Ongoing housing affordability challenges in the United States have scholars and policymakers focused on land-use regulation. Deregulatory reforms—like allowing multi-family housing in single-family neighborhoods—are proposed to allow more housing in supply-constrained places like California, or to keep building it in fast-growing places like Texas. But a focus on affordability and housing supply has left cities like Detroit or Cleveland, victims of long-term depopulation and deindustrialization, mostly ignored in the national conversation about zoning reforms. In new research, focusing specifically on Midwestern Rust Belt cities, we find that these places, too, badly need land-use reforms. Here, the consequence of outdated, overly restrictive land-use rules is not a housing shortage driving up prices, but unnecessary barriers to economic revitalization. Zoning reform is not only a task for the superstar cities, but for struggling cities as well.

A Focus on Housing Shortages and Affordability Has Left the Midwest Missing in Land-Use Policy

When studying urban land-use policy, academic lawyers, planners, and economists mostly focus on wealthy, coastal cities like the Bay Area or Greater Boston, which feature high housing costs and low new-housing production. They also focus nearly exclusively on housing. And reasonably so! In these places, housing shortages drive an affordability crisis, excluding working-class people from moving to opportunity and impeding innovation. In light of the urgency of their housing affordability challenges and in response to a mounting body of scholarly research, many of these cities—and their respective states—have undertaken important deregulatory reforms.

Some other analyses consider more elastic markets like Atlanta or Phoenix, which have, until recently, produced enough housing to satisfy demand, enabling growth while moderating housing costs. These cities stand in contrast to the first group. There, overly restrictive regulation isn’t (yet) so problematic. Depending on one’s perspective, these Sunbelt cities demonstrate how coastal areas could better regulate land use, show what housing problems remain even when supply constraints are minimized, or need reforms to prevent them from becoming like California as they hit the limits of sprawl. In this discourse, land-use law presents a choice for successful places: to be San Francisco or Austin.

Then, regions like the Rust Belt are largely ignored, and even where they undertake reforms, they receive relatively little attention. Conversely, in these shrinking cities, policy discussions often cover practically everything but zoning. Overlooking these places is, perhaps, understandable. Land-use regulation mostly controls new development. Even if zoning limits Rust Belt cities’ few developments, their surplus of available housing—as well as office, retail, and industrial space and vacant land—means that land-use rules rarely cap supply. Critiques of land-use regulation oriented around housing shortages and affordability have little to offer places where buildings are so oversupplied that many sit vacant and crumbling.

Nevertheless, central elements of these critiques—that land-use regulation is too inflexible, too wedded to low-density, too empowering of unrepresentative opponents of development—hold in depopulated places as well. We set out to study whether such rules still matter in places without a housing shortage.

Land-Use Rules In Slow and No-Growth Cities Block Badly Needed Redevelopment

We use a deep-dive quantitative and qualitative study of development in Detroit, along with detailed analyses in other Midwestern cities from St. Louis to Syracuse, to identify the effects of poorly tailored regulations in these places. We find a system that impedes redevelopment at the parcel level and citywide.

Even in a world where demand is low and land plentiful, land-use regulations prove binding and costly. Thousands of vacant lots in cities like Akron and St. Louis—though once occupied—are too small to rebuild under contemporary law. Zoning laws frequently force developers in these places to shrink projects, shoulder additional costs, or seek uncertain, discretionary relief, usually through variances or rezoning. For example, 52.5 percent of townhouse units permitted in Detroit required a variance, as did 64.4 percent of homes in the city’s downtown-adjacent R3 districts, where much of Detroit’s revitalization efforts are focused. In contrast, in other cities, variances tend to be used to grant relief in unique circumstances, such as where a small or irregularly shaped parcel cannot comply with generally applicable standards. Historic preservation laws or rules concerning subsidies, the latter of which are necessary to most projects’ viability, impose additional reviews. These processes empower the public to impose unpredictable and onerous requirements on builders. Dysfunctional building permitting systems—resulting from understaffing, antiquated technology, and other fiscal strain-driven capacity challenges—create even more burdens.

These rules and administrative structures increase developers’ costs. As a result, projects shrink or are scrapped, leaving vacant lots. Other developers are dissuaded from even trying. These effects are evident in downtowns and neighborhoods, for buildings large and small, for market-rate and affordable housing, and for some commercial and industrial projects. In addition to impeding projects by the public, private, and philanthropic sectors, such rules also inhibit organic, incremental rebuilding by individual homeowners and entrepreneurs. Although poor cities face many obstacles to redevelopment, market weakness in stagnant cities means that even small frictions have outsized impacts.

The effect of these frictions is not to create a regional housing shortage. Zoning reform, in these settings, should not be primarily focused on increasing overall zoned capacity or reducing average home prices. Rather, the goal is to reduce development costs.

In cities that experienced substantial population declines, an overhang of housing supply and continued low demand mean that housing is priced below the minimum cost of producing new units. Accordingly, little unsubsidized new construction occurs. Additionally, increased production costs cannot be passed on to consumers, rendering marginal projects unviable.

Under these conditions, zoning reforms might serve two purposes. First, reforms could enable cities to seize whatever opportunities exist where profitable development can proceed, hopefully seeding neighborhood changes that then increase overall demand. Second, they can reduce the gap between production costs—for housing and all other uses—and the price that future users will pay, helping more projects pencil and stretching limited subsidies further. In post-industrial Midwestern cities, we find problems on both fronts.

But, importantly, we also find nascent reforms. Not all zoning liberalization is successful in these cities: sometimes, the demand simply is not there. But zoning reforms have unlocked mixed-use development in Buffalo, townhouse construction in Cleveland, and affordable housing development in South Bend—among many others. Even where a rezoning facilitates a single new project, it may be in a neighborhood where residents and officials alike work tirelessly to attract each individual development.

The stakes are high. Population and job losses create a vicious cycle. Population decline means that the remaining residents must shoulder ever-larger shares of service and infrastructure costs. Vacancies sap cities of social and economic vitality. Basic services, from utilities to policing and education, are imperiled. These problems make attracting and retaining businesses and people harder still, compounding the cycle. In most Rust Belt cities, depopulation has hit Black residents—who have been more likely to remain in the city—hardest. Land-use regulatory reform alone cannot fix all of these problems, but better regulation is worth pursuing if it can promote some revitalization.

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Deregulation Is Not a Cure-All

While we find serious costs to depopulated cities’ continued use of restrictive zoning and discretionary review procedures, simply deregulating land-use is only a partial solution. Some of these cities’ greatest redevelopment challenges involve their limited administrative capacity, especially around permitting. Promoting growth requires optimizing—and investing in—those systems.

Moreover, even concerning zoning, post-industrial cities face a distinct challenge—generating demand, not just accommodating it—which deregulation alone cannot solve. With higher taxes and worse services than their suburbs, these cities’ urbanism is often their best competitive advantage. They must therefore build desirable urban spaces while pursuing the sometimes-countervailing goal of reducing development costs. Some reforms, like those removing barriers to improving vacant lots, achieve both. But mandating high-quality urban design—by, say, prohibiting strip malls or drive-throughs—may both increase costs and produce positive neighborhood spillovers. Similarly, historic preservation requirements leverage a unique attribute of older cities while adding potential frictions.

Some Rust Belt cities have navigated these tensions by permitting denser, mixed-use development while simultaneously imposing new design requirements. Although this combination is a sensible approach, it requires striking a delicate balance, and cities’ individual efforts are unproven. Further research is necessary to understand how prescriptive approaches to urban design can best function in these settings, without becoming undue barriers to redevelopment. Regardless, we note that liberalized land-use regulation is a precondition for these additional efforts.

State and Federal Pro-Housing Reforms Can Help Rust Belt Cities—and Can Build Needed Administrative Capacity

In high-demand areas, state intervention has been necessary to break through local land use politics, guiding hesitant localities and overruling recalcitrant ones through incentives and zoning preemption. Currently, the federal government appears interested in these efforts, with the bipartisan 21^st Century ROAD to Housing Act having passed the Senate. Though Rust Belt cities are substantially more pro-growth, they, too, could benefit from state and federal interventions: they have their own political challenges to overcome. Moreover, insofar as states and the federal government provide significant subsidies for Rust Belt redevelopment, they have reason to promote land use reforms. Even as state and federal policy efforts continue to center high-demand places, they should include—and be adaptable to—depopulated places.

In large part, those reforms should be the same: encouraging cities to allow more multi-family development, allow more by-right development, require less parking and speed up permitting. But we also note some differences in emphasis. For example, in slow- or no-growth cities, it may be advisable—or at least acceptable—to focus on policy inputs rather than outcomes. Essentially every rezoning effort we observed in the Rust Belt relied on external financial support, particularly from the federal government’s recent PRO Housing grant program. This external funding provides the necessary administrative capacity for developing significant reforms and the impetus to put zoning onto a crowded political agenda. In contrast, high-demand cities don’t need nudges around planning; they need to show results. Likewise, some reforms that have proven effective elsewhere may rely on either high housing costs or robust administrative capacity and be poor fits for low-demand settings.

The 21^st Century ROAD to Housing Act includes some elements well-suited for Rust Belt settings. For instance, it proposes funding communities to develop their own pattern books of pre-approved building designs, which can expedite permitting processes for builders of low-cost housing types. Some other provisions that might especially aid Rust Belt cities, like those requiring federal agencies to develop zoning best practices and guidelines for single-stair apartment building development, were previously approved but dropped from the latest version of the bill. As negotiations over the package continue, Congress should proceed with the understanding that its reforms can—and should—help improve land-use rules and permitting in both depopulated and supply-constrained cities.

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Conclusion

Many long-struggling cities are now revitalizing. Land-use law can support or smother these trends. Some cities are already adopting and adapting reforms pioneered elsewhere, without a media spotlight. Such efforts offer preliminary evidence of what land-use reforms can do for depopulated or stagnant places, even as they reveal a need to identify policies better suited for these cities’ unique needs. In an era of political and economic divides, it is worth understanding and improving places that have faced decline.

As Congress considers a greater federal focus on land-use, it should do more to support zoning reform and help rebuild administrative capacity in depopulated cities. Doing so could go a long way toward keeping some of the United States’s most affordable cities affordable, while vastly improving revitalization outcomes along the way.

Public discourse about economic inequality usually focuses on individuals or households.1 Common metrics, such as the income shares of the top 1% or 10%, offer telling indicators of the wide and growing dispersion in families’ incomes. In many contexts, the household-level focus is appropriate, especially for policies that redistribute income (such as the One Big Beautiful Bill Act) or provide social insurance (such as Medicaid) based on individual or household eligibility.

But measures of inequality at the individual or household level provide limited guidance about where national policies take hold or why economic growth fails to reach people in specific places. A regional perspective can help clarify the geographic incidence of policy and identify the local conditions that shape whether growth translates into jobs and rising household incomes. Recent research also underscores that regional inequality itself has become more important for explaining the overall dispersion in incomes, making place an increasingly important lens for understanding inequality.

Federal efforts toward reindustrialization and supply-chain configuration have also sharpened the need for regional economic analysis. These policies are being deployed into a landscape of regional divergence, where the capacity to absorb new investment, training, and infrastructure spending varies widely across places. Without understanding that landscape, even well-funded industrial policies may concentrate gains in already-thriving regions while bypassing distressed ones. Yet, on the whole, national policymakers still tend to rely more heavily on either microdata on individuals and households or highly aggregated macroeconomic indicators, and pay less attention to the regional dynamics that shape local economic performance. Building stronger analytical capability at policy institutions would improve policymakers’ ability to understand where growth occurs, why it fails to reach households in some places, and how emerging shocks, such as those from climate risk to AI adoption, may add to uneven regional opportunities and impacts.

Place-Based Divergence: County-Level Trajectories Are Pulling Apart

In the decades following World War II, many poorer regions of the U.S. tended to grow faster than richer ones. Indeed, many Southern states narrowed the per capita income gap with Northern states during this period. For residents, this regional convergence showed up in everyday life in the form of higher earnings, more and better job options, and improved local amenities. But since about the late 1970s, income dispersion across households and across places have been rising steadily, reversing the post-World War II trend of convergence.

By 1980, regional convergence weakened and largely disappeared by the late 1990s. Since then, higher-income places have tended to grow faster than lower-income ones. Figure 1 also shows that county-level dispersion in income accounts for a growing share of person-level income dispersion since the late 1960s. By 2019, this share hit an all-time high for the pre-tax measure of income and was near a series high for a measure that also considers federal transfers.

That rising (relative) importance of place is also visible in counties’ growth trajectories. Counties that ranked highest in median household income in 2000 went on to post the strongest gains in both GDP and jobs for the next two decades (Figure 2), while counties at the bottom posted the weakest performance. Between 2001 and 2023, counties whose median household income put them in the bottom fifth experienced a 39.5% increase in real GDP and an 8% increase in employment. For counties in the top fifth of the county median household income distribution, GDP grew 77.2% and employment grew 33.2%.

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Within counties, GDP growth doesn’t always translate into jobs or higher income for all households

Differences across counties are only part of the story. Even when counties experienced economic growth, that growth was not broadly shared within them. Between 2001 and 2023, real GDP growth was widespread, and nearly everyone lived in a county where the local economy grew (albeit at very different rates). Yet only about three-quarters of Americans live in a county where employment expanded. County GDP growth, in other words, does not always translate into local labor market gains.

This feature of economic growth among counties is not a statistical anomaly. Rather, several dynamics can drive a wedge between output growth and employment growth. Output can rise because firms invest in capital, adopt labor-saving technologies, or realize productivity gains that do not require comparable increases in hiring. Growth led by a small number of highly productive firms, for example, may boost local GDP without generating additional jobs. More broadly, “jobless recoveries” have marked several U.S. recessions since 2000, especially in middle-skill occupations vulnerable to automation and restructuring, such as bookkeeping, assembly line operations, and data entry. These dynamics tend to play out unevenly across places because productive firms, automation pressures, and spillover effects from weak labor demand are themselves geographically concentrated. Understanding why growth translates unevenly into jobs and income, and designing policies responsive to them, require looking beyond national statistics and more closely at local economic conditions.

The lack of employment growth is not the only way that economic growth can fail to translate to broad-based improvements in living standards. Economic growth is an imperfect proxy for gains in household income. From 2000 to 2023, inflation-adjusted median household income did grow faster in places where the economy expanded more. But the scale of those gains was much smaller, with median household income rising by 8.7%, compared with 59.3% growth in real GDP and 19.3% growth in employment.

As with job growth, several broader forces also held back growth in median household income during much of the 2000-2023 period. Slower productivity growth, weaker business dynamism, subdued wage growth, and the effects of the Great Recession all contributed to weak gains in median household income, even as GDP continued to rise. Regional dynamics compounded these broad forces. Trade shocks were concentrated in particular manufacturing regions, innovation gains accrued disproportionately to a small number of high-skill metros, and housing constraints varied with local regulation and market conditions. In some places, these forces held back growth in median household income directly while in others, they widened the gap between output growth and what reached workers paychecks. Tracing those patterns regionally is therefore essential for both understanding the geography of inequality and identifying the combinations of forces that have held back household income growth.

Why Regional Analysis Must Be Central to Policymaking

These patterns are not just academic. Rather, they shape how policies should be designed and evaluated. Because national aggregates average across divergent local trajectories, they can obscure both the sources of underperformance and the most promising policy levers. If convergence has faded and economic growth does not lead to more jobs or income, then analyzing regional conditions becomes essential to understanding how national policies interact with local economies.

Research shows that a locality’s features, including skills, agglomeration, industry mix, knowledge anchors (e.g. universities), innovation density, housing elasticity, firm dynamism, and amenities, correlate with local economic growth and help explain why similar GDP gains correspond so differently into jobs and household income across places. But there is no simple recipe for growth because these factors interact, and the payoff to any one lever often depends on the local context. Underperforming places with abundant housing, for example, may still struggle to attract businesses if they lack enough skilled workers. Likewise, sector-focused training tends to raise earnings most reliably when it is tied to active employer demand; without it, newly credentialed workers may leave the region to find work rather than become local hires.

Although it is not possible to account for every interaction among these local factors, the discussion above points to an important general lesson: local conditions often matter in combination. Housing and amenities, for example, may affect whether a place can translate new labor demand into economic growth. In some regions, limited housing supply may restrict access to jobs, while in others, weak infrastructure or fewer local amenities may make it harder to attract or retain households and firms. Research suggests place-based policies are most effective when they are tied to concrete hiring needs in specific sectors and occupations, supported by enough housing for workers to access jobs, and implemented at a scale large enough for agglomeration spillovers to materialize. Demographic responses also matter. Regional policy analysis should consider how these factors work together.

In support of policymakers, the research and policy analysis community should devote greater and more systematic attention to regional economic dynamics. Several priorities stand out. First, distributional analysis of policy impacts should routinely include a geographic dimension alongside the standard income-based lens, improving understanding of who benefits, where they live, and whether national policies are reaching their intended places. Second, the models most commonly used in policy analysis should be extended or complemented with tools that can capture how policy effects vary across regions with different industry mixes, labor market conditions, and housing markets.

Third, analysts should invest in making existing subnational data more accessible and analytically useful — not necessarily by collecting more data, but by lowering the barriers to using what already exists. In practice, this means developing and maintaining standardized geographic crosswalks that allow analysts to link datasets across counties, census tracts, commuting zones, and metro areas without bespoke data engineering for each project. It also means developing composite indicators, such as measures of economic distress, labor market health, or regional resilience, that synthesize multiple dimensions of local economic performance into measures that are comparable across places and legible to a broad policy audience.

Some tools already point in this direction, including the Economic Innovation Group’s Distressed Communities Index and the EDA-supported StatsAmerica platform. The next step is to embed this kind of place-based diagnostic infrastructure more systematically into routine policy analysis. Regional analysis already produced by the Federal Reserve banks and academic economists could also be incorporated more directly into mainstream policy evaluation to explore the geographic incidence of public policies. Nationally calibrated tools can have sharply uneven regional effects, and understanding those effects should be a precondition for designing policies that work across the country.

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There are a variety of regulatory barriers to housing development, from zoning restrictions to permitting delays and hassles, but separating the effects of each has been nearly impossible.

In Los Angeles, however, around one in five land listings come with “ready-to-issue” permits attached, creating an implicit market for development approval. In new research, we use this market to produce the first estimate of permitting costs.

We find developers pay a 50-percent premium for pre-approved land relative to otherwise equivalent raw land — roughly $770,000 for a typical building site — and that permitting accounts for about one third of the gap between home prices and construction costs in the city. Buying preapproved land also saves developers around two years from site acquisition to completion, not because total time falls, but because someone else has already waited.

How can local governments reduce permitting costs? We have two main recommendations. First, while many cities publish “open” data on building permits, few include the basic information needed to measure a standardized time-to-permit and time-to-build. This low-cost tweak could inform and improve future governance.

Second, we argue the root problem is institutional design, not inadequate public resources for permit review. That is, the status quo of discretionary review and hyperlocal vetoes fundamentally engages the wrong political actors at the wrong time. We review the theoretical rationale and empirical evidence that leads us to favor broad rules over project-level discretion (“as-of-right” permitting) as well as centralizing permitting decisions at the mayoral level (abolishing hyperlocal permitting authority, such as “aldermanic prerogative” or “member deference” on city councils).

Economic foundations: the tragedy of the anticommons

Why is permitting so costly in cities like Los Angeles? We see it as a case of the “tragedy of the anticommons,” the mirror image of the more familiar tragedy of the commons. Where the commons problem arises when too many people can use a resource, the anticommons problem arises when too many parties hold veto power over a transaction. When everyone can say no, mutually beneficial deals can fail to happen.

Under discretionary permit review — the standard in Los Angeles and some other high-rent cities — building an apartment complex of meaningful size requires approvals from multiple bodies: neighborhood councils, planning commissions, environmental review boards. Any one of them can compel changes or delay the process.

These complications not only add cost and risk, but they also create points of “hold-up” leverage against housing development. Economic theory has explored how, with private information about project value, such hold-up can be destructive, stopping deals that would be profitable even after transaction costs. We ultimately view such bargaining as rent-seeking competition over the surplus value created by other land-use constraints.

Journalists and policy researchers have documented dysfunctional bargaining outcomes in many real-world cases of permitting. In San Francisco’s Mission District, for example, one developer proposed to build 75 new apartments. He ended up spending a decade arguing about whether he could tear down a supposedly “historic” laundromat.

Developers pay a 50-percent ‘approval premium’ for permitted land

In equilibrium, the cost of permitting for the marginal project should equal the approval premium — that is, the incremental value of land with permits over its value without them. If approved land were too expensive, that is, developers would “make” the permits themselves. Too cheap, and every developer “buys” the permits.

To measure the value of a completed permit, we compare changes over time in listing prices of properties that experienced a change in their permit status. Differences in prices over the change in permit status provides a measure of the value the market places on the permit. To control from general trends in prices over time unrelated to permits, we also net out changes in prices over the same time period across listings that remain raw land.

We find developers pay 50 percent more for preapproved land than for otherwise-equivalent raw land. In dollar terms, that is $48 per square foot — roughly $770,000 for the typical building site, and about 36 percent of construction costs.

Figure 1. Land with Approved Permits Command Substantial Premiums

Note: Dots report event study estimates of price premiums for land that eventually receive permitting approval, by year prior to the ready-to-issue (RTI) permit approval. The reference period is three years prior to the RTI listing. The figure includes nine lead years before being fully approved. To estimate the approval premium, the event study compares changes over time in listing prices of properties that experienced a change in their permit status, controlling for contemporary price trends observed for listings that remain raw land. Bars indicate 95-percent pointwise confidence intervals, with standard errors clustered by parcel.

While these figures appear sizable, they might be small relative to the distortions that other land-use regulations create. Our data allow us to directly address that critique.

Following Glaeser and Gyourko (2003), the total regulatory tax on housing can be measured as the gap between home prices and construction costs. If land markets are roughly efficient, then this home price-construction cost gap is capitalized into the value of raw land. The approval premium goes on top of raw-land value. By this logic, comparing the approval premium to raw-land value pins down the permitting share of the regulatory tax. We find permitting can account for approximately one third of the home price-construction cost gap in Los Angeles.

The permit approval premium reflects avoided wait times and hassle costs

The permit approval premium has two components. The first is pure wait: permitting in Los Angeles takes roughly two years for the median project, accounting for 40 percent of the total time from site acquisition to receiving a certificate of occupancy. Overall, a 30-unit apartment building takes approximately 4.2 years to complete in Los Angeles, twice as long as in Raleigh or Fort Worth.

The second component is capitalized hassle: the compliance expenditures, legal fees, and plans that developers draw up during the review process.

To say how much might be pure wait versus hassle, we link listings to permit outcomes. By comparing projects on preapproved and raw land, we estimate projects on preapproved land are 8 to 12 percentage points more likely to complete construction within four years.

That effect is a 30-percent increase over the counterfactual four-year completion rate of 35 percent, for an average time savings of roughly two years. At standard discount rates, pure wait can account for roughly half of the premium, with the rest reflecting hassle.

Figure 2. Construction on Pre-approved Land is Completed Faster

Note: This figure displays the estimated effects of preapproval on time to completion. Specifically, it plots the empirical cumulative completion hazard for preapproved properties (red solid line) and then subtracts off the estimated effects of preapproval to obtain the counterfactual completion profile in time (blue dashed line) The sample is all vacant properties that ever submit a permit. Color bands indicate 95-percent pointwise confidence intervals, with standard errors calculated by a nonparametric bootstrap clustered by property.

These results suggest that preapproval effectively creates a “market for time.” For every year that developers save once they buy preapproved land, we estimate landowners spend an extra year in permitting. That is, preapproval changes who waits, without changing total time spent.

Who preapproves land?

Our research uncovers a specialized subsector of the Los Angeles real estate industry that has emerged and takes permitting as its comparative advantage, carving off a task distinct from construction. These are short-term landowners — permit-flippers — who buy raw land, navigate approvals, and sell rather than build.

We show this in two ways: by looking at land investor holding periods, and by identifying the landowners through their property-tax mailing addresses.

