On November 10, the city of Chester, Pennsylvania filed a Chapter 9 municipal bankruptcy petition. Although it has operated under state supervision since 1995, the Philadelphia suburb has not been able to address its large employee retirement liabilities.

In recent years, municipal bankruptcy filings have been rare. Only three cities invoked Chapter 9 between 2014 and 2021: Hillview, KY in 2015, Perla, AR in 2019, and Fairfield, AL in 2020. Although the large allocations of federal funds to local governments under the American Rescue Plan Act (ARPA) may have been expected to ward off bankruptcies for a few years, Chester’s situation is especially dire.

The city has received $30 million under ARPA. But this amount pales compared to the $430 million in liabilities reported on its most recent audited financial report, dated December 31, 2018. Further, the city has dedicated over $1.5 million of the ARPA funds to premium pay and other forms of employee compensation.

The fact that Chester has yet to publish financial statements for years beyond 2018 is also problematic because it deprives decisionmakers, creditors, analysts, and other interested parties of a current snapshot of Chester’s financial condition. The city’s tardy disclosure also violates the federal Single Audit Act as interpreted by 2 CFR 200.512 which requires a local government receiving substantial federal funding to produce an audit within nine months of its fiscal year end.

Of the city’s $430 million in reported liabilities as of 2018, the lion’s share is unfunded pension and retiree health benefits. The city’s three pension systems reported a total of $130 million in Net Pension Liabilities. According to the Pennsylvania Auditor General, the systems had an overall funded ratio of 47 percent in 2021. The Auditor designated Chester’s pensions as severely underfunded, the only city it placed in this category.

In fact, the pension systems’ funded status is even worse than official financial reports imply. In pension reporting, a funded ratio is the quotient of a system’s assets and its actuarially determined liabilities. Assets are normally available to make current benefit payments or are invested in securities expected to generate income and capital gains that can help meet future benefit obligations. But in the case of Chester’s pension systems, a large portion of the reported assets are receivables—amounts the city was supposed to pay over the years but has yet to actually pay. Given Chester’s severe financial distress, these receivables seem to be at risk.

The most indebted pension system in Chester is its Police Plan. According to a 2021 Actuarial Report, the plan had $34 million in assets and $98 million in liabilities, resulting in a funded ratio of 35%. But $32 million of the plan’s assets were receivables from the city, leaving less than $2 million of assets available to be invested or paid to beneficiaries. With the injection of some ARPA funds from the city, the police plan’s asset position improved somewhat in 2021, but Pensions & Investments recently reported that the system’s investable assets are sufficient to cover less than one year of retiree benefits.

The other large liability on Chester’s balance sheet is its Other Postemployment Benefit (OPEB) obligation. In 2018, this liability, which reflects amounts the city must pay for retiree healthcare, was $233 million.

Although Pennsylvania law protects retiree pension benefits, there does not appear to be similar legal support for retiree health benefits. Chester could greatly improve its financial situation by terminating its retiree health plan. Although this would be an adverse development for retirees, those over 65 have access to Medicare, while younger retirees on modest incomes would be able to take advantage of insurance subsidies available under the Affordable Care Act.

To meet its pension obligations, the city has a simple option: it can get a cash infusion from privatizing the local water authority. The Chester Water Authority, which is a separate government entity, reported a positive net position of $242 million in 2021, but may be able to fetch as much as $400 million from a private water provider. Since the authority serves customers outside of the city, Chester would probably not reap all of the sale proceeds. Although some analysts and journalists have been highly critical of water privatization, it is worth noting that the two worst municipal water crises of the last decade—Flint, MI and Jackson, MS—involved municipal water utilities.

Having experienced a fifty percent population decline since 1950, the City of Chester is no longer capable of servicing the large liabilities it has assumed. Perhaps the bankruptcy process will enable the city to make the adjustments necessary to function in a fiscally sustainable manner going forward.

Now that the midterm elections have passed, members of Congress are back in Washington and up to no good. Congress punted on appropriations which they were supposed to finish before September 30^th, by kicking the deadline into the middle of the lame duck. That continuing resolution is set to expire on December 16^th, after which date the federal government would partially shut down.

