Ahead of the Commission’s vote, analysts highlighted that releasing this new band of spectrum could add billions of dollars to the US economy, create millions of new jobs, and generate between $30 billion and $75 billion for the Treasury. Nevertheless, these various prospective benefits point to the challenge and importance of spectrum auction design. Namely, while a spectrum sale raises revenue for the US Treasury, the broader economic benefits of releasing more spectrum into the marketplace are what matter. The FCC should not focus on maximizing the revenue implications of the auction, but should instead focus on structuring the sale to optimize the benefits it provides to consumers, businesses, and the economy.

The electromagnetic spectrum refers to the various bands of energy waves that underpin modern communications and information technologies to convey information between devices. As such, the spectrum represents the lifeblood of the modern information economy. The management of this vital resource has, since 1927, been under the “command and control” of the FCC. For decades the FCC determined the allocation of spectrum through a highly inefficient process of “beauty contests” wherein prospective users would have to make their case to the Commission that theirs was the best use for a particular bandwidth. Unsurprisingly, these hearings and other non-market allocation processes the Commission devised were mired by all manner of chicanery and cronyism. 

The decision by Congress in 1993 to authorize the use of auctions introduced a much-needed dose of economic rationality to US spectrum policy. However, owing to bureaucratic inertia and congressional inaction, the FCC’s authorization to conduct auctions expired in 2023, once again leaving much of this valuable resource idle. Thus, the OBBB’s reauthorization of auctions is a welcome improvement from the past several years of spectrum policy.

The reopening of spectrum auctions goes a long way toward shifting spectrum to higher-valued uses, as growing demand from wireless providers, internet/cable providers, artificial intelligence, and low-Earth orbit satellite constellations all continue to compete for existing bands. Much of the spectrum to be sold comes from what is referred to as the “upper C-band,” running roughly from 3.98–4.14 gigahertz (GHz), which is currently allocated for use by satellite operators and aviation users. A CTIA-commissioned study that examined the economic benefits of mid-band spectrum reallocation estimates that each additional 400 MHz tranche of spectrum will, on average, yield approximately $264 billion in GDP, 1.55 million new jobs, and a direct benefit to consumers between $320 and $480 billion. 

However, here lies a tension in spectrum policy. The primary value of auctions is in the benefits they create for consumers by shifting scarce spectrum from low- to higher-valued uses, as these are revealed by what consumers actually pay for wireless services and devices in retail markets. Their use as a means to generate revenue for the government is of decidedly secondary importance, yet much of the public campaigning around auctions, as well as much of the professional advice rendered to the FCC, focuses on this particular aspect. This can be seen in the media coverage of the FCC’s previous 2.5 GHz auction, which cast the $428 million earned by the government as underwhelming. 

Since the price of a license represents the present value of the profits that can be earned from owning it, the price paid to the FCC at auction can be inflated by, for example, limiting the amount of bandwidth auctioned or setting high minimum prices. Such policies may maximize the revenues earned by the FCC, but at the cost of hurting consumers by limiting competition in the marketplace. Thus, the emphasis on public finance considerations risks biasing auction design in directions that harm consumers.

As economists have repeatedly emphasized, the FCC should auction spectrum rights with an eye toward market efficiency, not maximizing auction revenue. Ideally, this would mean granting licensees full property rights over the spectrum they purchase rather than restricting them to specific uses under the current licensing regime. Presently, the FCC auctions “flexible use licenses,” which, while providing licensees with greater discretion over how they can use the frequencies under their control, constrains the use of specific bandwidths to the production of specific services. For example, the 1993 legislation authorizing auctions provided for the sale of bandwidth for use by Personal Communication Service networks only, limiting firms’ ability to reallocate these bands as communications technology evolves. The FCC should avoid these issues by allowing private actors to own particular bandwidths outright. Doing so would allow licensees to determine the highest and best use of their spectrum based on changing market conditions rather than arbitrary regulatory constraints. 

Economists have shown that restricting the use of spectrum licenses limits consumer gains from auctions by restricting the extent of market competition. Moreover, full property rights would enhance the flexibility of spectrum markets, allowing users to shift band deployment as technology and demand evolve. Barring this, the FCC should simply get as much bandwidth on the market, in as short a time as possible, allocating spectrum to where it provides the largest benefit to society writ large.

The return of spectrum auctions is a welcome development in spectrum policy. However, whether the benefits of the FCC’s proposed sale will generate the most value possible for consumers will depend critically on how the Commission conducts the sale. A wrongheaded focus on maximizing revenue risks biasing policy in a direction that will limit market competition, thus harming consumers. Maximizing consumer welfare and enabling the fullest utilization of the airwaves requires that auctions be conducted to enhance efficiency in wireless markets rather than be narrowly focused on generating revenue. 

Markets in spectrum gave rise to the efflorescence of cellular and digital technologies enjoyed by many today. Keeping that revolution moving requires that full property rights to the spectrum be provided to the innovators and companies that will put them to use.

Today, trillion-dollar quantities have become commonplace in economic and financial life. At least 12 American companies boast trillion-dollar market capitalizations, with Apple approaching $5 trillion. BlackRock now manages more than $15 trillion in assets. The largest technology firms, cumulatively, measure their investments in the trillions as they build data centers, semiconductor capacity, and power systems on an unprecedented scale. SpaceX’s 2026 initial public offering valued the company at more than $1.7 trillion, and its subsequent surge briefly pushed Elon Musk’s paper wealth above $1 trillion.

Billionistan opened its gates in 1901, when JP Morgan assembled US Steel into the world’s first billion-dollar corporation. Perhaps it surrendered statehood on January 13, 2016, the day Powerball offered the first billion-dollar lottery jackpot. After ten more, Billionistan moved from a numerical destination to a waypoint. We now inhabit Trillionistan.

Governments, unsurprisingly, were early movers; they frequently are. Trillion-dollar economic figures first appeared during the great hyperinflations of the twentieth century. In the United States, the national debt crossed $1 trillion in October 1981, inaugurating an era in which ever-larger fiscal quantities gradually lost their capacity to shock. Annual deficits now exceed the entire national debt of 45 years ago, while America’s current indebtedness — as measured by the fiscal gap — extends into the hundreds of trillions.

Public finance is only one province of Trillionistan. The larger phenomenon is the steady upward drift of nominal magnitudes — and our tendency to mistake financial scale for real, truly productive achievement. Prices rise, credit and money supplies balloon, economies grow, markets deepen, and expected future earnings are capitalized across ever-longer horizons. Each process quietly extends the number of zeroes layered onto economic life.

Inflation is plainly part of the explanation. A dollar simply buys far less than it once did. Even if nothing real changed — if no new factories were built, no technologies discovered, and no improvement in living standards achieved — the same collection of assets would be priced higher over time as each dollar lost purchasing power. Nominal dollar records are easier to achieve than real value-driven ones.

But inflation alone cannot explain Trillionistan. The economy has also become larger, richer, more technologically sophisticated, and more global. Companies now serve billions of customers, software scales almost without cost, and intellectual property can generate extraordinary returns worldwide. Genuine wealth creation and monetary depreciation are operating simultaneously, both enlarging the nominal quantities around us. But it’s difficult for most observers to distinguish between a trillion dollars of productive assets, a trillion dollars of debt, a trillion-dollar market cap, a trillion-dollar spending bill, and a trillion dollars of future pension liabilities.

Sound economics cautions against confusing abstract money prices with the goods, services, productive capacities, and human satisfactions to which those prices refer. Additional wealth is not created merely because accountants add zeros to balance sheets, central banks expand the money supply, or financial assets are quoted at higher prices. Yet neither are such price changes meaningless. Money is a messenger: prices may reflect changes in scarcity, expected earnings, risk, preferences, credit conditions, monetary supply, or some combination of them. Wealth is created when entrepreneurs discover more valuable ways to arrange scarce resources, including capital and labor, to satisfy human wants. Market prices signal judgments about those uses, but they are not themselves the value being created.

Viewed through that lens, a trillion-dollar company is less alarming, and perhaps more inspiring. A trillion-dollar market capitalization is not a warehouse containing a trillion dollars; it is the market’s continuously revised estimate of future earning power (see the price trend in SpaceX since the IPO for confirmation of that phenomenon). Stock prices condense millions of judgments about technology, competition, consumer demand, production costs, and risk into a single signal of likely value. That estimate — whether it proves accurate or wildly optimistic — is a wager, a priced forecast of the future, rather than an inventory of existing riches.

Like the trillions now being committed to AI infrastructure, some investments will transform productivity; others will become expensive monuments to extrapolation. Entrepreneurship has always involved speculation. The more important question is whether monetary policy choices have the effect of systematically warping entrepreneurial judgment and promoting malinvestment. Persistently easy credit and artificially suppressed interest rates do more than raise prices generally. They encourage longer-duration projects, inflate the present value of distant earnings, and allow financial valuations to outrun the economy’s underlying productive capacity. 

Certainly not every trillion dollar valuation is a bubble. Monetary distortion and genuine innovation frequently coexist. Railroads truly transformed nineteenth-century Millionistan — the impressive Mohawk and Hudson Railroad was built for just $600,000 — though many fortunes disappeared in speculative railroad manias. The internet continued to power our economy well after the collapse of the dot-com bubble. Artificial intelligence may likewise reshape civilization while simultaneously destroying vast quantities of invested capital. Entrepreneurial ventures, especially at the cutting edge of technology, are entrepreneurial wagers. Profit and loss exist precisely because no one knows the outcome beforehand.

Life in Trillionistan has rewired our perceptions. Large numbers anesthetize. A million dollars once represented unimaginable wealth; a billion eventually replaced it; today even the billion is becoming commonplace. As each numerical frontier becomes familiar, it commands less wonder and less scrutiny. We experience reflexive suspicion of individuals who command great fortunes, but slip into complacency toward inflation, debt, and public liabilities. In both cases, the magnitude obscures the institution that produced it.

Not all trillions are created equal. A trillion accumulated through entrepreneurial discovery differs fundamentally from a trillion generated through monetary expansion, leverage, or habitual political can-kicking. Most modern trillions contain elements of both: genuine productive achievement expressed through a steadily depreciating unit of account. The trillion has migrated from cosmology and quantum mechanics into ordinary economic discourse because the economy has genuinely grown, but also because the monetary unit has contracted precipitously.

The important question, then, is not whether another company, fortune, industry, or balance sheet will cross the trillion-dollar threshold. Many will. The more interesting and relevant question is what kind of trillion it will be: one representing genuine wealth creation, one reflecting the capitalization of future possibilities, one inflated by monetary expansion, or some unstable mixture of all three. In Trillionistan, the zeros hint at the scale, but they do not tell us the actual story. And even as we acclimate ourselves to the trillion, the foundations of Quadrillionistan are quietly being laid. 

On June 17, the proposal qualified for the November ballot after state officials verified the required petition signatures. If approved, supporters estimate the measure would raise roughly $100 billion for healthcare, education, and social programs. Yet sound economic policy should be judged not by its intentions but by its consequences. The real question is not whether billionaires can afford to pay more, but whether a wealth tax can generate the promised revenue without driving away the investment, entrepreneurship, and innovation that created that wealth in the first place.

Why Wealth Taxes Don’t Work

The appeal of a wealth tax is easy to understand. Asking a handful of billionaires to finance public spending may sound politically attractive, but history suggests the economics are far less convincing. Unlike income taxes, wealth taxes target accumulated assets—not annual earnings — including business equity, investments, real estate, and intellectual property. Because most billionaire wealth is invested in productive businesses rather than sitting idle in bank accounts, taxing it discourages investment, entrepreneurship, and innovation while encouraging capital to flow to more competitive jurisdictions. 

International experience reinforces this point. An OECD report finds that wealth taxes discourage entrepreneurship and risk-taking, weakening innovation and long-term economic growth. These findings help explain why the number of countries levying wealth taxes fell from 12 in 1996 to just five today, as many governments abandoned them after they generated little revenue while imposing high economic and administrative costs. Even where they remain, they have historically raised only about 0.2 percent of GDP while discouraging investment and weakening long-term economic growth.

The existing tax burden makes this case even harder to justify. America’s wealthiest taxpayers already face one of the world’s most progressive tax systems, with a combined state, local, federal, and international tax rate of 59 percent. Recent research also found that US billionaires pay higher effective tax rates than their counterparts in the Netherlands, Sweden, Norway, and France and, contrary to the common narrative, pay the highest tax rates among all Americans. California is particularly vulnerable because it already relies heavily on a small number of high-income taxpayers to finance its budget. 

The proposal is also exceptionally difficult to administer. Much of the wealth it targets — private businesses, artwork, intellectual property, and real estate — has no clear market value, making annual valuations costly, subjective, and prone to dispute. California would compound these challenges by imposing steep penalties on taxpayers and appraisers whose valuations differ from those of state authorities, increasing compliance costs and creating legal uncertainty for investors and entrepreneurs.

Finally, the proposal ignores a basic economic reality: capital is mobile. Before France repealed its wealth tax in 2018, an estimated 10,000 wealthy individuals with €35 billion in assets had already left the country. California is already experiencing a similar trend, losing more wealthy individuals to outmigration than any other state and recording a net loss of 1.6 million residents to interstate migration over the past decade. A wealth tax would likely accelerate that exodus, forcing some entrepreneurs whose wealth is tied up in their companies to sell shares or dilute ownership simply to pay the tax, weakening founder control, discouraging long-term investment, and undermining California’s position as a global center of innovation.

California’s Billionaire Tax Is Already Backfiring

If California’s billionaire tax is intended to raise the projected $100 billion from the state’s wealthiest residents, early evidence suggests it may already be backfiring. Even Governor Gavin Newsom, who opposes the proposal, has warned that it risks driving high-income taxpayers out of the state. Rather than waiting to see whether voters approve the measure, many of California’s wealthiest entrepreneurs and investors have already begun relocating to lower-tax states, shrinking the very tax base the proposal seeks to capture.

Among those reported to have left California or moved to lower-tax states are Google co-founders Larry Page and Sergey Brin, PayPal co-founder Peter Thiel, venture capitalist David Sacks, financier Don Hankey, and film producer Steven Spielberg. Meta founder Mark Zuckerberg has also reportedly acquired property in Florida. Their departures demonstrate that taxpayers often express their preferences with their feet as much as with their votes.

The fiscal outlook is even bleaker than supporters anticipate. A Stanford University Hoover Institution study estimates the proposal would raise only about $40 billion, not the promised $100 billion, after accounting for billionaire departures and correcting flaws in its revenue projections. It also finds that just six publicly confirmed departures removed roughly $536 billion — nearly 30 percent of the proposed tax base — leaving the measure with a projected net fiscal loss of about $25 billion once future income tax losses are included.

Even if voters reject the measure, the damage may not end there. Investors and entrepreneurs respond not only to enacted policies but also to the broader political climate, and the prospect of recurring wealth taxes could discourage long-term investment, startup formation, and business expansion while encouraging more high-income residents to relocate.

California’s proposal reinforces a lesson repeatedly demonstrated around the world: wealth taxes rarely fail because taxpayers refuse to pay—they fail because taxpayers adapt. In an increasingly mobile economy, governments cannot assume that capital will remain in place as tax burdens rise. By the time Californians vote in November, much of the wealth the proposal seeks to tax may already have left the state, taking investment, jobs, innovation, and future tax revenue with it.

Trump’s Commerce Secretary Howard Lutnick has called the H-1B visa system “a scam that lets foreign workers fill American jobs.” But despite the fairly consistent narrative on immigration’s economic impacts from elected Republicans, most Americans think immigration has positive economic benefits. And new data continues to bear this out.

Nearly 50 percent of Fortune 500 companies in 2025 (231 out of 500) were founded by immigrants or their children. In fiscal year 2024, “these 231 Fortune 500 companies generated $8.6 trillion in revenue — an amount that, if compared with national GDPs, would rank as the third-largest economy globally.” What’s more, immigrants are founding not just industry giants but also some of the most dynamic and innovative companies, too — startups.

According to an analysis by National Foundation for American Policy, “[i]mmigrants have founded or co-founded 59 percent (455 of 775) of America’s privately held startup companies valued at $1 billion or more.” And even startups that aren’t founded by immigrants often have immigrants in key leadership roles. The analysis found that nearly 80 percent of America’s unicorn companies (privately held, billion-dollar companies) were either founded by an immigrant or have an immigrant in a key leadership role, like vice president of engineering. 

Take a specific immigrant population as an example. Indian immigrants to the United States have, alone, founded 96 billion-dollar startups. 

Today, there are approximately 3.2 million Indian immigrants in the United States. That means about one in every 30,000 Indian immigrants has founded a billion-dollar startup. And each of these billion-dollar startups creates 833 jobs, on average.

Now, one response to these statistics is that Americans could just as easily create these startups, but a 2025 study from the National Bureau of Economic Research puts that into question. The study’s analysis of nearly 91,000 US startups found that companies with mixed founder teams (immigrants and US-born entrepreneurs) grow faster, employing 20 percent more people than US native-only ventures three years after launch. They also raise larger funding rounds and are more likely to be acquired or go public.

The researchers suggest these benefits stem from immigrants’ broader access to global talent networks, cross-border capital, and foreign markets. Compared to native-only startups, native-migrant startups hire higher quality workers (using internal and external promotions as a proxy for labor quality). By drawing from a larger labor pool, startups that incorporate immigrants simply have better, higher-quality labor. That same dynamic shows up in startup financing and market access. Immigrant-founded firms are not just producing more than twice as many patents; they are also more likely to patent abroad, suggesting that immigrant founders are often better positioned to draw on international capital networks and reach customers beyond the US market.

While there is a debate to be had about low-skilled immigration (and particularly, illegal immigration), the Trump Administration is going after immigration broadly — including high-skilled immigration. New screening requirements, tougher vetting, and higher costs are also affecting people seeking to come to the US legally for work or study. Last year, Trump signed a proclamation overhauling the H-1B visa program, one of the most common pathways for highly skilled foreign workers, by imposing a new $100,000 application fee (which is in effect, though under appeal, at time of writing). The Trump Administration is also subjecting green card applicants to “anti-Americanism” screening, while student visa applicants must now undergo social media vetting. A special visa for STEM PhDs and startups passed the House of Representatives in 2022, but Senator Grassley blocked its inclusion in the CHIPS and Science Act.

And there’s a good chance these additional barriers mean that the US could be missing out on our next billion-dollar startup.

Take the newly added barriers on student visas: almost one in four US billion-dollar companies — 24 percent — was founded by someone who first came to America as an international student. These companies have generated an average of 1,123 jobs each. Together, US billion-dollar companies with international-student founders are valued at $3.5 trillion — or more than $4 trillion when including unicorns that have gone public since 2016.

Interestingly, while Republican politicians continue to make high-skilled immigration more difficult, Republican voters — though skeptical of immigration generally — are broadly in favor of high-skilled immigration. A 2025 poll from the Manhattan Institute, for instance, found that only nine percent of Republican voters think high-skilled immigration should be decreased.

The Trump Administration’s policies, unfortunately, will almost certainly decrease high-skilled immigration going forward. 

“President Trump has reduced illegal entries since Inauguration Day in January 2025, but … his administration has reduced legal entries far more,” David Bier writes for Cato. Confirming that trend, two indicators of high-skilled immigration — student visas and H-1B visas — are significantly down. Visas for international students were down by 40 percent in the summer of 2025, with high rates of refusal. And H-1B visas are likely down by at least 25 percent.

These policies are not just making the country less welcoming to high-skilled immigrants; they are weakening US prosperity, reducing future innovation, and almost certainly worsening the federal fiscal picture. More importantly, they expose the central misconception about the Trump Administration’s immigration agenda. This is not simply an effort to stop illegal immigration. It is a broader campaign to restrict immigration across the board, including the very forms of legal immigration that have helped make the United States the world’s leading destination for talent, entrepreneurship, and economic dynamism. As Americans debate what immigration policy should look like, that reality should be impossible to ignore.

There are two main theories of corporate governance: the shareholder theory and the stakeholder theory. The former, which originated in the earliest corporate law decisions of courts of equity in the nineteenth century, requires directors to manage the corporation for the long-term benefit of its shareholders. The latter, which is largely the creation of academics, holds that directors should balance the interests of all corporate stakeholders, including employees, customers, suppliers, creditors, and the communities in which the corporation operates. In an age of climate change, the class of stakeholders may expand to include all human beings now living or to be born in the future. 

Delaware law adheres to the traditional shareholder theory, and Delaware’s continuing dominance of the market for corporate charters, especially for public companies, has made the practical influence of stakeholder theory negligible. Nevertheless, the theory retains an academic following and enjoys episodic popularity in wider corporate governance circles, as happened in the recent, short-lived ESG movement. This paper traces some of this history, as well as the enactment in many states in the 1980s of so-called corporate constituency statutes that, on their face, allowed managers to consider the interests of non-shareholder constituencies in making business decisions, but were really intended to help managers thwart takeover offers that would pay shareholders large premiums but likely cost managers their jobs. 

The paper then argues that stakeholder theory is essentially vacuous. While the theory requires directors to balance the competing interests of various stakeholders, it utterly fails to explain which interests of which stakeholders are cognizable, much less how benefits to some stakeholders are to be traded off against harms to others. Unlike shareholder theory, which employs the concepts of financial economics to determine which of various alternatives available to directors maximizes value for shareholders, stakeholder theory has never integrated any concepts from economic theory (including welfare economics, which would seem to be the natural choice) and so offers no way to determine whether one distribution of value among stakeholders is any better or any worse than any other. Most tellingly, this point has been conceded even by leading stakeholder theorists, who expressly admit that stakeholder theory must be supplemented with any of various additional normative premises, which might range from utilitarianism to a Rawlsian theory of justice to Thomistic natural law to radical feminism to critical race theory. Stakeholder theory is thus best viewed as an empty placeholder, an unfulfilled promise of an alternative to the traditional shareholder theory. In any event, stakeholder theory cannot be regarded as a serious theory of corporate governance. 

Key Points

1. The two main theories of corporate governance are shareholder theory, which requires directors to manage the corporation for the benefit of its shareholders, and stakeholder theory, which requires directors to manage the corporation for the benefit of all those affected by its operations, including, besides shareholders, such other corporate constituencies as employees, customers, creditors, suppliers, the communities in which the corporation operates, and, if effects of greenhouse gas emissions and climate change are taken into account, all human beings now living or to be born in the future. 
   
2. Shareholder theory originated in the earliest corporate law decisions of English and American courts of equity, whose judges viewed the corporation as an arrangement in which some people (the shareholders) entrusted other people (the directors) with the management of some of their assets. The judges thus analogized corporate directors to trustees and so imposed on them a fiduciary duty to use the powers of their office exclusively for the benefit of the corporation’s shareholders. 
   
3. This never meant, however, that directors were required to extract as much value as possible, by all means possible, from all parties with whom the corporation dealt. For one thing, directors were always required to operate the corporation within the law, even if breaking the law would produce profits for shareholders. For another, even the earliest decisions in this area recognized that directors could cause the corporation to deal fairly and even generously with third parties if they believed that such dealings would maximize value for shareholders in the long term (e.g., paying employees bonuses not legally required in order to incentivize them to work harder in the future). This traditional rule remains the law in Delaware, the dominant jurisdiction in corporate law in the United States. 
   
4. The underlying rationale for shareholder theory is that, assuming other laws (such as environmental laws, product safety laws, employment laws, and so on) protect the legitimate interests of third parties (in economic terms, prevent the corporation from externalizing its costs onto such parties), then managing the corporation to maximize value for shareholders simultaneously maximizes value for society. This is, in essence, Smith’s invisible hand argument. 
   
5. In the 1980s, many states (but, of course, not Delaware), enacted so-called corporate constituency statutes that, on their face, allowed managers to consider the interests of non-shareholder constituencies in making business decisions. Nevertheless, as everyone at the time understood very clearly, these statutes were never intended to safeguard the interests of non-shareholder constituencies. Rather, they were designed to help managers thwart takeover offers that would pay shareholders large premiums but likely cost managers their jobs. 
   
6. Stakeholder theory makes shareholders unambiguously worse off. Stakeholder theorists claim that, under their theory, directors should take into account the interests of all stakeholders, including shareholders, and will benefit sometimes this group of stakeholders and sometimes that group of stakeholders, depending on what they judge to be best overall in the circumstances, which makes it sound as if each group of stakeholders, shareholders included, will win some and lose some, producing an overall basically fair result. That, in fact, is not the case. The reality is that all stakeholders other than shareholders have fixed claims against the corporation (whether under contracts, statutes, or both) that the corporation must honor. Under shareholder theory, whatever is left after these fixed claims are paid belongs to the shareholders; under stakeholder theory, some of this value may be directed to other stakeholders. Whenever stakeholder theory prescribes a result different from that prescribed by shareholder theory, value is diverted from shareholders to some other stakeholders. The inverse is legally impossible. Hence, shareholders are often worse off, and are never better off, under stakeholder theory. 
   
7. The fatal difficulty with stakeholder theory is that it is theoretically vacuous. To say that directors should balance the competing interests of various stakeholders is to say literally nothing about which interests of which stakeholders are cognizable or how benefits to some stakeholders are to be traded off against harms to others. Stakeholder theory offers no way at all to determine whether one distribution of value among stakeholders is any better or any worse than any other. This point has even been conceded by leading stakeholder theorists, who expressly admit that, to guide business decisions by directors, stakeholder theory must be supplemented with any of various additional normative premises, which might range from utilitarianism to a Rawlsian theory of justice to Thomistic natural law to radical feminism to critical race theory. Stakeholder theory is thus best viewed as an empty placeholder, an unfulfilled promise of an alternative to the traditional shareholder theory. In any event, stakeholder theory cannot be regarded as a serious theory of corporate governance. 

1. The Central Debate Over Corporate Purpose

Directors manage corporations, but for whose benefit should they manage them? The traditional answer is that directors should, within the law, manage corporations for the benefit of their shareholders; that is, in making a business decision, the directors should consider the legally permissible alternatives available to them, and they should choose the alternative they honestly believe will produce the most value for shareholders in the long term. This view, which may be called the shareholder theory, has been part of corporate law from the beginning, and it is still the law today in Delaware, the preeminent corporate law jurisdiction in the world, where most of the nation’s public companies are incorporated. There is, however, another view, the stakeholder theory, according to which directors should manage the corporation for the benefit of all its stakeholders, meaning not just its shareholders, but also its customers, employees, creditors, and suppliers, as well as the communities in which the corporation operates. In an age of climate change, when the operations of the corporation are thought to affect conditions globally, the class of stakeholders may expand to include everyone alive today or to be born in the future. 

The difference between the theories emerges when the board is considering an action that would confer a benefit, not otherwise legally due, on some group of stakeholders other than the shareholders, in circumstances in which conferring the benefit would not also result in a net benefit to the shareholders, even in the long run — in other words, an action that simply transfers wealth from the shareholders to some other stakeholders on a net basis. On the shareholder theory, directors may not take such actions, for the value in question belongs by right to the shareholders; on the stakeholder theory, directors may take such actions, and in some cases, presumably, are even required to do so. 

Although there are some intimations of stakeholder theory in earlier writers, the classic statement of the position emerged in a famous exchange between Adolph Berle of the Columbia Law School and Merrick Dodd of the Harvard Law School in the Harvard Law Review for 1932.^[2] Both Berle and Dodd recognized that established principles of corporate law reflected the shareholder theory, but Dodd argued that the law should be changed to reflect what we today would call stakeholder theory, whereas Berle defended the traditional view. For many reasons, including Delaware’s steadfast adherence to the shareholder theory, stakeholder theory has never had much effect on actual practice, but it has always retained a strong following in academia, albeit under different names in different eras. Harold Bowen’s book on The Social Responsibility of Businessmen^[3]
published in 1953 generated much discussion, as did John Kenneth Galbraith’s book on The New Industrial State, published in 1967.^[4] 

In that era, stakeholder theory went under the moniker of corporate social responsibility (CSR) and eventually prompted Milton Friedman’s famous retort in an essay in The New York Times that the only social responsibility of a business is to increase its profits,^[5] a classic restatement of shareholder theory. In the 1980s, Edward Freeman’s book Strategic Management: A Stakeholder Approach^[6] popularized the term stakeholder theory, which Freeman went on to elaborate in a series of articles well-known in business schools and management circles. Among legal practitioners, the legendary corporate lawyer Martin Lipton has advocated for stakeholder theory for decades, most recently under the rubric of The New Paradigm,^[7] which was adopted by the World Economic Forum in 2017. More recently, stakeholder ideas coalesced into the environmental, social, and governance (ESG) movement, which led Business Roundtable in 2019 to jettison its prior endorsement of the shareholder theory and adopt the stakeholder theory.^[8] Since 2022, however, the tide has turned dramatically against the ESG movement, with corporations dismantling ESG programs, institutional investors losing interest in ESG proposals, and investors generally fleeing funds dedicated to ESG investing. 

