Rogé Karma | The Atlantic

Young People Are Falling Behind, but Not Because of AI

2026-04-02T07:00:00-04:00

The job market for young people is brutal. Is AI to blame?

ChatGPT was released in late 2022. Since then, the unemployment rate for recent college graduates has shot up to near 6 percent, its highest level in more than a decade, setting aside the 2020 pandemic spike. That’s true even though the overall unemployment rate is about 4 percent.

Many observers have interpreted these data as evidence that AI has begun displacing entry-level white-collar professionals. “AI Is Wrecking an Already Fragile Job Market for College Graduates,” reads a representative Wall Street Journal headline from last year. But the AI-stealing-the-jobs story turns out to be wrong—or at least premature. Almost every data point available suggests that whatever is holding back young people in the job market has nothing to do with AI. Whether that’s good or bad news is a much tougher call.

The case that AI is already stealing young people’s jobs is based on a statistical mirage. Historically, recent college graduates have had a much lower unemployment rate than the average worker. Since ChatGPT was released, however, the unemployment rate for this group has risen nearly twice as fast as the overall number. Because AI is best suited to replacing white-collar workers, this trend is what you’d expect to see if AI was having a labor-market impact.

[From the March 2026 issue: America isn’t ready for what AI will do to jobs]

But the unemployment rate can be a highly misleading statistic. The Bureau of Labor Statistics counts individuals as “unemployed” only if they’ve actively looked for work in the past four weeks; otherwise, they are removed from the data set. The rationale is to avoid counting people who don’t actually want a job, such as students, retirees, and stay-at-home parents. But it also excludes people who want to work but have stopped looking for a job.

The economists Adam Ozimek and Nathan Goldschlag recently took a deeper look at the data and found that a significant number of young workers without college degrees had simply given up looking for a job, artificially improving the unemployment rate for young workers without a degree and thereby giving the appearance that recent college graduates were doing uniquely poorly. This is the labor-market equivalent of a school’s worst-performing students simply not showing up on standardized-test day.

Using a different employment measure that includes all working-age adults 25 and younger (except full-time students), Ozimek and Goldschlag found that those without degrees have experienced an even worse decline than their college-educated peers since 2023. “It turns out the labor market for young people—all young people—is even worse than we thought,” Goldschlag told me. “That makes me doubt that this is an AI story.”

The fact that recent college graduates are doing better than young people without a degree doesn’t quite rule out the AI labor-market theory, because the gap between the two groups—the advantage that recent grads enjoy—is much smaller than it used to be. But the recent-graduate premium peaked during the Great Recession and has been falling steadily ever since, well before the introduction of ChatGPT. This timing suggests that the shrinking new-grad gap is a much longer-term story about supply and demand. The percentage of young people with a bachelor’s degree has risen by about a third since 2008, and most of that increase has stemmed from expanded enrollment at less selective universities. As David Deming, an economist at Harvard, pointed out to me, this means that the number of graduates competing for jobs has increased at the same time that the skill level of the average graduate has fallen. “This is the same thing that happened with high school 50, 60 years ago,” Deming said. “A high-school diploma used to confer huge advantages, but then it became so ubiquitous that the advantages went away.”

Meanwhile, research from the San Francisco Federal Reserve has found that the share of online job postings seeking workers with a college degree has declined since 2010—possibly because after that point, digital technologies were so widespread that having a college degree was no longer a prerequisite for using them.

Perhaps the most compelling reason to doubt that AI is to blame for the job market is that workers at the highest risk of AI displacement aren’t seeing the worst outcome. In an August report, Goldschlag and his co-author, Sarah Eckhardt, evaluated five different measurements of which occupations were most exposed to AI-related disruption to see whether any of them correlated with changes to employment outcomes from 2022 to 2025. “No matter how we cut the data,” they concluded, they didn’t “see any meaningful AI impacts in the labor market.” The economist Ernie Tedeschi has shown that since June 2023, unemployment for young workers has increased the most for those in occupations least exposed to AI, such as construction workers and fitness trainers. Most other studies have come to similar conclusions. “I’m very open to the possibility that AI could displace entry-level workers,” Martha Gimbel, the executive director of the Yale Budget Lab and a co-author of one of these analyses, told me. “But we’re just not seeing it show up anywhere in the data.”

In fact, AI might be increasing employment for college-educated workers. One 2025 analysis found that since the release of ChatGPT, recent graduates in sectors with more AI usage have experienced slightly better employment outcomes than they did prior to its release. In an August survey of businesses from the Federal Reserve Bank of New York, a larger share of firms reported hiring more workers due to AI than reported hiring fewer. Even software developers—universally considered the canary in the coal mine for the AI jobs-pocalypse—are currently employed at their highest levels ever. “We use AI in all kinds of ways—coding, engineering, you name it,” Tedeschi, who serves as chief economist at the payment-processing company Stripe, told me. “And that hasn’t stopped us from bringing on new young people. If anything, our hiring has accelerated because of it.”

If AI isn’t to blame for the terrible job market for young people, then what is? In nearly every sector of the economy, the pace of hiring has slowed to levels last seen shortly after the Great Recession. A job market with few hiring opportunities is especially punishing for young people entering the workforce, including those with a college degree.

[Annie Lowrey: The job market is hell]

The slowdown, which I’ve previously referred to as “the big freeze,” began to emerge in mid-2022. The initial explanation was that employers, traumatized by the frenetic job-switching of the pandemic years, had decided to hold tightly on to their existing workers, preventing new positions from opening up. But the fact that the big freeze has persisted for as long as it has points to a second explanation: uncertainty. The fear of an impending recession and trepidation about the outcome of the 2024 election caused companies to pause plans to make new investments, open new locations, or launch new products—all of which meant less need to hire new employees. “Hiring young people doesn’t bring a lot of benefits right away—it is really an investment in the future,” Deming told me. “So if you’re unsure about what that future will look like, then that’s one of the first things you stop doing.”

When I spoke with hiring managers and employers a little more than a year ago, they were generally hopeful that, with the election decided and inflation defeated, the broader economic uncertainty would finally ease. Instead, they got an ever-changing set of tariffs and trade deals, attacks on the Federal Reserve and statistical agencies, higher-than-expected inflation, and, most recently, a foreign conflict threatening to upend the global oil market. Since Donald Trump took office, the Economic Policy Uncertainty Index—the most widely cited measure of economic-policy uncertainty—has reached its highest sustained levels ever. “You hear the same basic story from basically every employer, every hiring manager, right now,” Guy Berger, a senior fellow at the Burning Glass Institute, told me. “It’s impossible to predict where the economy will be in a few months, let alone a year or two. So we might as well just wait and see.” (Several economists, including Berger, told me that the looming question of AI’s labor-market impact could be part of this greater constellation of uncertainty, but that’s hard to see concretely in the data.)

In recent months, AI companies have been unveiling new agents capable of performing a wide range of tasks currently performed by entry-level workers. In that sense, the fact that the young-adult labor market is already weak isn’t exactly comforting. But if there’s a more hopeful takeaway from the data, it is that developments in the labor market are complicated and can’t be easily predicted. The experts I spoke with still can’t say for certain why young people have struggled so much in recent years; they have only theories. The mysteriousness of the labor market is itself concerning, but should also give us pause before we make big, scary predictions about AI with any certainty. No one even knows for sure what is happening right now, let alone what will happen in the future.

Iran Might Use Its Economic-Doomsday Option

2026-03-20T12:39:00-04:00

If you’ve been following the Iran war, you will have heard about the surpassing geopolitical significance of the Strait of Hormuz, the narrow waterway responsible for carrying a fifth of the world’s oil out of the Persian Gulf. Shortly after first being attacked, Iran announced that it would not let ships pass through, a move that almost overnight created what the International Energy Agency called the “largest supply disruption in the history of the global oil market.”

The good news is that the effects of closing the Strait of Hormuz will reverse almost as soon as it is reopened. If the conflict were to end tomorrow, then everything would quickly go more or less back to normal. The bad news is that Iran has an even more potent weapon than closing the strait, one with the potential to turn a temporary supply disruption into a lasting shortage: destroying oil-and-gas infrastructure in Arab nations. In recent days, Tehran has demonstrated that it isn’t afraid to use it. President Trump, eager to avoid a full-blown energy disaster, has begun scrambling to limit the fallout. But the situation might not be in America’s control.

The war’s unnerving new phase began on Wednesday, when Israel launched an air strike on Iran’s largest natural-gas field, which supplies most of the country’s electricity. This was the first time since the conflict began that Iran’s energy production had been directly targeted. In response, Iranian President Masoud Pezeshkian warned of “uncontrollable consequences” that “could engulf the entire world.” The regime released a list of crucial pieces of oil-and-gas infrastructure throughout the Middle East that are now considered “direct and legitimate targets.” Hours later, Iran launched attacks on Qatar’s Ras Laffan complex, the largest natural-gas-export facility in the world, responsible for about 20 percent of the planet’s liquefied natural gas.

[Rogé Karma: Would Trump risk an oil crisis?]

Until that point, Iran had conducted smaller strikes on nonessential infrastructure that could be repaired in days or weeks, mostly to send a message. This time, it targeted the most important pieces of equipment: the highly complex, expensive machines that turn vaporous natural gas into its liquefied form that can be shipped around the world. The CEO of QatarEnergy, the state-owned operator of Ras Laffan, reported that the strike had caused “extensive damage” and that the destroyed units would take three to five years to repair. This caused natural-gas prices to spike by 35 percent in Europe.

Iran launched separate attacks on a major Saudi oil refinery and on two more in Kuwait, one of which is the largest refinery in the Middle East. These attacks did not inflict the same kind of lasting damage to key infrastructure as the Ras Laffan strike. Their purpose seems to have been to demonstrate how far Iran might be willing to go. “Our response to Israel’s attack on our infrastructure employed FRACTION of our power,” Iranian Foreign Minister Seyed Abbas Araghchi wrote on X following the attacks, declaring that there would be “ZERO restraint if our infrastructures are struck again.” The message got through. The price of a barrel of crude oil temporarily surged from about $100 to $120 shortly after the attacks. (The price was sitting at about $65 before the war.) “The Iranians have demonstrated a capability to escalate this conflict to a much greater extent than really anyone expected,” Gregory Brew, the Eurasia Group’s senior analyst for Iran and energy, told me. “We are on the cusp of this conflict entering a completely different phase.”

One might have expected Trump to react to Iran’s escalation with grandiose threats to unleash yet more devastation. Instead, he tried to take the temperature down. In a Truth Social post, he claimed that the United States “knew nothing” in advance about the Israeli strike on Iran’s gas field and promised that “NO MORE ATTACKS WILL BE MADE BY ISRAEL.” (Several Israeli officials have claimed that they in fact had Trump’s sign-off.) And he suggested that future attacks on Iran’s energy supply would occur only if Iran were to strike more of the region’s oil-and-gas infrastructure.

[Rogé Karma: ‘We would be entering a completely different world’]

The fact that Trump felt the need to deny responsibility—and promise a cessation of attacks on Iran’s energy infrastructure—is telling. Significant damage to the Middle East’s oil infrastructure would be devastating for the American consumer. U.S. gas prices are already up from $2.90 a gallon in mid-February to $3.90 as of this morning. A March 9 Deutsche Bank analysis of more than 500 international and U.S. routes found that airfares for domestic routes had increased by 15 to 124 percent, depending on the route and airline, and that transcontinental flights had gone up by 106 percent. The president of the American Farm Bureau Federation recently wrote a letter to Trump warning that “the U.S. risks a shortfall in crops” as a result of a global fertilizer shortage created by the crisis, and that the disruption would “contribute to inflationary pressures across the U.S. economy.”

Trump’s announcement appears to have calmed oil markets, for now. The price of a barrel of crude has since fallen back down to about $110, but the situation could reescalate at any moment. Hours after Trump’s post, Iran launched a missile strike against an oil refinery in northern Israel. (The strike caused “no significant damage,” according to Israeli officials.) This morning, it launched a second attack on Kuwait’s largest oil refinery, causing multiple fires to break out across the facility and forcing the Kuwaitis to suspend operations while the damage was assessed. Whether or not those strikes violated Trump’s red line against future attacks is unclear, given the characteristic inscrutability of his Truth Social post. Meanwhile, Gulf states are beginning to threaten military retaliation of their own. “We will not shy away from protecting our country and our economic resources,” Saudi Arabia’s foreign minister said yesterday.

At this point, the difference between de-escalation and escalation is the difference between an energy shortage measured in months and an economic catastrophe that could be felt for many years. And those choices are no longer Trump’s alone to make.

‘We Would Be Entering a Completely Different World’

2026-03-13T07:30:00-04:00

Sign up for Work in Progress, a newsletter where Rogé Karma investigates the mysteries of a complicated economy.

The Iran war has already created the “largest supply disruption in the history of the global oil market,” according to the International Energy Agency, and the situation could still get much worse. Iran has vowed to sink any ship trying to pass through the Strait of Hormuz, the waterway responsible for carrying a fifth of the world’s oil supply. And according to The Wall Street Journal, the U.S. Navy has turned down requests to escort ships through the strait, deeming such efforts too dangerous. In a Wednesday interview with Fox News, Secretary of Energy Chris Wright said that the strait would reopen “hopefully in the next few weeks.” Note the adverb.

Before the United States attacked Iran, crude oil was trading at around $65 a barrel. Yesterday it hovered in the $90 to $100 range. How much higher could it go? Ebrahim Zolfaqari, a spokesperson for Iran’s Khatam al-Anbiya military-command headquarters, has declared that the world should “get ready for oil to be $200 a barrel.” According to several energy experts, if the strait remains closed for even a month—if the U.S. and Israel don’t swiftly defeat Iran’s navy and neutralize its sabotage ability—that might not be hyperbole. In that scenario, sustained higher oil prices could plunge the world into a recession, raise borrowing costs, alter the outcome of ongoing wars, and shift the balance of global-power competition in favor of Russia and China. “We would be entering a completely different world,” Meghan O’Sullivan, the director of the Geopolitics of Energy Project at Harvard Kennedy School, told me.

For America, the most obvious consequence of a prolonged energy crisis would be higher prices, and not just for gas. Oil is also a crucial input to just about every sector of the U.S. economy: the fertilizers needed to grow food, the fuel used to fly planes and deliver Amazon packages, the chemicals and plastics used to produce manufactured goods. When the cost of oil goes up, in other words, the cost of basically everything goes up.

[Rogé Karma: Would Trump risk an oil crisis?]

Historically, consumers tend to respond to big energy-price shocks by cutting back on spending in other areas. When the economy is humming, that isn’t such a big deal. But right now the job market is already weakening, economic growth is already slowing, and consumer spending is already falling. Several economists told me that, in this environment, a sudden pullback in consumer spending could trigger a full-on recession. Faced with less demand from consumers, companies, which have already stopped hiring new workers, might begin laying off their existing ones. Laid-off workers would pull back even more on spending, which would lead in turn to more layoffs and even less spending, and so on. That cycle would be likely to persist even after the original oil shock is resolved.

In normal times, the Federal Reserve might limit the damage by slashing interest rates to stimulate the economy. But if the central bank is simultaneously worried about an inflationary spiral, it would be far more likely to keep rates high, or raise them even higher, to bring prices under control—a move that could make an economic contraction even more severe. (Perhaps in anticipation of this exact situation, the interest rates on U.S. government bonds and home mortgages, which are determined by the market, have risen since the Iran conflict began.)

The geopolitical implications of $200-a-barrel oil are not any better from an American perspective. The country that would benefit most from a prolonged oil crisis is Russia. Unlike in the U.S., the Russian state directly controls most of its country’s immense oil resources, meaning that the spike in prices would produce a huge windfall for President Vladimir Putin’s government. That money could be used to dampen the impact of Western economic sanctions or directly fund the war effort in Ukraine. The fact that so many countries would be desperate for oil would also give Putin added leverage in negotiations over the outcome of that war, O’Sullivan said. Already, Donald Trump has temporarily waived some sanctions on the sale of Russian oil, and his administration is considering lifting more of them.

What about America’s greatest geopolitical adversary? In the short term, China would find itself in a more precarious position. It is the world’s largest importer of oil and buys more than half of its supply from the Middle East. That makes it extremely vulnerable to a global supply crisis. But in the long run, China has two big things going for it. The first is that it has accumulated the world’s largest excess reserve of oil—about 1.2 billion barrels, equivalent to nearly four months of seaborne imports—in anticipation of a moment like this one. The second is that it has spent the past three decades developing alternative energy sources. As Jason Bordoff, the founding director of Columbia University’s Center on Global Energy Policy, points out in a Foreign Policy essay, more than half of the cars sold in China today are electric, it is home to nearly half of the nuclear reactors under construction worldwide, and almost all of the country’s growth in electricity demand has been met with green-energy sources.

[Will Gottsegen: The wild 24-hour rise and fall of oil prices]

For this reason, several experts told me, a prolonged oil crisis could ultimately strengthen China’s geopolitical position. A seismic shock to the global energy system would push world leaders to rethink their own dependence on foreign oil imports. Fear about energy security could accomplish what fear of climate change never could. “If oil remains on this roller coaster, folks will absolutely look for alternatives,” Bob McNally, the president of Rapidan Energy Group, a leading energy consultancy, told me. “The main selling point for oil has always been that it is stable. But it isn’t looking so stable right now.”

That kind of shift would make other nations more reliant on China. The country produces more than 60 percent of the world’s wind turbines, more than 70 percent of the world’s lithium-ion batteries and electric vehicles, more than 80 percent of the world’s solar panels, and about 90 percent of the processed rare-earth minerals that are essential inputs to those technologies. Europe and Canada have long considered the prospect of depending on China for those resources to pose an unacceptable risk. An extended oil crisis caused by an American-led war might change that calculus. “I don’t think it would be crazy after all of this for countries to start viewing China as the least bad option in a menu of lots of bad options,” Bordoff told me.

These are just some of the consequences we can predict; the most significant might be the ones we can’t. The energy crisis of the 1970s in the U.S. is often credited with assisting in the destruction of the New Deal order and ushering in a libertarian economic revolution. Who knows what revolutions would be inspired, what institutions would crack, or what political forces would be empowered this time around.

The Real Reason California Can’t Build

2026-03-12T07:30:00-04:00

Sign up for Work in Progress, a newsletter where Rogé Karma investigates the mysteries of a complicated economy.

California knows it needs more housing. The state is the birthplace of the YIMBY movement—“Yes in My Backyard”—and its legislature has been passing laws designed to make housing easier to build for the better part of a decade. These laws are based on a simple theory: Housing is too expensive in large part because of laws that prevent homes from being built. Loosen those laws, and the houses will come.

And yet, in California, even though the laws have been loosened, the houses have not come. Last year, only about 102,000 new units of housing were permitted in a state with nearly 40 million inhabitants, almost the same number as a decade ago. Residents have begun fleeing for lower-cost-of-living states at such a high rate that California is poised to lose Electoral College votes after the next census.

Some observers look at such facts and conclude that the regulatory theory of housing costs was wrong, or at best badly incomplete, all along. “The movement to lift zoning restrictions is still new, but enough time has elapsed to begin to see how well it’s working, and the answer is … a little,” Paul Glastris and Nate Weisberg wrote in Washington Monthly last year. If that’s true, then the YIMBY activists pushing for zoning reforms around the country are making a terrible mistake, dooming themselves to repeating California’s failed experiment.

