About a year apart, in the wake of the global financial crisis, two documents that would dramatically change the future of finance were published: in 2008, the 9‑page white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” and in 2009, a 1,279-page draft of what would become the Dodd-Frank Act.

The subsequent history of these two documents is one of private innovation delivering what regulation in the U.S., at least so far, has not: an open and decentralized financial ecosystem where consumers have default access to their own financial transaction data. This history provides important lessons for policymakers on how the desired outcomes of regulations can fail to materialize years after laws’ inception and the market itself can achieve policy goals more quickly than regulation and without top-down direction.

While many are familiar with Dodd-Frank’s dramatic expansion of federal financial regulatory authority, a lesser known “open banking” provision (Section 1033), which occupies less than one page of the act, requires financial institutions to give customers access to their own transaction data in a usable format upon request, subject to Consumer Financial Protection Bureau (CFPB) rules. (While some definitions of “open banking” would have relevant laws explicitly refer to data transfers in addition to data access, Dodd-Frank’s access provision is solidly within the open banking universe.)

Last week, CFPB Director Rohit Chopra announced that the agency is planning to propose such rules in 2023, with the hope of finalizing them by 2024. Fittingly, this week was the fourteenth anniversary of the Bitcoin white paper. Over a decade on, Dodd-Frank’s goals of open banking by proclamation have languished, while Bitcoin has ushered in an entire industry unto itself that’s helped to accomplish open-banking objectives without any regulator ordering it.

Director Chopra’s announcement of the CFPB’s rulemaking plans articulated well some of the high-level goals of open banking and customers’ ability to port their financial data to new services, applications, and tools. Chopra argued:

• “A decentralized, open ecosystem will yield the most benefits for creators and consumers alike.”
• Expanded financial data access, if successful, will “reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers.”
• “It’s critical that no one ‘owns’ critical infrastructure.”
• And “more seamless integration … will give us all more choice.”

In a different context, Chopra’s words could be read as a laundry list of the benefits of cryptocurrencies and decentralized finance (DeFi). Open banking became a policy goal in no small part because of the gatekeeping role of centralized intermediaries. Cryptocurrencies’ main innovation is to remove reliance on such intermediaries. Accordingly, the benefits and opportunities Chopra seeks can be found in key features of the crypto ecosystem:

• Major cryptocurrencies are natively decentralized. Transaction histories are maintained not by a trusted intermediary but by a global network of computers incentivized to validate a cryptographically secure distributed ledger (a blockchain).
• Crypto users need not seek the permission of gatekeepers to access their transaction data. Rather, users are free to self-custody their own crypto holdings by directly controlling distributed ledger accounts with their own private keys. Where users do, their complete, pseudonymized transaction histories are available to them by default on public ledgers.
• Where financial rails are based on open-source software run by computers voluntarily participating in a permissionless network, the underlying infrastructure is not “owned” in the classic sense of someone possessing and controlling it with the right to exclude others.
• The crypto ecosystem is built on open-source code allowing it to be highly “composable,” meaning protocols and applications are modular and interoperable. In other words, they can be unbundled and reassembled like Lego blocks.

There is not complete overlap between an orthodox definition of open banking and the capabilities of crypto. As Nic Carter argues, unlike open banking, crypto and DeFi do “not seek to link multiple financial databases through either private sector agreement or state mandate, but instead envision[] an entirely novel financial system where a global userbase is united on one database—the ledger maintained by the blockchain.” Nonetheless, as sketched above, they drive toward similar goals.

When it comes to realizing these goals, it is worth looking at why it is regulation that has lagged private innovation. In the U.S., at least, consumer access to financial data typically has had more to do with the latter than the former. For instance, in an example of market-driven standardization, in 1997, software rivals Microsoft, Intuit, and CheckFree created a file format (OFX) for streaming financial information from banks to consumer desktop tools “before ‘open banking’ was even a term.” Banks in the U.S. went along based on consumer demand but became wary as their position as data gatekeepers eroded. Nonetheless, technology continued to lead the way as fintechs leveraged screen scraping software to collect data from financial institutions when consumers shared their login credentials with the fintechs.

With Dodd-Frank Section 1033’s regulatory hook, however, a bootleggers and Baptists alliance of banks and consumer advocates has objected to such tactics on consumer privacy and cybersecurity grounds, with some advocates questioning whether fintechs’ disclosures have been sufficient for consumers to give informed consent to the transfer of their own financial data. While private coordination can help to resolve such frictions, a top-down approach to driving market outcomes can falter by leading to zero-sum stakeholder competition that creates inertia or leads to regulatory capture. Director Chopra himself stated the capture problem clearly: “Regulation of the financial services industry has a bad name, and rightfully so. Financial regulators have largely complied with what dominant incumbents desire by writing complicated rules to fit existing business models.”