There’s a huge slate of issues that could get tacked onto that “must-pass” bill that threatens taxpayers with trillions of dollars in new spending. And there’s a simple solution. Punt on appropriations bills once more and kick the deadline out of the lame duck into the new year.

Here are five reasons why Congress should not legislate during the lame duck unless it is absolutely necessary (as in responding to an unexpected, sudden emergency that demands urgent action):

Congress might lift or eliminate the debt limit without first stabilizing the debt, rattling investors and increasing inflation expectations.

According to news reports, some Democrats are advocating for raising or even eliminating the debt limit before Republicans take control of the House of Representative next year. The U.S. debt is already so high that it drags down economic growth and it is growing at an unsustainable rate. With publicly held debt projected to grow to 260 percent of GDP over the next 30 years, there is a real possibility of a fiscal crisis within this generation, during which investors would lose confidence in the U.S. government’s willingness to service its debt.

Reaching the debt limit is an important wake‐​up call to legislators to correct unsustainable spending. It also provides legislators with political coverage and leverage to cut spending and reform policies that further indebt taxpayers. There is no other legislative action tool as powerful as the U.S. debt limit that has as consistent a history of leading to deficit-reduction deals. Raising the debt limit without first adopting a credible fiscal stabilization plan that cuts spending and controls the growth in debt would be a mistake. It could rattle investors and worsen inflation expectations.

Congress might increase discretionary spending, further adding to deficits and fueling inflation.

Congress increased discretionary spending by 20 percent in 2020 in response to the COVID-19 pandemic. Now that the pandemic has ended, members of Congress should return discretionary spending to pre‐​pandemic (2019) levels, and cap discretionary spending growth at no more than 2 percent annually. If Congress were to adopt spending proposed by the Democratic-led House of Representatives, discretionary spending would increase by $65 billion in year one and by $740 billion over the next 10 years, according to estimates by the Committee for a Responsible Federal Budget. As pandemic needs wind down, so should government spending. Hundreds of billions of dollars in COVID-related aid were wasted and continuing spending at such elevated levels would perpetuate government waste and could fuel inflation.

Congress might expand the welfare state by increasing eligibility for means-tested programs.

A bipartisan group of lawmakers have bundled a package of retirement savings provisions with several unrelated provisions that would increase welfare spending. An amendment in the Senate Enhancing American Retirement Now (EARN) Act would expand the welfare state by significantly increasing the eligibility age for so‐​called ABLE accounts, from 26 to 46. Funds in ABLE accounts do not count against Medicaid eligibility, ever, and account owners may accumulate up to $100,000 in assets while still maintaining eligibility for Supplemental Security Income cash benefits. By undermining asset tests, intended to ensure that government welfare benefits go toward individuals with the greatest need, the ABLE Age Adjustment Act amendment would increase means‐​tested welfare spending and incentivize more individuals to apply for benefits.

There are also rumors that some lawmakers are considering attaching the Savings Penalty Elimination Act to the EARN Act. This bill would increase asset limits for Supplemental Security Income (SSI) from $2,000 for individuals and $3,000 for couples to $10,000 and $20,000, respectively, and index both to increase with inflation. Congress should not increase SSI asset limits until Congress includes bigger programmatic reforms that make benefit determinations fairer and improve incentives to work (especially among younger populations). According to Tad de Haven, then with the Cato Institute:

“Policymakers have liberalized eligibility standards for SSI’s benefits over the years, with the result that many people who are capable of working are making the choice to remain idle and receive benefits instead. Of particular concern is the growing number of children who are qualifying for SSI on the basis of a mental or behavioral disability. Many children who are capable of becoming productive working adults are being lured into long-term government dependency.”

Tad de Haven recommends that Congress devolve the administration of the SSI program to the states to “allow greater innovation by state policymakers with their low-income programs, who have stronger incentives to reduce taxpayer costs and maximize work incentives than do federal policymakers.” Mark Warshawsky, a senior fellow with the American Enterprise Institute has recommended additional commonsense reforms Congress should consider before expanding eligibility for SSI.