In reality, the California experience does not disprove the YIMBY theory of the case, but it does provide an important addendum to it. Not all zoning reforms are created equal—as the more successful efforts of other states and cities demonstrate. The problem in California is that the state’s pro-housing laws try to do a whole lot more than just make it easier to build housing: preserve local autonomy, pay high construction wages, guarantee that new units are accessible to low-income renters. In other words, even as they removed some regulatory barriers, they created new ones. In trying to accomplish every objective and accommodate every interest, all at once, California set up its housing agenda to fail.

Senate Bill 9 was supposed to be the big one. Passed in 2021, the legislation, referred to as the “duplex bill,” overrode local laws that prevented landowners from building multiple units on their property. Proponents framed it as a key part of solving the housing shortage in California. Opponents said it would destroy the character of existing neighborhoods. Both sides agreed that the law would be transformative. A conservative analysis estimated that S.B. 9 could lead to about 700,000 additional units in a state that was permitting just 100,000 new housing units each year. A New York Times housing reporter called the law “probably the biggest change in housing in 50 years or more.”

[Reihan Salam: Why YIMBY righteousness backfires]

But cities and towns quickly realized that they still had ways to block development, Sonja Trauss, the executive director of YIMBY Law, a pro-housing nonprofit, told me. According to her organization, local governments issued more than 100 “emergency ordinances” designed to limit S.B. 9’s impact in the 18 months after the law passed. These included imposing fees and parking requirements to make projects financially infeasible, restricting the size of the potential units to make them unlivable, and designating certain areas as historic districts or endangered-species habitats to exempt them altogether. Two years after S.B. 9 came into effect, only about 160 projects had been issued permits.

“Frankly, a lot of us were caught off guard by the lengths that local governments went to stop the law from being effective,” State Senator Scott Wiener, one of the bill’s authors, told me. Wiener crafted a “clean up” bill targeting the most egregious efforts to circumvent S.B. 9. But he soon found that his colleagues had little appetite to hold localities accountable; the new bill failed to even make it out of committee. “Everyone says they want to solve the housing shortage,” Wiener said. “But no one wants to face a bunch of angry homeowners at their next town hall.”

For housing advocates, the lesson of S.B. 9 was clear: To get housing built, YIMBYs would have to find a path that did not run through single-family neighborhoods. So, in 2022, they introduced a bill that would allow apartments to be built on land that had been zoned for office and retail space. The bill would create up to 2.4 million units of housing, according to one analysis, while leaving most existing neighborhoods alone. Assembly Bill 2011 passed the legislature with near universal support. Governor Gavin Newsom called it “a big deal.”

But once again, months and years went by and hardly anyone even tried to build new housing—as if the law didn’t exist. Only 22 projects have applied for the relevant permits since A.B. 2011 went into effect, and even fewer have actually received them, according to an analysis by UC Berkeley’s Terner Center for Housing Innovation. And, once again, California’s YIMBYs were blindsided. “It was a shock, really,” Buffy Wicks, the assembly member who spearheaded A.B. 2011, told me. “Obviously, we didn’t think this bill would single-handedly solve the housing crisis. But we were expecting something like half a million or a million new units. And what we got was almost nothing.”

A.B. 2011 had made building multifamily housing technically legal—but economically impossible. In order to qualify for A.B. 2011, a project had to pay its construction workers “prevailing wages,” based on the relatively high level of compensation that the state’s labor unions had negotiated for public-sector projects. Several developers told me that this provision alone raised the potential cost of a given project by 20 to 25 percent. A.B. 2011 also required projects to reserve about 15 percent of units for low-income residents, reducing the revenue that the developers could expect to earn.

Each of these requirements might sound reasonable on its face. Who’s against high wages and cheap apartments? But when taken together, and combined with California’s already high construction costs, they meant that A.B. 2011 projects would never be financially viable. “It’s already hard enough to make a project pencil out in California,” Bruce Fairty, the chief development officer at Cypress Equity Investments, a national housing developer, told me. “These extra requirements make it basically impossible.”

[Ron Davis: The biggest myth about the YIMBY movement]

The New York Times columnist Ezra Klein has coined the term everything-bagel liberalism to describe Democrats’ tendency to layer bills with so many well-intentioned requirements that they become unworkable. The scholars Christopher Elmendorf and Clayton Nall argue in a 2024 paper that nearly all of the housing bills passed in California over the past decade have been positively covered with what they call “bagel toppings,” including labor and affordability standards. “It’s the same story over and over again,” Elmendorf told me. “A housing bill passes with this fantastic-sounding headline policy. But then you read the fine print and there are so many costly requirements that the actual policy itself is basically guaranteed to fail.”

This raises a question: Why would legislators keep making the same mistake? When it comes to prevailing wages, the answer is interest-group politics. “Every California politician knows that if you want to pass anything on housing, you need to get organized labor on board,” Brian Hanlon, the president of the housing-advocacy group California YIMBY, told me. “It’s that simple.”

The story of affordability requirements is more complicated. Some progressive organizations reliably threaten to oppose housing bills unless they include significant affordability requirements and tenant protections—but, unlike unions, these small nonprofits hardly have the political muscle to overpower legislators. Instead, these requirements may stem from an actual conviction that they’re useful. The view that new housing should be made available to the less fortunate is widely held among voters and progressive politicians. If a developer is going to profit off a project, then why shouldn’t they have to ensure some units are accessible to middle- and low-income households? “A lot of legislators just genuinely believe that the way you make housing more affordable is to force developers to provide affordable units,” Elmendorf said.

Of course, an apartment building that never gets built isn’t going to employ any construction workers at all, let alone at high wages, and it isn’t going to deliver any affordable units. “Look, I get why a 20 or 30 or 50 percent affordability requirement sounds great—I want low-income people to be able to afford housing too,” Wiener told me. “But no one benefits if nothing gets built. Fifty percent of zero is still zero.”

After the coronavirus pandemic, the housing shortage went national. And in the past few years, some states and cities have managed to avoid repeating California’s mistakes. In 2021, Raleigh, North Carolina, responded to a wave of new residents by relaxing its zoning laws for multifamily housing. Over the next three years, the city built 60 percent more housing units annually and experienced half of the rental-cost growth than it had during the previous five years, according to data gathered by Alex Horowitz, a project director for housing policy at the Pew Charitable Trusts. In recent years, similar stories have played out in places as diverse as Austin, Minneapolis, and New Rochelle, New York. What these cities have in common is that their new pro-housing laws came with less restrictive labor and affordability requirements—if any—and, because they were passed at the city level, didn’t encounter resistance from local governments. True YIMBYism has been tried, and it works.

Perhaps the most illuminating example of how not to be California comes, naturally enough, from Florida. In 2023, Florida’s legislature passed the Live Local Act, which changed the state’s zoning laws to allow apartments to be built in commercial, industrial, and mixed-use areas without needing local zoning-board approval. This was almost identical to California’s A.B. 2011, but with a key difference: Florida’s version had no prevailing-wage provision and only a modest affordability requirement that was offset by a large tax break for developers. According to estimates from the Florida Housing Coalition, a YIMBY-aligned nonprofit, the law has led to permits for at least 55,000 units of new housing even as the country has experienced a combination of high interest rates, soaring costs for building materials, and construction-labor shortages. “In a lot of ways, this bill was passed at the worst possible moment for new housing development,” Kody Glazer, the director of the Florida Housing Coalition, told me. “So the fact we’re already seeing such a huge response is really encouraging.”

[Derek Thompson: America’s magical thinking about housing]

In fact, California itself has experience with the benefits of the plain-bagel approach to housing. Its one big success story came in 2016, when the state legislature began passing a series of new laws allowing residents to build so-called accessory dwelling units on their property, stripping away legal barriers that had prevented building for decades. Since then, ADU growth has taken off. The number of permitted units jumped from just over 1,000 in 2016 to more than 28,000 in 2023 (the last year for which we have comprehensive data), accounting for nearly 20 percent of the total housing growth in the state. But California will never guesthouse its way out of the shortage.

The 2024 election marked a turning point in California housing politics. The crisis became a symbol of the kind of failed blue-state governance that had broken the Democratic coalition. In response, more lawmakers came around to the idea of bold reform. Last year, the California legislature, under pressure from Newsom, passed two bills that had long been considered the holy grail of housing reform. The first, A.B. 130, exempts most new urban construction from the state’s famously onerous environmental-review process. The second, S.B. 79, relaxes the state’s zoning laws to make building multifamily housing near public transit far easier. Versions of both bills had previously failed to pass; this time, they sailed through the legislature.

Crucially, S.B. 79 includes far less strict labor and affordability standards than previous bills, and A.B. 130 doesn’t include any such requirements for most projects. For this reason, some housing advocates believe that a new era has begun. “We think these bills will come to be seen as some of the most important pieces of legislation in modern California history,” Nolan Gray, the senior director of legislation and research at California YIMBY, told me.

We have, of course, heard that before. The success of these laws will hinge on whether California has actually learned the lessons of its past failures. With months to go before S.B. 79 takes effect, several localities are lobbying for carve-outs and exemptions, threatening lawsuits, and pushing to delay implementation until the 2030s. In January, the transportation agency of Los Angeles, the most populous county in America, claimed that it should be exempt from the law altogether. Already, the legislators behind S.B. 79, including Wiener, are being forced to draft a “clean-up bill” to prevent localities from exploiting ambiguities in the law’s wording. That effort might not have the political support needed to pass, let alone the two-thirds majority required for it to take effect this calendar year.

California’s leaders have, at long last, passed legislation free of the requirements that rendered previous bills unworkable. As a result, they are under intense pressure to add requirements back in or to let localities do the same. After a decade of failing to solve the housing crisis by saying yes to everyone and everything, the question now is: Will they finally be willing to say no?

The Economy’s Warning Light Is Flashing Yellow

2026-03-06T14:45:00-05:00

The job market is weakening, inflation is still too high, and we’re at serious risk of a once-in-50-years oil shock. This is almost the exact set of conditions that triggered the stagflation of the 1970s, which at the time was America’s worst economic crisis since the Great Depression. At the moment, the economy is still far from that kind of doomsday scenario, but the direction of travel is disquieting. The economy’s warning lights might not yet be flashing red, but they are certainly flashing yellow.

The jobs report released this morning showed that the U.S. labor market lost 92,000 jobs in February, causing the unemployment rate to rise to 4.4 percent. The numbers for the previous two months, which had suggested decent job growth, were also revised downward: January now showed fewer job gains than initially estimated and December showed overall job losses. These new numbers continue the trend of last month’s revisions, which showed that the economy had added just 181,000 jobs in all of 2025, a tenth of the jobs that had been added the year prior. Taken together, the numbers suggest that 2025 appears to have had the most months with negative job growth since 2010—the midst of the Great Recession—and that 2026 is off to a similarly slow start. The Trump administration sometimes claims that weak job numbers are the by-product of deporting undocumented workers, but the native-born unemployment rate has risen by half a percentage point since Trump took office.

[Rogé Karma: Would Trump risk an oil crisis?]

The labor market is not the only sign of trouble. A report released by the Commerce Department’s Bureau of Economic Analysis on February 20 showed that economic growth slowed dramatically in the final months of last year, from 4.4 percent in the third quarter down to just 1.4 percent, bringing total yearly growth to its lowest level since the pandemic decimated the economy in 2020. (The BEA estimated that one percentage point of the quarterly drop was caused by the federal-government shutdown.) On the same day, another report from the BEA showed that prices had risen by 3 percent in December compared with a year prior, the highest rate of inflation since April 2024.

The worst job numbers since the Great Recession, the slowest economic growth since COVID, and the worst inflation in nearly two years—these are not the signs of a healthy economy. And we haven’t even talked about oil yet.

As I wrote this morning, the U.S.-Iran war carries a very high risk of triggering an energy crisis if it lasts for more than a few weeks—the kind of crisis that experts believe could cause the price of oil to double or triple from its current level. That risk jumped almost immediately after my article was published, when Donald Trump posted on Truth Social that the war would not end without Iran’s “unconditional surrender.” The price of crude oil promptly shot up to about $90 a barrel and may go higher still. Meanwhile, Qatar’s energy minister, Saad al-Kaabi, has begun warning that oil prices could rise as high as $150 a barrel within weeks and that the situation could “could bring down the economies of the world.” As recently as yesterday, the oil markets were responding relatively calmly to the outbreak of war. Now panic might be setting in.

All of this looks eerily similar to the 1970s. At the beginning of the decade, the economy was already struggling. Inflation, after a period of decline, was starting to tick up again. The unemployment rate was low, about 5 percent, but higher than it had been just a few years prior. The economy was still growing, but less quickly than before.

[Annie Lowrey: Trump is a degrowther]

Then came the 1973 Arab oil embargo, and everything fell apart. Oil prices nearly quadrupled from late 1973 to early 1974. Because so much of the economy is dependent on energy, that caused the price of everything else to go up too. Inflation reached double digits. Meanwhile, consumers pulled back from spending, which, in turn, forced businesses to start laying off workers, setting off a vicious cycle. Economic growth plummeted, unemployment spiked, and the economy fell into recession. The Federal Reserve, facing both higher inflation and higher unemployment, hesitated to raise interest rates, making the inflation problem even worse. The crisis abated only at the end of the decade when, with inflation spiraling out of control, a new Fed chair jacked up interest rates to record levels and made the recession even deeper, with unemployment eventually reaching 11 percent and remaining high for most of the 1980s.

The current situation is not yet 1973 all over again, and it doesn’t have to be. The biggest difference between the situation then and the one we face now is that this time the pain is mostly self-inflicted. When Trump came into office, inflation was falling, job creation was strong, and the economy was projected to grow quickly. Only after the imposition of his global tariffs did things take a turn for the worse, and only after his decision to wage war on Iran did the world face the prospect of a full-blown energy crisis. Trump is old enough to remember the history that led to the bad old days of the ’70s. Perhaps that will keep him from repeating it.

Would Trump Risk an Oil Crisis?

2026-03-06T07:00:00-05:00

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The last time an Iranian regime was overthrown, the resulting oil crisis eventually saw Americans lining up at gas stations and paying double what they’d spent a few years earlier to fill their tanks. So far, Donald Trump’s new Iran war hasn’t caused anything close to a 1979-type crisis. But the longer the conflict goes on, the likelier such an outcome becomes.

In response to the strikes that killed Ayatollah Ali Khamenei, Iran announced that it would attack any ship that attempted to cross the Strait of Hormuz, a narrow waterway off the country’s southern coast. For decades, this move has been widely considered the doomsday scenario for the global energy system. About a fifth of the world’s oil passes through the strait every day, carried by ships bringing Middle Eastern output to the rest of the world, and virtually no alternatives exist for getting all of that oil to market. Several experts told me that if the strait were to remain closed for more than a few weeks, the price of oil could double or triple as countries and businesses engage in a bidding war to secure the limited supplies available from other sources. “It’s hard to overstate just how big of a deal this would be,” Rory Johnston, an analyst who writes the Commodity Context newsletter, told me. “It’s the mother of all tail risks—the boogeyman that keeps oil traders up at night.”

Now that the strait has been closed, hundreds of tankers carrying millions of barrels of oil are sitting idly at the entrance, afraid to proceed further; oil supplies around the world are dwindling, and, with nowhere to send their product, major exporters are shutting down their oil fields. And yet oil markets have so far been relatively sanguine about the situation. In recent days, oil prices have spiked by only about 20 percent. That seems to be due to a widespread belief among traders that the United States wouldn’t possibly allow such a catastrophic disruption to persist. That’s not an unreasonable bet—but it is very much a bet, and one that might not pay off. If anything, global oil markets might not be taking the current crisis seriously enough.

[Missy Ryan and Nancy A. Youssef: The one variable that could decide the war]

On Tuesday evening, Trump announced that, “if necessary,” he would direct the U.S. Navy to escort tankers through the strait. This seems to have briefly reassured the markets to some degree. Such an operation would be a massive logistical undertaking, however, and could take weeks to fully put in place. Even then, it might not work. Iran isn’t likely to simply back down and let traffic resume. The country’s military strategy is focused on inflicting enough economic pain to force the U.S. to back down. It has spent decades amassing weapons specifically tailored to attacking naval vessels. Although experts generally agree that the U.S. has the capability to disable Iran’s defenses and reopen the strait, doing so could take weeks or months of sustained effort, and would be made even more difficult by the fact that so much of America’s firepower is being deployed for other uses during the conflict. The chief safety-and-security officer for the world’s largest shipping-industry association has called the notion of the Navy protecting every tanker passing through the strait “unrealistic,” and some in the oil industry are skeptical too.

Even if Iran can’t control the strait, it has another option: to attack energy production at its source. Already, it has targeted Saudi Arabia’s largest oil refinery and Qatar’s largest natural-gas facility, both of which have been forced to temporarily halt production. The damage to the Qatari facility, which alone provides more than a fifth of the world’s liquified natural gas, has sent prices spiking by 40 percent in Europe. “Closing the strait is like a kink in the garden hose of global oil production: bad while it’s happening, but you could technically unkink it at any time,” Johnston told me. “These attacks on oil-production facilities would be different, like destroying the faucet that the hose is attached to. That’s much harder to fix.”

Immediately following Russia’s invasion of Ukraine in 2022, oil prices spiked to more than $100 a barrel. Experts told me that the Iran war could produce the same result after a few more weeks. (One barrel of crude now sits at about $80.) That’s how long they believe it would take for oil-importing countries to burn through their stockpiles. If the closure were to last much longer than that, prices would continue to go even higher, possibly reaching $200 a barrel, which would translate to about $6 per gallon of gas. (As of this writing, the average price of gas in the U.S. is slightly more than $3.30.)

The Trump administration has argued that the U.S. doesn’t have to worry about a global supply shortage because of how much oil we produce at home. This belief seems to have factored into the decision to attack in the first place. “We don’t get any oil anymore out of the Strait of Hormuz,” Interior Secretary Doug Burgum said in October, justifying the administration’s decision to strike Iran’s nuclear facilities earlier last year. “And so, then you’re in a position where now the military power, tied with the economic power of tariffs, tied with the courage to be able to actually use that, you’ve got the degrees of freedom.” Energy Secretary Chris Wright made a similar remark last month, citing the fact that oil prices didn’t spike when the U.S. attacked Iran last summer as “perfect evidence of Trump’s energy-dominance agenda, you know, growing production in the United States.”

There is a glimmer of truth to that argument. When it comes to natural gas, the U.S. has so much domestic supply that it can ride out global supply shocks. Oil is a different story. Yes, thanks to the fracking-enabled shale revolution that began in 2003, the U.S. is a net oil exporter. But many American oil refineries were built earlier, and are therefore set up to process the thick crude oil (known as “heavy sour”) found in other parts of the world rather than the thinner oil (known as “light sweet”) primarily found in America. Because of this mismatch, the U.S. exports much of its light-sweet oil to be refined abroad and imports heavy-sour oil to be refined in the U.S., as well as already refined gasoline.