This white paper first explains how the shareholder theory arose from the decisions of courts of equity in both England and the United States at the dawn of corporate law early in the nineteenth century. It then explains how, under shareholder theory, directors are permitted to consider the legitimate interests of other stakeholders under appropriate legal limits. This white paper then turns to stakeholder theory, explaining how, as part of an effort to protect incumbent managers from the takeover wave of the 1980s, many states (though of course not Delaware) enacted statutes that replaced traditional shareholder principles with stakeholder ones. This white paper then examines stakeholder theory and argues that the theory is not so much wrong as vacuous — that is, on the key issue of what makes one business decision by directors better or worse than another, the theory has literally nothing to say. It is not so much a bad theory as a non-theory that could not be implemented in practice in any rational manner. Astonishingly, some leading advocates of stakeholder theory in the academy have expressly conceded this point. To my mind, that should close the matter permanently, but history suggests that, like the grotesque villain of a successful horror movie franchise, stakeholder theory is never really dead. Sooner or later, it will appear again, in new garb and with a new name but still dedicated to the key claim that directors ought to direct value away from shareholders in order to benefit members of other corporate constituencies. 

2. The Origin of the Shareholder Theory in the Courts of Equity

Prior to the middle of the nineteenth century, a corporation came into being only when a sovereign body, such as Parliament in the United Kingdom or a state legislature in the United States, acted to create one. Usually, this happened only at the request of wealthy and well-connected individuals. Furthermore, besides the usual characteristics that we today associate with the corporate form (such as legal personality and limited liability for shareholders), corporations created in this way were often granted other special rights as well, such as a legal monopoly on some line of business. The British East India Company, for example, was established in 1600 with a monopoly on British trade east of the Cape of Good Hope and west of the Straits of Magellan. 

Changing economic conditions in the early decades of the nineteenth century, however, required new modes of economic organization and led to one of the most beneficial advances in human history: the general corporate enabling statute. This law allowed anyone to form a corporation merely by completing a filing with a government agency and paying a nominal fee. The first true general enabling statute was the Companies Act of 1844 in Britain,^[9] but, within a decade or two, all of the states in the United States had comparable statutes. Under these laws, not only could anyone create a corporation, but the corporations created had no special or monopoly rights either. This effectively democratized corporate law. As Mises might have said, it helped anyone to challenge the vested interests of anyone else. Most importantly, the modern corporate form made possible the aggregation of immense amounts of capital and its investment and reinvestment under professional managers, which in turn made the second industrial revolution possible (think railroads, steel, petroleum, electricity) and the consequent astonishing increase in the production of goods and services that define economic conditions in the modern world. When, in 1911, Nicholas Murray Butler said, “The limited liability corporation is the greatest single discovery of modern times,” he might not have been exaggerating.^[10]

Even before the advent of the general enabling statutes, courts occasionally had to deal with cases involving corporations and their directors, but the passage of the enabling statutes and the consequent increase in the number of corporations resulted in a great increase in the number of such cases. In particular, the law had to decide how it would regulate the relationship between the directors who controlled the corporation and the shareholders who had invested in it. In both the United Kingdom and the United States, this problem was solved when judges in both countries reached the basic insight that, in the corporate form, some people (the shareholders) entrust other people (the directors) with the management of some of their assets (whatever the shareholders have invested in the corporation in exchange for their shares). The courts of equity, which traditionally had jurisdiction over trustees of cestui que trusts to ensure that they managed the trusts properly, saw the obvious analogy between corporations and trusts, and so judges on these courts stepped in and asserted equity jurisdiction over corporate directors. Recognizing that directors, if not exactly like trustees of a trust, are very similar to them, the courts of equity imposed fiduciary duties on corporation directors for the benefit of the corporation and its shareholders. In 1855, the United States Supreme Court explained the key doctrines in Dodge v. Woolsey, which quickly became the leading American case: 

It is now no longer doubted, either in England or the United States, thatcourts of equity, in both, have a jurisdiction over corporations, at theinstance of one or more of their members [i.e., stockholders]; to applypreventive remedies by injunction, to restrain those who administerthem from doing acts which would amount to a violation of charters, orto prevent any misapplication of their capitals or profits, which mightresult in lessening the dividends of stockholders, or the value of theirshares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what is in the law denominated abreach of trust.^[11]

This captures the essence of the fiduciary duty of loyalty, which is that the one on whom the duty is imposed must act honestly for the exclusive purpose of benefiting the party to whom the duty runs. Hence, in making a business decision, the fiduciary duty of a director is to aim honestly and exclusively to the benefit of the corporation’s shareholders. In modern times, former Chief Justice Leo Strine of the Delaware Supreme Court has called this obligation to act in good faith for the exclusive benefit of the shareholders the core demand of the fiduciary duty of loyalty.^[12] It follows immediately from this basic principle that directors may not aim at other purposes, such as benefiting themselves or third parties. That directors may not hijack their power to manage the corporation to benefit themselves is obvious and disputed by no one. The fact that directors are not permitted to manage the corporation for the benefit of third parties, however, takes us directly to the question of the corporation’s relationships with non-shareholder stakeholders, such as employees, customers, creditors, and suppliers.

3. Other Stakeholders in Shareholder Theory

The key point about non-shareholder stakeholders is that, in their dealings with the corporation, such stakeholders typically have a wide array of legal protections unrelated to corporate law. Employees, customers, creditors, and suppliers are all in contractual relationships with the corporation, and the rights they have against the corporation under the relevant contracts are legally enforceable. When such stakeholders are themselves sophisticated commercial parties (e.g., banks lending to the corporation), they hardly need any additional protections. When such stakeholders are not sophisticated commercial parties, the law protects them in numerous ways. For employees, there are social security laws, minimum wage laws, fair labor standards laws, health and safety regulations, antidiscrimination laws, and ERISA and pension laws, as well as protections under union contracts for unionized workers. For customers, there are consumer protection statutes, warranty laws, products liability laws, fair trade and advertising regulations, and mandatory disclosure and warning laws. Stakeholders who are not in contractual relationships with the company are people who might involuntarily be injured by the corporation’s operations, and they are protected by tort laws, environmental regulations, and public nuisance law. When we say, therefore, that, under the stakeholder model, directors are required to manage the corporation within the law for the benefit of the shareholders, that qualification is very significant. The directors must give all stakeholders everything they are legally due, whether under a contract with the corporation, under the common law, or under any statute or regulation. 

Beyond all that, however, stakeholder theorists sometimes forget the important fact that managing the corporation for the benefit of the shareholders is certainly not the same as managing the corporation in the manner of Ebenezer Scrooge: 

But he was a tight-fisted hand at the grindstone, Scrooge! a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster!^[13]

That is, directors are certainly not required to seek at every turn to extract as much value as possible, by all means possible, from every employee, customer, supplier, creditor, or other party with whom the corporation deals in order to benefit the shareholders. They are not required to do this precisely because, as anyone involved in business knows, managing a business in this manner is manifestly self-destructive; it is bad for business in the long run. Businesses are entirely dependent on their ability to contract with other parties, and no one wants to contract with a Scrooge. This is why businesses, whether small sole proprietorships or multinational corporations, are never run like the Scrooge & Marley Counting House. 

The nineteenth century judges of the courts of equity, who often had tremendous insight into business and market realities, understood this perfectly. Thus, in 1864, in Taunton v. Royal Insurance Co.,^[14] an insurer paid some claims by policyholders even though the losses incurred were excluded from the policies and the company had no legal obligation to pay the claims. A shareholder sued the directors, alleging that they were giving away corporate assets, but the court held for the directors, because the directors had concluded that “by paying these small losses, rather than risk the character of the company and the loss of these or other customers,”^[15] they had “designed to secure to the Company the largest possible amount of profits in its own proper business.”^[16] In 1876, in Hampson v. Price’s Patent Candle Co.,^[17] a corporation had paid a gratuitous, year-end bonus of a week’s wages to its employees. Again a shareholder sued the directors, and again the court held for the directors, for the directors had concluded that “giving this gratuity to workmen in a prosperous year [will] induce the workmen . . . to work better — to carry on the factory in a better way in future,”^[18] thus maximizing profits for shareholders in the long term. And in 1883, in Hutton v. West Cork Railway Co.,^[19] Lord Bowen explained the doctrine at length as follows:

It seems to me you cannot say the company has only got power to spend the money which it is bound to pay according to law, otherwise the wheels of business would stop, nor can you say that directors . . . are always to be limited to the strictest possible view of what the obligations of the company are. They are not to keep their pockets buttoned up and defy the world … Most businesses require liberal dealings. The test there again is not whether it is bona fide, but whether, as well as being done bona fide, it is done within the ordinary scope of the company’s business, and whether it is reasonably incidental to the carrying on of the company’s business for the company’s benefit. Take this sort of instance. A railway company, or the directors of the company, might send down all the porters at a railway station to have tea in the country at the expense of the company. Why should they not? It is for the directors to judge, provided it is a matter which is reasonably incidental to the carrying on of the business of the company, and a company which always treated its employees with Draconian severity, and never allowed them a single inch more than the strict letter of the bond, would soon find itself deserted — at all events, unless labour was very much more easy to obtain in the market than it often is. The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale Shareholders and Stakeholders in Corporate Law except such as are required for the benefit of the company … [T]hat sort of liberal dealing with servants eases the friction between masters and servants, and is, in the end, a benefit to the company. It is not charity sitting at the board of directors, because as it seems to me charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who practise it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose.^[20]

In other words, directors may direct value to corporate stakeholders other than shareholders, such as employees or customers, if they do so for the purpose of benefiting the shareholders in the long term. 

This became the orthodox view in corporate law, and it remains law in Delaware, where most American public companies are incorporated. As explained by the Delaware Court of Chancery, 

In the standard Delaware formulation, fiduciary duties run not only to the corporation, but rather to the corporation and its shareholders. The conjunctive expression captures the foundational relationship in which directors owe duties to the corporation for the ultimate benefit of the entity’s residual claimants. It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term. Decisions of this nature benefit the corporation as a whole, and by increasing the value of the corporation, the directors increase the quantum of value available for the residual claimants [i.e., the shareholders]. Nevertheless, Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.^[21]

Put yet another way, directors may act as fair and honorable businessmen — fair and honorable, because they sometimes give more to the parties with whom the company deals than the law requires, but still businessmen because they do this not out of disinterested charity (they have no right to give away the shareholders’ money in disinterested charity) but because dealing fairly and even generously with employees, customers, suppliers, creditors and others tends to maximize the profits of the business in the long-run. 

Often it is clear how treating non-shareholder stakeholders generously can create value for shareholders, but sometimes the mechanisms are more subtle. For instance, a corporation that takes steps to ensure that workers employed in foreign countries by companies in its supply chain are paid well and have safe working conditions (as, for example, Walmart does extensively),^[22] may do so to avoid bad publicity and capture the goodwill of consumers in its home jurisdiction. For Ben & Jerry’s Ice Cream, supporting left-leaning causes may well be an effective (i.e., profitable) form of advertising and branding. When senior managers direct charitable contributions from the corporate treasury to their preferred rich-person charities (Texaco sponsored the Metropolitan Opera for sixty-three years until it was acquired by Chevron), this amounts to just another form of executive compensation, and in a competitive market for executive talent, it results in lower cash or equity compensation for executives. Gary Becker points out that a firm may keep on older workers beyond the age at which their productivity is sufficiently high to justify their salaries because doing so helps the company attract and retain younger workers at lower wages because these younger workers expect that they too will not be let go when they get long in the tooth.^[23]

From an economic point of view, when a corporation treats members of a non-shareholder constituency generously in this fashion, the corporation is making an investment not fundamentally different from spending money on researching and developing new products, in investigating new business opportunities, or lobbying government officials for favorable changes in the law. In each case, the directors cause the company to expend money today in the hope that the company will make more money in the future. Under traditional principles of corporate law, as long as the directors honestly believe that the expenditures they authorize will benefit the shareholders in the long run, they act properly. 

4. The Underlying Rationales for Shareholder Theory

The economic rationales for the shareholder theory have always been compelling. As Professors Hansmann and Kraakman have stated, 

All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society. The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end (that is, the pursuit of aggregate social welfare) is to make corporate managers strongly accountable to shareholder interests and, at least in direct terms, only to those interests.^[24]

The basic argument is that, provided that the corporation obeys applicable laws and honors its contracts with third parties, the corporation will not externalize any significant portion of its costs. Hence, whatever maximizes value for the corporation and its shareholders maximizes value for society generally. 

Perhaps unsurprisingly, some stakeholder theorists argue that inadequate regulations do permit corporations to externalize a significant portion of their costs, but such a claim is highly implausible. The modern corporation, including its shareholder model of governance, came into existence almost simultaneously with the immense improvement in living conditions in the developed nations that began about two centuries ago. Although it would be a simplification to attribute that improvement solely to the corporate form and shareholder theory (rather, these are two important factors among others), this observation does suffice to show that corporations operating under the shareholder theory do not cause widespread net harms to non-shareholders. If the activities of corporations were not making us better off on a net basis, our standard of living would not have risen so spectacularly above that of our great-grandparents. 

There are other factors favoring the shareholder model that arise naturally in competitive markets. For example, if directors do not manage the corporation to maximize shareholder value, then the price of the company’s shares tends to fall. Historically, this invited hostile takeover attempts, which are the ultimate discipline for lax managers.^[25] Nowadays, the more likely result is that the company will become a target for activist shareholders, hedge funds whose investment strategy involves identifying underperforming companies, taking a significant position in their stock (though less than a controlling interest), and pushing for changes that will increase shareholder value. Sometimes, activists will find some incumbent directors are already sympathetic to their concerns. Sometimes, the board will resist the activist’s efforts, and in that case the activist may launch a proxy contest to replace some of the directors with individuals sharing the activist’s point of view. In such cases, the ultimate arbiters will usually be the large institutional investors who collectively hold 70 percent to 80 percent of the shares of most public companies. 

Moreover, if a company operates in a competitive market and incurs costs not justified by resulting benefits, it will lose market share to its rivals. This is the primary reason that union membership in the private sector has been declining for decades: unionized labor costs more than ununionized labor without producing offsetting benefits. From the point of view of its customers, a unionized firm offers more expensive but no better products than its ununionized competitors. Hence, over time the unionized company will lose market share to its ununionized rivals. Exactly the same thing happens if managers direct value to any other non-shareholder stakeholders without producing a net benefit for the corporation and its shareholders. The public companies of the European Union provide a clear example of this. Because of differences in law and corporate culture, the directors of such companies do not manage them for the benefit of their shareholders in anything like the way directors of American companies do, and as a result the European companies have become relatively smaller compared to American companies over time. This is one reason the total market capitalization of all public companies in Germany is less than the market capitalization of Apple. 

5. Stakeholder Statutes of the 1980s

In the 1980s, many states other than Delaware passed statutes changing the traditional rule and allowing (and, in some cases, requiring) directors to consider the interests of non-shareholder stakeholders. For example, the Pennsylvania statute (in its current form) provides that, in discharging their duties, directors “may, in considering the best interests of the corporation, consider to the extent they deem appropriate … [t]he effects of any action upon any or all groups affected by such action, including shareholders, members, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.”^[26] Nowadays, approximately 29 states have some form of these so-called other constituency or stakeholder statutes. 

All of these statutes were conceived in sin. Appearances to the contrary notwithstanding, the people who advocated for them and the legislatures that enacted them had no interest at all in protecting non-shareholder stakeholders. Or, more accurately, they were intensely interested in protecting one and only one particular group of non-shareholder stakeholders, and that was incumbent managers. Indeed, these stakeholder statutes were almost universally enacted as parts of larger legislative changes designed to protect incumbent managers from hostile takeovers — that is, transactions that the company’s shareholders favored (because the bidder was offering a significant premium to market for their shares) but that incumbent managers resisted, for, if the transaction was successful, the managers would likely lose their jobs. 

Some background makes this clear. In the 1960s, many large American corporations purchased other companies in unrelated lines of business in order to become conglomerates. The theory was that, by owning an array of unrelated businesses, the company could reduce risk through diversification. By the mid 1970s, however, it was clear that this strategy was failing. For one thing, the reduction of trading commissions and the rise of mutual funds made it much cheaper for investors to capture the benefits of diversification at the shareholder level (i.e., with the investor holding a diversified portfolio of securities) than for the company to capture such benefits at the corporate level (i.e., with the company holding a diversified portfolio of businesses). Even worse, running disparate businesses under a single roof was inefficient. It destroyed value, and as a result the shares of many conglomerates were trading below the per-share value for which their assets could be sold piecemeal. Responsible managers responded by selling or spinning off business units to concentrate on those lines of business in which they had real competence. Irresponsible managers did not do this and sought to maintain their corporate empires, which made them targets for hostile takeovers. With the conglomerate’s shares trading at a discount from the value of their assets, corporate raiders like Ron Perelman or Carl Icahn could afford to purchase the company at a premium to market, separate the various business units, sell them off one at a time, and make tremendous profits. Many of the great takeover battles of the 1980s fit precisely into this pattern. 

Incumbent managers who wanted to hold on to their jobs and perquisites resisted such takeover attempts however they could. This effort played out differently in Delaware and in other states. In Delaware, the Delaware Supreme Court afforded directors significant but limited leeway to defend against hostile takeovers, but only in a way that ultimately resulted in a system that largely ensured that a determined bidder willing to pay a premium price would eventually prevail. In other states, however, the key developments were legislative and much more protective of incumbent managers. The reason for this was that, although a large majority of public companies are incorporated in Delaware, almost none are headquartered there. As a result, although Delaware cares intensely about having corporate laws to attract and keep incorporations, no one company has significant influence with Delaware politicians. Delaware’s interest, therefore, lies in pleasing the market as a whole, not any particular segment of it. All other states, however, have only a handful of public companies incorporated under their laws, and those companies are commonly also headquartered in those states, which means that these companies usually have significant influence with state legislators and governors. They are thus well-placed to seek protective legislation. In one especially notorious episode, the chief executive officer of the Norton Company, a Massachusetts corporation faced with a hostile takeover attempt by BTR, prevailed on the governor to call the legislature into an emergency session over a weekend to pass a statute that made the takeover virtually impossible to accomplish. 

The upshot of this political dynamic was that, as conglomerates came under attack in the 1970s and 1980s, many states passed statutes designed to protect their hometown companies against hostile takeovers. These so-called antitakeover statutes took many forms, but they commonly included a stakeholder statute. The rationale was that, under the traditional rule, directors had a fiduciary obligation to do what maximized value for shareholders, and, very often, when the directors received an unsolicited takeover, it certainly seemed that maximizing value for shareholders would require accepting the proposal (or, at least, opening negotiations with the potential acquirer to get an even better offer). Indeed, these proposals were often at such large premiums to market that it was difficult to imagine that the shareholders would ever receive as much value if the current managers continued to operate the company. For example, when Revlon’s shares were trading at $40.14 per share in June of 1985, Ronald Perelman offered to acquire the company at $47.50, later raising his bid to $58.00 per share. Hence, when the board received such an offer, the directors worried that they would be sued for breaching their fiduciary duty if they turned it down. This seemed especially likely after the Delaware Supreme Court held in Revlon v. MacAndrews & Forbes, once a board decides to sell the company, even the instrumental consideration of non-shareholder constituencies normally permissible becomes impermissible and the directors must make obtaining the best price for the corporation’s shareholders their sole objective.^[27]

It was to protect the directors against such suits — in other words, to license the directors to turn down offers that they knew to be in the best interests of the shareholders — that states passed stakeholder statutes. With the stakeholder statute in place, the directors needed only to identify some stakeholders or others who would be adversely affected by the takeover — say, employees whose jobs might be eliminated in a breakup of the company or bondholders whose bonds might trade at lower prices when the acquirer leveraged up the company. Looking to the interests of these stakeholders rather than those of the shareholders, the directors could, under the stakeholder statute, conclude that the takeover proposal was not in the interest of the corporation’s stakeholders and so they could reject it, while remaining safe against suits by outraged shareholders. 

Everyone at the time understood perfectly well what the true purposes of these stakeholder statutes were. Thus, in 1990, in criticizing these statutes, the Corporation Law Committee of the American Bar Association noted that in enacting the stakeholder statutes state “legislatures intended to provide some support to directors seeking to thwart unwanted offers,”^[28] and so stakeholder statutes “seem designed to protect directors against claims of breach of duty if they choose to take into account interests other than those of shareholders.”.^[29] As one knowledgeable practitioner put it, “Opponents of hostile takeovers apparently felt that by giving directors a wider range of factors upon which to base a rejection of a takeover offer, they would help protect directors from liability and thus encourage them to resist takeover offers.”^[30] Moreover, although these statutes allow directors to consider the interests of other stakeholders, they do not confer on these stakeholders any right to sue the directors for breach of fiduciary duty. That right remains exclusively with the shareholders. If the true purpose of the statute were to ensure that directors protect the legitimate interests of non-shareholder stakeholders, then surely when directors fail to do this, the non-shareholder stakeholders ought to have a legal remedy. Under none of the existing stakeholder statutes, however, is this the case. The reason is obvious: the purpose of the statutes was never to protect the interests of non-shareholder stakeholders but to allow management to reject, without fear of litigation, takeover proposals that maximized value for shareholders. 

6. Shareholders Under Stakeholder Theory

Stakeholder theory clearly makes shareholders worse off than they are under shareholder theory, but it may not be readily apparent just how true this is. Stakeholder theorists tend to obscure this issue, arguing that, under their theory, the board of directors will take into account the interests of all stakeholders, including shareholders, and will benefit sometimes this group of stakeholders and sometimes that group of stakeholders, depending on what they judge to be best overall in the circumstances. This makes it sound as if each group of stakeholders, shareholders included, will win some and lose some, producing an overall basically fair result. That, in fact, is not the case. The reality is that, in any business decision that a board of directors might make under the stakeholder theory, the shareholders either do no better than they would have under the shareholder theory or else they do worse. In other words, shareholders never do better under stakeholder theory than they would have under shareholder theory. The only question is how much worse off they will be under stakeholder theory. 

The reason for this is that every group of stakeholders other than shareholders has certain legally enforceable rights against the corporation, either because they have rights under contracts with the corporation (as with employees, creditors, and suppliers) or because they have rights under statutes (such as the environmental laws) or the common law (such as tort victims), or some combination of these. Whether the directors like it or not, therefore, these stakeholders have claims against the corporation that, short of bankruptcy, the corporation is legally obligated to pay. These claims thus place a floor under what the corporation owes these stakeholders; legally, they have to receive at least these amounts. Under the shareholder theory, as we have seen, the directors may direct additional value to non-shareholder stakeholders over and above what these stakeholders are legally due, if by doing so the shareholders will be better off in the long term. Indeed, if directing value to a non-shareholder group increases shareholder value in the long term, stakeholder theory holds that directors are required to do this. Stakeholder theory thus differs from shareholder theory only when, going further than this, the board confers even more value on some group of non-shareholder stakeholders — that is, confers value on some group of non-shareholder stakeholders in a manner that does not benefit the shareholders, even in the long term. That value, however, cannot come at the expense of other groups of non-shareholder stakeholders, at least not in the sense of these other groups getting less than what they are legally entitled to receive from the corporation. Therefore, the additional value being conferred on any non-shareholder stakeholders always comes at the expense of the shareholders. Therefore, any business decision that stakeholder theory permits but shareholder theory forbids involves diverting value from shareholders to non-shareholder stakeholders. 

Equivalently, it never happens under stakeholder theory that the shareholders get more than they would have received under shareholder theory. The board may not, for example, conclude that shareholder returns have been too low in recent years and so elect to pay more in dividends to shareholders by skipping an interest payment to the bondholders, or not paying suppliers for goods or services they have provided, or not paying employees wages they have earned. Similarly, the directors may not conclude that the environmental laws are too burdensome and so cause the corporation to stop complying with them in order to increase the corporation’s profits for the benefit of the shareholders. Stakeholder theory sometimes requires that shareholders get less in order that other stakeholders get more, but it never requires — indeed, it never permits — that other stakeholders get less in order that shareholders get more. Stakeholder theory is an emphatically one-way ratchet: to the extent that it differs from shareholder theory, stakeholder theory always works to the benefit of other stakeholders and to the detriment of the shareholders. 

7. The Theoretical Vacuity of Stakeholder Theory

Happily, the damage that the stakeholder theory can do in practice is limited. Most importantly, even in jurisdictions in which the law reflects the stakeholder model, directors are elected only by shareholders, and directors can be sued for breaches of fiduciary duty only by shareholders. As a result, directors have strong incentives to please shareholders — that is, to manage the corporation for their benefit. In addition, as noted above, underperforming managers invite hostile takeovers and activist attacks, and underperforming firms tend to lose market share over time to their higher-performing competitors. Taken together, these factors ensure that, in practice, stakeholder theory has little practical effect. 

Significant empirical evidence supports this view. In a study involving more than a hundred acquisitions by private equity buyers of companies incorporated in stakeholder jurisdictions (that is, exactly the kind of transaction at which stakeholder statutes were aimed), Lucian Bebchuk and his co-authors found that directors, who would have discretion under the applicable stakeholder statutes to negotiate for benefits to all groups of stakeholders, virtually never used that discretion to negotiate for benefits to stakeholders other than shareholders, directors, and managers (i.e., they did not negotiate for benefits to employees, customers, creditors, suppliers, or the communities in which the companies operated).^[31] In those few cases in which some protections were included for such other stakeholders, these “were generally cosmetic and practically inconsequential.”^[32]
In other words, the empirical evidence confirms what economic theory predicts. 

But although it probably does little damage in practice, stakeholder theory is fatally flawed on the theoretical level. The essential problem is that, although stakeholder theorists all agree that: 

1. in making business decisions, directors should consider the interests of all the corporation’s stakeholders (whether the class of stakeholders is defined narrowly to include, besides shareholders, the corporation’s employees, customers, creditors, and suppliers, or whether it is defined broadly to include everyone affected by the corporation’s operations), and 
   
2. with only de minimis possible exceptions, every possible decision will benefit some stakeholders and harm others, 

nevertheless, 

3. no stakeholder theorist has ever explained what it means to say that one business decision is, according to stakeholder theory, better or worse than any other. 

That is, while acknowledging that a given business decision benefits some stakeholders but harms others, stakeholder theorists commonly say that the decision is better for all stakeholders collectively or on balance or all things considered or overall or something else along those lines. As a result, these expressions — collectively or on balance or whatever — are doing all the important intellectual work. Until the stakeholder theorists explain what it means to say that one alternative is better for stakeholders collectively or on balance than another, they have not defined the key term in the theory. And, in fact, no stakeholder theorist has ever articulated what any of these phrases mean in the context of stakeholder theory.^[33]

It is important to see how fundamental this problem is. Stakeholder theory is intended to guide directors in making business decisions. It is intended to provide them with a criterion whereby they can determine which of two alternatives available to them is better and thus which of all available alternatives is best. If the theory cannot do this, then it fails its essential purpose. The problem with stakeholder theory is that it cannot even explain what it means to say that one alternative is better than another — much less provide a reason for thinking that one alternative is better than another. As far as stakeholder theory is concerned, all alternatives are equally good and equally bad. Therefore, as a theory of corporate governance, stakeholder theory fails as completely as any theory possibly could. 