When it comes to making progress toward the “decentralized, open ecosystem” of finance that Chopra describes, the Bitcoin whitepaper has outperformed Dodd-Frank Section 1033 in the past decade plus. As policymakers look to further regulate the crypto ecosystem itself, they should keep top of mind the capacity of private innovation to not only achieve broad policy goals but also to get there before regulations do.

“I accidentally started a school,” says Siri Fiske, founder of Mysa Microschool.

Siri has spent the majority of her adult life in education, primarily in urban schools in Los Angeles. She first got interested in education when her children attended a public school co-op in California. She began designing curriculum for a public school there, focusing on units of study and ways to make learning fun. She then worked for independent schools and spent seven years working at a school in Korea.

Siri eventually moved to Washington, D.C. where she started designing her ideal school based on her experience designing curriculum as well as working with her own five children, who each had different learning needs. She considered what research says about how kids learn and what is missing in the education landscape.

“My initial plan was for a middle school,” she says. “There are great elementary schools and high schools, but there aren’t a lot of great middle schools.” She created a middle school model that she intended to be a school within a school—an existing public school would be able to implement her model as a subset of the regular middle school. As she was working on her design, she set up a non-profit and learned grant writing.

Siri’s grant writing was more successful than she expected it to be, and she landed enough funding to start her own school: Mysa School, a modern version of the one-room school house. According to the Mysa website, “Our students learn in a cooperative, multi-age environment; this is a collaborative, interdisciplinary school community where students chart their learning pathways, in close consultation with faculty. Students are empowered to choose how knowledge is constructed and how to demonstrate understanding. This results in a truly student-centered learning experience, where students are gifted with open and flexible physical spaces, a number of technological tools, and individualized curricula.”

Mysa uses a hybrid model that combines hands-on, project-based learning with online lessons, programs, and resources from around the world. Each week, students receive a customized menu of work that has been crafted with their personal interests and learning needs in mind. Students manage their projects, assignments, and deliverables with guidance from teachers as they work to master the content.

According to Siri, “In this day and age, with what we know about how people learn, and the resources we have instantly available, schools need to more flexibly adapt the ways that they teach each child to that particular child’s learning style. I believe that the Mysa model of education, with its personalized learning plans, honors the uniqueness of each student and is a highly effective way of not only teaching, but of lighting a fire of curiosity within each student.”

Siri gets frequent requests to start other schools—including from parents whose children had a chance to spend a day at Mysa. In 2021, she worked with a group of parents to open a campus in Vermont. She says it’s been a good opportunity to see if what her program that has been successful for a diverse group of children in urban DC will also flourish in rural Vermont. So far, it seems to be working.

One area where Mysa differs from many other microschools is that part of its mission is to help improve public schools. Siri uses national standards as benchmarks but finds unique ways to help children reach those benchmarks. She’s even piloting a software program to help schools and parents track student mastery using various benchmarks separate from grade levels. If you’re interested in participating in the pilot program, you can connect with her through the Mysa website.

Siri says, “The Mysa model not only prepares students for college but it honors the needs of the student in the moment, as adolescents and young adults, acknowledging that they have the rest of their lives to be grown up, but only one childhood.”

Mysa Microschool is an exciting example of what education can look like when we think beyond the conventional understanding of “school.”

Responding to medical experts, including the American Medical Association, who have been complaining for years that the Center for Disease Control and Prevention’s 2016 Guideline for Prescribing Opioids for Chronic Pain lacked a strong basis in the evidence—and after it issued an Advisory in 2019 stating the Guideline was misinterpreted and “misapplied” by state lawmakers and health care practitioners—the CDC announced it was going to revise the Guideline before the end of 2022. Unfortunately, 38 states have already cast the flawed 2016 Guideline in stone by enshrining—and misapplying—all or part of it in statutes that dictate how health care practitioners may treat patients in pain.

In February of this year, the CDC released a draft of the revised Guideline and requested comments. I provided my comments here. In those comments, I stated. “Notwithstanding the well-intentioned exhortations and disclaimer in the draft 2022 opioid prescribing guideline, the recommendations change very little from those put forth in 2016.”

The CDC goes to great lengths to stress throughout the draft 2022 Guideline that the document is meant to serve as a list of suggestions and recommendations and is by no means intended as a mandate, emphasizing that physicians should use their best clinical judgment to provide individualized treatment to their patients. However, I commented, “The CDC guideline will inevitably become interpreted and adopted as hard and fast rules by state and local governments, pharmacies, health plans, and third-party payers, despite guideline warnings against doing so.”

I also criticized the draft for suggesting dosages based on “morphine milligram equivalents” of opioids:

For example, the guidelines still rely on Morphine Milligram Equivalent (MME) dose recommendations, even though there is no pharmacologic or biochemical basis for relying on equianalgesic conversion factors.