[Rogé Karma: Big oil knows that Trump’s Venezuela plans are delusional]

The upshot is that the prices Americans pay for gas reflect the global price of oil, no matter where exactly the supply is coming from. This is why U.S. prices rise every time OPEC announces even a small shift in production and why they spiked when Russia invaded Ukraine, even though the U.S. imports hardly any oil from OPEC and none from Russia. “The fact that we are a net exporter doesn’t make us immune from the swings of the global energy market—not even close,” Arnab Datta, an energy analyst at Employ America, told me. “It’s true that the U.S. is far less likely to experience the kinds of shortages and rationing it did during the 1970s. But that doesn’t mean it is protected from a major price shock.”

On Monday, Trump announced that the U.S. military had projected that the Iran conflict would last “four to five weeks” but that “we could go much longer than that.” This may be true from a military perspective. But Trump understands the political salience of the price of gasoline as well as anyone, and the relative calm of the oil markets reflects that fact. Iran probably can’t withstand an American assault forever. It also might not have to.

Get Ready for Zombie Tariffs

2026-02-20T13:31:00-05:00

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Updated at 1:49 p.m. ET on February 20, 2026

The Trump tariffs are dead. Long live the Trump tariffs?

This morning, in a 6–3 opinion, the Supreme Court struck down the bulk of the president’s sweeping global tariffs. The majority ruled that the law Donald Trump had used to carry out most of his trade policies does not, in fact, allow the president to impose tariffs at all. This is a major setback for Trump’s trade agenda, but it is far from a fatal one. The president has several alternatives that he can use to reconstruct his tariff regime, and his administration has spent months putting a plan in place to do so. Those efforts, too, may eventually be challenged in court, but fully litigating them would take years. Unless the president suddenly has a change of heart, Trump’s tariff adventure is far from over.

The case before the court centered on a 1977 law called the International Emergency Economic Powers Act, or IEEPA, which authorizes the president to “regulate” the importation of goods in a national emergency that arises from an “unusual and extraordinary threat.” The Trump administration had interpreted this vague statute, which had never been used to justify tariffs, to mean that the president can issue tariffs of whatever kind he wants, whenever he wants, on any country he wants, so long as he says an emergency exists, all without getting congressional approval. IEEPA was the basis of Trump’s tariffs on Mexico, Canada, and China last February, the “reciprocal” tariffs he levied on almost every country in the world on Liberation Day, and most of the one-off tariffs he has issued or threatened to impose on trade partners such as Brazil, India, and, more recently, Europe and Canada. (Industry-specific tariffs on goods such as steel and aluminum have been imposed under separate, more legally sound authorities, and are not affected by the ruling.)

Last year, the lower courts ruled that although IEEPA might allow some tariffs, it certainly didn’t allow these tariffs—many of which were set at arbitrary levels, on an arbitrary set of countries, using justifications that could hardly be thought of as a true national emergency (such as the existence of a trade deficit or an imaginary surge of fentanyl shipments from Canada). The Supreme Court went even further. “We hold that IEEPA does not authorize the president to impose tariffs,” Chief Justice John Roberts declared.

[Annie Lowrey: What tariffs did]

But even as it insisted that the law was on its side, the administration spent much of the past year preparing a backup plan to rebuild Trump’s tariff wall in case the courts ruled against them. Because, as the president observed on Truth Social a few hours after the ruling, “the Supreme Court did not overrule TARIFFS, they merely overruled a particular use of IEEPA TARIFFS.”

According to top Trump-administration officials such as National Economic Council Director Kevin Hassett and Treasury Secretary Scott Bessent, the administration’s plan draws on two main authorities. The first is Section 122 of the Trade Act of 1974. That law allows the president to levy tariffs of up to 15 percent on any country for up to 150 days to address “large and serious balance-of-payment deficits,” a term that refers to more money leaving the country than coming into it. After the initial window, the tariff must be reauthorized by Congress. According to estimates by Clark Packard and Stan Vueger, trade experts at the Cato Institute and the American Enterprise Institute, respectively, this technique alone would allow Trump to reinstate 70 percent of the tariff revenue struck down by the Supreme Court. This would be a temporary solution, and overbroad use of Section 122 could also be invalidated by the courts. It would most likely be intended only as a stopgap measure to buy time while the administration begins work on the second part of its plan.

Phase two would draw on Section 301 of the same law. Section 301 allows a presidential administration to levy essentially permanent tariffs of any kind on any country in response to “unfair” trade practices. The catch is that the tariffs can come into effect only after the federal government has navigated several layers of bureaucratic process, including launching an official investigation into the unfair practices of the country in question, compiling a report detailing those practices, and offering a public notice-and-comment period. That’s where the 150 days come in. The administration could use that time to launch investigations into the U.S.’s major trading partners so that once the five months are expired, the paperwork is already in place to switch to indefinite tariffs under Section 301. This authority rests on stronger constitutional grounds. The first Trump administration and the Biden administration both used section 301 to impose or raise tariffs on Chinese goods. Courts have generally been deferential to how presidents use the authority as long as the proper process has been followed.

Trump has already signaled that he plans to use all the legal authorities at his disposal. “Therefore, effective immediately, all National Security TARIFFS, Section 232 and existing Section 301 TARIFFS, remain in place, and in full force and effect,” he wrote in his Truth Social post. “Today I will sign an Order to impose a 10% GLOBAL TARIFF, under Section 122, over and above our normal TARIFFS already being charged, and we are also initiating several Section 301 and other Investigations to protect our Country from unfair Trading practices.”

Most experts I spoke with think that this one-two combination will allow Trump to functionally rebuild most of the current tariff regime in a way that could survive in court. “Nearly 90 percent of U.S. trade comes from our 20 largest trading partners,” Peter Harell, who served as a top trade adviser in the Biden administration, told me before the ruling came down. “I don’t think it would be too difficult to reconstitute tariffs on most of them in 150 days.”

Less clear is the degree to which the Court’s ruling will restrain Trump’s ability to impose new tariffs. The president is not really a notice-and-comment kind of guy. He prefers to use the threat of sudden, unpredictable tariffs to coerce other countries to do his bidding or punish them for crossing him. So far this year, he has threatened 25 percent tariffs on Europe over their unwillingness to hand Greenland over to him and100 percent tariffs on Canada for making a deal with China; he has also threated to “raise tariffs very quickly” on India for buying Russian oil. Such threats will be less intimidating if they have an upper bound of 15 percent (Section 122) or require a drawn-out bureaucratic process before implementation (Section 301). “They will lose quite a bit of flexibility,” Vueger told me. “Trump loves to threaten higher and higher tariffs on whatever country for whatever reason—and these tools just weren’t designed to do that.”

The administration appears to acknowledge this reality. Part of its legal argument for upholding IEEPA was that the alternatives would deny the president flexibility and immediacy. As Howard Lutnick, Trump’s commerce secretary, has noted in previous testimony, “other tools” are “procedurally time-consuming and do not allow for immediate action.”

[Rogé Karma: So, about those big trade deals]

Perhaps Trump will simply make a mockery of the procedural requirements under Section 301. He could threaten Canada on Monday morning, have his trade representative launch an “investigation” into Canadian trade practices that afternoon, and issue a “report” by Tuesday detailing why those tariffs are justified. Or he might try to rely on an even older legal provision: Section 338 of the Smoot-Hawley Tariff Act of 1930. This allows the president to impose tariffs of up to 50 percent on any country if the president determines that it has discriminatory trade practices toward the United States.

Either of these options would be vulnerable to court challenges. Courts are likely to strike down Section 301 tariffs on purely procedural grounds if the administration rushes them through without proper process. Section 338 of Smoot-Hawley, meanwhile, has never been used, and some question exists as to whether it still applies as law at all or whether it was superseded entirely by the 1974 bill. Even if it’s still good law, courts may rule that its use requires approval from the U.S. International Trade Commission, an independent agency that conducts investigations into trade disputes, or that the “discriminatory acts” justification doesn’t apply to countries with which the U.S. has “most favored nation” trading status—every country except Cuba, North Korea, Russia, and Belarus.

But those legal challenges, even if successful, might not constrain Trump all that much. The president could simply keep pushing the boundaries of different authorities to keep some version of tariffs in place while litigation takes its sweet time to resolve. The courts already took a year to decide on IEEPA. Who knows how long it would take them to overturn each one of these potential alternative efforts? “If you’re issuing separate country-by-country tariffs, then it’s likely they will have to be litigated one by one,” Vueger said.

But this type of strategic legal brinkmanship would create a logistical nightmare for businesses, with potentially painful economic consequences. Tariffs would constantly be overturned and refunded. Businesses would have no certainty to make investments. Companies would probably raise prices preemptively. “It would be total, complete chaos,” Harrell told me.

One institution could put an end to all of this at any time: Congress. The Constitution gives the legislative branch the power to regulate international trade; the only reason Trump is able to levy tariffs at all is because of previous laws passed by Congress that have given him that authority. Congress could decide to take that authority away. So far, a handful of Republicans have complained loudly about tariffs, but almost none have been willing to actually do anything about them.

If Trump were behaving purely rationally, he probably wouldn’t try any more tariff workarounds, given how unpopular his tariffs are and how much the cost of living dominates voter sentiment. He would simply accept a loss at the Supreme Court and move on. Without the tariffs in place, prices would likely come down, and the Federal Reserve might be more confident about lowering interest rates.

But for Trump, the tariff power is about a lot more than tariffs. It’s the primary way he exerts dominance over American companies and foreign countries. And he has shown little indication that he would ever be willing to give that up.

The One Tiny Problem With Trump’s Affordability Agenda

2026-02-10T07:00:00-05:00

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The people want affordability, and Donald Trump knows it. After initially calling the concept a “hoax,” the president has begun unveiling his own agenda to bring down prices and increase Americans’ purchasing power. Somewhat astoundingly, each of his proposals, if enacted, would be more likely to make the affordability problem worse, not better.

Trump’s signature idea is simply to give people money. In November, he promised to send out a “tariff dividend” of $2,000 to all but the highest-earning Americans sometime in 2026. This plan, which he has continued to promote, would almost certainly require an act of Congress, meaning that it’s unlikely to happen. That’s a good thing. Handing out free money would make voters happy in the short term but would ultimately backfire. This is because a massive one-time influx of cash is likely to create far more demand than the economy can possibly meet. Consumer spending is already strong, unemployment is already low, and inflation is still too high. “I’m usually all for giving people money,” Natasha Sarin, the president of the Yale Budget Lab, told me. “But a move this dramatic in our current macroeconomic environment is a recipe for inflation.”

America has very recent experience with this dynamic. In the spring of 2021, the Biden administration passed a spending package that included sending out more than 150 million stimulus checks of up to $1,400, fulfilling a campaign promise. When the country reopened, that money flowed into an economy whose supply chains were still disrupted. With too much money chasing too few goods, inflation took off. The spending package wasn’t the main cause of post-pandemic inflation—which, after all, occurred around the world—but economists broadly agree that it pushed inflation up by at least a few percentage points. You might think that Trump, of all people, would have internalized this lesson, given that he spent much of his 2024 campaign blaming inflation on Biden’s reckless spending.

[Rogé Karma: The debate that will determine how Democrats govern next time]

If sending out checks is a bad idea, what about tackling the housing crisis? Last month, Trump issued an executive order directing various government agencies to draft regulatory guidelines and Congress to write legislation that would prevent corporate investors from purchasing single-family homes. “Hardworking young families cannot effectively compete for starter homes with Wall Street firms and their vast resources,” the order declares. “My Administration will take decisive action to stop Wall Street from treating America’s neighborhoods like a trading floor and empower American families to own their homes.”

The notion that Wall Street is to blame for high housing costs is widespread among left-wing populists. It is also wrong. Large institutional investors, typically defined as those owning more than 1,000 homes, control just 0.5 percent of the single-family housing stock in the country. (The executive order itself doesn’t actually define what qualifies as an institutional investor.) That share is higher in specific neighborhoods in certain cities, including Cleveland, St. Louis, and Baltimore—which, notably, are among the places where housing costs haven’t gotten out of control. Meanwhile, the cities that have experienced the largest price increases over the past 15 years, such as San Francisco, New York, and Los Angeles, have some of the lowest percentages of institutional investment.

The weight of the evidence suggests that institutional investors actually make single-family homes more affordable. It is true that when a Wall Street firm buys a home, it decreases the total number of homes for sale, which pushes home-purchase prices up. But it also increases the number of homes available for rent, which pushes rental prices down. In this sense, institutional investment is functionally a downward redistribution of wealth from homebuyers to home renters. One recent study found that single-family-home rents in Atlanta would have been 2.4 percent higher without the presence of institutional investors, costing renter households nearly $3,000 a year on average. Another study, which analyzed a wide range of otherwise similar metro areas that had varying levels of institutional investment, found that these two forces are not symmetric. Institutional buyers push rents down slightly more than they push home prices up.

A ban on institutional investors, in other words, would have basically no impact on overall home prices at the national level while likely raising rents in the places where investment is most concentrated. Perhaps that is part of the appeal for Trump, who seems to want credit for tackling high housing costs without doing anything to actually lower them. “I don’t want to drive housing prices down,” the president admitted at a recent Cabinet meeting. “I want to drive housing prices up for people that own their homes.”

In yet another rebrand of a left-wing populist idea, Trump has also called on Congress to pass a one-year cap of 10 percent on credit-card interest rates. Consumers spend about $150 billion every year paying off interest on their credit cards. Rates average about 20 percent and can reach as high as 35 or 40 percent. In theory, capping the rate at 10 percent would save consumers tens of billions of dollars while redistributing wealth from big banks and their shareholders to the low-income consumers who typically carry credit-card debt.

[James Surowiecki: Trump doesn’t understand inflation]

The success of the proposal, however, hinges on how exactly the credit-card industry responds to the price cap. A major reason credit-card companies charge such high interest rates in the first place is to cover the losses incurred when cardholders don’t pay their balances. Some proponents argue that if those interest rates were capped, banks could simply absorb those losses by accepting lower profits or slashing their marketing budgets. But several studies have found that banks tend to respond to even small regulatory changes to the interest rates they can charge by issuing less credit to their highest-risk borrowers. There might be a point at which that’s worth the trade-off—but a cap as drastic as 10 percent is probably far past that sweet spot. “The literature is really clear on this,” Sarin, who specializes in banking regulation and recently co-authored a paper on the subject, said. “When you reduce how much banks can charge, you increase their risk—and that changes who they are willing to lend to in the first place.”

The individuals who would be most likely to lose credit-card access in this scenario—borrowers with low credit scores—are the same people who tend to rely on short-term debt to make essential purchases, such as groceries, gas, and medical bills. Without credit cards, they would likely be forced to rely on more expensive, less regulated, options such as payday loans, which can come with rates as high as 400 to 500 percent. Fear of that outcome may be why Trump has proposed limiting the cap to a single year. But a temporary version runs into another problem: Once the cap expires, credit-card companies will likely respond by jacking up their interest rates even higher than before to make up for their losses. “It’s not like this would put Chase or Bank of America out of business,” Ted Rossman, an analyst at Bankrate, a company that helps consumers compare credit cards, told me. “But it would be a huge hit to the industry. And it would be a huge hit to the consumers who depend on credit cards the most.”

Even in the one area in which Trump has notably succeeded at lowering some prices, he has still managed to make life less affordable overall. Last year, his administration announced a series of deals with pharmaceutical companies to lower prices of a few dozen drugs, including some eye-popping decreases of anywhere from 55 to 98 percent. But as with drug commercials, one must pay attention to the fine print. In order to qualify for the discounts, individuals must buy the drugs directly from the manufacturer through a government-run platform called TrumpRx and, crucially, cannot use insurance to do so, making the program basically irrelevant for 85 percent of Americans. (The order also claims that the new prices will be made available to “every State Medicaid program,” but there is no evidence that has happened or will.)

[Nicholas Florko: The real winner of TrumpRx]

These one-off deals haven’t altered the behavior of the pharmaceutical industry. Drug companies raised the prices of nearly 1,000 drugs at the beginning of this year, and the median overall increase, about 4 percent, was the exact same amount they raised prices by the prior year. The Trump administration has also handed them some major concessions. The One Big Beautiful Bill Act that Trump signed into law last year includes a provision that exempts or delays several drugs, including some of the most popular and expensive cancer medications, from having to participate in price negotiations through Medicare. The Congressional Budget Office estimates that taxpayers will pay $8.8 billion more over 10 years for these drugs relative to what they would have paid if negotiations had taken place on schedule.

Most of the real solutions to the affordability problem, such as building more housing and reforming the health-care system, would require years of sustained effort, large investments, and hard political trade-offs. (The obvious exception would be the repeal of Trump’s global tariffs, which the president could do tomorrow.) But voters want affordability right now and have proved that they are willing to throw out politicians who don’t deliver it. Trump’s response to this has been to float policies that promise a quick hit of relief. He might not be operating in good faith, but whatever president succeeds him will have to wrangle with the same dilemma.

Trump’s Fed-Chair Pick Is an Interest-Rate Hawk—Or Is He?

2026-01-30T18:26:00-05:00

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Cue the bankers’ equivalent of white smoke: Donald Trump has finally named his pick to be the next chair of the Federal Reserve. This morning, Trump announced that he will nominate Kevin Warsh, a former Wall Street banker and Fed governor, to lead America’s central bank. Unlike some of the other contenders for the job, Warsh does not have a track record as an avowed Trump loyalist. For that reason, the response to his nomination from mainstream figures has been mostly positive. “Kevin Warsh is well above the bar on both substance and independence to be Chair of the Federal Reserve,” Jason Furman, who served as the chair of Barack Obama’s Council of Economic Advisers, posted on X. But Warsh’s record raises the possibility that he is a partisan actor whose views on monetary policy are shaped less by real economic conditions than by whether a Democrat or Republican is in power.

Trump has not been shy about what he wants in a Fed chair: someone who will lower interest rates. He has constantly attacked current Fed Chair Jerome Powell for not slashing rates fast enough, to the point of launching an obviously spurious criminal investigation into him. Powell has stood firm, but his term as chair expires in May. This gives Trump the chance to install someone who will do what he wants.

[Will Gottsegen: The candor of Jerome Powell]

That someone was long expected to be Kevin Hassett, the head of Trump’s National Economic Council. Hassett, who was once a widely respected conservative economist, has in recent years taken a sharp turn into Trumpist propaganda. A Hassett chairmanship therefore augured reckless rate cuts that could trigger a fresh bout of dangerous inflation. This spooked Wall Street. Major bond investors met with the administration to tell them how worried they were. After Trump’s Department of Justice launched its investigation into Powell, Republican officials including Senate Majority Leader John Thune questioned the probe’s legitimacy and asserted the importance of central-bank independence. Senator Thom Tillis, a member of the Senate Banking Committee, said that he would refuse to vote on a nominee for Fed chair until the Powell investigation had finished.

This backlash appeared to get to Trump. He began saying that he’d had a change of heart—that Hassett was actually too valuable an asset as the NEC director to give up. And now the president has instead nominated Warsh, to much applause from the economics establishment. “I believe he brings a strong mix of deep expertise, broad experience, and sharp communication skills,” Mohamed El-Erian, the former CEO of the global investment firm PIMCO, posted on X. “I think he’s a great pick,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “The most important task for the next Fed chair is to preserve the central bank’s independence. And I don’t think there is anyone who is better suited to do that than Kevin.”