Congress might add a new taxpayer-funded handout.

Another troubling provision in the Senate EARN Act would make the saver’s credit into a refundable match. The saver’s credit subsidizes retirement account contributions for individuals with low or moderate incomes. An individual that contributed $2,000 to a retirement savings account would receive an additional $1,000 match from federal taxpayers directly into their retirement account—even if that individual had no net tax liability. The EARN Act also allows beneficiaries to withdraw $1,000 every three years to pay for a wide range of qualifying emergencies. This new saver’s credit would be a taxpayer-funded handout for low to moderate income earners who save money in retirement accounts.

Congress might increase deficits by $4,500 for every American household.

The Committee for a Responsible Federal Budget (CRFB) has tallied up the long list of issues that Congress may take up during this lame duck session. CRFB estimates Congress might increase deficits by $555 billion in year one and by a total of $4.5 trillion over the next 10 years. That amounts to $4,500 for every American household next year. And that’s before counting higher interest costs from greater deficits.

Lame duck sessions empower an unaccountable Congress to make decisions after constituents have cast their votes. And they don’t just empower legislators who’ve been voted out of office or were planning to retire. They also shield re-elected members of Congress who won’t face their constituents for at least another two years. And much can happen in two years to take constituents’ minds off votes cast during a lame duck session.

Congress should not use the threat of a government shutdown during a lame duck session to enact legislation that will increase deficits, undermine the Federal Reserve’s fight against inflation, or potentially rattle investors during uncertain economic times. We may all be better served by a Congress that takes an extended vacation from Thanksgiving all the way through Christmas.

On November 15, 2022, a Russian-made missile hit the Polish city of Przewodow and killed two civilians. Immediate reactions from think tankers and policymakers followed. There were arguments about whether this would lead to invoking NATO’s Article 5 – the Article that calls all NATO countries to provide collective defense if one member is attacked – and, if so, whether things like a No-Fly Zone and retaliatory strikes would be an effective response.

In fact, the Latvian Minister of Defense tweeted that the “criminal Russian regime fired missiles… on NATO territory in Poland.” Moreover, Ukrainian President, Volodymyr Zelensky stated that “Terror is not limited to our national borders. Russian missiles hit Poland. … To fire missiles at NATO territory. This is a Russian missile attack on collective security! This is a very significant escalation. We must act.”

Despite this rhetoric, it was never clear that Russia fired the missile. Early on, some analysts urged caution and that the missile looked like something that was used by Ukraine.

After considering more evidence, American and Polish officials issued statements indicating that the missile that landed in Poland was likely part of a S‑300 missile defense system that was fired defensively by Ukraine and either missed its target or deflected into Poland after hitting its target. In other words, Russia never fired the missile into Poland.

Thankfully, cooler heads prevailed among policymakers. The NATO alliance consulted and learned the truth of the matter, and there will be no invocation of Article 5 over this incident. This demonstrates the folly in rushing to judgment. Policy analysts and journalists doing so on Twitter can lead to disinformation, while policymakers doing it could lead to a nuclear holocaust. The risks of these types of accidents will only go away once the war in Ukraine comes to a close. Recent news reports that U.S. leaders are nudging Ukraine to take diplomacy seriously are welcome.

Pollsters and pundits were surprised by the 2022 midterms that didn’t deliver a Republican Red Wave. Republicans were expected to sweep the House and likely gain control of the Senate. But that’s not what happened. Republicans failed to take the Senate and may only barely garner a House majority. As of this writing, Republicans have only won 217 seats—1 seat shy of a majority—with 11 undecided races. What happened? Our analysis shows that Republican Senate and gubernatorial candidates who said that President Biden did not actually win in 2020 were more likely to lose than Republicans who accepted the election results.

Midterms historically have favored the political party opposite the President’s party. In fact, out-parties have gained seats in 17 of the past 18 midterm elections. Given President Biden’s low approval rating hovering at about 42%, it appeared especially likely that Democrats would lose seats. Further, the economy has not been doing well with high annual inflation, high interest rates, and high gas prices. And most Americans (58%) think we’re currently in a recession. Also, Americans said they trusted Republicans more to handle the issue they cared most about: inflation (59% were “extremely concerned” about this). Issues like abortion, where voters trust Democrats more, appeared to matter less to voters than the economy.

