On May 19, Minnesota Governor Tim Walz signed into law a bill legalizing all drug paraphernalia, including testing equipment and syringes, and decriminalizing drug residue. As Sophia Heimowitz and I explained in our Cato policy analysis last year, drug paraphernalia laws stand in the way of harm reduction organizations that seek to help people who use drugs avoid drug overdoses and the spread of infectious diseases.

In the late 1970s, the Drug Enforcement Administration began successfully encouraging states to enact drug paraphernalia laws and even developed and provided model legislation. Our study found that Alaska is the only state that never enacted drug paraphernalia laws. Our policy analysis called on all other states to emulate Alaska by repealing their drug paraphernalia laws.

Last June, I moderated a Cato online policy forum in which the Executive Director of Alaska’s oldest harm reduction organization compared notes with the Executive Director of Arizona’s oldest and largest harm reduction organization.

Arizona amended its paraphernalia laws in 2021 to permit syringe services programs to operate and to allow distributing and using fentanyl test strips. Still, it left most of the drug paraphernalia law intact. Minnesota, however, has gone even further by becoming the first state to repeal its drug paraphernalia laws. The law takes effect on August 1.

Hopefully, the remaining states will follow Minnesota’s lead.

Senate Finance Committee Chair Ron Wyden (D‑OR) held a hearing last week to counter the House Republican plan to cut the recent IRS enforcement boost. Sen. Wyden said, “If you’re looking for the big winners of the McCarthy IRS defunding plan, it’s billionaires and corporations who cheat on their taxes … Repealing that funding is a $191 billion giveaway to wealthy tax cheats.”

I offered a different view at the hearing. I noted that tax enforcement imposes collateral damage, that the tax gap has been stable for decades, and that the U.S. tax gap appears to be smaller than Europe’s. The “tax gap” means unpaid taxes from errors and cheating.

Here’s one problem with Sen. Wyden’s view: IRS audits find relatively smaller errors and cheating on higher-income returns than lower-income returns. As shown in the table below, IRS audits recommend additional tax of 5 to 8 percent of income for middle-income households, but just 1 to 4 percent of income for high-income households. These are averages within income groups over 2017 to 2021.

For example, for households facing additional tax, the average is $6,100 for those earning $75,000 to $100,000, which is 7.0 percent of income, and it is $117,033 for those earning $5 million to $10 million, which is 1.7 percent of income. Note that the average audit change of $117,033 for this high-income group may seem large, but that is just 6 percent of the average tax paid by these households. Also note that the large relative audit change in the bottom group mainly stems from errors and cheating on the earned income tax credit.

Why does the IRS find relatively smaller errors and cheating at the top? It may because these households are more likely to hire expert accountants and lawyers who have their reputations on the line. The relatively smaller errors at the top are impressive, given that high-income returns often involve complex issues such as business income and capital gains.

Data Notes. The IRS publishes aggregate results of audits in its annual Data Book. My table is based on a Government Accountability Office summary of the IRS data in GAO-22–104960 (p. 34).

The income groups are based on “total positive income” not adjusted gross income (AGI). However, the IRS and GAO do not appear to provide average total positive income within the income groups, so I roughly estimated it using average AGI for 2019 within AGI income groups.

A final note is that these are the additional taxes “recommended” by IRS auditors. But many taxpayers appeal these amounts and get them reduced. Also, some taxpayers challenge IRS audit results in court and many of them win, as discussed here.

UNESCO has just designated the Swedish Freedom of the Press Act of 1766 a “Memory of the World.” It’s a well-deserved honor. This more than 250-year old document, enacted during a period of strong parliamentary power in Sweden, is the world’s first freedom of the press act, signed into law ten years before the United States of America even existed.

In defense of “unrestricted mutual enlightenment,” the 1766 act created a constitutional right to publish one’s thoughts and ideas, abolished censorship (in everything but theological texts) and introduced the principle of public access to official records. The English parliament had let its censorship lapse as early as 1695, but it gave no legal protection to the press, so it could still be subjected to arbitrary intervention.