The reason for relief is twofold. First, Warsh’s résumé is conventional. He spent his early career on Wall Street and served as a top economic adviser to George W. Bush before becoming, at the age of 35, the youngest-ever appointee to the Federal Reserve Board of Governors, the body that votes on interest rates. When the financial crisis hit two years later, Warsh acted as the central bank’s liaison to Wall Street, helping engineer bank bailouts.

Second, Warsh is seen as an inflation hawk who will err on the side of higher, not lower, interest rates. During the 2010s, he became known within Wall Street and Washington circles as one of the fiercest critics of the Fed’s zero-interest-rate policy, to the point of warning about inflation when unemployment was still at 10 percent. “He’s a pretty stone-cold hard-money guy,” Jared Bernstein, who served as the chair of Joe Biden’s Council of Economic Advisers, told me. “It’s a peculiar choice for Trump, because the Fed that Warsh wants is very different from the one Trump wants.”

The case against Warsh is this: What he wants seems to change depending on which party controls the White House. Warsh was a staunch inflation hawk during the Obama administration. Then Trump was elected, and he seemed to soften. In a 2018 Wall Street Journal op-ed titled “Fed Tightening? Not Now,” Warsh and his co-author, Stanley Druckenmiller, argued that, “given recent economic and market developments, the Fed should cease—for now—its double-barreled blitz of higher interest rates and tighter liquidity.”

“He’s someone who has repeatedly shown a willingness to change his positions on a dime when it’s politically convenient,” Skanda Amarnath, the executive director of Employ America, a Fed-focused think tank, told me. “Sure, he’ll give lectures about inflation and sing the praises of high interest rates when a Democrat is in power, but the moment that a Republican is in office, he’ll suddenly change his tune.”

[Rogé Karma: The Federal Reserve’s little secret]

Under Biden, Warsh reprised his hawkish outlook. As late as September 2024, he criticized the Fed for cutting interest rates prematurely. Then, after Trump took office early last year—and it became known that Trump was considering him for Fed chair—Warsh began advocating for rate cuts. In a November Wall Street Journal op-ed, he argued that the United States was on the verge of an AI-driven productivity boom that would be a “significant disinflationary force” and that the Fed “should abandon the dogma that inflation is caused when the economy grows too much and workers get paid too much.” (Why these facts weren’t true a year earlier, when Biden was in office, was left unclear.)

In this telling, Warsh is a partisan shape-shifter who advocates for high interest rates (which results in slower growth and higher unemployment) under Democrats and lower rates (faster growth, lower unemployment) under Republicans. As my colleague Jonathan Chait pointed out last year, this description also applies to Trump himself, who spent the Obama years tweeting about how the Fed needed to be “reined in or we will soon be Greece”; he then demanded lower rates during his first term, went back to attacking the Fed for cutting rates under Biden, and then immediately demanded rate cuts once he was back in the White House. This shared approach—easy money for me, economic pain for thee—might explain why Trump was comfortable nominating Warsh.

No one can say which version of Warsh will lead the Fed, assuming he’s confirmed. Every other high-level presidential appointee during Trump’s second term has proved willing to carry out his wishes. Perhaps Warsh will break the pattern. Quite a lot of economic outcomes could turn on whether he does.

If You Tax Them, Will They Leave?

2026-01-28T07:00:00-05:00

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To hear some Silicon Valley insiders tell it, California is on the verge of economic suicide. This November, Californians will likely vote on a ballot initiative that would levy a one-off tax on the wealth of about 200 of the state’s richest residents. Garry Tan, the CEO of the start-up incubator Y Combinator, posted on X that the measure would “kill and eat the golden goose of technology startups in California.” Investors and tech executives are threatening to leave the state. Governor Gavin Newsom, who has been angling for a centrist presidential pivot, has vowed to “do what I have to do” to stop the initiative.

Many progressives, however, see the billionaire tax as a long-overdue effort to finally force the ultra-wealthy to pay their fair share. Senator Bernie Sanders, for example, calls it a “model that should be emulated throughout the country.” In their telling, hyperbolic claims about the death of innovation and entrepreneurship in California are a smoke screen for the fact that billionaires simply don’t want to pay higher taxes.

The unfortunate reality for progressive backers of the wealth tax is that what billionaires think about the policy, and how they react to it, will determine whether it succeeds. If voters approve the tax, they will be making a huge bet on billionaire psychology. That would be a very high-stakes wager indeed.

The California wealth-tax idea originated as a response to a federal tax cut. Donald Trump’s One Big Beautiful Bill Act lowered taxes for corporations and rich individuals and paid for those cuts in part by reducing Medicaid spending. That left a roughly $20 billion annual shortfall in California’s health-care budget. If left unfilled, that could cause 1.6 million low-income Californians to lose their health care, according to the Kaiser Family Foundation. In response, one of the state’s largest health-care-employee unions teamed up with a group of progressive economists and lawyers to come up with a way to make up the difference: impose a one-off 5 percent wealth tax on California’s billionaires.

The logic is simple enough: The ultra-wealthy, who amass their fortunes by owning assets as opposed to earning wages, pay very little in income taxes. According to calculations by the Berkeley economist Emmanuel Saez, who helped design the proposal, California’s billionaires pay approximately $3 billion to $4 billion a year in state income taxes, or less than 0.2 percent of their collective net worth of $2.2 trillion. He and the other architects of the ballot initiative determined that tapping into this pool of mostly untaxed wealth would be the most economically fair way to raise the money California needs, especially given that those same billionaires had just received a major tax break from Trump. “Right now our tax system effectively fails to tax the superrich,” Gabriel Zucman, another economist involved with the proposal, told me. “If you want to raise a lot of revenue, you need to focus on wealth.”

[Rogé Karma: Buy, borrow, die]

One serious objection to imposing a wealth tax at the state level is that it will trigger a process known as capital flight: When faced with the prospect of losing a sizable chunk of their fortune, wealthy individuals might leave the state altogether. If enough people make that choice, a wealth tax could backfire, resulting in lower long-term tax revenues. Many Silicon Valley critics of the ballot initiative have claimed that the proposal would give them virtually no choice but to leave. They say that it would result in massive tax bills that would force founders to sell off their companies, push entrepreneurs into bankruptcy, and ultimately make it impossible to build a successful company in California. “I think the technology industry kind of has to leave the state,” one anonymous venture capitalist told the tech-right publication Pirate Wires. “Because every person running a company will have to look at the math, and they will think, ‘Well obviously that cannot happen because it will literally destroy the company.’”

Already, several high-profile billionaires, including the Google co-founder Larry Page, the Paypal co-founder Peter Thiel, and the Oracle co-founder Larry Ellison, have reportedly begun shifting their assets out of California, and several have threatened to leave if the initiative passes. Andy Fang, a co-founder of DoorDash, claimed on X that the new tax “could wipe me out” and that it would be “irresponsible for me not to plan leaving the state.” (Others, including Nvidia CEO Jensen Huang and Airbnb CEO Brian Chesky, have said that they will remain in California regardless of what happens. “We chose to live in Silicon Valley, and whatever taxes I guess they would like to apply, so be it. I’m perfectly fine with it,” Huang recently told Bloomberg.)

The tax’s designers, however, think they’ve come up with a clever solution to capital flight: a one-off tax that is retroactive, based on a billionaire’s residency status on January 1, 2026. In other words, unless they’ve already fled the state, billionaires won’t be able to move to avoid paying the tax. “At this point, there’s no financial incentive to leave California,” Zucman said. “You’re going to pay the same amount either way.”

Contrary to what its opponents claim, moreover, the tax is carefully designed to avoid the most common objections. If billionaires are worried that the government will improperly value their assets, they can submit independent third-party appraisals. If they can’t come up with the full 5 percent all at once, they can spread out payments over five years, though they would be charged interest. If their fortunes are tied up in “illiquid assets” such as a privately held start-up, they can defer the tax rather than having to sell their stake. “So many of these criticisms are either completely ignorant or made in bad faith,” Brian Galle, a law professor at UC Berkeley who helped write the bill, told me. “I think it’s pretty clear that these guys will basically say anything to protect their giant mountains of wealth.”

[Brian Galle: The myth of the mobile millionaire]

Even if the wealth tax wouldn’t nuke the state’s tech start-ups, however, it would roughly quadruple the amount that California’s billionaires currently pay annually in taxes. And if most empirical research suggests that the superrich do not tend to move in response to state-level tax hikes, none of that research has considered a tax nearly as large as what is being proposed in California. “There’s just a different kind of anxiety in the air this time,” Cristobal Young, a sociologist at Cornell University and the author of The Myth of Millionaire Tax Flight, told me. “We’re not talking about paying a little more in income taxes. There’s a lot more at stake and a whole lot of unknowns.”

Part of that anxiety stems from the fact that billionaires don’t believe that the tax will really be one time only. “It’s not a one time; it’s a first time,” David Sacks, a venture capitalist and Trump’s AI czar, recently told CNBC. “And if they get away with it, there’ll be a second time and a third time.” That fear isn’t completely unfounded. In 2012, for instance, California voters approved a ballot initiative to raise the income-tax rate for high-earners for seven years to fill a budget shortfall. In 2016, voters overwhelmingly chose to extend the tax until 2030, and are likely to extend it even further. Voters could very well behave similarly with the wealth tax, especially given that the state’s budget problems probably won’t magically solve themselves in the next few years. “I just don’t think the idea that this will be one time is very credible,” Zachary Liscow, a tax scholar at Yale Law School who worked on a national wealth-tax proposal under the Biden administration, told me. “If this tax is really as successful at bringing in revenue as its proponents claim, I have a hard time imagining voters will just let it go away.”

This is where a debate ostensibly about economics reveals itself to be about political science and behavioral psychology. Proponents of the ballot initiative argue that Silicon Valley’s unmatched ecosystem of founders, investors, and talent is so alluring that no single tax would cause current and would-be billionaires to relocate. “Study after study has shown that the probability of becoming a billion-dollar company is higher in Silicon Valley than anywhere else,” Galle said. “You aren’t going to give that up just because there’s a chance that sometime in the future there’s going to be a tax on your wealth.”

Opponents of the bill, though, worry that the tax will be viewed as a harbinger of a soak-the-rich mentality among California voters that makes the state a risky place to do business. Start-ups and venture-capital investment could begin to flow to lower-tax states; the next hub of technological innovation may end up being seeded in Austin or Miami instead of Silicon Valley. “The real fear is less about the specific tax than the message it sends: that California is a dangerous place to be a billionaire,” Alan Auerbach, an economist at UC Berkeley, told me. “If people begin to fear that California has removed guardrails that allowed the wealthy to do well, they might get nervous and go elsewhere.”

[Elias Wachtel: New York can’t be progressive without the one percent]

Each side’s argument is rooted in a set of interlocking assumptions about how California voters will vote, how the state’s ultra-wealthy think they will vote, how those predictions will factor into would-be entrepreneurs’ decisions about where to locate their companies, and whether Silicon Valley will retain its unparalleled allure—all in response to a type of tax that has never been tried in the United States before.

For proponents of the proposal, going forward with the wealth tax is worth the risk, if only because the alternative is so much worse. Better to lose a handful of billionaires than for millions of low-income Californians to lose their health care. Other ways to generate the same revenue—such as raising income or corporate taxes, or cutting other parts of the budget—come with their own set of hard economic, political, and moral trade-offs. There is also a sense of basic fairness in asking society’s very wealthiest individuals, all of whom just got a massive tax break, to hand over a small portion of their staggering fortunes in order to help society’s least well-off.

And yet, doing so would mean wagering the future of California’s tax base on the proposition that billionaires are bluffing when they threaten to leave the state. Progressives tend to be clear-eyed about the lengths the rich will go to avoid paying their fair share. They should recognize a risky bet when they see one.

Big Oil Knows That Trump’s Venezuela Plans Are Delusional

2026-01-10T09:55:27-05:00

So, about all that Venezuelan oil. Although President Trump has declared that America’s oil companies will soon “go in” to Venezuela and “spend billions of dollars” to rebuild that country’s petroleum industry, the administration is making two huge assumptions. First, that unleashing Venezuelan oil would yield lower energy prices for American consumers and giant profits for American companies. Second, that unlike previous administrations, which got bogged down for decades in failed nation building in Iraq and Afghanistan, Trump can simply let great American companies do what they do best—drill, baby, drill.

[Jonathan Chait: Trump’s retro imperialism]

But my conversations with several oil-industry veterans and energy analysts indicate that the administration has the situation precisely backwards: Restoring Venezuela’s oil industry is completely unrealistic in the short term, and might not be in America’s economic and geopolitical interests at all. “Trump seems locked in the world of the 1980s and ’90s, when the U.S. imported most of its oil from a handful of foreign sources,” Arnab Datta, a lawyer who specializes in energy markets, told me. “But today, America is the world’s biggest oil producer. The play for Venezuelan oil doesn’t make a whole lot of sense for the new world we’re in.”

Although some oil executives who met with Trump at the White House yesterday expressed a vague interest in doing business in Venezuela, Exxon Mobil CEO Darren Woods offered a blunt warning about the country. “Today,” he said, “it’s uninvestable.”

The Trump administration is right about one thing: Venezuela has a lot of oil. As recently as the ’90s, it was one of the world’s top producers, pumping out more than 3 million barrels a day. But in the early 2000s, the populist leader Hugo Chávez forced out most Western oil companies, seized their assets, and turned their operations over to the country’s dysfunctional state-owned company. Production has since plunged by more than two-thirds. In this history, the Trump administration sees a golden opportunity. With Maduro, Chávez’s hand-picked successor, out of power, U.S. companies can return and bring hundreds of millions of barrels of new supply to the global market.

Yet expert after expert told me that rebooting the country’s oil industry would require a herculean effort. It would involve training an army of workers with no experience in the industry, rebuilding decrepit processing facilities and miles of crumbling pipelines, and amassing a private security force to protect these investments from cartels and private militias. “I really can’t overstate just how hard this would be to actually pull off,” Ben Nussdorf, who served as a senior adviser for the Department of Energy’s Office of Oil and Natural Gas from 2014 to 2021, told me. “Don’t even think about making a dollar for at least a decade.” According to the most optimistic projections, simply restoring Venezuela’s production to its previous peak would require a decade and $100 billion of investment; more conservative estimates put the numbers closer to 15 years and $200 billion.

In a Truth Social post before the White House meeting yesterday, Trump announced, “At least 100 Billion Dollars will be invested by BIG OIL.” That prediction would be more believable if oil companies could expect a lucrative return on these gargantuan investments. But in inflation-adjusted terms, current oil prices—about $60 a barrel—are historically low. And they are well below the roughly $80-a-barrel cost of extracting and refining Venezuelan oil—much of which is the kind of thick, low-quality petroleum (known within the industry as “heavy sour crude”) that requires extensive processing.

This basic dynamic is unlikely to change anytime soon. The price of oil is widely expected to remain near its current level, and perhaps fall even further, between now and 2030 as demand growth for fossil fuels slows in developed countries and several new oil projects elsewhere come online. “It’s hard to imagine that companies are going to be willing to take such big, risky bets in the current price environment,” Rory Johnston, a veteran oil-market analyst, told me. “It just doesn’t make financial sense.”

The single biggest obstacle to restoring Venezuela’s oil industry is the country’s fragile political situation. Every industry veteran I spoke with emphasized that a stable government is the most fundamental requirement for attracting expensive, multi-decade oil investments. Executives need to feel confident that a country won’t suddenly descend into civil unrest, military conflict, or armed revolution. But at the moment, nobody knows what the political situation will be in Venezuela a week from today, let alone in a year or a decade.

Trump has declared that the United States will “run the country,” which so far has meant issuing commands to Venezuela’s interim leader, Delcy Rodríguez, backed by the threat of military force. So far, Rodríguez has mostly complied with the Trump administration’s demands, which include turning over up to 50 million existing barrels of oil to the U.S. But how long will the Venezuelan government, military, and population tolerate their country being held hostage by a foreign power? Even though she has complied with most of Trump’s demands, Rodríguez has declared that her country is “ready to defend our natural resources” and “shall never be a colony ever again.” “Venezuela has 120,000 troops and a 300,000-person militia,” an oil-industry lobbyist who requested anonymity to avoid alienating the administration, told me. “Want to run that country forever? It will make Iraq look like a cakewalk.”

A 2024 report by S&P Global ranked Venezuela’s attractiveness for oil investment last out of 111 countries, citing, among other factors, its weak legal protections for companies, confiscatory levels of corporate taxes, and “high levels of corruption.” (Other reports have come to similar conclusions.) Addressing all of these problems sufficiently to unlock Venezuelan oil may require the exact kind of nation building that Trump and his allies now decry. Even then, companies may not trust the Venezuelan government to protect their interests. “These companies have already been burned investing in Venezuela before,” Johnston told me, referring to Chávez’s 2007 decision to nationalize the country’s oil resources and confiscate the assets of corporations such as Exxon Mobil and ConocoPhillips. “I think they are going to be very hesitant to go back in and do it again.”

Woods told Trump as much. The Exxon Mobil chief said that if an invitation from the Venezuelan government and “appropriate security guarantees” were forthcoming, he was prepared to send a technical team to assess the state of the country’s oil industry. But he also cited his company’s bitter past experience. “We have had our assets seized there twice,” Woods said, “and so you can imagine to reenter a third time would require some pretty significant changes.”

Half a century ago, Trump’s obsession with Venezuelan oil would have made more sense. For much of the late 20th century, the U.S. depended heavily on foreign petroleum, much of which came from the Middle East. The infamous Arab Oil Embargo of the 1970s caused oil prices to quadruple, led to long lines at gas stations, and helped trigger a recession. In that environment, the U.S. was desperate for any form of oil production that could ease global prices, and going into Venezuela was a way for American companies to diversify their sourcing.

But since then, the industry has undergone several major changes. Total global oil production has nearly doubled since the 1980s. Given the size of the market, Johnston estimates that restoring Venezuelan oil production back to its 1990s levels would lower global prices by only about $2 to $4 per barrel over a decade—about 5 to 10 cents per gallon of gas at the pump.

Even more important, the composition of global oil production has shifted dramatically. Today, the United States is the single largest oil producer and exports its petroleum all over the globe; Texas alone currently produces nearly 6 million barrels a day, almost twice as much as Venezuela at its peak. Canada is the world’s fourth-largest producer and exports most of its oil to America. Both countries currently sit on untapped reserves, and even larger new reserves have been discovered in U.S.-allied countries such as Argentina, Brazil, and Guyana. In this environment, the singular obsession with securing Venezuela’s oil—despite the economic, political, and legal risks—makes little sense. “This isn’t the 1970s anymore,” Jason Bordoff, the director of the Center on Global Energy Policy at Columbia University, told me. “If the U.S. wants more oil, there is a whole menu of potential places where it can invest, starting right here at home.”

In fact, now that the U.S. is a major oil producer, unlocking a trove of foreign oil could backfire. The current price of oil approximately matches the cost for most American companies to produce a barrel of oil. If the price were to drop significantly, then suddenly many of those companies’ assets would no longer be profitable. Major oil corporations would be forced to scale back investment and shut down their least profitable domestic wells, and many smaller companies would find themselves unable to pay back their loans, prompting a wave of bankruptcies across the sector. “We’re talking about this administration screwing us over again,” a top executive at one of the country’s leading shale groups recently told the Financial Times. “If the US government starts providing guarantees to oil companies to produce or grow oil production in Venezuela I’m going to be … pissed.”