Candidate quality problems may help explain, in part, why Republicans didn’t have a better night. For one, polls show that more voters wanted a Republican-controlled Senate than wanted to vote for their state’s Republican candidate in states with key Senate races. It’s worth noting that Republicans lost or got fewer votes in all four of the key toss-up Senate races in Arizona, Nevada, Pennsylvania, and Georgia.

Our analysis sheds light on what voters did not like about their particular Senate candidates. In our analysis of Republican candidates for Senate and Governor, we find that candidates who did not accept the 2020 election results may have paid a penalty at the ballot box.

We use FiveThirtyEight’s database of candidates’ stances on the 2020 election to categorize Republican candidates who “fully denied” and “questioned” the 2020 results compared to Republican candidates who did not question or challenge the validity of the election. We then examined what percentage of each category won their races.

Republican Senate Candidates

Of Republican Senate candidates who “denied” or “questioned” the 2020 election results, 42% won their elections compared to 67% of Republicans who did not deny or question the results. If Republican candidate Herschel Walker loses the Georgia Senate run-off, the share of winning denying/​questioning Senate candidates would fall to 38%. If he wins, the share would rise to 46%. If we only compare Republican Senate candidates who fully refused to accept Biden as President, then 50% won compared to 60% who did not refuse to accept Biden’s win.

Republican Gubernatorial Candidates

Forty-four percent (44%) of Republican gubernatorial candidates who “denied” or “raised questions” about Biden’s 2020 win were elected. In contrast, 53% of Republican gubernatorial candidates who did not challenge the 2020 election results won their races. One governor’s race, in Alaska, remains outstanding. Only 29% of Republican gubernatorial candidates who fully refused to accept Biden’s victory were elected, compared to 54% of everyone else.

Several states had voters elect a Republican Governor but not the Republican Senator, or visa versa. In the 3 states where there was this kind of split ticket voting, the Republican candidate who did not challenge the 2020 election results won 100% of the time. The Republican candidate who denied or questioned Biden’s win won 0% of the time.

Republican House Candidates

The House has a more complicated story. Raising doubts about the 2020 election may have helped Republicans in non-competitive House districts but may have cost them in competitive districts where they had to appeal to independent and Democratic voters. Among all House races, 65% of Republicans who denied or questioned the 2020 election results won compared to 39% of other Republicans. Comparing Republicans who fully denied the 2020 outcome shows a starker picture: 73% of Republicans who fully denied the outcome won, compared to 38% who did not fully deny.

We examined Republican House candidates in the most competitive House races according to Cook Political Report’s “Tier 1.” In these competitive districts, only 22% of Republicans who fully denied Biden’s victory won their races compared to 29% of Republicans who did not. Among the second most competitive tier, “deniers” won 50% and “non-deniers” won 43% of their races. Among the less competitive third and fourth tiers deniers won a higher share of their races than non-deniers. Among tiers 3 and 4, “deniers” won 67% and 78% respectively and “non-deniers” won 35% and 39% respectively.

Claiming that Biden did not legitimately win the presidency may have helped Republican candidates in non-competitive safe districts. After all, these candidates primarily had to appeal to Republican voters who don’t believe Biden won fairly. However, this rhetoric likely made it difficult for other Republicans running in competitive or statewide races in which they had to appeal to Democrats and independents who don’t believe Biden won due to voter fraud.

Conclusion

Political pundits and Republican officials are trying to determine why the expected Republican Red Wave petered out. Surely, the overturning of Roe vs. Wade and the resurgent salience of the issue of abortion played a significant role. Indeed, abortion was the number two issue affecting vote choice according to exit polls. Notably, Republicans regardless of their stance on the 2020 election did relatively poorly in toss-up/competitive House races. It is likely that abortion played an important role in subduing a Red Wave. Other explanations for Republican underperformance simply blame an electoral map more favorable to Democrats this election cycle. While these seem to be important factors, we cannot overlook the role that poor candidate quality may have played.

