Category: Uncategorized

“Fiscal dominance” refers to a situation where government debt grows so large that the nation’s central bank feels that it has little choice except to focus on making sure the government does not default–even if it means a surge of inflation. Janet Yellen described the issue and risks of fiscal dominance concisely in her comments at a session on the future of the Federal Reserve at the recent meetings of the Allied Social Science Associations in Philadelphia (January 6, 2026).

This postwar policy framework is characterized by monetary policy dominance that is, the Fed is not and must never become the fiscal authority’s financing arm. Fiscal policy’s job is to set taxes and spending, and to finance deficits through issuing debt to the market at prevailing interest rates. It is the responsibility of Congress and the president—not the Federal Reserve—to insure that the government’s intertemporal budget constraint is satisfied. It is their duty to ensure that the path of debt is sustainable.   

Fiscal dominance refers to the opposite configuration—a situation where the government’s fiscal position—its deficits and debt—puts such pressure on its financing needs that monetary policy becomes subordinate to those needs.  As a result, the central bank is pressured, implicitly or explicitly, to keep interest rates lower than warranted by macroeconomic conditions; or to purchase large quantities of government debt, not primarily to stabilize inflation and employment but to ease the government’s financing burden. In a fiscally dominant world, the government’s intertemporal budget constraint drives the price level. If markets don’t expect future primary surpluses to cover the debt, the adjustment eventually comes via inflation or default. This is the “fiscal theory of the price level.”

Fiscal dominance is dangerous because it typically results in higher and more volatile inflation or politically driven business cycles. When the central bank is constrained from raising rates or shrinking its balance sheet because that would increase debt service or trigger fiscal stress, inflation expectations may become unanchored. Households and firms may come to expect that inflation is the path of least resistance for managing high debts. Once such expectations take hold, stabilizing prices becomes significantly more costly. If inflation is firmly under control, the Fed has more flexibility to respond to labor market weakness. Fiscal dominance is also likely to raise term premia and borrowing costs as investors become concerned that the government will rely on inflation or financial repression to manage its debt. In addition, a central bank that is perceived as an arm of the Treasury may have less space to act forcefully in a crisis. For all of these reasons, avoiding fiscal dominance has been a central objective of modern central banking frameworks. 

Yellen does not believe that the US Federal Reserve currently faces a situation of “fiscal dominance.” But with the federal government running high annual deficits, while having already accumulated historically high levels of total debt, political pressures are building in that direction. Yellen says:

What would keep the U.S. out of fiscal dominance? First and foremost, this requires credible medium-term fiscal adjustment—not abrupt austerity, but a believable path that stabilizes debt/GDP; for example, through gradual changes to taxes and entitlements or reforms that tilt growth and productivity higher. Unfortunately, however, the revealed preference of both parties has been toward deficit-increasing policy. … I doubt that Americans will end up on the fiscal dominance course, but I definitely think the dangers are real.  

I almost always steer away from the personal in this space, but it feels like time to make an exception. Last weekend, at the 2026 Annual Meetings of the Allied Social Science Associations (which includes a number of associations with overlapping memberships joined by economics and finance academics), I was named a Distinguished Fellow of the American Economic Association.

It’s a considerable honor. The Distinguished Fellow award started in 1965, and in the 60 years since then, about 200 people have received it. For comparison, the Nobel Prize in economics started in 1969, and has been awarded to 99 people since then. There is partial but meaningful overlap in the lists of those who have won the two awards.

For me, the honor was quite unexpected. Distinguished Fellows are typically PhD economists who have been prominent in published research. But my job since 1986 has been Managing Editor of the Journal of Economic Perspectives. (All issues of the JEP from the first one to the most recent are freely available online.) As the prize citation notes: “Steering the JEP and ensuring continuity in its unique approach and voice has been Taylor’s primary contribution to economics over his four-decade career.”

Thus, being named a Distinguished Fellow reminded me of the time a decade ago when Bob Dylan was awarded the Nobel Prize in literature. Yes, Bob in general deserves awards. Me, too. But this particular award was not one I ever expected would come my way. I am more pleased about it than I can easily say.

You can read the prize citation here. Here is a picture of me receiving the award from Katherine Abraham, the current president of the American Economic Association.