[George Packer: Iraq was bad. This is absurd.]

Although consumers may initially benefit from such a drop in global oil prices, the resulting collapse in American oil production would make future price spikes more likely. “We see this cycle again and again,” Datta, the energy-market lawyer, said. “When oil prices get too low, you get bankruptcies. You get investment drying up. And every time, the sector is less able to respond to higher prices in the future.”

In one sense, the Trump administration is correct to distinguish its intervention from the Bush administration’s invasion of Iraq. As recently as 2003, you could have at least made a coherent argument that securing the invaded country’s oil reserves would serve the U.S.’s economic interests. That isn’t remotely true today.

The Respected Economist Turned Trump Propagandist

2026-01-07T07:30:00-05:00

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With the possible exception of the president, no person has more sway over the fortunes of the United States economy than the chair of the Federal Reserve. Because the Fed controls the U.S. money supply, sets interest rates, regulates banks, and provides liquidity in an emergency, the chair’s decisions help determine the pace of inflation, the strength of the labor market, the stability of the financial system, and the cost of a mortgage. If the country faces an economic crisis, the chair’s job is to get us out of it.

Soon, this all-important position might be held by Kevin Hassett, the current director of Donald Trump’s National Economic Council. No doubt, Hassett is a Trump loyalist. And there’s reason to fear that, as chair, he will do Trump’s bidding, undermining the central bank’s independence and marking a new stage in the president’s control over the American economy.

When Trump nominated Hassett to chair his first-term Council of Economic Advisors, in 2017, the Washington economics establishment was delighted. A bipartisan group of influential economists, including top advisers for former Presidents George W. Bush and Barack Obama as well as two former chairs of the Federal Reserve, wrote a letter urging the Senate to confirm him. As evidence of Hassett’s qualifications, the letter cited his “record of serious scholarship on a wide range of topics”; his stellar résumé, which included stints at the Federal Reserve and Treasury Department; and his efforts to “reach out to a wide range of people from across the ideological spectrum.”

Hassett is now the front-runner to succeed Jerome Powell as Fed chair when Powell’s term ends in May, and some of the experts who endorsed Hassett for the CEA are similarly pleased about the prospect of him overseeing the central bank. “I think he’d be a good Fed chair,” Mark Zandi, the chief economist at Moody’s Analytics, who has known Hassett for more than a decade and signed the 2017 letter, told me. “He’s smart, curious, willing to debate, and has a good working relationship with the president. Those are the qualities you need for this job.”

[Read: Trump almost has a point about the Federal Reserve]

A close examination of Hassett’s record, alongside conversations with nearly a dozen of his former peers and colleagues, however, suggests that what was true about him in 2017 might not be true today. Over the past decade, Hassett has become an unapologetic Trump propagandist in ways that the phrase good working relationship doesn’t quite capture. In his years working for Trump, Hassett has proved willing to change his beliefs, misrepresent basic facts, and endorse dangerous conspiracy theories, all in an apparent effort to please the president. His obsequiousness probably explains why he is now on the verge of running the Fed, and introduces the possibility of a central bank willing to uncritically carry out the president’s wishes, economic consequences be damned.

Before his MAGA career, Hassett, who didn’t respond to multiple interview requests, spent several decades as a respected conservative economist. He received his Ph.D. in economics from the University of Pennsylvania in 1990, before going to work as an economics professor at Columbia Business School, a researcher at the Federal Reserve, and, in 1997, a resident scholar (and later director of economic-policy studies) at the American Enterprise Institute. At the time, AEI was the preeminent conservative think tank in Washington. Over the next two decades, Hassett wrote op-eds for The New York Times, The Washington Post, and The Wall Street Journal; appeared frequently on cable news; and advised the Republicans George W. Bush, John McCain, and Mitt Romney on their presidential runs.

Like most conservative economists at the time, Hassett was a staunch deficit hawk, an advocate of higher levels of immigration, and, above all else, an unabashed free trader. During the Bush and Obama years, he called for major deficit reductions, defended the global trade system, and proposed that the U.S. double its intake of immigrants to boost GDP growth. In 2011, when Trump was floating a run for the presidency, Hassett wrote an op-ed eviscerating his proposal for a 25 percent tariff on all imports from China. “He appears to still have a tin ear on tax policy,” Hassett wrote of Trump, whose plan, he argued, “would be terrifyingly similar to the Smoot-Hawley tariffs that set off a trade war in 1930, and helped turn the stock market crash of 1929 into the Great Depression.”

The pre-MAGA version of Hassett had his share of questionable judgment calls. In September 1999, just months before the dot-com crash, he co-authored a book predicting that the Dow Jones would quadruple over the next three to five years. (This did not occur until 2021.) In November 2010, with unemployment at nearly 10 percent and the economy still in the throes of a recession, Hassett signed an open letter warning that the Fed’s efforts to boost the economy could trigger hyperinflation. The Fed ignored the letter, and inflation remained near or below 2 percent for the next decade.

Still, Hassett maintained a solid reputation among Washington insiders. Several of the signatories of the 2017 letter told me they believed that Hassett would be an adult in the room who would help prevent Trump from acting on his most dangerous impulses. (Much of the MAGA right opposed Hassett’s nomination for the same reason.) During the first two years of Trump’s presidency, this proved to be true. Although Hassett often defended the president’s decisions publicly, he was known to privately argue for a more conventional approach on issues such as immigration and trade. He was even willing to suggest that Trump was not omnipotent. When asked in a 2019 interview whether he supported Trump’s demand that the Fed slash interest rates, Hassett responded, “It’s not my job at CEA to give the Fed advice. My job at CEA is to remind people to respect the independence of the Fed.”

Then, in June 2019, Trump somewhat abruptly announced Hassett’s departure. The president’s first-term trade war with China was heating up and his spat with Powell was intensifying. Just a week before, Hassett had been excluded from a White House meeting in which the president decided to impose higher tariffs on Mexico, The New York Times reported.

In March 2020, Hassett was asked to return to the CEA to assist with the White House’s COVID response. Trump was busy downplaying the severity of the new coronavirus and insisting that the country had to swiftly reopen. If Hassett’s independence had gotten him pushed out the year before, he wouldn’t make the same mistake again. A few weeks after his return, the CEA released a model projecting that COVID deaths had already peaked and would drop to almost zero by mid-May. Experts immediately pointed out that Hassett had used a misleading method known as a cubic fit to make the mortality data appear less frightening.

“I was, quite frankly, pretty shocked that this had come from Kevin,” Dean Baker, a progressive economist who co-wrote several papers with Hassett and signed the 2017 letter supporting his nomination, told me. “It was the kind of thing that no serious analyst would ever produce.” Jason Furman, who chaired the CEA under Obama and had also signed the 2017 letter, tweeted at the time that the model might represent “the lowest point in the 74 year history” of the council. Hassett defended the chart by claiming that it wasn’t intended as a “forecast” but instead “just a different way of visualizing the model.”

At the time, many economists who had long known Hassett, including Baker, considered the cubic-fit episode a fluke. What they didn’t realize was that Hassett was, by his own account, in the midst of a profound ideological shift. In November 2021, Hassett published a retrospective of his time in the Trump administration called The Drift: Stopping America’s Slide Towards Socialism. It reads like a conversion experience. In it, Hassett describes his journey from an establishment figure who was deeply skeptical of Trump to a MAGA soldier who believed that Trump was engaged in an existential fight to save the U.S. from catastrophe. “Donald Trump found himself in the middle of a much bigger historical battle than the simple fight against Joe Biden or Hilary Clinton,” Hassett wrote. “He came to power determined to arrest and reverse the Drift to socialism. The entire Donald Trump saga only makes sense if one views him as a powerful opposition to the Left’s quest to defeat capitalism and turn the United States into a socialist country.”

Upon his return to the White House in 2025, Trump brought back a mere handful of his most trusted advisers from his first term. Hassett was among them. In January, he was appointed the head of Trump’s National Economic Council, and quickly emerged as one of the administration’s most important surrogates. Whenever the president floated some bizarre policy idea, issued a new threat, or told a brazen lie about the state of the economy, Hassett would be one of the first people on cable news justifying it. Gone were the carefully chosen language, the adherence to factual reality, and the reports of behind-the-scenes dissent that had characterized Hassett’s first two years working for Trump.

In April, the president announced his “Liberation Day” tariffs—the ones that would have introduced sky-high import duties on nearly every single country, as well as a few uninhabited islands, based on an incoherent formula. Hassett, the once ardent free trader, boasted on TV that Trump’s policy was an act of genius that would remake the global trade system for the better, raise gobs of revenue, and boost American industry. A week later, the president decided to implement a 90-day pause, and Hassett went back on TV to claim that this seemingly abrupt move had been the president’s real intention from the beginning. “This is the plan that he was pursuing all along,” he told Fox News. Hassett has so routinely delivered obvious untruths—such as that inflation had “come way down” at a moment when it had increased over the previous five months—that a genre of viral clip has emerged in which Hassett is fact-checked by the moderator.

Nor has Hassett’s remit been limited to economic policy. During Trump 2.0, he has gone so far as to endorse the president’s conspiratorial accusations against disfavored individuals. In July, he suggested that cost overruns on the renovation of the Federal Reserve’s headquarters could provide sufficient legal pretext for the president to fire Jerome Powell, saying that the Fed had “a lot to answer for” on the matter. In August, he called Trump’s flimsy mortgage-fraud accusations against Fed Governor Lisa Cook “serious” and implied that they could provide cause to fire her, as Trump did. (Subsequent reporting suggests that Cook did not list multiple homes as her primary residence in order to secure more favorable loan terms or receive tax exemptions, as the charges against her alleged. The question of whether Trump can fire Cook and other Fed officials is now before the Supreme Court.) When, in that same month, Trump responded to a negative jobs report by calling the data “rigged” and firing the head of the Bureau of Labor Statistics, Hassett defended the decision, citing a supposed “partisan pattern” in the data and claiming that U.S. statistical agencies had a long history of manipulating numbers in favor of Democrats. “That moment was a turning point for me,” Baker said. “This wasn’t just another Trump talking point. It was a completely baseless attack on empirical reality. And Kevin just went along with it.”

Many of those who have long known and respected Hassett have begun to worry that he’s lost credibility as an independent thinker and economist—a dangerous possibility for someone who is leading the race to become the head of the country’s central bank. “I’ve known Kevin since he was a grad student, and I’ve long respected him as an economist, but I think he’s been too willing to sacrifice some of his professional credibility to maintain his standing in Trump world,” Gregory Mankiw, a conservative economist at Harvard University who served as CEA chairman under George W. Bush, told me. “To say I’m disappointed is a grotesque understatement,” Alan Blinder, a Princeton economist who previously served on Bill Clinton’s CEA and as the second-highest-ranking member of the Federal Reserve, told me. “When you say inflation is falling when it’s rising; when you favor firing Chair Powell for no good reason; when you attack the very data that we depend on to understand reality—you’ve crossed multiple lines with me and I think almost all economists.” (Both Blinder and Mankiw signed the 2017 letter supporting Hassett for the CEA.)

Even so, other economists are sanguine about Hassett’s possible appointment as Fed chair. Hassett might have to parrot Trump’s talking points in order to get the job, they argue, but once he has it, he will be free to make his own independent decisions, at which point his training as a mainstream economist will kick back in. “I don’t think Kevin has changed his views very much over the years,” a conservative economist who has known Hassett for several years and requested anonymity to speak freely, told me. “I think he’s figured out that there is a certain set of positions he has to take if he’s going to retain the confidence of the president so he can do his job effectively.”

In fact, several economists who support Hassett’s nomination told me they believe that his close personal relationship with Trump would be an asset as Fed chair. If Trump started putting pressure on the Fed to lower interest rates to 1 percent, as he has suggested on several occasions, Hassett could calmly explain to the president that this would likely backfire. With anyone else, Trump would surely lash out at such a suggestion, but because Trump knows and trusts Hassett, he will be far more likely to listen and respect the decision. “I think you need someone for the job who has the president’s confidence and trust,” Zandi said. “And I don’t think there are many people other than Kevin who have that.”

This view of Hassett would be more persuasive if he hadn’t published a manifesto heralding Trump as a messianic figure. Notably, The Drift was published back in November 2021, before Trump became the clear front-runner for the 2024 Republican nomination; it would have gone to the printers at a time when Trump’s political career appeared to be over. Throughout the book, Hassett acknowledges that “president Trump is gone now” and urges his fellow Republicans to carry the flame forward. If this was all a ploy to manipulate Trump into someday appointing him Fed chair, it was one hell of a long con.

“He’s absolutely a true believer,” a conservative economist who has known Hassett for many years and requested anonymity to avoid retribution from the White House, told me. “You can’t get up every day and say things you know are wrong and that will hurt the nation and live with that cognitive dissonance. You believe what you need to believe or you quit.”

There’s no big mystery about what Trump wants the next Fed chair to do: immediately cut interest rates. Last month, the president deemed the central bank’s recent rate cut of a quarter of a percentage point “a rather small number” that should have been “at least doubled.” He has called for slashing rates to “1 percent and maybe lower than that” within a year. (They are currently about 3.75 percent.) “I won’t have anybody on the Federal Reserve that when you have good news, that means you automatically raise interest rates through the roof in order to kill inflation,” Trump recently told The Wall Street Journal. On Truth Social last month, the president was even more explicit: “Anybody that disagrees with me will never be the Fed Chairman!”

Hassett has said and done little to demonstrate that he would resist the president’s wishes. In a recent interview meant to calm the nerves of his critics, Hassett asserted that “the job of the Fed is to be independent,” but added that he “would be happy to talk with the president every day until both of us are dead.” He has also endorsed Trump’s call to “at least double” the current pace of cuts, and said that the Fed has “plenty of room” to cut even further.

The last time a president leaned on a loyal Fed chair to juice the economy with lower rates, the results were ugly. In 1970, Richard Nixon appointed one of his top economic advisers, Arthur Burns, to lead the central bank. He made clear that he expected looser monetary policy in the run-up to the 1972 elections, even as prices were rising. Burns delivered, and Nixon won reelection. But that move is now widely understood to have contributed to the double-digit inflation that roiled the country during the ’70s and ended only after a new Fed chair raised interest rates high enough to trigger a recession. “I worry Trump-Hassett would be even worse than Nixon-Burns,” Blinder, a historian of monetary policy, told me. “Burns at least put up some resistance to Nixon’s wishes.”

The chair of the Federal Reserve does not set interest rates unilaterally; they are determined by a 12-member board that votes eight times a year. One thing that’s changed under Trump, though, is the stability of the board from one administration to the next. When he moved to fire Cook, Trump was attempting to establish a broad right to dismiss Fed governors at will and nominate more pliant candidates to replace them.

If the Supreme Court hands Trump a victory in the Cook case, the president will gain effective control over the central bank. Although this eventuality is somewhat unlikely, the consequences could be disastrous. The Fed’s most important asset is its credibility: the belief, held by investors, bond traders, and business leaders, that the central bank will do whatever it takes to keep prices stable—even when that course of action is politically unpopular. Filling the central bank with partisans willing to lower rates on command would erode, if not completely decimate, that trust.

[Read: The man who thinks Medicaid cuts won’t cut Medicaid]

Recent history has not been kind to leaders who have embarked on a similar path. From 2019 to 2022, Turkish President Recep Tayyip Erdoğan packed his country’s central bank with loyalists who dramatically cut interest rates even as prices were rising. In turn, inflation spiraled even higher, at one point reaching 85 percent. Foreign investors panicked, triggering a fire sale of Turkish government bonds. Long-term interest rates spiked, the value of the Turkish lira cratered, and the country appeared on the verge of hyperinflation. Erdoğan changed course in 2023 and brought in new central-bank leadership who jacked interest rates to nearly 50 percent and plunged the country into a recession in a desperate effort to restore credibility. More than two years later, unemployment remains high and inflation is still running at more than 30 percent. “I’ve always mocked those who warn of ‘bond vigilantes’ or say the U.S. is going to end up like Turkey or Argentina,” Baker told me. “But if Trump really did gain control of the Fed, that kind of scenario would suddenly feel a lot less ridiculous."

The powers of a Trumpian Fed would extend beyond control over interest rates. The central bank also decides which institutions can have access to the financial system; control of it would give Trump the power to “debank” enemies of his choosing, including major universities, companies he considers too “woke,” and left-leaning foundations. The Fed also has an emergency lending authority with almost zero practical constraints. “It’s an infinite money pit,” Lev Menand, a professor at Columbia Law School who previously worked for the Federal Reserve Bank of New York, told me in September. Nothing can really stop the Fed “from lending trillions of dollars to the president’s priorities.”

If the Supreme Court rejects Trump’s firing of Cook, as is widely expected, the future of the Fed will be less grim, but hardly sunny. Hassett will then have to persuade a majority of the voting committee to go along with his plans. Burns, who was among the most famous academic economists of his era, was able to pull that off. There’s no guarantee Hassett would be able to do the same.

Even so, as the central bank’s voting board shifted from a technocratic body guided by consensus to a partisan battleground between those attempting to do the president’s bidding and those trying to hold the line, its decisions would become far less predictable. Investors might question whether a divided Fed could successfully navigate a future financial crisis or inflationary spike. In response, they might begin to sell some of their U.S. Treasury holdings, which would, in turn, send interest rates on car, home, and student loans even higher. (The interest rate on long-term U.S. Treasury bonds rose when Hassett emerged as the front-runner early last month, and several major bond investors have expressed concerns over his appointment.) “The Fed is widely viewed as the anchor of stability for the entire U.S. economy—the entire global economy, in fact,” Blinder said. “So if the Fed starts acting erratically, that’s a recipe for all kinds of market volatility.”

For most of his career, Kevin Hassett would no doubt have agreed with that analysis. The fate of the economy could soon depend on whether he still does.

Trump Is Throwing Away America’s AI Dominance

2025-12-12T13:58:00-05:00

Donald Trump launched his political career by insisting that free-trade deals had sacrificed the national interest in the pursuit of corporate profits. One wonders what that version of Trump would make of his most recently announced trade policy. On Monday, he declared on Truth Social that the United States would lift restrictions on selling highly advanced semiconductors to China. In doing so, the president has effectively chosen to cede the upper hand in developing a technology that could determine the outcome of the military and economic contest between the U.S. and its biggest geopolitical rival.

The U.S. is currently ahead in the AI race, and it owes that fact to one thing: its monopoly on advanced computer chips. Several experts told me that Chinese companies are even with or slightly ahead of their American counterparts when it comes to crucial AI inputs, including engineering talent, training data, and energy supply. But training a cutting-edge AI model requires an unfathomable number of calculations at incredible speed, a feat that only a few highly specialized chips can handle. Only one company, the U.S.-based Nvidia, is capable of producing them at scale.

This gives the U.S. not only an economic advantage over China, but a military one. Already, AI systems have revolutionized how armies gather intelligence on enemies, detect troop movements, coordinate drone strikes, conduct cyberattacks, and choose targets; they are currently being used to develop the next generation of autonomous weapons. “Over the next decade, basically everything the military and intelligence communities do is going to some extent be enabled by AI,” Gregory Allen, who worked on the Department of Defense’s AI strategy from 2019 to 2022, told me. This is why, in October 2022, the Biden administration decided to cut off the sale of the most advanced semiconductors to China. The aim of the policy, according to the head of the agency in charge of implementing it, was “to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence, and security services.”