This is in itself enough to make Sweden’s 1766 act a milestone in libertarian history, but it gets better. The law’s author was the Ostrobothnian priest Anders Chydenius, one of Sweden’s earliest and most principled classical liberals. Chydenius was a radical natural rights-thinker and a staunch defender of limited government, free markets, low taxes and open migration: “I speak only for the one small, but blessed word, freedom. I believe that nature, in this, as in so many other things, left to itself, accomplishes far more than many elaborate and ingenious plans.”

Among his many short books, in 1765 — 11 years before Adam Smith’s Wealth of Nations — Chydenius published the powerful pamphlet The National Gain, explaining how the price mechanism and the profit motive make markets self-regulating and engines of wealth creation. The great 20^th century economic historian Eli Heckscher described it as “an almost classically clear and simple exposition of the basic views of economic liberalism and a contribution which might well have gained international fame, had it appeared at the time in any of the major languages.”

Chydenius’ campaign for free trade for Ostrobothnia’s farmers made him popular and he was elected to the Swedish parliament 1765/66, where he wrote the freedom of the press act. Despite fierce opposition from the nobles, Chydenius’ skills, incredible work-ethic and seductive rhetoric carried the day.

As present-day authoritarians imprison dissenters, campus leftists cancel their way to utopia and national conservatives try to silence “woke corporations,” Chydenius’ ideas and accomplishments remain a source of inspiration: “the liberty of a nation is always proportional to the freedom of its press, so that neither can exist without the other. Where the press is closed under some kind of authority, it is an unfailing sign of the nation’s shackles.”

Of course much speech is uninformed or false, accepted Chydenius, and therefore, he insisted, we need more and better speech.

In California, private sector innovation is giving way to public sector experimentation. From the state that pioneered special gasoline formulations, cap-and-trade, and natural gas bans, we now have income-based electricity billing. While this idea may seem like a reasonable response to the problem of moderate-income families being priced out of the state, a better approach would be to tackle the underlying causes of high energy prices.

A 2022 state law instructed the California Public Utility Commission (CPUC) to replace a flat monthly charge for the fixed costs of providing electricity with an income-graduated charge. Californians with very low incomes already receive a discount on their fixed charges under the existing California Alternate Rates for Energy (CARE) program, but the new law requires at least three new levels. The state’s major utilities have proposed income-based rate structures to CPUC. For the most expensive utility, San Diego Gas & Electric, monthly fixed charges would vary from $24 for customers under the Federal Poverty Level (FPL) to $128 for users earning more than 650% of FPL, which, in 2023, is $119,000 for a couple with no kids. So, on an annual basis, upper middle income energy users will pay $1248 more than those on the most modest incomes.

Implementation of this scheme will raise both fairness and privacy concerns. California and the federal government already have progressive income tax systems and benefit programs that redistribute income from higher to lower earners. Using discriminatory energy prices to further income redistribution begs the question of whether other prices should be manipulated for the same purpose. For example, should food and clothing prices also vary based on income? Further, the income-graduated scheme will compel utilities to collect income and family size information from their customers, which some will see as invasive.

The income-graduated charge is an attempt to offset the consequences of previous state policies that have made electricity expensive in the Golden State. As the accompanying charts show, retail electricity prices are far higher in California than those in other large states and in neighboring far western states. Rates per kilowatt-hour (kWh) in California are double those in Texas, Arizona, Nevada, Idaho, and Oregon—states that are receiving many immigrants from the Golden State.

One contributor to the high cost of electricity in California is the Utility User Tax (UUT) levied by 156 cities and four counties across the state. This tax, which affects about half the state’s population, averages around 4–5% but can reach 10% in some extreme cases such as the Bay Area city of Richmond, which has relatively large shares of minority and low-income residents. UUTs appear to be uncommon outside of California. Golden State local governments often seek new revenue sources to fund growing expenditures given Proposition 13’s limit on property taxes.

A bigger contributor to California high electricity costs is the state’s climate policies. For example, until recently, California required utilities to buy power from customers who have installed rooftop solar panels at the full retail price of electricity. As the Energy Institute at UC Berkeley Haas Business School explains, this level of compensation is excessive because it fails to take into account the many fixed costs that contribute to electricity prices. By overpaying solar customers, utilities redistribute costs to other, often poorer, consumers who may not be in a position to install home photovoltaic systems. The Energy Institute estimates that this policy has been adding three to five cents per kWh for San Diego Gas & Electric customers where the effect is most pronounced.