By conventional big-picture measures, the US labor market looks pretty good. However, the mood about the US labor market feels undeniably grim. Is this a “vibe-session,” based on little more than gloomy moods? Or can we dig a little deeper into the data and find some reasons for concern?

Let’s start with the big-picture good news. The US unemployment rate at 4.4% has edged up a bit from the remarkably low levels that prevailed in the late days of the pandemic, but remains quite low by the standards of the last half century–for example, less than half the level at the worst of the Great Recession.

Overall real wages have been edging up. The figure shows inflation-adjusted median wages for wage and salary workers. The median means that half of workers are above this level and half below–so while a wage increase that only affects the upper-wage workers would cause the average to rise, it will not cause the median wage to rise.

The rise in real wages applies across the distribution of skill levels. This figure may look messy, but its message is straightforward. Divide up the labor force according to level of education. Focus again on workers over age 25, and the median wage. In the figure, the level of wages for each group has been set equal to 100 in the year 2000. Thus, the graph shows what education groups have received the highest increase in (nominal) wages over this time.

The orange line at the top shows that the biggest wage gains have gone to workers with less than a high school education. The purple line shows that the lowest wage gains have gone to those with “some college or associate degree.” The other three education categories–high school degree only, bachelor’s degree only, and bachelor’s degree and above–have seen median wages grow at about the same rate in the last 25 years.

Of course, these big picture labor market measures don’t mention everything. But they surely don’t suggest that the US labor market is in dire straits. So what is causing the feelings of gloom? Jeff Horwich of the Minneapolis Federal Reserve takes a deeper look at the labor market data in “Off the sidelines and into the low-hire economy: More Americans are diving back into the job hunt despite `ugliest’ labor market in years” (December 15, 2025). He points to several factors worth pondering.

First, the “hiring rate” is measured by the number of new hires divided by the number of current employees. Even as the unemployment rate nudges up, the hiring rate is sagging.

Second, the proportion of the unemployed who are long-term unemployed–that is, unemployed for 27 weeks or more–is on the rise. In the aftermath of the Great Recession, the long-run unemployment rate remained stubbornly high for years. It spiked again after the pandemic recession. But in the last few years, it’s on the rise again.

Third, labor market economists divide up adults into three groups: 1) those who are employed, 2) those who are in the labor force in the sense that they are actively looking for jobs, but are unemployed, and 3) those who are out of the labor force, not looking for a job, and thus not counted as unemployed. Horwich points out that people who were counted as “out of the labor force” are reentering the labor force (red line). The common pattern is that people move from out-of-the-labor-force straight into a job. But the number of people moving from out of the labor force into actively looking for a job but ending up unemployed is edging up (blue line).

Fourth, of those who remain out of the labor force in the sense that they are not actively searching for a job, a rising number say that they “want a job now.” As Horwich points out, about two million people each month are entering the labor force and looking for a job, but not finding one (the figure above), but another six million of those who are out of the labor force would like a job, with that number rising.

Fifth, as the share of those previously out of the labor force drops, the “labor force participation rate” (which counts both the employed and those actively looking for jobs but currently unemployed) is rising. This figure shows the proportion for “prime age workers” the 25-54 age bracket, but it’s rising for most age and demographic groups other than the elderly.

Finally, when existing workers perceive that the labor market is strong, they are more likely to quit an existing job to take another one. But when existing workers are more worried about finding an alternative job, the quit rate falls. For example, the quit rate plummets during the Great Recession from 2008-2010. After some big oscillations related to the pandemic and its aftermath (including changes in work-from-home rules), the quit rate has been dropping for several years now.

An overall picture begins to emerge from this data. A rising number of people are reentering the labor market seeking jobs–some after being absent from the labor market for several years–but hiring is down. Among the unemployed, long-run unemployment is on the rise. Existing workers don’t perceive that alternative jobs are plentiful, and quit rates have fallen. These issues aren’t apparent in the basic unemployment or median wage data, but they are nonetheless very real.