First, we find much higher preapproval rates among properties with holding periods of two or three years than ten. This pattern mirrors the behavior of short- versus long-horizon investors in other asset markets.

Second, the landowners who pursue preapproval on one site use this strategy more than 60 percent of their other land holdings. That fraction is around 50 percentage points higher than one would predict using the neighborhoods in which the owners and parcels are located. In short, preapproval is a business, not an accident.

The geography of permitting costs

One might expect permitting to matter most in lower-rent neighborhoods, where developers are less constrained by limits on how intensively they can use land. The data suggest the opposite.

Los Angeles County spans neighborhoods where housing is very dear and ones where most of the stock is highly depreciated. In economically-distressed South Los Angeles, home prices are roughly at par with construction costs. Consistent with this, developers are willing to pay essentially nothing for a permitting shortcut there. The regulatory tax is low because the market cannot bear it.

Figure 3. Permitting Is Most Burdensome In Places Where Housing Prices Greatly Exceed Construction Costs

Note: This figure displays zipcode-level estimates of the median wedge between rents and construction costs (Panel A), and the model-implied contribution of permitting costs to this wedge, reported as a percentage of construction cost (Panel B).

But in high-rent neighborhoods like Santa Monica, where home prices exceed construction costs by more than two to one, developers are willing to pay around 85 percent of construction costs just to skip permitting. Permitting is thus a major driver of the construction costs in places where other regulations already heavily distort housing supply.

What this means for permitting reform

While our results directly address the problems of one U.S. city, we think policymakers beyond Los Angeles might draw several lessons from our research.

For federal policymakers, the most actionable implication is data infrastructure. The Census Survey of Construction surveys developers on time from permit issuance to completion but omits the pre-issuance phase, which our research shows is important. A modest redesign to capture the full timeline would allow researchers and officials to track permitting costs across cities and over time.

For local policymakers, the key question is whether their city tracks the full permitting timeline: from a developer’s initial engagement with planners through to certificate of occupancy. Most cities post permit data online, but many are missing key dates. Without the complete picture, it is challenging to assess the performance of city practices.

Most fundamentally, our results raise two deeper governance questions that have been considered in scholarship on law and economics as well as fiscal federalism. First, to what extent should building permits be awarded by rules versus discretion? Second, at what level of government should permitting authority sit?

The classic tension between rules and discretion is that the decision-making agent (the government) has incentives that are better aligned with the principal (society) on a rule-level basis rather than case-by-case. However, governing by rule forgoes valuable case-specific information.

Under “as-of-right” (also known as “by-right” or “ministerial”) permitting, if a project satisfies predetermined rules, a city is obligated to issue the permit. Many jurisdictions are moving toward rules-based permitting. In California and Massachusetts, for instance, recent reforms have recently expanded as-of-right permitting, respectively for “infill” development and accessory dwelling units. While research has found speed benefits of rules-based permitting, we are not aware of empirical research that measures the benefits of discretion.

Turning to fiscal federalism, the canonical trade-off is between internalizing spillovers across jurisdictions and accommodating local preference heterogeneity. In the housing context, new construction is often genuinely disruptive to existing residents, and their concerns deserve a voice. But in spatial equilibrium, people benefit from more housing in places where they will never live — and where they will never vote.

Hyperlocal permitting authority, variously called aldermanic prerogative in Chicago or member deference in New York, puts undue weight on incumbent residents relative to everyone else. Recent research suggests that reallocating this authority to officials with broader constituencies, as at the state or regional level, could increase housing production.

The challenge is doing this while protecting democratic voice and disadvantaged communities from bearing disproportionate costs. But that challenge argues for thoughtful reforms, not for preserving the status quo — which is failing on all three counts: housing production, democratic voice, and minority protection.

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The Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps, is one of the U.S.’s largest safety net programs. A broad swath of American households, particularly those with children, elderly individuals, or individuals with disabilities, rely on SNAP, and research shows participation can reduce food insecurity, poverty, and improve health and health care use. Recent legislative and regulatory changes to SNAP will restrict its reach and reduce benefit levels, and devolve more of its costs to states. These policy changes provide financial and administrative challenges for states.

SNAP is a federal-state partnership that delivers food assistance to 42 million people each month

SNAP provides cash-like vouchers (via Electronic Benefit Transfers [EBT] cards) to eligible households that can be used to purchase foods to be prepared at home. Federal SNAP spending totaled $99.8 billion, with an average benefit of $187.20 per participant per month, in FY 2024. SNAP benefit levels are determined by household income and household size, and play a substantial role in the resources of low-income families. In FY 2023, the vast majority (86%) of SNAP benefits went to households in poverty; more than half (51%) went to households in deep poverty (income under 50% of the federal poverty level [FPL]).

SNAP benefits and eligibility are set nationally (consistent across the contiguous 48 states). The program has been fully federally funded historically, but states administer the program and recent legislation will increase states’ SNAP costs in the future. To receive SNAP, individuals must apply in the state in which they live and meet certain income and resource eligibility requirements. Currently, household gross monthly income must be under 130% of the Federal Poverty Level ($2,888 for a family of three in 2026) and household net income1 must be under the poverty line ($2,221 for a family of three), with some resource or asset limits.2 Households with elderly individuals or individuals with disabilities may have slightly higher incomes and assets. Most states, however, use Broad Based Categorical Eligibility (BBCE), meaning they align their SNAP eligibility requirements with their Temporary Assistance to Needy Families (TANF, cash welfare) programs, which removes asset limits and allows household gross income up to 200% FPL.

SNAP participants who are considered Able-Bodied Adults Without Dependents (ABAWDs; aged 18-64 without children under 14) are also subject to “work requirements” that limit them to three months of SNAP receipt every three years unless they are working, volunteering, or participating in qualified educational or training activities for at least 80 hours a month. These work requirements were recently expanded in the One Big Beautiful Bill Act (OBBBA) of 2025 and now include households with children aged 14-18 years and individuals aged 55-64, who were previously not subject to work requirements (see discussion below). States have considerable control over SNAP application procedures and requirements, such as whether benefits can be applied for online and how frequently participants must recertify eligibility. Paperwork requirements and other administrative burdens have been associated with reductions in participation.

More than 7 in 10 SNAP participating households contained children, elderly individuals, or an individual with a disability. In FY 2024, an average of 41.7 million people participated in SNAP each month. Nationally, 12.3% of U.S. residents received SNAP at any point across the year, though this rate varied substantially by state (4.8% to 21.2%). In FY 2023, about one-third (34%) of households receiving SNAP included children under 18; another third (33%) were households with one or more elderly individuals, and another 18% of households included a non-elderly individual with a disability. Nearly three-quarters (73%) of SNAP households had incomes under the poverty line.

Nearly half of all children in the U.S. have participated in SNAP at some point before their 18^th birthday. More recent research using administrative data in Virginia finds that nearly half of children receive either SNAP or TANF prior to their sixth birthday.

A wealth of research indicates that SNAP participation benefits food security, health, and other outcomes

Like other nutrition assistance programs (e.g., the Special Supplemental Nutrition Assistance Program for Women, Infants, and Children [WIC], free and reduced-price school meals), SNAP is designed to reduce hunger and food insecurity, defined as limited or uncertain access to adequate, nutritious food. Many studies across time and data sources that use methods that can adjust for systematic differences between individuals who participate in SNAP and those that do not find that SNAP reduces food insecurity. Food insecurity is linked to poorer health, and so it is not surprising that research finds that SNAP participation is associated with several health benefits, including reduced mortality. Research on the initial rollout of the Food Stamp Program in the 1960s and 1970s finds evidence that access to food assistance in childhood leads to improved health in adulthood and, among women, an increase in economic self-sufficiency and earnings. Other work indicates that SNAP participation is associated with improved health care use, such as reductions in emergency room (ER) visits, increased preventive care receipt among children, and lower average health care expenditures. Beyond nutrition and health, SNAP substantially reduces poverty, and has economic multiplier effects, with each SNAP dollar generating about $1.50 in economic activity. In turn, the loss of SNAP benefits is associated with increases in food insecurity and poorer health.

SNAP benefit amounts are relatively low, especially in high-cost areas, and monthly benefits distribution causes instability in household resources and purchases

SNAP benefit amounts are based on the Thrifty Food Plan (TFP), a food plan created by the U.S. Department of Agriculture (USDA) that is intended to represent the lowest possible cost needed to support healthy meals and snacks at home, calculated separately by gender and age. The TFP was updated in 20213 which resulted in a 21% monthly benefit increase for SNAP participants. In December 2025, the TFP’s weekly cost was $56.90 and $71.40 for a female and male, respectively, 20 to 50 years of age. (This amounts to $8.13 and $10.20 per day, or $2.71 and $3.40 per meal assuming three meals a day.) In FY 2023, maximum SNAP benefit amounts were $785 per month for a family of three. SNAP benefits averaged $332 across participating households. SNAP benefit amounts for FY 2026 are shown in Table 1.

Research indicates that the typical SNAP-participating household’s food consumption and diet quality falls short of nutritional guidelines. Some point to the TFP and SNAP benefit amounts as being too low to support a nutritious diet (even after the 2021 TFP reevaluation), particularly with recent food inflation, noting that benefit levels do not consider the time and labor costs of preparing food at home, nor do they account for different family compositions (e.g. health conditions, age of individuals). Further, because SNAP benefits are fixed across the lower 48 states, their purchasing power varies geographically. Research has found that in areas with higher food prices – places where SNAP benefits don’t go as far – children receive less preventive health care and miss more days of school due to illness. Consistent with this, other studies have found that the temporary SNAP benefit increase in the American Recovery and Reinvestment Act (ARRA) of 2009 reduced food insecurity and delays in needing but not being able to afford health care, and that higher SNAP benefits reduce ER visits for hypoglycemia. Beginning in January 2026, the Trump Administration allows states to apply for SNAP Food Restriction Waivers to prevent the purchases of foods like soda and candy using SNAP benefits.

SNAP benefits are distributed once monthly, leading to within-month instability as resources run low at the end of a benefit month. On average, SNAP households expend three-quarters of their benefits in the first half of the month; one-quarter of SNAP households redeem nearly all of their benefits in the week following receipt. Research has linked this SNAP benefit cycle to within-month variation in food and other purchasesanddietquality, as well as ER visits, the incidence of crime, student disciplinary infractions, conflict in the home, self-reported well-being, and children’s SAT and end-of-year exam scores.

Recent policy changes have restricted SNAP participation and benefits

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, will bring multiple, dramatic changes to the SNAP program – changes that will shift costs from the federal government to low-income households and to states. These changes include:

• Expansions in work requirements, which will reduce SNAP participation, in four main ways: (1) raises the age of ABAWDs subject to the 80 hour per month work requirement from 55 to 64, requiring older adults to engage in work activity; (2) restricts states from requesting waivers for ABAWD work requirements due to high unemployment rates; and (3) expands work requirements to parents whose youngest child is 14 years or older, down from 18 or older. Prior research shows that many of those subject to these expanded requirements already work or are caring for others, but reporting work activity, particularly for the many low-income workers who work variable schedules that fluctuate from week to week, will be challenging. Studies indicate that these work requirements, via the paperwork involved in proving work activity, reduce SNAP participation through increased administrative burdens. Indeed, reduced SNAP participation – both from those meeting eligibility requirements and those that do not – due to increased administrative burdens is one of the ways the OBBBA is expected to cut federal SNAP spending.

• Reductions in SNAP benefits. The TFP had been scheduled to be reevaluated (and presumably increased to reflect inflation) in 2027 and 2032; the OBBBA prohibits these TFP updates, essentially preventing changes to the TFP and SNAP benefits. The OBBBA also eliminated the allowances for households receiving energy assistance (heating and cooling) and for internet expenses when calculating SNAP benefit amounts. Together, these changes mean that, beginning in 2027, the average SNAP benefit is likely to be smaller than it would have been without the OBBBA.

• Increases in states’ costs. Whereas SNAP has been fully federally funded (and state-administered) since its inception in the 1960s, states will have to kick in for food benefit costs based on their “payment error rate,” a measure of how accurate a state’s eligibility and benefits determination processes are. Importantly, this payment error rate focuses on overpayment, not underpayment (cases in which individuals should be receiving SNAP but are not, or when recipients receive less than they should in program rules), so state administrators will have an incentive to be more restrictive when determining SNAP eligibility or benefit amounts. Beginning in 2028, states with payment error rates of 6% or higher will pay at least 5% of SNAP benefits costs. Because payment error rates vary from year to year, this will cause unpredictable expenses for state governments. In its forecasting of the OBBBA’s effects, the Congressional Budget Office (CBO) expects that some states will maintain benefits and eligibility while contributing state funds, while others will reduce benefits or eligibility or even leave the program altogether. The OBBBA also reduces federal support for administering SNAP – costs involved in enrolling and re-enrolling of individuals and of getting benefits to participants (e.g., the website, staffing) – from 50% of administrative expenses to 25% of operation costs beginning in 2027, meaning that states will have to shoulder these expenses, too.

• Finally, the OBBBA restricts SNAP eligibility to U.S. citizens or lawful permanent residents. This occurred immediately upon the law’s signing (July 2025) for new and recertifying applicants, for which states must verify immigration status. Prior, certain types of documented immigrants (i.e., those meeting eligibility requirements who had completed a 5-year waiting period) were eligible for SNAP. In late July 2025, the Administration released guidance that requests data from states on SNAP applicants over the past 5 years, including names, dates of birth, Social Security numbers, addresses, and other information used to determine eligibility. Individuals who meet SNAP eligibility requirements in mixed-status households remain eligible, but may be deterred from applying.

In addition to these legislative changes, the federal government shutdown in fall of 2025 led to a delay in SNAP benefits. After the shutdown began in October 2025, the USDA instructed states to pause November benefits and prohibited contingency funds from being used for SNAP. After a federal judge ordered benefits to resume by October 31, the USDA paid only partial benefits. Research on the effects of other shutdowns (e.g., the December 2018 – January 2019 shutdown, during which February benefits were disbursed early in January, leading to an extended gap before March benefits were disbursed) indicate that the uncertainty of SNAP benefits had cascading effects and created challenges for household finances.

Because of the 2025 government shutdown, the USDA delayed the three-month window to comply with the OBBBA’s new work requirements. SNAP participants who had their eligibility redeterminations in November and December 2025 have until the end of February 2026 to comply with the minimum 80 hours per month of work activity; those that do not meet these requirements or prove they are exempt (e.g., document a disability) will lose benefits in March 2026.

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SNAP, and changes to SNAP, affect other public programs

Recent policy changes to SNAP come alongside changes to other public programs that many SNAP participants rely on, particularly health insurance. In 2022, more than three-quarters (78%) of SNAP participants were covered by Medicaid, including 18% who were elderly and covered by Medicaid and Medicare. Medicaid was cut dramatically by the OBBBA, with an estimated 7.8 million individuals losing coverage by 2034. Together, this means some SNAP participants who are enrolled in Medicaid may lose both their health insurance coverage and their resources to purchase food.

As the benefits from and participation in traditional cash welfare (Temporary Assistance to Needy Families [TANF]) has waned over the last three decades, SNAP and Medicaid, along with tax credits, have taken on more important roles in the social safety net. The cuts to SNAP and Medicaid will likely increase poverty, particularly among the young and older adults prior to Medicare eligibility (age 65).

Policymakers have opportunities to make SNAP stronger

First, states and localities can reduce administrative barriers to SNAP enrollment and re-enrollment. This means adopting Broad Based Categorical Eligibility (BBCE), simplifying application paperwork, eliminating asset tests, and extending recertification time periods, among other changes. States may seek to streamline the process for reporting work requirements and documenting exemptions (e.g., caring for a young child or incapacitated person) as much as possible, and institute monthly vs. weekly reporting to (try to) account for work schedules that vary from week to week. These state-level changes may have implications for the effects of other social programs. A (longer-term) option to expand SNAP participation is to repeal the work requirement expansions and eligibility restrictions to citizens/permanent residents in the OBBBA.

Second, policymakers could expand access to SNAP benefits by “smoothing” the existing eligibility threshold, more gradually phasing out SNAP benefits as income increases, more similar to the structure of the Earned Income Tax Credit. This change, in addition to removing asset limits, can help combat the “benefit cliff effect” such that a small increase in income creates a substantial reduction in or loss of benefits that may exceed the increased income, resulting in lower total household resources.

Third, higher SNAP benefit levels – particularly benefit amounts that are adjusted to the local cost of living – could improve food access and quality among participating households. Research has found that the temporary increase in SNAP benefits following the ARRA smoothed food intake over the benefit month. Similarly, SNAP benefits were temporarily expanded during an emergency allotment during the COVID-19 pandemic, which increased SNAP recipients’ spending on food to be consumed at home (i.e., groceries) and reduced food insufficiency. At the federal level, policymakers could repeal the restriction on updating the TFP, and even elect to tie SNAP benefits to the USDA’s Moderate Food Plan, which is likely a more realistic representation of food spending than the TFP. Further, policymakers may seek to eliminate states’ SNAP Food Restriction Waivers to reduce the administrative burdens on SNAP-participating stores and stigma for households.

Another way to increase SNAP benefits is to subsidize healthy foods like fresh fruits and vegetables, which typically cost more than processed food items but for which households are particularly price sensitive. States may apply for SNAP Healthy Incentive project waivers from the USDA to use state, local, or private funding to increase benefits specific for vegetables, fruits, whole grains, or dairy foods.

Fourth, beyond expanding SNAP benefit amounts, policymakers could expand (vs. restrict) the items eligible for SNAP. While SNAP benefits are “cash-like” they are not fungible like cash, and many household essentials – including toothpaste, toilet paper, and diapers – cannot be purchased with SNAP benefits.

State budgets are currently strained and likely to become more so as the OBBBA increases state costs and reducesrevenues. SNAP is a counter-cyclic program, meaning SNAP participation increases during economic downturns (see Figure 1). If states need to balance their budgets, economic downturns can lead to worse financial situations for states at the same time that the food security of low-income households is strained. A repeal of the OBBBA provisions regarding states’ share in benefit and administrative costs would require federal action.

Conclusion

In sum, SNAP serves a wide range of American households, with 7 in 10 participating containing a child, an elderly individual, or an individual with a disability. SNAP participation reduces food insecurity and improves health care use and health, and higher benefit amounts could increase the program’s benefits. Recent policy changes, particularly those in the OBBBA of 2025, restrict SNAP participation, reduce benefits, and increase states’ costs.

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The Trump Accounts program, created through the One Big Beautiful Bill Act of 2025, provides each U.S. child born between 2025 and 2028 with a $1,000 government contribution invested in low-cost stock index funds. Families with children can contribute up to $5,000 annually, with the funds growing tax-deferred until the child turns 18, at which point they could be transitioned into an individual retirement account (IRA).

While the program generated headlines for its promised wealth accumulation, it also presents a new educational opportunity around saving and investing. Recognizing this, the U.S. Treasury’s Financial Literacy and Education Commission recently released a Request for Information to help review its strategy—in particular, to inform how financial education providers can “best use investment vehicles, like Trump Accounts, to teach children how to save, invest, and achieve financial security.” We describe how these accounts could help millions of Americans better understand exponential growth and improve their own retirement saving behavior, addressing a widespread cognitive bias associated with lower levels of retirement savings. In addition, we point out the limitations of financial education and why the choice architecture that accompanies Trump Accounts is poised to have a large influence on their success as vehicles of wealth accumulation. Thus, financial education and the ways in which choices are offered can complement one another towards the goal of broad-based wealth accumulation.

Exponential growth bias is prevalent and consequential in wealth accumulation

Exponential growth bias (EGB) is the tendency to misestimate how quantities grow when they compound over time. People with negative exponential growth bias perceive compound growth as if it were closer to linear growth, where their savings increase by a fixed dollar amount each period rather than accelerating as returns compound on previous returns. This bias is pervasive: research shows that approximately 70 percent of the U.S. population exhibits negative exponential growth bias, with almost a third of individuals perceiving compound growth to be linear (Levy and Tasoff, 2016; Goda et al., 2019).

People who exhibit negative exponential growth bias perceive that returns to investing will be smaller than they actually are, particularly over longer time horizons. While this bias could, in theory, lead to either undersaving or oversaving, research by our team has found that it is strongly associated with lower levels of retirement savings, even after controlling for cognitive ability, financial literacy, income, education, age, and other demographic factors (Goda et al., 2019).1 Specifically, moving from a typical level of bias to a more severe level of bias is associated with substantially lower average retirement account balances at age 65. Under an assumption that the relationship we estimate is causal, eliminating exponential growth bias across the population could increase retirement savings by 12% to 70%, depending on modeling assumptions.

How Trump Accounts could serve as an educational tool

Trump Accounts present an opportunity to help people overcome exponential growth bias through direct, personal experience with compound growth given the initial government contribution starts at birth, initiating experience with compound growth in a child’s (and family’s) formative years. Unlike abstract educational programs about retirement saving or textbook examples, these accounts involve real money growing over time in accounts that belong to the user’s child or family member. This creates natural opportunities for families to engage with compound growth concepts repeatedly. These lessons may translate to knowledge that young people can apply during their subsequent working and wealth-building years.

The Trump administration has offered a website that provides information about how the accounts work and includes projected wealth accumulation in those accounts by certain ages under one set of assumptions, claiming that accounts would accumulate to more than $200,000 by age 55 with no more than a $1,000 contribution at birth. Similar projections have also been described in a report by the Council of Economic Advisors. As discussed extensively by Alan Viard, however, the “administration’s projections greatly overstate the accounts’ likely payoff” because they do not adjust for inflation and taxes and they rely on extremely optimistic assumptions regarding future stock returns. Taking inflation into account, conservative estimates of taxes that would be owed, and using rates of return that are at the top end of six major investment firms’ forecasts, Viard estimates that the $1,000 investment would result in after-tax buying power of $8,000 in today’s dollars.

Providing projections based on a particular, inflexible set of assumptions that also convey certainty is a limitation to financial learning. To further the educational opportunity, the administration could instead create a tool that allows people to enter rates of return, additional contributions, and other details. That would allow families to determine how funding accounts for children today could accumulate into the future.

The results of integrating financial education in a real-world setting has some promise. Our research shows that providing people with personalized retirement income projections significantly increases retirement contributions (Goda et al., 2014). In a field experiment with university employees, those who received projections showing how current savings would translate into retirement income contributed approximately $85 more annually than the control group. Among those who made changes to their contributions, the increase averaged $1,150 annually.

Further, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed in December 2019, included provisions to require defined contribution plans like 401(k)s to provide lifetime income disclosures to their participants. In 2020, the Department of Labor described the requirements in regulations that took effect in September 2021, which include the types of projections required, actuarial and interest rate assumptions, and model language.

Trump Accounts would not be subject to these requirements; however, these requirements and recent research can offer insights into how to integrate projections and tools into the rollout of Trump Accounts to help consumers make contributions that better fit their goals and constraints. We highlight some opportunities here.

First, record keepers should use both personalized mailings and online calculators to serve complimentary purposes. Account statements provide a periodic snapshot of the account balance, and offer an opportunity to provide projections of accumulated balances under a limited number of assumptions. Online calculators can allow account holders the ability to adjust expected rates of return, adjust for inflation, estimate taxes and explore how making additional contributions impact the projections across different time horizons. However, evidence from a randomized control trial our team conducted suggests that those who access online tools are more likely to already be making high contributions and have higher levels of financial knowledge, thus limiting their reach (Goda et al., 2023).

Second, informational materials should account for the potential anchoring to assumptions. Our first study of non-adjustable mailers showed that the effect of projections on employee contributions varied by assumptions on retirement age and the scenarios presented (Goda et al., 2014). However, in a later experiment with an adjustable online calculator, initial assumptions did not affect savings (Goda et al., 2023). Thus, non-adjustable assumptions may anchor individuals to certain projections, but these anchoring effects can be mitigated by allowing users to change assumptions.

