"A truly free market is totally incompatible with the existence of a State, an institution that presumes to 'defend' person and property by itself subsisting on the unilateral coercion against private property known as taxation."

People who lost their homes last year in the LA wildfires are finding government roadblocks to rebuilding, due to systems put in place by progressives. And nothing will change.

A. Mitchell Innes—a chartalist pioneer—wrote a pamphlet “What Is Money?” (1913) which found a credulous and ideologically sympathetic audience in J. M. Keynes.

"The middle class is shrinking" might be the assertion of the decade. Progressives and populists alike use it to justify nearly all government interventions, from tariffs to minimum-wage hikes to massive spending to income redistribution. But before we accept its validity, we should ask a simple question: shrinking how?

Is the number of Americans considered part of the middle class diminishing? Or the amount of wealth they can realistically build? Or the value of what they can buy?

A new study by economists Stephen Rose and Scott Winship usefully reframes the debate. Most studies define the middle class relative to the national median, which makes the dividing line between haves and have-nots rise automatically as the country gets richer. Rose and Winship instead use a benchmark of fixed purchasing power, so that if real incomes (those adjusted for inflation) rise, more people are shown moving into—or beyond—the middle class in a meaningful sense.

Under this approach, the "core" of the middle class does indeed shrink modestly. But crucially, the middle class shrinks because people are moving up the income ladder, not because they're falling down. Since 1979, the share of Americans in the upper-middle class has roughly tripled—from about 10 percent to 31 percent—while shares of those considered lower middle class or poor fell substantially.

Much of the political rhetoric, such as former President Joe Biden's warning of a "hollowed-out" middle class, implicitly suggests downward mobility and national immiseration—a story difficult to square with data showing an overwhelmingly upward directional movement.

In the end, the American middle class may be a smaller share of the population by some relative definitions, but it's also significantly richer than it was a generation ago. So why does its supposed downfall resonate so powerfully? I can think of two reasons.

One is that the middle class has never been just an income bracket. It's also a social identity and a claim to civic pride. For much of the 20th century, belonging to the middle class meant more than just achieving a certain living standard. It meant occupying the cultural and civic center of the country—being the representative American whose tastes, habits, and aspirations have largely defined us.

As our prosperity has dramatically grown, our culture has diversified and fragmented. A richer and freer society offers more choice: more media, more platforms, more lifestyles, more ways of living well. We no longer all watch the same television programs or consume the same news. Fewer institutions define a single cultural mainstream.

This fragmentation is often experienced as loss. Without one cohesive middle serving as an obvious center of gravity, upward mobility no longer comes with the same affirmation of middle-class status or belonging. The mirror that once reflected a common identity has splintered.

But this is only one side of the story. The fragmentation is also a sign of success. It reflects abundance, pluralism, and the eroding ability of society's gatekeepers to dictate what's normal.

Still, when middle-class life feels messier or less satisfying, populism offers a tempting but misleading response: Blame elites and free markets. It recasts the disorienting effects of abundance and choice as evidence of economic decline. The real danger is not cultural fragmentation but conflating the costs of success with failure.

This leads to a second, more concrete reason for our fears: Washington hasn't destroyed the middle class, but it is putting most Americans in a frustrating squeeze. The largest cost pressures today are concentrated in sectors where government has distorted markets the most.

Housing, health care, and higher education—three of the largest household expenses—are among the most heavily regulated and subsidized parts of the American economy. Barriers on who can provide these essentials, how much can be supplied, and how other regulatory complexities raise prices and reduce choice. Even as incomes rise, the pressures are real. But they are the product of government failure, not evidence that economic growth has stopped working.

Recognizing this does not justify populist economic policies that mistake the source of our discontent. Rose and Winship rightly urge skepticism toward policies sold as "middle-class restoration." The impulse to reimpose uniformity or respond to an economic challenge in ways that suppress growth turns real gains into real losses. Restrictions on free trade, cartel-like favoritism for government-favored industries, and other heavy-handed interventions undermine the very dynamics that allowed the middle class to expand in the first place.

When more families cross into the upper middle class, that's a success. You might be frustrated by lost status and broken institutions. Just don't allow politicians to misdiagnose the problem and sabotage the upward mobility that is still delivering real gains despite government barriers.

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The brand-new Milken Center for Advancing the American Dream is weirdly evasive about capitalism's messy entanglement with the state. One might have expected that topic to come up, given the museum's location: It's a $500 million shrine to capitalism directly across the street from the White House, in what used to be Riggs Bank, a financial institution brought down by accusations of money laundering and other regulatory violations.