Observing the labor market data doesn’t reveal how to interpret it. Changes in immigration patterns may have some effect, but it’s not obvious how fewer immigrants looking for jobs would lead to lower hiring rates, fewer quits, or greater long-run unemployment. I’ve heard it speculated that employers perceive a rise in the uncertainty of the economic environment, with different reasons applying to different groups: for some firms, it’s the seesaw pattern of tariffs threatened, coming, and going; for others, the rapid advance and potential disruption of artificial intelligence technologies; and for still others in certain areas, the ongoing push for substantially higher minimum wages. When employers are doubt, they become more likely to default toward not hiring, at least not immediately.

As Horwich points out, burdens of consumer and mortgage debt are on the rise, in part because of higher interest rates, which can make getting a job feel even more urgent. In addition, I’ve heard it speculated that finding a job in the modern online labor market can feel forbiddingly dicey. You look at a website, fill out lots of online forms, maybe get an form letter notification back, or even a few interviews, but the sense is that every position that is posted online gets many, many applicants. Your chance of standing out from the crowd of other applicants feels small, unless you know someone or have a personal connection. To me, some of the grimness in the current labor market is about a justified and all-too-real feeling that navigating through the modern labor market feels like a long run up an icy hill–with the possibility of no reward waiting at the top.

It’s become a nearly standard claim that economics inequality makes people feel worse-off, or perhaps even leads to mental illness. However, Nicolas Sommet,  Adrien A. Fillon, Ocyna Rudmann,  Alfredo Rossi Saldanha Cunha and Annahita Ehsan did what is called a “meta-analysis” of the available studies–that is, they went back and looked at the underlying data, methods, and findings of the available studies. They state their findings bluntly in the title: “No meta-analytical effect of economic inequality on well-being or mental health” (Nature, published November 26, 2025, a readable overview/summary of the study is available here, and I quote from it below).

It’s perhaps useful to clarify the question being asked. Many studies have used survey data that asks people questions about themselves, and also asks them to rank their own well-being–say, on a scale from 1-7. Those with lower incomes will generally report lower well-being than those with higher incomes. But that finding shows only that income is associated with lower well-being–not that the degree of inequality affects the level of well-being.

Instead, imagine that you are in a society where inequality rises over time. Does the reported well-being of those at the lower end decline as inequality rises? Or imagine that you are comparing between people in different societies, some with greater inequality than others. Do those with lower income levels who also live in higher-inequality societies consistently report a lower level of well-being, compared with those with lower income levels who live in lower-inequality societies? Here’s a summary of the method and results of the study:

[E]xisting studies have mostly looked at a small number of countries, regions or cities, making their results sensitive to random variations and hard to replicate. Researchers have tried to address this limitation with meta-analyses (methods that combine findings across studies), but earlier efforts included only 9–24 studies and rarely examined for whom and when inequality might affect well-being and mental health.

To review the relationship between economic inequality and well-being or mental health, we screened thousands of scientific papers and contacted hundreds of researchers to identify all work on the subject. We included 168 studies, involving a total of more than 11 million participants. Nearly all samples were nationally representative, spanning countries across most world regions. We extracted more than 100 study features from each paper and linked them to more than 500 World Bank indicators to describe each study’s national context. We summarized the papers’ findings and conducted further analyses, including replicating results using data from the Gallup World Poll, which from 2005 to 2021 surveyed more than two million respondents from more than 150 countries.

First, we found that people living in more-unequal places did not, on average, report lower well-being (life satisfaction or happiness) than those in less-unequal places. The average effect across studies was not statistically significant, was practically equivalent to zero and did not depend on study quality, design, outcome or geographic scale. Second, although some studies reported that people in more-unequal places had poorer mental health, we found that this pattern reflected publication bias: small, noisy studies that reported larger effects were over-represented .. After adjusting for this bias, the average association between economic inequality and mental health shrank to essentially zero.

Further analyses showed that the near-zero averages conceal more-complex patterns. Greater income inequality was associated with lower well-being in high-inflation contexts and, surprisingly, higher well-being in low-inflation contexts. Greater inequality was also associated with poorer mental health in studies in which the average income was lower. We conclude that inequality is a catalyst that amplifies other determinants of well-being and mental health (such as inflation and poverty) but on its own is not a root cause of negative effects on well-being and mental health.

Of course, no single study or meta-study will offer a final consensus resolution to a big question like this one. Moreover, the statement that living in a society with greater income inequality does not make the poor worse off does not contradict the statement that being poor–regardless of the level of inequality in your society–can have negative effects on subjective well-being and on mental health.