Finally, financial information should be provided at moments when individuals are making relevant financial decisions. Research shows that this “just in time” information tends to be significantly more effective. A meta-analysis by Fernandes, Lynch, and Netemeyer (2014) found that even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention, suggesting that financial knowledge, like other forms of education, decays over time when not immediately applied. Kaiser and Menkhoff (2017) in their meta-analysis of 126 impact evaluation studies found that intervention success depends crucially on offering financial education at a “teachable moment.” The effectiveness of just-in-time education stems from its ability to overcome the temporal gap between learning and application that undermines conventional financial literacy programs. When individuals receive targeted information precisely when facing decisions about mortgages, debt management, or retirement planning, they can immediately incorporate that knowledge into their choices, enhancing both comprehension and retention while the motivation to learn and apply new concepts remains high. These findings suggest that providing information during a time when people are actively making financial decisions—such as when they are filing their taxes or enrolling in benefits—can increase the likelihood that the information is acted upon.

Research on retirement savings offers more lessons for Trump Accounts beyond education

While the Trump Accounts offer opportunities for education, the bulk of the evidence in the retirement savings literature suggests that it is difficult to move the needle on savings decisions solely through informational interventions. Financial literacy and counseling can improve knowledge, but the impacts on actual saving behavior are typically modest and uneven—especially when programs are delivered as one-off modules, are optional, or require people to translate abstract information into concrete actions amid competing demands (Hastings, Madrian, & Skimmyhorn 2013; Fernandes, Lynch, & Netemeyer 2014; Lusardi & Mitchell 2014). This gap between knowing and doing is why retirement policy over the last two decades has increasingly focused on how decisions are structured, not just what people are told.

In that context, the key takeaway for Trump Accounts is that “choice architecture”—the design of the choice environment—often dominates education. Automatic enrollment has repeatedly been shown to produce large, immediate increases in participation relative to opt-in systems because inertia and procrastination are powerful (Madrian & Shea 2001; Choi et al. 2004). Defaults also shape how much people save and how they invest: many participants accept default contribution rates and default asset allocations even when those defaults are not tailored to their circumstances (Choi et al. 2004; Beshears et al. 2009). If Trump Accounts are meant to build assets at scale, the most consequential design decisions will be the default enrollment mechanism, the way additional contributions are made (including whether contributions can “step up” over time), and the default investment option—because these features will determine outcomes for the many households that do not make active choices.

The retirement literature also suggests that simplifying the decision process and reducing “hassle costs” can amplify the power of defaults. When the action required to participate is small (or eliminated entirely), participation rises; when the process is complex, take-up falls, particularly among lower-income and less financially confident households (Madrian & Shea 2001; Beshears et al. 2009). For Trump Accounts, that would imply design choices that include making enrollment automatic, allowing contributions to be set up seamlessly through payroll withholding and tax refunds, keep the menu of choices limited and standardized, and using a prudent, low-cost investment fund as the default (Benartzi & Thaler 2007; Beshears et al. 2009).

Finally, the evidence points to complementary “autopilot” features that could materially strengthen Trump Accounts if the goal is persistent saving rather than one-time account opening. Automatic contribution escalation—popularized in retirement plans—can increase saving rates over time while minimizing perceived pain at any single moment (Thaler & Benartzi 2004). The transition into public pre-k or kindergarten can open up substantial space in family budgets previously stretched by child care expenses. Thus, allowing families to pre-commit to increase their savings at that transition might be fruitful. Portability and continuity matter, too: when saving is tied to a job, leakage and interruptions can erode balances; when saving mechanisms persist across job changes, balances tend to grow more reliably (Beshears et al. 2009). Translating these lessons to Trump Accounts means ensuring that accounts follow individuals across employers and life transitions, and reducing the number of required active steps—especially for households most likely to benefit from sustained asset accumulation.

Conclusion

Trump Accounts represent an opportunity for experiential financial education at a large scale. If designed thoughtfully, with realistic projection tools that account for investment returns, taxes, inflation, and various contribution scenarios delivered at the right time, these accounts could help millions of Americans develop a more accurate understanding of compound growth. This understanding could lead to better decision-making regarding retirement savings into the future.

However, realizing this potential requires deliberate policy choices. Providers must build user-friendly tools with realistic assumptions. Regulators should ensure that marketing materials present balanced scenarios and allow opportunities for exploration among a broad set of individuals, not just those who have higher levels of financial capability to begin with. And the design of the choice architecture will arguably have an even larger impact on the eventual wealth accumulated in these accounts into the future. For Trump Accounts to provide broad-based opportunities for wealth accumulation over the life cycle, policymakers need to take a multi-pronged evidence-based approach.

References

Benartzi, S., & Thaler, R. H. (2007). Heuristics and biases in retirement savings behavior. Journal of Economic Perspectives, 21(3), 81–104.

Beshears, J., Choi, J. J., Laibson, D., & Madrian, B. C. (2009). The importance of default options for retirement saving outcomes: Evidence from the United States. In Social Security Policy in a Changing Environment (University of Chicago Press volume).

Choi, J. J., Laibson, D., Madrian, B. C., & Metrick, A. (2004). For better or for worse: Default effects and 401(k) savings behavior. In D. A. Wise (Ed.), Perspectives on the Economics of Aging (University of Chicago Press volume).

Fernandes, D., Lynch, J. G., Jr., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861–1883.

Goda, G. S., Manchester, C. F., & Sojourner, A. J. (2014). What will my account really be worth? Experimental evidence on how retirement income projections affect saving. Journal of Public Economics, 119, 80–92.

Goda, G. S., Levy, M. R., Manchester, C. F., Sojourner, A., & Tasoff, J. (2019). Predicting retirement savings using survey measures of exponential-growth bias and present bias. Economic Inquiry, 57(3), 1636-1658.

Goda, G. S., Levy, M. R., Manchester, C. F., Sojourner, A., Tasoff, J., & Xiao, J. (2023). Are retirement planning tools substitutes or complements to financial capability?. Journal of Economic Behavior & Organization, 214, 561-573.

Hastings, J. S., Madrian, B. C., & Skimmyhorn, W. L. (2013). Financial literacy, financial education, and economic outcomes. Annual Review of Economics, 5, 347–373.

Kaiser, T., & Menkhoff, L. (2017). Does financial education impact financial literacy and financial behavior, and if so, when? The World Bank Economic Review, 31(3), 611–630.

Levy, M. R., & Tasoff, J. (2016). Exponential-growth bias and lifecycle consumption. Journal of the European Economic Association, 14(3), 545-583.

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44.

Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. Quarterly Journal of Economics, 116(4), 1149–1187.

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164–S187.

Viard, A. D. (2026). Trump Administration presents grossly exaggerated projections of Trump Accounts’ payoffs. AEIdeas. https://www.aei.org/economics/trump-administration-presents-grossly-exaggerated-projections-of-trump-accounts-payoffs/

Since the 2008 financial crisis, banks and private capital have become deeply integrated through equity partnerships, liquidity commitments, and risk-transfer arrangements largely overlooked by existing scholarship and regulation. The integration takes place in the shadows outside the prudential bank regulation and off the banks’ balance sheets. The size of bank investment is economically significant, amounting to 18% of the largest banks’ common equity tier-1 capital (a bank’s core capital, primarily common stock retained earnings) of large banks—rising to 56% when unfunded liquidity commitments to nonbank financial intermediaries are included. This bank and private capital “shadow venture” creates systemic vulnerabilities, hidden risks, and warrants regulatory consideration of a menu of prudential reforms.

The Standard Account: Banks Pushed Risk Out to Shadow Banks

For nearly two decades, the organizing narrative of post-crisis financial regulation has been bank de-risking. Higher capital requirements, enhanced supervision, and the Volcker Rule supposedly forced banks to push risk into the unregulated shadow banking sector while increasing capital inside the banking sector.

But if the banking sector is de-risking, why are its largest players aggressively partnering with the riskiest actors in the financial ecosystem in off-balance sheet ventures?

The Rise of the Bank and Private Capital Shadow Venture

The most important development since the crisis is not separation between banks and shadow banks, but strategic convergence. In September 2024, JPMorgan Chase announced a $50 billion investment in its private credit partnerships—direct lending arrangements with at least seven asset managers where the bank provides capital and origination expertise while private funds make the loans. Citigroup and Apollo announced a $25 billion joint lending program. Wells Fargo took equity stakes in Centerbridge Partners’ direct lending funds. These are not isolated transactions—they represent a structural realignment of American finance.

In a recent article, I refer to these arrangements as a bank and private capital “shadow venture”: a set of equity stakes, contractual partnerships, liquidity backstops, and risk-transfer arrangements that link banking organizations to private funds outside formal consolidation and that are not subject to prudential bank regulation. The shadow venture is not “shadow banking” as a sector, but the interface through which banks increasingly participate in private markets. Like shadow banking, however, the shadow venture operates outside the regulatory perimeter. In the shadow venture architecture, banks do not merely lend to private capital. They increasingly become owners, partners, and backstop liquidity providers.

Private credit, in particular, has emerged as a locus of systemic concern. One article chronicles how private credit has caused debt markets to “go dark.” Researchers at the Federal Reserve found that bank lending to private credit vehicles increased more than ten times over the period of 2013-2024. In the United Kingdom, the House of Lords Financial Services Regulation Committee recently published a report on the growth of private markets, focusing on private credit.

Table 1 presents public regulatory data and data obtained from the Federal Reserve through a Freedom of Information Act request on aggregate investments by the banking sector in entities where a financial holding company holds a significant equity exposure as of the end of the third quarter of 2025. It also presents data on unused loan commitments to nonbank financial intermediaries.

These exposures are concentrated in the six largest banking organizations (JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley) and represent approximately 56 percent of their combined common equity tier-1 capital when unused commitments are included.

Bank exposures to private capital have grown dramatically. Investments in unconsolidated joint ventures have increased fivefold since 2001. Real estate venture investments have grown tenfold over the same period. The structure of these investments is different than historical banking investments: they are made in entities where a banking organization has made a significant equity investment.

Why bank partnerships with private capital are increasing remains an open question. Functionalist theories assume that market relationships arise to solve information frictions and transaction cost problems. On this account, regulating these relationships would impose costs on efficient financial operations. But institutionalist theories counter that agents of the banks with conflicted incentives may exploit or even create market frictions. If the shadow venture is merely acting as a conduit for regulatory arbitrage—for banks to make loans and reduce capital in ways they could not do on balance sheet—then new regulation could provide net benefits. The too-big-to-fail moral hazard problem is of particular relevance if high-risk fund investments outside the regulatory perimeter operationalize high fee and high variance investments. The opacity of the shadow venture makes answering this question difficult. The investments are made off-balance sheet and the portfolio companies are almost all private entities.

Why This Matters: The Shadow Venture Creates Prudential Concerns

Hidden Interconnections and Systemic Risk

The bank-private capital integration creates transmission channels through which stress in private markets could propagate to insured banking institutions. There are recent, troubling precedents. In 2007 and 2008, private, nonbank asset-backed commercial paper conduits transmitted contagion and financial failure to the banking sector through liquidity lines and repo markets. In 1999, Long-Term Capital Management, a nonbank hedge fund stood on the brink of failure. Financial interconnections between Long Term Capital Management and the banking sector prompted the Federal Reserve to orchestrate an emergency private sector recapitalization and the Government Accountability Office to declare that “Regulators Need to Focus on Systemic Risks.” Unlike traditional lending relationships, equity partnerships and liquidity backstops in the shadow venture create contingent exposures that may not be fully reflected in current risk assessments or stress testing frameworks.

Who Bails Out Private Credit and Real Estate? Banks, Backdoors, and Risks of Expanding the Federal Safety Net for Banks to Private Funds

Recent research documents the extent of bank lending to nonbank financial intermediaries. Off-balance sheet contingent loan commitments ratchet up exposures.

Figure 1 shows that unused loan commitments to nonbank financial intermediaries (NBFIs) by the six largest banks have increased more than 4 times since 2010, with a 21 percent increase in the first three quarters of 2025 alone. Unused commitments to NBFIs stood at $531 billion as of the third quarter of 2025, a massive liquidity commitment that would provide a significant drag on the banking sector in a crisis.

Banking law and Federal Reserve require bank subsidiaries and affiliates to serve as a source of strength to the banking institution in a time of financial deterioration. In theory, the Federal Reserve can require affiliates and subsidiaries to use their financial resources to bail out the banks. But unused loan commitments to bank-sponsored funds flips this relationship on its head. If a financial crisis occurred tomorrow, banks would serve as a $500 billion plus source of strength to nonbank financial intermediaries and sponsored funds. Pre-arranged liquidity commitments to private funds effectively provide those funds with indirect access to the Federal Reserve as lender of last resort in a liquidity crunch. When liquidity tightens, private funds would draw on their bank credit lines, and banks would in turn access Federal Reserve liquidity facilities. Banks serve as conduits to extend the public safety net beyond insured depository institutions without corresponding prudential oversight of the ultimate beneficiaries.

Regulatory Arbitrage

The same lending and investment activity faces different regulatory treatment depending on where it occurs. Loans originated and held by banks are subject to capital requirements, supervisory examination, and lending limits. Loans originated by banks but held by affiliated private funds face none of these constraints. This disparity creates incentives to structure transactions in ways that minimize regulatory costs rather than optimize credit allocation.

Procyclical Amplification

Data on income impacts from bank equity investments shows high volatility and strong procyclicality—large gains during boom periods and significant losses during downturns. This pattern amplifies rather than dampens business cycle fluctuations, contrary to the diversification benefits sometimes claimed for these activities.

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The Shadow Venture’s Prudential Risks Warrant Consideration of Policy Reforms

There are three tiers of potential regulatory response, which can be pursued independently or in combination. Option 1, enhanced mandatory disclosures, could provide more data that would be useful in answering the question of additional regulatory measures are warranted. All three proposals in combination would extend the Volcker Rule’s covered fund prohibitions to real estate, credit, and securitization funds. Because it would restrict principal investing by banks, but not customer-facing intermediation as agent, the proposal would be in intermediate step and not full return to Glass-Steagall’s structural separation of commercial and customer-faced investment banking.

Option 1: Enhanced Disclosure Requirements

Require banking organizations to provide detailed, disaggregated public disclosures of their equity investments in and liquidity commitments to nonbank vehicles, including transaction-level data for large investments. Researchers have raised concerns with the opacity of private credit. The relationships that constitute the shadow venture are just as opaque. Current reporting by public banking organizations aggregates exposures in ways that obscure the nature and concentration of risks. Disclosures should also include narrative disclosures tracking the risk factor and management discussion and analysis sections of public disclosures. Enhanced disclosures, especially at the consolidated bank holding company level, where monitoring and securities litigation by public investors can bite, would facilitate public market discipline, constraining moral hazard problem. Disclosures would also provide more information with which to assess supervision and policy responses. Regulatory guidance already encourages public disclosure of equity investment activities by banking organizations “given the important role that market discipline plays in controlling risks,” but banking organizations appear to make only the minimal disclosures required for off-balance sheet exposures in the footnotes to financial statement.

Option 2: Restrictions on Liquidity Commitments to Affiliated Funds

Treat large unfunded credit commitments from banks to funds and “financial” companies as unsafe and unsound practices. This would require banks to choose between equity investment and liquidity provision—they could not do both for the same vehicle. Regulation under the liquidity coverage ratio may assuage some concerns about the safety and soundness risks to banks of these lines of credit, but this depends crucially on how the lines are structured and whether the rules can be arbitraged (the coverage ratio for general credit is much lower than for liquidity management or general credit). Moreover, during a systemic shock to private capital, when banking organizations must sell hundreds of billions of dollars in high-quality liquid assets to support private capital, it is unclear whether sufficient buyers would exist to prevent firesale pricing.

The Volcker Rules Super 23A and Super 23B provisions are designed to obtain a similar result for bank-sponsored or owned private equity and hedge funds and other “covered funds.” But the credit and real estate funds in the shadow venture are exempted from the Volcker Rule’s covered funds rule. A more robust version of Option 2 would extend the Super 23A and 23B restrictions to any fund that meets the definition of “investment company.”

Option 3: Narrowing Volcker Rule Exemptions

Amend the Volcker Rule to eliminate or narrow the exemptions that currently permit bank investments in credit funds, real estate funds, and securitization vehicles. This would bring these activities inside the prudential perimeter, subjecting them to capital requirements and supervisory oversight.

As noted above, the Volcker Rule prohibits banks from sponsoring or holding ownership interests in most private equity and hedge funds. But the shadow venture exploits exemptions from the Volcker Rule’s covered fund prohibitions for real estate, credit, and certain other funds. Option 3 would eliminate the exemptions from the Volcker Rule’s covered fund provisions for credit, real estate, and securitization funds.

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Conclusion

New evidence shows that the banking sector and private funds are deeply integrating. This new “shadow venture” challenges the narrative of a clean separation between banks and shadow banks, with banks de-risking by pushing risk out to shadow banks. The story instead appears to be one of increasing partnership through equity ownership and liquidity commitments. Much remains unknown about the rise of the shadow venture and its financial costs and benefits. But if prudential regulation continues to treat banks and private funds as separate domains, it will miss the institutional forms that increasingly matter for prudential regulation and risk repeating the familiar cycles of displaced risk.

President Trump campaigned in 2024 on the promise to conduct “the largest deportation program in American history.” The Trump administration has pursued this goal, deporting more than 600 thousand immigrants in 2025. A stated objective of this policy has been to improve public safety by prioritizing the deportation of undocumented immigrants with criminal records, though recent data indicate that nearly three-quarters of deported individuals had no criminal conviction prior to removal.

The general argument that immigration enforcement will improve public safety is often accepted as fact. In a 2024 Pew Research survey, over half of Americans believed that increased migration was leading to more crime and supported increasing deportation actions against immigrants. This argument is based on the idea that removing offenders through deportation will prevent them from committing crimes and also deter future criminal activity among others. While this logic is reasonable on its face, there are other potential ways that immigration enforcement could impact crime.

A heightened focus on immigration enforcement could undermine public safety if it creates fear among victims and community members. Victims of crimes could become reluctant to report incidents to police because they fear that they or a loved one could be deported as a result of interacting with law enforcement. When fewer crimes are reported, police are less able to identify, prevent, and solve crimes when they occur, making it harder to apprehend offenders. As a result, offenders may perceive a lower risk of being arrested for any crimes they commit and could actually increase their criminal behavior.

Indeed, our research on a past period of intensified immigration enforcement finds that increased deportation actions led to reduced victim and community engagement with police, and to increases in crime.

New research shows that a program that expanded U.S. immigration enforcement actually increased crime

In new research, we investigate how a relatively recent historical expansion in deportations impacted crime.1 Specifically, we study the Secure Communities program, a federal policy first established in 2008, that permitted the rapid detection of likely undocumented individuals who had been arrested for crimes. This program automatically forwarded the fingerprints of all individuals booked in local county jails to the Department of Homeland Security (DHS). DHS could thus check the immigration status of every person arrested by local law enforcement in the United States. If an arrestee was flagged as likely undocumented, the Immigration and Customs Enforcement (ICE) agency could then issue a “detainer” request (or an immigration hold) asking local officials to keep the individual in their custody until they could be transferred to federal authorities. The Secure Communities program was rolled out across counties between 2008-2013, at which point the entire nation was covered by the policy. Immigrant detentions and deportations increased dramatically following the launch of the program. We estimate that the number of individuals transferred from local county jails to ICE custody doubled between 2008 and 2012. Overall, the Secure Communities program was responsible for the deportation of over 400,000 individuals between 2008 and 2014.

Figure 1: Expanding Deportations Decreased Victim Crime Reporting and Increased Crime: Impacts of Immigration Enforcement Program on Victim Reporting and Crime, by Hispanic Ethnicity

Note: Panels A and B plot the raw means of outcomes using National Crime Victimization Data (NCVS) around the date of implementation of the Secure Communities program.

We find that the Secure Communities program reduced the likelihood that Hispanic victims of crime reported the incidents to police. After the Secure Communities program was implemented in a county, Hispanics were 30 percent less likely to report crimes to law enforcement. The reporting decline occurred relatively quickly and appears more prominent among property offenses, such as burglary and theft. The fact that the policy affected Hispanics specifically is consistent with the program’s realized focus on the Hispanic community; over 90% of Secure Communities detentions and deportations were for individuals of Hispanic ethnicity. In contrast, we find no changes in the reporting behavior of non-Hispanics (see Figure 1 Panel A).

We also find that the policy increased crimes perpetrated against Hispanic victims. Hispanic victimization (or offending against Hispanics) increased by 16% (see Figure 1 Panel B). These estimates imply that Secure Communities resulted in 1.3 million additional crimes in the two years following the onset of the program. Again, the increase in crimes appears to be concentrated among property offenses, which comprise the majority of crimes. We observe no change in the overall victimization of non-Hispanic individuals after the implementation of the Secure Communities program. There is, however, an increase in the victimization of non-Hispanics who live in Hispanic communities (or areas with a high share of Hispanic residents). In contrast to the intended goal of the program to reduce crime, our estimates can rule out that the policy led to public safety improvements in the total population.

How do we distinguish between total crimes and reported crimes?

We calculate our main effects on crime and victim reporting behavior by comparing outcomes in counties that implemented the program earlier versus those that implemented the program later. Critically, we evaluate crime reporting behavior separately from changes in victimization to accurately measure the full impact of the policy on public safety. To measure crime reporting, we use the National Crime Victimization Survey (NCVS), a nationally representative annual survey of approximately 240,000 persons maintained by the U.S. Census Bureau. The NCVS asks respondents whether they have been the victim of a crime and, if so, whether they reported this crime to police. Unlike administrative police data, which only measures crimes that are actually reported to police, the NCVS has the advantage of being able to track all victimizations, whether or not they are reported. The NCVS also includes the ethnicity of respondents, allowing us to separately estimate effects for Hispanics.

Results show that the reduced willingness to report crimes to the police drives the increase in crime

These findings, while perhaps surprising, are consistent with the experience of law enforcement on the ground and effects in other contexts. Indeed, police chiefs have expressed concerns that increases in deportations decrease victim engagement and make the job of policing more difficult. Relationships that officers make and maintain with community members are critical to maintaining public safety.

In other contexts, there is evidence that exposure to police-involved shootings reduces civilian crime reports to police and that high-profile acts of police violence erode community engagement. In the setting of domestic violence, where victims have close relationships to offenders, victim reporting can be particularly responsive to changes in policing and enforcement practices. In particular, laws that require police to arrest abusers when a domestic incident is reported seem to have the unintended consequence of increasing intimate partner homicide, potentially because victims are less likely to contact the police.

We examine this mechanism more carefully in the context of the national-level effects of the Secure Communities program described above. If increases in crime are the result of reduced civilian engagement with police, we should expect that areas across the U.S. that experienced greater declines in reporting also experienced the largest increases in crime. Indeed, we find that counties with larger declines in crime reporting rates following the Secure Communities program experienced larger increases in victimization rates (see Figure 2).

Figure 2: Counties with Larger Decreases in Victim Crime Reporting Have Larger Increases in Crime:

Note: This figure plots the impact of Secure Communities (SC) on crime/victimization effects against the impact on crime reporting separately for each Secure Communities cohort using NCVS data. A cohort refers to counties that activated Secure Communities in the same year and month. The diamond marker refers to the estimates that group all cohorts (or the total national estimate). Additional details on calculations can be found in the research paper.

Note that because the increase in victimization coincides with the decline in crime reporting, the overall rate of reported crime does not change after the launch of the program. This finding echoes the results of previous studies that found that Secure Communities did not have any measurable impact on rates of reported crime using administrative police data (see here, here and here).

Consistent with our work, prior research has shown that Secure Communities caused individuals, both citizens and non-citizens, to change their behavior in other ways that were likely motivated by fear of deportation. Secure Communities decreased Hispanic employment, by heightening the perceived risk of participating in the formal labor market within immigrant communities. Additionally, studies have found that Secure Communities reduced participation in the Supplemental Nutrition Assistance Program (SNAP) and in the Supplemental Security Income (SSI) program among qualifying Hispanic-headed citizen households. The onset of the Secure Communities program has also been linked to reduced workplace safety complaints to government regulators and increased injuries at workplaces with Hispanic workers.

