Welcome to Cato Audio for June 2024. I'm Caleb Brown. In this month's offering, Joanne Norbert details the threats to what has given us the healthiest and wealthiest time in human history. Scholars Jason Fichtner and Rachel Gressler discuss the urgent need for social security reform. Krishant Naran of the Nii Regulatory Research Center discusses economic freedom in India and its lessons for the U.S. Cato's Nick Anthony will discuss how, despite a looming change to federal marijuana policy, banking for cannabis-based businesses will likely remain a nightmare. First up, this month's Cato Roundtable.
One of the most vexing and pressing issues for economics, for family formation, for building wealth across generations is housing. And to discuss the issue of housing and where we ought to go from here, I'm speaking with Brian Kaplan, author of the new Cato Institute book, Build, Baby, Build, The Science and Ethics of Housing Regulation. He's also an adjunct scholar at the Cato Institute. And Nolan Gray, author of Arbitrary Lines, How Zoning Broke the American City. and how to fix it. And for our listeners, I'll refer you to the event we recently hosted for Brian's book to sort of highlight a lot of the false narratives that are nonetheless pretty popular surrounding housing. Brian, if you don't mind, let's begin way back before this book was even written. What inspired you to continue your comic book quest, if you will, with this?
Well, my first graphic novel, Caleb, was Open Borders, The Science and Ethics of Immigration. And honestly, that book was a New York Times bestseller. Combined with it, it was really fun to do. So it's put two things together. It was really successful. And I had a ball actually creating the book. So that made me think, hey, I'd really like to do another one. I actually started doing the storyboards in the very first weeks of COVID, where I felt too distracted to do something that was a traditional book. But somehow this felt more like I can do this even when the world is crumbling to pieces around me. So let's do something productive with the time.
And this is what I like about this book. In addition to, as I mentioned before we started recording, the correct usage of champing at the bit, the Brian Kaplan character in your book, a very flattering portrayal, I might add, is if you can't draw yourself well, why not? He won't let you go ahead and adopt the super duper solution. He's like, no, no, no. But what if I'm wrong about X, Y, and Z? Let's examine further. It's like you won't allow Brian Kaplan to win the argument without thoroughly interrogating the opposition.
Yeah, my friend Tyler Cowen once told me that I seem to like arguments almost like they're my own children. I'm like, well, that's actually making it sound like there's a difference. Arguments are children. I do really like the idea of taking an argument that at first doesn't seem very impressive or people aren't taking it seriously. It's like, this is actually a good argument. It's got potential. It just needs work. I'm going to go and raise this argument and make it strong.
So yeah, that is the way that I like to write books. I don't want to go and dodge hard questions. I always want to go and find out what are the strongest arguments against and let's confront them directly. Let's not go and demagogue them. Let's go and grant everything that we can reasonably grant to them and then see whether there's anything left after we dissect them. Well, let's start with some of those arguments. And to set the table here, the United States has a housing problem. It is widely believed that the United States is simply producing dramatically less housing than Americans demand and prices have reflected.
that lack of housing production. So just with that as background, why do we have that? Why is there so little housing being produced when people are ready to pay for it? Yeah, that's a great question. This really opens the book. The book definitely says, look, supply and demand is a fine place to start if you understand what's going on with U.S. housing. But if you think that it's just like other cases, well, there just happens to be low supply, happens to be high demand. What can one do? Of course, it's going to be expensive, just like courtside seats at a basketball game. So look, this is actually unusual because a lot of the reason why supply is so low is the government makes it low. Government makes it very hard to actually use the technologies that we've got to go and supply housing in abundance, which means that the cost is artificially much higher than it really needs to be.
Some of the technologies are things we've only had for like 100 years or so, like building really tall buildings. But also you just have a lot of regulations saying things like you're required to have only one house per acre of land. This is something that 3,000 years ago people could do better than that. And yet government says, no, you're not allowed to build too many homes in that space. It's just not right to do it. Put all this together and the rules make it really expensive to go and make homes. And that, I say, is the main reason why housing prices have risen so much more than inflation. Because key, it's not just inflation. We've had so much inflation in recent years, it's easy to say, well, everything's going up. But housing is especially going up even compared to inflation.
Nolan Gray, you have dug into the history of a lot of this in your book. How did we get here? Yeah, well, thanks for having me, Caleb, and thanks, Brian, for writing this great graphic novel. Thank you. You know, I think a lot of people have a sort of comforting narrative about zoning. Okay, we had these issues of incompatible neighbors, and we didn't want factories next to schools and housing, and we needed to coordinate growth with infrastructure, so we adopt this thing called zoning, right? At least that's certainly a version of that is taught in many planning schools, and I think that's the impression that people get from playing SimCity or City of Silence, you know, as I have for many hundreds of hours. Of course, if you actually look at the origins of zoning, it's often much more rooted...
in explicit attempts to carve up cities on the basis of socioeconomic status and often on race. So saying, look, if you're going to live in a certain type of neighborhood, you are not allowed to live here unless you can afford a house that's at least 2,000 square feet or on a half acre lot. You cannot live here in an apartment or a townhouse. So the vast majority of your typical American city, 75 to 90% of residential areas, the only form of housing you can legally build is a detached single family home. And part of that's rooted in explicit attempts by the government to segregate cities. And part of it's rooted in, I think, a little bit more of a sympathetic desire for folks to say, well, I want my community to look a certain way. And I think that's perfectly fine if you voluntarily opt into those rules through a deed restriction or a homeowner's association.