California utilities have also had to raise rates to fund wildfire mitigation efforts, especially after Pacific Gas & Electric was found liable for a series of deadly fires in Northern California. But the severity of California wildfires is often the result of the state’s poor forest management policies.

Finally, California is doing a poor job of balancing the supply and demand for electric power. The state is not permitting any new nuclear or gas-fired power plants. Meanwhile, it encourages more electricity use by providing rebates on electric cars and phasing out new gasoline-powered vehicles ahead of a ban in 2035. New wind and solar plants are insufficient to meet the state’s power demand. In 2021, the state imported 30% of its electricity. The need to buy power from out-of-state further increases energy costs.

It is not clear that California’s heavy handed climate policies are essential to reducing the state’s greenhouse gas emissions. The state is full of environmentally conscious consumers who are motivated to conserve, buy electric cars, and switch to solar power without the state’s carrots and sticks.

So instead of pursuing policies that drive up power costs and then worry about the distributional effects, state policymakers would be well served by finding ways to lower energy costs for everyone.

The Inflation Reduction Act of 2022 boosted the Internal Revenue Service (IRS) budget over the coming decade by $79 billion, most of which is for increased enforcement. President Biden’s March budget includes the new spending and would more than triple enforcement outlays by 2031. House Republicans have proposed cutting the new IRS funding as part of the debt deal being negotiated.

At a Senate Finance Committee hearing last week, I argued that jacking up enforcement and auditing would cause collateral damage to the private sector. There are better ways to reduce taxpayer errors, including simplifying the code and overhauling IRS operations. Some analysts claim there is vast cheating by the wealthy and corporations, but the official IRS “tax gap” has not increased in decades relative to the size of the economy.

The IRS needs to audit at some level, but there is a balance. Higher audit rates would impose more costs on individuals and businesses in the form of time consumed, legal fees, anguish, and financial uncertainty. Another harm is that “audited firms are more likely to go out of business following the audit,” concluded one statistical study.

Policymakers should recognize that with such a complex tax code, it’s not just taxpayers who make mistakes. The IRS makes mistakes on calculations, sending notices, auditing, and other administrative and enforcement functions. In auditing, the IRS uses algorithms, discrepancies, and other factors to target returns. But the targeting gets more scattershot as audits increase, and so the collateral damage on taxpayers who have done nothing wrong rises rapidly as enforcement increases.

This effect is evident in the Government Accountability Office (GAO) chart below (from p. 13). At all income levels except the lowest, there were more IRS audits closed with no change in past years than today. That is partly or mainly because audit rates used to be higher, and the broader IRS dragnet encircled a larger share of taxpayers who had paid the correct amount. Today’s lower auditing rates may represent a better balance of costs and benefits.

By the way, note that higher-income taxpayers have higher “no change” rates from IRS audits. They appear to make fewer errors and cheat less than lower-income taxpayers.

A Congressional Budget Office (CBO) analysis of IRS enforcement finds, in parallel, that the marginal benefits to the government of enforcement falls as enforcement rises. The CBO estimated that adding $20 billion to enforcement would yield an additional $61 billion in tax revenues, but then adding a further $20 billion on top would yield just $42 billion in addition. These gains to the government should be considered alongside the costs of enforcement to the private sector and the general displacement of private activities as the government expands.

In sum, policymakers should remember that as audit rates rise, the share of taxpayers hit who are innocent increases, and also that the marginal revenue raised falls. A better way to boost compliance would be to improve IRS computer systems and taxpayer services, as promised in the agency’s strategic plan.

More on the IRS here, here, here, here, here, here, and here.

Data Note: The GAO says of the chart, “IRS officials explained that the no-change rate has generally decreased because as IRS does fewer audits, it tends to select returns for audit that have the highest chance of resulting in changes.” Thus, the more auditing, the more time and energies are wasted in auditing returns that are already correct.