Hat tip: I ran across this study because of a mention at the ever-useful Marginal Revolution website.

By “selective universities,” I mean places like Ivy League schools, along with places like Stanford, MIT, Duke, and the Chicago. Such schools admit only a small fraction of their applicants. However, to reassure both insiders and outsiders that they are open to admitting a broad range of students–whatever their socioeconomic background–these schools also have large numbers of people working departments of admissions to screen and evaluate applicants.

It turns out, perhaps unsurprisingly, that the actual effect of departments of admissions is that the student bodies of these institutions end up including more students from the top 1% of the income distribution than would happen if the schools just admitted students purely by SAT scores. Raj Chetty, David Deming, and John N. Friedman provide the evidence in “Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges” (Quarterly Journal of Economics, published online October 30, 2025, ungated copies available a various places, like here). They write at the start of the essay:

Leadership positions in the United States are held disproportionately by graduates of a small number of highly selective private colleges. Less than half of one percent of Americans attend Ivy-Plus colleges (the eight Ivy League colleges, Chicago, Duke, MIT, and Stanford). Yet these twelve colleges account for more than 10% of Fortune 500 CEOs, a quarter of U.S. senators, and three-fourths of Supreme Court justices appointed in the last half-century.

From the abstract of the paper, they summarize the results this way (emphasis is mine):

We use anonymized admissions data from several colleges linked to income tax records and SAT and ACT test scores to study the determinants and causal effects of attending Ivy-Plus colleges (Ivy League, Stanford, MIT, Duke, and Chicago). Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admission rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. In contrast, children from high-income families have no admissions advantage at flagship public colleges. The high-income admissions advantage at Ivy-Plus colleges is driven by three factors: (i) preferences for children of alumni, (ii) weight placed on nonacademic credentials, and (iii) athletic recruitment. Using a new research design that isolates idiosyncratic variation in admissions decisions for waitlisted applicants, we show that attending an Ivy-Plus college instead of the average flagship public college increases students’ chances of reaching the top 1% of the earnings distribution by 50%, nearly doubles their chances of attending an elite graduate school, and almost triples their chances of working at a prestigious firm. The three factors that give children from high-income families an admissions advantage are uncorrelated or negatively correlated with postcollege outcomes, whereas academic credentials such as SAT/ACT scores are highly predictive of postcollege success.

In the paper, they write:

We consider a counterfactual admissions scenario in which colleges eliminate the three factors that drive the admis- sions advantage for students from high-income families—legacy preferences, the weight placed on nonacademic ratings, and the differential recruitment of athletes from high-income families—and refill slots with students who have the same distribution of test scores as the current class. Such an admissions policy would increase the share of students attending Ivy-Plus colleges from the bottom 95% of the parental income distribution by 8.8 percentage points …

The selective private colleges that are the focus of this study are what economists sometimes call “donative nonprofits,” meaning that they rely on donations (and earnings from an endowment based on those donations) as a major form of income. From a financial point of view, it is unsurprising that a donative nonprofit–with the potential for large future donations in mind–would tend to favor children of alumni or those from the top 1% of the income distribution over other applicants with equivalent test scores. But it’s useful to be clear on what’s happening here: when these selective schools tell potential applicants that they don’t just look at test scores, but instead use a variety of nonacademic criteria like being “well-rounded” or “authentic” for admissions, the actual result of their process is that applicants from families in the top 1% of the income distribution are admitted at a higher rate than others with the same test scores.

New Year’s Day feels like a time to reminisce about times past, to speculate about times to come, and to reflect and worry about one’s place along the journey. A concern that I perhaps share with others is that the pathway to future happiness may seem like a narrow one, so that my choices could so easily turn out to be incorrect, with catastrophic long-term consequences. Ralph Waldo Emerson’s 1841 essay “On Self-Reliance” offers a number of reflections on this theme, include modern-sounding admonitions to trust your own intuition and ideas, and to push back as needed against social pressures and expectations.