The use of MME conversion tables is nothing more than junk science. As Dr. Nabarun Dasgupta of the University of North Carolina Injury Prevention Center has written:

Contrary to conventional wisdom, conversion values are not based on pharmacologic properties. Instead, they arose 60 years ago from small single-dose clinical studies in postoperative or cancer populations with pain score outcomes; toxicologic effects (e.g., respiratory depression) were not evaluated.

On November 3, the CDC published the final version of the 2022 Clinical Practice Guideline for Prescribing Opioids for Pain. The Guideline no longer recommends MME dosage thresholds, but it still urges practitioners to be cautious about prescribing more than 50 morphine milligram equivalents of opioids per day, stating :

Many patients do not experience benefit in pain or function from increasing opioid dosages to ≥50 MME/​day but are exposed to progressive increases in risk as dosage increases. Therefore, before increasing total opioid dosage to ≥50 MME/​day, clinicians should pause and carefully reassess evidence of individual benefits and risks. If a decision is made to increase dosage, clinicians should use caution and increase dosage by the smallest practical amount.

To prevent the recommendation from being “misapplied,” the Guideline adds the following disclaimer to the above paragraph:

The recommendations related to opioid dosages are not intended to be used as an inflexible, rigid standard of care; rather, they are intended to be guideposts to help inform clinician-patient decision-making.

Alas, the 2022 Guideline still includes the now-discredited MME conversion table that providers can refer to when prescribing opioids.

The Guideline recommendations are still primarily based on “Type 3” and “Type 4” evidence, evidence with important limitations.

If the past is prologue, expect the Guideline’s suggestion to use caution approaching a dose of 50 MME to morph into another de facto mandate as lawmakers, pharmacies, and insurance plans fixate on that number. As Josh Bloom and I have written before:

When a government agency “recommends” a policy, it’s akin to a recommendation from Tony Soprano; it is inevitably interpreted as a mandate, obeyed by state and federal agencies, health insurers, and even pharmacies.

Perhaps most egregiously, the rationale of the 2022 Guideline remains predicated on the flawed assumption that overprescribing opioids caused the overdose crisis. There is no correlation between prescription volume and the nonmedical use or addiction to prescription opioids. And the percentage of people aged 18 or older addicted to prescription pain pills has been unchanged at less than one percent this entire century. The CDC should follow the evidence and abandon this mistaken premise.

Finally, as I concluded in my comments on the draft proposal back in February 2022:

1‑The Centers for Disease Control and Prevention should not be issuing opioid prescribing guidelines. Professional specialty organizations, overseen by practicing clinicians and clinical educators, are the institutions that should be issuing standard of care and best practices guidelines.

2‑The CDC guideline will inevitably become interpreted and adopted as hard and fast rules by state and local governments, pharmacies, health plans, and third-party payers, despite guideline warnings against doing so.

3‑The 2022 guideline very closely resembles the 2016 guideline and is based on weak evidence; in the case of Morphine Milligram Equivalent recommendations, the guideline is pharmacologically unsound, and the conversion tables are based largely on decades-old subjective studies that didn’t even examine toxicologic effects such as respiratory depression rates.

4‑The overdose crisis is largely caused by a growing population of nonmedical drug users intersecting with increasingly dangerous drugs being developed for the black market fueled by drug prohibition. Efforts to address the problem through reductions in opioid prescribing have only exacerbated the situation by driving nonmedical users to more dangerous drugs while depriving pain patients of necessary relief.

5‑The Centers for Disease Control and Prevention should abandon its efforts to establish a prescribing guideline and defer to the professional institutions usually charged with establishing best practices.

Nothing in the just-published Guideline makes me want to reconsider that conclusion.

A recent posting at the American Compass describes a trade problem that is not really a problem and then prescribes three bold solutions that are not really solutions. If implemented, their proposals would in fact create real problems for an American economy struggling to tame inflation and dodge a recession.

Like many skeptics of trade, American Compass focuses on the trade deficit as a sign of failure of U.S. trade policy. Here’s how it summarizes the problem: “America imports massively more than it exports, leaving us deeply indebted to our trading partners. Rather than exchange American goods for foreign goods, we import on credit, sending back IOUs and ownership of our economy, which future generations will pay for. In the process, we allow the erosion of American industry and innovation, the decline of manufacturing employment, and the collapse of communities.”

To combat the deficit, the American Compass proposes three sweeping new tax and licensing systems on international commerce: 1) a Global Tariff on all U.S. imports starting at 10 percent; 2) a licensing system of Import Certificates that would ration the value of U.S. imports to equal the value of U.S. exports; and 3) a Market Access Charge of 50 basis points or more on all foreign purchases of U.S. assets, i.e. inward foreign investment.

Before I count the ways that each of these prescriptions would damage the economy and the well-being of Americans, let’s examine what’s wrong with the diagnosis.