Although Secure Communities had measurable impacts on a broad set of outcomes, we argue that the decline in victim reporting is the main driver of the observed increase of crime by ruling out other channels. First, one alternative story for the crime increase we observe could be that because Secure Communities decreased Hispanic employment, it could have led to an increase in property crime by Hispanic offenders as a substitute for lost wages. However, we find that the share of arrestees who are Hispanic declines following the Secure Communities program, implying that the increase in crime is not driven by an economic motivation to commit offenses by newly unemployed Hispanic offenders. In a related exercise, we ask: how large a crime response would we expect if Secure Communities only affected labor market outcomes and household composition, but did not account for any changes in victim crime reporting? Drawing on estimates from the existing academic literature, we show that the predicted effects on crime due to these alternative channels are quite small compared to the actual crime increase we observe. Similarly, we calculate that if the Secure Communities program only incapacitated and deterred offenders – without altering victim crime reporting – we would have anticipated an 11% decline in crime, in contrast to the 16% increase that occurs following the onset of Secure Communities. Overall, our research suggests that the decline in overall apprehension risk, driven by victims reporting fewer crimes, is responsible for the increase in crime.

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The increase in crime we find following a historic rise in deportations is likely applicable to current immigration actions

Enforcement policies are often designed to change the incentives that offenders face, and we expect that harsher penalties will prevent or deter offenders from committing crimes. But offenders are not the only group that may respond to expansions in enforcement, as community members and victims may also change their behavior in important ways. In the context of immigration policy, intensified deportation efforts can generate fear among victims and discourage them from interacting with police. When crimes go unreported, police are less effective at apprehending offenders, which can have the unintended consequence of increasing crime.

Current deportation efforts by ICE are less targeted toward criminal offenders than in the Secure Communities time period. The Secure Communities policy that we study was relatively focused on offenders, in the sense that referrals to ICE originated in local jails and applied to immigrants arrested for offenses. During the Secure Communities time period, 20% of individuals transferred to ICE custody were not charged or convicted of any offense, whereas in 2025, over 70% of individuals deported by ICE were not charged or convicted of any offense. Our work implies that declines in trust in police and reduced public safety are likely to be more pronounced under deportation policies that do not focus on the most serious offenders, but instead cast a broad, unpredictable, or indiscriminate net across immigrant communities. It is in these cases where immigration enforcement is most likely to engender widespread fear and degrade community trust.

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This week, we’re bringing you a conversation with Nick Bagley, the Thomas G. Long Professor of Law at the University of Michigan and a former advisor to Michigan Governor Gretchen Whitmer. Nick is an expert in administrative law and health law, and in addition to his academic work, he has been a frequent contributor to public debates about related policy questions. Here, we discuss the abundance movement, the role courts could play in advancing its goals, how health policy could be more abundant, the Affordable Care Act, and forward-looking health policy goals, among other topics.

Briefing Book: Let’s start with Abundance. I think if you asked 10 different people what abundance was, you would probably get at least 8 different definitions. As a starting point, if you could give your definition of what abundance is as a policy agenda, we can go from there.

Nick Bagley: I think you’re right that abundance is a big political tent, or at least it aims to be. But those who are connected to the abundance movement share some things in common. The most important thing they share is a commitment to the view that American society today is marred by artificial scarcity. Things that matter a lot to well-being are undersupplied, whether that is housing or public infrastructure, cheap energy, good education.

One of the reasons we can’t seem to get what we want is because of real problems with the government’s capacity to achieve collective goals. State capacity in the United States has been eroded, in particular, by an overemphasis on procedures. We are much too heavily lawyered and rule-bound in a way that makes it very difficult or impossible to get big things done.

A second reason behind artificial scarcity is that entrenched incumbents systematically wield too much power across a range of policy domains and have perverted the law in order to maintain their advantages.

So, abundance is committed to improving supply of things that people really need, to breaking the back of incumbent rackets, and to improving state capacity. But consistent with all of those goals is a wide range of political commitments. You could imagine drawing very different trade-offs between environmental protection and housing construction. You could have very different goals for what cities look like. You could care a lot about renewables, or you could take a more all-of-the-above approach to energy abundance. There are lots of different ways to be an abundance type. But I don’t think it is an empty vessel.

Briefing Book: You mentioned a couple of areas that you hear a lot about in public discourse related to abundance, housing and infrastructure. Are there any other sectors, interests, or places, or any other kind of constituencies that you think stand to gain substantially from a shift toward a more abundance-like approach to policy? And conversely, are there any that you think are exposed to meaningful downside should we take that path?

Nick Bagley: I think that the abundance critique can be leveled across a lot of different parts of the economy. Right now, concerns about both housing and energy infrastructure are especially salient, and I think that the problems that the abundance movement identifies are quite literally visible, they’re tangible. You can go to another developed country, and you can see that they have infrastructure that’s far better than ours. Go to another developed country, and you can see that their housing prices are not through the roof to the same degree ours are. So I think it’s vivid and salient, but I don’t think that critique is limited to public infrastructure or the built world.

One example where abundance might make a big difference would be in the education space. Right now, we are doing quite poorly on providing a quality education for many kids across the country. Why can’t we get more abundant, higher quality schools? And some of the same criticisms that emerge in connection with housing and infrastructure re-emerge in the education space. We know that charter schools, properly overseen and regulated, can improve outcomes for children, especially lower-income kids. We know that parents like those options. Why don’t we see more of them? Well, it’s because of entrenched power of public sector unions. It’s because of a lack of confidence in our ability to oversee that kind of system, in some cases, a well-earned lack of confidence.

When you scratch the surface of almost any policy area, I think a lot of these concerns emerge, and that’s because the basic criticism here is cross-cutting. It’s that entrenched players are able to use the complexity of the system to twist it to their advantage. And that’s going to be the case whenever complexity exists, and of course, we live in a very complicated world. So I think it’s a criticism that has a lot of force across a range of domains. I don’t want to say it has equal force everywhere, or that it offers a set of off-the-shelf solutions, because I don’t think it does. Just saying a process is excessive doesn’t tell you much about which processes specifically are excessive. But it does orient you to a set of concerns and attune you to a set of solutions that I think are important.

Briefing Book: Within education, and probably also a few other sectors, too, a big part of providing the service is labor. In some cases, these may be sectors that are subject to some cost disease. You mentioned before that there’s a state capacity element, and then there are artificial constraint on supply. Which of those do you see as more important with respect to education? And do you see the importance of labor in the provision of the service, and the potential relevance of cost disease driving higher cost as interacting with either of those?

Nick Bagley: Some things are just going to get more expensive over time, and that’s fine in the sense that I don’t think it’s a problem of state capacity or incumbent interests pulling down more dollars to line their pockets. It’s just relative prices. So I don’t think you could identify an abundance-oriented problem by simply pointing to escalating costs. You’d have to ask why those costs are going up.

The reason that I think education is a good place to offer another way of thinking about the abundance frame is because we have some pretty concrete results. We can see that our kids aren’t learning nearly to the same degree and extent that we think they ought to be. And then you might ask, why? Well, is it about state capacity, or is it about incumbent protection? And I think the answer is obviously both, and they’re related.

In a lot of places, local school boards will wield a great deal of control over school districts, and that’s often lauded as local control. There are a lot of virtues to local control, but school boards, when they’re independently elected, people are not participating in those elections in large numbers, they don’t know a lot about the candidates. So the people who run and the people who are supported are those who can get support from organized interest groups, and those interest groups at the school board level tend to be teachers’ unions, which means their voices matter most in conversations about how to improve schools.

And it’s no slam on teachers. I was a schoolteacher; I think the world of teachers. It’s no slam on teachers to say that teachers’ unions are not designed primarily to benefit students. That’s just not their job. So if you give them an outsized voice in the process, you’re going to generate some subpar results, and so the lack of state capacity, the inability to teach effectively, is related to the political problems that underlie the education sector. And the way to overcome that is, frankly, through attention, organizing, bringing people in and giving them a way to understand that this isn’t inevitable, we don’t have to do it this way. There are ways to make sure that parental voices matter, that kids matter more, that some of what the teachers want is tempered by what the community needs. Again, I personally think we should pay teachers more than we do in order to attract higher quality teachers, but it’s very difficult to make that sale if the quality of education on offer today is so poor.

Briefing Book: Are there non-legislative legal tools you think are potentially valuable for building state capacity or for combating artificial supply constraints?

Nick Bagley: One of the key culprits that I see in the abundance narrative is the role of courts, and in particular, the way that courts have become much more enmeshed in day-to-day policymaking in the United States over the past 60 to 70 years. My own perspective is that the courts could help a lot simply by doing less, getting out of the way, hearing fewer cases, being more deferential to the government when those cases are brought, and being more humble about their ability to manage and oversee complicated bureaucracies.

Now, could the courts get out of the way on their own? To some degree, yes. The laws that govern administrative law are open-ended, they leave a lot of room for interpretation, and courts that were willing to take their foot off the brake would be able to go some distance in relieving some pressure on government agencies. I think that would be healthy, I think they should definitely do so. There are a bunch of doctrines. that I would like to see changed, that the courts are perfectly capable of changing on their own.

But it probably isn’t the case that the courts can do this on their own. If you want a massive reboot of the kinds of procedures that agencies are held to and how courts go about overseeing compliance with those procedures, you probably do need some kind of legislative steering. And I wouldn’t want to suggest that you could get a Supreme Court decision or two, and these problems are just solved. They’re not, but I do think there’s room for every actor in the ecosystem to take steps to put us on a more abundant path.

Briefing Book: As a non-lawyer, it seems like one of the things the Supreme Court has done recently is to meaningfully constrain the actions agencies can take on their own. Do you think that that has been helpful or harmful in terms of how we might see agencies act in a more abundant way going forward?

Nick Bagley: Yeah, the Supreme Court’s a real problem here. The conservative legal movement has had, as its chief goal, the restraining of the administrative state. The basic premise of a lot of what they’re up to is that green-eye-shade bureaucrats are making lots of decisions that snarl businesses in red tape, that hold back the economy, that insert their values into places where they ought not intrude, and where they try to remake American society without getting Congress’s stamp of approval first.

As a result, the conservative legal movement has sought to cut the administrative state down to size, and to do so by increasing procedural burdens, by limiting its range of motion, its freedom of action, by reviewing what it does with a more jaundiced eye. And so you put all that together, and agencies are more nervous, more skittish, more scared, and frankly, more incompetent.

I think this is the real mistake of the conservative legal movement. There was a thought that if you made government slower or less effective, that would somehow unleash the productive capacities of the United States. But the fact is, business depends on effective government. You can’t do much of anything in the United States without getting business licenses and permits and all sorts of government approvals, often for very good reason.

If you make government unfit for purpose, what you get are bottlenecks that are created by government incapacity. The beneficiaries of that government capacity are incumbents, who, of course, like the world they’re in. But the costs are often invisible. They’re the competitors that never get a chance to start. They’re the people with new business plans that never get off the ground. And that’s where I think the conservative legal movement has really lost the plot, and where the justices today are actively doing harm to not only government effectiveness, but also the broader economy.

My preference would be for the justices to realize, and to take more seriously, the narrowness of the role that they occupy. That doesn’t mean that every single decision that the Supreme Court has issued uniformly cuts in an anti-abundance direction. You can point to decisions where you see the kind of difference and light-touch review that I think is encouraging. But the attitude overall is one of deep skepticism about government power, and while I understand that skepticism, it has made government unfit for purpose, and I think we need to stop thinking about how best we can cripple government because we’re so afraid of it, and start thinking about how we can make government effective, and once it is effective, keep it in proper bounds.

Briefing Book: A lot of the initial discussion of abundance, especially right after the book came out, and especially on the left and center-left, sometimes felt like it was at least as much about who else’s ideas were being displaced. and who was going to go on to form the basis of the next Democratic administration, as it was about the underlying merits. Are there ideas out there now that you think it is actually good to be pushing aside in favor of more abundance-like thinking? Are there any other ideas out there that you wouldn’t want to throw out with the bathwater?

Nick Bagley: I think the backlash against abundance had a lot to do with internal struggles within the Democratic Party over the future of the party. And the heaviest criticism tended to come from folks who are associated with the Neo-Brandeisen antitrust movement, where they see bigness, and in particular the bigness of the tech companies, as an existential threat to the United States, the theory being that these big organizations can use their wealth and their influence and the monopoly position to corrupt the government and bend it to its will. I don’t actually think that the abundance agenda has a lot to say about the Neo-Brandeisians. I think the Abundance Agenda’s concerns are broader, and actually quite consistent with the concern that entrenched incumbents are going to exploit government and make it impossible to provide broadly shared benefits. On the policy merits, it’s not clear to me that there’s any deep tension.

What abundance advocates dislike are ideas that don’t work. I think a lot of abundance types are not terribly ideological. I certainly don’t feel that I am. I’d like to get more housing built because I think that’s the way we’re going to make it possible for people to live flourishing lives, especially people who are at the lower end of the income distribution. If you told me that the best way to build housing was massive amounts of public spending on public housing, sure, fine. It just doesn’t seem to work like that in the real world, nor do I think there’s any particular reason that it needs to. I don’t live in a public house, you probably don’t live in a public house, most of us don’t live in public housing, and there’s nothing wrong about that. There’s nothing especially right about it, either. It’s just that the market effectively produced the thing that I needed.

Abundance-types are perhaps more market-friendly than others on the left, but not because of any kind of deep ideological commitment to markets as virtuous. It’s because they tend to be effective. So what you might see pressure on are pie-in-the-sky ideas that don’t actually achieve the results that they’re billed to achieve. I think you see this most clearly in Zohran Mamdani’s mayoral race. You see him starting as a DSA socialist who is suspicious of private housing developers, who is suspicious of the market. Now that he’s won his election in New York City, and as he’s had to confront the scope and scale of the challenges, and really put meat on the bones of his proposals, I think he’s starting to appreciate that, actually, the market and private developers need to be a big part of the solution here. I think that’s an abundance move. I think it’s asking, “what would it take to be effective?”

Briefing Book: Are there examples of past federal administrations or state-level leaders who you think have done abundance well? Maybe partially because of the prominence of infrastructure in this conversation, abundance has a little bit of an FDR vibe, but are there concrete examples of people doing this well that come to mind for you?

Nick Bagley: Abundance does conjure a kind of wartime and post-wartime swagger, FDR to Truman to Eisenhower, a sort of optimism and confidence that led to an extraordinary burst of American infrastructure construction. I don’t think anybody wants to go back to that era, right? It’s also an era characterized by Jim Crow, massive environmental degradation, you name it. But there was something to admire in that kind of confidence, and I think abundance types would like to get back some of that swagger.

It’s possible to point to politicians today who put abundance at the center of their political rhetoric, and who have made it a big part of what they are trying to achieve on the ground. I think of Michigan Governor Whitmer, who ran on a “Build the Damn Roads” slogan, who has been a proponent of more housing construction, just came out swinging in favor of the building of a big data center not far from where I live, who has been working to attract business to the state, including semiconductor facilities and new EV battery facilities. To an extent, she’s constrained, as are any politicians that put abundance at the center, by the broader legal culture that makes it so hard to get things done. When I worked for her, one of my colleagues used to refer to it as pulling an elephant through mud. The goal of the Abundance Movement is to clear away some of that mud to make it possible to pull the elephant a little bit faster. It’s never going to be easy, but it should be easier than it is.

But I almost want to resist your question. To some extent, the problem is not so much which politician here, which politician there, but the broader legal culture. The state that is crushing the rest of the country when it comes to the rollout of green energy is, of course, Texas. It’s not because Texas has a lot of climate activists, it’s because it’s got its own grid. It doesn’t have hardly any federal land, so it doesn’t have to ask the federal government for permission for much of anything, and it has a get-to-yes mentality when it comes to new energy infrastructure. And that means, in a world where solar is out-competing other forms of energy production, that they’re just going gangbusters. I don’t know that I could point to a particular politician and say that was because they were abundance-minded. I think it was because of a bunch of factors coming together over an extended period to enable Texas to take the lead on that front. I think it’s that systematic consideration of obstacles that we’re gonna need if we’re gonna try to get abundance in states that are tangled in procedural nets.

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Briefing Book: To change direction a little bit and connect abundance to another area you’ve worked in, healthcare: Is there an important way in which you think abundance should influence how we think about health policy going forward?

Nick Bagley: Yeah, healthcare’s a funny example because it’s a little bit weird to talk about a lack of healthcare in the United States when it consumes 17.4% of our economy, when it is the biggest line item on the federal budget after Social Security, you’ve got Medicare and Medicaid, where they’re the biggest drivers of state budgets, and where we know that Americans get lots of low-value medical care. There’s an argument that what we have in many parts of healthcare is an overabundance of healthcare.

That said, there are lots of distortions in the healthcare system that arise because of the same kinds of artificial supply constraints that you see in other domains. I’ll offer a couple. Probably the biggest one is licensing rules that make it impossible for trained professionals to work up to the limits of their training, rules that make it hard for nurses with advanced degrees to participate in medical care, or that make them subject to supervision by doctors, which may make it more difficult for them to provide that care. You want to ask hard questions about when those rules are strictly necessary, and in many cases, they just are not. They are simply protectionist measures. We also make it hard to transfer licenses across state lines. We should make that a whole lot easier. That’s one.

Another are certificate of need laws that exist in about half the states. They basically allow incumbent providers to veto construction of new medical facilities whenever they can persuade government decision-makers that there’s no need for them. That strikes me as a pretty classic case of incumbent capture.

The third that I’d point to is just how we train and encourage doctors. By that, I mean we subsidize residencies here in the United States, and those residency slots are, for complicated reasons, basically capped by the amount of money that the federal government’s willing to plow into it. And then once residents are trained, they decide what they want to do, and a lot of them don’t go into primary care where we have the greatest needs but instead go into specialty care, mostly because of how we pay providers.

There are lots of reasons that we end up paying specialists so much more than we do primary care physicians, but a lot of it has to do with choices that the government has made under the Medicare program about how to set prices. We could change that and make it more attractive for people to go into primary care than we do. All of that would be addressing some of the artificial supply constraints that make it hard to get the kind of high-value, relatively lower-intensity care that we’re bad at in comparison to some of our peer countries. We’re really good at the high-end, fancy care. We’re much worse at routine care, and I think you could imagine a healthcare system where we eliminated some of these supply constraints, and I think some of those challenges, the difficulty of getting an appointment, of seeing a doctor, of having a doctor spend a lot of time with you, I think those challenges could be eased somewhat.

Briefing Book: The Affordable Care Act passed more than 15 years ago. It still seems to be the central framework for how Democrats think about health policy, at least when they’re thinking in practical terms, rather than campaigning on something like Medicare for All. Even Republicans, at least when it comes to their own constituents, seem to at tacitly acquiesce to the fact that, if they’re going to serve the immediate interest of the people they represent, it probably needs to be through the system as it exists. All that brings us to two questions: First, are there any missed opportunities in the ACA that you see now from an abundance perspective, or is there any low-hanging fruit in that spirit for the next time we undertake a meaningful health policy agenda? And second, are there any important lessons you think we should learn from how the policy implementation, but also the politics around the ACA, have evolved over the last 15 years?

Nick Bagley: I’ll take the first one first. The Affordable Care Act was, to a first approximation, just an insurance expansion. It left many opportunities to try to deal with high healthcare prices on the table. If you think of access as primarily a function of supply, then constrained supply means that prices are going to be higher and access is going to be lower. In the healthcare sector, there definitely is a constrained supply in the sense that there are fewer medical outlets than you might ideally want, but also it’s really hard to comparison shop. That means, as a practical matter, that healthcare prices tend to be higher than they ought to be.

That’s exacerbated by the fact that healthcare is an industry that is characterized by high degrees of concentration, usually provider concentration, such as where there’s a major hospital system or two, and they aren’t competing as vigorously against one another in a particular geographic area as you might hope. There is also concentration on the insurance side, though that varies very much depending on the market.

So you’ve got very high prices, and the Affordable Care Act, to a first approximation, doesn’t address them at all. Instead, what it does is subsidize demand. By bringing more people into the insurance system, it basically adds fuel to that fire. Now that’s not bad, right? Dealing with one problem, which is that people can’t get health insurance, is often going to have knock-on consequences, and those may be worth bearing. I think they definitely were in connection with the Affordable Care Act. But it left undone the project of trying to get a handle on high healthcare prices.

We started the conversation by talking about Baumol’s effect and the possibility that some things were just going to get more expensive over time, and certainly healthcare was one of those things. We have lots of better drugs than we used to, we can treat heart disease much better than we used to, we can treat cancer much better than we used to, and it’s worth spending money, and indeed a lot of money, to get those benefits. They are highly worthwhile. The goal here is not to drive healthcare spending to be a smaller fraction of GDP. The goal instead is to make sure that prices align with value, and on that front, there’s a lot of room to improve.

Dealing with that is going to be a mix of a bunch of different approaches. It’s going to be a mix of antitrust, where you’re either gonna have to break up existing hospitals or prevent further mergers that make it difficult to compete. It may require some regulation and limits on what providers can charge for certain kinds of services, especially when their rates seem completely unmoored from the actual cost of providing those services. It could require changes in how Medicare goes about spending for healthcare, and it could require the same in Medicaid. So it’s a lot of different changes that would all have to come together. I certainly don’t have an entire political program sketched out for you, but I do think that the question of abundance does relate to price, and for much medical care in the United States, the price is too damn high.

Briefing Book: We just had this government shutdown that turned into a mini healthcare fight, though the healthcare part of the fight was pretty one-sided. Do you have a view on what health policy priorities on the Republican side are?

Nick Bagley: Republicans have consistently had a very difficult time with health reform. The chief problem is really simple: healthcare is expensive. It’s really, really expensive. The average cost of a family plan for a family of four in the United States is something like $27,000 per year. Now, if you get insurance from your employer, you don’t see that coming out of your paycheck directly, it just sort of eats into your wage increases over time. But it’s a staggering figure, if you step back and think about it for a minute. Which means that if you want to provide additional coverage to people, it’s going to cost a lot of money, and that was the objection to the adoption of the Affordable Care Act. And it is the objection today to the extension of the subsidies.

Now, what do Republicans want to do? They don’t want to spend more to cover people because they have a commitment to keeping spending low—although how real that commitment is, I don’t know, given the size and scope of the deficit increases they just adopted. But what is clear is that they don’t want to spend more on healthcare, or at least that they’re reluctant to do so. If they’re reluctant to spend more on healthcare, then just as a matter of math, fewer people are going to get health insurance. And you saw that with the slashes to the Medicaid program that the Trump administration did, and you’re going to see it again with the slashes to the exchanges that are going to come starting in January.

So that’s just mathematically going to lead to fewer people insured, and all of the solutions that they have to that problem are sort of half-baked efforts to improve choice. And you think to yourself, well, gosh, choice isn’t really the problem here. Prices are the problem. It’s not like there’s some magical healthcare plan out there that costs half the price of another. Healthcare is just expensive. You can have healthcare plans that have higher deductibles, and you can have healthcare plans with lower deductibles, but what you can’t have is a comprehensive health insurance plan that, on average, is going to cost less. Unless you make major reforms to how we pay for medical care, which would require the kind of top-down regulation that, generally, Republicans don’t want.

Sometimes Republicans call for more consumer shopping and consumer-directed healthcare, and I think these arguments are good in the abstract, but they fall apart in the first brush with reality. People don’t call up to comparison shop their medical procedures. You can’t even call to get a price. If you were to call a hospital and ask for a price for your knee replacement, I mean, they’d laugh at you. So, it’s not a market that works especially well, and Republicans are kind of all thumbs dealing with it.

I don’t want to say that Republicans have no good ideas. You have to remember that the healthcare exchanges we’re talking so much about were originally an idea touted by Heritage that were then set up first by Mitt Romney in Massachusetts. It’s a market-friendly approach to extending insurance, one that preserves patient choice without overwhelming them with a bunch of decisions that they can’t possibly make in the market. It’s a pretty good model. It’s just that all of this costs money, and Republicans seem reluctant to spend that money. I don’t know what’s going to happen come January when the crash of the exchanges, combined with the impending wind-down of a big part of the Medicaid expansion.