The essay is perhaps best-known today for Emerson’s aphorism: “A foolish consistency is the hobgoblin of little minds.” In other words, feeling an internal pressure to “be consistent” is another of those social pressures and expectations that should be critiqued and reconsidered. (Of course, being automatically opposed to social pressures and expectations would be another example of a “foolish consistency.” And making a change rather than giving in to “foolish consistency,” but then feeling compelled to stick to the change as new experience and evidence emerges, may only exchange one foolish consistency for another. I suspect that Emerson underestimates the difficulties of discerning, enunciating, and believing in one’s own intuition and ideas. Also, the possibility of “foolish consistency” does not rule out the possibility that a wise consistency may be a hallmark of great minds. This stuff isn’t easy.)

But on this re-reading of Emerson’s essay, I was struck by a comment that he attibutes to Caliph Ali: “Thy lot or portion of life is seeking after thee; therefore be at rest from seeking after it.”

The phrase appears as the saying numbered XV in a 1717 manuscript Sentences of Ali, Son-in-law of Mohamet, and his fourth successor, translated from an authentick Arabick manuscript in the Bodleian Library at Oxford, by Simon Ockley. Caliph Ali (c 600-661) was a cousin and son-in-law of Muhammad.

Imagine that looking for your true long-term happiness, for your destiny, is like searching for a needle in a haystack. If so, the task may seem impossible. But now imagine that you are rolling around the haystack, or perhaps more apropos, that the haystack is also rolling around you. You become much more likely to be pricked with that needle, whether you are carefully searching for it or not, especially if you remain sensitive to the presence of the needle. I know that I’m a lucky guy. But many of the deepest connections and joys in my personal and work life in large part seemed to come seeking after me, and my task was to notice when they pricked my attention. May you experience your destiny seeking you in the year to come.

In his Essays, Moral, Political, and Literary, Part 2 (1752, 1777), David Hume included a short essay titled “Of the Jealousy of Trade,” which speaks to certain sentiments of international trade in our own time, as well as his own. Hume wrote:

Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expence. In opposition to this narrow and malignant opinion, I will venture to assert, that the encrease of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours; and that a state can scarcely carry its trade and industry very far, where all the surrounding states are buried in ignorance, sloth, and barbarism. …

Compare the situation of Great Britain at present, with what it was two centuries ago. All the arts both of agriculture and manufactures were then extremely rude and imperfect. Every improvement, which we have since made, has arisen from our imitation of foreigners; and we ought so far to esteem it happy, that they had previously made advances in arts and ingenuity. But this intercourse is still upheld to our great advantage: Notwithstanding the advanced state of our manufactures, we daily adopt, in every art, the inventions and improvements of our neighbours. The commodity is first imported from abroad, to our great discontent, while we imagine that it drains us of our money: Afterwards, the art itself is gradually imported, to our visible advantage: Yet we continue still to repine, that our neighbours should possess any art, industry, and invention; forgetting that, had they not first instructed us, we should have been at present barbarians; and did they not still continue their instructions, the arts must fall into a state of languor, and lose that emulation and novelty, which contribute so much to their advancement.

The encrease of domestic industry lays the foundation of foreign commerce. Where a great number of commodities are raised and perfected for the home-market, there will always be found some which can be exported with advantage. But if our neighbours have no art or cultivation, they cannot take them; because they will have nothing to give in exchange. In this respect, states are in the same condition as individuals. A single man can scarcely be industrious, where all his fellow-citizens are idle. The riches of the several members of a community contribute to encrease my riches, whatever profession I may follow. They consume the produce of my industry, and afford me the produce of theirs in return.

Nor needs any state entertain apprehensions, that their neighbours will improve to such a degree in every art and manufacture, as to have no demand from them. Nature, by giving a diversity of geniuses, climates, and soils, to different nations, has secured their mutual intercourse and commerce, as long as they all remain industrious and civilized. Nay, the more the arts encrease in any state, the more will be its demands from its industrious neighbours. The inhabitants, having become opulent and skilful, desire to have every commodity in the utmost perfection; and as they have plenty of commodities to give in exchange, they make large importations from every foreign country. The industry of the nations, from whom they import, receives encouragement: Their own is also encreased, by the sale of the commodities which they give in exchange.

