Money and the Rule of Law

Tuesday, May 25, 2021
Peter J. Boettke

Daniel J. Smith, Alexander William Salter, and Peter J. Boettke announce the publication of their new book from Cambridge University Press, Money and the Rule of Law. Read more at FifteenEightyFour.

COVID Stimulus Won’t Cure the Pension Pandemic

Friday, March 26, 2021
Eileen Norcross

Public sector pensions should've been prepared to weather the pandemic recession without outside help. Read more at the Finger Lakes Times.

Money and the Rule of Law

May, 2021

Contemporary monetary institutions are flawed at a foundational level. The reigning paradigm in monetary policy holds up constrained discretion as the preferred operating framework for central banks. But no matter how smart or well-intentioned are central bankers, discretionary policy contains information and incentive problems that make macroeconomic stability systematically unlikely. Furthermore, central bank discretion implicitly violates the basic jurisprudential norms of liberal democracy. Drawing on a wide body of scholarship, this volume presents a novel argument in favor of embedding monetary institutions into a rule of law framework. The authors argue for general, predictable rules to provide a sturdier foundation for economic growth and prosperity. A rule of law approach to monetary policy would remedy the flaws that resulted in misguided monetary responses to the 2007-8 financial crisis and the COVID-19 pandemic. Understanding the case for true monetary rules is the first step toward creating more stable monetary institutions.


'A profound and highly original assessment of monetary policy and its inseparable connection to the rule of law, a key principal of economic freedom. This is a great read, carefully researched with telling quotes from top policy makers. It dissects tough monetary problems into easy-to-understand pieces – objectives, instruments, targets, and models. It candidly describes political pressures on the Fed with hard evidence from past to present. It creatively uses the great ideas of Hayek, Friedman, and Buchanan to confront the weaker scholarship of today. Most ominously, it warns that Fed is once again expanding its reach and thereby threatening the rule of law.'

John Taylor, Mary and Robert Raymond Professor of Economics at Stanford University


'Like Hayek, Friedman, and Buchanan before them, Boettke, Salter, and Smith argue convincingly for fundamental changes in institutional design that, by enforcing rules over discretion in monetary policymaking, will help restore economic prosperity and the smooth functioning of our liberal democratic system. Anyone with a serious interest in using economics to improve the lives of all Americans should read this book.'

—Peter Ireland, Professor of Economics at Boston College


'This book takes a fascinating deep dive - a dive off of a springboard founded by economists as diverse as Adam Smith, Milton Friedman, John Maynard Keynes, F.A. Hayek, and John Taylor - into the thesis that money creation and responsible monetary institutions are as fundamentally important for our prosperity as any institution. It couldn't have arrived at a better time, when many believe money can be printed without consequence and when monetary institutions are increasingly coming under enormous political, cultural, and social pressure to perform the impossible. Their well-argued conclusion that the fragility of good monetary systems should fundamentally be embedded within the rule of law makes this book important for all readers hoping to preserve good governance, promote shared prosperity, and limit expropriation by those who would exploit democratic institutions.'

Lee Ohanian, Professor of Economics at University of California, Los Angeles


'This book is required reading for anyone concerned about monetary policymakers’ management of the COVID 19 economic crisis and, especially, their lack of attention to the long-term impacts of their historically dramatic monetary policy changes.'

William F. Ford, President of the Federal Reserve Bank of Atlanta from 1980–83


'From the adoption of the US Constitution to the founding of the Federal Reserve System, policymakers concluded that a currency anchored by a gold standard was essential to maintain monetary discipline. However, during our central banks’ century of existence, it evolved into an undisciplined discretionary system of fiat money creation. In Money and the Rule of Law, the authors provide a very much needed road map for returning to a disciplined monetary system for the remainder of the 21st century.'

Jerry Jordan, President of the Federal Reserve Bank of Cleveland from 1992 to 2003


'Many economists rightly advocate the rule of law, and allocation by markets rather than by expert central planners, as the key to economic development. Too few apply these principles to monetary institutions. Boettke, Smith, and Salter offer an insightful alternative. They diagnose the serious problems with the management of our money by central bankers who exercise discretion unconstrained by the rule of law. And they point the way toward much better arrangements. Highly recommended.'

Lawrence H. White, Professor of Economics at George Mason University


'Boettke, Salter, and Smith have produced a well-researched, well-written, highly-readable gem. By weaving the technical, philosophical, institutional, historical, and empirical aspects of money tightly together with the thread of economic principles, they are able to present money in a new light - the light of the rule of law. With that, the authors masterfully show why virtually every idea in vogue today has been tried before and why each has failed time and time again.'