Claiming Biden did not legitimately win the presidency appears to have had a polarizing effect. It may have helped shore up support among the base of Republican voters while also coming across as unserious and perhaps juvenile to independent swing voters who do not doubt the legitimacy of the 2020 election.

Our analysis illustrates that in statewide races, Republican candidates who denied or questioned the 2020 election underperformed. Could Republicans currently be surfing a tidal wave into Congress had they not nominated candidates who repeated 2020 voter fraud claims? Accepting the 2020 election results may have helped them persuade independents and Democrats to vote for them. But perhaps many feared doing so would hamper enthusiasm among their Republican base. What is clear is that claims of 2020 voter fraud are a polarizing cause that likely cost Republicans. Is this the only factor to blame for the lackluster Republican performance? No. Other issues, such as abortion, played a large role. But these data do provide some indication that Republicans may have had a better night had they not nominated candidates who dabbled in election denialism.

Did tax increases deepen and extend the Great Depression?

That is one topic explored in a new book by Art Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield, Taxes Have Consequences: An Income Tax History of the United States. The authors include a discussion of federal, state, and local tax increases during the 1930s.

Many economists would point to monetary policy mistakes for causing the initial slide into the Great Depression. The nation’s money supply fell nearly 30 percent between 1930 and 1933.

But Laffer and coauthors argue that the “chief cause of the Great Depression was taxation.” That is a bold claim because policymakers made many mistakes during the 1930s. Aside from adverse monetary and tax policies, the government undermined the economy with regulatory interventions, labor union laws, and a general antagonism toward businesses and high earners. George Selgin discusses the era’s economic policies here.

Let’s explore the major tax increases of the 1930s, based on the Laffer book, an analysis by Alan Reynolds, and numerous other sources. Herbert Hoover signed the first two laws listed here and Franklin Roosevelt the others.

• Smoot-Hawley Tariff Act of 1930. Signed in June, the act raised import tariffs on thousands of goods. Two-thirds of the tariffs were specific charges per unit, so the real burden rose as prices fell during the early 1930s. In response, foreign nations retaliated against U.S. trade. The stock market dropped coincident with the congressional debate and passage of the law.
• Revenue Act of 1932. The law was signed in June but retroactive to January. It increased all individual income tax rates with the top rate rising from 25 percent to 63 percent. The act broadened the income tax base, raised the corporate tax rate from 12 percent to 13.75 percent, and increased the top estate tax rate from 20 percent to 45 percent. The act also imposed a slew of large excise tax increases on items such as cars, tires, radios, and electricity. As a result, excise taxes raised more federal revenue than income taxes the rest of the decade.
• Gold Confiscation. Roosevelt issued an executive order in April 1933 requiring all Americans to hand over to the government all their gold worth more than $100 for payment at a set price per ounce. After the government grabbed the gold, it set a higher price in 1934 thus devaluing the dollars that people had received. Laffer and coauthors say the “gold confiscation was a wealth tax, pure and simple.”
• Agricultural Adjustment Act. This May 1933 law imposed processing taxes on agricultural products that raised an enormous $526 million a year by 1935, or more than 10 percent of federal revenues. Wheat and hogs were big tax revenue producers. The law was struck down by the Supreme Court in 1936.
• National Industrial Recovery Act. This June 1933 law imposed capital stock and excess profits taxes on corporations and a short-lived five percent tax on dividends.
• Alcohol. Prohibition ended in 1933 and federal and state governments began collecting large revenues from beer, wine, and liquor. The federal liquor tax rate was almost tripled between 1933 and 1940, and state liquor tax rates were also increased. Probably because of the high taxes, bootlegging was still a major problem at the end of the decade.
• Revenue Act of 1934. Passed in May, this law broadened the income tax base and aimed to reduce tax avoidance (exacerbated by now-higher tax rates) by increasing taxes on personal holding companies. The act also raised the top estate tax rate from 45 percent to 60 percent.
• Revenue Act of 1935. Passed in August, this law hiked top-end individual income tax rates, with the highest rate rising from 63 percent to 79 percent. The act also increased taxes on corporations a number of ways, including raising the top corporate tax rate from 13.75 percent to 15 percent.
• Social Security Act of 1935. This law imposed one percent payroll taxes on both employers and employees effective in 1937.
• Revenue Act of 1936. Passed in June, this law imposed a surtax of up to 27 percent on undistributed corporate profits on top of the normal corporate income tax. The idea was to hit corporations that had been retaining earnings in response to the high tax rates on individuals.
• Revenue Act of 1937. This law broadened the income tax base and imposed new rules to reduce tax avoidance in response to Treasury concerns that the 1936 tax hike were not raising as much revenue as expected.
• Revenue Act of 1938. This law—combined with follow-on legislation in 1939—repealed the undistributed corporate profits tax after widespread recognition of the damage it was causing to business investment. FDR opposed repeal and allowed the act to become law without his signature.