Los Angeles spent $200,000 on La Sombrita (‘“in the shade”), a bus stop shade/​light structure that provides little shade or light. It has been almost too easy to criticize its design, the token DEI framing given to the project, how most of the funds went to a global junket for the designers, or the fact that city officials held a tone deaf celebratory press conference for its unveiling. Would this “make waiting for the bus at night [feel] safer” to you?

But La Sombrita isn’t really the problem. Rather, its failures are symptoms of its designers trying to work around deeper, structural problems with the governance of infrastructure in Los Angeles. Others have focused on how the shelter-on-a-stick reveals the flaws of governance via non-profit, the kludgery of excessive permitting, or “Blue America’s” systemic failures. There is plenty of blame to spread around, but I want to focus on what I believe is a more fundamental flaw that separates Los Angeles’s failures with transit infrastructure from those of even other progressive city governments.

But let’s start with the basics. Cities are paved heat sinks that get unbearably hot in the summers, especially for the poor bus riders waiting and baking for an average of 40 minutes (!) per day. They need shade from the sun, but only about 25% of bus stops in Los Angeles have shelters. Riders are left to squeeze themselves into the narrow shadows cast by utility poles.

Riders want LA to build more shelters. And the LA Metro wants to build more shelters. But most municipal bus systems already hemorrhage money — LA is on track to lose $1 billion a year by 2026 — and there’s no political will for raising fares to cover operating costs, let alone to fund new capital expenditures. And non-bus riders don’t like being taxed to pay for stuff for bus riders. So how to pay for thousands of new bus shelters?

Well, what if I told you that don’t have to pay…anything? In 2000, someone offered to build and maintain thousands of bus shelters for Los Angeles for no upfront cost, even offering to return ~$6 million a year to the city for the privilege of doing so. Sounds too good to be true, eh? Hold that thought.


Yet that’s precisely what JCDecaux, a French company specializing in designing street furniture, promised to do. Over the next twenty years, JCDecaux promised to build 1,285 new shelters to join a few hundred already existing shelters. However, as the contract expired, they had built only a little over half of the promised shelters, just 660. The overwhelming majority of LA’s 8,100+ bus stops remain shelterless.

It’d be easy to blame JCDecaux for the failure, although the firm actually has a decent global track record of building street infrastructure. Still, the firm suffered from a malincentive problem. You see, JCDecaux offered to pay the upfront cost of the bus shelters because it would then have the exclusive right to sell advertising space on those shelters, splitting a share of that revenue with the city.

But that means JCDecaux’s goal is not to erect bus shelters that function as bus shelters per se. They are incentivized to put up bus shelters that maximize advertising revenue. And maximizing ad revenue means putting new shelters in wealthy neighborhoods rather than in the poor, underserved neighborhoods where more people actually ride the bus. That means that shelters are clustered in wealthy West LA.

In fact, having *people* in your bus shelter is actually a problem because they get in the way of the ads that are facing out at the cars driving by. As one urban planning professor put it, “The advertising company may be interested in putting their shelters on high-traffic streets where there are relatively few people waiting for buses.” In other words, these are billboards first, bus shelters second. And Los Angeles banned most new billboards in 2002, which meant that the value of the bus shelter advertising substitute has since soared.

But the advertising malincentive explains suboptimal distribution of shelters, not why JCDecaux failed to build the stipulated total number of shelters. That is in large part a function of the byzantine tangle that is the shelter permitting process. To build each bus shelter, the company must get sign-offs from eight discrete city agencies, an alphabet soup of bureaus and departments. That’s for every. single. shelter.

Each permission can take months or years to acquire, adding time and cost to each shelter. Furthermore, that process looks a little bit different — but just as cumbersome — in each of the other 88 cities and 20 smaller transit agencies in Los Angeles County. Contrast that with the fact that each shelter takes just two hours to install once approved.