Steven Hanke, Professor of Economics at John Hopkins

To Fix the Fed, We Need True Monetary Rules

Monday, October 26, 2020
Peter J. Boettke

The Fed loves operating under a "constrained discretion" framework becasuse it lets central bankers decide when to follow their own rules. Read more at The Hill

Alabama at the Crossroads: An Economic Guide to a Fiscally Sustainable Future

March 22, 2016


Alabama currently lags behind its regional neighbors and the nation in economic growth and performance. For example, Alabama’s per capita personal income is $2,800 below the average of the rest of the states in its region and it ranks 45th in Forbes’s “Best States for Business.” This is because of Alabama’s poor performance in connection with several indicators of economic freedom, particularly its overspending, excessive regulation, and high public employment.

A new study for the Mercatus Center at George Mason University undertakes a comprehensive analysis of where Alabama stands today as well as the reforms necessary to put Alabama on the road to economic prosperity. Alabama must undergo comprehensive reform to expand economic freedom, which will lead to economic growth and prosperity.


Alabama’s budget has experienced recent shortfalls leading to political gridlock, which demonstrates the need for a major budgetary overhaul to rein in spending and better streamline revenues and expenditures.

  • A lack of transparency in spending further exacerbates the situation: unlike the vast majority of states, Alabama does not have a consolidated budget, but rather a number of separate budgets and trust funds.
  • Each budget and trust fund receives its revenues from separate sources, and 85 percent of the state’s revenue is earmarked for a particular purpose—by far the largest percentage of earmarking out of all the states in the country.

Recommendations: Consolidate Alabama’s budgets into one general budget and curtail earmarking. Further, in order to limit the growth of state expenditures, several programs require long-term reform, such as Medicaid and others discussed below. Strict tax and expenditure limits, such as an expenditure limit that ties annual expenditure growth to the state’s population growth, would better align state expenditures with economic conditions. In addition, such limits would help minimize the negative effects that the business cycle can have on the state budget.  


Alabama’s public pension system is severely underfunded, putting retirees and taxpayers at risk.

  • The funded ratio of the Retirement Systems of Alabama (RSA) has dropped precipitously as the actuarial value of assets in the Teachers’ Retirement System, the Employees’ Retirement System, and the Judicial Retirement Fund have declined while their liabilities have increased.
  • The declining funding health of the RSA has prompted a reliance on increasing state and employee contributions to the system.
  • In response to its declining funding health, the RSA has also increased its investment risk exposure—an exposure that taxpayers ultimately bear.

Recommendation: Transition new members of the RSA to private, defined contribution accounts, providing them with more portable and customizable retirement benefits.


Alabama currently offers a range of economic incentive programs, including film subsidies. This attempt to handpick economic winners and losers creates an unfair business environment and leads to cronyism.

  • Economic incentive programs are costly, impede economic growth, and undermine the free market by granting politicians the opportunity to play venture capitalist with taxpayer money. Alabama’s incentive policies tend to crowd out private investment and leave certain firms or would-be entrepreneurs at a competitive disadvantage.
  • Alabama has experienced a clear downward trend in net firm formation (for all firm sizes) in recent decades.

Recommendation: Eliminate Alabama’s economic incentive programs in favor of low, equal taxes, welcoming businesses of all varieties to Alabama.


Alabama’s government currently provides many services that can—and should—be provided by the private sector.

  • Many of the services Alabama provides are not proper functions of a limited government, meaning that state resources are being unnecessarily diverted from the core functions of government.
  • Privatization of these services can decrease their cost, improve their quality, and reduce the number of public-sector workers who must be supported by the private sector.

Recommendation: Privatize ABC liquor stores, golf courses, and other non-public goods, turning them over to the competitive market.


Underperforming K–12 schools in Alabama leave youth unprepared for college or the workforce.

  • Only 20 percent of Alabama’s 2013 high school graduates were fully ready for college based on their ACT results. In addition, Alabama has one of the highest dropout rates in the nation. Between 2002 and 2012, roughly 30 percent of Alabama’s high school students failed to graduate within four years.
  • Higher standards, across-the-board reductions in class size, more stringent teacher qualification requirements, promises to improve political-administrative accountability based on test scores, and large per-pupil spending hikes have all failed to address Alabama’s education woes.
  • The one-size-fits-all approach demonstrably fails to provide the necessary flexibility to encourage experimentation and meet the diverse educational needs of parents and students.