When those come crashing down, I think the Republicans are going to start seeing lots of their own voters complaining bitterly. I think it’s going to be a very serious electoral liability. I don’t know what they’re going to do. One answer is simply find the money because they don’t care about deficits, and that, in some ways, is the easiest and cleanest solution, and it may be the one that they come around to. But healthcare expansions touch on something very deep, ideologically, on the Republican side. You saw this in the reluctance of Texas and Florida, still, to expand their Medicaid programs, notwithstanding that it’s billions of forgone federal dollars every year. If that ideological commitment holds sway, I think they’re going to have a very difficult time making any changes that actually would expand insurance.

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Briefing Book: In the debate and campaign around the ACA when Congress was considering it, it felt like the two big priorities at the time were, first, expanding insurance coverage, as you mentioned, and then, to a lesser extent, both in the public presentation and in practice afterwards, quote-unquote bending the cost curve. What do you think the big priorities should be next time? Does the jurisprudence that sprang from the decade-plus of litigation that followed the ACA shape what you think is feasible or advisable to pursue going forward?

Nick Bagley: I mostly don’t think the litigation tells us very much about health reform going forward. Congress has a lot of room to operate. There were a couple of parts of the Affordable Care Act that were pushing up against constitutional limits, and folks knew that at the time. Now that the constitutionality of the exchanges has been established, you’d have to come up with a whole different constitutional theory for whatever it is that was attempted the next time. It’s possible someone would dream it up, but I wouldn’t count on it. So that’s the first thing.

The second thing I’ll say, on what the priorities ought to be: the first and most important priority is undoing the damage that the Trump administration has caused, and in particular, undoing the damage on the Medicaid side. The biggest and most harmful thing that the administration has done is adopt work requirements for the Medicaid program. These sound good, the idea that you have to work if you’re gonna take advantage of a government benefit. Work requirements poll really well when you ask people about them, but in practice, it turns out that logging your hours every month on an obscure website at the pain of losing your health insurance for the rest of the year is something that predictably squeezes Medicaid beneficiaries off the rolls.

And we’re not talking a couple here and there who just forget to do it. A large majority of the folks who are on the Medicaid expansion and subject to the work requirements are going to struggle with this paperwork, and they’re going to struggle with the paperwork even though the vast majority of them either work or they wouldn’t be required to work under the work requirements, but they still have to flag that they’re exempt. And so you’re talking about pitching a lot of people who are otherwise deserving of Medicaid off the rolls, and undoing those work requirements is going to be the first order of business.

Looking forward, I do think it’s worth having lots of conversations about how we can bend the cost curve and make sure that prices align with value. I think that’s the frame that I prefer. It’s possible that costs will continue to go up, and that may not be a problem. But we know that there are lots of distortions in the healthcare system, and lots of abuses in the healthcare system that we can and should address. I think that would be the place to go.

The share of Americans reporting disabilities has continued to climb since our first post on this topic in September 2023, with cognitive difficulties among younger people continuing to drive much of the increase. New research reveals that health-related work absences—a key proxy for COVID-19 illness—have produced lasting reductions in labor force participation, though expanded work-from-home arrangements may be offsetting some of these effects. The increase in the prevalence of disability represents roughly 4 million additional people with disabilities compared to prepandemic levels, raising important questions about the economy’s productive capacity and the future of disability support programs.

Disability rates have continued to increase, with the largest gains among younger people experiencing cognitive difficulties

Since the onset of the pandemic, self-reported disability rates have risen substantially. Figure 1 displays the share of the population reporting any of six disabilities from January 2017 through August 2025 for all ages and for prime-age (25–54) Americans as measured by the Current Population Survey. Since February 2020, the share reporting any disability has increased from 6.1 percent to 6.5 percent among prime-age workers and 11.9 percent to 12.7 percent for all ages. This increase represents 4 million more workers reporting a disability, 0.8 million of whom are in their prime working years.

The driving force behind this increase in reported disabilities is an increase in “serious trouble concentrating, remembering, or making decisions.” Figure 2 shows the change in the prevalence of each of the six disabilities since February 2020. While difficulties with walking/climbing stairs or dressing/bathing have stayed relatively stable, the most striking pattern remains the increase in the number of people reporting serious trouble concentrating, remembering, or making decisions.

Figure 3 shows changes in the prevalence of cognitive difficulties by age group. The figure reveals that while younger individuals have lower levels of cognitive difficulties overall, these age groups have experienced the sharpest increases since the start of the pandemic.

The age pattern is particularly concerning from a long-term perspective, as those in younger age groups face decades of potential labor market participation going forward. These younger workers experiencing cognitive challenges represent a potentially significant constraint on future economic growth if their difficulties persist or limit their productive capacity.

Health-related absences reveal COVID-19’s ongoing impact

Research using health-related work absences as a proxy for COVID-19 illness provides new evidence on the pandemic’s labor market effects. Goda and Soltas (2023) showed that week-long absences from work spiked in time periods and places in which reported COVID-19 cases and hospitalizations were higher between March 2020 and June 2022. Dennet et al. (2025) extended this analysis through the end of 2024, finding that health-related absences are still correlated with COVID-19 wastewater surveillance, though the relationship between COVID-19 measures and absences is weaker following the end of the public health emergency (PHE) in May 2023. Specifically, COVID-19-related disruption resulted in a 57 percent increase in health-related absences during the pandemic period, and such absences have remained 13 percent higher since the PHE ended. Figure 4 shows how excess health-related absences compare to COVID-19 cases, hospitalizations and wastewater surveillance levels over time.

While the frequency of health-related absences has declined, the consequences of these health-related absences continue to be severe and persistent. Workers who experience health-related absences show a meaningful decline—approximately 10 percentage points—in labor force participation 12 months later. As shown in Figure 5, this effect was present prior to the COVID-19 pandemic and has largely persisted after the end of the PHE, suggesting that the average severity of a COVID-19-related absence from work is similar to that of a health-related absence prior to the pandemic and has stayed roughly constant after the end of the PHE.

Combining these estimates of severity and frequency, the estimated impact of excess health-related absences from work as a result of COVID-19 on the US labor force participation rate peaked at 0.24 percentage points in mid-2022 and was approximately 0.05 percentage points by the end of 2024 (Figure 6).

Similar analysis suggests that COVID-19 may also be contributing to the increase in the prevalence of disability. Workers who have health-related absences are more likely to report having a disability after the absence. A year later, the gap in the rates of reporting any kind of disability for workers with and without a health-related work absence has increased by nearly 4 percentage points; the gap in the rates of reporting cognitive disabilities has grown by about 1 percentage point (Figure 7).

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Labor force participation among people with disabilities has increased, but the reasons are still unclear

Despite the rising prevalence of disability, employment outcomes for people with disabilities have shown remarkable improvement (Figure 8). Labor force participation among those reporting disabilities has increased notably since the pandemic began, from 20.9 percent to 25.5 percent. The increase among those with disabilities is in sharp contrast to labor force participation among those without disabilities, a number which has remained relatively flat over this period.

The increase in employment among people with disabilities could reflect several factors. The normalization of remote work during the pandemic may have removed barriers that previously limited job opportunities for those with mobility issues, cognitive difficulties requiring flexible schedules, or other health conditions. Tight labor markets may have also prompted employers to be more accommodating and creative in adapting roles to workers with different needs. However, these patterns could also signal a composition effect wherein those reporting disabilities represent a healthier group overall in the post-pandemic period.

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Understanding the mechanisms can help mitigate the impacts of the higher prevalence of disability

The trends documented here present both challenges and opportunities. On one hand, the increased prevalence of disability—particularly cognitive difficulties among younger people—could reduce productive capacity, increase healthcare costs, and raise Social Security Disability Insurance expenditures if these conditions prove persistent and work-limiting. The potential for millions of young workers to experience lasting cognitive difficulties represents a significant concern for long-term economic growth.

Moreover, new evidence suggests that COVID-19 continues to impose disruptions on the labor market. While the frequency of absences from work has declined since the height of the pandemic, it remains elevated compared to prepandemic levels, and each absence still results in meaningful declines in labor force participation such that the aggregate impact is measurable.

On the other hand, the concurrent increase in labor force participation among people with disabilities suggests that labor force participation could expand even as the prevalence of disability rises. This implies that the economic costs of increased disability could be partially mitigated through policies and practices that make employment more accessible. The extent to which the reasons are related to increased workplace accommodations, particularly work-from-home arrangements, or compositional factors can help determine how both employer practices and government policy could harness the existing capacity for work in the population.

Several key uncertainties remain. First, the extent to which rising disability rates reflect long-COVID specifically versus other pandemic-related health effects or increased diagnosis and reporting remains unclear. Second, whether the increased prevalence of disability will persist, increase further, or gradually decline as the pandemic recedes is unknown. Third, the degree to which current employment gains among people with disabilities will be sustained if work-from-home opportunities contract is uncertain.

Continued monitoring of disability trends through surveys such as the Current Population Survey and administrative data from the Social Security Administration regarding applications for its disability program will be essential. Policymakers should pay particular attention to cognitive difficulties among younger workers given the potential for these challenges to affect individuals across their entire working lives.

If work-from-home arrangements and other flexible work options prove effective in maintaining employment among those with disabilities, preserving and expanding access to such arrangements could help offset the economic costs of the increased prevalence of disability. Understanding which types of accommodations work best for different types of disabilities will be crucial for policy design.

Finally, the healthcare system’s capacity to treat and manage COVID-19’s long-term effects, including cognitive difficulties, will play an important role in determining whether current increases in disability represent a permanent shift or a temporary phenomenon. Research into effective treatments and interventions for post-COVID-19 cognitive difficulties should continue to be a priority.

The accelerating integration of crypto into global financial markets has generated extensive debate about consumer protection, financial stability, and national security. Yet one of crypto’s most consequential implications has received far less sustained attention: its capacity to serve as a vehicle for political self-enrichment. Through a combination of technical design, regulatory ambiguity, and doctrinal gaps in public-corruption law, crypto now enables mechanisms of influence-based enrichment that can operate with little cost, minimal transparency, and virtually no legal constraint.

This phenomenon is not limited to any one political figure or administration. Rather, crypto introduces a set of structural vulnerabilities that future officeholders could easily exploit. Certain categories of digital assets, particularly meme coins and stablecoins, allow political actors to translate name recognition, public allegiance, or regulatory authority into substantial personal wealth without any contractual exchange, explicit promise, or identifiable quid pro quo. These architectures pose challenges precisely because they function almost automatically: value accumulates not through the traditional indicia of corruption but through market dynamics that current law does not meaningfully regulate.

The convergence of doctrinal narrowing in corruption law, declining white-collar enforcement, and the rapid expansion of crypto markets thus creates a landscape in which political enrichment can proceed in ways that feel intuitively corrupt yet remain effectively beyond the reach of the legal system. If unaddressed, the United States risks entrenching a form of crypto kleptocracy, one in which the boundary between public power and private wealth becomes increasingly difficult to discern.

Crypto as a New Vector for Political Enrichment

Meme Coins and the Monetization of Allegiance

Meme coins illustrate how crypto enables political enrichment through the commodification of identity rather than through the exchange of value for services. These tokens typically lack intrinsic utility and instead derive their worth from association: membership in an online community, affiliation with a public figure, or participation in a cultural moment. When connected to political actors, they function less as collectibles and more as mechanisms through which supporters—and, crucially, foreign and domestic interest groups—can transfer value in a manner that resembles political contribution without being governed by campaign-finance rules.

The key features of meme coins render them particularly conducive to influence-based wealth accumulation. They can be issued with negligible capital or expertise; they can be marketed through social media infrastructures; and, most importantly, they appreciate in value simply because individuals choose to purchase them. Appreciation does not require the political actor to perform any official act, make any representational claim, or even maintain engagement with the token’s community. The political figure’s name or likeness serves as the value proposition. The blockchain then becomes the mechanism that converts allegiance into private gain.

Because crypto markets are global, these tokens also facilitate forms of foreign influence that evade the traditional safeguards of campaign-finance law. A foreign company or sovereign entity can purchase political tokens openly, in unlimited amounts, and without the disclosures or legal constraints that would accompany political contributions. In this respect, meme coins represent a substantive departure from earlier forms of political merchandising: they do not merely sell a T-shirt or a hat—they sell affiliation itself, in a way that translates directly into the issuer’s wealth.

Stablecoins and Passive, Large-Scale Revenue Streams

Stablecoins present a parallel, and in some respects even more significant, risk to public corruption. Unlike meme coins, stablecoins are pegged to a reference asset—most commonly the U.S. dollar—and backed by reserves composed largely of short-term debt. Because these reserves generate interest income, stablecoin issuers can earn substantial revenue independent of transactional fees. The world’s largest stablecoins already produce annual earnings measured in billions of dollars, primarily through these passive returns.

When public officials or their associates participate in the creation or ownership of stablecoins, the path to enrichment becomes almost entirely decoupled from political conduct. The stablecoin generates revenue whenever it is held or used by third parties, including foreign institutions and private actors with strategic interests. To the extent that the political figure has a stake in the issuing entity, personal enrichment proceeds automatically. Neither solicitation nor official action is required; the architecture of the stablecoin itself produces the financial benefit.

This dynamic marks a substantial departure from earlier political business enterprises. Real-estate holdings, media platforms, and consulting ventures involve significant capital investment and continued operational risk. Stablecoins, by contrast, scale effortlessly through global markets. Once launched, they can become multi-billion-dollar enterprises within months, operating with a thin corporate structure and minimal public oversight.

Doctrinal Gaps in the Law of Public Corruption

The Limits of Bribery and Honest-Services Fraud

U.S. anti-corruption law has long depended on statutory frameworks designed to capture transactional forms of misconduct. Federal bribery requires a thing of value exchanged for an “official act,” a term the Supreme Court has construed narrowly to encompass only formal exercises of governmental authority. Honest-services fraud—once a flexible mechanism for targeting self-dealing—now reaches only explicit bribes and kickbacks. These doctrines hinge on the presence of identifiable exchanges, promises, or misrepresentations.

Crypto-based enrichment often lacks all of these. A meme coin does not require a commitment or exchange; buyers may acquire it for expressive reasons unrelated to governmental action. A stablecoin’s revenue stream arises from underlying debt securities rather than from any action taken by the official. Because the financial gains occur without a transaction between the politician and the investor, the statutory elements of bribery and honest-services fraud rarely align with the crypto model.

Recent Supreme Court jurisprudence further reinforces these constraints. Decisions narrowing the definitions of “official act,” “scheme to defraud,” and “public official” have created an increasingly stringent set of requirements for prosecuting influence-based conduct. Even assuming broad agreement that crypto-facilitated enrichment is normatively troubling, the doctrinal tools available to prosecutors are ill-suited to address corruption without an explicit quid pro quo.

The Weakening of Securities and Fraud Enforcement

Historically, the securities laws offered a potential check on political crypto ventures. Under the Howey framework, many crypto tokens would qualify as “investment contracts,” bringing them within the ambit of registration, disclosure, and anti-fraud obligations. Yet, both regulatory retrenchment and political pressure have narrowed the circumstances in which crypto assets are treated as securities. Where agencies decline to assert jurisdiction—or courts decline to recognize tokens as securities—the statutory basis for enforcement evaporates.

Other fraud statutes, including wire fraud and commodities fraud, offer limited recourse. They require proof of deception, a feature that many political crypto schemes lack. The promoter of a meme coin may accurately describe it as speculative or without intrinsic value. A stablecoin issuer may truthfully disclose its backing assets. In such cases, the absence of a misrepresentation undermines the evidentiary foundation for fraud liability.

Taken together, these doctrinal limitations create an enforcement environment in which crypto-based political enrichment is largely unregulated, even when it appears to subvert core democratic norms.

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The Replicability and Scalability of the Crypto-Corruption Model

The most significant danger posed by crypto-enabled enrichment is its ease of replication. The barriers to entry are extraordinarily low. A political actor requires only modest technical assistance to create a token; thereafter, market dynamics can propel its value independent of any further involvement. Unlike traditional corruption, which often requires clandestine meetings, intermediaries, or contractual arrangements, crypto corruption scales almost effortlessly.

Moreover, the global nature of crypto markets facilitates forms of influence that evade existing legal frameworks. The longstanding prohibition on foreign contributions is premised on the ability to identify donors, characterize contributions, and trace money flows. Crypto markets undermine each of these assumptions. If adopted widely, this model risks shifting the economic incentives associated with political office. The capacity to transform digital attention into passive financial returns may distort public decision-making in ways that existing law is unequipped to address.

Toward a New Framework for Crypto-Era Corruption

Addressing these vulnerabilities requires legal reforms that match the scale and character of crypto’s risks. One approach is to restore the applicability of securities law to crypto assets. Congress could clarify that tokens issued or promoted by public officials constitute securities, thereby triggering registration, disclosure, and anti-fraud requirements. Courts, too, could resist narrow interpretations of Howey that artificially exclude politically linked tokens from regulatory oversight.

A second—and more targeted—approach involves creating explicit statutory prohibitions on crypto-based enrichment by public officials. Such provisions could ban sitting officeholders or candidates from issuing, promoting, or holding financial interests in digital assets that could appreciate based on political affiliation. By focusing on bright-line rules, these statutes would circumvent the doctrinal limitations that have weakened honest-services fraud and bribery enforcement.

Enhanced transparency also has a role to play. Financial-disclosure regimes should be updated to include digital-asset holdings, wallet addresses, and income streams derived from token issuances. Real-time visibility into political actors’ crypto activities would facilitate oversight by the public, the media, and watchdog organizations.

Finally, campaign-finance law must be modernized to recognize that certain digital assets function as political contributions in substance if not in form. Tokens that monetize allegiance or confer financial benefit on candidates should be treated as contributions subject to existing limits and prohibitions, including the ban on foreign donations.

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Conclusion

Crypto’s capacity to facilitate political self-enrichment does not stem merely from technological novelty. It arises from the combination of legal gaps, doctrinal narrowing, and market designs that convert reputation and public power into private wealth without the direct transactional features that have historically defined corruption. Meme coins and stablecoins represent a qualitatively different form of political economy—one in which financial gain can accrue invisibly through infrastructures that the law has not yet adapted to regulate.

If left unchecked, these architectures risk hardwiring a new form of influence-based corruption into the American political system. Preventing that outcome will require treating crypto not only as a financial-regulatory challenge but as an urgent problem in public-law design.

Common leadership is prohibited in many cases, but that prohibition has rarely been enforced

In the corporate world, members of the board of directors are often sourced from the leadership teams (boards or executive suites) of other companies. This means that serving multiple companies at once is not uncommon. Among US public companies, more than a third share a leader with at least one other public company—more still if start-ups and other non-public companies were included.

When two companies connected by such a common leader compete in the same space, this raises concerns that coordination by the two companies will weaken competition. The “opportunity and temptation” to coordinate can result in companies with common leadership setting higher prices, or limiting the choice or supply of products, to the detriment of the public. Such coordination is more lucrative the greater the competitive overlap between two companies, so it is perhaps concerning that a disproportionate share of common leadership links are to companies in the same industry.

US antitrust law includes a prohibition on many such common leadership links. Specifically, Section 8 of the Clayton Act forbids common leaders for companies with competing product lines. Based on this rule, antitrust enforcers last year pressured Microsoft to relinquish its seat on the board of OpenAI. Both companies ostensibly compete in the artificial intelligence space. The overlap triggered concerns among antitrust enforcers that Microsoft’s presence at OpenAI’s deliberations would make it easier for the two to coordinate, resulting in fewer or less safe AI product choices for the public.

However, until very recently, Section 8 was rarely enforced. In part, this was due to lobbying by corporations, which complained about the difficulty of finding qualified directors. It also seems to have been fed by a lack of evidence linking common leadership to anticompetitive behavior. In theory, shared information and incentive alignment can trigger or facilitate collusion. But does that really mean common leadership fosters collusion?

Below, we discuss new evidence showing a strong link between common leadership and anti-competitive behavior. In our study, the arrival of a common leader between a pair of companies raised the probability of later collusion by a factor of nine.1 These results provide backing for enforcers’ renewed interest in enforcing Section 8’s prohibition against competing companies sharing leaders. They also raise questions about Section 8’s current restriction to large product market competitors, as we show anticompetitive effects extend to cases where the current restriction does not apply. We return to potential policy implications at the end.

Common leadership predicts collusion

To understand whether enforcing against common leadership is likely to reduce collusion, we look to labor hiring policies. Labor is one of the most expensive inputs for most companies, and consequential for a company’s productivity and profitability. We study the largest known modern case of labor market collusion in the US.

In the mid-2000s, dozens of tech (and other) companies entered into no-poaching agreements: agreements not to recruit one another’s employees. The agreements involved high-profile companies including Apple, Google, Intel, and Genentech. They were eventually discovered by the Department of Justice (DOJ), which launched an investigation in 2009. The investigation led to a DOJ lawsuit and a series of follow-on civil court cases. By the time the legal dust settled, 65 companies were revealed to have been involved when the presiding judge released an unusually detailed trove of evidence from multiple court cases.

Unsealed court evidence allowed us to construct an analysis of over 900 pairs of companies—including both pairs that colluded and pairs that did not. For example, Pixar, Apple, and Google all feature among the colluding companies, because Pixar colluded with Apple, and Apple colluded with Google. Pixar and Google did not collude with each other, and that absence of collusion is also informative. All of the companies we study were thoroughly investigated for collusion with other companies in the sample, so we can also be more confident than usual that pairs not found to have colluded truly did not collude. Our analysis follows all 900-plus pairs of companies (including Pixar-Apple, Apple-Google, and Pixar-Google), tracking if and when they start to collude. Since collusion is meant to stay hidden, academic studies often need to infer collusion from other outcomes, like prices or auction behavior, and it is difficult to be certain whether two companies colluded or not. Thanks to the unsealed court documents, we have a direct measure of collusion from emails and internal memos documenting the agreements.

Akin to comparing “treatment” and “control” subjects in a medical study, we compared patterns of collusion among pairs of companies that recently began to share a common leader to other pairs that did not. We controlled for factors that might drive a company to collude more or less at a given point in time, such as new product launches that make collusion difficult to sustain. We also controlled for any factors that might drive collusion between a pair of companies, such as the similarity of their products or target markets.

The figure below shows that the probability of collusion among company pairs that eventually get a common leader initially follows the same pattern as among “control” pairs that do not, up until the arrival of the common leader. Once the common leader arrives, the trajectories diverge, with company pairs with common leadership becoming more likely to collude.

Probability of Collusion Rises by 11 Percentage Points After Onset of Common Leadership

Note: Event study showing the probability of collusion increases in the years after pairs of companies become connected via common leadership. The regressions include company pair and company-by-year fixed effects to account for competitive overlap within company pair, and company trends that could also influence the probability of collusion.

We find that the probability of a no-poaching agreement rises by 11 percentage points following the onset of common leadership. This is a ninefold increase in the probability of collusion over the baseline rate of 1.2 percent in the absence of common leaders. Some of the companies involved paid over $400 million in a settlement in the case.

Common leadership is a useful marker for difficult-to-detect illegal behavior

Collusion is ordinarily difficult for antitrust enforcers to detect. Because of its secretive nature, it is difficult even to estimate the prevalence of undetected collusion. At the same time, collusion is recognized as one of the most clearly harmful types of economic behavior. The law treats collusion as per se illegal, meaning the presumption of harm from collusion is so great that courts do not require prosecutors to demonstrate specific harms. It is sufficient merely to show that collusion took place, and harms are assumed. Given the high social costs of collusion and the difficulty of detecting it, a tool that gives antitrust enforcement agencies an easy way to reduce collusion can be very valuable. Our findings show that enforcing the prohibition against common leadership may be such a tool.

Of course, not every common leadership link is accompanied by collusion. Even in our sample, most company pairs that share leaders did not have no-poaching agreements. Moreover, there are reasons to think that the relationship between common leadership and collusion across the entire modern economy is smaller than in our sample. Because of our data source, our sample likely overrepresents “bad apples,” or companies that are more willing to collude than a typical company. We also study a time period with laxer antitrust enforcement. Common leadership is not a smoking gun, but the direction and strength of its relationship with collusion is notable.