The Non-problem of the Trade Deficit

The U.S. trade deficit is not a problem to be solved, but a basic feature of a U.S. economy that excels at attracting foreign investment from around the world. That investment, which even American Compass folks occasionally celebrate, keeps domestic interest rates lower than they would be otherwise and fuels job creation, innovation, and the construction or modernization of plant and equipment at U.S. factories.

American Compass complains that years of trade deficits have only succeeded in piling up “more than $13 trillion of trade debt.” That figure is a misleading way of describing America’s “net international investment position”—the difference between the value of assets abroad owned by Americans and the value of U.S.-based assets owned by foreigners. At the end of 2020, the difference was indeed more than $13 trillion, with foreign-owned assets in the United States totaling $46.7 trillion and U.S.-owned assets abroad $32.0 trillion. But that difference is not “debt” in any normal sense. Most of the assets that foreigners own in the United States are in the form of foreign direct investment (FDI) in U.S. companies and portfolio investment in equities. When people outside the United States invest $1 billion in Apple Inc. stock or an automobile factory in Tennessee, this is not debt our children need to repay, but an infusion of new capital into the American economy.

The critics push back that almost all inward FDI comes in the form of mergers and acquisitions rather than “greenfield” investment in new plants. But as my Cato colleague Scott Lincicome has argued, this misses the important fact that those mergers and acquisitions allow U.S. sellers to reinvest those funds in other enterprise, injecting additional capital into the U.S. economy. Those transactions also encourage further investment in domestic firms that may then draw foreign partners in the future. Foreign acquisitions also typically lead to improved production methods, better marketing and customer service, and greater investment in research and development. The net inflow of FDI enhances the productivity of the nearly 8 million Americans who work for foreign-owned affiliates in the United States, boosting their wages and benefits.

Whatever its composition, the $13 trillion in “trade debt” is economically sustainable. Americans routinely earn about $200 billion more each year on their investments abroad than what foreigners earn on their investments in the United States. And $13 trillion may seem like a big number, but according to the Federal Reserve Board’s quarterly “Financial Accounts of the United States,” the net worth of American households, non-profits, and businesses (corporate and non-corporate) at the end of 2020 was a whopping $170 trillion. Far from selling off our assets to fund consumption, the net worth of Americans has been growing impressively since the Great Recession of 2008-09. The inflow of foreign capital has made America a wealthier place.

The American Compass critique is even flimsier when it claims that trade deficits have been bad for American industry. It’s true that manufacturing employment has been on a downward trend, but that has been true for decades. The decline is driven more by rising productivity in manufacturing rather than by rising imports—and it’s been happening (often even more steeply) in countries such as Japan and Germany with persistent trade surpluses. Meanwhile, total manufacturing value-added in the United States, adjusted for inflation, has increased 36 percent since 2000—reaching a record $2.5 trillion in 2021. The struggles of certain communities tied to heavy industry, such as Youngstown, Ohio, date back to the 1970s, before trade deficits became an issue.

To address this non-problem of the trade deficit, American Compass calls on the federal government to dramatically extend its powers to tax and regulate America’s international commerce. Leaving aside the obvious conflicts these policies would have with U.S. international trade agreement commitments, each suffers from serious economic flaws:

Non-solution #1: The Global Tariff

The first club American Compass would wield is a “Global Tariff.” The tariff would start at 10 percent on all imports, rising by another 5 percentage points each year if the trade deficit persists. If the U.S. runs a trade surplus, the global tariff would fall by 5 percentage points in the following year.

This crude sledgehammer would do nothing to “cure” the trade deficit. As the American Compass authors acknowledge, such a tariff would not alter the net inflow for foreign investment, which by necessity mirrors the trade balance. Despite the tariff, foreign investment would continue to flow into the United States, filling the gap between the level of domestic savings and investment. That’s why the U.S. goods deficit remained high under the Trump administration, around $800 billion a year, despite its escalating tariff war with China and other major trading partners.

A global tariff on U.S. imports would reduce overall trade but not the trade deficit. To the extent it discourages imports, it will cut the flow of dollars into the foreign exchange market, driving up the dollar’s value and discouraging exports, while likely spurring retaliatory tariffs as well. Both imports and exports would fall in roughly equal measure, leaving the trade deficit fundamentally unchanged. Without a change in the trade deficit, the global tariff would continue to rise unchecked until it would virtually cut the United States off from international trade.

The global tariff would drive up the cost of living for American workers and families and the cost of business for American producers. U.S. businesses would be forced to pay more for imported components, commodities, and capital machinery, making them less competitive in global markets. For American households, the tariff would fall disproportionately on lower-income households, which spend a higher share of their incomes on more tradable goods such as food, clothing, footwear, and housewares. It would further reduce the real wages of American workers, who are already struggling under the highest inflation rate in 40 years.