Recommendation: Systematically expand school choice in order to empower parents to hold schools accountable and use educational experimentation and innovation to meet the diverse needs of schoolchildren.


While Alabama’s tax revenues per person may be low compared to those of other states, Alabama’s tax rates are not. Furthermore, Alabama currently does not have tax and expenditure limits that would restrict the growth of government spending.

  • Low, fair, and straightforward tax structures expand states’ economies, attract residents and businesses, and eventually bring in more tax revenue.
  • In its 2015 State Business Tax Climate Index, the Tax Foundation ranks Alabama’s business tax climate 28th. Regionally, Alabama falls behind Florida, Mississippi, Tennessee, and Texas.

Recommendation: Eliminate loopholes and tax incentives in order to lower income and corporate tax rates for all Alabamians, offering a tax environment more conducive to economic growth and more competitive with Alabama’s regional neighbors.


Excessive regulation is impeding business growth and innovation in Alabama, restricting entrepreneurship and job growth.

  • Alabama has the eighth-lowest rate of new entrepreneurs in the nation (tied with Kansas, Illinois, and Virginia), the absolute lowest opportunity share of new entrepreneurs, the fourth-lowest start-up density in the nation, and only one Fortune 500 company headquarters.
  • While regulatory agencies are statutorily required to make all economic impact studies available to the public, in practice this rarely happens, making the entire regulatory process less transparent and increasing the likelihood of regulatory capture. Where economic impact studies do exist, their content tends to be insufficient.

Recommendations: Sensibly reform business, alcohol, health, and labor regulations to remove the regulatory thickets entrepreneurs and business owners face. The state should also consider a complete overhaul of its regulatory review process. Although the de jure review process should work in theory, in practice the outcomes are far from what is intended. This leads to greater regulatory burdens and uncertainty in the marketplace, which slow business formation and, with it, economic growth. 


Alabama’s lengthy and complex constitution centralizes power and undermines the state’s ability to constrain and limit the size of state government.

  • Largely as a result of the concentration of power that the constitution granted and continues to grant to the state legislature, Alabama’s constitution is now the longest written constitution in the world at 276,006 words.
  • Alabama’s constitution denies local governments the opportunity to self-govern and to rapidly meet and deal with local problems as they emerge. Instead, the constitution bogs down the part-time state legislature by requiring it to address these local issues.

Recommendation: Undertake a complete constitutional overhaul to grant home rule to local governments, ensuring an effective delimitation of powers and empowering local authorities to deal with purely local matters. 


Relative to other states, Alabama has a deep-seated problem of political corruption.

  • The Edmond J. Safra Center for Ethics at Harvard University recently ranked Alabama as one of the most corrupt states in the nation, considering both illegal and legal corruption.
  • This corruption, largely driven by lack of transparency, inhibits economic activity by creating an unfair political, legal, and business environment.

Recommendation: Increase government transparency and openness, especially as it pertains to spending, legislative activity, economic incentive programs, and public pension management, in order to foster accountability and help limit growth-restricting corruption.


Alabama requires systematic reforms that expand economic freedom and put the state on the road to economic prosperity. Some of these are broad, structural reforms, such as overhauling the constitution and consolidating the budget, as well as tackling corruption. Comprehensive reforms of specific policy areas are also required. Policy issues in need of attention include public pensions, taxes, privatization, and the regulatory system.

On Your Mark, Get Set, Develop!

October, 2015

One of the lingering questions for development economists is that of economic transition and whether development can be promoted by a strong political leader. Earlier writings on leadership and economic development tend to fall into one of two camps: (1) leaders matter and can contribute positively to economic growth, or (2) leaders seldom have positive effects and, at best, can avoid doing a great deal of harm. This article establishes a third option—a middle-ground position—between these two views. Good leadership can, indeed, have a positive effect on economic growth but only during the initial moment when economic reform is up for grabs. Once the opportunity to implement sweeping reform has passed, interests become entrenched, and the opportunity for growth-enhancing reform passes. Bad leaders, on the other hand, can hamper economic growth in periods well beyond the ideal reform moment.

The Oxford Handbook of Austrian Economics is available through Oxford University Press.

Christopher Coyne
Peter J. Boettke

Evolving Views on Monetary Policy in the Thought of Hayek, Friedman, and Buchanan

December, 2016

Attempting to find the technically optimal monetary policy is futile if the Federal Reserve’s independence is undermined by political influences. F. A. Hayek, Milton Friedman, and James Buchanan each sought ways to improve the performance of the Federal Reserve. They each ended up rejecting the possibility that technical refinement or minor reforms might be sufficient. After properly accounting for the concerns of robust political economy, each concluded that a fundamental restructuring of our monetary system was necessary. Friedman turned to binding rules, Buchanan to constitutionalism, and Hayek to competing private currencies. We synthesize their contributions to make a case for applying the concepts of robust political economy to the Federal Reserve through the adoption of professional humility, creative thinking, and an emphasis on the politically possible, not the politically acceptable.