But I don't think it's the government's business, certainly to be imposing segregation on cities, but even to be maintaining a certain quote-unquote community character. I think that folks can voluntarily opt into arrangements that will guarantee that without bridging the rights of other people. Now, Brian, as a policy matter, as we were discussing briefly before we started recording, the view of radically reducing the regulation surrounding housing, allowing the supply to meet the demand at what we expect to be more reasonable prices is not controversial. Well, what's controversial is that the government should actually go and start reducing the regulations. Because every regulation exists because somebody thinks it's a good idea. And I say the best way of thinking about it is that almost all the regulations that exist are there because people think the world would be a lot worse without them. And a lot of what I try to do in Build Baby Build is, first of all, say there are high costs of these. It's not something where you just costlessly solve the problem or cheaply solve the problem. Rather, you are really jacking at the price of housing often to deal with pretty minor issues. But like Nolan was saying, often there is a private way of dealing with the problem if you really take it seriously. And then the last thing that I think almost no one really thinks about is that
When you build new things, of course there's going to be some bad things that go with it, but there's also going to be some good things. And you need to think about the package. And here's what's amazing when you really start thinking about new construction as a package of good and bad things that happen to people that are nearby, which is you say, huh, well, maybe it's a good package. How would we know? And I say, actually, actions speak louder than words so we can just see. Look, if you were a typical New Yorker, bellyaching about all the traffic and noise and everything else, there's a really easy way for you to solve your problems. Move out to the middle of nowhere. You will save a pile of money and no one else will ever bother you again.
Why then aren't they doing it? And the answer really has to be that despite all the complaining about the negatives, they put even more value on the positives. Positives like there's a lot of restaurants or there's good jobs around here or there's cultural opportunities. And that's what's really striking is that the voice of all the good things that are going to happen that people aren't thinking about doesn't really get voiced in policy. It's more like, let's hear all the complaints.
all right, there's some complaints, so let's stop things. Like, well, what about all the people saying that things are good? And very real to human nature, because I think almost everyone knows that people just complain a lot more about things they don't like than sit around saying, oh, isn't it wonderful that I have this thing and that thing? Isn't it wonderful that I can walk? Isn't it wonderful that I still have the ability to speak? This is not the kind of thing people talk about, and yet it's highly relevant. And it's not just some weird philosophical point, because like I said, actions speak louder than words. People pay a lot of extra money to get the package of population, which means something, means a lot.
Yeah, I mean, I'll just say, I think, you know, something that Brian actually does really effectively in the book is that I think part of the reason why we got these rules that make it just so hard to build housing is that we didn't want to solve other problems of density through prudent means, right? So when you actually ask people, we've done this in various surveys, what are your concerns about new development? Maybe they're just being polite. They're not saying things like, well, I don't want somebody poorer than me or somebody of a different race near me. Maybe they're being polite and telling, you know, not espousing unacceptable views, but I think...
what they say is like probably basically correct, which is I'm concerned that my off-street parking is going to be taken away and I'm concerned that the traffic is going to get worse. And as Brian has pointed out, you know, we actually have market mechanisms for solving those problems. We can apply prices to otherwise unpriced government comments that get overly exploited. So you can have prudent on-street parking pricing and have that revenue go back into community improvements. You can have congestion pricing or tollways. And again, invest that money into alternative transportation means that deal with these problems without saying, well, we're just going to solve these problems on the margin of stopping all growth. So, you know, I think that's part of the story here is that it's not just about, well,
need to remove a lot of these land use regulations that stand in the way of new housing production. That's necessary, but not sufficient. But I think to make that politically stable, you also have to solve some of these other urban quality of life issues by applying prices. I mean, what's crazy about the situation is that I think most psychologically normal people will freak out and say, what about the poor? The poor won't be able to pay to drive. The poor won't be able to pay to park. It's like, so what is better for poor people to have cheap housing, but you have to go and pay to park and drive during peak times if you in fact want to, or to go and have really expensive housing and then parking and driving are free. And on top of that, also really congested.
The idea that the first thing is really unfair and the second thing is fair, it's just so bizarre. There's this strange fetishization of free driving and parking as if these are things that is just meant to be free for all, regardless of how ridiculous it is, even when you turn your roads into parking lots. five times or really 10 times a week. It's like, what's the point of all this? Why is it you can't just go and use prices to do this? And you're worth pointing out that there used to be some technological issues in charging people for doing all this stuff all the time. But now you can just reach in your pocket, take out your phone and realize we have the technology as the $6 million man taught us in the 1970s. We are in a world where we could easily do it. The only barrier remaining is massive popular opposition to doing the common sense solution to the problem. Brian, I don't think Nolan remembers the 1970s very well. Well, surely you saw the $6 million man in reruns.
And there's also a graphic novel, season three, Six Million Dollar Man, where they went and did one more season just for all the diehards. So don't miss it. It's good. And so, Brian, back to your book, you take some pains to point out that those who are associated with the left... broadly are also singing this same tune that radically reducing the regulation surrounding housing is the one thing that really could make a huge difference for the ability of people to own, secure, and have just reasonable cost of housing. But once again, I think that speaks to the fact that in the policy world, this isn't all that controversial. And once you take this argument to communities, that's where the problems begin.
Right, and that's probably why, actually no one knows more than I do, that a lot of the reforms we're seeing at the state level where they're actually taking it out of the hands of local communities. I know there's probably a lot of Cato fans who really love localism, but I think it is quite overrated in a lot of ways. You may idealize and say, well, it's close to the people, but it's close to the few people that actually show up at meetings, the very few people that would actually bother to participate in local elections. It's not really some incredible... way of getting inside the heads of a regular person. It's not even remotely close to a business. Economists are used to something called the Tibo model where you say, well, basically local government is just like a business. And yeah, it's not. It's a nonprofit, it's a democracy, and it has the standard pitfalls of those systems. To my mind, the ultimate form of local control is letting people do what they like with their property. My very principled stance on what level of government to do this type of policy is what's the level of government where we're going to get the policy that maximizes individual freedom to do what they like with their property. In many local governments, they tend to operate like...
uh little uh tyrannies where they highly highly prescribe everything you can and can't do uh and if we can shift those decisions up to the state level where state policymakers maybe aren't so bound by the two or three crazy people who show up at a public hearing but are at least in theory, meant to be considering the welfare of everybody in a much larger geographic area, they can make decisions that say, okay, let's restore some of these rights. So in places like California, we've seen state legislatures restore the rights of homeowners to build accessory dwelling units. Just last week, places like Colorado, we've seen state governments say, hey, we're removing these parking requirements in urban areas or we're going to allow for multifamily in places where the demand is highest. So to my mind, I don't think folks who are committed to liberty should have a hard and fast stance on what level of government to do this type of reform. They should just look at what level of reform can we advance our cause the most and ship the policy decision there.