Proponents of the global tariff wistfully claim that the higher prices would be offset by the redistribution of tariff revenue. They claim, for example, that the tariff revenue could be used to offset sales taxes, but of course it’s the federal government that collects the tariff revenue while it is states that impose sales taxes. Do they assume the debt-ridden U.S. treasury will send billions to California, New York and other states so they can reduce their sales taxes? That is not likely. In practice, their tariff would act as a regressive tax that would widen income inequality.

Non-solution #2: The Import Certificate

Under this second club, Congress would create a licensing system that would allow U.S. companies to import only when they can present a government certificate authorizing the transaction. Companies could earn certificates by exporting, and then sell them for the going price on an open market—similar to “cap and trade” markets for pollution control. A company that exports $100 million in, say, wheat or semiconductors could then sell the certificate it earned to another company that wants to import $100 million in bananas or shoes. The system, if rigorously enforced, would in theory reduce the value of imports to match the value of exports. Hocus Pocus, Alakazam, no more trade deficit!

In practice, import certificates could be an even worse restriction on international trade than the global tariff. It would create a kind of “licensing raj” that was a sad feature of pre-reform India, longtime economic basket-case Argentina, and other developing countries forced to ration foreign exchange reserves. It would expand the power of the administrative state, encourage smuggling, complicate supply chains and potentially create shortages on retail shelves as well as factory assembly lines. Like the global tariff, it would raise costs for U.S. households and producers but without producing any tariff revenue that could—in theory, at least—be used to compensate households or invest in public infrastructure.

Like a tariff, import certificates would also fail to address the underlying causes of the trade deficit. The national level of savings and investment that drive cross-border investment flows would not be fundamentally altered. If the government attempted to enforce such a licensing scheme, the value of U.S. imports would almost certainly drop, but so too would the outflow of dollars from the United States into global currency markets. This in turn would drive up the value of the dollar, making U.S. exports and U.S. assets more expensive and less attractive to foreign buyers. Imports and exports would both fall in a death spiral, depriving the U.S. economy of the gains from both international trade and investment.

Non-solution #3: A Market Access Charge on Inward Investment

The third club proposed by American Compass would empower the Federal Reserve Board to impose a “Market Access Charge” on the purchase of domestic assets by foreign entities. Under their plan, the Fed would start by charging 50 basis points (0.5 percent) on the value of any foreign purchase of a U.S. asset. As with the global tariff, the Fed would be directed to vary the charge depending on the size of the deficit, “increasing it while the trade balance remains in deficit and decreasing it once trade is balanced.” Banks would collect the charge from cross-border financial transactions and deposit the revenue in an “American International Competitiveness Account” at the U.S. Treasury “to be used for improving global competitiveness”—whatever that means.

A tax on inward capital flows is arguably the most serious of the three “solutions.” It at least has the virtue of aiming at the underlying cause of the trade deficit—the persistent net inflow of foreign capital to the United States. A bill has been introduced in the U.S. Senate that closely resembles the American Compass proposal. But like the two clubs aimed at imports, it’s hard to imagine how making U.S. assets less attractive to foreign investors will make Americans more wealthy and prosperous. Russia’s war in Ukraine has made its assets less attractive, downright toxic, to foreign investors. This may have even contributed to an “improvement” in Russia’s trade balance, but the flight of foreign capital has caused real damage to its domestic economy and living standards.

If the access charge were to work as advertised, it would deprive the U.S. economy of investment capital. Domestic savings would need to rise, or the level of domestic investment to fall, for there to be any real change in the trade balance. With U.S. household savings low, and the federal government still borrowing a trillion dollars or more per year, less inward foreign investment would likely translate into a lower level of domestic investment (with federal borrowing crowding out private investment). Less foreign demand for Treasury bills would put downward pressure on bond prices, leading to higher interest rates, driving up borrowing costs for the federal government, businesses, and homebuyers.

In reality, the inward investment tax may have less impact than its advocates predict. The United States remains the most popular “safe haven” for global savings. The U.S. economy, and in particular Treasury bills, offer global investors safety and liquidity in times of economic or geopolitical uncertainty. In effect, the United States acts as “banker to the world,” paying a lower interest rate on global inward investment while earning higher returns by re-investing those funds at home and abroad. An access charge on U.S. assets is unlikely to fundamentally alter the global appeal of U.S. assets, leaving the trade deficit intact while expanding the taxing power of the federal government.

For all the reasons above, a persistent trade deficit at current levels would be far preferable for the U.S. economy and the welfare of Americans than any of the three radical interventions proposed by the American Compass and its fellow travelers.

I have an op-ed in the Daily Beast that helps illuminate both the politics and the causes of the large numbers of illegal crossings at the U.S.-Mexico border.

A coalition of Republican-led states is asking a district court to consider whether the Biden administration should be held in contempt of court for violating an order requiring it to expel undocumented immigrants at the U.S.-Mexico border. The supposed offense? Letting Haitian immigrants enter the country legally.