Gauging the Perception of Cronyism in the United States

October 17, 2012

Cronyism is ubiquitous across all political systems. Whenever political actors intervene in economic affairs, they provide the incentive for businesses to take legal (cronyism) and/or illegal (corruption) action to ensure that political actors intervene in their favor. Yet only recently have economists started to seriously study cronyism and its prevalence and economic impact. The lack of scholarly work is largely because cronyism, like corruption, is notoriously difficult to measure, and unlike corruption, cronyism is not illegal, making it even more difficult to define and measure because there are no court or indictment records. This paper surveys the research on cronyism and the available methods of measuring it—in particular, using surveys to measure the perception of cronyism. We also make suggestions for improving our measurements of cronyism.

The defense of free markets and limited government from Adam Smith and David Hume forward hinges on the key assumption that businesses in the pursuit of profit will serve the public interest. Instead of legislating against or awaiting a transformation of human nature, Smith and Hume argue that capitalist institutions harness human self-interest to advance the well-being of all. As Smith famously states, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”[1] Most economists accept the argument that under market institutions, profit-seeking businesses will generally serve the interests of consumers. Yet profit seeking will not serve consumers if businesses can secure from government monopoly privileges or other regulations inhibiting their competitors. Such a mixed or politicized economic system has been dubbed crony capitalism, or cronyism, to distinguish it from a system of free markets and limited government.

While economists have been aware of cronyism since the beginning of economics, it has only recently become the focus of economic research. Several strands of literature in economics establish the general costs of cronyism and provide guidance for its scholarly investigation. The public choice analysis of rent seeking examines competition for favors or transfers from government and the costs of the transfers and lobbying activities.[2] The analysis of corruption, illegal attempts to secure favors from politicians, establishes the negative impact on the investment environment of bribes for favors.[3] And economic freedom has been strongly linked to prosperity and growth,[4] yet as cronyism expands in a country, economic freedom will decline. The actual measurement of cronyism has proven difficult because the parties involved tend to hide their actions.[5] Cronyism can also be obscured by public interest or consumer protection rationales for regulation, as Yandle’s example of the bootleggers and Baptists emphasizes.[6] 

This paper explores avenues for measuring cronyism as a means of advancing this new line of research. Although economists’ focus on cronyism is relatively recent, extensive literature exists on the related topics of corruption and rent seeking, and any attempt to investigate cronyism should be informed by these literatures. A first challenge is to distinguish cronyism from corruption and rent seeking, a task we consider in section 1. We consider in section 2 some general insights on the costs and measurement of cronyism offered by the corruption and rent-seeking literatures. Our focus then turns to the measurement of cronyism. Scholars have found surveys to be an effective means to measure corruption; surveys could also be used to mea- sure cronyism. Public perceptions of cronyism are important for the future of the free market economic system. Does the public consider cronyism to be endemic to or a corruption of capitalism? The public’s perception of cronyism will likely affect the future course of policy and may offer clues about how crony influences could be ameliorated. Section 3 discusses the reasons why perceptions of cronyism matter. Section 4 reviews some of the available evidence on insider and public perceptions.

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Daniel J. Smith and Daniel Sutter discuss Tornado Recovery in Joplin, Missouri on KZRG

Daniel Sutter
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Jun 28, 2012
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Tornado Recovery: How Joplin Is Beating Tuscaloosa

Friday, April 13, 2012

This article was written by Daniel J. Smith and David T. Beito. It was originally published in The Wall Street Journal

Last April 27, one of the worst tornadoes in American history tore through Tuscaloosa, Ala., killing 52 people and damaging or destroying 2,000 buildings. In six minutes, it put nearly one-tenth of the city's population into the unemployment line. A month later, Joplin, Mo., suffered an even more devastating blow. In a city with half the population of Tuscaloosa, a tornado killed 161 and damaged or destroyed more than 6,000 buildings.

More than 100,000 volunteers mobilized to help the stricken cities recover. A "can-do" spirit took hold, with churches, college fraternities and talk-radio stations leading the way. But a year after the tragedies, that spirit lives on far more in Joplin than in Tuscaloosa. Joplin is enjoying a renaissance while Tuscaloosa's recovery has stalled.