I'm just going back to what Caleb was saying about how there's especially a lot of left-wing economists that are very much in favor of housing deregulation. I'm someone who is always thrilled to get anybody who will agree with me about anything. I don't need to go out of my way to make enemies. And if there's someone who surprisingly is on board, it's like, oh my God, this is fantastic. All right, great.
So, you know, in the book, I make a big deal about how we got Paul Krugman, Matt Iglesias, Jason Furman, who was Obama's CEA head, all being very much on board with housing deregulation. And I will say that for an audience that normally is very skeptical of markets to go and have me tell them, they're probably not going to listen to me. But on the other hand, if there's someone that they already trust in other issues, they realize this person does not have a general level of markets. If a person who does not have a general level of markets says in this specific case is a good idea, it does have a lot more credibility. So that is something that at least gives some hope here.
Part of why I'm glad that you wrote this is that I think a lot of libertarians take a very different perspective where they take a reflexive perspective of, oh, like zoning is kind of sort of like a property right. Didn't I buy into, I bought my home in a neighborhood that looked a certain way and the government implicitly gave me a property right. And I hear those arguments. I'm like, well, no, do the sugar barons of Florida have a property right and sugar tariffs that keep their business alive? Do the taxi cartels have a property right and the taxi system that just made it harder to get a ride in most cities? No, no more than any individual has a right in a set of government regulations that ban what their neighbor can and can't do with their property. And so I appreciate you, I think.
making some of these arguments with clarity, that actually I think they should be arguments that are just totally natural to folks who are committed to liberty. And in many cases, if you actually dive into some of the earlier literature, you read folks like Bernard Segan, who you referenced in your book, right? They're saying a lot of things that modern Yimps are saying, but coming from the perspective of, hey, how do we maximize the right of folks to do with their property what they like and allow markets to actually work and solve social problems? So to both of you, and Brian, you mentioned that Nolan might be more, have his finger on the pulse here than you do. What are some cities and then states?
that understand this issue or just by virtue of some sort of inertia, just have better policies than the rest of us. Right. So, I mean, Nolan can definitely tell you a lot more details, but California, Oregon, Minnesota have all made big moves against single family zoning. In terms of the places that are the best, I do think it's places like Texas where they don't really have much of a conscious YIMBY move. And it's just that out of inertia, they have had lower regulation overall. I know that when you talk to people in Texas that know much about this, they'll start arguing and say, no, Texas is terrible. It's like, well, compared to what? You may say that downtown Austin is making it hard to build stuff. Although if you're there, it's like, wow, they're building a lot more than San Francisco ever would. But more importantly, say, look, even if you're not happy in Austin, you just go and drive 40 minutes south of San Antonio and in between the two cities.
At least four years ago, you had four bedroom houses going for $300,000. I might say that's still too expensive. We can do better. But by the standards of so much, the rest of the country is like, my God, the American dream is alive and well here in Texas. Yeah, I mean, part of what's happened, I think, is that, you know, we were despairing at the politics of this issue. You know, and it is true that certainly for the past 50, 60, 70 years.
There has been the entrenchment of a really robust local NIMBY politics. I think what's happened, especially over the last 10 years, is the rise of the YIMBY movement. Yes, in my backyard, where a diverse range of folks who are affected by the housing shortage are mobilizing to address the issue. I think part of what happened with YIMBY was that the crisis has gotten to be so bad in places like San Francisco, where the movement started, that even young professionals who, you know, two, three decades ago had no trouble affording a decent home in the neighborhood of their choice are now finding that they have no path to homeownership in the entire Bay Area without making radical life sacrifices, right? And investment bankers with a bunch of three roommates. Right, right. Actual story.
And, you know, I'm playing the world's smallest violin for the otherwise well-off professional who's having trouble finding a home in their neighborhood. I mean, I'm in that situation, and I don't think we should dismiss those people's concerns. But I think what they're bumping into are issues that had long-affected folks in much more marginal economic positions. And you're seeing coalitions form among these groups that maybe historically hadn't really talked. in cities all across the country, you're seeing exciting stuff happen here. We talked about some of the state reforms, California, of course, and Oregon, and being at the leading edge of this, but increasingly places like Montana, places like Colorado, all across the country this year. I mean, it was almost getting impossible to track pro-housing reform bills this year, and I would suspect that's only going to spread in the years to come. There is still some room for reform at the local level. I mean, you are seeing a lot of cities try to take this stuff on. You know, here in Los Angeles, we've done a lot of massive permit streamlining in recent years to just try to get permits out quicker. New York City, they're undertaking the City of Yes initiative to try to remove a lot of these barriers. You know, it's small steps. It's not...
reform at the radical scale that I think everyone on this podcast would agree needs to occur. But I think it's the beginnings of a radical shift in how we think about this policy. That said, again, to put it on stable footing, we have to have broader policy changes that address people's concerns about growth. When I saw the Montana reform sort of move forward and a lot of this sort of public push behind that reform, I saw at least a lot of messaging about we don't need California-style housing policies here in Montana. And of course, Nolan, you and I are both from the Commonwealth of Kentucky.
California has some much better policies than states like Kentucky. Well, you know, I appreciate I'm stopping my stopwatch. You mentioned that we're both from Kentucky. So very good. That's always required in our conversations. 22 minutes. 22 minutes. It took me.