Consider, again, the stakeholder statutes passed in the 1980s, which were designed to allow managers to reject hostile takeover offers, even when they were manifestly in the interests of the company’s shareholders. Accepting a takeover offer, like virtually any other business decision, will affect various stakeholders differently. Even if shareholders holding a large supermajority of the shares want to accept the offer, not all shareholders will want to do so; hence, if the board agrees to a merger, the shareholders in favor will get their way and be benefited, but the shareholders opposed will be cashed out against their will and will be harmed. To be sure, employees who subsequently lose their jobs will be harmed, but employees who are retained will likely work for a financially healthier company and have better opportunities for advancement, and so they will be benefited. Assuming the acquirer intends to lever up the company, existing bondholders of the company will likely be harmed because their bonds will decline in value — unless, that is, the bonds include protective provisions (as many bonds do, nowadays) that require the company to redeem the bonds at a premium, in which case the bondholders will be benefited by the transaction. Similar things will be true for other groups of stakeholders. Under the stakeholder theory, should the directors accept the offer or reject it? Surely, it cannot be that the directors should accept the offer merely because it benefits some stakeholders; that is true of virtually any possible business decision. Equally surely, it cannot be that the directors should reject the offer merely because it harms some other stakeholders; that, too, is true of virtually any possible business decision. If stakeholder theory is to guide the directors’ conduct, if it is to provide them a rule of decision, if it is to give them a criterion whereby to determine whether accepting the offer is better than rejecting it or vice versa, then stakeholder theory, at a minimum, has to explain why, when virtually every decision benefits some stakeholders and harms others, one decision is better than — or ought to be preferred to — another. But although stakeholder theory tells directors to consider the effects of a transaction on all stakeholders, it never tells them how these effects tend to make one decision better or worse than another. 

This problem with stakeholder theory is glaringly obvious. If I tell you, for example, that you should divide a million dollars among the ten possible recipients, considering the interests of each possible recipient in doing so, I have obviously told you nothing at all about how to divide the money among them. Assuming dollars are indivisible, there is an astronomically large number of ways of dividing a million dollars among ten recipients,^[34] but for all I have told you, each of these ways is as good as any other. It would thus be natural to think that stakeholder theorists would have confronted the problem and supplemented their theory in order to address it. Shockingly, however, even though stakeholder theory has been discussed in the literature for almost a century, no prominent stakeholder theorist has done anything to address this problem. 

Indeed, stakeholder theory has made no significant intellectual progress since it first appeared in the Berle-Dodd debate in 1932. Back then, Dodd formulated the stakeholder position by declaring, “Those who manage our business corporations should concern themselves with the interests of employees, consumers, and the general public, as well as of the stockholders,” and should “take into consideration the welfare of employees and consumers.”^[35] In 1953, in the Social Responsibilities of the Businessman, Bowen ^[36] wrote that “businessmen … [are] obligated to consider social consequences when making their private decisions,” “have social responsibilities that transcend obligations to owners or stockholders,” and should “follow those lines of action which are desirable in terms of the objectives and values of our society.^[37] True, he then provided a “tentative list of goals” he considered socially desirable, such as a high standard of living, economic growth, equity in the distribution of income, freedom, community improvement, national security and personal integrity,^[38] but he also conceded that these goals may be “mutually conflicting in the sense that the attempt to achieve one of them may be at the sacrifice of another,” and so “in applying these goals we are necessarily faced with compromises.” Galbraith said similar things in 1967 in The New Industrial State. It was no doubt this lack of intellectual development of stakeholder theory led Manne to say in 1971 that “corporate social responsibility … has not had a distinguished intellectual history in America,” for the theory “has never been integrated in any systematic manner into either traditional or more contemporary modes of economic theory.”^[39] Nor did things get better after that. In 1984, in his highly influential book on Strategic Management: A Stakeholder Approach, Freeman wrote that the point of stakeholder theory “is in some sense to chart a direction for the firm. Groups that can affect that direction and its implementation must be considered in the strategic management process,”^[40] and “if business organizations are to be successful in the current and future environment then executives must take multiple stakeholder groups into account.”^[41] Writing in 1990, the Corporate Law Committee of the American Bar Association concluded that the views of stakeholder theorists in the 1980s were “virtually identical” to those expressed by Dodd in 1932.^[42]

Although stakeholder theorists are well aware of these criticisms, they have never effectively replied to them. Rather, ignoring the criticisms, they continue saying essentially the same things. For example, Margaret Blair and Lynn Stout are among the most influential advocates of stakeholder theory in the legal academy,^[43] and in a widely cited article published in 1999 they offered what they called a new theory of the corporation — the “team production” theory — but it did not differ in essentials from what all the stakeholder theorists before them had said. They say, for example, that directors should “serve the joint interests of all stakeholders who comprise the corporate ‘team’”^[44] and should “balanc[e] the competing interests of the many stakeholders who comprise the firm. ^[45] As to how this balancing should be done, or what would make one way of balancing these interests better than another, however, Blair and Stout have nothing to say. Similarly, in a widely anthologized article, Freeman says that managers must “look after the health of the corporation, and this involves balancing the multiple claims of conflicting stakeholders,” and although stakeholder theory “does not give primacy to one stakeholder group over another,” “there will be times when one group will benefit at the expense of others” and “management must keep the relationships among stakeholders in balance.”^[46] Lipton’s New Paradigm, versions of which he has espoused for many decades, requires that “consideration should be given [by managers and directors] not only to shareholders, but also to the corporation’s broader group of stakeholders, including employees, suppliers, customers, creditors and the community,”^[47] which makes the paradigm anything but new. The Business Roundtable’s Statement on Corporate Purpose in 2019 declared that the executives signing the statement “share a fundamental commitment to all of our stakeholders,” including customers, employees, suppliers, the communities in which their companies operate, and shareholders.^[48] In a particularly unilluminating formulation, the British Academy’s Principles for Purposeful Business declares that “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems.”^[49]

Colin Mayer, perhaps the leading stakeholder advocate of the day, says very similar things.^[50] In his view, “the private incentives of the pursuit of profit” under the shareholder theory of corporate governance conflict with “the public interest in human and natural world flourishing and prosperity,” and so corporate law should be amended to “address that defect through requiring the adoption of appropriately formulated corporate purposes.”^[51] Hence, the law should “permit of commitment to objectives beyond the pursuit of the success of the company for the benefit of its members [i.e., shareholders] … through committing to the interests of others” to “ensure the alignment of the corporation’s incentives with individual, societal, and planetary interests.”^[52] As Marcel Kahan and Edward Rock point out, this is a change from the traditional stakeholderism of Dodd in that now non-shareholder stakeholders are not just employees, customers, creditors, and suppliers, but everyone now living or to be born in the future — a position Kahan and Rock call direct social welfarism.^[53] Expanding the number of stakeholders, however, merely increases the number of individuals whose interests need to be considered; it does not explain how they are to be balanced or how conflicts between those interests are to be resolved. This just makes the problem harder. 

At this point, it is helpful to contrast stakeholder theory with shareholder theory. Under shareholder theory, one alternative is better than another if and only if it produces more value for shareholders. In the typical case, the directors will have before them a set of alternatives, each of which involves the corporation making certain investments (i.e., cash outflows) in the hopes of receiving in the future certain returns (i.e., cash inflows). For example, one alternative may require that the corporation invest $1 million today and another $1 million a year from now in order to receive an expected $2.4 million a year after that. Another alternative may require the corporation to invest $1.5 million today in order to receive an expected $1.85 million next year. If we leave the problem at an intuitive level, it is very hard to say which alternative generates more value for shareholders; indeed, it is even hard to explain what it means to say one alternative generates more value for shareholders. But shareholder theory does not leave these problems at the intuitive level; rather, it has integrated the concepts of financial economics precisely to answer such questions. Applying those concepts, we can compute the net present value of each investment, at least if we have certain additional information, such as the betas of the two investments, the risk-free rate, and the equity risk premium. Once we know the net present value of each investment, we know which produces the greater value for shareholders. ^[54] This is why, in making business decisions, directors and managers at large corporations have for decades routinely used discounted cashflow analyses, the Capital Asset Pricing Model, and other concepts of financial economics. By adopting and applying these concepts, shareholder theory can determine, subject only to empirical uncertainty, whether any alternative action is better than, worse than, or equal to another in terms of its effect on shareholder value. Stakeholder theory has never done anything analogous.

8. Stakeholder Theory Can be Given Actual Content by Any Normative Theory

The argument so far has shown that stakeholder theory, in any of its current formulations, utterly fails of its essential purpose of guiding directors in making business decisions because stakeholder theorists have no way of explaining, in terms available within their theory, even what it means to say that one alternative available to the directors is better than another. The only way to salvage this dismal situation is by adding additional assumptions to stakeholder theory — assumptions that can give a coherent meaning to such assertions. Of course, since the purpose of adding these assumptions is to tell us which alternatives are better than others, those assumptions will have to be normative in character, and it will be these assumptions that do all the real work in the supplemented theory. 

And therein lies the problem, for virtually any normative theory can be adapted to the task. The most obvious choice would be some form of utilitarianism. We have been thinking of stakeholder theory as evaluating alternative actions that the directors might take by considering the effects of these alternatives on the various stakeholders of the corporations: each action benefits some stakeholders and harms others. If we think utilitarianism is the correct moral theory, then we could have the directors apply some form of utilitarian calculus to their business decisions: one business decision would be better than another if it produces greater utility for all stakeholders collectively. In particular, if we assume that the preferences of the individual stakeholders involved should determine which alternative is best overall (assumption commonly called welfarism), then we could apply the concepts of welfare economics to give stakeholder theory definite content.^[55]
Unfortunately for stakeholder theory, however, problems internal to welfare economics almost certainly doom such efforts.^[56]

Or we could have a deontological version of stakeholder theory, with the directors applying the Kantian categorical imperative to discover which business decisions they should make.^[57] Then again, we could have an Aristotelian stakeholder theory, adapting the concepts of contemporary virtue theory in order to determine which business decisions are better than which. Or we could have a Thomistic, natural-law version of stakeholder theory, or we could have a Lockean version. We could have a version of stakeholder theory based on the moral intuitionism of G.E. Moore or on the moral emotivism of C.L. Stevenson or the moral prescriptivism of R.M. Hare. We could have a Rawlsian version of stakeholder theory, a feminist version, a communist or fascist one, or even one based on critical race theory. For that matter, if we adopt a Chicago School account of normativity, stakeholder theory collapses back into shareholder theory. Even shareholder theory is thus a version of stakeholder theory, a version that holds that, in some robust normative sense, non-shareholder stakeholders ought to get what they are legally entitled to receive, plus whatever else results in net benefits to shareholders, and no more. 

In other words, since stakeholder theory is a theory in search of premises that will give meaning to the word should in claims that one business decision should be preferred to another, any normative theory — any account of what people should do — can be used to supplement stakeholder theory and give it some definite meaning. There will be as many stakeholder theories as there are normative theories. 

Lest the reader think I exaggerate, it turns out the leading academic stakeholder theorist has come to precisely this same conclusion. Freeman writes, 

The stakeholder theory can be unpacked into a number of stakeholder theories, each of which has a “normative core,” inextricably linked to the way corporations should be governed and the way managers should act. So, attempts to more fully define, or more carefully define, a stakeholder theory are misguided.^[58]

In other words, stakeholder theory just by itself means nothing. What matters is the “normative core” we add to it which gives it some definite meaning. Freeman continues,

A “normative core” of a theory is a set of sentences that includes among others, sentences like:

(1) Corporations ought to be governed …

(2) Managers ought to act …,

where we need arguments or further narratives which include businessand moral terms to fill in the blanks.^[59]

And there it is: the leading stakeholder theorist admits that stakeholder theory does not tell us how corporations ought to be governed or how managers ought to act. To answer those questions, we need a “normative core,” which is just a fancy way of saying additional assumptions, to supplement stakeholder theory. 

Freeman next explains that there are many possible “particular normative cores,”^[60] with one being based on “private property rights plus the other institutions of political liberalism” (a Rawlsian version), another on “a feminist standpoint” that would “restructure ‘value-creating activity’ along principles of caring and connection,” and yet another on “ecological principles.”^[61] But, of course, there is no reason to stop with these three obvious possibilities. As the argument above shows, any normative theory can be poured into the stakeholder theory’s empty core, with the result that there will be as many versions of stakeholder theory as there are normative accounts of how human beings should live. Indeed, I suggested above that even the normative assumptions underlying Friedman’s shareholder theory fit the bill, and Freeman admits this too, conceding that “Friedman’s maximizing shareholder value” — perhaps the most forceful statement of the shareholder theory ever articulated — “is compatible with the stakeholder theory.”^[62] When one and the same theory can mean utterly incompatible things, that theory, by itself, does not mean anything. A theory that can mean anything is a theory that means nothing. 

9. Reconsidering Corporate Purpose

All this makes stakeholder theory something of a mystery in the sociology of knowledge. It is not difficult to see that the theory lacks any definite content. No serious person would deny that, in making decisions, we should consider the effects of our actions on the people affected by them. Apply that true but banal assertion to the corporate context and you get stakeholder theory: in making business decisions, directors should consider the effects of their actions on stakeholders of the corporation. But to say that we should consider the effects of our actions on everyone affected by them tells us nothing about which effects matter and which do not, which interests of other people should be respected and which need not be respected, and so on, and of course it is these questions that will matter in deciding what we should do. So it was obvious, or it should have been obvious, to any reasonable observer that stakeholder theory never said anything of consequence. No doubt this is the main reason that the theory has never had any significant practical effect in the world. 

But why has the theory remained such a force in academic, legal, and management circles for such a long time? If the theory’s leading academic exponent has expressly conceded that the theory, standing alone, lacks definite content, how is it that we are still talking about it? The answer must lie in psychology, not law, economics or philosophy. Mises suggests that, despite the immense material benefits people living in capitalist economies enjoy because of capitalism, many of them suffer from an anti-capitalist mentality because capitalism is a form of meritocracy (those who please the market win, and those who fail to do so lose), and many people find it difficult to accept that their lack of economic success lies in their own failure to produce goods or services that others value highly.^[63] Psychologically, it is easier to think something must be amiss in the capitalist system. Perhaps something similar is going on here. On a stakeholder view, those aggrieved by the success of companies run on the shareholder model can tell themselves that such success is predicated on these companies profiting illicitly by violating the rights of their other stakeholders — e.g., exploiting workers, duping consumers, destroying the planet, dooming future generations. I do not insist on this view, however, for even abject envy seems to me an inadequate explanation for the continuing vitality of a theory of corporate governance that has so little to recommend it.

End Notes

^[1] Allison and Dorothy Rouse Chair in Law and Professor of Law, Antonin Scalia Law School, George Mason University; Fellow and Co-Director of the Program on Organizations, Business and Markets at the Classical Liberal Institute, New York University School of Law; Adjunct Fellow, Manhattan Institute. Parts of this article derive from Professor Miller’s articles on How Would Directors Make Business Decisions Under a Stakeholder Model, 77 Bus. Law. 773 (2022); Delaware Law Requires Directors to Manage the Corporation for the Benefit of its Stockholders and the Absurdity of Denying It, 48 J. Corp. L., 32 (2023); Stakeholder Theory and the Challenge of Welfare Economics, 51 J. Corp. L. (2026, forthcoming); and Interpretations of Stakeholder Theory: Economic, Philosophic and Political, J. Morality & Markets (2026, forthcoming). ps://oui.doleta. gov/unemploy/solvency.asp. 

^[2] A. A. Berle, Jr., Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049 (1931); E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145 (1932); A. A. Berle, Jr., For Whom Corporate Managers are Trustees: A Note, 45 Harv. L. Rev. 1365 (1932). 

^[3] Harold R. Bowen, Social Responsibilities of the Businessman (1953). 

^[4] John Kenneth Galbraith, The New Industrial State (1967). 

^[5] Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. TIMES MAG. (Sept. 13, 1970). 

^[6] R. Edward Freeman, Strategic Management: A Stakeholder Approach (1984). 

^[7] Martin Lipton, The New Paradigm A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, available at https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.25960.16.pdf [hereinafter, The New Paradigm]. 

^[8] Statement on Corporate Purpose, Bus. Roundtable (August 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans (“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country”). 

^[9] Limited liability was added only eleven years later, in 1855. 

^[10] Nicholas Murray Butler, “Politics and Economics,” Address to the 143rd Annual Banquet of the Chamber of Commerce of the State of New York (November 1911), available at https://babel.hathitrust.org/cgi/pt?id=coo.3192409310566 0&view=1up&seq=59. 

^[11] Dodge v. Woolsey, 59 U.S. 331, 339, 341 (1855) (emphasis added). 

^[12] Leo Strine et al., Loyalty’s Core Demand, 98 Geo. L. J. 629, 641-643 (2009). 

^[13] Charles Dickens, A Christmas Carol, at Stave I (1843). 

^[14] Taunton v. Royal Ins. Co. (1864) 71 Eng. Rep. 413. 

^[15] Taunton v. Royal Ins. Co. (1864) 71 Eng. Rep. 413, 415. 

^[16] Id. 

^[17] Hampson v. Price’s Patent Candle Co. [1876] 34 LT 711. 

^[18] Hampson v. Price’s Patent Candle Co. [1876] 34 LT 711, 712. 

^[19] Hutton v. W. Cork Ry. Co. [1883] 23 Ch D 654. 

^[20] Hutton v. W. Cork Ry. Co. [1883] 23 Ch D 654, 672–73 (emphasis added) (footnote omitted). 

^[21] Frederick Hsu Living Tr. v. ODN Holding Corp., No. 12108, 2017 WL 1437308 at *17 (Del. Ch. Apr. 25, 2017) (omission in original, citations and internal quotation marks omitted); see also Unocal Corp. v. Mesa Petrol. Co., 493 A.2d 946. 955 (Del. 1985) (referring to “the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation’s stockholders”); Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (stating, “Although such considerations [regarding non-shareholder constituencies] may be permissible, there are fundamental limitations upon that prerogative. A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”). In a minor academic scandal, some law professors who repeat in their academic and popular writings that Delaware law is unclear or unsettled in this regard and might actually follow stakeholder rather than the shareholder theory. At best, this is self-deluded wishful thinking. See Robert T. Miller, Delaware Law Requires Directors to Manage the Corporation for the Benefit of its Stockholders and the Absurdity of Denying It, 48 J. Corp. L. 32 (2023). 

^[22] Product Supply Chain Sustainability, Walmart, Inc. (May 14, 2025), https://corporate.walmart.com/purpose/esgreport/environmental/product-supply-chain-sustainability. 

^[23] Gary S. Becker, Do Corporations Have a Social Responsibility Beyond Shareholder Value? Becker-Posner Blog (July 24, 2005), https://www.becker-posner-blog.com/2005/07/ do-corporations-have-a-social-responsibility-beyond-stockholder-value-becker.html. 

^[24] Henry Hansmann and Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439, 441 (2001). As might be suggested by their title, the authors were writing before the rise (and the more recent fall) of the ESG movement and its concomitant impetus to stakeholder theory. Their basic economic points remain as sound today as when they made them twenty-five years ago. 

^[25] Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965). 

^[26] 15 Pa. Code. 515(a)(1). 

^[27] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) 

^[28] Committee on Corporate Laws, American Bar Association, Other Constituencies Statutes: Potential for Confusion, 45 Bus. Law. 2253, 2262 (1990). 

^[29] Committee on Corporate Laws, American Bar Association, Other Constituencies Statutes: Potential for Confusion, 45 Bus. Law. 2253, 2266 (1990). 

^[30] James J. Hanks, Jr., Non-Stockholder Constituency Statutes: An Idea Whose Time Should Never Have Come, 3 Insights 20 (Dec. 1989). 

^[31] Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, For Whom Corporate Leaders Bargain, 94 So. Cal. L. Rev. 1467 (2021). 

^[32] Id. at 1467. For more evidence on similar issues, see Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, Stakeholder Capitalism in the Time of COVID, 40 Yale J. Reg. 60 (2023). 

^[33] To be clear, explaining what a sentence means and determining whether it is true are different things. When I say, “The number of blades of grass in Harvard Yard on Commencement Day in 1903 was even,” it is perfectly clear what that sentence means, even though determining whether it is true or false may be beyond human abilities. Similarly, when I say, “Investing in new equipment has positive net present value,” the meaning is clear (at least if we use the concepts of financial economics), but knowing whether the sentence is true or false may depend on knowing empirical matters difficult or impossible to ascertain in practice. Meaningfulness is one thing; our ability to know whether a meaningful assertion is true or false is another. 

^[34] This is a classic stars-and-bars problem: for n1 + … + ni = S with each n being a non-negative integer, the number of possible solutions is given by S+i-1!S!i-1!. With i = 10 and S =1,000,000, there are about 2.75×1048 different ways of dividing the million dollar among the ten recipients. 

^[35] E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1156 (1932). 

^[36] This is Harold R. Bowen, an American academic and sometime president of the University of Iowa, not to be confused with Lord Bowen, the English judge whose opinion in Hutton v. W. Cork Ry. Co. [1883] 23 Ch D 654, was discussed above. 

^[37] Harold R. Bowen, Social Responsibilities of the Businessman (1953). 

^[38] Id. at 8-12. 

^[39] First Lecture, at 1, Henry G. Manne & Henry C. Wallich, Rational Debate: The Modern Corporation and Social Responsibility 1 (1972). 

^[40] R. Edward Freeman, Strategic Management: A Stakeholder Approach 46 (1984). 

^[41] Id. at 52. 

^[42] Committee on Corporate Laws, American Bar Association, Other Constituencies Statutes: Potential for Confusion, 45 Bus. Law. 2253, 2261 (1990). 

^[43] Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247 (1999). 

^[44] Id. at 288-89. 

^[45] Id. at 305-06. 

^[46] R. Edward Freeman, A Stakeholder Theory of the Modern Corporation, at 44, in T. Donaldson, et al., eds., Ethical Issues in Business (2002). 

^[47] Martin Lipton, The New Paradigm A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, available at https://www.wlrk.com/ webdocs/wlrknew/AttorneyPubs/WLRK.25960.16.pdf at 8. 

^[48] Business Roundtable, Statement on the Purpose of a Corporation (2019) (emphasis added). 

^[49] British Academy, Principles for Purposeful Business 8 (2019). 

^[50] See generally, Colin Mayer, Prosperity 2018. 

^[51] Colin Mayer, What is Wrong with Corporate Law? The Purpose of Law and the Law of Purpose? European Corporate Governance Institute – Law Working Paper No. 649/2022 (June 15, 2022). 

^[52] Id. 

^[53] Marcel Kahan and Edward Rock, Corporate Governance Welfarism, 15 J. Leg. Analysis 108, 112 (2023). 

^[54] More precisely, we compute the profitability index (net present value per dollar invested) of each alternative and select alternatives in the order of the profitability indices, beginning with the highest, until we run out of capital to invest. See Richard A. Brealey, Steward C. Myers & Alan J. Marcus, Fundamentals of Corporate Finance 248-250 (2012). 

^[55] I consider how this might be done, and the extremely serious problems any such program would encounter, in Robert T. Miller, Stakeholder Theory and the Challenge of Welfare Economics, 51 J. Corp. L. (forthcoming, 2026), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=5139793. 

^[56] See id. 

^[57] E.g., William M. Evan & R. Edward Freeman, A Stakeholder Theory of the Modern Corporation: Kantian Capitalism in Norman E. Bowie & Tom L. Beauchamp, eds., Ethical Theory and Business (2000). 

^[58] R. Edward Freeman, A Stakeholder Theory of the Modern Corporation, at 44, in T. Donaldson, et al., eds., Ethical Issues in Business (2002). 

^[59] Id. at 45 (ellipses in original). 

^[60] Id.

^[61] Id.

^[62] R. Edward Freeman et al., Stakeholder Theory: The State of the Art, at 12 (2010). 

^[63] Ludwig von Mises, The Anti-Capitalist Mentality (1956).

A common but erroneous belief about entrepreneurship is that success is a property of the entrepreneurial idea itself. Sometimes described as an “opportunity” that was out there waiting to be discovered and exploited, all it took for the successful entrepreneur was to come up with the “right” idea at the right time. Henry Ford’s success wasn’t just the automobile, but the idea of an affordable automobile. Walmart is the result of Sam Walton having the idea of a low-cost retail store. The success of Sears was based on Richard W. Sears’ idea of using a catalog combined with shipping instead of physical stores. Mark Zuckerberg’s Facebook was the idea of putting the common student photo directory online to make it searchable. And so on.

Many of my students majoring in entrepreneurship suffer from believing in this myth: that it is the idea that makes the business and their success. Consequently, they seek that one great idea that will make them rich and successful. And when they find it, they therefore want to keep their idea secret and not tell anyone about it before launching the business. 

In stark contrast, practically all experienced entrepreneurs have the opposite view. Instead of keeping their ideas secret, they test their ideas in practice as soon and as often as they can. What matters is how the rubber hits the road, not the idea of a tire, so to speak. Experienced entrepreneurs seek feedback, not secrecy. Investors similarly put their money not on those amazing ideas that will “automagically” bring in the big bucks, but because they invest in the the person’s or team’s ability to build a successful business.

Certainly, a good idea helps. But it is not what makes a successful business.

As students learn in class, and entrepreneurs are forced to learn in practice, it is a common and often necessary entrepreneurial practice to pivot. Pivoting means “fundamentally changing the strategic direction or core aspects of a business.” If it is so common for entrepreneurs to change course mid-journey, then the great idea they supposedly pursued must not have been a sure thing. Rather, the outcome was uncertain.

In fact, entrepreneurship is often defined as uncertainty-bearing for the simple reason that the value of what is created can only be known after the fact. The expectation of value created is what justifies the entrepreneur’s decisions — including the strategy and costs of production. Experienced entrepreneurs include intended customers early in the start-up process and seek feedback.

This also suggests the oft-repeated truth in entrepreneurs’ and investors’ circles: that execution is king. The idea, core to the entrepreneurship myth, is in reality of very little import if the execution — how the product is positioned, presented, and provided — is not good enough. Similarly, an old and not even exciting idea that is executed as a unique and better positioning, presentation, and provision can be golden. It is not the thing that is sold that matters, but the totality of the customer experience. Or, simply put, the value in the customer’s eyes.

In other words, it often makes sense to not be the first mover but rather learn from the mistakes made by previous attempts — and instead find a better and more valuable positioning. Just like Pfizer had the idea for, and even developed the first-generation, but failed the entrepreneurial endeavor to create Ozempic, the success stories above — Ford, Walton, Sears, and Zuckerberg — excelled in their execution. Neither one of them was first or discovered an original grand idea for entrepreneurship. But all of them took product or business ideas that already existed and made them significantly better. 

As these examples also show, the entrepreneurs not only built from what already existed but they also did not succeed with the idea as it was originally conceived. Instead, they responded to feedback, learned from the market, and repositioned their offering — the value proposition — to be of as great value as possible to the intended customers. They pivoted, recognized their mistakes and failures, and tried again — using what they had learned. 

The myth is therefore the very opposite of real entrepreneurship. It is not the idea that makes a business or even an innovation. The idea is not unimportant, but what matters first and foremost is to be of service to customers. Because they are the ones who decide the value of what the entrepreneur has created. 

Entrepreneurship is rooted in humility rather than power; it’s about being of service to others rather than attempting to shape the world according to one’s own views.

The sooner we realize this true nature of entrepreneurship, the better we can understand the driving forces of market economies and the nature of our prosperity.

The largest monthly decline came from motor fuel, which fell 9.6 percent in June. Other notable declines included movie and theater admissions, tobacco and smoking products, and purchase, subscription, and video rentals. The largest increases came from gardening and lawncare services, intracity transportation, personal care services, and fuels and utilities. Food away from home and food at home also rose, but not by enough to counteract the decline in gasoline-related costs.