In Joplin, eight of 10 affected businesses have reopened, according to the city's Chamber of Commerce, while less than half in Tuscaloosa have even applied for building permits, according to city data we reviewed. Walgreens revived its Joplin store in what it calls a "record-setting" three months. In Tuscaloosa, a destroyed CVS still festers, undemolished. Large swaths of Tuscaloosa's main commercial thoroughfares remain vacant lots, and several destroyed businesses have decided to reopen elsewhere, in neighboring Northport.

The reason for Joplin's successes and Tuscaloosa's shortcomings? In Tuscaloosa, officials sought to remake the urban landscape top-down, imposing a redevelopment plan on businesses. Joplin took a bottom-up approach, allowing businesses to take the lead in recovery.

"Out of the heartbreak of disaster," declared Tuscaloosa Mayor Walt Maddox several days after his city's tornado, "rises an extraordinary opportunity to comprehensively plan and rebuild our great city better than ever before." In this transformative spirit, Tuscaloosa's city council imposed a 90-day construction moratorium in the disaster area, restricting commercial and residential redevelopment until officials could craft and adopt a long-term master plan. Many of the restrictions remained long after the moratorium officially expired. Joplin, by contrast, passed a 60-day moratorium that applied only to single-family residential structures and was lifted on a rolling basis, as each section of the city saw its debris cleared, within 60 days.

The Alabama city's recovery plan, "Tuscaloosa Forward," is indeed state-of-the-art urban planning—and that's the crux of the problem. It sets out to "courageously create a showpiece" of "unique neighborhoods that are healthy, safe, accessible, connected, and sustainable," all anchored by "village centers" for shopping (in a local economy that struggles to sustain current shopping centers). Another goal is to "preserve neighborhood character" from a "disproportionate ratio of renters to owners." The plan never mentions protecting property rights.

In Joplin, the official plan not only makes property rights a priority but clocks in at only 21 pages, compared with Tuscaloosa's 128. Joplin's plan also relied heavily on input from businesses (including through a Citizen's Advisory Recovery Team) instead of Tuscaloosa's reliance on outside consulting firms. "We need to say to our businesses, community, and to our citizens, 'If you guys want to rebuild your houses, we'll do everything we can to make it happen,'" said Joplin City Council member William Scearce in an interview.

Instead of encouraging businesses to rebuild as quickly as possible, Tuscaloosa enforced restrictive zoning rules and building codes that raised costs—prohibitively, in some cases. John Carney, owner of Express Oil Change, which was annihilated by the storm, estimates that the city's delays and regulation will cost him nearly $100,000. And trying to follow the rules often yielded mountains of red tape, as the city rejected businesses' proposals one after another.

"It's just been a hodgepodge," says Mr. Carney. "We've gotten so many mixed signals from the get go. The plans have been ever-changing." Boulevard Salon owner Tommy Metrock, one of the few business owners to rebuild on Tuscaloosa's main thoroughfare, McFarland Boulevard, says the restrictions created "chaos" as people put their livelihoods on hold while the city planned.

Joplin took a dramatically different approach. According to interviews with local business owners, right after disaster struck the city council formally and informally rolled back existing regulations, liberally waving licensing and zoning mandates. It even resisted the temptation to make "safe rooms" a condition of rebuilding.

The owner of one Joplin construction company told us that when it came to regulations, the "city just sort of backed out. . . . We had projects that we completed before we got building permits." Said another Joplin resident: "When you have the magnitude of that disaster, really the old ways of doing things are suspended for a while until you create whatever normal is. . . . The government was realistic to know that there is a period of time when common sense, codes and laws that are in place to protect people are suspended for the sake of the greater good."

Despite it all, Tuscaloosa officials are determined to stick to their plan. The final version of Tuscaloosa Forward is on track for approval by the City Council. The city is banking on defraying its costs through as-yet-unreceived funding from the Federal Emergency Management Agency (FEMA), the Department of Housing and Urban Development, and other federal bodies. As Tuscaloosa Forward bluntly acknowledges, full implementation of the plan is impossible without "public subsidies to leverage private capital."

Last year's decentralized volunteer response seems to be entirely forgotten by city officialdom. As Mayor Maddox recently said: If Tuscaloosa "had a trained FEMA corps on the ground" when the tornado struck, "they could have taken over organizing the volunteers immediately."

In an age of mounting deficits and limited federal attention spans, hoping for more subsidies from Washington, D.C. is a risky bet at best. Joplin's safer wager is in the good sense and independently generated resources of those individuals and businesses most directly affected by nature's fury.