[Rogé Karma: Something ominous is happening in the AI economy]

The policy seems to have done its job. Chinese AI firms tend to explicitly cite export controls as one of the biggest obstacles to their growth. DeepSeek, the Chinese company that earlier this year introduced an AI model nearly as good as those made by the leading American firms, is the exception that proves the rule. At first, DeepSeek’s progress was taken as evidence that restricting China’s access to advanced chips was a failed project. However, the company turned out to have trained its model on thousands of second-tier Nvidia chips that it had acquired via a loophole that wasn’t closed until late 2023. DeepSeek’s AI model would have been even better if the company had had access to more and better Nvidia chips. “Money has never been the problem for us,” Liang Wenfeng, one of DeepSeek’s founders, told a Chinese media outlet last year. “Bans on shipments of advanced chips are the problem.”

At first, Trump seemed eager to tighten the Biden-era restrictions even further. In April, his administration banned the sale of Nvidia’s H20 chip, which the company had designed specifically to sell to China without violating the export ban. But in subsequent months the balance of power in the White House began to tilt toward advisers who were skeptical of export controls, notably Trump’s AI czar, the Silicon Valley investor David Sacks. Meanwhile, Trump began meeting regularly with Nvidia CEO Jensen Huang—who, somewhat understandably, didn’t love that his company was being deprived of the Chinese market. In July, Trump reversed course and lifted restrictions on the H20 chip. And this week, he went even further by removing the ban on the far more powerful H200, Nvidia’s second-best chip.

“This policy will support American Jobs, strengthen U.S. Manufacturing, and benefit American Taxpayers,” Trump declared in his Truth Social post. The strongest case for the shift goes something like this: Restricting the sale of American chips would simply encourage Chinese companies like Huawei to develop their own. Selling chips to China, by contrast, would undercut Chinese chipmakers and keep its AI firms dependent on American technology. Meanwhile, as long as the U.S. maintained controls on the most advanced chips, Chinese AI firms would remain behind. “We are not selling the latest and greatest chips to China, but we can deprive Huawei of having this giant market share in China that they can then use to scale up and compete globally,” Sacks said at an event in July, defending Trump’s decision to lift the H20 ban. “The policy is nuanced and it makes a lot of sense.”

It does not, in fact, make a lot of sense. China is nowhere close to producing chips as advanced as America’s. “This is the most complex device made by most complex machines depending on most complex supply chains in all of human history,” Chris McGuire, a senior fellow at the Council on Foreign Relations and one of the architects of the Biden administration’s export controls, told me. “China is great at making things, but this may just be the one thing they can’t.” According to McGuire’s analysis of Huawei’s own projections, by the end of this decade the Chinese giant still won’t be capable of producing a chip on par with what Nvidia is producing today.

Even if China could one day produce highly sophisticated chips, there’s no evidence that lifting export controls will slow down the country’s effort to do so. In response to Trump’s latest decision, Beijing reportedly plans to limit access to H200s to only the companies that can convincingly justify why they need these foreign chips rather than domestic ones. According to Saif Khan, who served in Joe Biden’s National Security Council, American exports will allow Beijing to bring in just enough foreign chips to enable it to stay competitive in the AI race while continuing to provide state assistance to its own local chip producers. “We’re basically handing them a lifeline,” Khan told me.

Moreover, although the H200 is technically the second-best Nvidia chip, it is still nearly six times more powerful than the H20, the best chip China currently has access to, and is more than capable of training top-performing AI systems. Prior to Trump’s decision, the Institute for Progress, a think tank focused on science and technology policy, estimated that the U.S. would produce 20 to 50 times more “compute power” than China by 2026 if it had kept full chip restrictions in place; unrestricted H200 exports could shrink that gap to almost nothing. “Compute power is the only reason we’ve retained our advantage so far,” Khan, who co-authored that report, told me. “And we’re about to just give it away.”

[Thomas Wright: Trump wasted no time derailing his own AI plan]

Perhaps this would have been justified if Trump had extracted a major concession from China. In fact, the president received nothing from Beijing in return for lifting the export controls. The one concession he did extract was from Nvidia itself: According to Trump, the company will give the U.S. government 25 percent of its revenue from sales to China. (It isn’t yet clear how exactly this will work or whether it is even legal.) Nvidia has said that Chinese companies will need approval from the Commerce Department in order to access H200s, but experts told me that that this measure won’t stop the chips from falling into the hands of the Chinese military or defense contractors; after all, the U.S. has no control over what happens to the chips once they’re in China.

You don’t have to believe that AI companies are creating godlike superintelligence to believe that this technology will be transformative. Already, AI systems are being used to produce self-driving cars, automate coding, develop autonomous weapons systems, allow for instant translation, speed up drug discovery, and enhance manufacturing productivity. The country that emerges as a leader in AI will gain a huge upper hand in many of the most important industries of the future, giving it much greater geopolitical and economic clout. “I think a world where China catches up to us on AI looks fundamentally different in five or 10 years,” Tim Fist, the director of emerging technology policy at the Institute for Progress, told me. “This is about who has the best military, who has soft power, who leads the world in economic growth and scientific progress. Those are the stakes.”

Even some of Trump’s Republican allies are alarmed by what he has done. Just days before the Trump administration’s announcement, a bipartisan group of senators, including Tom Cotton, introduced the SAFE Chips Act, a bill that would have prevented the Commerce Department from loosening chip-export restrictions for two and a half years. The move to lift restrictions on the H200 chips has been assailed by both progressive Democrats such as Senator Elizabeth Warren and MAGA Republicans such as Senators Josh Hawley and Lindsey Graham. But unless Congress actually passes a law, those criticisms will just be empty talk. Perhaps this is a test of whom congressional Republicans fear more: Beijing or Trump.

Something Ominous Is Happening in the AI Economy

2025-12-10T13:13:00-05:00

Updated at 10:15 a.m. ET on December 12, 2025

A company that most people have never heard of is among the year’s best-performing technology firms—and a symbol of the complex, interconnected, and potentially catastrophic ways in which AI companies do business these days.

CoreWeave’s IPO in March was the largest of any tech start-up since 2021, and the company’s share price has subsequently more than doubled, outperforming even the “Magnificent Seven” tech stocks. On Wall Street, CoreWeave is regularly referred to as one of the most important companies powering the AI revolution. In the past few months, it has announced a $22 billion partnership with OpenAI, a $14 billion deal with Meta, and a $6 billion arrangement with Nvidia.

Not bad for a former crypto-mining firm turned data-center operator with zero profits and billions of dollars in debt on its books.

CoreWeave’s business model consists of buying up lots of high-end computer chips, and building or leasing data centers to house those chips. It then rents out those assets to AI companies that need computing power but prefer not to take on the huge up-front costs themselves. If this is straightforward enough, CoreWeave’s financial situation is anything but. The company expects to bring in $5 billion in revenue this year while spending roughly $20 billion. To cover that gap, the company has taken on $14 billion in debt, nearly a third of which comes due in the next year. Many of these loans were issued by private-equity firms at high interest rates, and several use complex forms of financial engineering, such as giving the money to newly formed legal entities created for the explicit purpose of borrowing on CoreWeave’s behalf (more on that later). CoreWeave also faces $34 billion in scheduled lease payments that will start kicking in between now and 2028.

[From the May 2025 issue: The new king of tech]

The money that CoreWeave is making, meanwhile, comes from just a few intimately connected sources. A single customer, Microsoft, is responsible for as much as 70 percent of its revenue; its next biggest customers, Nvidia and OpenAI, might make up another 20 percent, though exact numbers are hard to find. Nvidia is also CoreWeave’s supplier of chips and one of its major investors, meaning CoreWeave is using Nvidia’s money to buy Nvidia’s chips and then renting them right back to Nvidia. OpenAI is also a major CoreWeave investor and has close financial partnerships with both Nvidia and Microsoft.

All of this might make CoreWeave the purest distillation of a trend sweeping through the AI sector. In recent months, tech giants including Amazon, Google, Meta, Microsoft, and Oracle have been making gargantuan investments in new data centers, tying together their fortunes through circular financing deals, and borrowing huge piles of debt from lightly regulated lenders. The companies and their most ardent backers argue that these deals will set them up to capture the limitless profits of the coming AI revolution. But the last time the economy saw so much wealth tied up in such obscure overlapping arrangements was just before the 2008 financial crisis. If the AI revolution fails to materialize on the scale or the timeline that the industry expects, the economic consequences could be very ugly indeed.

The extreme financialization of the AI sector reflects a simple reality: The infrastructure required to train and run AI systems is so expensive that not even the largest companies have enough cash to pay for it all. Spending on data centers is conservatively projected to exceed $400 billion this year, roughly the size of the economy of Denmark; McKinsey estimates that it will reach nearly $7 trillion by 2030. Creative measures are necessary to pay for all of this investment.

At the center of the action is Nvidia, the world’s most valuable company. Companies that train and run AI systems, such as Anthropic and OpenAI, need Nvidia’s chips but don’t have the cash on hand to pay for them. Nvidia, meanwhile, has plenty of cash but needs customers to keep buying its chips. So the parties have made a series of deals in which the AI companies are effectively paying Nvidia by handing over a share of their future profits in the form of equity. The chipmaker has struck more than 50 deals this year, including a $100 billion investment in OpenAI and (with Microsoft) a $15 billion investment in Anthropic. Formally, these transactions don’t obligate the AI companies to spend money on Nvidia’s chips—an Nvidia spokesperson told Bloomberg that the company “does not require any of the companies we invest in to use Nvidia technology”—but in practice, that’s where the money goes.

OpenAI has made its own series of deals, including agreements to purchase $300 billion of computing power from Oracle, $38 billion from Amazon, and $22 billion from CoreWeave. Those cloud providers, in turn, are an important market for Nvidia’s chips. OpenAI has also invested in several smaller AI start-ups, which in exchange have agreed to pay for ChatGPT enterprise accounts. Even when represented visually, the resulting web of interlocking relationships is almost impossible to track.

Together, these arrangements amount to an entire industry making a double-or-nothing bet on a product that is nowhere near profitable. A single company, OpenAI, is simultaneously a major source of revenue and investment for several cloud companies and chipmakers; a close financial partner to Microsoft, Oracle, and Amazon; a significant customer for Nvidia; and a leading investor in AI start-ups. And yet the company is projected to generate only $10 billion this year in revenue—less than a fifth of what it needs annually just to fund its deal with Oracle. It is on track to lose at least $15 billion this year, and doesn’t expect to be profitable until at least 2029. By one estimate, AI companies collectively will generate $60 billion in revenue against $400 billion in spending this year. The one company that is making a lot of money from the AI boom, Nvidia, is doing so only because everyone else is buying its chips in the hopes of obtaining future profits.

The AI companies and their boosters see this as a gamble worth taking. Demand for AI services, they point out, is growing at an exponential rate. According to calculations by Azeem Azhar, a widely cited AI-industry analyst, the direct revenues from AI services have increased nearly ninefold over the past two years. If that pace continues, then it’s only a matter of time before AI companies will begin making record-shattering profits. “I think people who fixate on exactly how these investments are being financed are stuck in an outdated way of thinking,” Azhar told me. “Everyone is assuming that this technology will improve at a linear pace. But AI is an exponential technology. It’s a whole different paradigm.”

If, however, AI does not produce the short-term profits its proponents envision—if its technical advances slow down and its productivity-enhancing effects underwhelm, as a mounting body of evidence suggests may be the case—then the financial ties that bind the sector together could become everyone’s collective downfall. The extreme concentration of stock-market wealth in a handful of tech companies with deep financial links to one another could make an AI crash even more severe than the dot-com crash of the 2000s.

And a stock-market correction might be the least of America’s worries. When equity investments go bad, investors might lose their shirts, but the damage to the real economy is typically contained. (The dot-com crash, for example, didn’t cause mass unemployment.) But the AI build-out is so expensive that it can’t be funded by equity investments alone. To finance their investments, AI companies have taken on hundreds of billions of dollars in debt, a number that Morgan Stanley expects to rise to $1.5 trillion by 2028. When a bunch of highly leveraged loans go bad at the same time, the fallout can spread throughout the financial system and trigger a major recession.

The AI sector’s debt is, of course, not guaranteed to go bad. But the complex way in which it is arranged and packaged isn’t reassuring. For instance, earlier this year, Meta decided to build a new data center in Louisiana that will cost $27 billion. Instead of applying for a loan from a traditional lender, the company partnered with Blue Owl Capital, a private-equity firm, to set up a separate legal entity, known as a special-purpose vehicle, or SPV, that will borrow the money on Meta’s behalf, build the data center according to Meta’s instructions, and then lease it back to Meta. Because Blue Owl is technically the majority owner of the project, this setup keeps the debt off of Meta’s balance sheet, enabling the company to keep borrowing at low interest rates without worrying about a hit to its credit rating. Other companies, including xAI, CoreWeave, and Google, have borrowed or plan to borrow huge sums through similar kinds of arrangements.

Meta has described its arrangement with Blue Owl as an “innovative partnership” that is “designed to support the speed and flexibility required for Meta’s data center projects.” But the reason the credit-rating system exists is to give lenders and investors a clear sense of the risk they are taking on when they issue a loan. A long history exists of companies trying to circumvent that system. In the run-up to the 2008 financial crisis, several major financial institutions used SPVs to keep billions of dollars in household debt off of their balance sheets. Enron, the energy corporation that famously collapsed in 2001 after a massive accounting scandal, used SPVs to mask its shady accounting practices. “When I see arrangements like this, it’s a huge red flag,” Paul Kedrosky, a managing partner at SK Ventures and research fellow at MIT who has written extensively about financial-engineering techniques, told me. “It sends the signal that these companies really don’t want the credit-rating agencies to look too closely at their spending.”

SPVs aren’t the only 2008-era financing tool making a comeback. Data-center debt totaling billions of dollars is being sliced up into “asset-backed securities,” which are then bundled and sold to investors. This is not an inherently problematic way for companies to fund their borrowing. But Kedrosky argues that during periods of heightened speculation, these vehicles turn debt into a financial product whose worth is disconnected from the value of the underlying asset it represents—which can encourage reckless behavior. “Investors see these complex financial products and they say, I don’t care what’s happening inside—I just care that it’s highly rated and promises a big return,” Kedrosky said. “That’s what happened in ’08. And once that kind of thinking takes off, it becomes really dangerous.”

[Rogé Karma: Just how bad would an AI bubble be?]

Then there are the so-called GPU-backed loans. Several data-center builders and cloud providers, including CoreWeave, have obtained multibillion-dollar loans to purchase chips by posting their existing chips as collateral, just as many homeowners used their homes as collateral to take out loans for second and third homes in the 2000s. But, as Advait Arun, an analyst at the Center for Public Enterprise, notes in a recent report on the AI sector’s finances, whether that collateral will hold its value is far from clear. When new chip models are released, the value of older models tends to fall. According to Arun, if the collapse in chip prices were steep enough, a vicious cycle could ensue. As older chips fall in value, any loan using those chips as collateral suddenly becomes at risk of default. Lenders might respond by calling in their loans early, before companies have the revenue to pay them back. At that point, the lender might try to sell the chips to recoup their investment, but that will only flood the market with even more chips, driving down the values of existing chips even further, causing other lenders to call in their loans and so on. “A few months ago I would have told you that this was building toward a repeat of the dot-com crash,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “But all of this debt and financial engineering is making me increasingly worried about a 2008-like scenario.”

The federal government responded to the 2008 crisis by limiting the ability of traditional banks to take on big, risky loans. Since then, however, private-equity firms, which aren’t subject to the same regulatory scrutiny as banks, have gotten more heavily into the lending business. As of early this year, these firms had lent about $450 billion in so-called private credit to the tech sector, including financing several of the deals discussed above. And, according to one estimate, they will lend it another $800 billion over the next two years. “If the AI bubble goes bust, they are the ones that will be left holding the bag,” Arun told me.

A private-credit bust is almost certainly preferable to a banking bust. Unlike banks, private-equity firms don’t have ordinary depositors. In theory, if their loans fail, the groups that will be hurt the most are institutional investors, such as pension funds, university endowments, and hedge funds, limiting the damage to the broader economy. The problem is that nobody knows for certain that this is the case. Private credit is functionally a black box. Unlike banks, these entities don’t have to disclose who they are getting their money from, how much they’re lending, how much capital they’re holding, and how their loans are performing. This makes it impossible for regulators to know what risks exist in the system or how tied they are to the real economy.

Evidence is growing that the links between private credit and the rest of the financial system are stronger than once believed. Careful studies from the Federal Reserve estimate that up to a quarter of bank loans to nonbank financial institutions are now made to private-credit firms (up from just 1 percent in 2013) and that major life-insurance companies have nearly $1 trillion tied up in private credit. These connections raise the prospect that a big AI crash could lead to a wave of private-credit failures, which could in turn bring down major banks and insurers, Natasha Sarin, a Yale Law School professor who specializes in financial regulation, told me. “Unfortunately, it usually isn’t until after a crisis that we realize just how interconnected the different parts of the financial system were all along,” she said.

An AI-induced financial disaster is far from inevitable. Still, given the warning signs, one would hope for the federal government to be doing what it can to reduce the risk of a crisis. Instead, the Trump administration is doing the opposite. In August, the president signed an executive order that instructs federal agencies to loosen regulations so that ordinary 401(k) holders can invest directly in “alternative assets” such as, yes, private credit, a change that could expose a far broader swath of the public to the fallout if AI loans go bad. Perhaps that is the key difference between 2008 and 2025. Back then, the federal government was caught off guard by the crash; this time, it appears to be courting one.

This article originally misstated the amount of debt that comes due for CoreWeave next year.

Democrats Finally Realize It Isn’t 2016 Anymore

2025-11-20T09:01:00-05:00

Something strange is happening on the left. Signs of peace are emerging in the long civil war over economic policy between the progressive and moderate wings of the Democratic Party. In the past two months, a prominent group from each of the two factions has produced its own report on how to win back working-class voters—a problem that, notwithstanding Democrats’ strong results earlier this month, has grown more acute since Donald Trump was first elected, in 2016. The result, far from a battle of dueling worldviews, is a surprising amount of consensus. Although they might not put it this way—and although fierce debates still rage over cultural differences—members of the far left and the center seem to have concluded that, for Democrats to win elections, each side needs to become more like the other.

The first report, “Democrats’ Rust Belt Struggles and the Promise of Independent Politics,” was produced by a constellation of progressive organizations and labor groups—some of which were founded to channel the energies of the 2016 Bernie Sanders campaign—along with the socialist magazine Jacobin. And yet the report does not call for classic Sandersian policies such as Medicare for All and universal child care; indeed, it warns against big redistributive government interventions. Its authors point out that such programs are “often met with skepticism by working-class voters, who may distrust government-administered systems they perceive as inefficient, overly bureaucratic, or disproportionately benefiting others.” This will sound obvious to some readers, but coming from the Bernie left, it’s a major concession.