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

Also on July 14, 2026, the US Bureau of Labor Statistics (BLS) released the June 2026 Consumer Price Index (CPI) data. Headline CPI fell 0.4 percent on a seasonally adjusted basis in June after rising 0.5 percent in May; this was the largest one-month decline since April 2020. Core CPI, which excludes food and energy, was unchanged in the month after increasing 0.2 percent in May.

June 2026 US CPI headline and core month-over-month (2016 – present)

Consumer prices in June were driven overwhelmingly by a reversal in energy costs. The energy index fell 5.7 percent after rising 3.9 percent in May, 3.8 percent in April, and 10.9 percent in March. Gasoline prices declined 9.7 percent on the month, both seasonally adjusted and before seasonal adjustment, making energy the largest contributor to the decline in the all-items CPI. Electricity fell 1.0 percent, while utility gas service rose 0.5 percent.

Food prices continued to rise, though moderately. The food index increased 0.2 percent in June, as did food at home and food away from home. Within groceries, meats, poultry, fish, and eggs rose 0.6 percent, with eggs up 4.3 percent. Dairy and related products increased 1.2 percent, cereals and bakery products rose 0.3 percent, and other food at home increased 0.5 percent. Offsetting those gains, nonalcoholic beverages fell 1.5 percent, helped by a 2.0 percent decline in coffee prices, while fruits and vegetables slipped 0.2 percent.

Core inflation softened notably. The index for all items less food and energy was unchanged in June, with several categories declining outright. Motor vehicle insurance fell 2.0 percent, communications declined 1.5 percent, apparel fell 0.6 percent, medical care slipped 0.1 percent, and used cars and trucks declined 0.2 percent. Shelter rose only 0.1 percent, its smallest monthly increase since January 2021. Rent of primary residence rose 0.1 percent, owners’ equivalent rent increased 0.2 percent, and lodging away from home fell 2.3 percent.

Over the twelve months ending in June 2026, headline CPI rose 3.5 percent, down from 4.2 percent in May. Core CPI increased 2.6 percent over the year, following a 2.9 percent annual increase in May.

June 2026 US CPI headline and core year-over-year (2016 – present)

From June 2025 to June 2026, food inflation remained moderate but persistent. Food at home rose 2.7 percent over the year, while food away from home increased 3.4 percent. Fruits and vegetables rose 5.3 percent, other food at home increased 2.4 percent, meats, poultry, fish, and eggs rose 2.6 percent, nonalcoholic beverages advanced 2.9 percent, and cereals and bakery products increased 2.4 percent. Dairy prices were nearly flat, rising only 0.4 percent over the year.

Energy remained the dominant annual inflation story despite June’s monthly pullback. The energy index increased 15.7 percent over the twelve months ending in June, with gasoline prices still up 26.7 percent from a year earlier. Electricity rose 4.0 percent and utility gas service increased 3.0 percent over the same period. Thus, while June brought meaningful short-term relief at the pump, energy costs remained substantially higher than a year earlier.

Core inflation was less dramatic but still broad enough to matter. Prices excluding food and energy rose 2.6 percent over the year. Shelter increased 3.3 percent, continuing to anchor underlying inflation, while medical care rose 2.0 percent, recreation increased 2.8 percent, and household furnishings and operations advanced 2.5 percent. Airline fares remained one of the most striking annual increases, rising 26.5 percent from June 2025, even as they eased modestly on the month.

The June CPI report provided the clearest evidence yet that the spring 2026 energy shock is beginning to reverse. After gasoline and other fuel costs drove inflation sharply higher in March through May, June brought falling gasoline prices, a lower headline CPI reading, and a decline in AIER’s EPI. For consumers, this was particularly significant because gasoline is among the most visible and psychologically influential prices they face. Even so, affordability remains strained as shelter, dining out, and many service-sector prices continue to rise, leaving June looking more like a pause in an energy-driven inflation surge than the end of the inflation problem.

The report also reshaped the Federal Reserve’s near-term outlook. Chair Kevin Warsh has emphasized that restoring price stability remains the Fed’s overriding priority, but the softer June inflation data reduce the urgency for another rate hike while allowing policymakers to maintain a hawkish tone. Markets responded by substantially lowering the probability of a near-term increase in interest rates, suggesting the Fed can afford to wait for additional evidence from future inflation reports, labor-market conditions, and energy prices before deciding whether further tightening is warranted.

That patience, however, comes with risks. June’s improvement depended heavily on lower gasoline prices, leaving inflation vulnerable to renewed geopolitical disruptions, higher oil prices, tariffs, or continued AI-related investment pressures that could reignite cost increases. While the Fed cannot produce more oil or resolve supply shocks, it must remain alert to the possibility that temporary increases in energy costs become embedded in inflation expectations, wage demands, and business pricing decisions. The result is a delicate balancing act: avoiding an unnecessary policy response to what may prove to be a temporary supply shock while ensuring that inflation does not become entrenched once again.

Core inflation cooled as well. Excluding volatile food and energy prices, CPI was flat in June, down from a 0.2 percent increase in May. On a year-over-year basis, core inflation eased to 2.6 percent from 2.9 percent.

As in recent months, much of the headline story came down to energy, but this time in reverse. The energy index fell 5.7 percent in June, its largest monthly decline since April 2020, and was, according to the BLS, “the largest contributor to the monthly all items decrease, more than offsetting increases in other indexes including those for shelter and food.” Gasoline prices fell 9.7 percent over the month, though they remain up 26.7 percent over the past year. The broader energy index is still up 15.7 percent, a reminder of how far energy prices had climbed during the oil shock tied to the conflict involving Iran and the disruption to shipping through the Strait of Hormuz.

But the cooling was not confined to energy. Services excluding energy were flat in June, core goods prices fell 0.1 percent, and shelter rose just 0.1 percent, its smallest monthly increase since January 2021. That breadth distinguishes the June report from earlier months, when softer core readings often coexisted with persistent pressure in major service categories.

The recent trend confirms the price moderation. Over the three months through June, headline CPI rose at a 2.8 percent annualized rate, well below its 3.5 percent year-over-year pace. Core CPI rose at a 2.4 percent annualized rate over the same period, also below its 2.6 percent year-over-year rate. For the first time in months, recent momentum in both headline and core inflation is running cooler than the annual figures, not hotter.

Although the Federal Reserve officially targets the personal consumption expenditures price index, CPI data remain a timely and relevant gauge for policymakers. The June report clearly moved expectations. At the time of writing, the CME Group’s FedWatch tool put the probability that the Fed would raise rates at its meeting later this month at roughly 16 percent, down from 42 percent before the release. A hold is now the clear baseline expectation, pushing the debate over further tightening into the fall.

The labor market has lost some momentum as well. Employers added just 57,000 jobs in June, and the BLS revised April and May payrolls down by a combined 74,000. The unemployment rate fell slightly to 4.2 percent, average hourly earnings rose 0.3 percent on the month and 3.5 percent over the past year, and labor-force participation slipped to 61.5 percent.

With workforce growth held down by an aging population and reduced immigration, even soft payroll gains need not signal a weakening economy. Indeed, June’s increase was roughly in line with the average over the prior year. But the combination of slower hiring and cooler prices marks a clear change from where things stood just a few months ago.

The case for tightening rested on inflation that was drifting higher and on the risk that the energy shock would spread to broader prices. That case has weakened. The June data offer the first meaningful sign that price pressures are abating rather than broadening.

Still, one month does not make a trend, and the deeper question is whether demand is moderating. A one-time oil shock changes relative prices. By itself, it cannot sustain inflation year after year; that requires nominal spending to continue outpacing the economy’s capacity to produce. The advance estimate of second-quarter GDP, due at the end of the month, will provide the first comprehensive reading on whether nominal spending has begun to slow. If it has, June’s report will look like the start of genuine disinflation. If it does not, the month may prove an energy-driven reprieve rather than a turning point.

For now, the Fed has little reason to change rates in July. The case for an increase, which markets took seriously only weeks ago, has faded. But inflation remains above target, and the labor market, though softer, is not weak enough to demand a cut.

The current schedule and financing cannot survive under existing law. That is the setting for Romina Boccia and Ivane Nachkebia’s Reimagining Social Security. Nearly a year after its release, the book is more relevant than ever.

The authors argue that Social Security should return to the program’s original purpose: old-age poverty protection. As President Roosevelt warned, “We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life.” Yet the program has become both a redistribution and a public pension promise for nearly everyone, making it politically untouchable.

The book draws lessons from Canada, Germany, New Zealand, and Sweden. Its reform menu includes a higher retirement age, a flatter benefit, automatic balancing mechanisms, and expanded private saving. Cato’s reform hub frames the problem clearly: promises exceed dedicated financing, and delay makes the eventual adjustment larger.

The book’s strongest point is that solvency and purpose are separate questions. Congress could close the gap through higher payroll taxes, benefit cuts, borrowing, heavier taxation of benefits, a higher retirement age, or some combination. None of those prescriptions answers what Social Security is for. If the goal is old-age poverty prevention, a flat benefit makes sense. If the goal is an earnings-related federal pension, higher taxes become harder to avoid.

Recent work sharpens the case. Boccia and Krit Chanwong argue that the low fertility assumptions used by the Trustees report raise the long-term shortfall from roughly $33 trillion to $35 trillion or $36 trillion. The warning is clear: pay-as-you-go systems are hostage to demography.

The trust-fund question receives similar care both in the book and on Cato’s visual feature on Social Security’s financial crisis, which rightly rejects the idea that the trust fund is a pile of saved payroll-tax contributions. Social Security is mostly pay-as-you-go. When costs exceed non-interest income, redeeming trust-fund securities requires Treasury financing. The bonds are legal obligations; the issue is who pays.

A flat benefit would bring Old-Age Insurance back to its original promise of “some measure of protection” against end-of-life poverty while making redistribution more explicit. Low earners would be protected. Middle- and high-income workers would rely more on private saving and receive less than scheduled benefits.

A higher retirement age has similar appeal and danger. Longer lifespans support later eligibility in the aggregate, but averages conceal workers with shorter life expectancy, manual jobs, disability risk, or weak late-career attachment. This is the greatest challenge for reformers.

Without a sustainable transition, political backlash can unravel any reform. The 2007 AIER Bulletin “What You Need to Know About Social Security” warned that current retirees and near-retirees have planned around specific benefits. Reducing them, especially for middle and high earners, will feel like a rug pull deserving of political punishment. Reformers should, therefore, keep cohort politics at the center of any proposal.

I hope the next phase of this project tackles cohort differentiation. Simply put, this involves separating citizens by age group and applying different changes to each cohort. Retirees and near-retirees could remain in the current system, while COLA adjustments, transitions to flat benefits, and switches to private savings accounts phased in for succeeding generations. Here I am a bit more hopeful than Boccia that Trump Accounts and Trump IRAs can help create the universal savings account off-ramps to Social Security’s crisis.

The book’s savings account proposal is attractive for younger workers, myself included, because it promises ownership, portability, and flexibility. Yet voluntary accounts may suffer from low take-up, while automatic enrollment moves toward compulsion. That tension is unavoidable. Retirement policy operates amid inertia, liquidity constraints, and imperfect foresight.

Reimagining Social Security asks whether Social Security should remain an expansive public pension promise or become a clear floor against old-age poverty. The latest Trustees Report makes that question urgent. Boccia and Nachkebia’s answer is a smaller, more candid system: protect seniors at the bottom, honor reliance interests among current retirees, and stop pretending payroll taxes can finance promises demographic change has already undermined.

As Social Security rapidly approaches the fiscal cliff, Reimagining serves as an important starting point for a national conversation about the program’s future — one that can no longer be deferred.

How can one sign a contract before birth? That question can’t be answered by President Bill Clinton, who said “we mustn’t break the solemn compact between generations,” in a 1998 address on Social Security. 

Such a speech constructs Social Security as a contractual mandate in need of protection rather than an insurance and redistribution program. Grand national “contracts” should face significant scrutiny, as they borrow the moral force of a contract without the requirements that define one.

No national contract language appeared in the Social Security Act when Franklin D. Roosevelt signed it in 1935. The argument was about insurance, protection against unemployment, and poverty among the elderly. The original New Deal case for Social Security was that the federal government had a responsibility to create a system of economic security against the hazards of modern life. Contrast that with the contract framing of Social Security. Social Security becomes a question of sacred duty and obligation, not policy. Altering the program, a necessity given the debt, would seem to be a generational betrayal.

But for contracts to be legally enforceable, at a minimum, both parties must be capable of consent. 

Legally, the four requirements of a contract are offer, consideration, acceptance, and an intention to create legal relations. A person not yet born cannot be offered a contract, consider it in any manner or ask for compensation, accept it in any way, or intend legal relations. By any measure, Social Security cannot be a legal contract.

True, some contracts allow you to consent in ways other than signature. John Locke’s ideas of Social Contract Theory hold that paying taxes and participating in the democratic process constitute a valid contract with the government. Even this type of contract, however, needs clear parties and justification for the consent. Social Security cannot meet this most basic criterion, as the Social Security contract relies on the participant before they are alive. To highlight this absurdity: I was born in 2005, and Social Security relied on my payments to beneficiaries long before I existed. I supposedly entered a contract decades before I, in any meaningful sense, existed. This is not a minor technicality but a central contradiction. A contract is, at root, an agreement between two parties; Social Security is neither an agreement nor between two parties.

The defender of Social Security may object that this is too literal. “Generational contract” is a mere metaphor. Such a notion creates a dilemma: if the phrase is only metaphorical, Social Security cannot carry the moral duty of an actual contract. Following that claim, younger workers are not morally bound by the choices of prior political actors. But Clinton clearly intended us to be so bound. If the phrase is meant to carry moral force and contractual obligations, then we are entitled to ask the basic questions: Who agreed? When did they agree? What were the terms? And how could people who were not consulted be said to have consented?

The metaphor survives by morphing into a form that is most convenient. When challenged, it is a metaphor. When used politically, it is an obligation — specifically (at least) 30 trillion in unfunded obligations over the next 75 years.

Once demographic realities are taken into account, relying on future generations of unborn contributors becomes less a matter of social contract than one of program solvency. Social Security is largely financed on a pay-as-you-go basis. Taxes from current workers fund benefits for current retirees. This system can only work if the number of workers is sufficient to pay for the number of retirees. That is not a timeless contract but gambling the future on unknown, and unknowable, demographic trends.

If fertility falls, immigration slows, the worker-to-beneficiary ratio declines, wage growth disappoints, or longevity increases faster than expected, the supposed contract becomes harder to honor. Retirees are told after a lifetime of payroll taxes that they will have secure funding, but the actual financing of that compact depends on workers yet unborn — workers who may never exist in sufficient numbers.

If the number of workers is insufficient, few remedies are available, and each has significant drawbacks. In short, options are limited to cutting benefits, raising taxes, or taking on still more national debt. All violate some of the system’s promises. Contracts don’t work under these conditions. A contract does not normally depend on a party that never consented, may not exist in sufficient numbers, and can have its obligations rewritten by future legislation. Yet this is exactly the structure of Social Security’s “generational bargain.”

To be clear, this is not a critique of Social Security for failing to predict the future perfectly. No government program can foresee every war, recession, pandemic, fertility decline, or demographic shift. The fault is not that Social Security lacks omniscience. The fault is that the pay-as-you-go system needs omniscience to function. Every time history turns, benefits and taxes need to be rewritten. Policymakers need to know the demographics of the far-off future to ensure the budget remains balanced. While year-to-year Social Security can survive without knowing the future, it is impossible in the long term to avoid repeated tax increases, benefit reductions, or new borrowing. All allow policymakers to retroactively alter the deal, while conscripted participants can only pray it isn’t altered further.

Social Security’s defenders should say what they mean and mean what they say. If the program is redistributive, defend the program as redistribution. If it is an anti-poverty policy, defend it as such. If it is forced retirement saving, defend forced saving. If it is social insurance, defend social insurance. Each of those claims may have merit, but it is in no shape or form a contract. 

It is a great disservice to the American people that a program as massive as Social Security, a program that takes 6.2 percent (often twice as much) of every paycheck, is so poorly argued for, and its rationale is murky and drifting. 

Justice requires that a program of this magnitude have clearly articulated goals and functions. Unfortunately, Social Security does not. A contract requires intent and consent. Unfortunately, Social Security mocks them. Even taxation requires the consent of the governed, and representation of the taxed, to distinguish itself from tyranny, extortion, and abuse. Unfortunately, Social Security defies that standard.

That particular phrasing may be fictional, but it is not hard to imagine a young high school teacher, fresh out of college in the era of radical politics, delivering such a verdict to her teenage charges in the mid-1970s. And such lessons have only become more common over time. The left-wing contempt for our founding values has, by this point, acquired a long pedigree of its own, from Howard Zinn’s A People’s History of the United States (1980) to James Loewen’s Lies My Teacher Told Me (1995) and beyond.  

It is often said that any work of history reveals as much about the time in which it is written as it does the period on which it is ostensibly focused. While that is true of historical works in general, it seems virtually guaranteed to be true of a new book whose topic is the semiquincentennial of the signing of the Declaration of Independence. 

After 250 years of conflict and compromise, the Declaration is still considered essential US political theory and the starting point for arguments about which sort of country we have, and which sort we should have. Richard Reinsch’s new edited collection of essays — The Civitas Collection 250 — certainly fits into that tradition.

A student of US history approaching debates over the American Founding for the first time might not see this immediately. Many of the essayists spend most of their time in the eighteenth century, or before. The writings of Thomas Jefferson, John Adams, and John Dickinson get plenty of attention, as do familiar names like John Locke, Thomas Hobbes, and Montesquieu, and famous precedent documents like the Declaration of Right (1689), Petition of Right (1628), and Magna Carta (1215). But first impressions can be deceiving. 

Is Kody Cooper’s essay on the sources of liberty in the Declaration of Independence, for example, just about the development of law and philosophy prior to the American founding? He certainly covers writers ranging from Cicero and Tacitus to Richard Hooker and Locke, but he also moves forward in time to contrast the founding principles of the Declaration to much later interpreters. Arguing for a universalist view of the rights proclaimed in 1776, Cooper writes “Contrary to exclusive interpretations advanced by later jurists like Justice Roger Taney and his successors among the critical race theorists, the word ‘men’ did not mean merely white men.”  

In the blink of an eye, the discussion zoomed past the ancient philosophers and early modern legalists to The 1619 Project and Ibram X. Kendi. The contributors to The Civitas Collection are all serious scholars with much to say about the founding era, but it is also clear they have contemporary battles to wage with their interpretation of what our founding documents really say. With the Declaration functioning, in the famous words of the late historian Pauline Maier as “American scripture,” it seems inevitable that most combatants in US politics will want to claim the document’s mantle for their own preferred ideological strain. 

Some of these conflicts are longstanding and easily recognizable ones, between political theorists of the right and the left. Cynicism about the motives and beliefs of the founding generation, for example, is not new. 

Anti-hagiographies of the Revolutionary generation are so common they’ve inspired their own subgenre of anti-anti-founding fathers publishing, including books like Thomas West’s Vindicating the Founders (1997), Larry Schweikart and Michael Allen’s A Patriot’s History of the United States (2004), and Brion McClanahan’s The Politically Incorrect Guide to the Founding Fathers (2009). 

Those left-versus-right debates continue to be timely and there’s plenty of scholarship in the present volume to illuminate them further. But perhaps more interesting are the fights, more often flying under the radar, that are happening within the center-right segment of the political spectrum. Not between conservatives and Marxists, but between nationalists, libertarians, classical liberals, new whigs, and whatever else the non-leftists of America are calling themselves these days.     

Adam Lebowitz, for example, laments early in his essay that a “broadly libertarian reading [of the Declaration] has hardened into something like conventional wisdom.” Rather than being fearful of executive authority and a strong government because of the negative example of King George III, Lebowitz argues that our founders thought of the Declaration as “a warrant for a stronger, more energetic government, grounded in democratic sovereignty and endowed with plenary powers.”  

The argument that the spirit of the Declaration was consistent with a strong executive and a federal government of essentially unbounded authority obviously has implications for how the powers of the presidency are practiced and circumscribed in the age of Donald Trump. High-profile debates over immigration and deportation, National Guard deployments, and the bombing of Iran are directly relevant to whether our nation’s founders are perceived to have been wary and concerned about dictatorial executive power or in favor of its wide exercise.  

Even more pointed is the contribution of former deputy attorney general John Yoo, who writes, “We should not mistake…the colonists’ frontal attack on tyranny for a rejection of the idea of executive power,” stating plainly that “the Declaration of Independence itself is not a rejection of executive power.” Yoo documents the history of the Articles of Confederation and the rapidly evolving state constitutions of the 1780s, which initially favored a very weak (often plural) executive, but were quickly reformed to establish offices of more effective leadership. Yoo’s previous scholarship and policy advocacy for a maximalist view of the president’s war powers during the George W. Bush administration are clearly relevant here.    

Beyond the specific powers of the federal government — the kind that can be parsed in a decision of the Supreme Court, for example — contributors also take on the wider cultural understanding of the Declaration. Wilfred McClay, for example, considers the contemporary divide “between creed and culture.” He asks whether being an American is defined more by embracing the universal propositions of the Declaration’s famous second paragraph (about all men being created equal) or whether our Americanness has as much, or more, to do with the unique heritage of our geographical homeland.   

This question could, of course, not be more timely. One of the hottest debates in the second Trump administration has been over the birthright citizenship doctrine of the Fourteenth Amendment, and whether it is just and reasonable to gatekeep US citizenship based on racial, religious, ethnic, or other criteria. Are we all equal as Americans because of the doctrine of the Declaration, or are some Americans with longer North American lineages, so-called “Heritage Americans,” entitled to more deference and privileges? And if not formal legal privileges, some ask, are they at least able to credibly claim to be “more American” than someone who took the oath of citizenship yesterday?  

Contributors to The Civitas Collection 250 also take on that other great cause of the day: tariffs and trade. Samuel Gregg, in particular, lays out how the American Revolution was an anti-mercantilist one, with much of the fervor of the patriot cause generated by infringements on the colonists’ commercial relationships, not just the rights and relationships that are usually considered to have the most sublime claim to moral seriousness.  

Many popular revolts against alleged tyranny, both before and after 1776, centered on things like religious conscience and freedom of expression. Certainly, many of the violent and bloody conflicts in the West between the time of the Protestant Reformation and the Treaty of Westphalia involved both. Colonists of British North America were relatively short on complaints about burning churches, executions for heresy, smashed printing presses, and tarred-and-feathered pamphleteers. They did, however, complain most vociferously about the King “cutting off our Trade with all parts of the world” and being subjected to the British East India Company’s crown-granted monopoly on tea and other commodities.

As with the other questions about contemporary public policy, the attitude of the founders toward the freedom to trade is directly relevant to what the president and Congress are doing today. The late eighteenth century was a significantly less globally integrated place, with much of British North America consisting of smallholding farmers who rarely traded with anyone more than a day’s journey from home. If the freedom to buy and sell goods internationally was important enough to help spark the American Revolution back then, how much more important should we consider it to be in the twenty-first century of the Internet, containerized shipping, and FedEx? 

American history nerds will love poring over the detailed references in the book and noticing references to events and documents that are often forgotten today, like the Continental Congress’ Olive Branch Petition (1775) or the infamous Cornerstone Speech (1861) by Confederate Vice President Alexander Stephens. 

Armchair political theorists will likewise thrill to the supporting roles played by a long list of distinguished thinkers, both prominent and obscure. The academic tone may be a little intimidating for regular Americans just hoping for some Independence Day fireworks, but amateur historians and bookish patriots everywhere will no doubt love the collection Reinsch has assembled.  

This is a familiar pattern, notes Jack Nicastro:

The United Nations estimates that the European continent accounted for approximately 175,000 heat-related deaths annually between 2000 and 2019. The Environmental Protection Agency, meanwhile, calculates that about 1,300 deaths per year in the US are due to extreme heat. (This translates to four heat-related deaths per million annually in the US and 235 heat-related deaths per million annually across Europe.)

Europe and the US differ in demographics, urban density, reporting methods, and climate patterns. Even so, the death rate due to heat in Europe is 59 times higher than in the US.

In the United Kingdom, only about five percent of homes have air conditioning. In the United States, roughly 93 percent do.

Research identifies 72°F and 45 percent humidity as optimal for maximizing office and mental productivity.

With sweltering temperatures once again gripping much of the world, it is worth appreciating air conditioning — the quiet invention that transforms dangerous heat into manageable discomfort, shields millions from heat-related suffering and death, boosts productivity, and makes once-hostile climates livable. It is a powerful reminder that wealth, innovation, and human ingenuity enable societies to adapt to nature’s extremes and protect human life.

To understand why the US heat death rate is 59 times lower than that of Europe, it helps to begin with a young engineer named Willis Carrier.

The Father of Air Conditioning

Willis H. Carrier was born outside of Buffalo, New York on November 26, 1876, the same day inventor Alexander Graham Bell successfully demonstrated his large box telephone between Boston and Salem, Massachusetts. Carrier was an only child and attended a one-room schoolhouse. When he was nine years old he struggled to grasp the concept of fractions. His mother helped him master the idea using a pot of apples and slicing them into portions. Carrier remembered this event fondly as “the most important thing that ever happened to me.”

Carrier was awarded a full scholarship to attend Cornell University. He majored in engineering, earning a Master’s degree in 1901. After graduation, Carrier accepted a job at the Buffalo Forge Company for $10 a week.

The Sackett & Wilhelms printing plant in Brooklyn, New York was losing money because the sweltering, humid summers caused sheets of paper to absorb moisture from the air. The paper would expand and warp, throwing off the alignment of colored inks on the printed page and ruining entire print runs. They asked the Buffalo Forge Company for help. Carrier was assigned to solve the problem.

He was not trying to cool people. He was trying to save knowledge.

Air conditioning began not as a luxury, but as a technology of information, productivity, and adaptation — a machine that transformed oppressive heat from an economic barrier into a manageable inconvenience.

Carrier’s breakthrough system, in July of 1902, controlled both temperature and humidity, stabilizing the paper and rescuing the precision of mass communication.

Carrier applied for a patent on his invention, an “Apparatus for Treating Air,” which became patent No. 808897 and was issued on January 2, 1906.

On December 3, 1911, Carrier presented what is perhaps the most significant document ever prepared on air conditioning – Rational Psychrometric Formulae – at the annual meeting of the American Society of Mechanical Engineers. It became known as the Magna Carta of Psychrometrics and tied together the concepts of relative humidity, absolute humidity, and dew-point temperature, thus making it possible to design air-conditioning systems to precisely fit the requirements at hand.

In 1915 Carrier and six other engineers formed the Carrier Engineering Corporation using their personal savings of $32,600. Carrier Global Corporation (NYSE: CARR), the parent company of the Carrier HVAC and refrigeration business, has a current market capitalization of approximately $56 billion. This valuation makes it one of the largest climate and energy solutions providers in the world.

“With his new company,” Alexander Hammond notes, Carrier began to expand the use of air conditioning units by supplying hotels, department stores, movie theaters and private homes. His units were even installed in the White House, the US Congress and Madison Square Garden.”

Another overlooked legacy of Carrier’s invention is the birth of the summer blockbuster. Before air conditioning, movie theaters dreaded the hot months — few people wanted to sit in a crowded, sweltering auditorium. That changed in 1925 when the Rivoli Theatre in Times Square installed one of Carrier’s new cooling systems. Crowds flocked in, many as eager for the cool air as for the feature presentation. Almost overnight, summer transformed from Hollywood’s off-season into its most profitable season. Air conditioning didn’t just cool theaters — it reshaped the economics of entertainment and helped create one of America’s most enduring cultural traditions.

When New York City organizers launched the 1939 World’s Fair under the motto “Building the World of Tomorrow,” they sought technologies that would advance human progress and improve everyday life. Few embodied that vision better than modern air conditioning. During the Fair’s first 100 days, nearly 1.3 million visitors toured the striking “Carrier Igloo of Tomorrow.”

Inside, guests learned how air conditioning worked, explored a modern refrigerated food store, and experienced Carrier’s latest self-contained cooling systems — getting a glimpse of a future that would soon make homes, offices, and entire cities more comfortable, productive, and livable.