FDR had a misguided zeal to penalize high earners and corporations, and Hoover had a misguided zeal to balance the government’s budget with his 1932 tax hike. Hoover’s signing statement here illustrates his government-centric view of fiscal policy.

State and Local Tax Increases

State and local governments jacked up taxes during the 1930s.

• Property taxes hit hard in the early 1930s because assessments often remained high even as incomes were falling. Nationwide, property tax revenues increased from 4.3 percent of gross domestic product (GDP) in 1929 to 7.4 percent by 1932.
• General sales taxes were adopted by 23 states during the 1930s.
• Individual income taxes were adopted by 17 states during the 1930s.
• Corporate income taxes were adopted by 15 states during the 1930s.

The chart below shows total federal, state, local revenues and spending as a percentage of GDP, based on national income data. Total tax revenues dropped between 1929 and 1932 but GDP fell much further, which resulted in taxes rising substantially as a share of GDP. Early in the 1930s, the largest revenue increases as a share of GDP were local property taxes and federal excise and customs taxes. Later in the decade, those revenue sources faded and federal income and payroll taxes grew.

Taxpayer Responses

Tax revenue data only partly captures the harm imposed on the private sector by tax increases. Taxpayers respond to tax hikes by changing their behavior. The larger the changes the more economic damage is done, which is referred to as deadweight losses. Large taxpayer responses also reduce government revenues. Thus if the government jacks up income tax rates on high earners, and they respond by substantially reducing productive activities and increasing tax avoidance, it would create major economic damage but raise little revenue.

Alan Reynolds finds that high earners responded strongly to the income tax increases of the 1930s, which is supportive of the analysis in the Laffer book. Reynolds shows that the reported incomes of high earners got slugged in the early 1930s and remained low the rest of the decade. This suggests major economic damage.

At the local level, taxpayers responded strongly to rising property taxes. Tax revolts spread across the nation in the early 1930s because millions of people were suffering and could not afford to pay their property taxes. Citing a history by David Beito, Laffer and coauthors report that for cities over 50,000 in population, the median property tax delinquency rate rose from 10 percent in 1930 to 26 percent by 1933. In Chicago, about half of homeowners were refusing to pay their property taxes by 1932.

The large undistributed profits tax imposed in 1936 was widely criticized by business leaders for undermining investment. In response to the outcry, the tax was repealed in the revenue laws of 1938 and 1939. More generally, U.S. real private investment plunged in the early 1930s and only fully rebounded to surpass the 1929 level in 1940. (1.1.6)

Rising federal and state alcohol taxes during the 1930s appears to have caused a large tax-evasion response. A 1941 article noted, “The Alcohol Tax Unit of the Bureau of Internal Revenue had 4,184 employees on December 31, 1940, of whom 1,293 were investigators and special investigators. These men, successors to the prohibition agents of fifteen years ago, are kept fully occupied in the business of trying to prevent bootlegging and the operation of illegal stills. The extent of liquor law violations is indicated by the fact that convictions totaling 4,941 persons, or 46.5 per cent of all federal prisoners committed to penitentiaries in the fiscal year 1940, were attributed to the work of the Alcohol Tax Unit.”