In this regard, Los Angeles’ failure to build bus shelters resembles California’s (and the US’s) larger inability to build any kind of infrastructure in either a reasonable timeframe or at a sustainable cost. For example, anti-development activists have gotten really good at weaponizing both federal and state environmental review laws to stymie infrastructure projects, even those that are environmentally beneficial like transmission lines for renewable energy. My favorite example is how the town of Woodside, California — median home price $5.5 million — declared itself a mountain lion habitat to avoid zoning reform that would’ve allowed denser housing to be built. The good news is that there is growing support on both sides of the partisan divide to reform some of the worst of those permitting delays.

But even as onerous as LA’s permitting system is, it mostly slowed down the progress of installing bus shelters rather than stopping construction altogether. There’s another factor that prevented many of the desired bus stops from being built at all.

Los Angeles is unique among major US cities for giving absolute veto power over bus shelters to city council members. And that veto doesn’t merely reside with the city council as a whole, but with every individual councilperson. Thus, if you’re JCDecaux, and you’ve spent years jumping through all the permitting hurdles for a shelter, and you’ve finally obtained the requisite eight sign-offs, there’s one more boss battle to confront. You have to ask the councilperson whose district encompasses that bus shelter to give a gladiatoral thumb up or thumb down.

This is a shooting fish in a barrel scenario for NIMBYs, those who don’t want to see any new development built in their backyards. You see, only 9% of Los Angelenos commute via any form of mass transit, let alone via bus. Bus riders presumably want more bus shelters, but they can easily be out shouted by the other 91% of Angelenos who are worried that bus shelters are a visual blight, impair pedestrians, provide havens for the homeless, and so.

What happens is that Los Angeles council people express their theoretical desire for new bus shelters while blocking actually proposed bus shelters in their districts under pressure from store owners, anti-development activists, and the like. I’m pro-bus shelter but just not in my backyard.

That’s utterly bizarre. We don’t do other infrastructure projects like that. Imagine if every time a new traffic sign was proposed, your individual, local councilperson could veto it. People would lobby to stop these visual blights from being in front of their residences or places of business. Signs would cluster in poorer neighborhoods that have less political pull. It would be a mess.

Yet that’s why Los Angeles did. The reason why is even more bizarre. When JCDecaux was given its bus shelter contract, it also agreed to build 150 public toilets. But public toilets suck. They are exponentially more expensive to build and maintain, they aren’t worth much as advertising venues, and they’re even more wildly unpopular with their immediate neighbors. But building 150 toilets was the bitter pill that JCDecaux would swallow in exchange for getting up to 2,000 bus shelters/​billboard substitutes.

However, JCDecaux’s contract only stipulated penalties if they built fewer than 15 toilets, so JCDecaux built precisely 15 new toilets and stopped. And that was a‑okay with anti-development Los Angelenos, who didn’t want 150 public toilets in the first place. At the last second, they slipped the veto power into the bill so that they could win the fight block by block, toilet by toilet. Thus, the entire Los Angeles bus shelter program is in the proverbial shitter because local NIMBY activists created a NIMBY-friendly council veto to block new toilets from being constructed. It was, to quote a retrospective, “a case study in how not to structure a contract for implementing bus shelters.” Indeed.

And that veto is the key difference between what happened with Los Angeles’ bus shelter program and similar programs in other cities. For instance, New York City also decided it needed more bus shelters. They also contracted with the same company to provide the shelters, JCDecaux. It’s also notoriously hard and expensive to build infrastructure in New York City, a place which spent $11 billion and took 50 years to build a single new train station.

Yet New York managed to build 3,500 new bus shelters in just 5 years. That compares to LA building 660 in 20 years, which means NYC built bus shelters at TWENTY-ONE TIMES the pace that LA did. LA deserves infinitely far more shade for that failure than even a thousand La Sombritas could ever provide!

To return to La Sombrita, the sum of money spent on the shade-for-nowhere project would be a rounding error in the city budget. [Editor’s Note: The LA Department of Transportation’s Public Information Office reached out to note that no taxpayer money was spent on the La Sombrita project, which was fully financed by the Robert Wood Johnson Foundation.] La Sombrita isn’t the real problem, but it is a dead end. It only exists because it allowed the LA Metro to bypass the onerous permitting and veto regime by being relatively slim and pole-mounted. But after having a short chuckle at La Sombrita, go ahead and fuhgettaboutit.