The effort shows the states are not interested in solving illegal immigration, but rather, keeping immigrants out of the country entirely. Indeed, by trying to stop the legal flow of immigrants, they are explicitly requesting that the Biden administration intentionally sabotage the border in a way that would increase illegal immigration.

These Republican-led states want immigration illegal, even if it means more chaos.

You can read the whole thing here.

I have previously explained in detail how the Obama administration ended illegal immigration by Haitians at the U.S.-Mexico border by letting them in legally, how the Trump administration recreated illegal immigration by Haitians by banning that process, and how the Biden administration again nearly eliminated Haitian illegal immigration this summer by reopening legal immigration at the border to them.

You can read the more complete explanation here.

The graph of Haitian border crossings is as clear as can be: illegal immigration is a policy choice, not a natural phenomenon. People who are fighting to stop legal migration want illegal immigration and border chaos. To create order at the border, we need legal immigration, as I explained in my TED talk in 2020.

In the seminal 1978 Supreme Court case, Regents of the University of California v. Bakke, four justices held that racial quotas and set asides, implemented as part of an affirmative action program at the UC Medical School at Davis, violated the non-discrimination provisions of the Civil Rights Act. Four other justices concluded that race can sometimes be applied as one factor among others to counteract past discrimination. Justice Lewis Powell concurred with both views. As a result, the Court ordered that Alan Bakke be admitted to the UC Medical School, but that a race-based admissions criterion might be permissible in subsequent cases. In examining the validity of affirmative action programs, the Court would apply a two-part strict scrutiny test: First, the program must be designed to achieve a compelling state interest. Second, the program had to be narrowly tailored – i.e., it must not sweep more broadly than necessary, and the goals must not be attainable via race-neutral means.

Fast forward a quarter of a century. In 2003, the Court validated the affirmative action program at the University of Michigan Law School, which used race as an admissions factor to reach a “critical mass” of minority students. That policy, argued the Law School, served a “compelling interest in achieving diversity among its student body.” In a 5–4 opinion by Justice O’Connor, the Court agreed. Justice O’Connor noted that “all factors that may contribute to diversity are meaningfully considered alongside race” as part of an “individualized inquiry into the possible diversity contributions of all applicants.” After Grutter, admissions programs designed to promote racial diversity would be deemed to satisfy the first part of the Court’s strict scrutiny test – i.e., diversity is a compelling state interest. Still, the programs would have to satisfy the second part of the test – i.e., the programs must be narrowly tailored. In Grutter, the University of Michigan Law School passed that test.

Today, the Supreme Court is being asked to overturn Grutter. The case is Students for Fair Admissions v. Harvard,consolidated with a similar case involving the University of North Carolina. The plaintiffs argue that the affirmative action programs at Harvard and UNC have discriminated against Asian applicants. Because UNC is a public university, it is bound by the Equal Protection Clause of the 14th Amendment. And because Harvard receives significant federal funding, it is bound by Title VI of the Civil Rights Act, which also prohibits racial discrimination. If the Court decides that Asians have been unduly harmed, it could declare that diversity is not a compelling interest, thus reversing Grutter; or the Court might determine only that Harvard’s and UNC’s programs were not narrowly tailored because the schools could have met their diversity goals using race-neutral admissions policies.

My personal view of the Grutter case goes like this. The Court implicitly condoned four injustices: punishment of individuals to advance group interests; discrimination that often benefited non-victims and injured those who had done no wrong; preferences for some minorities who endured few of life’s hardships; and prejudicial treatment of other minorities and some whites who were less fortunate than those persons who were favored.

Plainly, the 14th Amendment’s Equal Protection Clause was intended in major part to target racial discrimination. So, if Justice John Marshall Harlan, in his famous Plessy v. Ferguson dissent, meant for the term “color-blind Constitution” to rule out race-consciousness, he clearly over-reached. But if he meant, as he explained further, that our color-blind Constitution rules out racial classifications, then he was more in tune with Chief Justice John Roberts’ recent guidance (Parents Involved v. Seattle, 2007): “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”

My prediction: The Roberts Court will surely not dispute that the Equal Protection Clause and Title VI allow race-conscious remedies that address actual or potential individualized discrimination. But the Court will likely hold that racial classifications for the purpose of achieving diversity are unconstitutional. Diversity will no longer be considered as a compelling governmental interest that justifies classifying persons by race and extending benefits to those persons merely because they fall within the favored group.

Over the years, opponents of affirmative action have expressed several reservations about the alleged benefits of diversity. First, if diversity is a compelling governmental interest, why not diversity by measures other than race — e.g., religion, nationality, socio-economic status, geography, and (perhaps most important) viewpoint. (According to a recent poll, Harvard’s class of 2025 is 72.4% liberal and 8.6% conservative. I suspect that the faculty has similar leanings.)