That evasiveness is especially striking given the founder's own biography: a financier whose "junk bonds" helped fuel massive economic change, who was then prosecuted and punished before being pardoned by a populist president. There are plenty of inspiring tales of entrepreneurship and grit on display in the glossy, gorgeous displays. There's a much more interesting, complicated story about capitalism hiding in Michael Milken's arc alone, but the museum mostly sidesteps it.

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The rapid growth of artificial intelligence is causing an AI power crisis, as the electricity demands of massive AI data centers are straining existing power grids and outpacing the development of new energy sources. This has led to concerns about grid stability, rising electricity costs, and significant environmental impacts. If there's not enough juice, then I'll have to write my own ledes—as those two sentences were penned by AI and powered by the local grid.

Excuse my snarkiness, as I'm not feeling too kindly toward AI this morning after being stuck on the most insane call with a "virtual assistant" who was supposed to help me get my internet service up and running but was oddly aggressive and incapable of fixing my problem. Nevertheless, I know AI is a remarkable advancement that offers huge potential. A big issue, as raised by the robot above, is whether our state has the electricity capacity to handle it.

California remains the national hub for AI development, and it's one of the main bright spots in our economy. The state's budget—now awash in an $18-billion deficit—is increasingly dependent on it. In its recent fiscal analysis, the Legislative Analyst's Office noted that income-tax collections are the one bright spot in the state economy. They are "growing at double‑digit rates" and are "driven by enthusiasm around AI, which has pushed the stock market to record highs and boosted compensation among the state's tech workers."

Obviously, the state has a vested interest in assuring that there's plenty of electricity available to power this major tax-generating sector. Meanwhile, lawmakers keep proposing—and sometimes passing—regulations that would hobble the industry. Gov. Gavin Newsom has so far rejected the worst measures, but has signed some new transparency requirements. With the new legislative session comes renewed efforts to regulate more—plus a possible ballot measure in November to impose a billionaire's tax, which will mostly affect tech titans.

If the state wants to remain competitive in the burgeoning AI world, then it needs to resist these efforts. If it gives in to them, then it will watch AI momentum shift toward Texas, Virginia, and other states that also have built significant AI infrastructure. The wrong choice will be costly in terms of the state budget. But the state's AI-related electricity challenges are a different matter, as that issue is all about planning for the future.

Of course, California doesn't have the best track record for planning for future infrastructure. For decades, state policymakers have failed to upgrade our water systems, freeways, and electricity grid. California hasn't built significant new water storage since the 1970s. Anyone who drives around the Los Angeles basin understands the inadequacy of the freeway system. The state's struggling electricity grid has been the subject of much discussion, given that state energy policy is all about moving toward EVs and other "green" electricity-dependent technologies.

My AI assistant reminds me of one emblematic example: "In September 2022, during an extreme heatwave, California's grid operator (CAISO) asked residents, including EV owners, to voluntarily conserve energy by avoiding charging during peak evening hours … to prevent grid strain and potential blackouts." And the latest reports suggest that EV charging is nothing compared to the massive demand that new data centers will impose.

Furthermore, the push for new generation runs up against the state's environmentally oriented goals. As a CalMatters report on the data-center controversy reveals, despite its 2045 total carbon-neutrality goal, the state "still depends heavily on natural-gas plants during hot summer days." It points to a recent report showing that "data-center carbon emissions nearly doubled from 2019 to 2023—largely from gas-fired generation—underscoring how even a relatively clean grid may struggle to absorb AI-driven load without higher emissions."

Something has to give—either the state budget or our aggressive climate goals. Simply put, California needs more electricity competition. My R Street Institute colleagues gave the state a C+ grade in that area—not as bad as its usual F grades for most things, but we can do better. Competition is the best way to incentivize new capacity (and improve the environment).

Communities are rebelling against the construction of massive data farms. Some opposition is based on land-use concerns, but it's also driven by fear of inadequate electricity and higher energy prices. As the Competitive Enterprise Institute's Clyde Wayne Crews explains, this is a symptom "of far deeper structural problems rooted in legacy approaches to infrastructure—approaches that tether data centers to coercive public utility price- and access-control models."

Perhaps it's time for an approach that unleashes market forces, as the AI boom is showing the limits of our regulated monopoly power model. If California continues down its usual regulated path, it's unlikely to have the capacity to build power plants that are needed to drive the industry—and pay for all that state government spending.

This column was first published in The Orange County Register.

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