What should we do with what we’ve learned? In order of importance:

• Don’t give individual veto power over infrastructure projects to local politicians.

• Reform the permitting process to allow blanket approvals. For instance, New York stipulated that if the engineering bureau signed off on a structure design, its approval was good for all such structures. More, please.

• Stop signing one-size-fits-all, multi-decade mega-deals with big contractors. Auction off pole, parking, & right-of-way leases on something closer to an a la carte basis. Let a thousand flowers bloom when it comes to building and maintaining infrastructure.

Crossposted from the author’s Substack. Click through and subscribe for more posts on the intersection of history and policy. 

The U.S. government teeters on the brink of defaulting on its payment obligations over the next few weeks as the debt limit threatens to bind in early June. There’s been extensive coverage about the potential for catastrophic impacts on the economy if Congress and the President do not raise the debt ceiling. What’s missing from the debate is serious consideration of the potentially catastrophic longer-term scenario the United States could face if spending and debt continue growing unabated.

Current debt limit discussions are indicative of the myopia that characterizes the federal budget process. A debt limit crisis presents a short-term legislative impasse of politicians’ own making. There’s an easy and certain way out of the immediate problem: increase the debt limit. A full-fledged fiscal crisis, however, is a much more uncertain, longer-term, and yet far more damaging scenario with no easy way out. And it becomes much more likely if legislators continue borrowing like there is no tomorrow.

The relevant question isn’t whether to raise the debt ceiling. Instead, the debt ceiling deadline should serve as an action-forcing event during which lawmakers halt the unsustainable growth in the debt.

As someone who cares deeply about the future of the United States and the well-being of current and future generations, I am frustrated by the misguided focus on short-term political considerations at the debt limit. Meanwhile, the longer-term debt crisis continues to unfold.

A study in the National Tax Journal, co-authored by Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, and Katherine C. Lim, lays out why a catastrophic U.S. debt crisis is a likely outcome of current fiscal policy and how it could play out. Below, I summarize their findings in the hopes that this will clarify why legislators and the public should be much more concerned about the prospects of a future U.S. debt crisis.

What are the risks of a U.S. debt crisis, and how could it affect the economy and individual Americans?

A U.S. debt crisis would have significant negative consequences for both the economy and individual Americans. A fiscal crisis could lead to a rapid increase in interest rates, inflation, and unemployment. This could trigger a recession and severely reduce economic growth. These modelled effects are based on observations of how debt crises played out in other countries. While there is no decisive threshold at which countries experience debt crises, as debt grows, the likelihood increases. Burman et al. write:

“Nearly one-fifth of countries that defaulted or required debt restructuring had external debt (held by foreigners) of less than 40 percent of GNP (Gross National Product), and more than half of countries experiencing debt crises had debt levels below 60 percent of GNP. Thus, 60 percent might be viewed as a rough barometer of high risk for budget failure. However, nearly one sixth of countries did not reach a crisis point until their debt level had exceeded 100 percent of GNP.”

At this time, foreign holdings make up about one-third of U.S. government publicly held debt. In case of a fiscal crisis, the government’s ability to respond would be limited. Below are some of the potential impacts.

Higher interest rates. A debt crisis could lead to a sudden increase in interest rates, which would make it more expensive for the government, consumers, and businesses to borrow money. This could slow down economic growth and potentially lead to a recession.

Decline in the value of the U.S. dollar. A debt crisis could also cause a decline in the value of the U.S. dollar, which could lead to inflation and reduce the purchasing power of Americans’ savings and investments.

Market volatility. A debt crisis could cause significant volatility in financial markets, which could lead to losses for investors and pension funds. This could also lead to a decline in consumer and business confidence, which could further reduce economic growth.

Steep and sudden cuts to government services. A debt crisis could constrain government services, forcing sudden and steep cuts to government programs with significant consequences for vulnerable Americans who rely on these programs for their livelihoods. Congress should reduce spending on these programs in a responsible way that allows affected individuals to find alternative sources of income, a possibility that could be precluded by a debt crisis.