Second, why do some universities that tout diversity also allow racially segregated dorms and graduation ceremonies? Third, how would a Pedro Goldberg — Hispanic mom, Jewish dad — measure on the diversity scale? Would Harvard ensure that he gets in, or that he’s kept out? Fourth, not only Blacks have experienced discrimination. How do we select which groups are to receive preferential treatment? Fifth, if diversity trumps academic criteria, will colleges be prodded either to lower academic standards or fail affirmative action admittees who may be less qualified? Sixth, have diversity goals increased minority enrollments, or have they simply re-directed some minority students to elite universities at the expense of other universities which those students might otherwise have attended? And finally, “diversity” has never been contextually defined. What, precisely, are its educational benefits? How will we know when the goals have been reached? (In her 2003 Grutter opinion, Justice O’Connor speculated that 25 years might be sufficient. But diversity proponents haven’t accepted that time frame, even as college admissions approach for classes that will graduate in 2028.)

Eight states — Arizona, California, Florida, Michigan, Nebraska, New Hampshire, Oklahoma and Washington — currently ban public universities from considering the race of their applicants. Before mid-2023, the U.S. Supreme Court will probably extend a comparable ban to 50 states and Washington, D.C.

Clark Warburton, in Depression, Inflation, and Monetary Policy (1966), contended that “the guiding principles for Federal Reserve action in the Federal Reserve Act, both in its original form and in amendments, are vague and ambiguous, and Federal Reserve officials and staff developed an ambiguous terminology, resulting in confusion as to the proper kind of guide for central bank action” (p. 343). His concern is still relevant today. Although the Fed has a dual mandate to achieve maximum employment and price stability, there is no clear rule that policymakers follow, and no one is held accountable for not meeting those objectives.

Central bankers need a clear guide to monetary policy—and that guide can’t be the price of credit, which should be determined in free capital markets, not by government officials. Most importantly, in a pure fiat money regime, there needs to be a credible, transparent rule for the conduct of monetary policy that ensures stable money—that is, a rule that prevents stop-go policy and preserves, as much as possible, monetary equilibrium (see, e.g., Schuler 2011 and Selgin 1990).

Interest Rates Are a Poor Guide to Monetary Policy

In “The Counter-Revolution in Monetary Theory,” Friedman (1983) argued that “interest rates are a highly misleading guide to monetary policy.” An excess supply of money will initially increase asset prices and decrease yields (interest rates). However, eventually, the excess money (cash balances) will increase incomes and spending, push the average level of money prices upward (i.e., produce price inflation), raise the nominal demand for loanable funds, and push nominal interest rates up. The opposite is true in the case of monetary deficiency (i.e., an excess demand for money). In sum, the relation between money and interest rates is not uniform—interest rates could, for example, rise because monetary policy has been too loose or too tight—and is a poor guide to the stance of monetary policy (see Friedman 1983: 24–25).

Likewise, Warburton (1966) concluded “that monetary policy should be concerned, not with the rate of interest per se, but with the maintenance of a suitable quantity of money” to avoid both inflation and depression (p. 101). He reached this conclusion by drawing on his own statistical analysis informed by “orthodox theory.”

In particular, Warburton (1966: 90) recognized that:

The interest theory developed in the nineteenth century and accepted in early twentieth-century theory, like price theory, had two main subdivisions: first, a theory of a natural [equilibrium] rate determined by the demand for and supply of loans under the condition of monetary stability, and with the demand influenced primarily by prospective profits and the supply by savings offered for loans, and, second, a theory regarding departures from the natural rate induced by changes in the quantity of money.

Warburton challenged contemporary thought regarding the “identification of monetary policy with interest-rate manipulation” (p. 96). He insisted that “changes in interest rates” can’t “be depended on as a guide to monetary policy” (p. 290). His key argument is that:

In order for interest rate changes to be used successfully as a criterion for central bank action they must somehow be used in a manner to produce a monetary growth in accord with the need for money generated by growth of population, growth in production per capita, and increased holdings of cash reserves by individuals and business. Interest rates cannot be so used because the rate of interest must be free to respond to real changes in the demand and supply of loan funds, in order to avoid producing monetary maladjustment, and there is no method of judging accurately the “correct” level of interest rates except when monetary maladjustment is avoided [Warburton 1966: 290].

In sum, interest rates are best left to free markets. They are relative prices that reflect tradeoffs between present and future consumption, and thus depend on consumers’ time preferences as well as on the productivity of capital. A central bank that tries to use interest rates, rather than the quantity of money, to guide monetary policy is prone to create monetary disequilibrium and distort interest rates away from their natural, market-determined levels—misallocating capital in the process. This is what Warburton (1966: 233) called “upside-down monetary policy.”