But what if the result of these interactions is an imbalance of trade, with a mixture of trade surpluses and deficits? Hume has you covered here, as well, with a short essay “Of the Balance of Trade.” During Hume’s time, the primary concern was that if a nation had a trade deficit, it would experience an outflow of gold and silver. Hume points to several writers of his time who made dire predictions about what would happen with a sustained trade deficit. Then he points out that these dire predictions did not, in fact, come true. Similarly, the US economy has had trade deficits for about a half-century now, and while trade has disrupted certain industries (with real costs that deserve a policy response), it would be bloviating ignorance to claim that the US economy as a whole has been impoverished as a result.

Instead, Hume argues, as long as an economy remains productive, then trade imbalances are not a primary concern. He points out that paper currency can substitute for actual gold and silver if needed. Hume also offers a thought experiment: Surely there are trade imbalances within regions of a given country, and yet, the national economy proceeds forward. Hume writes:

How is the balance kept in the provinces of every kingdom among themselves, but by the force of this principle, which makes it impossible for money to lose its level, and either to rise or sink beyond the proportion of the labour and commodities which are in each province? Did not long experience make people easy on this head, what a fund of gloomy reflections might calculations afford to a melancholy Yorkshireman, while he computed and magnified the sums drawn to London by taxes, absentees, commodities, and found on comparison the opposite articles so much inferior? And no doubt, had the Heptarchy subsisted in England, the legislature of each state had been continually alarmed by the fear of a wrong balance; and as it is probable that the mutual hatred of these states would have been extremely violent on account of their close neighbourhood, they would have loaded and oppressed all commerce, by a jealous and superfluous caution. Since the union has removed the barriers between Scotland and England, which of these nations gains from the other by this free commerce? Or if the former kingdom has received any encrease of riches, can it reasonably be accounted for by any thing but the encrease of its art and industry? It was a common apprehension in England, before the union, as we learn from L’Abbe du Bos, that Scotland would soon drain them of their treasure, were an open trade allowed; and on the other side the Tweed a contrary apprehension prevailed: With what justice in both, time has shown. What happens in small portions of mankind, must take place in greater.

In 1933, John Maynard Keynes gave the first Finlay Lecture delivered at University College, Dublin, on the subject of “National Self-Sufficiency” (Studies: An Irish Quarterly Review,” June 1933, 22: 86, pp. 177-193). The Irish Free State of 1933 was a transition phase: after the Irish War of Independence that had ended in 1921, but before Ireland officially leaves the Commonwealth in 1949. Under the  Fianna Fáil party led by Éamon de Valera, Ireland at this time was pushing along many margins toward greater independence–and one of these margins was a trade war and retaliatory tariffs affecting trade between Ireland and the UK.

The early 1930s were also a time when many nations were exploring a wide array of alternative institutional arrangements: including Communist Russia, Nazi Germany, and Keynes’ own much milder proposals that instead of having the British government just send money to people during the Great Depression, it should be hiring those people to produce long-lasting goods like houses and roads. It’s also a time when the “first age of globalization” from the late 19th and early 20th century has crashed and global trade has contracted.

Thus, Keynes finds himself in his 1933 lecture reflecting on how his beliefs about free trade have evolved since several decades earlier. He begins:

I was brought up, like most Englishmen, to respect Free Trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England’s unshakeable Free Trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy. As lately as 1928 I was writing that Free Trade was based on fundamental truths “which, stated with their due qualifications, no-one can dispute who is capable of understanding the meaning of the words.” Looking again to-day at the statements of these fundamental truths which I then gave, I do not find myself disputing them. Yet the orientation of my mind is changed ; and I share this change of mind with many others.

What form does this re-orientation take? One of the arguments for free trade in the first age of globalization was that it would lead to greater international peace. With the memories of World War I still very fresh, this promise had not been kept. Keynes:

We are pacifist to-day with so much strength of conviction that, if the economic internationalist could win this point, he would soon recapture our support. But it does not to-day seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country’s economic structure by the resources and the influence of foreign capitalists, that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary. The protection of a country’s existing foreign interests, the capture of new markets, the progress of economic imperialism–these are a scarcely avoidable part of a scheme of things which aims at the maximum of international specialisation and at the maximum geographical diffusion of capital wherever its seat of ownership. …

Take as an example the relations between England and Ireland. The fact that the economic interests of the two countries have been for generations closely intertwined has been no occasion or guarantee of peace. It may be true, I believe it is, that a large part of these economic relations are of such great economic advantage to both countries that it would be most foolish recklessly to disrupt them. But if you owed us no money, if we had never owned your land, if the exchange of goods were on a scale which made the question one of minor importance to the producers of both countries, it would be much easier to be friends.