The report argues that Democrats should focus instead on policies that directly lower costs, rein in excessive wealth, and shape how resources are distributed in the first place—often referred to as “predistribution.” To that end, it recommends such progressive but non-radical ideas as capping drug prices, raising taxes on the superrich, upgrading the country’s infrastructure, and cracking down on corporate price gouging. “These are the kinds of policies that align most closely with working-class values,” Jared Abbott, the director of the Center for Working Class Politics and a lead author of the “Rust Belt Struggles” report, told me. “It’s this sense of, We don’t just want a handout. We want to be able to provide for our families and have the dignity and respect that comes with that.”

“Deciding to Win” ends up in a similar place, starting from the opposite direction. Democratic moderates have long been associated with such technocratic ’90s-style ideas as means-tested programs, business tax credits, and deregulation. But the report—which drew input from über-establishment Democrats including James Carville, David Axelrod, and David Plouffe—concludes that many of these policies are political losers. So, too, are some of the buzzier new centrist-coded policies, such as loosening land-use regulations, paring back environmental-review laws, and subsidizing electric-vehicle purchases.

Meanwhile, the moderate report’s list of Democratic proposals worth running on is full of ideas well to the left of even Barack Obama’s agenda, including many of the same policies recommended by the “Rust Belt Struggles” report as well as other longtime progressive priorities, such as universal paid family leave. “Don’t get me wrong: This isn’t exactly a socialist wish list,” Simon Bazelon, the lead author of the report, told me. “But I think it may come as a surprise to everyone just how much there is for progressives to like in here.”

[David A. Graham: Are the Democrats overthinking this?]

After the 2016 election, Democrats plunged into a prolonged struggle between a socialism-curious left in favor of Medicare for All, a Green New Deal, and free college, and moderate capitalists who preferred tax credits and means-tested programs. That clash of big, sweeping ideologies is nowhere to be found in these reports.

How did two camps with such different worldviews arrive at such similar recommendations this time around? The answer may be that both groups were committed to figuring out what policies are actually popular among voters. This is surprisingly rare in politics. During the 2020 Democratic primary, leftists and centrists tended to assert that their ideal policy agendas also happened to be beloved by the public; both groups cited their own carefully selected polls as evidence. This gave the impression that almost every Democratic policy was, somehow, widely popular with voters.

In recent years, however, an emerging body of evidence has found that single-issue polls—in which a pollster asks, for example, “Do you support Medicare for All?”—tend to greatly overestimate real-world voter support. (This is in part because so many of them are commissioned by advocacy groups for the purpose of pushing a particular agenda.) Policies that garner supermajority support in polls, such as universal background checks and school-choice laws, regularly fail to gain even a simple majority when they appear on the ballot.

To avoid those traps, the authors of both reports used more rigorous methods in an effort to figure out which policies actually resonated with voters. “Deciding to Win” gave respondents the kind of context they would likely get if the idea were proposed in the real world, such as which party tends to favor it, the arguments for and against, and how much it would cost. “Rust Belt Struggles” required voters to rank different policies against one another to determine their relative popularity. By doing that, the groups ended up with a more credible picture of how voters might respond to Democratic policies in the context of an election.

The reports converged not only on policy specifics but on how Democrats should talk about economic issues. On this point, the party has long been divided between economic populists such as Sanders and Elizabeth Warren, who tend to rail against corporations, billionaires, and the system more broadly, and economic pragmatists including Obama and Joe Biden, who prefer the more positive-sum language of equality, fairness, and opportunity. But the report from the party’s moderate wing ends up endorsing the populist approach—which in 2025 means a focus on affordability for ordinary citizens, and strong criticism of powerful individuals and corporations that benefit from the status quo.

“In our view, the case for a more anti-establishment posture is strong,” the “Deciding to Win” authors write, citing reams of evidence showing that majorities of voters are dissatisfied with the state of the country, distrusting of institutions, and convinced that the economic system is rigged in favor of the wealthy. In that kind of political environment, Democratic messaging centered on concepts such as the American dream and Kamala Harris’s “opportunity economy” has become out of touch. “Deciding to Win” suggests that even those who propose a more moderate economic agenda should embrace populist rhetoric to tap into these prevailing attitudes. “Being moderate does not mean running on a defense of the political establishment, elites, corporate interests, or the status quo,” the report argues. “It also does not mean having a mild-mannered temperament or taking the centrist position on every issue.”

The convergence on both policy and rhetoric is already beginning to occur in the real world. The latest policy agenda released by the congressional Progressive Caucus calls for raising the federal minimum wage and extending federal drug-price negotiation, but doesn’t mention Medicare for All or universal child care. Moderates, meanwhile, have begun to sound a lot more like their progressive counterparts. In her successful campaign for governor, New Jersey’s Mikie Sherrill, a centrist, adopted distinctly populist themes, including a utility-rate freeze. She touted an “affordability agenda” that promised to lower prices by going after “health care middlemen who make your prescriptions unaffordable, the monopolies that hike up mortgage and rental prices, and the grid operators who continue to raise energy costs without accountability.”

If the Democratic Party appears to be marching toward something of a big-tent consensus on economics, disagreement remains over how to approach social and cultural issues.

According to the moderates, the root cause of working-class disaffection with the Democratic Party is the fact that the party swung too far to the left on issues such as crime and immigration. “Deciding to Win” notes that, as Democrats have taken more progressive positions on a range of social and cultural issues over the past decade, the number of voters who say the party is “too liberal” has spiked, voter trust in Democrats on these issues has plummeted, and voters who self-identify as ideological “moderates” and “conservatives” have abandoned it. “When you put all of this together, it tells a really clear story,” Bazelon told me. “The Democratic Party has moved significantly to the left on a number of issues that are important to voters, and lots of voters have moved away from our party in response.” The only way to win back these voters, the report concludes, is for Democrats to adopt more conservative cultural and social stances that may infuriate their base but align with the views of working-class voters in a general election.

[Jonathan Chait: Democrats still have no idea what went wrong]

This approach, the moderates argue, has worked in the past. In 1992, Bill Clinton ran as a tough-on-crime Democrat and went out of his way to distance himself from left-wing racial-justice advocates. While running for president in 2008, Obama refused to support gay marriage, and throughout his presidency clashed with immigration advocates who considered his positions to be overly restrictionist. “It’s extremely difficult to find examples of Democratic candidates who win in swing districts without taking more conservative positions on some issues—particularly immigration and crime,” Bazelon told me. “Over and over again, the candidates we see winning tough races do so by breaking with the national party.”

Many on the left have a different view. “Even on issues like immigration, populists don’t need to ape Trump to win Rust Belt voters,” the “Rust Belt Struggles” report declares. Although it acknowledges that some voters may think the party is too far left, it argues that “the cultural critique of the party is ancillary to many voters’ core criticism: that the party is beholden to elites, doesn’t deliver, doesn’t listen, and doesn’t fight.” So long as Democrats adopt a relentless eat-the-rich message, recruit working-class candidates who embody genuine anger at the status quo, and offer policies that speak to voters’ real material concerns, this theory holds, they can win over those voters without needing to substantively change their positions on social issues.

The progressives have their own examples. They point out that Bernie Sanders is the most popular politician in the Democratic Party. A less obvious but perhaps even more important case study is Dan Osborn, a 2024 independent U.S. Senate candidate who nearly upset a Republican incumbent in Nebraska, a state that Trump won by 20 points, by running on an aggressive economically populist message. “What we think is vital about them is that they exude a kind of populist anger,” Abbott, the “Rust Belt Struggles” report’s lead author, told me. “They aren’t just saying the words. This is deep in their bones. They’re pissed off; they’re fed up. People relate to that. It’s more important than even the policies.”

Here, the weight of the evidence supports the moderates. Osborn himself ran as not just an economic populist but an immigration hawk. His 2024 campaign ads, for instance, featured lines such as “Social Security to illegals? Who would be for that?” and “If Trump needs help building the wall, well, I’m pretty handy.” Sanders, too, has routinely taken immigration stances that make many on the party’s left uncomfortable, including calling open borders a “Koch Brothers proposal” during his 2016 campaign and more recently praising Trump’s approach to the border.

[Marc Novicoff: Democrats don’t seem willing to follow their own advice]

Still, the fact that this is the central debate among Democrats is revealing. The first time Democrats lost to Trump, in 2016, the party plunged into a grueling battle over economic ideology that pitted democratic socialism against reforming capitalism. Democrats still have their share of disagreements. But, for the time being, they might actually have managed to find an economic message they can agree on.

Mamdani Has a Point About Rent Control

2025-11-02T08:25:00-05:00

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Few policies disgust academic economists quite like rent control. In the 1970s, the Swedish economist Assar Lindbeck famously described it as the “most efficient technique presently known to destroy a city—except for bombing.” In a 2012 poll of prominent economists, just 2 percent said that rent-control laws have had “a positive impact” on the “amount and quality of broadly affordable rental housing in cities that have used them.” (The Nobel Prize winner Richard Thaler sarcastically proposed a follow-up survey question: “Does the sun revolve around the earth?”)

Unsurprisingly, then, economists and policy wonks have almost universally disparaged New York City mayoral candidate Zohran Mamdani’s proposal to “freeze the rent.” Headlines like “Zohran Mamdani’s Socialist Housing Plan Could Crash New York’s Rickety Rental Market” and “A Rent Freeze Is Not the Answer to New York’s Housing Crisis” have proliferated. My colleague Michael Powell, summing up the prevailing expert sentiment, described the proposal (among others) as “magic realism.”

But maybe his proposal is closer to political realism. The expert consensus holds that the way to bring down housing costs is to build more housing; and the best way to do that is to remove the regulatory barriers to a construction boom. When I interviewed Mamdani about his housing plans, however, he emphasized that although more building is necessary, it is not sufficient—or sufficiently fast. “We absolutely have to expedite the process by which we build new housing,” he told me. “But we can’t do that unless we also address people’s immediate needs.”

In many places, especially those where the housing shortage is most severe, the politics of building new units is toxic. The perceived costs of development often inspire intense opposition while the benefits take years, even decades, to materialize. This dynamic cannot be neatly separated from ideal housing policy. Mamdani argues that “freeze the rent” is not just a way of delivering relief from exorbitant housing costs; it is the only way to get enough voters on board with a growth agenda. A growing body of real-world evidence suggests that he has a point.

The case against rent control is simple and powerful: Housing is too expensive because there isn’t enough of it, and rent control makes that shortage worse. Most studies find that, by limiting how much profit developers can earn, rent caps make them less likely to build new housing. Meanwhile, if landlords can’t raise rents enough to cover the rising costs of maintaining their existing units, then those apartments will fall into disrepair or be taken off the market.

Among experts, the preferred solution to the housing crisis is to relax regulations around what kinds of housing can be built. But this approach, often called YIMBYism—“Yes in My Backyard”—has some practical problems. One is popularity. Although reams of empirical evidence show that building new homes tends to reduce housing prices in a given area, most city dwellers have the opposite intuition about it. They associate new development with rising rents, a higher cost of living, and displacement of existing residents—also known, collectively, as gentrification—and often oppose new development on those grounds.

Another problem is timing: Even if laws are passed to allow more housing to be built, people won’t feel the results for years. “This is the core challenge for the YIMBY worldview,” Christopher Elmendorf, a law professor at UC Davis who has conducted several surveys on voter attitudes toward housing development, told me. “How do you get voters on board with an agenda that violates just about every law of electoral politics?”

One answer, somewhat counterintuitively, might be rent control. In a 2022 paper, the political scientists Anselm Hager, Hanno Hilbig, and Robert Vief used the introduction of a 2019 rent-control law in Berlin to study how access to rent-controlled apartments influenced local attitudes toward housing development. The fact that the new law included an arbitrary cutoff date (it applied only to buildings constructed before January 1, 2014) allowed the authors to create a natural experiment, comparing otherwise-similar tenants in otherwise-similar buildings.

Heading into the experiment, the authors hypothesized that having access to a rent-controlled apartment would keep tenants in their existing units longer and therefore make them more resistant to neighborhood change. Instead, they found the opposite: Residents who lived in rent-controlled apartments were 37 percent more likely to support new local-housing construction than those living in noncontrolled units. (Hilbig cautioned to me that “there is some uncertainty, since the confidence intervals are really large,” but that “the effect is definitely sizable.”) This gap was largest in neighborhoods that had experienced the sharpest rental-price increases over the previous decade. The authors concluded that by guaranteeing price stability, rent control eases residents’ fears that new housing will make their current living situation unaffordable. “The takeaway for me is that when people feel protected, when they feel secure, they become much less scared of change,” Hilbig told me.

[Read: New York is full]

Rent control is also a clear political winner. Depending on the poll, it garners anywhere from 75 to 85 percent support among voters. In a 2024 survey of 5,000 voters across the country, Elmendorf and his co-authors gave respondents a series of choices between several different state-level policy platforms—each consisting of a random set of positions drawn from 39 different policy issues—and calculated how likely each issue was to cause respondents to switch their support from one platform to another. To the authors’ surprise, they found that rent control is, as Elmendorf put it to me, “one of the most important issues in state politics today,” more salient to voters at the state level than even such hot-button issues as immigration and policing. And, unlike the process of building new housing, passing a rent-control law can deliver tangible benefits almost immediately.

Taken together, the Berlin study and Elmendorf’s survey suggest that rent control could be very useful to a politician seeking to woo voters, and to make residents more open to new housing development. (This of course still leaves the question of who builds or invests in new housing—more on that in a minute.) Mamdani seems to understand this dynamic. “Freeze the rent,” his signature proposal, would halt rent increases for people living in the roughly 30 percent of city units designated as “rent stabilized” under law, whose annual rent increases are determined every year by a board appointed by the mayor. (This policy generally does not apply to either existing market-rate units or new units.) But his agenda also includes a commitment to use city funds to build 200,000 new units of housing over 10 years—a target that would slightly exceed the 185,000 new multifamily units of all kinds built in the city from 2010 to 2020. Mamdani has also expressed support for a YIMBY wish list of policies, including streamlining permitting rules, up-zoning wealthy neighborhoods, allowing apartment buildings to be built near transit, and relaxing regulations to allow for cheaper construction.

“It’s important that when a New Yorker sees housing constructed in their neighborhood, they know that this is actually part of a larger housing plan,” Mamdani told me, citing both rent control and stronger tenant protections. “And so the arrival of additional neighbors won’t be considered something that would then expedite displacement within that same neighborhood.”

Whether Mamdani is capable of pulling off this synthesis, or even willing to try, is unclear. He might not even be able to “freeze the rent” in the first place. The annual price increase of a rent-stabilized apartment is set by the Rent Guidelines Board, a government agency that New York’s outgoing mayor, Eric Adams, is reportedly considering packing with appointees who are unlikely to support Mamdani’s agenda, and Mamdani might not have the legal authority to replace them.

Perhaps more important, Mamdani has sent mixed signals on just how committed he is to building more market-rate housing. His platform states that he will meet his housing goals by tripling the city’s production of “publicly subsidized, permanently affordable, union-built, rent-stabilized homes”—an incredibly narrow type of housing that is extremely difficult to produce at scale in New York City. In interviews, Mamdani has hedged on this position, claiming that he has changed his mind on “the role of the private market in housing construction.” Even so, he has continued to send contradictory messages, including his refusal to take a position on several pro-housing ballot measures. “The truth is that no one really knows what he’s going to do,” Alex Armlovich, a senior housing analyst at the Niskanen Center and a member of the Rent Guidelines Board, told me. “We’re all left staring at these vague, conflicting statements he’s made and trying to make sense of them.” (Armlovich said that whether he would vote for a rent freeze would be “context dependent.”)

Setting aside the specifics of New York City government, though, Mamdani may have hit upon a winning political formula for cities and states struggling to respond to the housing crisis. When I put Mamdani’s argument about rent control to YIMBY organizers—the people who are working to pass pro-housing laws in cities and states across the country—I expected them to roll their eyes. Instead, they lit up. In nearly every blue state that has passed significant pro-housing legislation, they explained, introducing some form of rent control has been crucial to getting those bills across the finish line. “It was absolutely essential,” Alex Brennan, the executive director of Futurewise, a Washington State think tank that helped spearhead an ambitious housing-reform package that passed in May, told me. “Saying that we’re going to have a lot more housing five or 10 years from now isn’t enough. Legislators want to know: What happens in the meantime? What are we going to do for those folks whose rents are increasing by double digits every year? We needed an answer for those people.”

[Ron Davis: The biggest myth about the YIMBY movement]

I heard similar stories from organizers in other states, including California and Oregon. “We’ve seen this over and over,” Henry Honorof, the director of the coordinating team of Welcoming Neighbors Network, a national umbrella organization for dozens of YIMBY-aligned organizations, told me. “When major expansions in housing availability in blue places succeed, they usually pass alongside tenant protections and rent stabilization.”

The same dynamic appears to apply in New York City. Andrew Fine, the policy director of Open New York, the city’s most prominent YIMBY organization, told me that outgoing Mayor Adams’s relative success in getting housing built had much to do with the passage of a 2019 law that strengthened tenant protections. The law, Fine said, made progressive legislators more comfortable with pro-building policies. Fine spent much of the 2010s working on housing policy for the city. He watched as concerns around gentrification and displacement stymied dozens of proposed housing projects and efforts to change the city’s zoning laws. “That fear pervaded every single housing conversation in the city,” he told me. “We learned very quickly that you’re not going to get any support for new housing in an environment where people are scared of being priced out.”

Rent control might be good for getting voters on board with more building, but that doesn’t make it good policy on its own. Rent-control laws must be carefully designed to avoid the outcomes that economists have long warned about. Most of the recent state-level rent-control laws, including those in California, Oregon, and Washington, tie their annual rent caps to the overall inflation rate so that landlords can keep up with their own rising costs. These laws also typically allow landlords to raise the rent to the market rate—subject to rent control moving forward—when a tenant moves out, which helps keep those units on the market. Mamdani’s rent freeze would have neither of these qualities. (When I pointed that out, he said he was “not blind to the pressure that landlords face” and would find ways to reduce their major expenses, which include insurance premiums, utility bills, and property taxes.)

Rent control can also scare off investors and developers, even if the policy doesn’t apply to new construction, as Montgomery County, Maryland, learned when it passed a rent-stabilization law in 2023 only to watch new-housing investment plummet. Avoiding a similar outcome in New York, and other cities, might require some extremely skillful diplomacy, if it can be done at all. “What my investors care about is whether a given political climate is going to be hospitable to their investments not just tomorrow, but five or 10 years from now,” Bruce Fairty, the chief development officer at Cypress Equity Investments, a national housing developer, told me. “A policy like ‘Freeze the rent’ would almost certainly have a chilling effect.”

Another risk inherent to pairing a populist, fast-acting policy like freeze the rent with a series of politically tricky, slow-acting technocratic reforms, like eliminate height requirements for single-stair buildings, is that the technocratic reforms might never get done. Making it easier to build new homes requires upsetting powerful actors who benefit from the existing system. Tellingly, Mamdani has refused to take a position on a set of pro-housing New York City ballot measures, on the grounds that he is having “active conversations with labor leaders, elected officials, and other stakeholders.” If Mamdani becomes mayor and can’t or won’t defy the interest groups that oppose housing reform, housing won’t get built. Meanwhile, repealing a rent freeze would be a nightmare for any politician who tries it. Without enough new construction, the housing crisis will only get worse over time, tempting city leaders to engage in even more egregious forms of rent control, which will in turn make building homes even harder. This could trigger the kind of cycle that leads economists to compare rent control to bombing.