In 1985, Willis H. Carrier was inducted into the National Inventors Hall of Fame, and in 1998, Time magazine recognized him as one of the 100 most influential people of the 20th century.

By conquering heat and humidity with knowledge, Carrier enlarged the realm of human possibility. His invention transformed sweltering regions into thriving economies, extended human productivity, and brought comfort and prosperity to billions around the world.

One of the great triumphs of entrepreneurial capitalism is how quickly air conditioning traveled the familiar path from luxury to necessity. What began as an expensive convenience for a tiny elite became, within a generation, affordable to ordinary families. The market did not merely invent comfort — it democratized it.

In their report Time Well Spent: The Declining Real Cost of Living in America, Michael Cox and Richard Alm found that a 5,500-BTU air-conditioning unit cost about $350 in 1952. At the time, entry-level workers earned roughly 83 cents an hour, putting the time price at 422 hours.

Today, Walmart sells a far more efficient 6,000 BTU air-conditioning unit (with a remote control) for only $115. The current hourly wage for limited-service restaurant workers is around $19 an hour, putting the time price at six hours.

The time price has decreased by 98.6 percent. For the time it took US workers to earn the money to buy one unit in 1952, they get 70 today.

If air conditioning saves lives, why don’t more Europeans have it?

Europe’s electricity prices are typically much higher than the US, driven by higher taxes, network costs, renewable energy mandates, and energy import dependence. Customers in the US pay 17 to 19 cents per kilowatt-hour (kWh) compared to 25 to 32 cents in Europe. This means Europeans pay roughly 47 to 68 percent more per kWh than US customers.

Americans are also much richer than Europeans. According to World Bank data, American gross domestic product (GDP) per capita was $84,809 in 2024, while the European Union’s was 25 percent lower at $63,585. That $21,224 difference could buy a lot of comfortable cooling.

The European Union also prioritizes environmental targets over human comfort by imposing strict regulations for heating and cooling, making these amenities much more costly. The commission encourages citizens to use fans instead of air conditioning. Imagine the government doing that in Phoenix and Atlanta in July. Italy, Greece, and Spain even announced temperature limits in public spaces during the 2022 heatwave in an effort to meet these environmental objectives. Spain limited air conditioners to be set no lower than 80°F. No wonder European productivity is 38 percent lower than the US.

Historic preservation laws and strict landlord rules frequently ban exterior window units to maintain aesthetic uniformity.

While air conditioning ownership increases households’ electricity consumption, it may be a small price to pay for comfort and avoiding death.

The problem is not the climate but the policy mindset. Too many European regulators approach energy and technology through the ideological lens of scarcity rather than creative innovation and human flourishing. One reason such policies persist is that the officials who design them are largely insulated from the consequences of their decisions and rarely experience their costs directly. Instead, those costs are borne by millions of ordinary citizens.

Air conditioning is not ultimately a story about cooling. It is a story about knowledge. It transformed oppressive heat into comfort, inhospitable regions into thriving communities, and summer misery into year-round productivity. Coal, copper, and electricity become valuable only after humans discover how to harness them. The history of air conditioning is the history of knowledge triumphing over nature’s constraints.

The ultimate resource is neither energy nor matter. It is the infinite capacity of human beings to learn, create, and discover.

Much of modern technology came from a collective investment, with public institutions like the US Defense Advanced Research Projects Agency (DARPA) or the European Council for Nuclear Research (CERN), leading the way in the most high-risk capital-intensive phase. What would Google be without the DARPA-funded internet? What would Uber be without the US Navy-funded GPS? What would Apple be without the CIA-funded touch-screen technology and DARPA-funded voice assistant, Siri?

Thinkers like Mazzucato seem to view the state as a sort of partner in these businesses; after all, it’s only fair that a partner should get a cut of the profits and a say in their operations. 

“We need to develop a new governance structure, which starts with creating a new vocabulary,” she says. “For example, calling platform companies ‘tech giants’ implies they have invested in the technologies from which they are profiting, when it was really taxpayers who funded the key underlying technologies — from the Internet to GPS.”

This argument is particularly relevant to the case of AI, especially as both Donald Trump and Bernie Sanders have expressed support for partial government ownership of major AI companies. Mazzucato herself suggests that government officials ought “to actively steer [AI’s] development.”

At first glance, the claim that governments are entitled to help control AI companies because they helped create AI sounds plausible. If you were part of building something, don’t you deserve a share of it?

The case for government control of tech companies is far more complicated than it appears, however. 

First, note that people are compelled to fund government research. To see why this makes a moral difference, consider a case inspired by the philosopher Michael Huemer. 

Suppose you’re an entrepreneur in the beverage industry trying to create a new soda. One day, a rogue food scientist bursts into your office and demands money for his flavor research. He doesn’t ask politely or offer you a contract; he points a gun at you and takes your money. Years later, he develops a delicious new synthetic flavor. You discover it, add it to your soda, and your company takes off, making you a multimillionaire.

Does the food scientist now own part of your company because you used his flavor? Of course not. There’s no doubt your business benefited from his research. Without the flavor he created, your soda might never have existed. But the scientist has already been paid — and it’s worth remembering that he obtained that payment by force. The idea that he’s entitled to additional compensation because you successfully used his research is absurd. Contributing an input does not automatically confer ownership over everything built with that input. Likewise, the fact that government-funded research contributed to AI development does not automatically give the government ownership rights in AI companies.

In fact, the “government investment” argument fails even in a friendlier scenario that doesn’t involve coercion. Imagine that you voluntarily hire the food scientist to develop a new flavor. You agree to pay him $100,000 for his research, and he accepts. You then use the flavor he creates to launch a highly successful soda company.

Again, the food scientist does not own part of your company merely because he contributed to its success. He is entitled to whatever compensation the agreement specifies — nothing more and nothing less. If the contract grants him an equity stake, he has a claim to it. If it doesn’t, he doesn’t. That’s how market exchange generally works. Suppliers of inputs do not automatically acquire ownership of outputs. If the government wants to fund research in exchange for equity, it can try to negotiate those terms in advance. But that’s very different from claiming, after the fact, that successful companies partly belong to the government because some of the knowledge they relied upon emerged from government-funded research.

If merely contributing to a business entitled someone to partial ownership, every business would face endless competing claims from the countless people who helped make it possible. Imagine your local barista claiming partial ownership of the house you built ten years ago because the coffee she sold you helped fuel its construction.

This matters because property rights determine who gets to make decisions about how resources are used. A workable system of property rights requires clear rules for identifying who controls an asset. Without such rules, individuals and firms could never know whether they were free to use, improve, or exchange a resource. In market economies, ownership is generally determined by voluntary agreement, not by the mere fact of having played some causal role in a project’s success. The food scientist is paid as agreed; he does not acquire an open-ended claim on everything his work makes possible. Likewise, even if government-funded research contributed to the development of AI, it does not follow that governments thereby acquire ownership rights over AI companies. Causal contribution may explain how something came into existence, but it is not enough to establish a right to control it.

California has long been a proving ground for where fortunes were spent as quickly as they were made. It is where private ambition often takes physical form in estates, gardens, and grand personal experiments which escape the boundaries of wealth itself, transforming over time to enrich civic life long after their creators are gone.

To illustrate this point, let’s consider the lives of a few remarkable women whose relationships with wealth were strikingly different, yet whose legacies ultimately became public in unexpected ways. Some inherited fortunes. Some accumulated wealth through relationships and social mobility. Others earned influence through ideas rather than vast riches. But in California, each left behind something larger than herself.

Consider Ganna Walska. She was born in Poland in 1887, and reinvented herself repeatedly throughout her life. She moved through elite circles in Europe and America as an opera singer, socialite, and cosmopolitan celebrity. Her wealth came largely through a series of marriages to extraordinarily rich men, including multimillionaire carpet tycoon Alexander Smith Cochran and industrial heir Harold Fowler McCormick. Critics often regarded her as flamboyant and indulgent, a woman better known for glamour than substance. Yet in Santa Barbara, Walska built something extraordinary.

What began as a private estate evolved into Lotusland, now one of the most celebrated botanical gardens in the United States. Walska purchased the property in 1941 and spent decades reshaping it according to her own tastes. She transformed lawns into dramatic cactus collections, sculptural gardens, and exotic landscapes unlike anything else in America. Lotusland made little sense in traditional economic terms, yet its cultural capital is now immense. Visitors from around the world wander its paths, generating tourism, education, and conservation benefits Walska likely never fully anticipated.

Now consider a stranger example in California of how a private indulgence can generate second-order benefits. That of Sarah Winchester, heir to the Winchester rifle fortune. Sarah Lockwood Pardee married William Wirt Winchester in 1862 and the family fortune grew as the company’s rifles became famous in the post–Civil War American West, eventually earning the nickname “the gun that won the West.”

But Sarah’s personal life was marked by profound tragedy. In 1866, Sarah gave birth to a daughter who died only a few weeks later. Then, in 1881, Sarah’s husband William died of tuberculosis. By her early forties, Sarah had lost her family but inherited a vast fortune.

Grief-stricken and increasingly reclusive, Winchester relocated to California and began construction on what became the Winchester Mystery House in San Jose. According to popular legend, spiritual advisors convinced her she was haunted by those killed by Winchester rifles and that continuous building would keep malevolent forces at bay.

For decades, construction continued almost without logic or restraint. The mansion grew into a labyrinth of staircases leading nowhere, doors opening into walls, oddly proportioned rooms, hidden passages, and architectural dead ends. To many contemporaries, the estate appeared little more than irrational excess and a waste of wealth.

Yet history has a curious habit of repurposing private eccentricity into public value. Today, the Winchester Mystery House is one of California’s most beloved tourist attractions. It is a site of fascination, storytelling, and local identity. What looked absurd in one generation became cultural curiosity in another.

And then there is Ayn Rand, who also settled in California but whose story offers a deliberate contrast. Unlike Walska and Winchester, Rand did not inherit a fortune or accumulate one through marriage. Born Alisa Rosenbaum in Russia in 1905, she fled Soviet collectivism for the United States, eventually becoming one of the twentieth century’s most influential defenders of capitalism and individual ambition. Rand’s intellectual work established her philosophy of Objectivism, celebrated builders and creators, and shaped generations of political and economic thought.

During the 1940s, Rand lived with her husband, Frank O’Connor, in the dramatic Von Sternberg House in Southern California. Designed by Richard Neutra for Hollywood director Josef von Sternberg, the house was one of California’s most architecturally significant private homes. Rand called it “unbelievably wonderful.” It was here that she wrote much of Atlas Shrugged, her most ambitious work, but her deep engagement with architecture and beauty had already found full expression in The Fountainhead, completed before she arrived in the San Fernando Valley. That novel, built around a fiercely idealistic architect who refuses to compromise his vision, suggests that Rand understood, perhaps better than most, what it meant to shape physical space as an act of individual will.

But here the pattern breaks with that of Lotusland or the Winchester house. Rand’s California residence did not survive to become a public place. The house was demolished in 1972, after Rand had sold it in 1951, and with it went one of Neutra’s most unusual works. In hindsight, many came to see the demolition as a major cultural loss, and some historians argue that it helped spur the formation of later preservation movements like the Los Angeles Conservancy.

Overall, the contrast between these women is striking. Ganna Walska accumulated wealth through relationships and left behind beauty. Sarah Winchester inherited wealth and left behind mystery. Ayn Rand earned wealth through ideas and intellectual property and left behind a legacy.

California, perhaps more than anywhere else, reminds us that private ambitions have strange afterlives, and this broader perspective matters particularly in an era when the rich are often portrayed only as symbols of inequality or excess. Criticism has its place, but premises matter. If we begin from the assumption that concentrated wealth produces nothing beyond private consumption, we miss the ways history often transforms private visions into public goods, long after the owners of the property pass on.

Undoubtedly, extraordinary wealth creates extraordinary discretion, and billionaires can shape private worlds according to their own tastes and desires. But what is beautiful, bizarre, or deeply personal is up to the owner until their time passes. Critics may dismiss such projects as extreme, and sometimes they are. Yet history often proves less interested in motives than outcomes.

Private estates, as depicted above, have morphed into public treasures, and this pattern stretches far beyond California. Pierre du Pont’s horticultural passions produced Longwood Gardens in Pennsylvania, still one of the finest display gardens in the world. Henry Huntington’s railroad fortune gave rise not only to a legendary art collection and rare manuscript library, but to the stunning botanical gardens at his San Marino estate. The Vanderbilt family’s Biltmore Estate evolved from conspicuous luxury into a regional economic engine. And Rockefeller wealth transformed Kykuit into a cultural institution.

Public debate often treats extraordinary wealth as either proof of virtue or evidence of vice. Reality is usually more nuanced and more surprising. A pleasure garden becomes a sanctuary. A strange mansion becomes folklore. A demolished house becomes the reason a city learns to protect what it has. The rich, it turns out, have a habit of leaving things behind that those who would redirect their wealth never thought to build and couldn’t even imagine.

One of them is Duke University professor Adrian Bejan.  He has taught mechanical engineering there since 1984 and has authored numerous scientific books with a particular emphasis on constructal law — the organizing principle by which natural phenomena and human-designed systems evolve in a way that facilitates the optimal flow of energy and material through them. He has just published a new book entitled Diversity Through Freedom. In it, he contrasts the beneficial results that stem from diversity in nature and among humans with the harmful results that we see when governments, universities, or other organizations impose their plans for diversity (or equality or other goals) through force. 

Bejan’s thinking was shaped by his youth in Romania, then ruled by a communist dictatorship. His family suffered under the regime because his parents were not of the favored “working class.” Bejan recounts how one night his father conspicuously burned many of his books to show that he wasn’t an enemy of the people — but as he explained to his son, it was the least valuable ones that were burned; the most important ones were saved and carefully hidden. In school, Bejan quickly figured out that much of what he was being taught was misleading, manipulative jargon “enrobed in clever metaphors that fool the young.” But he couldn’t be fooled. 

In studying natural phenomena, Bejan concluded, “What changes the world is the ability to act, to make change, without fear. The ability does not come top-down from voices in high places. The ability bubbles up from the bottom, in a few enterprising individuals, engineers, builders, entrepreneurs, and doers.” What we should strive for, therefore, is freedom for people to learn and try — equality of opportunity, not equality of result. He often points to sports to make his point. Teams find the best players naturally and they would not be nearly as successful if they were required to make their rosters conform to some imposed notion of “diversity.” 

The book abounds in scientific evidence for constructal law, with numerous photographs and charts. The message that will most resonate with AIER readers, I believe, is Bejan’s point that freedom optimizes outcomes while coercion leads to waste and conflict. His observations directly challenge many “progressive” beliefs about society.  

Consider, for example, Bejan’s views about the academic world. He writes, “Academia is in trouble when the structure becomes rigid, which happens when those in charge refuse to be questioned because they are an elite, deeply in bed with even more powerful elites such as the government.” Unfortunately, our academic leaders are now much less interested in new ideas than they are in securing as much grant money for their institutions as they can from government officials. “Big money,” Bejan writes, “is funneled to those who promise ‘energy’ materials and ‘live matter’, not to those who dare to speak of fuels, machines and microscopic configurations in motion. Notions from creators with dirty hands are beneath the ruling class of science, which is indoctrinated in reductionism, and marching obediently behind the invisible.” Thus, much of the money that we spend on research is squandered. 

Nowhere is the malign influence of academic groupthink more evident than in the quest for artificial diversity.  University officials have so thoroughly succumbed to this artificial ideology that it infects the curriculum, hiring decisions, and research projects. Merit counts for much less than the happenstance of a person’s background — whether he or she is from an “underrepresented” group. But Bejan doesn’t think that most of the leaders who bow down to this idea actually believe it. He writes, “In reality, colleges and universities have never been woke. Instead, it’s more apt to understand these institutions as oriented around the interests and worldviews of highly educated and relatively well-off suburban whites — often at the expense of the marginalized and disadvantaged in society — ‘social justice’ discourse notwithstanding.”  

Nevertheless, the “diversity” mania marches on.  Bejan finds it chillingly similar to other ideological movements in this century where people were rewarded or punished merely because of their class background. He writes, “From Latsis, Timoshenko, and Grossman, we see a project of destroying the individual and replacing him with a new ‘disadvantaged class’ that wins the class struggle by force….It was all an envious and murderous dream and its henchmen are still busy today.” 

In sum, nature yields a diversity of talent, which leads to progress and benefits for all. Capitalism works that way, as do competitive sports. Unfortunately, an elite few are not content to allow nature to take its course, demanding instead an artificial system they impose and control. Bejan hits the nail on the head when he states, “The class struggle is a design of unnatural diversity: only two classes, not the natural diversity of individuals with freedom to live, associate voluntarily, and move.” 

What does the future hold? Bejan is optimistic that today’s diversity mania will die out “like all the other unnatural prescriptions.” I wish I could share that optimism; the desire of some elitists to dictate how a society must function seems to be more firmly rooted in America than ever and their tools of domination are powerful. 

Executive Summary

The following paper examines unemployment insurance (UI) trust fund solvency before, during, and after the COVID-19 economic downturn of 2020. This paper examined UI trust fund solvency levels for all 50 states and the District of Columbia from 2014 through 2025. The central finding is that state UI systems did not fail or recover uniformly. States entered 2020 with different reserve positions, and those starting conditions shaped their ability to absorb the shock. States that exited federal pandemic UI programs earlier and more fully generally experienced stronger trust fund outcomes, while partial withdrawal, borrowing, and administrative weakness complicated recovery. The evidence is descriptive rather than causal, but it suggests that UI solvency depends on institutional design, fiscal discipline, and administrative execution.

Key Points

This paper finds the following:

• State unemployment insurance trust funds entered 2020 with different levels of preparedness. Those with the strongest solvency were better positioned to absorb the 2020 shock and recover afterward.
  
• The COVID-19 economic downturn produced a sharp solvency shock across the board. Some states were hit harder and took longer to recover, depending on their reserve levels, benefit payouts, and financing decisions.
  
• States that exited the federal pandemic unemployment programs earlier in 2021 generally maintained stronger trust funds and recovered faster than states that remained in the program until expiration.
  
• Timing mattered. States that exited earlier tended to see better outcomes, suggesting that prolonged participation may have weakened recovery.
  
• Arkansas, Indiana, Maryland, and Oklahoma attempted to exit the program early but were only partially successful because of legal or administrative obstacles. These cases suggest “partial withdrawal” did not produce the same results as full withdrawal.
  
• Debt and improper payments compounded existing problems. Although improper payments were not the primary drivers of solvency deterioration, states with higher improper payment rates tended to recover more slowly and benefited less from policy changes.
  
• The path forward is to replace the existing framework with personal savings-based alternatives. Personal unemployment insurance savings accounts (PISAs) may improve on the status quo, but universal savings accounts (USAs) offer a broader and potentially stronger alternative.

How a Temporary Crisis Exposed Permanent Weaknesses

The 2026 Department of Labor report on State Unemployment Insurance Trust Fund Solvency notes that only eighteen states meet the minimum solvency standard going into a recession.^[1] Conversely, in February 2020, 31 states had solvency levels “greater than or at the recommended minimum solvency standard.”^[2]

Solvency reflects a state’s ability to pay full unemployment benefits — typically 30 percent to 50 percent of lost wages for up to 26 consecutive weeks — relative to total wages within the state.^[3] The current structure is especially vulnerable to the next economic downturn. This paper explores why state UI trust funds experienced such different outcomes after the same national shock. The analysis finds that the interaction between the 2020 shock, pre-2020 trust fund solvency, state policy choices, and administrative capacities all contributed to the variation in solvency outcomes. It also examines how a federal-state program designed for stabilization can weaken fiscal discipline when costs are pooled across governments or pushed onto future taxpayers and employers.

With the federal government facing growing fiscal pressure from rising public debt and structural deficits, the unemployment insurance program cannot rely indefinitely on emergency cash injections to compensate for underlying program weaknesses. While technical fixes aimed at improving program integrity can offer slight improvements, fully replacing UI with universal savings accounts (USAs) can help remove the structural problems that produced the current situation.

The first section briefly outlines unemployment insurance (UI) and where UI policy currently stands. The second section examines UI trust fund solvency before and after the 2020 downturn. The third section explores ways to reduce stress on UI trust funds, including improving program integrity and expanding state flexibility. It also discusses replacing the existing UI system with universal savings accounts. The fourth section concludes. The appendix includes a glossary of key terms, describes the data, and fully discusses model equations and empirical results.

Section 1: What is Unemployment Insurance and How Does it Work?

To understand unemployment insurance, it is important to understand the concept of a reservation price, specifically a reservation wage. A reservation wage is the lowest wage at which someone will accept a job. When someone searches for a job, they look for a job that matches that reservation wage or higher. This comes at the cost of the foregone income you give up by not taking the first job available.

In practice, unemployment insurance (UI) is a joint state-federal program that provides cash benefits to eligible workers who lose their jobs. While states follow uniform federal law, each state administers its own UI program. These programs are funded with taxes on employers based on the wages paid to employees. The taxes are then transferred into trust fund accounts maintained at the US Treasury.^[4] There are no federal requirements specifying how much money states must maintain in their trust funds. Instead, states operate on a forward-funding basis, building up reserves during periods of economic growth in anticipation of higher benefit payouts during recessionary periods.^[5] The Unemployment Insurance Trust Fund (UTF) is overseen by the Treasury and contains 59 different accounts: 53 state accounts — representing all 50 states, the District of Columbia, Puerto Rico, and the US Virgin Islands — along with four interrelated federal accounts and two accounts associated with the Railroad Retirement Board.^[6] For states, these accounts act similarly to a checking account, but understanding how taxpayer dollars flow to these accounts can be complicated.

The modern UI system was created in 1935 through the Social Security Act. At the time, most unemployment insurance options were voluntarily created by employers or established in trade agreements.^[7] One exception was the state of Wisconsin, which was the only state to establish an unemployment insurance fund managed by the state government.^[8] The creation of the joint federal-state program ushered in a federal unemployment payroll tax that was paired with a tax offset for employers. This structure allowed the federal government to create the financing framework while leaving states substantial discretion over benefit levels, eligibility rules, and program administration. Additionally, different sectors of the economy were given “experience ratings,” which tied the amount of payroll taxes to firms’ “layoff behavior.” Employers who maintain a “stable work force” are assigned favorable tax rates compared with the rates of other employers.^[9]

The creation of the mandatory, tax-financed system reshaped the landscape of private and voluntary unemployment insurance arrangements. The program crowded out private unemployment insurance plans using mandatory payroll taxes (coming at the cost of higher employee compensation, a private unemployment insurance plan, or a myriad of other uses) as well as the broader risk-pooling capacity of the public system, backstopped by federal taxpayers. ^[10] Over time, the program grew in size and scope, introducing new layers of financial and administrative complexity. Coverage broadened from a limited segment of the workforce to include most wage and salary workers. Bene-fit structures converged toward a standard of replacing about half of prior wages for up to 26 weeks. The broader federal program evolved to include mechanisms for extending and increasing benefits during periods of high unemployment. Beginning with temporary programs in the postwar period and culminating in the establishment of a permanent extended benefits framework in 1970, unemployment insurance increasingly incorporated features designed to respond automatically to cyclical downturns.^[11] These additions transformed the program from a narrowly defined insurance mechanism into a central component of the federal government’s countercyclical policy toolkit.^[12] Figure 1 (below), reproduced from the Bipartisan Policy Center, illustrates how money flows through the UTF.^[13]

Figure 1: How Taxpayer Dollars Flow Through the Unemployment Insurance Trust Fund

Sources: Sprick, Emerson. “How Is the Unemployment Insurance Program Financed?” Bipartisan Policy Center. 15 Mar 2022; US Department of Labor.

In Figure 1, previous page, the three accounts (seen in bold) serve the following purposes:

• Employment Security Administration Account (ESAA): This is the first destination of most federal unemployment tax revenue. The federal government treats this like a checking account, directing tax revenues in one of three ways:
  • Funding federal administrative costs of the UI program
  • Funding state administrative costs by dividing the funds earmarked for administrative purposes into state accounts.
  • Funding Extended Unemployment Compensation Accounts.
• Extended Unemployment Compensation Account (EUCA): This finances the federal government’s share of Extended Benefits costs. The Treasury is statutorily required to transfer 20 percent of ESAA’s net monthly balance (revenue minus distributions) into the EUCA each month.
• Federal Unemployment Account (FUA): This provides loans to states that do not have sufficient funds to cover UI benefits. This is funded by loan repayments from state tax dollars and revenue from higher federal unemployment taxes placed on employers when the state has outstanding loans.
• Federal Employees Compensation Account (FECA): This account reimburses states for UI benefits paid to former federal employees. Each federal agency transfers money to FECA to cover UI benefits for its workers.^[14]

The evolution of the unemployment insurance system introduced new layers of complexity into its financing and governance. While the original design emphasized the accumulation of reserves during periods of economic expansion, repeated downturns exposed weaknesses in state-level programs. In response, the federal government expanded its role through mechanisms that facilitate borrowing, redistributed funds across states, and support extended-benefit payments. Federal borrowing and cross-state financing weakened the link between contributions and payouts, reducing cost discipline.

Public agencies operating under conditions of imperfect oversight and indirect cost allocation tend to expand beyond strictly efficient levels, particularly when their budgets are financed through pooled or opaque revenue sources.^[15] The unemployment insurance system’s administrative financing and shared fiscal structure exhibit these characteristics, as costs are spread broadly while decision-making authority remains fragmented.

At the same time, the financing mechanisms embedded in the unemployment insurance system create opportunities for intertemporal cost shifting. Federal lending to state trust funds and the use of deferred tax adjustments allow policymakers to deliver benefits during downturns without imposing immediate, visible costs on taxpayers or employers. This dynamic aligns with James Buchanan’s analysis of public finance, which emphasizes how political actors face incentives to shift the burden of current expenditures into the future, thereby reducing present resistance to spending increases.^[16] In the context of unemployment insurance, borrowing and delayed financing mechanisms soften budget constraints and enable benefit expansion during periods of economic stress, while postponing the fiscal adjustments required to restore solvency.

These institutional features are reinforced by increasing reliance on automatic stabilizers within the unemployment insurance system. The development of extended benefit programs and other countercyclical mechanisms allows expenditures to rise without the need for new legislative action. While such features can enhance macroeconomic stabilization, they also reduce the frequency with which policymakers must explicitly weigh the tradeoffs between program generosity and financing. More broadly, the system illustrates a central insight of public choice theory: policy outcomes are shaped not only by stated objectives, but by the incentive structures embedded in institutions.^[17] In this case, the combination of decentralized administration, pooled financing, and intertemporal fiscal mechanisms produces a system that is capable of responding flexibly to economic shocks, but one in which the link between costs and benefits is obscured.

It’s also important to note that an unemployed worker is not currently employed but is seeking employment. Those who do not have a job and are not looking for one are counted as not in the labor force.^[18] Workers who are not in the labor force are not eligible for UI benefits.

A worker becomes qualified for UI payments if.^[19]:

• The worker is terminated from a job without cause.
• The worker meets work and wage requirements, such as the state’s requirements for wages earned or time worked during a calendar period.
• The worker meets any additional state requirements.

To maintain eligibility, workers must file weekly claims, report earnings, job offers and enroll with the State Employment Service to assist the worker in finding employment.^[20] These UI benefits are designed to supplement income while workers are searching for a job. By supplementing income, workers can spend more time searching for a job that provides their desired wage. Unfortunately, this system is susceptible to fraud and corruption. As outlined in the introduction, the changes made to UI benefits during the course of the pandemic made unemployment fraud much easier and more widespread.

Figure 2 (below) groups states by two measures: trust fund solvency (2026) and estimated unemployment insurance tax burden (2025) using the latest data available at the time of writing this paper.^[21],[22] Solvency is measured by the 2026 Average High Cost Multiple (AHCM), with states at or above 1.0 classified as high solvency. Tax burden is measured by the 2025 estimated employer contribution rate as a percentage of taxable wages, with states at or above the national average of 1.74 percent classified as high tax.