So, you know, a lot of states are coming from a significantly better baseline, I should say, than California. It's much easier to build in most of the Sunbelt, certainly most of the Midwest, to a lesser extent the Mountain West. But there are still issues, right? I mean, some of the fundamental issues that made California expensive are present in most other states. The vast majority of urban land is restricted to either purely commercial or if it's residential, it's purely detached single-family housing. You know, so many new projects require some sort of discretionary permitting process that takes months, if not years, to just get a permit. And so I would say to folks, hey, if you don't want to turn into California, now would be a very good time to liberalize some of those rules and streamline some of those processes.
was very effective messaging in a place like Montana, where they said, well, we don't want to turn into California. And I said, if you don't want to turn into California, just don't do anything. There's enormous demand to live in a place like Montana. I'm sorry to say it's very beautiful, and there's a healthy, growing economy, right? People are going to keep moving here. You can either maintain the California-style land use regulations that you have today and eventually find yourself in a California-style housing crisis, or you can reform. And that's true to a lesser or greater extent of many states across the country. In a place like Kentucky, right, we have this huge high-tech manufacturing boom that's underway, many thousands of jobs at places like Ford and Toyota and many other hundreds of employers, and there's no commensurate plan to build the housing that's needed to house all those workers that certainly had higher incomes. And so, you know, in a place like Kentucky, as in every state in the country, I think you need to be reckoning with some of these rules and considering, hey, what are the free things? This is the lowest.
of the low-hanging fruit, right? We always talk about how much money should we spend in housing subsidies, how much money should we spend in down payment assistance, yada, yada, yada. And it's like, well, you could just perform some of these regulations, cost you literally nothing, and immediately the market will start supplying a source of new inherently affordable housing. Brian, when I drive around my hometown here, where I live, there are a lot of features of the urban landscape that I think people just don't connect to any kind of policy decision, but policy decisions are driving a lot of what cities and suburbs and exurbs look like.
Well, of course. Especially when you see that You've got homes on a very large amount of land when the land is valuable. There is very strong evidence that most people are actually not willing to pay a lot of money to go and get a bunch of empty land. They like to have a little bit of yard, but almost no one is really interested in paying for an acre unless government makes them. And yet, if that's all the government allows, then people do wind up paying for it. And you wind up then having homes very far apart when your kids want to go trick-or-treating. The distance from house to house to get the candy is a lot greater. And then that does wind up changing other things like driving patterns. I mean, obviously, just saying that you're not allowed to go and do mixed use where you've got residences above and stores below is another big difference.
And then finally, I don't know about your town, but historic preservation is a big deal in a lot of parts of the U.S. There's one where you say, well, it's nice to have some history, but how much history do you really need? If you go and take a look at my book where we got some helicopter shots of San Francisco, it's almost like the whole city's museum to what life was like 100 years ago, because they just have a very small number of skyscrapers. And then the rest of the city is just two and three story buildings, which in a free market would probably be bought up en masse and torn down, replaced with much bigger buildings where they could hold a lot more people. But yeah, regulations go and freeze the world in place.
Nolan, one challenge that you've put out on social media, and I'll put that same challenge out to our listeners here, drive around your town today and look at buildings and try to figure out if those buildings that exist around you today are legal to build today. And I think it's such a great thought experiment for people to do to understand how much more restrictive building housing has become. I mean, that's one great thought experiment. Another one is just to look at any construction site and say, is this what the owner actually would have wanted to do if they could just do whatever they wanted? And yeah, it's like, you think that they wanted to put 20 homes on 30 acres? That was their plan?
This is the kind of thing where almost every builder is going to go and build a very maximum number of units they can get permission for because the government just has this idea of, like, we don't want to have too many. That would be bad. And some of it is just parking and traffic. But even when that's nowhere near close to being any kind of a noticeable problem, it's more of just this aesthetic thing of, I don't think things should look that way. I mean, one of the reasons why I did Build Baby Build as a graphic novel was realizing that so many of the objections to new construction are just aesthetic.
And I wanted to go and try fighting aesthetics with aesthetics by saying, well, let's just take a look at how things might appear in an alternate universe where these things are allowed. One of my favorite panels is actual California coastline and alternate California coastline. Actual California coastline, usually there's just nothing you can do there. It's just totally unimproved nature. Looks nice. But imagine we were to go and develop it. And I'd say, actually, it looks a lot better. The most famous beloved coastlines in the world are not undeveloped nature. It's more like the Amalfi Coast in Italy, where you go and start with gorgeous nature, and then you go and put an incredible human habitations.
that are merged with the nature to get you this experience that you otherwise say, wow, it's hard to believe that even exists. But there it is. Let's take a picture. Well, and I mean, on the aesthetic point too, I mean, early zoning, you know, of course, we're very, very, very skeptical of pure aesthetic regulations, right? I think there was still some notion that, okay, this has got to at least approach a nuisance on some form. But I mean, just imagine if we did this in other spheres of human life, right? Like imagine if your local government could regulate what type of clothes you could wear or what color shirts you could wear or what, you know, what color shirts, not only that, but what kinds of clothes can you wear in certain types of neighborhoods, right? It sounds completely crazy. I mean, it sounds like something out of some, you know.
you know, ancient despotism, right? It would be totally intolerable today. And yet I said to people, this is exactly how your city controls another intimate aesthetic decision that you have to make, which is what your home looks like. And again, if people want to opt into private arrangements that regulate that, maybe they really want to live in a neighborhood that has strict aesthetic uniformity, great, go opt into that. But in your typical US city, I mean, you have this entire regulatory infrastructure that purely exists to enforce one particular aesthetic vision on everybody. And, you know, I think in a liberal society, I think we should find this inherently somewhat offensive. Let people, purely on the basis of ethical decisions, right? There's no actual health and safety concern. Let people make these decisions for themselves. And you get this incredible competition that I think actually ends up creating...
some of the most beautiful buildings that we have. I mean, some of the most incredible works of architecture, entire neighborhoods were built in an age where you had this relatively open market, a lot of new construction, a lot of competitive pressure to figure out, you know, what does the most beautiful building look like? What does the most beautiful street look like? It didn't come from planners sitting down and writing a strict set of rules for, you know, design provisions and having discretionary design reviews. It came from this emergent competition of folks with different visions and ideas of what our community could look like.
