Chapter 15: Empathy Is Not a Policy

In 2009, with the housing market in ruins, Congress devised a rescue: an $8,000 tax credit for first-time homebuyers, fully refundable, meaning the government would cut a check even to someone who had never paid a dollar in taxes. The program was so loosely monitored that a four-year-old successfully claimed the credit. Mortgage lenders soon realized they could accept this "refund" as the entire down payment, letting buyers purchase homes with no equity of their own. That November, Congress expanded the giveaway, offering $6,500 to "long-time residents" who had owned and lived in the same home for five of the previous eight years: a first-time homebuyer credit extended to people who had owned a home for half a decade. As the investor Ed Thorp observed, the logic could justify almost anything: why not pay homeowners $100,000 to demolish their houses and rebuild, reviving the construction industry in one stroke? "There is no end to the possibilities," he noted dryly.

This is what happens when policy is built on empathy instead of analysis. The economist Henry Hazlitt identified the mechanism decades earlier: empathy only extends to the people we can see, those closest to us, those on the news, or the sympathetic figures we conjure in our minds. A policymaker crafts a solution for that visible group while ignoring the hundred other groups the policy will touch. The result, Hazlitt warned, is a policy that may fail even its intended beneficiaries while spawning consequences no one anticipated. Real estate lobbyists didn't need to corrupt anyone; a sympathetic image of the struggling homeowner did the work for them.

The psychologist Paul Bloom arrived at the same conclusion from a different direction. Empathy, he argues, is "a capricious and irrational emotion that appeals to our narrow prejudices." We do our best moral reasoning, Bloom suggests, not when we feel the most, but when we're disciplined enough to reason from a distance, drawing on what he calls "a more distanced compassion" rather than raw feeling.

That distance requires a method. Two frameworks force it. The first is John Rawls's veil of ignorance: design the policy as though you'll be born into it at random, stripped of your gender, your ethnicity, your class, your ability, your history. You might be the winner or you might be the one crushed beneath the fine print. The second is consequentialist ethics, which asks a harder question than "who deserves help?" It asks what happens next, then what happens after that: the second- and third-order consequences a policy sets in motion. Hazlitt described this as the whole art of economics, tracing those effects not just immediately but over time, and not just for one group but for every group the policy touches.

The Fed

Twelve people on the Federal Open Market Committee heavily influence the price of money for 330 million Americans and, by extension, for billions more who live under the shadow of the dollar as the world's reserve currency.

Warren Buffett distilled the entire logic of markets into a single image: interest rates are to asset prices what gravity is to the apple. "When there are low interest rates, there is a very low gravitational pull on asset prices." Every business, every farm, every apartment building is a claim on future cash, and the value of that claim depends entirely on the rate used to discount it back to the present. Push rates toward zero and that gravity all but disappears, sending valuations soaring. Raise them, and the pull returns with force.

That power invites a particular kind of theft. John Maynard Keynes observed that inflation lets a government confiscate its citizens' wealth "secretly and unobserved," and that the confiscation falls unevenly: "while the process impoverishes many, it actually enriches some." The winners are asset owners, whose holdings inflate in nominal value. The losers are cash savers, whose money quietly loses purchasing power while the number in their account stays the same. No legislation is required, no vote is taken, and most people never notice the transfer until their savings buy less than they once did.

The imbalance is built into the design of the money itself. As the analyst Lyn Alden observes, users want money that holds value, that's private, that can't be frozen or seized, while issuers want money that discourages saving, that pulls future spending into the present, that's easy to monitor, and that can be confiscated when convenient. Modern currencies are built almost entirely around the issuer's incentives, which is why they reward short-term consumption over long-term wealth.

The theory behind this system, as Alden explains, sounds reasonable on paper. When credit is expanding too fast, the central bank raises rates and the government runs surpluses to cool things down; when the economy contracts, they lower rates and run deficits to stimulate it. The goal is a smooth, moderate expansion of the money supply, with the peaks and troughs of the private sector sanded down by careful management. But the theory assumes officials are more detached and long-term in their thinking than the private citizens they're managing, or at least that the two sets of incentives point in the same direction. Neither assumption holds. Elected officials answer to voters who want lower taxes and more services now, not fiscal discipline that pays off after the next election. The result isn't a healthy cycle of surplus and deficit. It's a steady deficit that becomes a bigger deficit whenever trouble arrives.