Figure 2: Taxation to Solvency Ratios

Notes: Each tile reports state abbreviation, 2026 AHCM, and 2025 estimated employer contribution rate as percent of taxable wages. High solvency = 2026 AHCM ≥ 1.0. Low solvency = 2026 AHCM < 1.0. High tax = 2025 estimated employer contribution rate (% of taxable wages) at or above the U.S. average of 1.74. Low tax = below 1.74. Includes DC; excludes Puerto Rico and the Virgin Islands. Image designed in Python with assistance from ChatGPT.

Sources: U.S. Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026; U.S. Department of Labor, Estimated Employer Contribution Rates, Calendar Year 2025.

The most favorable category is low tax, high solvency, shown in dark green. Sixteen states fall into this group: Alabama, Alaska, Arkansas, Idaho, Iowa, Kansas, Maryland, Mississippi, Montana, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota, Utah, and Wyoming. These states combine relatively stronger trust fund positions with below-average UI tax rates.

Only Maine and Oregon fall into the high tax, high solvency category. Sixteen states fall into the high tax, low solvency group, including California, Illinois, New York, Pennsylvania, and several northeastern states. These states face both below-benchmark solvency and above-average tax rates.

The low tax, low solvency category contains seventeen states, including Arizona, Colorado, Florida, Georgia, Indiana, Texas, Virginia, Washington, and Wisconsin. These states have below-average tax rates but a trust fund solvency rate below the 1.0 AHCM benchmark.

The next section explains the patterns shown in Figure 2 (previous page) by examining pre-2020 reserves, the 2020 economic downturn, policy choices, borrowing, and administrative capacity.

Section 2: UI Trust Fund Solvency Before and After 2020

This section presents the paper’s main findings in plain language. It explains how state unemployment insurance trust fund solvency changed before, during, and after the 2020 economic downturn, with particular attention to pre-pandemic solvency levels, benefit costs, borrowing, early withdrawal from federal pandemic UI programs, partial-withdrawal cases, and program integrity. The purpose of this section is to make the results accessible to readers who want to understand the broader patterns without engaging the full econometric analysis. Technical readers can find the model specifications, variable definitions, robustness checks, and complete regression results in the appendix.

2.1 Summary of Findings: What Explains Differences Across States?

The evidence points to several factors that help explain why state UI trust funds recovered differently after the pandemic shock. The most consistent finding is that states with stronger pre-pandemic solvency remained in better condition after the shock. That finding is consistent with the forward-funding logic of the UI system: reserves accumulated during periods of economic expansion before claims surge.^[23] Policy timing also matters, but the evidence should be stated carefully. Earlier and more complete withdrawal from federal pandemic UI programs is associated with healthier post-pandemic trust fund outcomes. The relationship is consistent across specifications, but it is descriptive rather than causal. States did not withdraw at random.

Implementation matters as well. Full withdrawal and partial withdrawal are not interchangeable. Arkansas, Indiana, Maryland, and Oklahoma attempted early withdrawal but faced legal, administrative, or implementation complications. Their results differ from the full-withdrawal states, reinforcing the importance of distinguishing announcement from sustained policy execution.^[24]

Borrowing completes the fiscal story. States with greater borrowing exposure generally exhibited weaker later solvency, although borrowing itself was largely a response to trust fund stress. Program integrity also belongs in the narrative because pandemic UI created major administrative and fraud-control challenges. However, the regression evidence on improper payments is less consistent than the evidence on initial solvency conditions, withdrawal timing, implementation, and borrowing.

The central findings are institutional. Post-2020 UI trust fund recovery was associated with how prepared states were before the shock, how long they remained in temporary federal programs, the extent to which withdrawal policies were fully implemented, reliance on borrowing, and how effectively their systems were administered under stress.

2.2 Starting Conditions: The Pre-2020 Landscape

The UI system illustrates institutional path dependence in a limited sense. Policy rules and fiscal choices made before 2020 shaped the feasible options available afterward, while still leaving room for adaptation and reform.^[25] States entered 2020 with very different UI trust fund positions. Some had built sizable reserves relative to their taxable wage bases. Others had allowed their systems to remain thinly capitalized despite years of economic expansion. Those differences reflected prior policy choices, including tax schedules, benefit rules, taxable wage bases, and the political willingness to accumulate reserves when unemployment was low. Federal law does not require every state to maintain a specific trust fund balance, but the solvency framework assumes states will build reserves during stronger labor-market periods so they can finance benefits when unemployment rises.^[26]

Once the pandemic shock arrived, these differences became consequential. States with stronger pre-pandemic trust funds were better positioned to pay benefits without quickly resorting to borrowing. Their solvency measures declined, but the decline was less severe, they tended to recover more quickly after the initial shock passed.

Figure 3: State AHCM Before and After the Pandemic: 2019 vs. 2023

Notes: The withdrawal status is discussed in Section 2.6. Figure includes DC; excludes Puerto Rico and the Virgin Islands. Image designed in Python with assistance from ChatGPT.

Sources: U.S. Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026

States with weaker starting positions faced the opposite problem. They had to finance elevated claims from a smaller reserve base. In many cases, this meant deeper drawdowns, greater reliance on external financing, and a more difficult recovery. Rebuilding reserves after a downturn is harder than building them beforehand, especially when states must also manage debt obligations and political pressure to avoid tax increases. Figure 3 (above) illustrates these patterns.

This pattern appears across both solvency measures used in the analysis. The estimated magnitude differs across specifications, but the direction is stable: stronger initial solvency is associated with stronger post-pandemic solvency outcomes.

The findings of this paper are consistent with the institutional logic described above. The 2019 solvency controls are positive and statistically significant across the baseline models, indicating strong persistence in trust fund condition. In the initial conditions specifications, both the 2019 AHCM variable and the 2019 reserve ratio are positive and statistically significant in their respective models. The high explanatory power in these models is consistent with strong path dependence in state trust fund condition.^[27] In plain terms, states that were stronger before the pandemic generally remained stronger afterward. They still experienced the shock, but they had more fiscal room to absorb it.

2.3 How Trust Fund Health Is Measured

This analysis uses two complementary measures of UI trust fund health: the Average High Cost Multiple (AHCM) and the reserve ratio.

The Average High Cost Multiple measures preparedness for economic stress. It compares current reserves to a state’s historically high benefit costs. In practical terms, AHCM asks whether a state has accumulated enough reserves to handle a severe downturn based on its own experience. The US Department of Labor treats an AHCM of 1.0 as the minimum level for adequate solvency going into a recession.^[28]

The reserve ratio provides a more direct balance-sheet measure of trust fund health. It compares the size of the trust fund to the state’s covered wage base, offering a snapshot of available resources relative to the payroll base that finances the system. Both AHCM and reserve ratio measurements are included in Figure 4 (below).

Figure 4: Solvency Measures Over Time (50 State Plus DC Average)

Sources: U.S. Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026

Neither measure is perfect. The AHCM is useful because it incorporates a state’s own history of benefit costs, but it can also reflect past policy and labor market conditions that may not fully describe future risks. The reserve ratio is simpler and more transparent, but it does not account for how costly downturns have historically been in a particular state.

The analysis therefore treats the two measures as complements rather than substitutes. A state may appear stronger under one measure than the other, depending on its benefit history, wage base, and current reserve position. Using both helps distinguish between current financial capacity and preparedness for severe stress.

Across the results, the main patterns are generally consistent. Where the measures diverge, the differences are informative. The AHCM emphasizes resilience under historically costly conditions, while the reserve ratio emphasizes current fund strength relative to taxable wages.

Together, they provide a clearer picture of whether states had had sufficient reserves not only in nominal terms, but also relative to the severity of shocks the UI system is designed to absorb.

2.4 The 2020 Solvency Shock

The COVID-19 recession placed immediate pressure on state unemployment insurance trust funds. Claims rose rapidly in early 2020, while payroll tax revenues adjusted more slowly. This timing mismatch is a structural feature of the unemployment insurance system: benefit obligations rise quickly during downturns, while revenue collections respond more slowly and remain constrained by preexisting tax schedules. As a result, states entered the recession with different levels of fiscal preparedness despite operating within the same federal-state framework.^[29]

The federal government responded in 2020 by temporarily expanding unemployment insurance. The Families First Coronavirus Response Act provided emergency administrative funding and regulatory flexibility to help states process the surge in claims. The CARES Act then created three major federal programs: Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation, and Federal Pandemic Unemployment Compensation.^[30]

Pandemic Unemployment Assistance expanded eligibility beyond the regular state unemployment insurance system to workers who would not normally qualify for benefits. This included self-employed workers, independent contractors, workers with limited work histories, and others who were unemployed, partially unemployed, or unable to work for specified COVID-19-related reasons.^[31]

Pandemic Emergency Unemployment Compensation provided up to 13 additional weeks of benefits to individuals who exhausted regular unemployment benefits and remained eligible.^[32] Federal Pandemic Unemployment Compensation added $600 per week to unemployment benefits for eligible individuals for weeks ending on or before July 31, 2020.^[33]

These unemployment supplements should be distinguished from the Economic Impact Payments sent directly to eligible taxpayers. The unemployment programs, by contrast, were tied to benefit eligibility and administered through state workforce agencies.

The CARES Act also changed the financing of unemployment programs during 2020. It provided full federal funding for Pandemic Unemployment Assistance, Federal Pandemic Unemployment Compensation, and Pandemic Emergency Unemployment Compensation. It temporarily funded the first week of regular unemployment compensation in states that waived the waiting period. It also provided relief for reimbursing employers, including state and local governments, certain nonprofit organizations, and federally recognized Indian tribes.³⁴ The law further supported Short-Time Compensation, or work sharing, by reimbursing qualifying benefit costs and authorizing grants for implementation, administration, and promotion of state work-sharing programs.^[35]

After the $600 weekly supplement ended, the federal government authorized Lost Wages Assistance through the Federal Emergency Management Agency. Lost Wages Assistance was not financed through the regular unemployment insurance trust fund structure. Instead, it was funded through FEMA’s Disaster Relief Fund and administered in coordination with state unemployment agencies. Eligible claimants could receive a $300 federal supplement, and states were permitted to add $100, bringing the possible weekly supplement to $400.^[36]

State benefit levels differed because each state sets its own minimum and maximum unemployment insurance benefits. The federal supplements temporarily increased total payments to claimants, but they did not eliminate underlying differences across state systems. Nor does federal law require states to maintain a specific trust fund balance. Instead, states operate on a forward-funding basis, accumulating reserves during stronger labor-market periods to prepare for higher benefit payments during recessions.^[37]

The fiscal effect was a rapid drawdown of state trust fund balances. Both AHCM and reserve-ratio measures declined sharply in 2020. In many states, reserves accumulated over several years were depleted in a much shorter period. The shock was national, but its effects were not uniform. Some states experienced moderate deterioration and began recovering once labor markets stabilized. Others saw deeper declines and remained financially strained for longer.

These differences matter because they reveal variation in state preparedness. Systems with stronger starting positions were better able to absorb the recessionary shock. Systems with weaker reserves were more exposed to borrowing, delayed recovery, and greater pressure for tax or benefit adjustments. This pattern reflects a limited form of fiscal path dependence, in which prior trust fund conditions shaped the options available to states when unemployment surged. Earlier fiscal choices constrained the range of feasible responses once the 2020 shock occurred. The 2020 experience shows that unemployment insurance can provide substantial countercyclical support during a recession, but it also shows that trust fund solvency remains a central measure of state fiscal resilience.

The policy debate over emergency UI also focused heavily on labor-market incentives. In 2020, Casey Mulligan and Stephen Moore warned that the $600 bonus unemployment payments and payroll tax suspension would create competing incentives: unemployment supplements would reduce the return to work for some workers, while payroll tax relief would support employment. Later work by Mulligan, et al argued that bonus unemployment payments weakened work incentives.^[38]

That literature helps explain why the duration of federal pandemic UI programs became a contested policy question in 2021. This paper does not estimate the labor-supply effect of those programs. Instead, it examines whether state trust fund outcomes differed across states with different starting conditions, policy timing, implementation paths, borrowing exposure, and administrative capacity.

The policy implication is that forward funding matters. UI systems can provide countercyclical support during recessions, but states enter downturns with varying fiscal capacity. When the federal government offers supplemental payments to unemployment benefits, state policymakers are incentivized to treat UI trust fund solvency as a secondary concern during periods of economic boom. They then face fewer options when claims rise, reserves fall, and borrowing becomes necessary. This, in turn, can further incentivize rent-seeking for additional federal support.

2.5 Pandemic Spending Persists in 2021

During the pandemic, the federal government expanded unemployment benefits and eligibility through temporary programs layered on top of state UI systems. These programs provided additional support, but also changed the

incentives facing workers, employers, and state policymakers. The expansion occurred as state trust funds were already under severe stress. According to the analysis, every state except Arizona, Idaho, Maine, North Dakota, and South Carolina experienced a decline in recession preparedness after 2020. Thirty-seven states fell below the “adequate solvency” threshold in 2021, leaving them poorly positioned for another recession.^[39]

The federal programs did not end uniformly. Some states participated until the September 2021 expiration date, while others exited earlier. Across empirical specifications, earlier withdrawal is associated with stronger trust fund outcomes during the recovery period. This relationship appears across both solvency measures but should be interpreted carefully. Early exit states may have differed from states that remained in the programs in ways that also affected trust fund recovery, including labor market conditions, fiscal capacity, political preferences, or administrative capacity. The evidence therefore supports a consistent association, not a definitive causal claim.

Pandemic-era policy decisions became part of the institutional environment in which states managed their UI systems. By July 2021, half of the states had announced plans to end bonus UI payments before the federal programs expired in September 2021. Most ended the payments in June, with several ending in July.^[40] Arkansas, Indiana, Maryland, and Oklahoma attempted early withdrawal but faced legal or administrative challenges that kept the states enrolled in the programs until September. These states are treated separately because partial withdrawal did not create the same policy environment as full withdrawal.

Emergency programs can alter state incentives. When federal policy expands benefits or eligibility, state officials face different tradeoffs than they would under ordinary UI financing rules. In addition to CARES Act funding in 2020, 22 states took Title XII advances, which are federal loans available when state unemployment insurance trust fund balances reach zero. The analysis also reports that seventeen states had an AHCM of zero, indicating that their UI trust funds had no remaining balance.^[41]

These weak positions were not random. With the exceptions of Hawaii, Nevada, and New Mexico, these states were already poorly prepared for the 2020 downturn, and the downturn exposed and accelerated preexisting solvency problems.

Program integrity problems compounded the fiscal strain. GAO reported that Pandemic Unemployment Assistance expanded UI eligibility to workers not previously covered by regular unemployment insurance, including self-employed workers and certain gig workers. States had to implement the program quickly, and the law initially allowed applicants to self-certify employment history and eligibility. Expanded eligibility, rapid implementation, and self-certification increased fraud risk. GAO later estimated that pandemic UI programs, including PUA, were subject to $100 billion to $135 billion in fraud from April 2020 through May 2023.^[42] GAO also found that states’ fraud controls varied and evolved during the pandemic, but some states applied new controls only to new claims rather than to continuing claims that had already been approved, leaving those programs vulnerable to fraud.^[43]

The labor-market literature is mixed but relevant. The effects of expanded benefits were also part of the policy environment. Mulligan, Moore, and Antoni (2021), as well as Dublois and Ingram (2021), argue that expanded benefits reduced the return to work for many households.^[44],[45]

Other studies reach more mixed conclusions about early withdrawal’s labor-market effects. Holzer, Hubbard, and Strain find that early termination increased flows from unemployment to employment, while also noting welfare tradeoffs.^[46] Coombs, Dube, Jahnke, Kluender, Naidu, and Stepner find that early withdrawal substantially reduced UI receipt and produced a smaller increase in employment, with income and consumption losses for affected households.^[47] Arbogast and Dupor find that ending emergency unemployment benefits was associated with a statistically significant increase in employment.^[48]

Taken together, the evidence indicates that UI trust fund solvency depends on the size of the shock as well as the policy environment in which states respond. Federal emergency programs provided temporary support, but also affected incentives, increased administrative burdens, and interacted with already-weak trust fund positions. States that entered the pandemic with stronger reserves were better positioned to absorb the shock. States that entered with weaker reserves faced deeper drawdowns, greater reliance on borrowing, and slower recovery. The 2020 experience underscores the importance of forward funding, program integrity, and state-level policy choices before the next recession begins.

The policy implications are that emergency support can strain state administration, weaken fiscal discipline, and obscure the condition of state UI trust funds, especially when such support is poorly designed. Reforms must therefore focus on financing rules, program integrity, and state flexibility, in addition to benefit levels, before the next downturn.

Figure 5: State Withdrawal from Pandemic Bonus Unemployment Programs

Note: Image designed in Python with assistance from ChatGPT.

Source: U.S. Department of Labor, Congressional Research Service, Foundation for Government Accountability.

2.6 Full vs. Partial Withdrawal

Some states experimented with ways to use the end of bonus payments to encourage labor-market reentry. Montana and South Carolina were early movers. Their governors announced that the states would end participation in several federal programs created under the CARES Act and extended under ARPA, including the additional $300 per week in federal unemployment benefits.^[49] Figure 5 outlines states by withdrawal status.

The distinction between full withdrawal and partial withdrawal is central to this paper’s empirical design. A simple early-withdrawal indicator can obscure important differences between announcement and implementation. Arkansas, Indiana, Maryland, and Oklahoma attempted early withdrawal but faced legal, administrative, or implementation complications. As a result, they should not be treated as equivalent to states that fully sustained withdrawal.^[50]

CRS reports that state courts in Indiana and Maryland issued orders prohibiting early termination from some or all COVID-19 UI programs.^[51] Ballotpe-dia’s state-by-state tracker records similar implementation complications:

Indiana announced an end to participation effective June 19, 2021, but a court order required the state to resume participation; Maryland announced an end effective July 3, but a Baltimore Circuit Court ruling required continued participation; Oklahoma ended participation June 26, but an Oklahoma County judge later ordered reinstatement; and Arkansas announced an end effective June 26.^[52]

The findings of this paper confirm that partial withdrawal does not replicate the full-withdrawal pattern. When partial-withdrawal states are separated from full-withdrawal states, the coefficients differ; the partial group does not behave like the full-withdrawal group. This result reinforces the importance of distinguishing between formal policy announcements and sustained implementation.

This finding shows that the state policy environment was shaped by implementation, not by announced intent. States that fully exited experienced one kind of administrative and fiscal path; states that attempted to exit but were delayed or constrained experienced another.

2.7 Timing Matters

The analysis does not stop with whether a state exited federal pandemic UI programs early. It also considers when that exit occurred.

That timing matters. States that withdrew earlier from the temporary federal programs tend, on average, to show stronger improvements in UI trust fund solvency during the recovery period. The relationship appears across multiple specifications and under both primary solvency measures.

The mechanism is plausible. Longer participation in expanded benefit programs may have prolonged elevated outflows from state UI systems. Earlier withdrawal may have shortened that period of pressure, allowing trust funds to stabilize sooner once labor market conditions improved.

The interpretation should remain measured, however. States did not exit at random. Early-exit states may have differed from late-exit states in labor market strength, fiscal condition, political preferences, administrative capacity, or other institutional features that are difficult to observe fully. Even with controls, these differences cannot be ruled out.

The evidence therefore supports a narrower conclusion: timing is consistently associated with trust fund recovery. It does not, by itself, prove that earlier exit caused stronger solvency outcomes.

That distinction matters. Policy timing may have affected fiscal recovery, but it operated within broader state systems. A state with stronger pre-pandemic reserves, more favorable labor market conditions, and greater administrative capacity would be expected to recover differently than a state lacking those advantages.

Even so, the pattern is meaningful. Emergency programs are often debated as if participation is simply on or off. The evidence here suggests duration also matters. The length of time a state remains in an extraordinary benefit regime can shape the fiscal environment in which recovery occurs.

2.8 Debt and Borrowing

When UI trust funds were exhausted, many states borrowed to continue paying benefits. That borrowing solved an immediate liquidity problem. It did not solve the underlying solvency problem.

The findings of this paper show that higher borrowing is associated with weaker trust fund positions in subsequent years. This is consistent with the basic mechanics of debt finance. Debt allows a state to meet obligations today by shifting costs into the future. Once the crisis passes, repayment still must occur.

That repayment burden can slow rebuilding reserves. States with outstanding obligations may face pressure to raise payroll taxes, impose surcharges, reduce benefits, or rely on other financing mechanisms. These choices can restore balance over time, but they also make recovery more difficult.

DOL explains that states may borrow from the federal government through the Title XII program when trust fund balances are exhausted. States may also use private-sector borrowing instruments, such as revenue bonds, to repay federal loans. DOL’s 2026 report notes that two states had outstanding Title XII advance balances as of January 1, 2026, totaling $21.4 billion, and that one state had outstanding private borrowing instruments totaling an estimated $1.86 billion.^[53],[54]

The form of debt appears less important than the presence of debt itself. Whether liabilities take the form of federal loans or bonded obligations, they represent claims on future UI system resources. States may change the timing, interest cost, or political visibility of repayment, but they cannot eliminate the liability.

This is the basic tradeoff of crisis finance. Borrowing can be necessary when a trust fund is depleted during a downturn, but it also reveals that the system was not sufficiently prepared for the stress it faced. Debt provides breathing room, not solvency.

The interpretation requires caution. Borrowing is not randomly assigned.

States borrow because their trust funds did not have sufficient reserves to finance benefit payments without additional federal support. This form of fiscal stress can appear through federal Title XII advances, private borrowing instruments, delayed repayment, or future employer tax increases. Borrowing should, therefore, be interpreted both as a marker of prior weakness and as a mechanism that can carry the costs of the downturn into later years. A negative borrowing coefficient may reflect reverse causality: weak trust funds produce borrowing, rather than borrowing alone producing weak trust funds.

The defensible conclusion is that borrowing identifies states under greater trust fund strain, and those states tended to experience weaker post-pandemic solvency outcomes.

 2.9 Improper Payments

The analysis also considers improper payment rates as a measure of administrative performance. The measure is imperfect, but it is still informative.

Improper payments include both errors and misrepresentation. They do not capture every form of administrative weakness, and they do not distinguish cleanly between fraud, claimant mistakes, employer reporting issues, and agency processing failures. Still, they provide one window into whether a UI system is operating with sufficient integrity under pressure. DOL’s Benefit Accuracy Measurement program provides state-level improper payment estimates and root-cause information, making it useful for examining administrative performance despite measurement limitations.^[55]

The results suggest that higher improper payment rates are often associated with weaker or slower improvements in trust fund solvency. This relationship is less stable than the relationships observed for starting solvency, policy timing, and borrowing. That instability counsels caution.

Measurement is a serious problem. Reported improper payment rates reflect both underlying improper payments and the capacity to detect them. A state with stronger oversight may report more improper payments precisely because it finds more problems. A state with weaker oversight may appear cleaner than it is.

That makes interpretation difficult. A high reported rate may indicate poor administration, better detection, or both. A low reported rate may indicate sound management, under-detection, or both. The measure should therefore be read as suggestive, not definitive.

Even with those caveats, the administrative dimension cannot be ignored. UI trust funds are administered systems. Eligibility determinations, payment controls, employer reporting, appeals, fraud detection, and data systems all affect program performance.

The pandemic placed unusual pressure on those systems. GAO estimated that fraud in UI programs during the pandemic was likely between $100 billion and $135 billion from April 2020 through May 2023, or roughly 11 percent to 15 percent of total UI benefits paid during that period.^[56] A weaker administrative system is one that has greater difficulty verifying eligibility, preventing improper payments, detecting fraud, processing claims accurately, and maintaining reliable data. In normal periods, these weaknesses can be partly concealed. During a shock, however, rapid program expansion can expose them. Where administration was weaker, the fiscal consequences may have been larger because weaker systems have difficulty administering benefits accurately under pressure. The evidence does not prove that improper payments drove solvency outcomes, but it supports the broader point that program integrity is part of fiscal resilience.

2.10 Policy and Administration Interaction

Policy choices do not operate in a vacuum. They are filtered through the administrative systems that carry them out. A state may adopt a sound rule, but the result depends on whether the rule can be implemented. Early withdrawal, fraud prevention, eligibility verification, and borrowing decisions all pass through state agencies with different levels of capacity. This means that UI reform must consider the institutional machinery that determines whether rules are enforced consistently, not just benefit generosity or tax rates.

The results suggest that the relationship between early program exit and improved solvency is stronger in states with lower improper payment rates. In states with higher improper payment rates, the relationship is weaker and less consistent. Because the improper payment specifications are less stable than the main policy and solvency specifications, this pattern should be treated as suggestive rather than central.

This pattern is consistent with a simple institutional explanation. Policy change is more likely to produce predictable fiscal effects when the administrative system implementing it is reliable. If eligibility controls, payment systems, and reporting practices are weak, the same policy change may have less direct or less measurable effects.

That does not mean improper payments alone determine trust fund outcomes. They do not. Nor does it mean administrative capacity is the only reason some states benefited more from early exit than others. The finding is an interaction, not a standalone causal mechanism.

The interaction is still important. It shows why formal policy design and administrative capacity should not be analyzed separately. A state may adopt a rule, announce a withdrawal, or change eligibility parameters, but those choices matter only to the extent that the system can implement them.

This is especially important during crises. Emergency programs often expand quickly, rely on strained agencies, and operate under political pressure to deliver payments rapidly. That environment increases the importance of administrative competence.

The evidence here suggests that policy effectiveness depends partly on institutional execution. States with stronger administrative systems may translate policy changes into fiscal outcomes more effectively. States with weaker systems may see those relationships blurred.

The broader lesson is that program design should account for implementation capacity from the beginning. A UI system that cannot reliably enforce rules during normal times is unlikely to do so well during a crisis.

2.11 Tax-Side Controls and Financing Structure

UI trust funds are financed primarily through employer payroll taxes, and state tax structures differ considerably. Taxable wage bases, experience-rating rules, tax schedules, and debt assessments all affect how states raise revenue for their UI systems. Those differences are part of the institutional background. DOL’s estimated employer contribution rates show wide variation across states in taxable wage bases and employer contribution rates, underscoring that UI financing differs substantially across state systems.^[57]

The tax-augmented specifications provide a useful robustness check. They test whether the main results are simply capturing differences in UI financing structure. The findings of this paper suggest that the main pattern remains intact: pre-pandemic solvency continues to matter, early withdrawal timing remains directionally consistent, and the tax variables do not dominate the results.

Tax policy remains relevant. Taxable wage bases, employer tax schedules, experience rating, and debt assessments are central to how UI systems are financed. In these specifications, however, the tax-side controls function mainly as robustness checks. They belong in the Appendix and can be discussed briefly in the main text, but they should not displace the primary findings.

2.12 Contributions to the Existing Literature

The existing literature on pandemic UI has focused primarily on employment, household income, and consumption. Holzer, Hubbard, and Strain find evidence that early termination increased flows from unemployment to employment, while also noting welfare tradeoffs.^[58] Coombs and coauthors find that early withdrawal sharply reduced UI receipt and produced a smaller increase in employment, while benefit losses were only partly offset by earnings gains and consumption fell.^[59] Arbogast and Dupor find that ending emergency unemployment benefits had a positive employment effect.^[60]

The Moore, Mulligan, and Antoni studies sharpen the incentive-side argument. They emphasize that the federal supplements raised replacement rates and, in their view, reduced the incentive to return to work. Their claims are relevant to the policy debate that motivated state early-withdrawal decisions, particularly the argument that extended participation could prolong labor-market disruption. This paper uses a different empirical outcome: fiscal solvency rather than employment flows.

This paper contributes a trust-fund perspective to the pandemic UI debate. It asks how state UI trust funds performed across different institutional and policy environments. That fiscal lens matters because UI is a state-administered financing system that must accumulate reserves, pay benefits during downturns, borrow when depleted, and rebuild afterward.