Creating a Harmonious Monetary Order

In the search for stable money, it is critical to distinguish clearly between the demand for money and the demand for credit. When there is an excess demand for money, individuals and businesses will adjust their cash balances: they will hold more cash and reduce their expenditures in a myriad of markets—ultimately affecting the general level of money prices. In contrast, a change in the demand for credit will lead to an increase in the price of credit—that is, the interest rate (see Yeager 1997: 107). That is why Leland Yeager is so adamant in arguing that “no other excess demand could be as … disruptive as an excess demand for money” (p. 106).

Because of the unique characteristics of money, especially its function as a generally accepted medium of exchange, an excess demand or supply of money, in a world of price rigidities, can disrupt the smooth operation of a market price system. In particular, as Yeager (1997: 192) notes, “The supply of and demand for money [cash balances] interact … to determine the nominal flow of spending and eventually the purchasing power of the monetary unit.” Consequently, “anything that shrinks the flow of money interferes—barring complete price flexibility—with the exchange of goods and services” (p. 107). Creating a harmonious monetary order is therefore paramount.

One of Warburton’s chief contributions to monetary theory was to show that the fundamental cause of the Great Depression was monetary disorder. He came to that conclusion well before Friedman and Schwartz in their Monetary History of the United States (1963).

There is no monetary rule that will automatically bring the demand for and supply of money in balance to restore monetary equilibrium. Nevertheless, in a fiat money regime, a rule-based money policy is more likely to reduce uncertainty about the flow of nominal income and the long-run value of money. In doing so, a monetary rule, as opposed to pure discretion, is likely to diminish monetary disorder and create both a harmonious monetary system and help markets more efficiently allocate scarce resources. In particular, stable money will improve long-run investment decisions and thus provide a positive environment for wealth creation.

There are a number of monetary rules one could consider. Milton Friedman, in Dollars and Deficits (1968), argues against a price-level rule in favor of a constant money-growth rule. He thinks that a rule aimed at achieving price stability “is the wrong kind of rule because the objectives it specifies are ones that the monetary authorities do not have the clear and direct power to achieve by their own actions” (Friedman 1968: 193). Although he sees “a close connection” between money and prices, he argues that “the connection is not so close, so invariable, or so direct that the objective of achieving a stable price level is an appropriate guide to the day-to-day activities of the authorities.”

In selecting a money-growth rule, Friedman (1968) suggested that the Fed should keep the narrowly defined money supply (i.e., currency held by the public plus commercial bank deposits) growing at a rate of 3 to 5 percent. However, he did not consider this rule “a be-all and end-all of monetary management”—that is, as a rule which is somehow to be written in tables of gold and enshrined for all future time” (pp. 193–94). Friedman (1968) concludes that, although his rule is not perfect, given the state of knowledge at the time, it would offer “the greatest promise of achieving a reasonable degree of monetary stability.”

Friedman hoped that, over time, “as we learned more about monetary matters, we might be able to devise still better rules which would achieve still better results” (p. 194). The key point, however, is that Friedman saw a rules-based monetary regime as “the only feasible device currently available for converting monetary policy into a pillar of a free society rather than a threat to its foundations.”

One thing we have learned is that a constant money growth rule is inferior to a velocity-adjusted monetary rule, designed to maintain a target path for NGDP and achieve long-run price stability (see, e.g., Dorn 2022 and the references therein). Warburton had such a rule in mind when, in 1953, he wrote:

The most appropriate rule of action for the monetary authorities is that of maintaining a rate of growth in the quantity of the circulating medium which will compare with the general rate of growth in the total output of final products under conditions of “full employment,” with such adjustments as may be needed on account of (1) observed trend in the rate of use of circulating medium for purchase of final products, (2) seasonal variations, and (3) any other conditions which have been demonstrated to require variations from the calculated line of growth in the quantity of money in order to maintain stability of prices of final products [in Warburton 1966: 377].

Increasing interest in NGDP targeting is something both Friedman and Warburton would likely approve of, in the quest for a rules-based monetary regime.

Conclusion

The current inflation has focused attention on monetary policy and the search for monetary order. Focusing monetary policy on interest rates (i.e., the price of credit) is a poor guide for achieving a harmonious monetary order. What Warburton wrote in 1966 remains true today: “There is still an overemphasis on manipulation or control, or exertion of pressure on, interest rates as a means of exercising governmental influence over aggregate demand or major sections of such demand” (p. 16).

Today, the Fed (or more correctly, the Board of Governors) conducts monetary policy by administering two key interest rates—namely, the rate paid on reserves held at the Fed and the overnight reverse repo rate. Until recently, those rates have been kept near zero, leading to sharply negative real rates as inflation has reached a forty-year high.

In a fiat monetary regime characterized by discretionary government management, the likelihood of monetary disorder increases compared to a rules-based regime. The Fed and Congress need to listen to those who propose monetary alternatives based on rules rather than discretion (see, e.g., the essays in Dorn 2017). Attention should turn away from the day-to-day operation of the Fed and focus on fundamental guiding principles and learning from past mistakes.