All right, gentlemen, we're going to leave it there. Brian Kaplan is author of the new Cato Institute book, Build, Baby, Build, The Science and Ethics of Housing Regulation. It's available exclusively at Better Booksellers. And Nolan Gray, author of Arbitrary Lines, How Zoning Broke the American City and How to Fix It, is also the research director at California YIMBY. That book also is available exclusively at Better Booksellers. And of course, you can follow all of our work at the Cato Institute on this issue at our website, cato.org.
Globalization has come under fire for the past two decades as the world has lived through an international financial crisis, terrorist attacks, a pandemic, and the return of war in Europe. At the fall New York City City Seminar, Cato's senior fellow John Norberg discussed why, despite such turmoil, the free market has still made the past 20 years the best time in human history by almost any measure. Writing a capitalist manifesto in this day and age is kind of controversial. It is not always a popular take on world events. A recent survey showed that 21%, no more than 21% of Americans think that capitalism provides the benefits that we expect. 21%. This means that more Americans believe in ghosts than believe in capitalism. But it gets worse. 46% of Americans think that humanity is doomed. Doomed. It's over.
46%, which to me as a European, as a Swede, that's wonderful. It shows me that you're still the world's diehard optimists because, you know, the world average is 56% who think that humanity is doomed. So it's scary out there, or at least people think it's scary out there. Most people think, or at least people with loud voices, think that capitalism has failed. Inequality is out of control. Global warming will kill us all. Free trade and global supply chains are dangerous. And Gen Z.
will be the first generation who lived a poorer life than their parents. Now we get this from not just the left, but we get it from the right too. We hear this from the new national conservatives and the populist right saying that it's big tech. They're the villains, big business. They're dangerous and they're killing jobs and they're killing the middle class and free trade is dangerous. So I hear a lot about polarization. There's no more bipartisanship. I don't agree because I get a lot of consensus out there, a consensus that the American experiment has failed. Freedom doesn't work.
And there's this sense that we should demonize those who produce. We should subsidize those who do not produce. And then we should canonize those who complain. Grievance is the new hard currency in the world today. So I, and we heard this just recently from Robert Lighthizer, Donald Trump's trade czar, who said that libertarianism, classical liberalism, that's a philosophy for stupid people. Because it's the idea that you face a problem and then you do nothing.
That's what libertarianism is. And when did you ever solve a problem by doing nothing? So that's why I wrote this book, to try to challenge this consensus. And the book is here tonight. So if you don't have a copy or if you want to bring one to a friend or an enemy, it's down there. I wrote it to address this question. Did capitalism fail? And to me, it's very much like a meme I saw recently with three images. It's this young, very serious man who says capitalism has failed. And then this more...
A wise lady asks, so compared to what? To real socialism or fictional socialism? And he responds, fictional socialism. Because here's the real deal. We have had 20 awful years. I'll give them that. We've had 20 bad years of financial crises, of the global pandemic, the world shut down. We have the return of big industrial warfare in Europe after Putin's invasion of Ukraine. It has been awful.
But interestingly, these 20 bad years, 20 years of horrors, shocks to the system and disasters have also been the 20 best years in human history. Compared to what? Compared to any other system in any other era. When you look past the headlines and look to the trend lines and look at objective indicators of human living standards. Then we see that if we measure human wealth by looking at GDP per capita, some 30% of all the wealth that mankind has ever attained was produced during these 20 years.
130,000 people were lifted out of extreme poverty every day during these 20 awful years. And it happened in the places that started to liberalize the system, giving people more freedoms to think, innovate, produce, and trade with others. We've seen that child mortality has almost been reduced by half over these 20 years, in the same places when people got more freedom, which means that last year, 4 million fewer children died than in 2003. Inequality, global inequality has declined for the first time since the Industrial Revolution because of this massive rise in emerging countries that emerge once they give people a little bit more freedom. And at the same time, some 40 countries around the world, and they just happen to be the richest and freest countries, have started to reduce fossil fuel emissions.
in absolute terms, even including imported emissions. And Generation Z, this lost generation, and this is the most counterintuitive fact that I've seen when it comes to human progress. You know what? At the same age, they are doing much better than the boomers, then Generation X, better than the millennials, even when you include housing and higher education. Isn't this weird? Isn't this strange? Why is it that everything turned out so well when everything was so miserable and everything was going to the dogs? And we have these real, very serious problems. To me, this is the Mario Puzo paradox. You know Mario Puzo, the great novelist who wrote the Godfather novels? And he also adapted them for the big screen and created these wonderful movies. And he got an Academy Award for his screenwriting. So he thought that...
I'd better learn how to write scripts because he had no formal education. He had never read a book on how to write for the big screen. So he thought, so in order not to feel like an imposter, I'm going to buy a book and read up on how you actually produce great movies. And when he did, apparently on the first page, it said, before you start writing for movies, go and watch the Godfather movies because that's how to do it. That's what we're trying to do here, right? Create such marvelous things. So he apparently threw the book away.
He didn't have a great plan. He couldn't foresee what to do, but by improvising and adapting to the challenges, putting one foot in front of another, he managed to create the best movies that have ever been made. And to me, this is what humanity does all the time, as long as we're free to do it. There's not a big plan for how to deal with a global financial crisis, massive inflation, a pandemic that puts more than half of the world's population under house arrest, or an invasion of Ukraine. There's no plan for this. That's why it works, because there are millions of plans.
made up by the real experts, those who have local knowledge in offices, in factories, in finance, in farms, those who are actually constantly in touch with real information, knowledge about what is changing, what's accessible, what's suddenly gone, where there's a shortage. And they are the experts who know what they can do, how they can change what they're doing without creating even bigger problems instead. And that's how they constantly adapt, improvise and innovate ourselves out of every problem that we are facing. You know, we would have expected with the Russian situation that we had oil prices that go through the roof. But now, suddenly, because of lots of innovation and fracking technology, suddenly America produces more crude oil than every year, than any country has ever done in human history.