The paper’s results fit that institutional story. States with stronger pre-pandemic trust funds were better positioned after the shock. Earlier and more complete withdrawal from federal pandemic programs is associated with stronger trust fund outcomes. Partial-withdrawal states differ from full-withdrawal states. Borrowing exposure is associated with weaker solvency. Pro-gram integrity appears relevant, but the estimates are less consistent.

Those conclusions are narrower than a causal labor-supply claim, but they are important for understanding UI solvency. The pandemic showed that the same federal shock can produce different state-level fiscal outcomes because states begin with different reserves, administer programs differently, and make different policy choices during the recovery. Section 3 turns from diagnosis to reform, beginning with near-term improvements to program integrity and state flexibility before considering broader savings-based alternatives.

Section 3: Escaping the UI Trap

The COVID-19 Economic Downturn highlighted the structural weaknesses in the current Unemployment Insurance framework. The findings discussed in section 2 and the appendix do not by themselves prove that any single reform would restore solvency. They do show that UI trust fund performance depends on starting reserves, financing choices, administrative capacity, and policy implementation. Those patterns point to several reform priorities. While other analyses offer fixes to the existing system, this section offers alternative frameworks to the current UI program.^[61]

Savings-based reform must account for institutional path dependence. The current UI system is embedded in federal tax rules, state trust fund accounts, employer experience rating, administrative agencies, and emergency federal backstops. A transition to universal savings accounts would therefore require staged reform rather than simple replacement. The institutional-design challenge is to move from the existing federal-state system toward a more portable, worker-controlled savings model.^[62] Personal Unemployment Insurance Accounts (PISAs) and Universal Savings Accounts (USAs) are two examples.^[63]

A PISA functions similarly to 401(k)s. These accounts are financed through payroll tax contributions from both the employer and employees. The employees fully own these accounts. When the worker is unemployed, he or she can make withdrawals to compensate for the loss of their income. When the worker does go back to work, he or she can build their PISA balance back up. Upon retirement, retirees can also use PISAs to bolster their retirement income or transfer funds to their heirs.^[64]

PISAs were initially pioneered by Chile in 2002 and are currently in place in several Latin American countries as well as in Austria and Jordan.^[65] In addition to the PISAs, Chile also includes a public safety net, known as the solidarity fund, financed by employers and the government, similar to UI trust funds.^[66] As de Rugy notes, the solidarity fund creates the same incentives not to work as a traditional UI, such as postponing a search for a new job until benefit payments are expected to stop.^[67]

A recent analysis of the PISAs in Chile found that the moral hazard — workers postponing their employment until solidarity fund benefit payments ran out — was minimized because the requirements to use the solidarity fund are stringent.^[68] While workers have full access to their PISAs, they must make 12 contributions to the solidarity fund within 24 months to qualify to access the solidarity fund. Most workers in Chile did not make the 12 contributions.^[69] If the barriers to the solidarity fund were lowered, it is reasonable to expect the risk of moral hazard to increase.

One tradeoff of PISAs, however, is the added complexity to the tax code. By the end of 2026, the federal tax code will provide 13 different tax-advantaged savings vehicles, each with different rules, limitations, and regulations.^[70],[71]

Adding further complexity to the existing tax code can disadvantage many workers. A solution to this challenge, as discussed in “The Work vs. Welfare Trade-Off Revisited,” is universal savings accounts (USAs).^[72]

Economist Adam Michel describes a USA as an account “that would function similarly to retirement accounts — income saved in the account would only be taxed once — but without restrictions on who can contribute, on what the funds can be used for, or when they can be spent.”^[73] Michel and others have noted that current tax and fiscal policy punishes savings through income and payroll taxes and then again through corporate income taxes, taxes on investment income, or taxes on transfers (i.e. taxes on gifts and inheritance).^[74],[75] McBride, et al. (2024) also notes that USAs are in place in Canada and the United Kingdom, where “tax-advantaged savings vehicles with unrestricted use of funds” allow citizens to secure financial stability.^[76]

These reforms can help get people back to work, allow them to keep more of the money they earn, and reduce wasteful spending and strains on state budgets.

Building a Stronger Alternative

The unexpected economic downturn of 2020 highlighted the vulnerabilities of many unemployment insurance trust funds. States entered the crisis with different levels of preparedness, and those starting positions shaped how well they absorbed the shock. States with stronger pre-2020 solvency tended to remain stronger afterward. States that exited federal programs earlier and more completely generally had stronger trust fund outcomes, while partial withdrawal states followed a different pattern.

These findings identify consistent associations rather than definitive causal effects. States did not choose policies at random, and borrowing often reflected preexisting stress. Even so, the evidence points to an institutional lesson: UI solvency is shaped by incentives, fiscal rules, and administrative capacity. Near-term reforms should improve program integrity, financing rules, and state flexibility. A more durable reform would move toward savings-based alternatives that give workers greater control, reduce reliance on federal backstops, and limit the fiscal vulnerabilities exposed by the pandemic. 

Appendix

Glossary of Terms

This appendix defines terms used in this paper. Definitions are drawn from the US Department of Labor Handbook 394.^[77]

• Adjusted Debt Ratio: A measure of UI debt relative to covered wages or trust fund balance.
  
• Average High Cost Multiple (AHCM): A standard measure of unemployment insurance (UI) trust fund solvency. It is calculated as the ratio of a state’s reserve ratio to the average of its three highest benefit-cost rates over the past 20 years. An AHCM of 1.0 is commonly interpreted as a minimum solvency benchmark, though adequacy depends on the severity of a recession.
  
• Average High Cost Rate (AHCR): The average of the three highest benefit cost rates over the previous 20 years. This approximates historical peak payout intensity and serves as the denominator in the AHCM calculation.
  
• Benefit Cost Rate (BCR): The ratio of total UI benefits paid to total covered wages each year. It measures the benefit outflows relative to the state’s wage base.
  
• Bond Financing: State-issued debt used to repay federal UI loans, typically repaid via employer payroll taxes.
  
• Covered Employment: The number of workers employed in jobs covered by the UI system. Coverage varies by state and excludes certain worker categories defined in statute.
  
• Covered Wages (Total Wages): Total payroll paid to workers in covered employment. This serves as a key denominator for solvency metrics such as the reserve ratio and benefit cost rate.
  
• Early Withdrawal: A state’s decision to terminate participation in federal pandemic UI programs prior to their federal expiration date.
  
• Experience Rating: A system that adjusts employer UI tax rates based on their history of layoffs and benefit claims. Employers with higher layoff rates typically face higher tax rates.
  
• Federal Pandemic Unemployment Programs: Temporary UI expansions enacted under the CARES Act and subsequent legislation, including programs such as Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC), and Pandemic Emergency Unemployment Compensation (PEUC). These programs were federally funded and largely outside standard state trust fund financing structures.
  
• Forward Funding: The practice of accumulating UI trust fund reserves during economic expansions to finance benefit payments during recessions without requiring borrowing.
  
• Insured Unemployment Rate (IUR): The number of individuals receiving UI benefits as a percentage of covered employment. This differs from the total unemployment rate, as it only includes individuals eligible for and receiving UI benefits.
  
• Partial Withdrawal: Cases where states attempted early withdrawal but continued partial participation due to legal or administrative constraints (e.g., AR, IN, MD, OK).
  
• Post-2021 Indicator: Binary variable indicating periods after federal pandemic UI program phaseout.
  
• Replacement Rate: The share of a worker’s prior wages that is replaced by UI benefits. Higher replacement rates increase income support but may affect work incentives.
  
• Reserve Ratio: The ratio of a state’s UI trust fund balance to total covered wages. It measures the size of reserves relative to the state’s economic base.
  
• Solvency (UI Trust Fund Solvency): The ability of a state’s UI trust fund to meet benefit obligations without borrowing or requiring emergency funding. Typically evaluated using the AHCM.
  
• Taxable Wage Base: The maximum amount of each worker’s wages subject to UI payroll taxes. States set their own taxable wage bases, which affect revenue generation.
  
• Title XII Advances (Federal Loans): Loans provided to states by the US Treasury when their UI trust fund balances are insufficient to cover benefit payments. These loans must generally be repaid with interest. A state’s “Title XII Borrowing Status” refers to whether a state has outstanding federal UI loans.
  
• Total Benefits Paid: The total amount of unemployment benefits disbursed in a given year, including both state and federal funded programs enacted during the COVID-19 economic downturn.
  
• Trust Fund Balance (Reserves): The amount of funds held in a state’s UI trust fund, typically measured at the end of the calendar year. This represents the resources available to pay benefits.
  
• Unemployment Insurance(UI): A joint federal-state program that provides temporary income support to eligible workers who lose their jobs through no fault of their own.
  
• Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work, typically measured by the Bureau of Labor Statistics. This is broader than UI participation and includes individuals not receiving benefits.
  
• Weeks Compensated: The total number of weeks for which UI benefits are paid to recipients. This reflects both the number of beneficiaries and the duration of benefits.
  
• Year-End Federal Loans (Title XII Balance): The outstanding balance of federal loans to a state unemployment insurance trust fund at the end of the calendar year. Positive balances indicate that the state borrowed from the US Treasury to finance benefit payments.

The following definitions come from the US Government Accountability Office relating to improper payments:^[78]

• Improper Payments: Payments that should not have been made or that were made in the incorrect amount; typically they are overpayments. The Improper Payment Rate is the share of total UI payments classified as improper.
  
• Fraud: Obtaining something of value through willful misrepresentation. Fraud can sometimes involve benefits that do not result in direct financial loss to the government (such as passport fraud). While all fraudulent payments are considered improper, not all improper payments are due to fraud.
  
• Waste: When individuals or organizations spend government resources carelessly, extravagantly, or without purpose.
  
• Abuse: When someone behaves improperly or unreasonably or misuses a position or authority using federal resources.

Data

The US Department of Labor publishes an annual report on unemployment trust fund solvency in 50 states plus DC, Puerto Rico, and the US Virgin Islands.^[79] The most recent report was published in April 2026. These reports provide a clear picture of state trust fund conditions before and after the federal unemployment programs enacted by Congress.

When the Department of Labor examines UI trust fund solvency, it looks at more than just the dollar amount in the trust fund. First, the Department measures the Reserve Ratio. The Reserve Ratio is the trust fund balance divided by the total wages (earned both in the public and private sector) paid for that year.^[80] The Reserve Ratio (RR) for state s in year t is expressed as a percentage in Equation 1.

Next, the Department compares the Reserve Ratio to the Benefit Cost Rate. The Benefit Cost Rate is the dollar amount of unemployment benefits paid in a year divided by total wages paid in that same year.^[81] The Benefit Cost Rate (BCR) for state s in year t (expressed as a percentage) is shown in Equation 2.

The Department then compares the current Reserve Ratio with the state’s high-cost experience. One common measure uses the average of the three highest Benefit Cost Rates during the previous 20 years. This measure, the Average Benefit Cost Rate (ABCR) for state s in year t, is shown in Equation 3.^[82]

Where BCR(1) (s,t), BCR(2) (s,t) and BCR(3) (s,t) are the three highest annual Benefit Cost Rates for state s during the 20-year lookback period used for year t. 

The Department then calculates the Average High Cost Multiple by dividing the current Reserve Ratio by the Average Benefit Cost Rate. The result is the Average High Cost Multiple. This measure, the Average High Cost Multiple (AHCM), for state s in year t, is shown in Equation 4.^[83] 

The Department of Labor considers a UI trust fund to have “adequate solvency,” meaning it is prepared for a recession, if the Average High Cost Multiple is greater than or equal to one. The closer the AHCM is to zero, the less prepared a state is for the next recession.^[84]

Methods

This analysis uses a state-year panel to examine variation in state unemployment insurance trust fund solvency before, during, and after the COVID-19 downturn. The unit of observation is the state-year, and the sample includes all 50 states and the District of Columbia over the years covered by the final dataset.

The analysis employs two dependent variables. The first is the Average High Cost Multiple, or AHCM, which measures a state trust fund’s reserve relative to histor-ical high-cost benefit experience. AHCM is used as the primary solvency measure because it captures a state’s capacity to withstand periods of elevated benefit pay-ments. The second is the reserve ratio, which measures trust fund reserves relative to the covered wage base. Using both measures allows the analysis to distinguish between forward-looking solvency and the fund’s current accounting position.

The baseline empirical specification is a two-way fixed-effects model:

where Yst is either AHCM or reserve ratio for state in year t. Solvency2019s is the state’s pre-pandemic solvency measure, matched to the dependent variable where appropriate. Early Withdrawals captures the timing of sustained withdrawal from federal pandemic unemployment insurance programs. State fixed effects, Ys, control for time-invariant differences across states, including long-standing institutional differences in UI tax systems, benefit rules, industrial composition, and administrative structure. Year fixed effects, St , control for shocks common to all states in a given year, including the pandemic recession, federal UI legislation, national labor-market conditions, and inflationary pressures. Standard errors are clustered by state.

The models estimate conditional associations rather than definitive causal effects. Early withdrawal decisions were not randomly assigned. States that withdrew earlier may have differed from other states in labor-market recovery, fiscal capacity, political institutions, administrative capacity, or other unobserved factors. State and year fixed effects reduce some sources of confounding, but they do not eliminate all policy endogeneity or differential state trends.

The paper estimates several alternative policy specifications. One specification separates full-withdrawal states from partial-withdrawal states:

This specification allows full-withdrawal and partial-withdrawal states to differ from the comparison group after the pandemic-policy period. The distinction is important because partial-withdrawal states announced or attempted early withdrawal but did not sustain withdrawal in the same way as full-withdrawal states.

A policy-intensity specification replaces the withdrawal indicators with a continuous measure of withdrawal timing:

In this specification, WithdrawalIntensitys measures the extent to which a state exited federal pandemic UI programs before their scheduled expiration.

The paper also estimates lagged-debt specifications:

where Borrowed _s,t-1 indicates whether a state had borrowing exposure in the prior year. These models test whether debt exposure is associated with weaker trust fund outcomes after accounting for initial solvency and policy timing. Because borrowing is likely endogenous to trust fund stress, the debt coefficients are interpreted as associations rather than causal effects.

Program-integrity specifications add improper-payment and fraud measures:

These models examine whether administrative-capacity measures are associated with variation in trust fund outcomes. Because improper-payment and fraud data are not available for the full panel and may vary in measurement across states and years, these estimates are treated as supplementary mechanism checks.

The paper also estimates an interaction specification: 

This model tests whether the association between policy timing and trust fund outcomes differs with the level of improper payments. Additional specifications split the sample into high- and low-improper-payment groups to assess heterogeneity. 

Finally, the paper estimates difference-in-differences and event-study models as supplemental checks. The difference-in-differences model compares post-policy changes in full-withdrawal states with the comparison group: 

The event-study model estimates year-specific differences around the pandemic-policy period: 

The omitted event-time category is the pre-policy reference year. These estimates are used to examine timing and assess whether treated and comparison states displayed differential pre-policy trends. Where pre-period coefficients differ from zero, the event-study estimates are interpreted as diagnostic rather than causal. 

Robustness checks include models excluding the largest states, specifications using winsorized dependent variables, and specifications omitting the 2019 solvency control. These checks test whether the main associations are sensitive to influential states, extreme values, or the inclusion of baseline solvency. 

Empirical Results

This Appendix reports the regression results supporting the discussion in Section 2. The models examine state unemployment insurance trust fund solvency before, during, and after the COVID-19 downturn. The dependent variables are the Average High Cost Multiple (AHCM) and the reserve ratio. AHCM is the primary solvency measure because it compares a state’s trust fund reserves with its historical high-cost experience. The reserve ratio is included as a secondary measure because it captures trust fund balances relative to covered wages. 

The results should be interpreted as descriptive evidence. The models include state and year fixed effects where appropriate, and several specifications control for pre-pandemic solvency. These specifications identify associations between initial trust fund condition, pandemic-program withdrawal timing, withdrawal type, borrowing, program integrity, and post-pandemic trust fund outcomes. They do not establish definitive causal effects. 

Initial Conditions with State and Year Fixed Effects

The first set of models examines whether pre-pandemic solvency predicts later trust fund conditions after accounting for state and year fixed effects. These models use 2019 AHCM and 2019 reserve ratio as baseline measures of state trust fund preparedness. 

The results show strong persistence. States that entered the pandemic with stronger trust fund positions generally remained in stronger condition afterward. This pattern appears for both AHCM and the reserve ratio. The 2019 solvency measures are positive and statistically significant in the corresponding models, and the models have relatively high explanatory power. This is consistent with the interpretation in Section 2 that the pandemic did not hit all states equally: states entered 2020 with different reserve positions, and those starting conditions shaped later outcomes. 

Full and Partial Withdrawal from Federal Pandemic Programs 

The second set of models separates states that fully withdrew from federal pandemic unemployment programs from states that partially withdrew. This distinction is important because announcement and implementation were not always the same. Some states announced or attempted early withdrawal but later faced legal, administrative, or implementation complications. 

Arkansas, Indiana, Maryland, and Oklahoma are treated as partial-withdrawal cases. These states should not be grouped with states that fully sustained early withdrawal. The results indicate that full-withdrawal and partial-withdrawal states followed different empirical patterns. The partial-withdrawal group does not reproduce the same results as the full-withdrawal group. 

This distinction supports the treatment of partial withdrawal as a separate category throughout the paper. The results do not prove that full withdrawal caused stronger trust fund outcomes, but they do show that full and partial withdrawal are not interchangeable in the data. 

Table A2. Full and Partial Withdrawal Models

Policy Intensity (Continuous Timing Measure) 

The third set of models examines policy intensity, measured through the timing and extent of early withdrawal from federal pandemic unemployment programs. These specifications focus on whether earlier sustained withdrawal is associated with stronger trust fund outcomes. 

The results indicate that earlier sustained withdrawal is associated with stronger AHCM and reserve-ratio outcomes. This relationship appears in the policy-intensity specifications and is consistent with the main descriptive results discussed in Section 2. The interpretation should remain cautious. 

Earlier withdrawal may reflect reduced benefit outflows or faster trust fund rebuilding, but it may also be associated with stronger labor-market recovery or fiscal conditions that made early withdrawal more feasible. 

The most defensible conclusion is that states that exited earlier and more completely tended to show stronger trust fund outcomes. The estimates should be framed as associations rather than causal effects. 

Table A3. Policy Intensity and Withdrawal Timing Models

Debt, Borrowing, and Tax-Side Controls 

The fourth set of models examines borrowing exposure, debt-related variables, and tax-side controls. These specifications test whether the core findings remain when accounting for state financing pressures and UI tax-related measures. 

The borrowing results generally point in the expected direction: states with borrowing exposure tend to show weaker trust fund outcomes. This should not be interpreted as proof that borrowing caused weaker solvency. Borrowing is likely a response to trust fund weakness. States borrow because they are under fiscal stress, so negative borrowing coefficients may reflect underlying weakness rather than an independent effect of borrowing itself. 

The tax-side controls provide an additional check. UI tax policy is central to trust fund financing, but these specifications do not overturn the main findings. 

Pre-pandemic solvency and withdrawal timing remain central to the empirical pattern. The tax variables should therefore be treated as supplementary controls rather than as the main explanatory result. 

Table A4. Debt, Borrowing, and State Tax Controls

Program Integrity and Exploratory Administrative Capacity Models 

The fifth set of models examines program integrity and administrative capacity, including improper payment measures and related exploratory specifications. 

These results are less consistent than the main solvency, withdrawal, and borrowing results. Improper payment and fraud variables may help describe administrative capacity, but they should not carry the paper’s central empirical claim. Measurement issues are likely important. Improper payment data may vary across states and over time, and fraud-related measures may reflect detection and enforcement capacity as well as the underlying level of fraud. 

For that reason, these specifications should be presented as exploratory. They are useful for showing that program integrity belongs in the broader UI solvency discussion, but the estimates are not stable enough to support strong conclusions about improper payments as a primary driver of trust fund outcomes. 

Note: Some integrity specifications are exploratory and they are reported to show sensitivity to administrative capacity measures. The main interpretation relies on the solvency, withdrawal, timing, and borrowing specifications, which are more stable across models.

Robustness Checks 

The final set of models reports robustness checks. These tests examine whether the main empirical patterns are sensitive to influential states, alternative treatment of outcomes, or changes in model controls. 

The specifications excluding large states and winsorized specifications preserve the main directional pattern: pre-pandemic solvency predicts later solvency; earlier and more complete withdrawal is associated with stronger trust fund outcomes; full withdrawal differs from partial withdrawal, and borrowing exposure is associated with weaker later outcomes. These results suggest that the main findings are not driven entirely by a small number of unusually large states or by extreme values in the dependent variables. 

The specifications that omit 2019 solvency controls are less stable. In those models, some policy coefficients change more substantially, underscoring the importance of baseline solvency in explaining later trust fund outcomes. This does not negate the broader descriptive pattern, but it does show that pre-pandemic trust fund condition is not merely a background control. It is central to the empirical story. States entered the pandemic with different reserve positions, and those initial conditions explain a substantial share of the variation in later solvency. 

The borrowing results require similar caution. Borrowing is not randomly assigned. States borrow because their trust funds lack sufficient reserves to finance benefit payments without additional support. This fiscal stress can appear through federal Title XII advances, private borrowing instruments, delayed repayment, or future employer tax increases. Borrowing should therefore be interpreted both as a marker of prior weakness and as a mechanism that can carry downturn costs into later years. A negative borrowing coefficient may reflect reverse causality: weak trust funds produce borrowing, rather than borrowing alone producing weak trust funds. 

The program-integrity results are also less consistent than the main solvency and withdrawal results. Improper payments and related administrative measures remain relevant to the broader UI solvency story, but the robustness checks do not support treating them as the central empirical driver. They are better interpreted as secondary indicators of administrative capacity that may condition how states experience and recover from fiscal stress. 

Taken together, the robustness checks support a disciplined interpretation of the results. The results are not wholly dependent on outliers or a single modeling choice, but they remain observational. Earlier and more complete withdrawal is associated with stronger post-pandemic trust fund outcomes, borrowing exposure is associated with weaker outcomes, and baseline solvency remains the most consistent predictor of later solvency. These patterns are durable enough to merit attention, but they should be read as descriptive associations rather than causal estimations. 

Table A6. Robustness Checks

End Notes

^[1] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026 (Washington, DC: US Department of Labor, 2026), https://oui.doleta. gov/unemploy/solvency.asp. 

^[2] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2020 (Washington, DC: US Department of Labor, 2020), https://oui.doleta. gov/unemploy/solvency.asp. 

^[3] US Department of Labor, Employment and Training Administration, “Unemployment Insurance Fact Sheet,” accessed April 30, 2026, https://oui.doleta.gov/unemploy/ uifactsheet.asp. 

^[4] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2021 (Washington, DC: US Department of Labor, 2021), https://oui.doleta.gov/unemploy/solvency.asp.

^[5] US Department of Labor, Solvency Report 2021.

^[6] Julie M. Whittaker, “RS22077: Unemployment Compensation (UC) Financing,” Congressional Research Service, December 15, 2020; Emerson Sprick, “How Is the Unemployment Insurance Program Financed?,” Bipartisan Policy Center, March 15, 2022, https://bipartisanpolicy.org/explainer/how-is-the-unemployment-insur-ance-program-financed/.

^[7] Edwin E. Witte, “An Historical Account of Unemployment Insurance in the Social Security Act,” Law and Contemporary Problems 3, no. 2 (1936): 155–69; Daniel N. Price, “Unemployment Insurance, Then and Now, 1935–85,” Social Security Bulle-tin 48, no. 10 (1985): 22–32; Ballotpedia, “Timeline of Unemployment Insurance,” accessed April 26, 2026, https://ballotpedia.org/Timeline_of_unemployment_in-surance.

^[8] Witte, “Historical Account of Unemployment Insurance.”

^[9] Price, “Unemployment Insurance, Then and Now,” 30.

^[10] Price, “Unemployment Insurance, Then and Now,” 30.

^[11] Price, “Unemployment Insurance, Then and Now,” 26–28; US Department of Labor, Fifty Years of Unemployment Insurance: A Legislative History, 1935–1985 (Washington, DC: Employment and Training Administration, 1986).

^[12] Federal Reserve Bank of St. Louis, “Unemployment Insurance: A Tried-and-True Safety Net,” Page One Economics, December 1, 2020, https://www.stlouisfed.org/ publications/page-one-economics/2020/12/01/unemployment-insurance-a-tried-and-true-safety-net.

^[13] Sprick, “How Is the Unemployment Insurance Program Financed?”

^[14] Sprick, “How Is the Unemployment Insurance Program Financed?”

^[15] William A. Niskanen Jr., Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971).

^[16] James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977).

^[17] James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor: University of Michigan Press, 1962).

^[18] US Bureau of Labor Statistics, “How the Government Measures Unemployment,” accessed June 28, 2021, https://www.bls.gov/cps/cps_htgm.htm#unemployed.

^[19] US Department of Labor, Employment and Training Administration, “Unemployment Insurance Fact Sheet,” accessed April 28, 2021, https://oui.doleta.gov/ unemploy/docs/factsheet/UI_Program_FactSheet.pdf.

^[20] US Department of Labor, Employment and Training Administration, “Unemployment Insurance Fact Sheet,” accessed April 28, 2021.

^[21] US Department of Labor, Employment and Training Administration, Estimated Employer Contribution Rates, Calendar Year 2025 (Washington, DC: US Department of Labor, 2025).

^[22] US Department of Labor, Solvency Report 2026.

^[23] US Department of Labor, Solvency Report 2026.

^[24] Julie M. Whittaker and Katelin P. Isaacs, Unemployment Insurance (UI) Benefits: Permanent-Law Programs and the COVID-19 Pandemic Response, CRS Report No. R46687 (Washington, DC: Congressional Research Service, January 31, 2022).

^[25] Paul Pierson, “Increasing Returns, Path Dependence, and the Study of Politics,” American Political Science Review 94, no. 2 (2000): 251–67; Elinor Ostrom and Xavier Basurto, “The Evolution of Institutions: Toward a New Methodology,” SSRN Electronic Journal, 2009, https://doi.org/10.2139/ssrn.1934360.

^[26] US Department of Labor, Solvency Report 2026.

^[27] See Appendix Table A1. The initial conditions models report positive and statistically significant coefficients for 2019 solvency controls in both AHCM and reserve-ratio specifications.

^[28] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026.

^[29] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026.

^[30] US Department of Labor, Employment and Training Administration, “Coronavirus Related Information for State Unemployment Insurance Agencies,” accessed April 26, 2026, https://oui.doleta.gov/unemploy/coronavirus/.

^[31] US Department of Labor, Employment and Training Administration, “Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 — Pandemic Unemployment Assistance (PUA) Program Operating, Financial, and Reporting Instructions,” Unemployment Insurance Program Letter No. 16-20, April 5, 2020, https://www.dol.gov/agencies/eta/advisories/unemployment-insurance-pro-gram-letter-no-16-20.

^[32] US Department of Labor, Employment and Training Administration, “Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 — Pandemic Emergency Unemployment Compensation (PEUC) Program Operating, Financial, and Reporting Instructions,” Unemployment Insurance Program Letter No. 17-20, April 10, 2020, https://www.dol.gov/agencies/eta/advisories/unemployment-in-surance-program-letter-no-17-20.

^[33] US Department of Labor, Employment and Training Administration, “Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020—Summary of Key Unemployment Insurance (UI) Provisions and Guidance Regarding Temporary Emergency State Staffing Flexibility,” Unemployment Insurance Program Letter No. 14-20, April 2, 2020, https://www.dol.gov/agencies/eta/advisories/unemploy-ment-insurance-program-letter-no-14-20.

^[34] US Department of the Treasury, “Economic Impact Payments,” accessed May 1, 2026, https://home.treasury.gov/policy-issues/coronavirus/assistance-for-ameri-can-families-and-workers/economic-impact-payments.

^[35] US Department of Labor, Employment and Training Administration, “CARES Act of 2020 — Summary of Key Unemployment Insurance (UI) Provisions,” UIPL No. 14-20.