Antitrust enforcers are right to step up scrutiny of common leadership

Our new findings carry two important implications for modern antitrust enforcement. First, they provide empirical support for the renewed interest that enforcers have shown in using Clayton Act Section 8 to police interlocking directorates. The 11-percentage point increase in the probability of collusion following the formation of a common leadership tie suggests that Section 8 enforcement can serve as an effective tool for reducing opportunities for coordination.

Second, our results raise questions about Section 8’s current limitations. At present, Section 8 applies only to interlocks between large companies that compete in product markets. But the anticompetitive effects we observe extend beyond product market competitors. In our study, many pairs of companies that colluded were not product market competitors; some competed in labor markets, and others barely seemed to compete at all.2 To the extent that common leadership facilitates collusion by providing a discreet communication channel and a way to set and enforce common goals, it can facilitate collusion in labor markets and other input markets, not just product markets.

These findings suggest a path toward more focused antitrust enforcement by the DOJ’s sister agency, the Federal Trade Commission (FTC). The FTC, which benefits from more preemptive oversight tools than the DOJ under Section 6(b) of the FTC Act, could use the prevalence of common leadership as a screening metric when selecting industries for market studies. Investigating such markets may allow the FTC to catch emerging collusive risks earlier.

Overall, our results suggest that although common leadership is not always accompanied by collusion, it is a meaningful predictor of collusive risk. This makes it a potentially powerful lever for proactive antitrust enforcement—not only under the existing structure of Section 8 but also in potential reforms that broaden its scope or create analogous tools for labor and other input markets.

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Each year, tens of millions of American families receive support through two important tax credits: the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Together, they deliver over $180 billion annually to working households—more than the federal government spends on food assistance, housing aid, and cash welfare combined. The EITC and CTC form the core of the country’s work- and family-support policy—rewarding employment, supplementing earnings, and helping parents meet the costs of raising children.

While the EITC and CTC share a common goal of improving family well-being and operate in similar ways, they differ in who they primarily benefit. The EITC is a fully refundable credit targeted toward low-income households, boosting after-tax earnings and lifting millions out of poverty each year. The CTC, by contrast, is a partially refundable credit that extends high up the income distribution, helping middle- and upper-middle-income families, but only modestly supporting those with the lowest incomes.

Understanding these two credits is key to understanding America’s social safety net and the ongoing debate over how best to support working families. The goal of this post is to describe three aspects of these two tax credits: (1) their current design and historical development, (2) research evidence on their effects on families, and (3) ways they could be improved.

The EITC: Increasingly Important for Low-Income Families Since 1975

The EITC is a refundable tax credit that reaches about 25 million low- and moderate-income households and delivers roughly $60 billion in benefits each year. Designed to reward work and support families, the credit increases with earnings up to a threshold—rising by 34 cents per dollar for families with one child, 40 cents for those with two children, and 45 cents for families with three or more children—before plateauing for moderate-income households and gradually phasing out. Maximum benefits are about $8,000 for families with three or more children, $7,000 for those with two children, and $4,000 for those with one child, but only about $600 for those without qualifying children. Figure 1 illustrates the 2025 EITC and is based on IRS data. Because it is fully refundable, the EITC provides meaningful income support even to families with little or no tax liability—often representing a quarter or more of their annual income.

The EITC was created in 1975 as a wage subsidy for low-income families intended to “make work pay” and offset payroll taxes. Congress modestly expanded the credit several times over the next decade, before the largest expansion in the 1990s, which created separate benefit schedules for workers with no children, one child, and two or more children. Maximum credits for families with two or more children roughly tripled in real terms, and total program costs rose from about $15 billion to nearly $60 billion (in 2025 dollars). Later reforms in the 2000s and 2010s added modest marriage-penalty relief and a higher credit rate for families with three or more children.

Building on the federal model, 30 states and the District of Columbia offer their own EITCs, typically as a percentage match of the federal benefit. Programs vary widely in details and generosity—ranging from small matches of around 5–10% to more ambitious designs in places like Maryland, New Jersey, and the District of Columbia, which have matches of 40–70%. These state credits collectively deliver about $7–8 billion annually and have become an important complement to the federal EITC.

The CTC: A Middle-Income Credit Since 1997

The CTC is a major federal program that helps working families offset the cost of raising children, reaching roughly 40 million households and delivering about $120 billion in benefits each year. Like the EITC, it varies by household income, filing status, and number of qualifying children. Unlike the EITC, benefits extend much further up the income distribution. Figure 2 illustrates the 2025 CTC and is based on IRS data. The maximum credit in 2025 was $2,000 per child, with up to $1,700 refundable. Unlike the EITC, however, CTC benefits phase in more slowly—at 15 cents per dollar earned above $2,500.

Created in 1997, the CTC began as a nonrefundable tax credit aimed at middle-income families, offering up to $400 per child. Over the next two decades, the credit steadily expanded to reach more families and increase refundability. The 2017 Tax Cuts and Jobs Act doubled the maximum CTC to $2,000 per child and expanded eligibility to higher-income families, while also creating a smaller $500 Credit for Other Dependents for older children and non-child dependents.1 The 2021 American Rescue Plan briefly transformed the CTC into a fully refundable monthly child allowance—$3,600 per child under six and $3,000 for older children. After that temporary expansion expired, the credit reverted to its prior structure and a maximum of $2,000 per child. A small 2025 expansion raised the maximum benefit to $2,200 per child, with $1,700 refundable.

A growing number of states have established their own CTC to supplement the federal benefit. As of 2025, more than a dozen states—including California, New York, Minnesota, Utah, Colorado, Vermont, and Oklahoma—offer refundable or partially refundable CTCs, typically ranging from a few hundred dollars to over $1,000 per child. These programs vary in eligibility and structure but generally target low- and middle-income families. Collectively, state CTCs provide $3–4 billion each year in additional support, strengthening the overall safety net for families in states offering CTCs.

Who Receives These Credits?

Unlike nonrefundable tax credits, which only reduce taxes owed, refundable credits can exceed a family’s tax liability and provide a direct payment. This distinction matters because most families with children owe little or no federal income tax until their earnings exceed roughly $50,000, meaning only refundable credits reach those most in need.

Although both programs support working families, their benefits are distributed very differently across the income spectrum. The EITC is highly progressive—ramping up quickly at low earnings, peaking at modest wages, and phasing out around $50,000. More than 90% of EITC dollars go to families earning under $40,000, about half of them single mothers. The CTC, by contrast, delivers most of its benefits to higher-income families: in 2023, roughly 70% of all CTC dollars went to families earning above $50,000, while those below $30,000 received less than 10%.

Because full CTC benefits extend up to $400,000 for married couples and $200,000 for single filers, simply increasing the maximum credit, as in the 2025 change, is a costly and poorly targeted approach. A family with three children must earn at least $40,000 to access the full refundable amount, while households earning up to $400,000 remain eligible for the maximum credit—meaning children in higher-income families benefit more than the roughly 20 million poorest children in the U.S.

Figure 3 illustrates where children fall across the income distribution. Of the 69 million children under age 18 in the United States, more than 7 million live in families earning below $20,000 a year, and 40 million are in families with incomes under $100,000. In contrast, 10 million children live in households earning above $200,000, including 2.5 million in those above $400,000. These figures show that millions of children grow up in families with very low incomes—and highlight why expanding the refundable portion of the CTC would do far more to reach those most in need.

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Research Shows Short- and Long-Run Benefits of Tax Credits for Children

Decades of research show that the EITC is one of the most effective tools for supporting low- and moderate-income families. By increasing take-home pay and the return to work for parents, it substantially boosts employment—especially among single mothers. Major expansions in the 1970s and 1990s led to large gains in labor force participation. Each year, the EITC lifts about 5–6 million people—including roughly 3 million children—above the poverty line and reduces the depth of poverty for millions more.

Beyond its immediate effects on income and work, the EITC improves several additional short- and long-run outcomes. The additional income reduces financial stress, improves maternal physical and mental health, reduces smoking, and helps families move to neighborhoods with greater economic opportunity. For children, larger credits are linked to higher birth weights, better health, stronger school performance, and higher rates of high-school graduation. These benefits persist into adulthood when these children reach their 20s and 30s: they are more likely to attend and graduate from college, work and earn more, experience better health, and have lower rates of mortality. These positive effects operate through both higher parental earnings and the transfer income itself since benefits are evident among children from married families (who do not raise labor supply after EITC expansions) and unmarried families (who do).

Research on the CTC shows smaller effects on families than the EITC, reflecting its slower phase-in and limited refundability. However, the 2021 expansion briefly transformed the CTC into a near-universal child benefit—and the results were striking. Monthly payments sharply reduced food insecurity, material hardship, and financial stress, while improving parents’ mental health and ability to meet basic needs. Most of the benefits paid for food, rent, utilities, debt repayment, and school supplies. Despite concerns about work disincentives, evidence shows little impact on labor-force participation, although it is possible that these effects would have grown over time had the program become permanent. The 2021 expansion cut child poverty nearly in half—demonstrating that child poverty is a policy choice that can largely be reversed through a fully refundable and accessible credit.

Ways to Make These Policies Even Stronger

Despite their proven success, both the EITC and CTC have significant gaps that policymakers could address to strengthen their reach and effectiveness.

EITC improvements. One of the EITC’s main weaknesses is its treatment of workers without qualifying children, who receive less than $600 annually—just a fraction of what families with children receive. Expanding the credit for these workers would meaningfully reduce poverty, particularly among younger adults, and could also help older adults whose children have aged out of eligibility and who therefore experience a de facto wage cut when their EITC benefits disappear.

Under current law, the EITC requires that both the filer and each qualifying child have valid Social Security numbers, making mixed-status immigrant families ineligible even when the children are U.S. citizens. The CTC, by contrast, allows parents to file with an ITIN as long as the child has an SSN. Expanding EITC eligibility to align with the CTC’s rules would extend the credit to an estimated 4.5 million U.S. citizen children who are currently excluded.

Improving take-up and simplifying access is often discussed as a top priority. Nearly one in five eligible families fails to claim the EITC (compared to about 93% for the CTC), leaving billions of dollars unclaimed each year. However, take-up among families with children is closer to 90%, while it is closer to 50% among those without children that are eligible for much less. Many families who do claim the credit rely on paid preparers who capture a share of the very benefits these programs are meant to provide. Policymakers could make filing easier through automatic eligibility checks, prefilled tax forms, and broader access to free, user-friendly filing tools. Instead, Congress ended the IRS Direct File pilot program—a move that will make filing more time-consuming and costly for many low-income families.

The precertification idea considered by Congress in 2025—requiring families to verify EITC eligibility with the IRS before filing their tax return—would have been a serious step backward. In practice, it would operate like a universal audit for low-income families, discouraging many from claiming the credit they are owed. This approach has been tried before—and failed: a 2003 IRS pilot using a similar process caused many eligible families to drop out entirely. Adding new red tape would again deter legitimate claims and delay refunds, weakening a program proven to boost work, reduce poverty, and improve child outcomes.

A concern driving the precertification idea—the EITC’s “improper payment” rate—is often misunderstood. Improper payment rates of 22% to 33% include all payments that differ from what the IRS later determines to be correct, regardless of intent. Most of these discrepancies arise from unintentional eligibility or reporting errors—for example, confusion about which parent can claim a child, how to report part-year income, or whether informal earnings qualify. Estimates based on detailed IRS audit data show that only 7–8% of EITC dollars are linked to intentional misuse, where claimants knowingly provide false information. Overall, roughly 4% involve actual fraud, such as fabricated income or dependents. In short, the vast majority of EITC “errors” reflect good-faith mistakes or claims that still benefit the child’s household, not fraud.

Safety-net programs face a tradeoff between erroneous payments and administrative costs. Together, these determine how much of a program’s spending fails to reach intended beneficiaries. The EITC’s administrative cost is only about 1% of total spending—far lower than many other safety-net programs, including roughly 6% for SNAP and 10% for TANF. As a result, the overwhelming majority of EITC funds go directly to eligible working families.

CTC improvements. The CTC could be restructured to better reach low-income families. Making the credit fully refundable—or phasing it in faster, with higher rates for families with multiple children as in the EITC—would enhance work incentives and channel more assistance to families in need. The cost of CTC expansions and more generous benefits to lower-income families could be offset by lowering the phase-out threshold from its current $400,000 for married couples to $200,000, which would save an estimated $24 billion annually while maintaining broad access for families in need.

It is also important to consider age eligibility. The CTC currently applies only to children up to age 16. Expanding eligibility to include 17- and 18-year-olds, as the EITC does, would extend benefits to roughly 8.3 million dependent children—1 million of whom live in poverty and would benefit substantially from the additional income.

Another key design issue concerns when benefits begin phasing in. The current CTC starts at earnings above $2,500, whereas the EITC begins with the first dollar of income. This matters greatly for low-income families. For example, with a 15% phase-in rate, a family earning $15,000 would receive $1,875 if the CTC began after $2,500 in earnings but $2,250 if it began immediately—a $375 difference that can be vital for the 5.7 million children in households earning below $15,000. The gap would be even larger with a steeper phase-in rate.

Finally, restoring monthly or periodic payments, as in 2021, would help families meet ongoing expenses such as rent, food, and utilities, improving financial stability throughout the year.

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Conclusion

The EITC and CTC are two of the most effective and evidence-based policies ever enacted to support American families. They reward work, reduce poverty, and improve children’s long-term outcomes—all while enjoying broad bipartisan support. Yet millions of families remain excluded from full benefits because of design flaws, administrative hurdles, or incomplete refundability. Strengthening these credits—by expanding access, simplifying delivery, and ensuring full benefits for all children—would not only cut poverty but also reaffirm a simple truth: economic opportunity for families is a choice we make through policy.

The United States Postal Service needs a structural overhaul. For decades, Congress has asked this vast public system to operate as if it were a self-financed business, while asking it to do more than any private business would ever attempt. With more than 600,000 employees, 31,000 post offices, and six-day delivery to 169 million addresses, it is one of the largest and most important pieces of national infrastructure—a network that quite literally binds the country together. The self-funded model, created in the 1970s and sustained ever since, no longer matches the economic realities of how Americans communicate, trade, or live. Yet, its mission is more important than ever. The Postal Service is particularly critical for linking rural communities to the broader national economy, and any reforms to it must preserve its public service.

What most clearly distinguishes the Postal Service from any private carrier is its Universal Service Obligation (USO), or its legal and operational commitment to deliver mail and packages to every address, reliably and at uniform, affordable rates. This mandate applies as equally to mail destined for an office building in Manhattan as to a remote household in rural Montana, ensuring that geography, density, or profitability do not determine access to the national economy. No private carrier could or would operate under such terms. The USO is what transforms the Postal Service from a logistics company into a national infrastructure: it sustains service in markets that would otherwise be unprofitable, anchoring the Postal Service’s civic and economic value for communities that the private market has left behind.

A Growing Network but Shrinking Revenues: USPS is Doing More with Less

Over the last two decades, the Postal Service’s workload has grown while its core revenue base has eroded. Even while traditional mail volumes have fallen by more than half since 2000, the number of delivery points has increased by more than 30 million (Figure 1). Each year, the network must grow to meet its universal service obligation, reaching new addresses to serve a population that is larger, more dispersed, and more reliant on home delivery for essential goods than ever before.

Packages now account for much of the system’s growth, but package delivery has not replaced the revenue lost from letter mail. Competition in this sector is intense, and margins are thin, especially on the dense, profitable routes that its competitors dominate. Meanwhile, the Postal Service must deliver everywhere, including the less dense and rural places that its private market competitors do not serve, using infrastructure built for letters rather than parcels. The result is a system that must do more work, over a greater distance, with less revenue to sustain it. Despite these shifts, the institution still operates within a framework built for the last century, and it can’t meet the demands of our modern economy without real reform.

Postal Infrastructure: An Economic Imperative for National Connectivity

The Postal Service is more than a delivery network—it is one of the few institutions that still reaches every community in the United States, six-days per week. Its universal service obligation guarantees affordable delivery to more than 169 million addresses, regardless of geography or profitability. No private carrier duplicates its coverage; in fact, all rely on the Postal Service to complete deliveries in less-dense markets where the economics make service unprofitable.

For many rural areas, the Postal Service is a critical link to the broader economy. Nearly one in five Americans, or roughly 60 million people, live in rural communities, and roughly 90% of the land area served by the Postal Service is rural. Indeed, 30% of delivery points, one-third of delivery routes, and nearly 60% of post offices are located in rural areas. In these places, the Postal Service provides the most consistent point of federal presence, connecting communities that have seen banks, hospitals, and retail institutions disappear.

Post offices facilitate the delivery of prescription medicines, government checks, and ballots. They support small businesses that rely on affordable parcel delivery. And, they maintain a dependable channel for goods and correspondence where broadband and private logistics are limited. While population growth over the past two decades has concentrated in metropolitan and suburban areas, the physical postal network of more than 31,000 post offices has remained largely in place, reflecting the enduring obligation to maintain service in all parts of the country, not just where market demand is strongest.

The economics of that service are straightforward but consequential. Most delivery costs are route-based, driven by labor time, vehicle operation, and fixed schedules. The marginal cost of serving an additional address on an existing route is low, but dispersion increases the overall cost: rural routes cover more distance with fewer deliveries, raising the average cost per piece. These routes nevertheless sustain the last-mile network that underpins e-commerce and connects low-density regions to national markets. In this way, the Postal Service functions less as a stand-alone enterprise and more as shared infrastructure—a logistical platform that supports both private carriers and public needs. Recognizing that cost structure is essential to understanding how the system should be maintained and funded in the future.

A Funding Model Built for 1970 That No Longer Works

The modern Postal Service, and the funding model that continues to define it, was established by the 1970 Postal Reorganization Act (PRA). Before then, the Post Office Department functioned as a cabinet-level agency, financed through a mix of service revenues and congressional appropriations. The PRA transformed it into a self-funded, independent establishment of the federal government, overseen by a Board of Governors and monitored by the Postal Regulatory Commission. It also codified the postal monopoly—the exclusive right to deliver letter mail and access mailboxes—to preserve a stable source of revenue for universal service. At the time, this model appeared to be sound: the Postal Service was handling roughly 50 billion pieces and still growing rapidly (Figure 2). For the next three decades, mail volumes and revenues would rise in tandem, reinforcing beliefs that a self-financing structure could sustain the system indefinitely.

By the early 2000s, that confidence was deeply ingrained. The Postal Accountability and Enhancement Act (PAEA) of 2006 sought to modernize the Postal Service’s regulatory framework for a system that was stable and operating with near-constant, modest surpluses (Figure 3). The law introduced a new ratemaking process that limited price increases for market-dominant (monopoly-protected) mail products to the rate of inflation while giving the Postal Service greater flexibility to compete in the fast-growing parcel and shipping market.

Yet, the law’s most consequential provision was a requirement that the agency pre-fund retiree healthcare benefits. This mandate is unique in the federal government and rare in the private sector. Importantly in the context of the Postal Service’s financial solvency, this obligation added more than $5 billion per year to reported expenses.

Within a year of passage, however, the bottom fell out of the system. The Great Recession and the rapid shift to digital communication quickly eroded letter mail volumes, and with it, the very revenue that the Postal Service depended on. As shown in Figure 3, what had been a reliable surplus quickly reversed, and the combined effects of the prefunding obligation and collapsing demand turned a solvent agency into one that appeared to be permanently in deficit. In 2022, the Postal Service Reform Act (PSRA) finally removed the pre-funding requirement, relieving this budgetary pressure, but otherwise left the broader funding structure intact. Today, the Postal Service remains legally obligated to fulfill its public mission of universal service entirely through its own revenue—an arrangement that may have made sense in 1970, but one that no longer fits the scale or economics of its workload.

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The Global Decline in Letter Mail: A Structural Shift Seen Worldwide

The American postal experience is hardly unique. Across the world, the digital substitution of paper has overturned the economics of national postal networks. Letter volumes have declined by roughly half, or more, in every income group of countries since 2000 (Figure 4). What distinguishes countries is not the direction of the trend, but their efforts to adapt in its wake.

The United Kingdom moved toward privatized Royal Mail in 2013, only to see the company struggle with labor unrest, cost pressures, and eroding service. Italy’s Poste Italiane has used profits from its banking and insurance arms to finance modernization, while France’s La Poste has relied on La Banque Postale to underwrite its network as it ventures into parcels, digital identity, and green logistics. Canada has begun scaling back—most recently ending most door-to-door delivery in an effort to contain mounting losses and adapt to declining letter mail. Denmark has gone even further, moving to end ordinary letter delivery altogether as digital mail replaces paper. These are different strategies for managing the same reality: mail revenues keep falling, and national posts everywhere are in financially precarious positions.

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From Letters to Parcels: The New Postal Economics

The future of the postal sector lies in parcel delivery. E-commerce has transformed postal operators around the world into delivery networks for moving goods rather than correspondence, and parcel traffic is growing worldwide. In the United States, e-commerce has grown from 1% of total retail spending in 2000 to 16% in 2024 (Figure 5). Packages now account for roughly half of the Postal Service’s revenue and more than 60% of total volume by weight.

But, the economics of parcel delivery are far less forgiving than those of mail: competition is intense, margins are thin, and logistics costs are rising. FedEx, UPS, and Amazon Logistics are formidable rivals, capturing roughly 31%, 34%, and 15% of market revenue, respectively (Figure 6, panel A). These private carriers dominate high-density and commercial markets, leaving the Postal Service to cover the least profitable routes with infrastructure that was optimized for letters rather than parcels. In effect, the postal network sustains the last mile of the digital economy, bearing costs that private carriers and online retailers depend on but do not bear. Consistent with this imbalance, USPS moves about 31% of all U.S. parcels but only captures 16% of total parcel revenue (Figure 6, panel B).

From Self-Financing Back to Public Infrastructure: A New Model for the USPS

The United States operates the world’s largest and most capable postal network. USPS handles 44% of all mail volume globally and delivers to every address six-days per week over a geography that is larger than all of Western Europe combined. It is an active infrastructure that not only connects Americans to one another but also connects America to the world economy. For rural America in particular, the Postal Service remains a crucial point of continuity by linking communities that have lost banks, hospitals, and retail institutions to a national market. Where private carriers must optimize for density and profit, the Postal Service provides the connective tissue that ensures both the shared success of the parcel economy and equitable geographic access to it.

In 2021, the Postal Service introduced its ten-year strategic plan, Delivering for America (DFA). Framed as both a path to financial stability and a reinvestment strategy, the plan promises new facilities, vehicles, and technology upgrades. Yet its reinvestment is defined by the limits of the self-financing model—it seeks efficiency gains and balance-sheet improvement at the expense of the public mission. The plan’s savings are expected to come from network consolidation, revised transportation schedules, and slower delivery standards, alongside a greater emphasis on parcels and other “competitive” products.

The Postal Regulatory Commission (PRC) has raised persistent concerns about this approach, warning that the strategic plan will have “disproportionate impacts [that] will most greatly affect rural citizens and businesses who rely heavily on the Postal Service,” and that the plan “relies on overly optimistic and unsubstantiated financial projections for cost savings that are not likely to improve the financial health of the Postal Service.” In effect, Delivering for America proposes many of the same cost-cutting measures that a private carrier would adopt to improve margins: reducing service on costly, rural routes, and prioritizing balance sheet performance over public mission.

Some have argued that privatization could offer a path forward for the Postal Service. But, experience abroad and analysis in the United States suggests otherwise. Privatization would erode the universal service that distinguishes the network, not preserve it.

The only sustainable future for the Postal Service is on which Congress recognizes the Postal Service for what it already is: a national infrastructure rather than a self-contained business. The expectation that universal service must be self-financed must end. Public funds should instead support the fixed costs of delivering to every address, while enabling a modernization agenda that has been deferred for more than a decade.

This agenda should include electrifying one of the world’s largest civilian vehicle fleets, optimizing logistics for a parcel-dominant system, and re-establishing post offices as civic access points in communities where the federal government has few others. It should also cultivate the public-private partnerships that already define the U.S. postal economy, including collaborations with e-commerce retailers, logistics firms, and local governments that extend the reach of both market and state.