Damage to the United States’ international standing. A debt crisis could damage the United States’ reputation as a stable and reliable borrower, which could make it more difficult for the government to borrow in the future and undermine the current standing of the U.S. dollar as a global reserve currency.

Why might a U.S. debt crisis come on suddenly instead of building over time?

Burman et al. contrast rising debt leading to higher interest rates, which could be a disciplining force for Congress, with debt accumulation as interest rates stay low, which could encourage further fiscal profligacy until gradual corrections are no longer possible. They write:

“A far worse situation would be for interest rates to stay low while we accumulate unprecedented amounts of debt only to respond very suddenly when financial markets or foreign lenders decide that the United States is no longer a good credit risk. That could produce a catastrophic financial meltdown, like the Great Recession, which was triggered by the housing bubble bursting, but with one crucial difference. If the crisis is caused by an excessive amount of government debt, the government will not be able to borrow to deal with its effects. This would be a catastrophic budget failure.”

Like recent banking crises, a U.S. debt crisis could arise suddenly because of how financial markets respond to revised information and changing economic and political conditions. Certain economic models, such as herd models and winner-take-all models, suggest that when investors suddenly doubt the government’s ability to pay back its debts, they may rush to sell U.S. bonds all at once. Such a sudden surge in sales could lead to a rapid rise in interest rates, making it more expensive for the government to borrow and potentially triggering a broader financial panic.

If government bond markets represent a winner-take-all scenario, Treasury bonds could be trading at lower interest rates than they arguably should, given U.S. government debt accumulation, until such time that another country’s bonds take the first spot. According to Burman et al.:

“The safest asset, currently U.S. government securities, can secure an almost limitless supply of cheap capital, while the next most safe asset trades at a substantial risk premium. Volatility in world markets, even if it makes Treasury bonds less safe, raises the risk premium even more — increasing the flow of capital to the United States and further depressing interest rates. This would explain why Treasury yields plummeted even as the U.S. financial sector was teetering on the brink of collapse and the economy was heading into a deep recession, and it would be consistent with the further decline in U.S. interest rates when Greece and other Euro-zone countries experienced debt crises.”

In a winner-take-all scenario, the United States government could continue to borrow at low rates for as long as there is no suitable competitor to take the spot of the U.S. dollar as the world’s preferred reserve currency. Betting on the permanency of U.S. Treasury bonds being considered the safest, global dollar-denominated asset, besides cash, could be a very risky bet over the long run. As the American Enterprise Institute’s Michael Strain so aptly wrote: “the absence of a better alternative is a thin reed for national greatness and global economic and political leadership.”

Herd models suggest that a fiscal crisis can arise suddenly because investors’ behavior is driven less by the underlying economic fundamentals, and more by the actions of other investors in the market. If a fiscal crisis triggered a Treasury sale-off, the first investors to sell off their holdings reap significant rewards, while those who hold onto their investments could face steep losses. This creates a powerful incentive for investors to act quickly and follow one another in a panic, potentially leading to a self-reinforcing cycle of selling bonds and increasing interest rates. The sheer size of the U.S. debt, which is approaching the country’s gross domestic product, makes the federal government’s ability to borrow vulnerable to sudden shifts in investor sentiment and changing market conditions.

What steps can policymakers take to address the root causes of our fiscal imbalance and reduce the risk of a sudden fiscal crisis?

Instead of the false dichotomy being presented by the Biden administration of raising the debt limit without conditions as the only way to stave off a crisis, the responsible choice is to adopt fiscal reforms that slow the growth in future debt when increasing the debt limit. The United States debt is highly unsustainable, growing faster than the economy toward all-time-record levels. The primary driver of our long-term fiscal imbalance is entitlement spending on programs like Social Security, Medicare, and Medicaid. Any serious reform proposal must reduce spending on these programs.

Congress should consider a Better Budget Control Act to save at least $8 trillion through a combination of new limits on discretionary spending, immediate reductions to mandatory spending, and future savings from reforms to Medicare and Social Security put forth by an independent commission. Such an agreement would allow Congress to responsibly raise the dollar‐​denominated debt limit without further inflating the public debt as a share of the economy. Taking steps to prevent a future fiscal crisis won’t be politically easy, but it’s necessary.