^[36] US Department of Labor, Employment and Training Administration, “Presidential Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019 (COVID-19) — Unemployment Insurance (UI)-Related Technical Assistance for States Administering Lost Wages Assistance (LWA),” Unemployment Insurance Program Letter No. 27-20, August 12, 2020, https://www.dol.gov/agencies/eta/advisories/ unemployment-insurance-program-letter-no-27-20; US Department of Labor, “US Department of Labor Announces Guidance for the Lost Wages Assistance Pro-gram,” news release, August 12, 2020, https://www.dol.gov/newsroom/releases/ eta/eta20200812-0.

^[37] US Department of Labor, Solvency Report 2026.

^[38] Casey B. Mulligan, The Economic Effects of Pandemic Unemployment Programs (Committee to Unleash Prosperity, December 2020).

^[39] US Department of Labor, Solvency Report 2021.

^[40] Katelin P. Isaacs and Julie M. Whittaker, States Opting Out of COVID-19 Unemployment Insurance (UI) Agreements, CRS Insight No. IN11679 (Washington, DC: Congressional Research Service, updated August 20, 2021), https://www.congress. gov/crs-product/IN11679.

^[41] US Department of Labor, Solvency Report 2026.buyer.com/opinion/will-the-fed-kill-the-municipal-bond-market

^[42] US Government Accountability Office, Unemployment Insurance: Estimated Amount of Fraud During Pandemic Likely Between $100 Billion and $135 Billion, GAO-23-106696 (Washington, DC: Government Accountability Office, September 12, 2023), https://www.gao.gov/products/gao-23-106696.

^[43] US Government Accountability Office. Pandemic Unemployment Assistance: States’ Controls to Address Fraud. GAO-24-107471. Washington, DC: Government Accountability Office, July 23, 2024. https://www.gao.gov/products/gao-24-107471.

^[44] Casey Mulligan, Stephen Moore, and E. J. Antoni, “Bonus Unemployment Benefits Are Causing Major Labor Shortage in America,” Committee to Unleash Prosperity, June 2021, https://committeetounleashprosperity.com/wp-content/uploads/2021/06/CTUP_BonusUnemploymentBenefitsLaborShortage.pdf.

^[45] Hayden Dublois and Jonathan Ingram, Even in Florida, Taxpayer-Funded Benefits During COVID-19 Pay Better than Returning to Work (Naples, FL: Foundation for Government Accountability, May 11, 2021), https://thefga.org/wp-content/ uploads/2021/05/Florida-Incentives-Not-to-Work.pdf.

^[46] Harry J. Holzer, R. Glenn Hubbard, and Michael R. Strain, “Did Pandemic Unemployment Benefits Reduce Employment? Evidence from Early State-Level Expirations in June 2021,” NBER Working Paper No. 29575, December 2021.

^[47] Kyle Coombs, Arindrajit Dube, Calvin Jahnke, Raymond Kluender, Suresh Naidu, and Michael Stepner, “Early Withdrawal of Pandemic Unemployment Insurance: Effects on Employment and Earnings,” AEA Papers and Proceedings 112 (2022): 85–90.

^[48] Iris Arbogast and Bill Dupor, “The Jobs Effect of Ending Pandemic Unemployment Benefits,” Federal Reserve Bank of St. Louis Working Paper 2022-010, February 2023. https://ssrn.com/abstract=4213346.

^[49] Arbogast and Dupor, “The End of Emergency Pandemic Unemployment Benefits in 2021.”

^[50] Whittaker and Isaacs, “Unemployment Insurance (UI) Benefits”; Ballotpedia, “State Government Plans to End Federal Unemployment Benefits Related to the Coronavirus (COVID-19) Pandemic, 2021.”

^[51] Whittaker and Isaacs, “Unemployment Insurance (UI) Benefits.”

^[52] Ballotpedia, “State Government Plans to End Federal Unemployment Benefits Related to the Coronavirus (COVID-19) Pandemic, 2021.”

^[53] US Department of Labor, State Unemployment Insurance Trust Fund Solvency Report 2026. DOL reports that two states had outstanding Title XII advance balances totaling
$21.4 billion and one state had outstanding private borrowing instruments totaling an estimated $1.86 billion as of January 1, 2026.dition-August-2013.pdf

^[54] The states with the outstanding Title XII advance balances are California and the US Virgin Islands (the latter is not included in this analysis). California an outstanding Title XII balance with $21,427,502,779 (99.9 percent of the total balance owed) while the US Virgin Islands had an outstanding balance of $19,879,008 for a total of $21,447,381,787. The state with the outstanding private borrowing was Massachusetts.

^[55] US Department of Labor, Employment and Training Administration, “Unemployment Insurance Payment Accuracy by State.”

^[56] US Government Accountability Office, GAO-23-106696: Unemployment Insurance: Estimated Amount of Fraud During Pandemic Likely Between $100 Billion and $135 Billion. September 12, 2023. https://www.gao.gov/products/gao-23-106696

^[57] US Department of Labor, Employment and Training Administration, Estimated Employer Contribution Rates, Calendar Year 2025.

^[58] Holzer, Hubbard, and Strain, “Did Pandemic Unemployment Benefits Reduce Employment?”

^[59] Coombs et al., “Early Withdrawal of Pandemic Unemployment Insurance.”

^[60] Arbogast and Dupor, “The Jobs Effect of Ending Pandemic Unemployment Benefits.”

^[61] For reform-oriented discussions of unemployment insurance financing, work incentives, program integrity, and employer tax burdens, see Matt Darling, “Cre-ating a More Dynamic Unemployment Insurance System: The Case for Eliminating Experience Rating,” Niskanen Center, April 23, 2024; Chris Edwards and George C. Leef, “Failures of the Unemployment Insurance System,” Cato Institute, June 1, 2011; William Yeatman, “Unemployment Insurance Waste Is a Debacle Years in the Making,” Cato Institute, June 11, 2021; and Tax Foundation, “How the Federal Government and the States Could Help Save Small Businesses Through Temporary UI Tax Adjustments,” March 17, 2020.

^[62] Eric Alston, Amber Case, and Michael Zargham, “Path Dependence: An Uncomfortable Institutional Design Axiom,” conference paper, Digital Library of the Commons, Indiana University, 2024, https://hdl.handle.net/10535/11015.

^[63] Veronique de Rugy, “A Better Form of Unemployment Protection,” Regulation, Spring 2021, https://www.cato.org/regulation/spring-2021/better-form-unem-ployment-protection.

^[64] Veronique de Rugy, “A Timely Redux for Personal Unemployment Insurance Savings Accounts,” Mercatus Special Edition Policy Brief, April 3, 2020, https://ssrn.com/abstract=3592936.

^[65] de Rugy, “Timely Redux.”

^[66] de Rugy, “Better Form of Unemployment Protection.”

^[67] de Rugy, “A Timely Redux.”

^[68] Kirsten Sehnbruch, Rafael Carranza, and Dante Contreras, “Designing Unemployment Insurance Systems in Developing Countries: Moral Hazard vs. Liquidity Constraints in Chile,” May 21, 2020, https://ssrn.com/abstract=3607058.

^[69] Sehnbruch, Carranza, and Contreras, “Designing Unemployment Insurance Systems.”

^[70] William McBride, Huaqun Li, Garrett Watson, and Alex Durante, “Simplifying Saving and Improving Financial Security through Universal Savings Accounts,” Tax Foundation, May 29, 2024, https://taxfoundation.org/research/all/federal/ universal-savings-accounts-financial-security/.

^[71] In addition to the 11 savings vehicles mentioned in McBride et al., the federal tax code will also offer Trump Accounts for children as well as Trump IRAs. This point is offered only as an illustration of the broader complexity of the federal savings system, not as a separate empirical claim.

^[72] Thomas Savidge, “The Work vs. Welfare Trade Off Revisited,” AIER, February 19, 2025, https://aier.org/article/the-work-vs-welfare-tradeoff-revisited/.

^[73] Adam Michel, “Universal Savings Accounts to Help Families Build Wealth,” Cato Institute, May 22, 2024, https://www.cato.org/blog/universal-savings-accounts-help-families-build-wealth.

^[74] Michel, “Universal Savings Accounts.”

^[75] McBride et al., “Simplifying Saving.”

^[76] McBride et al., “Simplifying Saving.”

^[77] US Department of Labor, Solvency Report 2026.

^[78] US Government Accountability Office, “Fraud and Improper Payments,” accessed April 27, 2026, https://www.gao.gov/fraud-improper-payments.

^[79] US Department of Labor, Solvency Report 2021.

^[80] US Department of Labor, Solvency Report 2021.

^[81] US Department of Labor, Solvency Report 2021.

^[82] US Department of Labor, Solvency Report 2021.

^[83] US Department of Labor, Solvency Report 2021.

^[84] US Department of Labor, Solvency Report 2021.

“

Most recently, their scapegoat for high drug prices has become pharmacy benefit managers, or PBMs. PBMs operate as the middlemen between drug manufacturers, insurance companies, pharmacies, and employer health plans. They negotiate rebates with pharmaceutical companies, determine which drugs are covered by insurance plans, and help manage prescription drug benefits for millions of Americans. In recent years, concerns have grown about PBM business practices and increasing vertical integration within the healthcare industry. Many of the largest PBMs are owned by or affiliated with major health insurers and pharmacy chains, creating complex corporate structures that place multiple parts of the prescription drug supply chain under common ownership. Critics argue that these arrangements can create conflicts of interest and reduce market competition, while supporters contend they help coordinate care and lower costs through economies of scale. Because they sit in the middle of the prescription drug supply chain, PBMs have become powerful players in the debate over healthcare costs and transparency. 

In February, Congress passed major PBM reforms through the Consolidated Appropriations Act (CAA), requiring expanded reporting on rebates, fees, spread pricing arrangements, and financial relationships throughout the prescription drug supply chain. The law imposed substantial new oversight and transparency requirements on PBMs operating in both Medicare and the commercial market. Now, before those reforms have even had time to fully take effect, the Department of Labor (DOL) has proposed a second, overlapping disclosure regime targeting PBMs that serve self-insured employer plans. 

The DOL’s proposed PBM Fee Disclosure Rule would require PBMs and affiliated consultants to disclose extensive information regarding direct and indirect compensation under Employee Retirement Income Security Act (ERISA) fiduciary standards. The proposal is framed as a transparency measure. Transparency itself is not the problem. The problem is that Congress already established a broad federal transparency framework through the CAA just months ago. 

Instead of allowing those reforms to be implemented and evaluated, the DOL is building a parallel compliance structure with separate timelines, reporting expectations, and disclosure obligations. 

The problem of bureaucracy, which creates layers of overlapping functions, is well documented. Gary Hamel and Michele Zanini of the Management Lab and co-authors of Humanocracy estimate that the cost of excess bureaucracy in the US economy amounts to more than $3 trillion in lost economic output, or about 17 percent of GDP. 

This effect is no less significant with PBMs, who would now have to navigate overlapping systems governing many of the same financial arrangements. In some cases, the same transaction could require disclosure under multiple regulatory frameworks using different definitions and standards. 

To keep up with the layered compliance requirements, it takes staffing, legal review, auditing infrastructure, reporting systems, and operational restructuring. Large PBMs will likely absorb those costs. Smaller and mid-market PBMs may not, effectively pushing some out of the market altogether and leaving even more power concentrated among the largest players. 

Ironically, that could undermine the very accountability policymakers say they want. Less competition rarely leads to lower prices or greater responsiveness. It creates markets where fewer institutions dominate more of the system while smaller innovators and regional actors disappear under administrative burden. 

Supporters of the DOL proposal will argue that stronger transparency standards are necessary because PBMs remain opaque and influential actors in the healthcare system. They are not entirely wrong, but they’re failing to recognize that Congress already tackled that issue with CAA. For example, the CAA already requires PBMs to report information related to rebates, fees, spread pricing arrangements, and compensation structures throughout the prescription drug supply chain. The DOL proposal would require many of the same entities to disclose overlapping compensation and financial relationship data under the Employee Retirement Income Security Act (ERISA) framework. Two new sets of rules that effectively do the same things are not useful in practice. 

The better approach now is to allow the CAA reforms to take effect, assess whether meaningful gaps remain, and coordinate future oversight in a way that strengthens accountability without creating more bureaucracy and unintentionally reducing competition. 

Washington wanted more transparency in the PBM market. Fair enough. But if regulators are not careful, they may end up creating a healthcare system where only the largest firms can afford to survive, competition shrinks as smaller players are pushed out, and the high costs policymakers set out to address become even more entrenched.

Vacancy taxes have been in vogue recently. France has a nationwide housing vacancy tax, Ottawa implemented one a few years ago, Washington, DC has enacted a vacancy tax on both residential and commercial properties, and San Francisco has an active commercial vacancy tax.

Do these vacancy taxes reduce rents? The best available evidence says no. These taxes do appear to reduce vacancies, but it is unclear whether they also reduce housing supply. After all, one way to avoid a housing vacancy tax is to reclassify a structure as nonresidential, such as by removing the kitchen.

Some people seem to be under the impression that landlords are hoarding a large number of long-term vacant units for no apparent reason. Supposedly they do this because they are “speculating” on the vacant units. But if you’re speculating on housing, why wouldn’t you rent it out and make some extra income while you’re seeing if the underlying value will rise?

In fact, when more housing units become vacant, rents fall. This is an extremely clear relationship, validated by sophisticated scholarship as well as the plain evidence of one’s eyes. Here’s a chart from the left-leaning Center for Economic and Policy Research (Figure 1). High vacancy rates are followed by declines in rental costs.

And here are two charts of Austin, Texas recently posted by Nolan Gray on X (Figure 2). Vacancy rates in Austin fell dramatically right before rents rose equally dramatically. Then as rents fell back, vacancy rates rose again.

When housing providers have vacant units, they cut rents to attract renters. That’s just basic economics.

In most cases, it makes no sense to hold property and pay property taxes and insurance on it while making no income from it, even in the absence of vacancy taxes. When Ottawa enacted a vacancy tax, it found that it applied to only a few thousand units. As of 2023, 4,140 dwelling units had to pay the vacancy tax there, amounting to 1.2 percent of the housing stock to which the law applies and 1.0 percent of the total housing stock. Glenn Gower frames the tax as a success because between 2022 and 2023, 1,602 previously vacant housing units became occupied. But even if we assume that every single one of these newly occupied units was driven to the market by the vacancy tax, that’s just 0.4 percent of Ottawa’s housing stock, with an infinitesimal effect on rents under any reasonable assumptions about the elasticity of housing demand.

It’s unclear whether vacancy taxes will even reduce rents on net. Will housing providers treat vacancy taxes paid as another cost of business that they must recoup from their tenants? If so, they may raise rents on already-occupied units to cover the cost of the vacancy tax.

In fact, there are a few rare cases when it does make sense to leave a unit vacant. For example, if the unit is substandard and requires massive, costly renovations that one cannot yet afford to perform, it may be better to keep the unit vacant rather than undermine one’s reputation and brand in the community by renting out a substandard unit that elicits complaints and perhaps even unfavorable regulatory attention. Thus, a vacancy tax may disproportionately force substandard units into the market.

Second homes are also typically vacant for a majority of the year, making them potentially subject to vacancy taxes. Zohran Mamdani’s pied-a-terre tax in New York is apparently intended to deter people from having second homes in the city, with the idea that these homes will be made available to full-time residents.

But let’s think through the consequences of deterring high-net-worth individuals from visiting and spending time in New York. How will these changes affect the important retail, hospitality, entertainment, and arts industries in the city? Will the tenants helped by a small number of second homes’ coming to market lose more in wages and employment from the second-order effects of the tax?

One final reason why a housing provider might hold a unit back from the market is that rent controls and eviction protections could mean that the rental income would not cover the operating cost of renting out the unit. These are reasons to roll back rent control and eviction protections rather than force housing providers to take losses. After all, if the owners of rental buildings find that their line of work has negative returns, they will try to get out of it. And that could mean, alongside deferred maintenance, condoization, demolitions, and residential-to-commercial conversions, a decline in multifamily structure property values, putting more of the property tax burden on everyone else in the city. Indeed, New York’s tightening of rent stabilization in 2019 has done just this, even playing a role in forcing Signature Bank into FDIC receivership and New York Community Bancorp into near-collapse.

What about vacancy taxes on commercial properties, as Washington, DC and San Francisco have enacted and Tacoma, Washington is considering? High commercial vacancy rates in the 2020s are a legacy of the pandemic and the rise of work-from-home. Commercial rents and values have already dropped to rock-bottom in much of the country. Will punishing these owners with vacancy taxes help the situation? Owners of vacant commercial buildings need more cash flow and collateral to finance conversions, not less. (It’s also not clear that owners will comply with commercial vacancy taxes: San Francisco’s commercial vacancy tax has resulted in widespread underreporting.)

The solution to vacant commercial buildings is to reform local zoning rules and permitting processes to speed conversion of these structures to other uses. If necessary, cities could also consider tools like land-value taxation or tax-increment financing (TIF) to reduce the extent to which property taxation disincentivizes value-increasing improvements. These solutions face their own limitations, from the difficulty of assessing the unimproved value of urban land to the potential for TIF to be a tool of cronyism, but at least they rely on improving the financial strength of partners in development, not harming it.

Even if vacancy taxes work exactly as designed, they are not a major solution to the housing crunch. Their positive and negative effects are generally small. The biggest problem with vacancy taxation is its use as a totem by people who oppose housing solutions that would make a real difference, namely, making it easier and less costly to build housing.

In one much-cited example, a molecular diagnostics company developed non-invasive prenatal testing that allowed fetal DNA to be collected from the mother’s blood, replacing invasive in-utero testing that risks pregnancy loss. The judge called it a “meritorious invention” but was compelled to invalidate patents because the circulating DNA is a natural phenomenon, and the test was well understood. The discovery was beyond the reach of patent eligibility. Competitors were immediately empowered to duplicate the technique.

The result has been a decline in innovation, ceding America’s global leadership in critical areas like medical diagnostics to our foreign partners and rivals. The bipartisan Patent Eligibility Restoration Act of 2025 (PERA) attempts to rectify this by clarifying what inventions can be protected under the US Patent Act Section 101. PERA is before the Senate Judiciary Committee and would define clear statutory exceptions to patentable subject matter that would replace broad and vague judge-made exceptions. 

The Patent Act allows useful and new manufactured products, machines, processes, compositions of matter, and improvements to these to be patented, so long as they are novel and non-obvious. The goal is to incentivize inventors, researchers, and investors to allocate the substantial time, resources, and talent it takes to bring about scientific and technological advancements by granting them a temporary monopoly. 

Unlike trade secrets, patents are publicly disclosed, allowing anyone with the means to replicate and reproduce the inventions after the patent expires, or to license them from the owner during the patent period. Protections against infringement give innovators confidence to share inventions with manufacturers, distributors, and other commercial partners.

Historically strong patent rights have made America both a leader in pharmaceutical research that creates new cures, as well as a leader in speedy and abundant availability of generic drugs, which account for over 90 percent of US prescriptions. Manufacturers would have nothing to replicate if inventors and investors did not have the incentive and ability to recoup R&D investments. Patents also encourage inventors to make useful improvements to their existing works to secure new patents.

By 2014, the Supreme Court held that abstract ideas, laws of nature, and natural phenomena could not be patented even though these categories are not mentioned in the Patent Act. Alice, Mayo, and Myriad were well-intentioned rulings. Since these are discoveries rather than inventions, the court reasoned that making them patentable subjects would restrict or penalize use of the building blocks of human ingenuity. This would defeat IP’s constitutional purpose of promoting “the Progress of Science and useful Arts.” Patent claims tied to one of these categories must include an “inventive concept” placing them outside the banned category. Since these rulings, medical diagnostics, certain biotechnologies, and software and AI tools have become difficult if not impossible to patent despite their economic value and the substantial investment and research it often takes to discover them.

PERA addresses the Supreme Court’s rationale while encouraging innovation. It would replace the Court’s broad non-patentable subject categories with narrower statutory prohibitions against patenting unmodified genes and natural compounds, human thoughts, laws of nature, mathematical formulas and abstract methods. PERA affirms the patent-eligibility of diagnostic tests, extracted chemical compounds, modified genes, and computer processes requiring a “machine or manufacture.” By restricting patent protection to novel, non-obvious innovations, it maintains guardrails against weak or frivolous patents.

​Computer processes using standard programming or off-the-shelf Large Language Models (LLMs) remain difficult to patent. To qualify, computer processes must offer something novel to programmers of ordinary skill — beyond what exists in GitHub repositories, academic papers, or open-source documentation. Applicants must publicly disclose their algorithms, code, and training methodologies. This transparency encourages developers to innovate “around” existing work without infringing, similar to how Instagram replicated TikTok’s “Reels” and Google replicated Microsoft Word to create “Docs.”

Unlike the United States, the EU and China did not restrict patenting diagnostics in 2012–13. Europe’s In-Vitro Diagnostics market grew 2.7 percent annually following that period. Because 74 percent of investors prioritize patent eligibility, Supreme Court decisions likely drove investment away from US diagnostic research firms toward Europe and Asia. Today, Asia hosts 40 percent of molecular diagnostic kit manufacturers, while the United States hosts only 29 percent. If broad patent eligibility hindered innovation, we would expect the opposite result. 

​Protecting novel, useful innovations from broad, sweeping exemptions will strengthen America’s patent system and economic competitiveness. Conversely, ceding leadership to China and Europe through overbroad IP restrictions threatens jobs and opportunities for American innovators, entrepreneurs, and researchers. 

The guns versus butter graph illustrates a fundamental economic reality: in a world of scarce resources — land and raw materials, labor, and capital — devoting more resources to producing one good necessarily means producing less of another, all else equal. Because resources typically have multiple uses, the true cost of any choice is the value of the next-best alternative forgone, known as its opportunity cost. A production possibilities frontier, the broader category to which the guns versus butter graph belongs, neatly visualizes this constraint by showing the menu of feasible combinations available to an individual, firm, or entire society.

The specific example of a tradeoff between guns and butter depicts a societal decision made by governments, whether through democratic processes or dictatorship. While the classic example may feel somewhat dated today (a more contemporary version might be military drones versus smartphones), it still captures a timeless reality: producing more military goods necessarily means devoting fewer resources to consumer goods.

Consistent with this theory, a survey of the empirical literature on the economic effects of military spending by Dunne and Tian finds that the predominant conclusion is that “military expenditure has a negative effect on economic growth.” In times of war, military personnel and civilians bear the ultimate and most tragic costs. Beyond this human toll, however, the guns versus butter analogy reminds us that war also carries significant economic costs. 

The trade-off represents a static snapshot where resources are fixed in the short run. But, in the long term, technological improvements, driven by investment, better institutions, access to markets, and innovation, expand the production possibilities frontier, allowing societies to produce more of both guns and butter. As the US experience during WWII demonstrates, it is the entrepreneurial dynamism, economic flexibility, and material abundance brought by open and competitive markets that ultimately provide the strongest foundation for national defense. Conversely, restrictions on technology, resource shocks, erosion of the rule of law, weakened property rights, and trade barriers can shrink the frontier, reducing the production of both military and civilian goods. 

Paul Samuelson’s popular textbook Economics (1948) was the first apparent depiction of a guns versus butter graph, making it a permanent staple of introductory courses. Samuelson was introduced to the first production possibilities frontier graph, depicting the tradeoff between two goods, by his Harvard professor Gottfried von Harberler, a student of Friedrich von Wieser and Ludwig von Mises, who had introduced it in his book Theory of International Trade (1936).

Yet the underlying insight, arguably, reaches back much further. In Book IV of Wealth of Nations, Adam Smith meticulously documented the economic costs of Britain’s imperialism. Subduing, protecting, and administering far-flung territories had enormous costs and few benefits. Contrary to the prevailing wisdom of his day, he argued that empire, once all the tradeoffs were considered, diminished the wealth of nations rather than increasing it.

Modern scholars have built on Smith’s foundation, adding insights from public choice theory and Austrian economics to “understand state-provided defense in the actual world,” to better appreciate the incentive and knowledge problems and the erosion of domestic liberties that can come from militarism. International relations theory has also questioned the benefits of defensive buildups, given the inherent security dilemma where increasing allocation to “guns” leads other countries to do likewise, leaving all countries in the same relative position defensively, with consumers bearing the costs. James Monroe recognized this (in a letter to John Quincy Adams) following the Treaty of Ghent, observing “The increase of naval armaments on one side upon the lakes, during peace, will necessitate the like increase on the other, and besides causing an aggravation of useless expense to both parties…”

Wikipedia’s entry for the guns versus butter model claims the origin of the analogy traces back to the United States during World War I. That, however, does not appear to hold up. The cited references fail to support it, and extensive searches of variations of the term on Newspapers.com and Google Ngrams do not turn up results that can confirm those origins. Rather, the historical evidence suggests another, far more sinister, origin.  

The phrase appears to have originated in Nazi Germany (referred to as “kanonen und butter” in German). As Adam Tooze demonstrates in Wages of Destruction, living standards in the Weimar Republic — and even more so under the Nazis — lagged behind those in Britain and the United States. Hitler’s drive for territorial expansion to secure land and resources ran headlong into the economic reality captured by the guns versus butter tradeoff: building a massive military required significant sacrifices from German consumers.

To encourage those sacrifices, the Third Reich launched a propaganda campaign — widely reported in US newspapers — urging Germans to patriotically accept lower living standards, including higher prices, fewer consumer goods, and rationing, in order to produce more Panzers and Messerschmitt Bf 109 fighters for the Fatherland. In 1936, Joseph Goebbels declared, “We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns.” Hermann Göring put it even more bluntly: “Guns will make us powerful; butter will only make us fat.” Mussolini soon appropriated the same rhetoric as a patriotic slogan.

The British diplomat and journalist R. H. Bruce Lockhart published a 1938 memoir of his travels through Europe, Guns or Butter, in which he classified countries as either “butter” or “gun” countries. Butter countries enjoyed peaceful societies and higher standards of living, while gun countries sacrificed living standards to pursue military buildups. Even in 1938, Lockhart recognized from his travels that “Germany put guns before butter.”

Adam Tooze notes that estimates of German economic growth between 1935 and 1938 indicate that direct and indirect military expenditures accounted for two-thirds of the increase in national output, compared with just 25 percent for private consumption. Japan, too, pursued resource-driven territorial expansion and chose guns over butter. As Michael Barnhart writes in Japan Prepares for Total War, “One route did exist which avoided reliance on foreign nations or occupied areas, was politically possible, and was especially attractive to the Planning Board. Still harsher controls could be imposed on consumption within the Japanese Empire.”

And the sacrifice made by consumers wasn’t limited to the Axis powers. The Allies were also required to make drastic wartime sacrifices in response. In The Journal of Economic History, economic historian Robert Higgs writes that “during the war the economy was a huge arsenal in which the well-being of consumers deteriorated…” Economists Steve Horwitz and Michael McPhillips supplement this with archival evidence from newspapers and diaries, finding that “the wartime economy actually amounted to a retrogression for many families because they had to supply additional labor, accept inferior goods, and do without many goods altogether as resources were diverted to the war effort and wartime controls constrained the market process.” 

The tradeoff for the Soviet Union was even more devastating, Tooze notes. “…the production [of military equipment] came at the expense of enormous sacrifice on the Soviet home front,” he writes, “where hundreds of thousands if not millions of people starved to death for the sake of the war effort.”

It is this bitter experience that led President Eisenhower to observe:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

The guns versus butter tradeoff remains one of the most powerful analytical tools in economics precisely because it forces us to confront an uncomfortable truth: resources are finite, and every choice carries a cost.

The phrase’s apparent origins in Nazi Germany — and its grim application during the 1930s and 1940s — remind us that when governments prioritize guns over butter, the burden falls heaviest on ordinary citizens through lower living standards. Adam Smith recognized this principle in the eighteenth century, famously distilling the ingredients of prosperity to “peace, easy taxes, and a tolerable administration of justice.” The ultimate lesson of the guns versus butter graph is straightforward: military buildups and war come with real tradeoffs, often at the expense of civilian prosperity and living standards.