No private carrier can match the scale of the Postal Service, and no market mechanism can sustain it indefinitely. The choice, therefore, is not whether the United States will have a postal system, but what kind of system it will be: one that continues to optimize around a broken business model, or one that recognizes the postal network as a public good that is essential to economic and civic life.

Across the United States, an increasing number of metropolitan areas are experiencing a housing shortage that has led to an affordability crisis. There is a concurrent growing awareness that the primary cause of the affordability crisis is political: regulatory barriers decrease the supply of housing, increasing the price of houses. Cities and states around the country have started to respond by reducing minimum lot sizes (Austin), permitting larger multifamily buildings (New Rochelle, NY), eliminating mandatory single-family zoning and parking minimums (Oregon), and increasing density around mass transit stops (Minneapolis and California).

Since December 16, 2022, Los Angeles has attempted to expand middle-class housing by reducing regulatory barriers to building housing for individuals earning up to 120% of local area median income. Its experience highlights three lessons that can inform housing policy: (1) straightforward changes to permitting rules increases housing supply; (2) increased supply faces immediate opposition; and (3) contrary to conventional wisdom, this opposition, while often fervent, is a minority viewpoint. Responses to a large annual survey of Angelinos, the Los Angeles Quality of Life Index (LAQLI), shows that a majority of Angelenos supports apartment construction on single-family streets, and specifically in their own neighborhoods.

Los Angeles’ Streamlines Permitting, Increasing Supply of Affordable Housing

As a mayoral candidate, Karen Bass campaigned on reducing homelessness and improving housing availability. Four days after becoming Mayor on December 12, 2022, Mayor Bass issued Executive Directive 1. ED 1 introduced two policy changes, ministerial approval and faster application review time for “100% affordable housing projects, or for Shelter”.1 This change overcame prior permitting barriers that which added large costs and uncertainty to apartment construction. Ministerial approval is especially meaningful for projects over 50 units because the Los Angeles Municipal Code otherwise requires discretionary review even for projects compliant with zoning. These changes reduced project approval time from 6-9 months to 45 days, according to the Mayor’s office.

ED 1 applies to projects with at least five units that are “100% affordable housing,” defined as a building where 80% of units go to households earning below 80% of the area median income — $121,200 for a family of four in Los Angeles—and 20% of units for households earning $127,900. Affordable housing also caps rents for renters below 100% of area median income.

ED 1 unleashed a bonanza of housing applications. In 2023, applications for 13,770 affordable units were filed with the city’s planning department, more than the three prior years combined. As of September 16, the city’s planning department has received applications for 484 projects proposing 39,344 units, of which 394 and 29,910 respectively have received approval.2 By contrast, in 2022 only 4,600 affordable housing units were approved, and during the decade from 2013 to 2022 only 29,900 were.

Figure 1 combines data from the City Planning department on affordable housing approvals from 2013-2022 with the ED 1 resource portal’s data on affordable housing projects. The ED 1 stimulus is clear, with a lag.

Figure 1

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Opposition to ED 1

ED 1 faced immediate opposition, leading to two notable curtailments restricting the number of lots available for ED 1 development. On June 12, 2023, ED 1 was amended so that “in no instance shall the project be located in a single family or more restrictive zone”, which is 74% of land in Los Angeles. On July 1, 2024, ED 1 was revised a third time, resulting in the version of record at the time of writing, seven pages long versus the original’s three.3 Sites in a very high fire hazard severity zone, on a hillside, replacing a historic building, in a historic preservation overlay zone, and that are zoned only up to are no longer available for ED 1 development. The change also restricts the number of density bonuses and waivers available.

At the April 17, 2024 UCLA Luskin Summit, an audience member asked Mayor Bass to explain the dilution of ED 1. “As a politician,” she explained, “you have to listen to your constituents. We were getting a lot of pushback against ED 1 for leading to housing where it was not expected.”

A Silent Majority of Angelenos Supports ED 1

While opposition to ED 1 was undoubtedly true, representative survey data shows that a strong majority of Angelenos support new apartment construction, even in their neighborhood.

The Los Angeles Quality of Life Index provides those data. Approximately 1,500 adult respondents are reached via random telephone dialing and online probability sampling. In 2023, respondents were presented with a question about their support for the location of new multifamily housing.4

Figure 2 shows these results by City Council district. The left subfigure shows the percent of respondents who support new apartment buildings in Los Angeles, on streets zoned for single-family housing. The results clearly show that a majority of Angelenos in every district except one support new apartment construction on streets zoned for single-family homes. But support for building may depend on where the building takes place. The right subfigure shows the percent of respondents who support new apartment buildings in their neighborhood. Support for housing in one’s neighborhood is less widespread than on single family streets, but it still receives majority support in 12 of 15 districts.

Figure 2

Overall, 63.51% of residents support apartments “in streets that primarily have single-family houses”, and 58.83% support apartments in their own neighborhoods. This agreement is not driven by the preponderance of renters in Los Angeles, 60% of residents according to the Los Angeles Housing Department and 45.25% of respondents in the 2023 LAQLI. 58.83% of homeowners support new apartments in single-family areas and 49.40% support them in their neighborhood; the percentages are 64.8 and 64.6 for renters. There is overwhelming support across Los Angeles for more apartments in Los Angeles.

Policy Lessons

The private market can generate middle-class housing. Los Angeles provides no public monies to subsidize ED 1 projects. For qualified projects, ED 1 simply reduces bureaucracy and increases density. It also does not require union labor, lowering construction costs. With these tweaks, Los Angeles reoriented itself from saying no to housing by default to saying yes. The surge of applications from for-profit developers to construct income-restricted units, without government funding, gives lie to the notion that the market can only build luxury housing. The market only builds luxury housing because the jungle of regulations and reviews that are currently required creates costs that only luxury projects can overcome. While the term “affordable” evokes low-income housing, ED 1 is actually a middle-class housing program.

Policymakers must also better understand selection bias in public opposition, and opportunities to engage silent majorities. In the case of ED 1, constituents who have the time and ability to contact their elected officials were not representative of the broader constituency. People who make their voice heard are likely to be more educated, higher income, older, and homeowners, and the opinions of people with those characteristics often differ from those of people with different backgrounds. Inferring public opinion only from people who proactively make their voices heard leads to selection bias and eventually biased policy. High-quality surveys such as the Los Angeles Quality of Life Index are much more likely to be representative of the broader population.

Even when recognizing the aggregate benefits of new housing construction, local elected officials often oppose it on the belief that beneficiaries of it are not voters while those harmed by it are. The LAQLI results show this dynamic no longer holds, if it ever did. In Los Angeles, in a supermajority of districts, a majority of adults support new apartment construction in their neighborhood. Los Angeles City Council members can support new apartment construction with the protection of their public’s opinion.

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Economists and columnists have written about why low birth rates in the United States and elsewhere are a matter of concern. The standard, well-worn case is that a shrinking population with fewer workers and more retirees per capita is an economic problem because it will strain pension systems, government budgets, and the labor market.

The issue has been getting attention because fertility rates have been falling fast around the world. Among the 115 richest countries, the average birth rate is 1.5—far below the 2 children per 2 adults threshold needed to maintain population sizes over time, absent net migration. Japan has been shrinking for over a decade. China has been shrinking since 2022. Europe has been shrinking since 2021 and is projected to continue to decline. Absent migration, the United States would be shrinking within a few years, too. Derek Thompson has recently observed that because net migration will be lower this year than in recent years and could possibly turn negative, the U.S. population could shrink as early as 2025.

Our social safety net systems were designed under very different demographic circumstances. The median age in the United States in 1965, when Medicare was established, was 27. Today, it is 39. The old-age dependency ratio, which is the number of people aged 65 and older for every 100 people aged 25 to 64, is rising. It approximately doubled between 1950 and today. It is projected to double again by 2100. So the standard case for paying attention to low birth rates is timely. And it is an important change from the overpopulation doom-mongering of the past half century, which, despite the repeated failures of its predictions, remains a cultural force.

But the standard case also misses something big.

Bigger than Social Security

What could be bigger than the 3.2-trillion-dollar challenge of funding the U.S. public pension and healthcare system each year? A slowdown in progress.

A future with fewer people will be a future with slower improvements in some areas and stalled progress in others. Over the long run, larger populations—not only national populations, but the global population—make each of us better off. That’s one argument (though not the only one) that we make in detail in our book After the Spike: Population, Progress, and the Case for People.

There are two important ways that population size matters for living standards that have nothing to do with age structures and public finances. The first comes down to fixed costs. Fixed costs are the costs incurred to make something rather than nothing—for example, the monthly rent to have a storefront open, regardless of how many customers come through the doors. Some activities can only happen if there is sufficient scale, because it makes sense to undertake them only if there are enough consumers demanding them. That’s true for posts by substackers who need to spend the same time writing and researching a 1,500-word post, whether they have 10 paid subscribers or 10,000. It’s true for blockbuster video games and movies, outstanding museums, and any other investment that needs to recoup its costs over many users.

And it’s true for deadly serious matters: Daron Acemoglu and Joshua Linn, for example, show how market size substantially influences where R&D investment goes. They tracked what happened to drug development as the large baby boomer generation entered middle age, which meant there were more consumers who needed the sorts of drugs that middle-aged people need. Acemoglu and Linn found that a 1 percent increase in market size generated a 4 percent increase in the entry of new drugs tailored to that market.

A lesson from the economics of market size is that progress happens when people demand it—whether as consumers waiting to pay for a new innovation, or as voluntary contributors to institutions like NPR that benefit from scale, or as citizens supporting a government that prioritizes public investment in knowledge creation through institutions like the National Science Foundation or the National Institutes of Health.

That means living in a big world with many other people makes each of us better off. As we wrote recently in the New York Times: “Whenever people need and want things, they make it more likely that you will get what you need and want. That’s true if what you want is good public transportation (because a network of trains and buses can’t operate without enough riders), or green energy infrastructure built on the work of scientists and engineers across generations and borders, or a vaccine for a novel virus, or a cure for a rare disease that only the niche medical specialization of a big world could produce.”

There’s a second economic reason that other people matter for the wellbeing of each of us, and it isn’t about the age pyramid, either. It is that knowledge turns out to be an endlessly renewable resource—a nonrival good in the language of economics. If one person trades an apple to another person, who in return gives an orange, then each is left with one piece of fruit. If two people trade one idea each, then each ends up with two ideas. And so the total stock of available knowledge is also the per-capita stock of available knowledge. As simple as that insight is, it lies at the core of models that explain long-run macroeconomic growth. Growth in material conditions over time—improvement in average living standards—is driven by improvements in productivity. Productivity improvements come from the discovery and sharing of ideas. Ideas come from people.

Bigger than National Interest

Discussions of population decline, by politicians and commentators on both the right and left, tend to get framed in terms of national interest. Here’s the problem for those who view the problems of demographic change primarily through the lens of national interest: The biggest benefits of larger populations—overcoming fixed costs and generating endlessly reusable new ideas—do not stop at national borders. When a team of researchers in Japan discovered how to improve LEDs to create bright, efficient white light—an achievement that earned them a Nobel Prize in physics—people everywhere in the world benefited. Invented just once, that idea is used over and over again without ever being used up. You are using it right now to read this sentence.

A move to liberalize and formalize immigration into the United States may mean more workers and higher tax receipts per capita, and that might help shore up the balance sheet of Social Security. (That’s a fine reason, among others, to endorse it.) But it would do little to address the fact that when the world population begins to decline, it will mean smaller global markets thirsty for innovation and progress, or that fewer people in Japan (and Brazil, China, India, and elsewhere) will be contributing to the advancement of knowledge.

Of course, halting the global population decline is not all that matters for progress. In fact, raising birth rates is an especially ineffective approach to promoting progress in the short run, with benefits not materializing for at least a generation. Liberalized immigration and job automation are near-term solutions to the problem of too few workers. Restructuring public benefit programs and retirement ages is a near-term solution to balancing the government’s books in an aging population. Increased funding for scientific research is a near-term solution to boosting innovation. Indeed, in the short term and within the United States, perhaps the highest-return activity is merely holding the line against backsliding in scientific progress. At Health and Human Services, RFK Jr. is cancelling $500 million in contracts for mRNA vaccine research; a fast way to protect progress would be not to do that. Raising birth rates is a slow alternative in comparison.

But the long run matters too, just as reducing carbon emissions today matters, even though it offers no help to any victim of a natural disaster exacerbated by climate change this year. In the long run and globally, a future that avoids depopulation is a future worth investing in. If 50 percent of a 1-billion-person global population were engaged in some kind of innovation, pushing forward the frontier and contributing to progress and improvements in material conditions around the world, they’d produce fewer innovations than 10 percent of a 10-billion-person population set to the same task.

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Bigger than a Legislative Agenda

Most policy discussions around fertility come down to offering people money: sometimes by tweaking incomes, sometimes by tweaking prices of important inputs to building a family, like housing and childcare. So should we expect programs like an expanded child tax credit, a universal basic income program, or New Mexico’s newly announced universal free childcare program to steer the future away from depopulation?

Such policy changes, organized around income and prices, will make things easier for parents and lift many families out of poverty. They are unlikely, however, to lift birth rates up to replacement levels. The evidence from studies evaluating pronatal policy is that such policies have never led to a sustained increase in birth rates to above-replacement levels. (Nor has anything else that has been tried, as we discuss in After the Spike.) Families randomly assigned to treatment in universal basic income experiments do not change their fertility. Even women who win lottery jackpots don’t go on to have substantially larger families than women who play the lottery and lose, as researchers have discovered looking in administrative tax data from the United States and Sweden. And the evidence from looking across U.S. states over time shows that even though the financial burdens of parenting matter to parents, lowering them to the tune of a few thousand dollars a year won’t swing many people’s big life decisions. The evidence from comparing countries that differ in how much they subsidize childcare, college, and other inputs to building a family corroborates these findings.

Low fertility will not turn around in one presidential term, or because of one set of legislated parental leave rules, tax credits, or childcare subsidies. So, what is the way forward? It begins with recognizing that declining birth rates are a widespread phenomenon—in richer and poorer countries, in secular and religious countries, in countries with bigger and smaller social safety nets—and are not likely to be turned around only by tweaking the affordability of parenting in the United States or anywhere.

Indeed, asking about policy responses at this point, when this phenomenon is still so new at the scale of human history, is almost certainly the wrong next step. For now, the place to begin is correcting decades of misunderstandings and misinformation about what other people are good for—or if people are good at all. A place to start is with a wider consensus—among both policy wonks and the general public—that avoiding depopulation should be a goal for anyone who cares about long-run progress and human welfare.

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As economic advisers in the Biden and Obama Administrations, we contributed to decision memos and evening briefing books for our principals—the cabinet members charged with the task of setting national economic policy. Our jobs were to help busy people understand what really matters when weighing the implications of different policy options, using the most reliable analysis and existing research available.

We started Briefing Book two years ago with Kevin Rinz and Jeffery Zhang to bring this type of analysis to the public. In the two years since, we’ve been lucky to amass a network of 47 terrific contributors, listed here. Together, we’ve published 67 posts on topics like child care, tax cuts, gas prices, tariffs, infrastructure, Social Security, cryptocurrency, and health care, to name a few. Our audience has grown from 823 when our first post was published, to nearly 11,000 today.

Some of our most viewed posts over the last 12 months were:

• The effect of online interviews on the University of Michigan Survey of Consumer Sentiment, by Ryan Cummings and Ernie Tedeschi

• Post-election partisan shifts in consumer sentiment, by Leo Feler, Kevin Rinz, and Jack Chylak

• The Long-term Dangers of Trump’s Big Beautiful Bill, by Wesley Yin

• Brave New World, on financial regulations in an AI and blockchain world, by Hilary Allen

And as we enter our third year, we look forward to publishing more content on major economic challenges and opportunities on the horizon—climate adaptation, labor market disruptions, economic resilience, and our ever-evolving political economy. And with increasing information congestion created by fake news, and threats to data integrity and reporting independence, accessible and reliable analysis of important economic issues has become as important as ever.

We’ve also greatly appreciated feedback from contributors and subscribers. We continue to welcome your input as we grow in our third year. If you would like to pitch an idea for a piece, you can email us or send us a message through Substack.

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To our engaged subscribers, our expert contributors, and our colleagues who have found something useful to share with their audiences by linking to our posts: thank you for your readership. We are excited to bring you more great analysis in year three.

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The One Big Beautiful Bill Act (OBBBA) is projected to cause millions of Americans to lose health insurance. The Congressional Budget Office (CBO) projects that the $800 billion in Medicaid cuts over the next ten years will increase the number of uninsured by roughly 10 million. The OBBBA’s impacts on Medicaid have justifiably received much attention, as they will represent the largest reduction in enrollment in the program’s history. However, less attention has been paid to how the OBBBA will harm another important source of health insurance coverage: the Affordable Care Act (ACA) Marketplaces.

The OBBBA allows Marketplace premium subsidies to lapse at the end of this year and introduces new administrative barriers to obtaining Marketplace coverage. The CBO projects that, together, these policy decisions will result in 5.1 million additional people losing health insurance coverage. Millions more with marketplace coverage will face markedly higher health care costs due to higher premiums and lower benefits. While OBBBA’s Medicaid cuts will not take effect until after the 2026 midterm elections, the changes to Marketplace coverage will happen in January 2026. Indeed, the impact of these cuts can already be seen in the double-digit premium increases that many health insurers have announced for 2026.

Both the Medicaid and Marketplace cuts were made to finance tax cuts that disproportionately benefit the wealthy.1 But actions that make Marketplace coverage less affordable don’t just exacerbate inequality and limit access to healthcare. As we show below, the Marketplaces have proven to be an especially important source of health insurance for America’s small business owners and the self-employed. Thus, the resulting increase in marketplace plan premiums also harms entrepreneurs by markedly raising operating costs and exposing small business owners to increased medical spending risks.

Marketplace Insurance and its Importance to Entrepreneurs

The vast majority of Americans with private health insurance receive coverage through their own employer or the employer of a family member. The link between the workplace and health insurance coverage arises from the tax exclusion of employer payments for health insurance as well as efficiencies associated with large group purchasing. Historically, health insurance purchased by self-employed workers did not receive the same tax advantage as employer-sponsored group coverage. In addition, small businesses could not achieve the same efficiencies from economies of scale and risk pooling as large employers. As a result, self-employed workers and employees of small businesses were significantly less likely to have health insurance than otherwise similar wage and salary workers. Prior to the passage of the ACA, limited access to affordable health insurance was found to reduce entrepreneurship.

To make non-group coverage more affordable and to improve risk pooling, the ACA established premium tax credits for purchasing coverage through newly created individual insurance Marketplaces. These premium subsidies effectively capped the price of a benchmark plan to a fixed percentage of income for consumers with family incomes between 100 and 400 percent of the Federal Poverty Level (FPL).2 The 2021 American Rescue Plan (ARP) made Marketplace coverage even more affordable by increasing the premium subsidy for consumers who were already eligible and newly extending eligibility for subsidies to consumers with incomes above 400 percent of FPL. The Inflation Reduction Act (IRA) of 2022 extended these enhanced subsidies through 2025. These subsidy enhancements were an important reason that Marketplace enrollment more than doubled between 2020 and 2025, increasing from 11.4 million to 24.3 million.

Since they were established in 2014, the ACA Marketplaces have been an important source of health insurance for small businesses. To put this in perspective, self-employed workers, alone, represent about 10% of the U.S. workforce. According to data from the Census Bureau, 23% of working-age self-employed entrepreneurs had individual insurance market coverage in 2024–roughly four-times more than the fraction of working-age wage and salary workers that have individual market coverage.3^,4 As a result, self-employed entrepreneurs and small business owners comprised nearly 30% of working-age marketplace enrollment in 2022, according to the Treasury Department.

Access to Marketplace coverage is especially valuable for individuals who lack alternative coverage options, such as public insurance and or employer-sponsored coverage. Nearly 60% of working-age self-employed entrepreneurs who lack alternative coverage options rely on individual market insurance, or would likely be uninsured (Figure 1). An even greater percentage of middle-class entrepreneurs—those with incomes between 400% and 600% of the FPL–who lack alternative coverage options rely on individual market coverage.

Moreover, individual market coverage for these self-employed entrepreneurs has been increasing recently across most income groups, most of all among those with incomes above 400% of the FPL—those who gained eligibility for Marketplace premium subsidies under the ARP and IRA. In 2024, roughly 20% of all self-employed workers had family incomes above 400% of the FPL. Among those with incomes between 400-600% of FPL and no alternative source of coverage, 70% obtained coverage on the individual market that year, up from 61% in 2019. In 2024. For those with incomes above 600% of FPL, 81% relied on the individual market in 2024, up from 76% in 2019.

Effects of the OBBBA on Health Insurance Marketplaces

The OBBBA weakens Marketplace coverage in two ways. First, while the law extended several different tax cuts that were set to expire, it failed to extend the enhanced premium tax credits of the APRA and IRA. As a result, the amount that consumers are required to pay for Marketplace coverage will increase dramatically. One analysis, using data from HealthCare.gov, estimates that if gross premiums stayed the same and the tax credit enhancements were allowed to expire, net premiums for consumers currently receiving tax credits would nearly double on average.

But gross premiums will not remain constant. Because we can expect consumers who maintain their coverage in the face of such large premium increases to be more costly to insure than those who drop coverage, insurers will raise premiums to cover their costs. As noted above, insurers are already incorporating this “adverse selection” into their 2026 rates.

The exact impact of allowing the tax credit enhancements to expire will vary across geographic markets and consumer characteristics, most notably income and age. Figure 2 reproduces analysis by the Urban Institute estimating average annual premiums for different income groups with and without the enhanced premium subsidies. Their microsimulation accounts for the premium effects of adverse selection, and indicate that individuals whose income is above 400% of the FPL will be hit especially hard: with the loss of enhanced premium subsidies, the average annual consumer price for a plan will rise roughly $2,900, or by 81%. As noted above, roughly one in five self-employed workers has an income greater than 400% of the FPL.

Beyond cuts to premium subsidies, the OBBBA makes it more difficult to get insurance, adding administrative burdens to obtaining or maintaining Marketplace premium subsidies. For one, the legislation requires that eligibility for subsidies must be verified prior to renewing existing coverage, rather than after, effectively eliminating automatic coverage renewal. OBBBA also limits subsidy eligibility within special enrollment periods, and greatly restricts the flexibility of state-based Marketplaces to streamline their processes. As noted above, CBO projects that the Marketplace provisions of OBBA combined with other administrative changes, such as shortening the annual open enrollment period, will cause an estimated 5.1 million people to lose health insurance coverage.

Harms of the OBBBA go beyond the lost marketplace coverage for millions of Americans. Facing higher premiums, those who retain coverage will either pay more for coverage, or downgrade to a less generous plan with fewer benefits, or both, thereby raising medical costs. ARPA and IRA enhanced premiums led to marked increases in upgrading from high deductible Bronze plans to Silver, Gold or Platinum plans, which have much lower deductibles.

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The Bottom-line for Self-Employed Entrepreneurs

For all consumers who have turned to the Marketplaces for affordable health coverage, these changes will represent a significant financial shock, with real implications for their health. For small-businesses and self-employed entrepreneurs, specifically, the OBBBA’s health care cuts could be even more financially damaging, threatening the health of their business.

Insurance premiums have risen as a share of total operating expenses in recent years, but Marketplace subsidies have helped moderate premium growth for eligible firms. Lower subsidies combined with large premium increases will force entrepreneurs to make difficult decisions. A recent study by JP Morgan Chase finds that fewer nonemployee firms (i.e., self-employed businesses) dropped health insurance coverage because of high premiums in 2022-23, when enhanced tax credits were available, than in 2018-19, when they were not. As coverage through the Marketplaces becomes less affordable, would-be entrepreneurs may once again face a difficult choice between launching a business or maintaining health insurance.