I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, science, hospitality, travel–these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. … For these strong reasons, therefore, I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation between countries, than existed in 1914, may tend to serve the cause of peace rather than otherwise. At any rate the age of economic internationalism was not particularly successful in avoiding war …

In our own time, it surely feels, from time to time, as if the economic ties between countries–say, between the US and China–are as much a source of geopolitical tension as a force for peace.

But what about the risk of losing the gains from trade? Keynes argues in 1933 that those gains are real, but in many industries not especially large. Thus, trading off some modest degree economic prosperity in exchange for greater freedom for a nation to experiment with its own desired economic/political model might be worthwhile. Here’s Keynes again:

But I am not persuaded that the economic advantages of the international division of labour to-day are at all comparable with what they were. I must not be understood to carry my argument beyond a certain point. A considerable degree of international specialisation is necessary in a rational world in all cases where it is dictated by wide differences of climate, natural resources native aptitudes, level of culture and density of population. But over an increasingly wide range of industrial products, and perhaps of agricultural products also, I become doubtful whether the economic loss of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the producer and the consumer within the ambit of the same national, economic and financial organisation. Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency. Moreover, with greater wealth, both primary and manufactured products play a smaller relative part in the national economy compared with houses, personal services and local amenities which are not equally available for international exchange; with the result that a moderate increase in the real cost of the former consequent on greater national self-sufficiency may cease to be of serious consequence when weighed in the balance against advantages of a different kind. National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford, if we happen to want it.

Keynes argues that different countries may wish to with to make “a variety of politico-economic experiments,” based on their own traditions and beliefs, without being held back by pressures related to international trade and finance.

Each year it becomes more obvious that the world is embarking on a variety of politico-economic experiments, and that different types of experiment appeal to different national temperaments and historical environments. The nineteenth century free-trader’s economic internationalism assumed that the whole world was, or would be, organised on a basis of private competitive capitalism and of the freedom of private contract inviolably protected by the sanctions of law–in various phases, of course, of complexity and development, but conforming to a uniform type which it would be the general object to perfect and certainly not to destroy. Nineteenth century protectionism was a blot upon the efficiency and good-sense of this scheme of things, but it did not modify the general presumption as to the fundamental characteristics of economic society.

But to-day one country after another abandons these presumptions. Russia is still alone in her particular experiment, but no longer alone in her abandonment of the old presumptions. Italy, Ireland, Germany, have cast their eyes or are casting them towards new modes of political economy. Many more countries after them, I predict, will seek, one by one, after new economic gods. Even countries such as Great Britain and the United States, which still conform par excellence to the old model, are striving, under the surface, after a new economic plan. We do not know what will be the outcome. We are–all of us, I expect–about to make many mistakes. No-one can tell which of the new systems will prove itself best.

But the point for my present discussion is this. We each have our own fancy. Not believing that we are saved already, we each would like to have a try at working out our own salvation. We do not wish, therefore, to be at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laisser-faire capitalism. There are still those who cling to the old ideas, but in no country of the world to-day can they be reckoned as a serious force. We wish–for the time at least and so long as the present transitional, experimental phase endures–to be our own masters, and to be as free as we can make ourselves from the interferences of the outside world. Thus, regarded from this point of view, the policy of an increased national self-sufficiency is to be considered, not as an ideal in itself, but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued.

The Great Depression of the early 1930s was a time when it seemed obvious to many observers that capitalism had failed. Looking back on the economic growth and industrial output of World War I, there was also a sense that strong government oversight of the economy–minus the world war–would generate better outcomes.

Keynes argues for a gradualist and experimental approach, which would steer clear of the disasters emerging (in different ways) in Russia and Germany. He argues that Ireland does benefit from its access to selling in British markets (a lesson largely ignored in our own time by those who advocated the Brexit from the European Union). Keynes also suggests that there will be a gap between the rhetoric and reality of those advocating alternative political-economic arrangements. Rhetoric can bring a party to power, but it then needs to govern with a sharp-eyed view to costs and consequences.