And when we start to think about, well, there will be problems with global warming, yes, we see the emergence then of electric cars, and Musk and others come up with these new innovations. And when that affects the lithium prices for batteries, then someone comes up with sodium-ion batteries. That's what humanity does, constantly coming up with new, novel, unpredictable solutions to the problems that we are facing. And that's why we can deal with these awful shocks to the system constantly, because there isn't one person in charge. There isn't someone trying to control everybody. But there are millions of people who look at the world from their particular vantage point.
and have their individual creativity and comes up with novel solutions to those problems. Cato Senior Fellow John Norberg is author of The Capitalist Manifesto, Why the Global Free Market Will Save the World. Social Security is in dire straits and it's past time for reform. Few in Congress seem to want to make room for that reform. At the Cato Institute Social Security Symposium, Jason Fichtner of the Bipartisan Policy Center and Rachel Gressler of the Heritage Foundation discussed what happens if Congress continues to take the path of least resistance.
So let me just do two sort of narratives to start real quick. First, we as individuals, policymakers, researchers should help create a safe space for members of Congress to talk about social security reform. That's a first principle, because right now very few are willing to do it politically. So I want to give Senator Cassidy credit for putting something out there and being willing to talk about it, because if we keep attacking members of Congress and senators, they're not going to do it. And we're not going to create the space. We're going to get to the fiscal cliff in 2033. That's the first thing. The second is now we talk to panels about trying to rethink social security and what that actually means. So the earlier panels talk about the idea of the trust fund. What is it? It goes into special issue treasuries.
which is basically like an accounting gimmick. In some ways, it's already been spent, but it is owed back to Social Security, but it's a liability on taxpayers. It's borrowing money. So if you look at a pension plan, if we were all part of a regular pension plan, the pension plan would invest in a diversified portfolio of assets, bonds, treasuries, equities, maybe real estate. Why should we not think about Social Security's trust fund in the same context? So one of the ideas and the benefits of thinking about a trust fund first, I want to put the trust fund in one category, let's put financing separate for a second. So if you think about a trust fund, what you would do is presumably you would have a diversified portfolio that would give you a greater return than you're just getting on Social Security's trust fund assets now that are in treasuries.
And had we done this in 1983, including a market crash we had in 2008 in COVID, we would be better off today, even after those crashes, had we put money in the market in a diversified portfolio than just leaving the treasury securities. So what Senator Cash is trying to do is get through that equity premium to give Social Security a longer term fix on the assets. Now, we've been better off doing this back in 83 or 10 years ago. We're now very short in a window left to trust fund depletion. And it's hard to see that math working because where does the money come from? So the plus of this, the pro is talking about what does it mean to invest in the market? How does that look? There are people who are concerned the government's investing. I remind you that.
We have a thrift savings plan for government employees. They do a really nice job wallowing off with political interference. But I realize that is still a challenge we have to discuss because we're talking about a larger bit of money. And that is a hard thing for politicians to, one, not meddle in. And two, if the market does well, what's going to stop them from saying, hey, I want to send that money back to pay for something else? So there are challenges, and that's kind of the con. But the pro is it's looking at the market. The concern that a lot of people have expressed, though, is how do you finance it? So with the trust fund, when we did this in 83, the payroll taxes created a surplus. That surplus money went into the trust fund.
Now we're getting to the point where we don't have surplus money. You could sell the trust by the day and put it in the market, but it's not going to be enough. We're looking at what you said earlier, a $22 or $23 trillion shortfall on a net present value basis. That's money to put basically in the bank, getting a government return that would allow you to cover the shortfall going for 75 years. If you carry that out and discount it back to a market rate, it's about $2, $2.5 trillion. Do we want to borrow $2.5 trillion today and put it in the market? That is basically what you would have to do to make this work. I'm not sure we could borrow that kind of money anymore. But I will point out, if we don't do anything and we get to 2033, the gap is about a $400 billion gap annually.
And given Congress right now, they seem to take the path of least resistance, which is borrowing money. So it looks like they will probably end up in 2033 not raising taxes. I can't see them doing a 25% benefit cut. I could easily see Congress saying, let's just borrow the money to do it for everything else. The question is, would the market allow that if we get to that point? So Jason created a safe space for us to discuss the Cassidy proposal. What are your thoughts, Rachel, on particularly the borrowing and investing component, which is not entirely novel, but in terms of legislative approaches is the newest take, I guess you could say, in the legislative space.
I mean, the borrowing and investing, it is a form of arbitrage. You're hoping that you can get higher returns. And we are now in an environment where we have higher interest rates. And so the real return that you're getting is actually only the market rate minus what you're paying on Treasury. And we're hoping that the markets would do well. But as Jason could tell you in Puerto Rico, they tried this too. Detroit tried it as well. They've gone through bankruptcy, trying to borrow to get your way out of debt. If it doesn't make sense for us to be borrowing to get our way out of our federal debt as a whole, I don't think it makes sense for the Social Security program. But I would like to recognize the benefit of money actually being invested in something positive.
And so instead of having this be a borrowing, government borrowing and putting it in, what about instead allowing individuals, you know, a portion of what they're paying in or even an additional on top of what they're paying to be actually owned by them? And the incentives there are just very different. When we look at government pensions, you know, state and local pensions in the U.S., yes, they are benefiting from positive returns. And over a long run, those are always going to be significantly positive, but they've nevertheless accumulated massive shortfalls, magnitude of Social Security, because the incentive is always there to increase benefits and to pay out more. As Jason said, the market does well. Well, let's pay a 13th benefit this year or let's increase benefits more. And so I think that you will not be able to.
avoid that with government ownership. And I think it's important, because this is Rachel giving me a good study to talk about individual accounts. So part of this, when Senator Cassie started this idea, interest rates were 0%, 1%. So the idea of borrowing at 1% and maybe getting an equity premium if you can get 6% or 7% isn't too bad. If you're now borrowing at 5% and hoping to get 7%, 8%, you're now playing for the equity premium, you're chasing yield. That's not a good investment strategy, to your point as well. But we are talking about, what does it mean to rethink Social Security? And I think we should rethink what the trust fund is if we're going to maintain it. Because right now, if we don't, we just go to a pay-as-you-go system. What does that mean? We might have to have some cushion.