Despite these taxpayer responses to higher tax rates, the chart shows that governments did manage to squeeze substantially more money out of the public during the 1930s. Tax revenues as a percentage of GDP rose from 10.3 percent in 1929, to 15.4 percent in 1933, and then to 16.6 percent in 1940. Meanwhile, government spending soared from 9.9 percent of GDP in 1929 to 18.0 percent in 1932, and then remained near the higher level the rest of the decade.

Notes: I estimated total government expenditures from BEA’s Table 3.1 as current expenditures plus gross investment less consumption of fixed capital. Taxes, including Social Security payroll taxes, were about 94 percent of BEA’s total government revenues or “receipts” during the 1930s. A good survey of policy mistakes during the 1930’s is Jim Powell’s FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression. A source for the tax history of the 1930s is W. Elliot Brownlee, Federal Taxation in America: A Short History.

The U.S. mid-term election cycle brought mixed results on state and local ballot measures determining wage and employment laws.

Nebraskan voters approved a minimum wage hike from $9 per hour to $15 per hour by 2026, as DC voters opted to mandate that tipped workers’ minimums rise from $5.35 per hour to $16.10 per hour by 2027.

Ballot measures in Laguna Beach, California and elsewhere looking to introduce special minimum wages for staff in particular industries (such as hotel staff) genuinely failed. Illinois voters opted to enshrine a state constitutional amendment for the right to collectively bargain, whereas Tennessee voters opted to enshrine a right-to-work law as an amendment to their constitution.

These changes remind us of the large role governments play already in our labor markets and how contentious this can be. Internationally, the U.S. has relatively lightly regulated jobs markets. However, over the past century, workers’ freedom to contract and U.S. businesses’ freedom to hire and fire at-will have still been substantially watered down here, even if other countries have gone much further in curbing these freedoms.

U.S. anti-discrimination laws affect firms’ recruitment and layoff decisions and there are restrictions for businesses in many states on what they can ask about would-be employees’ criminal histories. Minimum wage laws, overtime pay regulation, restrictions on independent contracting, and forced unionization can create legal obligations for firms to provide pay, conditions, or benefits which they and individual workers in free negotiation might otherwise spurn.

All such policies tend to be predicated on an adversarial model of worker and management interests, with policymakers swooping in to “protect” workers from their bosses by imposing mandates on business or threats of fines for actions deemed unfair. In public debates, most such laws and regulations are therefore assumed to benefit “American workers” as a cohort.

Yet in my chapter of the Empowering The New American Worker book, I explain how basic economic analysis (confirmed by empirical evidence) tells us that, at best, these policies tend to help some workers enjoy more security or higher pay or benefits at the expense of others, who often suffer heavily. At worst, they raise the overall costs and risks of mutually beneficial job agreements, reducing net opportunities, harming business productivity, or distorting remuneration packages in ways that harm employees.

What’s more, in recent years, there has been political momentum – mainly from the left, but also the national conservative right – for expanding U.S. labor regulation in a more highly regulated “European” direction, with stricter mandates on contract provisions and greater curbs on firms’ ability to freely recruit or layoff workers. These have included a push for a $15 federal minimum wage, government encouragement of collective bargaining agreements, shoehorning gig economy and other independent workers into traditional employee‐​employer regulatory frameworks and rolling out predictive scheduling laws.

This direction of travel is an error. First, because cross-country evidence suggests that restrictive labor market regulations raise the structural level of unemployment, particularly for demographic groups with the weakest attachment to the labor market, such as young and unskilled workers. Prior to the pandemic, for men and women, the EU (which has much more stringent labor laws, on average) saw youth unemployment rates (15–24 percent) of 15.3 percent and 14.8 percent, against just 9.4 percent and 7.3 percent in the U.S.

Second, because recent research by Niklas Engbom has found that policies and regulations that make hiring workers more expensive or risky also reduce job-to-job fluidity, which itself is strongly associated with better life-cycle wage growth for workers. Given that the U.S. had already seen a sustained reduction in the movement of workers to new jobs or states prior to the pandemic – over a period associated with weaker productivity and wage growth – moving in this direction would amount to compounding some of the problems that have afflicted the economy over the past two decades.