The deeper flaw runs beneath the politics: price controls don't work, whether applied to gasoline or to money itself. If one state caps the price of gas during a shortage, sellers in neighboring states have no incentive to ship supply in, since they can't charge enough to make the trip worthwhile. The shortage isn't fixed. It just persists until the pumps run dry. Alden extends this logic directly to the Fed: "the price to borrow money depends on multiple factors, including how creditworthy you are but also how abundant or scarce credit generally is at the time." In a market left alone, scarce credit raises rates and abundant credit lowers them, a natural signal that allocates capital to where it's needed. A central bank overriding that signal doesn't eliminate the underlying scarcity or abundance. It only delays the reckoning, trading a "mild, short-term gain" for "severe, long-term losses."

The 2008 financial crisis marked a turning point in how far this override could reach. Before then, the Fed's main lever was the interest rate itself. After, it began manipulating the size of the entire monetary base directly, expanding and contracting the supply of base money in ways that ripple through contracts and balance sheets across the economy. The rapid drain of bank reserves during the Fed's balance sheet runoff in 2018 and 2019 helped set up the September 2019 spike in repo rates, the cost of overnight loans between banks. The speed of its rate hikes in 2022 and 2023 left regional banks holding securities worth far less than they had paid for them, contributing directly to the failures that followed. Twelve people, moving levers meant to smooth out chaos, become the source of it.

Government Fiscal Aid Programs

In the 2010s, major airlines took the profits of a decade-long boom and handed them straight to shareholders, through dividends and buybacks, while building no cash reserve for the inevitable downturn. When COVID-19 grounded air travel in 2020, several of these companies stood at the edge of bankruptcy. Chapter 11 would not have erased them; it would have wiped out shareholders and handed the companies to their creditors, while airlines that had grown slowly, avoided debt, and kept cash on hand would have absorbed the crisis and emerged stronger. Instead, the federal government spent tens of billions bailing out the industry and offered subsidized loans on top of it, rescuing the companies whose recklessness had put them at risk while doing nothing to reward the airlines that had planned for exactly this scenario.

The pattern repeated at the scale of the entire economy. The typical American received a few thousand dollars in stimulus checks. Wealthy lawyers, investment managers, and business owners received hundreds of thousands of dollars in aid they never needed, and some corporations collected billions and laid off employees regardless. None of this money came from a reserve built during good times; the government issued trillions in new bonds, which the Federal Reserve bought with reserves created from nothing. Between early 2020 and the end of 2021, the broad money supply grew by roughly 40 percent, and the distribution of what followed was anything but even: the bottom 50 percent of the population saw their collective net worth rise by $1.5 trillion over that stretch, while the top 1 percent gained $11.8 trillion.

This is Henry Hazlitt's warning made concrete. A policy built on empathy for the visible group, whether laid-off workers or struggling airlines, ignores every group left outside the frame: the businesses that didn't apply for aid and lost competitive ground to those that did, the savers whose cash bought less each month, the disciplined companies punished for the crime of being disciplined. Hazlitt named the cost: "all government expenditures must eventually be paid out of the proceeds of taxation; that to put off the evil day merely increases the problem, and that inflation itself is merely a form, and a particularly vicious form, of taxation." There is no such thing as money for nothing. Someone always pays, and the tragedy of these programs is that the bill is quietly handed to the saver, the prudent business, and the person too far from the source of money creation to have a seat at the table when the checks go out.

The deeper failure was structural, not just distributional. Aid itself was not the mistake. A monetary system that rewarded savings and careful borrowing would have left the economy far better equipped to absorb a shock like a pandemic. Instead, the system rewards leverage, so when the shock came, it arrived in an economy already stretched thin on debt, and the bailouts that followed were rushed, selective, and skewed toward whoever stood closest to the money spigot.