This week, we’re using our Quick Hits series to bring you a collection of perspectives from retirement experts on the recent proposal by Senators Cassidy and Kaine regarding Social Security. The proposal would entail borrowing funds – approximately $1.5 trillion – to invest in stocks, bonds, and other investments, and using the proceeds to pay the funds back to Treasury and supplement existing payroll tax revenue to fund future Social Security benefits.

We've invited three experts on retirement security to provide brief reactions to the proposal: Sita Nataraj Slavov, Professor at George Mason University’s Schar School of Policy and Government and non-resident senior fellow at the American Enterprise Institute; Jason Brown, Visiting Fellow, Retirement Security Project, Brookings Institution; and Gopi Shah Goda, Senior Fellow & Director, Retirement Security Project, Brookings Institution, and Co-Founder of Briefing Book.

Sita Nataraj Slavov: A Sovereign Wealth Fund Would Expose Taxpayers to Risk and Politicize Private Businesses

Senators Bill Cassidy and Tim Kaine deserve praise for drawing public attention to Social Security’s funding shortfall. Unfortunately, their proposal does not improve the program’s finances because it avoids imposing the tax increases or benefit reductions that are necessary to keep it solvent. Instead, the two senators call for the federal government to invest $1.5 trillion in stocks, bonds, and other private securities. Since these investments’ returns have historically exceeded the government’s borrowing costs, the excess amount could be transferred to Social Security. But economists have repeatedly pointed out that these higher returns are not a free lunch; they are compensation for taking on risk. In the event of a stock market crash, or an increase in the interest rate on government debt, taxpayers and Social Security beneficiaries would be on the hook for any required adjustments. Such a scenario is most likely to occur during a time of economic weakness, when these adjustments would be especially painful.

Another important concern is that the Cassidy-Kaine proposal would greatly extend the federal government’s reach into the private sector, distorting and politicizing investment flows and business operations. State government pension funds have a track record of making politically driven investments despite a fiduciary duty to serve their beneficiaries’ interests (similar to the safeguard that’s part of the Cassidy-Kaine proposal). In addition, the federal government has long used federal funding and tax breaks as leverage to influence private entities and incentivize behavior that aligns with its priorities. Policy makers are likely to use a new federal investment fund in the same way. For example, one could easily imagine future Democratic and Republican administrations alternating between requiring federal investment only in companies with diversity, equity, and inclusion (DEI) programs, and prohibiting federal investment in companies with DEI programs. Such policies will in turn influence business decisions. Both Republicans and Democrats should ask themselves whether they trust the other party not to behave this way when it is in power.

Jason Brown: A sovereign wealth fund still will not solve Social Security’s funding shortfall

Senators Cassidy and Kaine’s proposal to create a sovereign wealth fund to fund Social Security benefits is not a new one. The Treasury Department considered the idea nearly 20 years ago in a brief dedicated to options for funding benefits. Treasury takes on the proposition that the government investing in private-sector assets with newly issued debt can generate higher returns for the Social Security Trust Fund to pay for future benefits:

“The higher expected rates of return on risky assets merely compensate for risk that would ultimately be borne by taxpayers. And risky trust fund investments would not increase national saving, so risky assets held in the trust fund would just displace risky assets held in the consolidated portfolio of the private sector (the private sector would hold fewer risky assets and more federal debt). To the extent that risky assets held by the trust fund would earn higher returns, therefore, the resulting gain to taxpayers would be offset by lower returns earned on private-sector assets.”

In other words, any improvements to Social Security’s finances will be offset by losses elsewhere. Treasury goes on to warn that higher returns in the near term—either realized or projected—could delay the real reforms necessary to shore up the program’s finances, pushing the costs of reform to future generations. Moreover, higher returns are not guaranteed, and the additional risk borne by taxpayers could result in lower-than-expected returns, bringing forward a crisis that taxpayers and beneficiaries will have to face.

Gopi Shah Goda: There are no free lunches in Social Security

The plan endorsed by Senators Cassidy and Kane to rescue Social Security involves developing a separate trust fund — sometimes referred to as a sovereign wealth fund — to fund the program. While this proposal makes efforts to address the current financial shortfall by infusing the system with an additional investment fund, it does so in a way that does not tackle the structural imbalances in the program and introduces new risks to the funding structure.

A sensible package of reforms would change the benefit formula to better target assistance, taking care to protect the most vulnerable beneficiaries. The program can be made more progressive by slightly reducing benefit growth rates for higher-income retirees, many of whom live longer and collect more from the program. In addition, increasing the number of working years used to calculate benefits would help reduce the program's shortfall while also improving incentives to work at older ages. There are ways that revenues can also be increased to improve incentives — for instance, adding elements of non-wage compensation to Social Security taxable income. The nonpartisan Congressional Budget Office periodically publishes a report that includes other similar options to address the Social Security funding gap. But borrowing funds in the way the proposal suggests would likely raise interest rates and slow growth, and avoids the difficult but important work of modernizing the program so that it can continue to provide important protection to seniors in a sustainable manner.

Despite Silicon Valley’s increasing importance to the delivery of financial services, people who work on financial regulatory policy rarely spend much time in conversation with those who study technology policy. My new internet serial, the cheekily named Fintech Dystopia: A summer beach read about Silicon Valley ruining things, was written to help bridge this gap – and bridging this gap is becoming increasingly urgent. For those worried about the stability of our financial system, there are aspects of Silicon Valley’s modus operandi that should make them particularly concerned about the rise of fintech. And for those worried about Silicon Valley’s power over our society, that power is only becoming more entrenched as Silicon Valley makes incursions into the financial services industry – with all the money, data, and government safety nets that come with that kind of business.

Unfamiliar forms of regulatory arbitrage

Silicon Valley is adept at weaponizing technological complexity to dissuade regulatory scrutiny and intervention. Wall Street also weaponizes complexity to similar ends, but policymakers, regulators, and scholars working in the field of financial regulation have learned enough about how finance works to see through industry talking points; they may not, however, have learned enough about Silicon Valley’s new technologies to do the same.

As is often the case with Wall Street innovation, much of Silicon Valley’s fintech innovation is simply regulatory arbitrage. In other words, fintech’s new technologies are often most useful as a sexy new cover story for artful lawyering around regulatory requirements; many a fintech business derives its competitive edge from finding a way around the law rather than from offering an otherwise superior product or service. However, if those who study finance have little understanding of the workings of technologies like blockchains and so-called artificial intelligence, that makes it difficult to challenge claims from Silicon Valley fintechs and their venture capital funders that new technologies deserve bespoke legal treatment.

Take, for example, claims that blockchains decentralize economic control and that that decentralization scrambles the application of existing financial regulations. It is true that, much like a corporation with lots of shares, a blockchain with lots of nodes affords a theoretical opportunity for decentralized economic control. But, just like the corporate form, the blockchain does nothing to push back against economic forces that drive the centralization of power. If someone controls a lot of a blockchain’s nodes, or if some nodes become de facto more important than others, then some people will exert outsized control over the operations of the blockchain. The same is true for projects that are built on blockchains using computer programs called smart contracts: governance participation is typically much lower than in publicly-traded corporations and founders and their VC funders tend to retain control. If people don’t appreciate that blockchains and smart contracts offer only theoretical opportunities for economic decentralization, they might be talked into supporting special legal treatment that encourages blockchain-based finance – notwithstanding that blockchains are clunky databases, inferior in almost every respect to preexisting technological alternatives.

Or take AI tools that might be used to make credit decisions, or for managing risks related to investment portfolios. Those who don’t understand the technology often fail to appreciate that AI tools are hamstrung by the limitations of their training data, or that there are many points at which human intervention skews the operation of AI tools. These tools are ultimately applied statistical engines, and historical data is neither neutral nor predictive. When it comes to portfolio management, AI tools will be plagued by the same data problems that have plagued other kinds of economic models. We only have one market history, a single timeline to demonstrate how credit and market and liquidity risks have interacted in moments of panic. That is not a big data situation, and so AI tools cannot come close to reliably predicting how tail risks will impact investment portfolios in the future. Regarding credit decisions, if members of some racial groups have historically had fewer opportunities to generate income and wealth, then that will obviously have impacted how they have accessed and used credit in the past. If members of those groups disproportionately struggled to repay and were extended less forbearance than others when they did default, all of that history will be reflected in the data now being used to train AI tools on how to assess future applications for credit.

When it comes to AI’s limitations and lack of neutrality, biased and insufficient data are not the only issue. Humans choose which data the AI tool will learn from; they label that data to help with the learning process. Humans program the AI tool that does the learning, and can tune and tweak it to pay more or less attention to some kinds of data. And yet many people see the output of these tools as automatic, neutral, and superior to anything a human might produce – and might deduce that less regulation and oversight are needed as a result. Regulatory capital requirements and anti-discrimination laws like the Equal Credit Opportunity Act could be arbitraged in this way.

Disregard for regulation and domain expertise

Traditional financial institutions certainly engage in regulatory arbitrage and lobby heavily for regulatory relief, but Wall Street has generally accepted that some regulation is part of the landscape – in part because there is some understanding from past scandals, abuses, and panics of what can go wrong. Margaret O’Mara, author of the Silicon Valley history The Code, has observed that Silicon Valley businesses tend to disdain learning about the history of the industries they plan to disrupt. In this context, regulation is seen through an ahistorical lens as something that exists simply as an impediment to innovation and exponential growth. Financial regulatory experts may not appreciate how little some fintech businesses know about what might be considered fundamental financial vulnerabilities. In particular, we are witnessing the crypto industry learn in real-time about problems like runs and rampant fraud that we already knew would plague any unregulated financial system.

Until very recently, problems in the crypto markets were largely walled off from most of the rest of the financial system, and so most of us have been spared their fallout (although crypto market volatility did have repercussions for several banks that failed in the regional banking crisis of 2023, and the bailout of Silicon Valley Bank’s uninsured depositors served to prop up the USDC stablecoin). But with Congress now poised to permanently carve crypto out of existing regulatory regimes while regulatory authorities are permitting increased integration of crypto and traditional finance, more paths for contagion are developing. We are probably doomed to learn the same lessons about finance all over again.

To avoid that fate, thoughtful regulatory policy informed by both financial and technological expertise is necessary. We often hear the mantra, “same activity, same risk, same rules.” As a rule of thumb, that mantra is a good place to start. For example, if we understand leverage, we understand that it is highly problematic to create an unlimited supply of crypto assets out of thin air to borrow against. And if we understand that things like bank deposits and money market mutual funds are vulnerable to runs, then we understand that stablecoins have similar vulnerabilities. In these circumstances, existing securities and banking regulatory frameworks should be applied; it is unwise to carve out new exemptions simply because a new technology is involved.

But the mantra has its limitations: those familiar with financial regulatory policy may not appreciate that even the same activity can pose different operational risks if a different kind of technological plumbing is being used. For example, far too little attention is paid to the operational fragilities of the public blockchains supporting the crypto markets. There is no one who can be held accountable for ensuring that blockchain software is maintained, protected from cyberthreats, or relaunched after an outage. Application programming interfaces (better known as APIs) also pose new operational risks. These APIs allow for interoperability between different IT systems and form the backbone of open banking efforts, but APIs in other fields have often proved to be weak links that are particularly vulnerable to exploitation by cyber criminals. Although human resources can be a challenge, financial regulatory agencies should strive to employ public-minded technologists who understand these operational risks (and can help agencies see through technology-shrouded regulatory arbitrage strategies like the ones discussed above).

New levels of “bigness”

Another thing that those used to looking at Wall Street may not fully appreciate is how much Silicon Valley tends towards monopoly. There is often room for more than one big player in many traditional financial markets, but that is rarely the case in Silicon Valley. The platform-based economy tends towards “winner takes all” markets, where reams of user data and network effect advantages are used to build unassailable market positions. This tendency is particularly important in the context of pending legislation that would allow the largest tech platforms to issue their own deposit equivalents known as “stablecoins.” Five years ago, Facebook tried to launch its Libra stablecoin and the world collectively – and appropriately – balked at the prospect of a tech platform controlling a significant portion of the money supply and becoming a systemically important financial institution. But that kind of future is precisely what the new stablecoin legislation endorses, and even the largest banks may struggle to compete for deposits in this kind of environment.

Silicon Valley’s incentives and worldviews

Finally, those more used to dealing with financial regulatory policy may not fully appreciate the incentives and worldviews of the Silicon Valley elite who are driving fintech’s expansion. Fintechs are typically funded by venture capital firms like Andreessen Horowitz, and venture capital is in many ways, a very broken business model for everyone but the VCs themselves. Venture capitalists tend to fund their own in-group of privileged men who attended elite universities, and to fund the same overhyped business models that their colleagues are funding. This limits the likelihood of producing truly innovative solutions, but venture capitalists are primarily concerned with “exiting” a few of their investments at a profit within a few years – and they spin hype and lobby heavily to make that happen. Venture capitalists have little incentive to perform diligence on their ventures because they expect most of them to fail; venture capitalists encourage their startups to engage in regulatory arbitrage, knowing that they will be entirely insulated from the consequences of any regulatory crackdown.

In addition, many of the top venture capitalists and other members of the Silicon Valley elite are animated by anti-democratic and TESCREAList worldviews, and handing over the reins of our financial system to the Silicon Valley elites necessarily involves ceding ground to their belief systems. Peter Thiel, for example, has long dreamed of a financial system beyond the reach of governmental authorities and central banks. That was part of his initial ambition for PayPal back in the 1990s; now he supports efforts to build “Network States” with financial systems built on blockchain technologies that would operate as tech-CEO led dictatorships outside the boundaries of democratic governance. Blockchain is extremely limited as a technology; its adoption has arguably been spurred more by an ideological desire to opt out of democratic governance than by any efficiency rationale.

Andreessen Horowitz’s Marc Andreessen is also a proponent of the Network State movement and, like Thiel, ascribes to many TESCREAList ideologies. Rooted in extreme utilitarianism, these beliefs include faith in the ability of technology to radically enhance or even transcend the intelligence and other “desirable” qualities of human beings, and to enable space colonization. These kinds of ambitions and beliefs seem far-fetched, but it is well-documented that they are widely-held among the Silicon Valley elite. For example, Silicon Valley’s faith in the ability of statistically-driven AI tools to one day achieve general intelligence and solve all our problems is just that – an article of ideological faith.

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Silicon Valley and financial crises

As Silicon Valley becomes an increasingly important provider of financial services, the confluence of these incentives, worldviews, and new forms of technologically-driven regulatory arbitrage is likely to threaten financial stability. In my book Driverless Finance, I included a prologue that explored how the volatility of Ponzi-like crypto assets, coupled with increased automation from the use of tail-risk ignoring smart contracts and AI tools, could precipitate our next financial crisis. There is no reason to expect that Silicon Valley will seek to stop such a crisis from happening.

Some of Silicon Valley’s incentives are reminiscent of those that led Wall Street to undermine the stability of the financial system in the run-up to 2008. First, venture capitalists will probably have exited their fintech ventures before a crisis occurs. This “I’ll be gone, you’ll be gone” attitude from those with no skin in the game is one that will be very familiar to those who have studied the 2008 crisis. Stablecoin-issuing tech giants may also be insulated from the consequences of a future financial crisis by virtue of achieving “too big to fail” status (although it is possible that, when faced with the prospect of a teetering tech behemoth, the US may come closer to the “too big to save” dilemma that countries like Iceland and Switzerland have faced with their banks in the past).

There are, however, some less familiar incentives and motivations that may exacerbate the risk of a financial crisis. Venture capitalists have benefited significantly from the easy money available during periods of accommodative monetary policy: financial crises typically beget accommodative monetary policy, and so venture capitalists may relish the prospect of another one. Even more disturbingly, the chaos following a financial crisis may be seen as an opportunity for adherents of the anti-democratic Network States movement to exploit. Finally, some of the Silicon Valley elite genuinely ascribe to TESCREALIST ideologies focused on ensuring that our artificially intelligent descendants can prosper in outer galaxies. A global financial crisis would seem like a non-event to someone fixated on a sci-fi style long-term enumerated in the thousands of years. That perspective should be deeply concerning to those of us familiar with the human costs of financial crises.

In a previous Briefing Book post, we observed that “[s]tablecoins pose systemic dangers to the economy, and they are not going to disappear by themselves.” That is even more true today, as Congress has laid the groundwork for proliferation in the Senate-passed GENIUS Act. While the legislation takes steps to improve the resiliency of stablecoin issuers, it falls short of preventing systemic risk.

New Legislation, Old Mistakes

In a new research project titled “Why Financial Crises Recur,” we argue that lawmakers typically make two types of mistakes in crafting financial regulation. These mistakes are not made in bad faith but rather occur because the correct actions are counterintuitive.

First, lawmakers fail to understand that “banks”—both traditional commercial banks and, as we soon discuss, shadow banks like stablecoin issuers—produce runnable short-term debt, which facilitates market transactions. For the short-term debt to become money, its price must be fixed. And for that to happen, the banks’ assets must be opaque so that the price of the short-term debt does not fluctuate with the awareness of negative news. This is particularly true for maintaining price stability during periods of financial stress. Yet commonly received wisdom suggests that firms can be, and should be, disciplined by the market. Transparency is of paramount importance, as sunlight is often considered to be the best disinfectant.

Second, there is a difference between a “systemic crisis” and the failure of individual institutions. Strengthening individual institutions is not sufficient for panic-proofing the system. Our regulatory framework has focused too much on preventing the failure of individual institutions without consideration of the system as a whole. It is certainly possible, as the demise of Silicon Valley Bank vividly reminded everyone, to have strong individual banks yet still have the risk of failures spreading.

If lawmakers and regulators can correct the two conceptual errors, then modern economies may enjoy a period free of crises.

Opacity—yes, opacity—can enhance financial stability

To set the stage, we start by introducing an apparent paradox: the market economy needs short-term debt created by banks and bank-like entities—oftentimes referred to as “money”—but that short-term debt is vulnerable to destabilizing runs. In other words, money in the form of short-term debt is needed for the economy to function, but that money can lead to system-wide crashes when holders of the debt start questioning its value (e.g., when depositors panic during a bank run). Recognizing this paradox allows one to understand that banks and producers of such short-term debt are special and that opacity is beneficial for maintaining stability.

As we have previously written, to make short-term debt effective as money, its price should not fluctuate. For example, a one-dollar banknote should always hold its price at one dollar. Similarly, withdrawals from a bank account should always be one-for-one. But how is that possible? In a market economy, the price of a good or service moves to equate supply and demand. Prices move in response to new information.

The answer is that, ideally, no one should have an incentive to produce information about the backing for the money (i.e., the banks’ assets); and everyone should know that no one has an incentive to produce that information. If that is the case, then we say that the money is “information insensitive.” This is why heightened opacity is, perhaps counterintuitively, beneficial for stability.

What’s notable is that this insight is seemingly forgotten by every generation, with each new form of runnable short-term debt that is invented by the financial sector. In the 18th and 19th centuries, lawmakers had to learn this lesson with respect to privately issued “banknotes” that circulated as money. In the late 19th century and early 20th century, regulators had to relearn this lesson with respect to “demand deposits” that proliferated as account-based money in the aftermath of the Civil War. In the Global Financial Crisis, the runnable debt was repurchase agreements (“repos”). Now, this current generation of lawmakers is in the process of relearning the lesson with respect to digital money in the form of circulating stablecoins and various account-based crypto demand deposits.

Stablecoins, as widely discussed in the literature, are a subset of cryptocurrencies. They are digital tokens designed to trade at par and backed by an asset or a basket of assets. The most popular versions of stablecoins are pegged to the U.S. dollar, meaning that one stablecoin can be redeemed for one U.S. dollar. While stablecoins are viewed through the novel lens of cryptocurrencies, they represent a classic form of runnable short-term debt. When holders of stablecoins begin to question the health of the stablecoin issuer, they will seek redemptions from the issuer, just as nervous depositors will seek redemptions from their bank if they perceive their bank to be weak.

Over the past few years, the largest stablecoin issuers have already experienced episodes akin to bank runs, so this is not a concern that exists only in theory. Most recently, Circle faced a run on its stablecoin when Silicon Valley Bank collapsed in early 2023. These episodes are not one-off events, and they show that stablecoin issuers are susceptible to the same run risk as traditional banks and other issuers of short-term debt.

In order to address this risk, lawmakers must relearn the first lesson: the production of runnable short-term debt is a special activity that must be regulated in ways to enhance opacity. Otherwise, runs will continue to occur and, once stablecoin issuers become sufficiently large, the consequences for the rest of the economy may be devastating.

Improving microprudential safety and soundness is not sufficient to mitigate systemic risk

System-wide financial crises are vastly different from the failure of individual financial institutions. Regulating with the intent to enhance the safety and soundness of individual banks is not sufficient to produce system-wide stability. In our latest project, we analyze several historical examples to illustrate the point: the National Bank Act of 1863 and the creation of a national currency; the double liability regime for banks prior to 1933; the Banking Act of 1933 and the establishment of federal deposit insurance; the Basel Accord of 1988 and the pivot to bank capital regulation. Here, we focus on the so-called GENIUS Act of 2025.

It is now apparent that Congress believes the path forward is stablecoin circulation in the broader economy. Lawmakers’ latest attempt to regulate these run-prone digital assets was introduced in the Senate on May 1, 2025. After several weeks of debate, the bill passed on June 17. As it stands, the bill would require stablecoin issuers to hold “reserves backing the outstanding payment stablecoins of the permitted payment stablecoin issuer on an at least 1 to 1 basis.” Such reserves may include U.S. dollars, funds held as demand deposits or insured shares at IDIs, short-term Treasuries, repos and reverse repos, securities issued by MMFs holding those assets, or “any other similarly liquid Federal Government-issued asset approved by the primary Federal payment stablecoin regulator.”

Now, it is certainly a step in the right direction to have stablecoins backed by safe assets like short-term Treasuries. However, the underlying presumption is that, because the backing assets are of high-quality and there would be regular reports, systemic risk would not be a problem. Not so. While the legislation would improve microprudential safety and soundness, it is not sufficient to mitigate systemic risk.

What happened in the spring of 2023 once again serves as a useful case study. Suppose each stablecoin issuer holds only Treasuries in its portfolio. Play out the macroeconomic shock that hit Silicon Valley Bank. If interest rates rise, then the value of the Treasuries—the assets meant to back the stablecoin’s peg—will fall. And if this happens to all stablecoin issuers, then they will seek to buy new Treasuries that are of higher value. As bond prices fall, issuers will need to buy more Treasuries. When interest rates are sufficiently high and the value of Treasuries are sufficiently low, holders of stablecoins will have to decide if their issuer has the cash to buy more Treasuries. At that point, holders of stablecoins might ask questions about what is in the rest of their issuer’s portfolio and if the issuer is able to hedge any risk. Once the “No Questions Asked” condition is violated, holders of stablecoins will begin to run.

To be sure, rising interest rates is only one scenario where a common factor could affect all stablecoin issuers. There are other scenarios as well. Perhaps money market funds are misvalued and stablecoin holders do not know which issuers are most affected. Or perhaps there is a shortage of safe assets, and other firms have a demand for the exact same securities. In short, the GENIUS Act may be able to guard against idiosyncratic risk, but it does not prevent systemic risk.

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Conclusion

Financial crises have recurred for centuries, and they are very costly. When a crisis hits, businesses fail, unemployment spikes, and human capital is destroyed. In the United States, the cost of the Global Financial Crisis was estimated to be as high as $30 trillion. So why do crises recur, despite the shared goal of preventing them and the deployment of considerable legal and economic effort to do so? Our answer would start and end with this observation: “Lawmakers take actions that appear to be intuitive and beneficial but are actually detrimental.”

Without understanding the two conceptual errors we highlighted above, every crisis appears to be idiosyncratic. This is why some policymakers and scholars hold the view that crises cannot be prevented. Crises materialize from unpredictable sources, and one must deal with the aftershocks.

We disagree. Crises can be prevented with the right regulatory interventions. Doing so would require a course correction along two fronts—a course correction that is likely to strike many as counterintuitive. But if these two counterintuitive lessons can be internalized, society can move toward true financial stability. Otherwise, financial crises will recur every generation, with every new form of private money created.