Words ought to be a little wild–for they are the assault of thoughts upon the unthinking. But when the seats of power and authority have been attained, there should be no more poetic licence. We have, therefore, to count the cost down to the penny which our rhetoric had despised. An experimental society has need to be far more efficient than an old established one, if it is to survive safely. It will need all its economic margin for its own proper purposes and can afford to give nothing away to softheadedness or doctrinaire impracticability. When a doctrinaire proceeds to action, he must, so to speak, forget his doctrine.

Keynes was correct in 1933 that enormous experiments in what we sometimes now call a “mixed economy” were underway in high-income countries around the world: think of the much larger role of government in a social safety net, the transition from industrial to service-based economies, the evolution of the health care industry, the rise of enviromental and consumer-protection movements, and so on and so forth. Keynes was incorrect that these changes ruled out a new and more powerful wave of globalization, as we have seen in the last half-century. In my own view, Keynes underestimated what the gains from international trade in the future could be. Finally, his admonition that doctrinaires should count costs and practicalities, and moderate their own doctrine when in power, has only rarely been followed.

US economic growth can be divided into two parts: more hours worked, or more productivity per hour worked. In the past, the US labor force has been rising over time: the US labor force totaled 107 million people in 1980, 142 million in 2000, and was up to 171 million this year. However, after several decades of falling birthrates and population aging, US workforce growth has been slowing down. Future US economic growth will need to rely more heavily on higher productivity per hour–a change that is already underway.

Nathan Modica of the US Bureau of Labor Statistics offers some discussion in “Industry growth patterns: a closer look at output, productivity, and hours worked from 1990 to 2024” (Monthly Labor Review, December 2025).

Here’s an overall economy-wide view. Notice, for example, that productivity growth in the last six years or so (red bars) isn’t much different from the 1990s, but the annual gain in hours worked is much smaller.

Here’s a hours and output-per-hour breakdown by major sectors of the economy. Most of these industries had little change in hours worked from 1990-2024, and some had declining hours worked. The main exception where more hours were worked was in “Accommodation and food services.” Elsewhere, all or nearly all of the output gains are from higher productivity measured by output-per-hour, not more hours worked.

Modica offers a number of industry-level breakdowns. Here’s one for a subset of the “Accomodation and food services” category, broken down into “Limited service eating places” and “Full service restaurants.” The interesting shift here is that during the 1990s and into the 2000s, most of the output gains these businesses can be traced to more hours worked, with only modest changes in productivity. But since the pandemic, hours worked is barely up in Limited-service eating places and down substantially in Full-service restaurants, while productivity gains now represent the lion’s share of output growth in both categories.

The reason behind this change seems to be a lasting effect that was jump-started by the COVID pandemic: that is, more widespread use of take-out ordering.

The pandemic seems to have hastened the adoption of newer business practices and technologies in both restaurant industries, which could have boosted measured productivity in either industry. A survey from a trade association indicated that the shift to off-premises revenues accelerated during 2020 in all restaurant types. Later surveys confirmed that off-premises consumption in restaurants was still higher in 2021 than before the pandemic, concurrent with the drop in on-site dining. Even well after most pandemic restrictions loosened, off-premises dining remained higher in 2023 than in 2019 throughout the restaurant trade.

Complementary to the increase in off-site consumption was the expanded use of digital technologies like ordering, payments, and delivery-management online or with mobile apps. Again, this does not seem to be merely a short-term reaction to pandemic conditions. Market survey data from 2023 suggest that many full-service restaurant operators introduced delivery service during the pandemic—including many fine-dining establishments—and that most of those who introduced it planned to retain it.

Over at NPR Marketplace, Sarah Leeson got to wondering about what economists mean by a “widget.” This curiousity led her to my post about three years ago, “A Brief History of Widgets” (August 15, 2022). In turn, this led to a four-minute report on “How do `widgets’ fit into our services-based economy?” (NPR Marketplace, December 25, 2025). If you would like to listen me and others giggling about widgets–with some actual information mixed in–I commend the episode to your attention.