like a year or two's worth of benefits to allow for fluctuations in the market and for economic recessions. Should that value be put in treasuries? Should it be put in corporate market securities? Should it be in a diversified portfolio so you can get a better return over the long run? But we should rethink what that trust fund should look like if we continue to have one past 2033. And then on the new ideas and the private accounts, we've tried in some ways private accounts shifting it. And that's not going to work politically anymore. But there might be a compromise. So I did a paper several years ago with Gary Koenig at AARP.
and Bill Gale, who was still at Brookings. And we had an idea called Start Accounts. And basically, the idea was we would have a 2% increase in the payroll tax, which would be 1% of the employer, one of the individual. And it would go into a savings-type private account for that individual with their name on it, so it was protected legally theirs. But it would be used to facilitate delayed claiming to Social Security. So if someone went into Social Security age 62 and said, I want to get my benefit, they'd say, great, you've got a Start Account value of $100,000. We're going to take your age 62 benefit, pay you today, but pull it from the start. And when that Start Account got to zero, you would then be put in the Social Security program at the delayed age, which would give you a higher monthly benefit that was inflation-protected for the rest of your life. And it would be a way to keep the current system in some fashion, have private accounts, and access to the market.
and facilitate delayed claiming, all which would help with Social Security and help with individuals' retirement security overall. Jason Fichtner is the Chief Economist of the Bipartisan Policy Center. Rachel Gressler is a Senior Research Fellow at the Heritage Foundation. Courts do very little to protect the right to earn a living. By all accounts, that precious right was intended to be a centerpiece of the 14th Amendment. Yet federal courts have all but written it out of the Constitution. Drawing on his TEDx talk on the same subject and using vivid imagery from India, Prashant Narong, the Nii Regulatory Research Center at West Virginia University, discussed the fight for economic freedom in Indian courts and lessons that may help litigators restore judicial protection in America.
The court became more differential to the government's assessment of what constitutes reasonable restrictions. So if you look at the right, the right is in part three of the constitution under right to freedom. It says all citizens shall have the right to practice any profession or to carry on any occupation, trade or business. There is a corresponding article which talks about what the state can restrict. So it says the state can make any law which is a reasonable restriction in the interest of the general public. So these are two qualifications.
So scholars have noted that judiciary often avoids a deep dive into these issues, opting instead for a more differential stance that focuses narrowly on whether the restrictions are reasonable rather than examining whether they genuinely serve the public interest. And so this doesn't necessarily offer a... a good, genuine, authentic judicial review. There is also a lack of research in India into how the justice's own ideologies might influence their decisions regarding economic liberties. There has been very less work on judicial ideology and the outcomes. So what happens when there is an economic restriction and a business challenges that economic restriction? The state defends it, right? So they are the two primary parties, the business and the state.
But what about a third party? Who can this third party be? Apart from business and the state, sometimes third parties such as labor union or consumer association or sometimes environmental advocates can also be deeply invested in these legal battles. And their involvement stems from the fact that they may also be directly or indirectly impacted by some of these regulations. These groups may align with the businesses.
And these groups otherwise, if it's a zero-sum game, they may try and defend the economic restriction. So what I did in this study is, utilizing the legal databases, I filter for the relevant Supreme Court cases between 2010 to 2024. And I look for the cases that involve this article, Article 19 1G. Then I look for cases that have third-party interest. So what I'm trying to do is to identify...
cases that have third party interest which are aligned with businesses and cases where third party interest are not aligned with businesses and then look for the variation in outcomes. So I look for alignment of interest. I examine whether third-party interests are aligned with those of the businesses or they are in conflict, nature of the economic activity, core rights at stake. So apart from 1901G, if there are any other fundamental rights at stake. So for example, it could be freedom of speech and expression for a third party, or it could be right to life for a third party, or it could be an issue of environment for the third party. And then what is the outcome of the case? So I find...
A total of 13 rulings and 13 judgments involving significant third-party interest. Out of these 13 cases, nine feature non-aligned interest between businesses and third parties. This is the stigma, not aligned. And out of these, if you see, eight decisions upheld the economic restrictions, which means business lost and the economic restriction was upheld and the third-party interest, they were also upheld. So only one decision went in favor of the business where their interests were not aligned with third parties. And that sole decision which went in favor of the business was a dissenting opinion. So I counted dissenting opinion as a separate ruling, and that was a dissenting opinion. So not very optimistic scenario for businesses if their interests are not aligned with third parties. Out of these eight cases, the remaining eight cases, three rulings summarily rejected the claim without doing any proper review.
Another three rejected the challenges based on the premise that this is a restriction which is in furtherance of the director principles, the socialist ideals enshrined in the part four of the constitution. So you don't need any review. We assume that this is a reasonable restriction and this is in public interest. So no review needed. Two left. And the remaining two were related to state conducting common admission tests for admission to private medical schools. The first of those rulings took a partial proportionality test while referring to precedents. And the second one, of course, treated the first one as a precedent and upheld the restriction.
So these were the eight decisions. Prashant Narang is with the Nee Regulatory Research Center at West Virginia University. As of this recording, it seems likely the DEA will reschedule cannabis from Schedule 1, reserved for drugs the agency believes have low medical value and a high potential for abuse, to Schedule 3, drugs perceived to have fewer risks relative to their potential benefits. So if that happens, what changes in federal banking regulation for cannabis-based businesses? Cato's Nick Anthony says, not much. The banking system will remain a nightmare for those businesses. We spoke last month for this Cato Audio exclusive.