Indeed, although burdensome laws that have existed for years cannot logically explain recent decades’ labor fluidity declines, undoing some existing policy could permanently raise the level of U.S. labor market dynamism and improve productivity levels, much to American workers’ overall benefit.

Legislators should be looking to row back on existing labor market regulation, rather than adding more hurdles to employers and employees freely negotiating what they perceive to be mutually beneficial workplace relationships.

New analysis produced by the Joint Committee on Taxation (JCT) finds that extending the American Rescue Plan’s (ARP) Child Tax Credit (CTC) expansion would result in costly economic consequences.

Last year’s CTC expansion increased the credit up to $3,600 per qualifying child (from $2,000), including a bonus for children under six years old. The expansion also eliminated the income (read: work) requirement and allowed the full value of the credit to be refunded. This ensures that the tax “credit” functions more like a welfare program administered through the tax code.

Combining two different macroeconomic models, the Joint Committee on Taxation (JCT) estimates the effect of extending the CTC expansion and finds a number of negative effects. The proposal is estimated to both discourage labor supply and capital investment. Because it changes the incentives for labor supply and capital, and these changes are larger than the effects on household consumption, JCT finds GDP declines by 0.1–0.3 percent.

An important caveat with macroeconomic models like the ones used by JCT is that economic outcomes of the model rest heavily on their assumptions. For instance, with lower labor supply elasticities, the effects would be muted. However, the negative effects that the JCT model finds seem, at minimum, directionally sound.

This is not the first study of the CTC expansion to find costly consequences for workers. A 2021 study by Kevin Corinth and Bruce Meyer et al estimated the expanded CTC would push 1.5 million workers, constituting 2.6 percent of working parents, to leave the labor force. They concluded that previous National Academies of Sciences, Engineering, and Medicine (NASEM) estimates for the expanded CTC’s ability to reduce child poverty and deep child poverty were exaggerated since the authors had ignored the labor supply effects resulting from the elimination of (pro-work) elements of the previous version of the CTC.

In response to criticism from authors of the original estimates, Corinth, Meyer, et al responded with a research note further clarifying their analysis. Using a labor elasticity on par with what the NASEM report used in its Earned Income Tax Credit (EITC) estimates, they found that the negative labor supply effects were still comparable to their initial results.^[i]

In addition to the effects on labor supply, investment, and GDP, ARP changes to the CTC have also reportedly resulted in fraud, similar to the traditional EITC program: a September 2022 U.S. Treasury Inspector General for Tax Administration (TIGTA) review of the Advance CTC program finds that “3.3 million payments, totaling over $1.1 billion, were sent to 1.5 million taxpayers who should not have received them…these payments… included instances in which a dependent did not meet age requirements, was deceased, or was claimed on another tax return.”^[ii] Meanwhile, the IRS did not send 8.3 million payments to those that qualified for the benefit.

Why does any of this matter? Proposals to augment the benefit, make benefit payments monthly, or increase the credit’s refundability are bound to continue, with the less-recent (and more modest) Tax Cut and Jobs Act CTC expansion set to expire in 2025.^[iii] And with a divided congress, tax credit expansions may be one thing that Republicans and Democrats find common ground on, since—at least historically—both parties are fond of expanding these programs.

As a result, it is important that what lessons can be learned from recent experiments are internalized by policymakers. Since there is growing evidence that the ARP formulation of CTC is economically harmful, and that its monthly payment program has produced administrative challenges and fraud, these findings should be carefully considered in future discussions.

Moreover, although the proportion of families with children with one or more working parents is an imperfect measure of the American family’s level of self-sufficiency, it is nonetheless one indication of the extent to which families are free and self-determining. And it is only when families are independent that families are empowered.

As policymakers continue to look for ways to make family life easier, more convenient, and more affordable, it is key that they avoid reforms that inadvertently undermine families or reduce the size of the economy and associated opportunities for workers.