sequence was inevitable. In other words, did the appreciation force Japan to introduce a powerful stimulus to sustain growth, which then triggered a bubble, which caused the Lost Decades when it collapsed? Let’s consider each step in turn.
Was Such a Large Stimulus Needed?
Studies suggest that, in fact, the monetary policy easing may have been excessive. Estimates by Jinushi, Kuroki, and Miyao (2000) and Leigh (2010), among others, suggest that the policy rate was up to 4 percentage points too low during 1986–88 relative to an implicit Taylor rule based on the output and inflation outlook. Why, then, did the central bank sustain such a policy? A key reason is that current inflation remained reasonably well behaved, which led some economists to argue that soaring growth rates did not represent a cyclical boom but rather a “new era” of higher potential growth. This growth was particularly gratifying because it was led by domestic demand, a key commitment under Plaza.
But IMF reports at the time suggest another factor was also at work. The authorities worried that higher interest rates would further strengthen the yen and feared that appreciation would eventually have serious effects on the economy. In the end, external demand did indeed diminish. But it did not collapse. Real exports continued to grow in the five years after Plaza, by an average of 2½ percent a year (half the rate of the previous five years), while the current account surplus diminished by a moderate 2 percentage points of GDP. (Similarly, Germany’s currency appreciation failed to derail its export or GDP expansion, even with a smaller monetary response.) Put another way, excessive stimulus was adopted in part because there was excessive concern about the impact of appreciation.
Did the Stimulus Cause the Bubble?
Although the monetary easing was certainly large, it is far from clear that it alone was responsible for the asset price bubble. Chapter 3 of the October 2009 World Economic Outlook and Posen (2003) have examined the link between monetary policy and asset price booms in advanced economies over the past 25 years. They conclude that policy easing is neither necessary nor sufficient to generate asset price booms and busts. In Japan’s case, two other elements seem to have played a large role. As Hoshi and Kashyap (2000) explain, financial deregulation in the 1970s and early 1980s allowed large firms to access capital markets instead of depending on bank financing, leading banks to lend instead to real estate developers and households seeking mortgages. As a result, bank credit to these two sectors grew by about 150 percent during 1985–90, roughly twice as fast as the 77 percent increase in overall bank credit to the private sector. Finally, because the dangers of real estate bubbles were not well understood in those years, the Japanese government did not deploy countervailing regulatory and fiscal policies until 1990.
Did the Bubble’s Collapse Cause the Lost Decades?
The aftermath of the bubble proved extraordinarily painful for Japan. But the collapse of a bubble does not inevitably have such powerful and long-lasting effects. What was special about Japan’s case? A key factor was the buildup of considerable leverage in the financial system, similar to what occurred in the United States before 2008. Tier 1 capital of Japanese banks in the 1980s was very low, much lower than elsewhere, as global standards (the Basel I accord) had not yet gone into effect. Moreover, much of the collateral for loans was in the form of real estate, whereas under the keiretsu system a significant portion of bank assets consisted of shares in other firms from the same group. So, when real estate and share prices collapsed, the banking system was badly damaged.
This underlying vulnerability was exacerbated by a slow policy response. The authorities delayed forcing banks to recognize the losses on their balance sheets and allowed them to continue lending to firms that had themselves become insolvent, a process Caballero, Hoshi, and Kashyap (2008) call “zombie lending.” This process continued into the early 2000s, stifling productivity growth and prolonging Japan’s slump. Why did the authorities not force faster restructuring? Possibly because restructuring would have required additional bank capital, which they were not in a position to provide in light of the strong political backlash after an initial injection of public capital in 1995. Consequently, the authorities exercised forbearance instead.
The postbubble slump may also have been exacerbated by the macroeconomic policy response and adverse external shocks. Some argue that premature monetary tightening and the lack of a clear commitment to raising inflation led to unduly high real interest rates (Ito and Mishkin, 2006; Leigh, 2010). In addition, the tightening of fiscal policy in 1997 may have undercut the nascent 1995–96 recovery (Posen, 2003; Corbett and Ito, 2010). Finally, adverse external shocks played a role, including the 1997–98 Asian financial crisis.
In sum, Japan’s experience shows that currency appreciation does not, in fact, inevitably lead to “lost decades.” The appreciation did not inevitably require such a large macroeconomic stimulus. The stimulus did not inevitably lead to the bubble. Nor did the bubble’s collapse inevitably lead to the Lost Decades. Instead, it was the particular combination of circumstances and choices that led to that result.
Lessons for Rebalancing Today
Calibrating a policy response to exceptionally large appreciations and movements in asset prices remains an extraordinarily difficult task. But some pointers can be gleaned from Japan’s experience. The keys are to
• avoid an excessive macroeconomic response to currency appreciations;• use prudential policies to prevent vulnerabilities from building up, especially in the form of leverage;• address banking problems quickly if they do materialize; and• provide significant macroeconomic support when banking systems and economies come under stress.An even broader lesson is that bubbles can prove dangerous. Accordingly, Japan has introduced a two- perspective framework for monetary policy, with one pillar focusing on price stability and the other looking out for financial imbalances such as asset price bubbles.
But even as Japan’s experience offers lessons to countries considering rebalancing today, the direct parallels are limited. Most notably, circumstances in China today differ from those in Japan in the 1980s in ways that should help it avoid Japan’s disappointing outcomes (Figure 1.4.2). First, the leverage of households, corporations, and the government in China is lower now than it was in Japan before the bubble (N’Diaye, 2010), and the risk of excessive borrowing may thus be smaller. Second, as Chapter 4 of the April 2010 World Economic Outlook and Igan, Fabrizio, and Mody (2007) find, climbing the quality ladder helps offset the impact on growth of currency appreciation, and China has more room to climb the export quality ladder than Japan did. (At the same time, the impact on labor-intensive industries may be greater.) Third, Japan had a floating exchange rate regime in the 1980s, but China has a managed exchange rate supported by vast foreign currency reserves and strong restrictions on capital inflows. This difference in currency regimes should help China avoid the sharp appreciation observed in Japan. Most important, China should be able to reap the benefits of learning from Japan’s experience."