This is an odd situation for libertarians, as I mentioned to Jeff Singer recently in a podcast, which is this doesn't end prohibition of cannabis at the federal level. In fact, it's just moving it to a less restricted category of prohibition, which is to say controlled under the Controlled Substances Act. But one of my very first thoughts was, well, how does this affect cannabis businesses? Because for federally illegal behavior, which cannabis related businesses still are in dozens of states. how does this change their relationship with banks? And I reached out to you and you said, it doesn't. It doesn't change their relationship with banks at all. But so it's, I think, a worthwhile moment to say, what's the situation with businesses that are involved in cannabis at the state level?
What is their relationship with banking? There's not much of one. For businesses operating in states that chose to legalize cannabis, it should be just like operating any other business. But when it comes to having a bank account, whether that's a business account or even a personal account, if you're working in the cannabis industry, you really have a tough time getting access to basic financial services. And that really comes out of the financial industry is regulated at the federal level.
Cannabis remains illegal at the federal level. And so even though you're complying with state laws, that clash between the federal and state level means financial services are an uphill battle to put lightly. And that's for federally chartered banks. They are subject to all of these rules and they're effectively prohibited from providing. really basic business banking services to cannabis-based businesses. Exactly. We have this set up in the United States where banks have been effectively deputized as law enforcement investigators, as we've talked about before with the Bank Secrecy Act. And what the Financial Crimes Enforcement Network told financial institutions is that they can do business with the cannabis industry. However...
They have to monitor them to check to make sure they have all the appropriate licenses. They have to make sure that they're doing business how they say they're doing business. They need to make sure they're serving the right clientele. Effectively, it boils down to banks are almost required to hold stakeouts outside of these businesses. And frankly, the cost is just too high. That is a huge ask to say that you need to serve as a bank, serving the community, issuing loans, taking deposits and the like. But oh, yeah, you also need to be a private detective agency. Don't get me wrong. There's good reason to want to know who you're doing business with.
But it goes too far by requiring them to act like this. There's a separation between police and banks for a reason, and we should have that separation. And yet... The blurring of the lines there and the clash between federal and state laws has effectively meant that getting very basic financial services is off the table for most people working in the cannabis industry. And the feds being so concerned with what are federal crimes, which is to say having a cannabis-based business where you're selling this product that's legal at the state level, illegal at the federal level, or growing it, or being some sort of intermediary in that process. So I wonder, the feds are so concerned with this technically criminal activity that it leaves...
the people involved in the business who want to be legit. Let's be clear. it leaves them open to being victimized by other kinds of criminals because they have to deal in so much cash, not just in terms of paying their own bills, but also all the money that they're taking in at the business. I remember years ago, there was an older gentleman at a town hall meeting about whether or not there should be dispensaries in Baltimore. And he stood up and shared that he had some concerns. And I was expecting kind of the typical objection that, oh, we don't want drugs on our streets.
Or, oh, we don't want a business like that here because it's too radical. And instead, what he said really caught me off guard at the time. And that was he didn't want cash on the streets. He didn't want people walking in and out with cash in the neighborhood with large volumes. And to be fair, he made a good point. This is a business that's forced to be overflowing with cash. It's a little bit of a rare problem for startups.
We have not only are they operating in cash at the register, but they're paying employees in cash. They're paying their taxes in cash. And this means that they become a target for robberies. And it's really heartbreaking to see all too often dispensaries and their employees have become targets where whether it's armed robberies or even people driving trucks through the storefront. And we have to recognize that this is something that policymakers have effectively created. It's a very unique situation that they have created through policy choices.
Not to poo-poo this, but there are some positive changes with respect to taxes that moving a drug from Schedule 1 of the Controlled Substances Act to Schedule 3 that it does enable. But up to now, businesses that are heavily involved in cannabis have had to pay their taxes effectively in cash as well. Is that right? That is correct. And I encourage everyone just to look up how difficult.
it is to pay your taxes in cash. If you have not had the privilege of experiencing that before, you have to call ahead, in which case they'll tell you all the ways to go ahead and not pay in cash. They'll encourage you to buy prepaid debit cards, to go to retailers and have them send the money, to wire the money on your behalf. But if you finally get them to accept your case, then you can schedule a time to come visit. That's what these businesses have had to do. Take duffel bags of cash or hire armored car services to carry the cash into the IRS processing facilities just to pay their taxes and stay above board. I mean, it's already a pretty stressful process to file your taxes in the most mundane sense. I can't imagine what it's like for these cannabis businesses to try to keep track and make sure everything's above board when they have to jump through so many unnecessary hoops. What is the simplest, most straightforward way for the feds to make it easier for these?
legitimate businesses in one sense and federal criminals in another sense to just move forward to take advantage of banking services that the rest of us take for granted. The simplest step would be to legalize cannabis at the federal level. That makes it so banks no longer have to look at these groups as criminals. They no longer have to err on the side of suspicion when wanting to do business with them. But that's not the only option, to be clear. Full legalization would be the easiest. But then there's also options like reforming the Bank Secrecy Act so that they no longer have to incur such heavy compliance costs when looking into this business and other businesses. Or another option is to create an exemption to say that the government recognizes that states have legalized this industry and that they want to be compliant. And so to say, OK.
You still have to keep up with other compliance. But here's a place where you can go easy. You can relax a little bit. There's a safe harbor that you can operate in. And that's the type of proposal that we've seen over the years with, for example, the Safe Banking Act. And so really, there's three pretty straightforward options for policymakers. And this has been a problem for years. And yet they just don't move forward on it. And it's really such a shame because it's innovative entrepreneurs on the ground and their employees that are suffering the most for Congress continuously having its hands tied.
Nicholas Anthony is a policy analyst at the Cato Institute. Was the recent inflation spike made worse by corporate greed? Do rent controls really help the needy? Are U.S. health care prices set in a Wild West marketplace? Do women get paid less than men for the same work? In a new book from the Cato Institute, The War on Prices, edited by Cato's Ryan Bourne, top economists answer all of these burning questions and more as they debunk popular notions about inflation, price controls, and how product prices determine value. Order your copy of The War on Prices today at Cato.org. That will do it for this edition of Cato Audio. I'm Caleb Brown. Talk to you again next month.