So combining rent control with YIMBY policies is no sure thing. But the status quo, in New York and many other cities, is intolerable. The housing crisis has metastasized for years while leaders have failed to figure out the politics needed to address it. If rent control offers a way to break through that impasse, it might be worth the gamble.

Trump Is Getting Closer to Having an ‘Infinite Money Pit’

2025-09-22T07:00:00-04:00

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President Donald Trump could be close to taking over the Federal Reserve. On September 9, a federal district judge blocked Trump’s effort to remove Lisa Cook as a Federal Reserve governor; on Thursday, the administration petitioned the Supreme Court to allow the firing to go through. If the high court ends up siding with the administration, then Trump will have a clear path to filling the central bank with loyalists willing to vote the way he directs them to.

So far, most of the hand-wringing over this possibility has centered on Trump’s desire to dramatically cut interest rates, which could juice the economy and improve the GOP’s political prospects in the short term, but make inflation worse and destroy the Fed’s credibility in the long term. But the Fed has far more power than just setting rates; in fact, setting rates is the least of what it can do. The central bank determines the supply of money flowing through the economy, decides which institutions can have access to the financial system, and can print and spend money at will. If Trump takes control of the Fed, he will have attained extraordinary power to reward his friends and destroy his enemies.

The Constitution makes clear that Congress, not the president, holds the power to authorize new government spending. But a major exception to this rule exists. In 1932, Congress gave the Federal Reserve the power to lend money to “any individual, partnership, or corporation” during “unusual or exigent circumstances.” The Fed used the emergency-lending provision to make a few modest loans during the Great Depression. The power then lay dormant until the 2008 financial crisis, when the central bank issued hundreds of billions of dollars in loans in an effort to rescue major financial institutions on the brink of collapse. During the height of the coronavirus pandemic, the Fed went even further, offering trillions of dollars in loans not just to big banks but to corporations, small businesses, nonprofits, and even city governments.

[Lev Menand: The Supreme Court made a bad bet]

Several legal experts told me that even this expansive use of the Fed’s lending authority was relatively restrained compared with what the central bank could do. Federal law imposes virtually no limits on what kind of institutions the Fed can lend to, how much money it can lend, or whether the loans ever need to be paid back. Whether any party would even have standing to sue the Fed for abusing its lending authority is unclear. As part of the 2010 Dodd-Frank financial-reform act, Congress imposed a few restrictions, but these turned out to be vague and easily gamable. “There are really no limits to this power,” Aaron Klein, a senior fellow at the Brookings Institution and former Treasury official who helped draft the relevant provisions of Dodd-Frank, told me. “The Fed can basically lend however much it wants, to whoever it wants, whenever it wants.”

Perhaps Trump would instruct his Fed appointees to exercise that power with restraint, lending only as needed to guide the economy through truly perilous circumstances. But little would stop him from instead treating the bank’s lending power as a bottomless slush fund. He could direct money to favored industries, such as crypto, or even his own businesses. He could reward media outlets that give him favorable coverage, companies that donate to Republican campaigns, and even the budgets of local officials who promote his agenda. If Democrats in Congress shut down the government to limit funds for ICE, say, he could send hundreds of billions of dollars to private contractors to keep operations moving. “It’s an infinite money pit,” Lev Menand, a professor at Columbia Law School who previously worked for the Federal Reserve Bank of New York, told me. “There’s really nothing to stop the administration from lending trillions of dollars to the president’s priorities.”

Perhaps even more alarming, control of the Fed would give the president a powerful weapon for punishing his enemies. The Fed is the central node of the U.S. financial system. Every major bank in the country holds a master checking account at the Fed, which they depend on to make and receive payments, manage their reserves, and access credit. The central bank, in turn, operates as the country’s main financial regulator: It determines whether banks are in compliance with existing laws on financial risk management and illicit transactions, for example, and has various ways to enforce that compliance, ultimately backed by the threat of cutting off access to the financial system altogether.

The Fed has considerable discretion over how it uses this authority, giving it enormous power over not only the country’s banks but all of the individuals, businesses, and organizations that require any kind of financial services. The response to marijuana legalization by one regional Fed branch is an instructive example. When Colorado legalized recreational marijuana in 2012, the Kansas City Fed, which has regulatory jurisdiction over the state, declared that banks offering financial services to cannabis sellers were in violation of federal law, implying they could lose their master accounts at the Fed. As a result, the state’s banks largely refused to provide services to marijuana businesses, forcing them to choose between dealing in cash, banking illegally, or going out of business. Colorado tried to fix this by passing a law authorizing the creation of special “marijuana financial-services cooperatives,” to provide credit for the industry, but the Fed refused to allow the new institutions access to the federal financial system. When one of the newly formed credit unions sued, the courts sided with the central bank.

How might Trump use the power to “debank,” as it is sometimes called? Take the administration’s threats against prominent left-leaning donors and organizations such as George Soros’s Open Society Foundations and the Ford Foundation following the murder of Charlie Kirk. Trump could designate them as a “domestic terrorist threat” and direct the Fed to cut off any bank that does business with them. “That kind of thing is basically what happened with cannabis,” Klein told me. “It isn’t hard to imagine the same powers being used to go after Trump’s enemies.”

[Rogé Karma: Meddling with the Fed could backfire on Trump]

The tools Trump has used so far to bend institutions to his will, such as withholding federal funding, are powerful, but they pale in comparison to the power of debanking. An organization subjected to such treatment would be unable to pay its employees, manage its endowment, or receive funding from government or private sources. An individual would be unable to receive direct deposits from their employer, get a mortgage from a bank, or pay their bills. “If you’re made a persona non grata by the Fed, that’s completely debilitating,” Menand told me. “It’s the financial equivalent of cutting someone off from the electricity grid.”

Several legal experts told me that, given the broad discretion the courts have given the Fed over both lending and financial regulation, the judiciary would be unlikely to stop Trump from taking full advantage of the central bank’s powers. In theory, the market itself could provide the necessary check: Reckless actions could cause investors to panic and tank the stock and bond markets, forcing the administration to back down. But control of the Fed would also give the administration plenty of tools to placate the markets with low interest rates and easy money. The only sure check on Trump’s power would be Congress stepping in to amend the Federal Reserve Act. But this would require an implausible two-thirds majority vote to overcome a presidential veto in both chambers.

And so the most likely way to prevent these scenarios from unfolding is for the Supreme Court to rule that the firing of Lisa Cook was illegal, preventing Trump from taking over the central bank in the first place. If it instead green-lights Trump’s efforts, the scale of what could ensue is difficult to predict. Most of the experts who have worked within the Fed or studied it closely have never contemplated what could happen if an institution with so much unchecked power came under the control of one man. Perhaps it’s time to start imagining.

Just How Bad Would an AI Bubble Be?

2025-09-07T07:30:00-04:00

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If there is any field in which the rise of AI is already said to be rendering humans obsolete—in which the dawn of superintelligence is already upon us—it is coding. This makes the results of a recent study genuinely astonishing.

In the study, published in July, the think tank Model Evaluation & Threat Research randomly assigned a group of experienced software developers to perform coding tasks with or without AI tools. It was the most rigorous test to date of how AI would perform in the real world. Because coding is one of the skills that existing models have largely mastered, just about everyone involved expected AI to generate huge productivity gains. In a pre-experiment survey of experts, the mean prediction was that AI would speed developers’ work by nearly 40 percent. Afterward, the study participants estimated that AI had made them 20 percent faster.

But when the METR team looked at the employees’ actual work output, they found that the developers had completed tasks 20 percent slower when using AI than when working without it. The researchers were stunned. “No one expected that outcome,” Nate Rush, one of the authors of the study, told me. “We didn’t even really consider a slowdown as a possibility.”

No individual experiment should be treated as the final word. But the METR study is, according to many AI experts, the best we have—and it helps make sense of an otherwise paradoxical moment for AI. On the one hand, the United States is undergoing an extraordinary, AI-fueled economic boom: The stock market is soaring thanks to the frothy valuations of AI-associated tech giants, and the real economy is being propelled by hundreds of billions of dollars of spending on data centers and other AI infrastructure. Undergirding all of the investment is the belief that AI will make workers dramatically more productive, which will in turn boost corporate profits to unimaginable levels.

On the other hand, evidence is piling up that AI is failing to deliver in the real world. The tech giants pouring the most money into AI are nowhere close to recouping their investments. Research suggests that the companies trying to incorporate AI have seen virtually no impact on their bottom line. And economists looking for evidence of AI-replaced job displacement have mostly come up empty.

None of that means that AI can’t eventually be every bit as transformative as its biggest boosters claim it will be. But eventually could turn out to be a long time. This raises the possibility that we’re currently experiencing an AI bubble, in which investor excitement has gotten too far ahead of the technology’s near-term productivity benefits. If that bubble bursts, it could put the dot-com crash to shame—and the tech giants and their Silicon Valley backers won’t be the only ones who suffer.

Almost everyone agrees that coding is the most impressive use case for current AI technology. Before its most recent study, METR was best known for a March analysis showing that the most advanced systems could handle coding tasks that take a typical human developer nearly an hour to finish. So how could AI have made the developers in its experiment less productive?

The answer has to do with the “capability-reliability gap.” Although AI systems have learned to perform an impressive set of tasks, they struggle to complete those tasks with the consistency and accuracy demanded in real-world settings. The results of the March METR study, for example, were based on a “50 percent success rate,” meaning the AI system could reliably complete the task only half the time—making it essentially useless on its own. This gap makes using AI in a work context challenging. Even the most advanced systems make small mistakes or slightly misunderstand directions, requiring a human to carefully review their work and make changes where needed.

This appears to be what happened during the newer study. Developers ended up spending a lot of time checking and redoing the code that AI systems had produced—often more time than it would have taken to simply write it themselves. One participant later described the process as the “digital equivalent of shoulder-surfing an overconfident junior developer.”

Since the experiment was conducted, AI coding tools have gotten more reliable. And the study focused on expert developers, whereas the biggest productivity gains could come from enhancing—or replacing—the capabilities of less experienced workers. But the METR study might just as easily be overestimating AI-related productivity benefits. Many knowledge-work tasks are harder to automate than coding, which benefits from huge amounts of training data and clear definitions of success. “Programming is something that AI systems tend to do extremely well,” Tim Fist, the director of Emerging Technology Policy at the Institute for Progress, told me. “So if it turns out they aren’t even making developers more productive, that could really change the picture of how AI might impact economic growth in general.”

[Read: Tesla wants out of the car business]

The capability-reliability gap might explain why generative AI has so far failed to deliver tangible results for businesses that use it. When researchers at MIT recently tracked the results of 300 publicly disclosed AI initiatives, they found that 95 percent of projects failed to deliver any boost to profits. A March report from McKinsey & Company found that 71 percent of companies reported using generative AI, and more than 80 percent of them reported that the technology had no “tangible impact” on earnings. In light of these trends, Gartner, a tech-consulting firm, recently declared that AI has entered the “trough of disillusionment” phase of technological development.

Perhaps AI advancement is experiencing only a temporary blip. According to Erik Brynjolfsson, an economist at Stanford University, every new technology experiences a “productivity J-curve”: At first, businesses struggle to deploy it, causing productivity to fall. Eventually, however, they learn to integrate it, and productivity soars. The canonical example is electricity, which became available in the 1880s but didn’t begin to generate big productivity gains for firms until Henry Ford reimagined factory production in the 1910s. Some experts believe that this process will play out much faster for AI. “With AI, we’re in the early, negative part of the J-curve,” Brynjolfsson told me. “But by the second half of the 2020s, it’s really going to take off.” Anthropic CEO Dario Amodei has predicted that by 2027, or “not much longer than that,” AI will be “better than humans at almost everything.”

These forecasts assume that AI will continue to improve as fast as it has over the past few years. This is not a given. Newer models have been marred by delays and cancellations, and those released this year have generally shown fewer big improvements than past models despite being far more expensive to develop. In a March survey, the Association for the Advancement of Artificial Intelligence asked 475 AI researchers whether current approaches to AI development could produce a system that matches or surpasses human intelligence; more than three-fourths said that it was “unlikely” or “very unlikely.”

OpenAI’s latest model, GPT-5, was released early last month after nearly three years of work and billions in spending. (The Atlantic entered into a corporate partnership with OpenAI in 2024.) Before the launch, CEO Sam Altman declared that using it would be the equivalent of having “a legitimate Ph.D.-level expert in anything” at your fingertips. In a few areas, including coding, GPT-5 was indeed a major step up. But by most rigorous measures of AI performance, GPT-5 turned out to be, at best, a modest improvement over previous models.

The dominant view within the industry is that it is only a matter of time before companies find the next way to supercharge AI progress. That could turn out to be true, but it is far from guaranteed.

Generative AI would not be the first tech fad to experience a wave of excessive hype. What makes the current situation distinctive is that AI appears to be propping up something like the entire U.S. economy. More than half of the growth of the S&P 500 since 2023 has come from just seven companies: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. These firms, collectively known as the Magnificent Seven, are seen as especially well positioned to prosper from the AI revolution.

That prosperity has largely yet to materialize anywhere other than their share prices. (The exception is Nvidia, which provides the crucial inputs—advanced chips—that the rest of the Magnificent Seven are buying.) As The Wall Street Journal reports, Alphabet, Amazon, Meta, and Microsoft have seen their free cash flow decline by 30 percent over the past two years. By one estimate, Meta, Amazon, Microsoft, Google, and Tesla will by the end of this year have collectively spent $560 billion on AI-related capital expenditures since the beginning of 2024 and have brought in just $35 billion in AI-related revenue. OpenAI and Anthropic are bringing in lots of revenue and are growing fast, but they are still nowhere near profitable. Their valuations—roughly $300 billion and $183 billion, respectively, and rising—are many multiples higher than their current revenues. (OpenAI projects about $13 billion in revenues this year; Anthropic, $2 billion to $4 billion.) Investors are betting heavily on the prospect that all of this spending will soon generate record-breaking profits. If that belief collapses, however, investors might start to sell en masse, causing the market to experience a large and painful correction.

During the internet revolution of the 1990s, investors poured their money into basically every company with a “.com” in its name, based on the belief that the internet was about to revolutionize business. By 2000, however, it had become clear that companies were burning through cash with little to show for it, and investors responded by dumping the most overpriced tech stocks. From March 2000 to October 2002, the S&P 500 fell by nearly 50 percent. Eventually, the internet did indeed transform the economy and lead to some of the most profitable companies in human history. But that didn’t prevent a whole lot of investors from losing their shirts.

The dot-com crash was bad, but it did not trigger a crisis. An AI-bubble crash could be different. AI-related investments have already surpassed the level that telecom hit at the peak of the dot-com boom as a share of the economy. In the first half of this year, business spending on AI added more to GDP growth than all consumer spending combined. Many experts believe that a major reason the U.S. economy has been able to weather tariffs and mass deportations without a recession is because all of this AI spending is acting, in the words of one economist, as a “massive private sector stimulus program.” An AI crash could lead broadly to less spending, fewer jobs, and slower growth, potentially dragging the economy into a recession. The economist Noah Smith argues that it could even lead to a financial crisis if the unregulated “private credit” loans funding much of the industry’s expansion all go bust at once.

[Rogé Karma: Does the stock market know something we don’t?]

If we do turn out to be in an AI bubble, the silver lining would be that fears of sudden AI-driven job displacement are overblown. In a recent analysis, the economists Sarah Eckhardt and Nathan Goldschlag used five different measurements of AI exposure to estimate how the new technology might be affecting a range of labor-market indicators and found virtually no effect on any of them. For example, they note that the unemployment rate for the workers least exposed to AI, such as construction workers and fitness trainers, has risen three times faster than the rate for the workers most exposed to it, such as telemarketers and software developers. Most other studies, though not all, have come to similar conclusions.

But there’s also a weirder, in-between possibility. Even if AI tools don’t increase productivity, the hype surrounding them could push businesses to keep expanding their use anyway. “I hear the same story over and over again from companies,” Daron Acemoglu, an economist at MIT, told me. “Mid-to-high-level managers are being told by their bosses that they need to use AI for X percent of their job to satisfy the board.” These companies might even lay off workers or slow their hiring because they are convinced—like the software developers from the METR study—that AI has made them more productive, even when it hasn’t. The result would be an increase in unemployment that isn’t offset by actual gains in productivity.

As unlikely as this scenario sounds, a version of it happened in the not-so-distant past. In his 2021 book, A World Without Email, the computer scientist Cal Newport points out that beginning in the 1980s, tools such as computers, email, and online calendars allowed knowledge workers to handle their own communications and schedule their own meetings. In turn, many companies decided to lay off their secretaries and typists. In a perverse result, higher-skilled employees started spending so much of their time sending emails, writing up meeting notes, and scheduling meetings that they became far less productive at their actual job, forcing the companies to hire more of them to do the same amount of work. A later study of 20 Fortune 500 companies found that those with computer-driven “staffing imbalances” were spending 15 percent more on salary than they needed to. “Email was one of those technologies that made us feel more productive but actually did the opposite,” Newport told me. “I worry we may be headed down the same path with AI.”

Then again, if the alternative is a stock-market crash that precipitates a recession or a financial crisis, that scenario might not be so bad.

The Lisa Cook Case Could Be the Whole Ball Game

2025-08-26T17:15:00-04:00

Yesterday, Donald Trump posted a letter to Truth Social announcing that he had fired the economist Lisa Cook from her position as a member of the Federal Reserve Board of Governors. Whether this is true—whether Trump has, in fact, successfully fired Cook—is an unsettled question of enormous consequence. Under the law, a president can fire a Fed governor only “for cause.” To clear that bar, Trump has accused Cook of having made false statements on a mortgage application.

Cook, who has not been charged with any crime, has promised to sue to keep her job. Her lawyers will likely argue, among other things, that the “for cause” standard requires proof that Cook has engaged in misconduct or poor performance related to her job as a Fed governor, and that it does not permit the president’s lackeys to go digging through her personal history to gin up a pretext for termination. But because no president before Trump crossed this particular line, the vague standard has never been litigated. Ultimately, the Supreme Court will have to weigh in. Much more than Cook’s employment status hinges on its decision. If Trump succeeds at firing her and replacing her with a loyalist, he could be just months away from a full-blown takeover of the Federal Reserve.

Trump has not been coy about his interest in the makeup of the Fed. He complains that the central bank is hurting the U.S. economy (which, confusingly, he otherwise insists is better than ever) by keeping interest rates too high. Rates are set by a 12-member body known as the Federal Open Market Committee (FOMC). Seven of those members come from the Board of Governors, a group appointed by the president that includes Fed Chair Jerome Powell as well as Cook. Trump appointed two of its other members, Michelle Bowman and Christopher Waller, during his first term, and has nominated the head of his Council of Economic Advisers, Stephen Miran, to replace a member who recently stepped down. If Trump successfully replaces Cook with a loyalist, he will have appointed four out of the seven board members, enough for a majority. (Trump elevated Powell, who had been appointed to the Fed by Barack Obama, to the position of chair in 2018.)

[Jonathan Chait: What Trump’s feud with Jerome Powell is really about]

Normally, that wouldn’t be enough to dictate how the FOMC sets rates. The remaining five votes come from the presidents of the Federal Reserve’s 12 regional banks, who take turns serving as voting members on the FOMC. The president has no direct power in choosing these individuals. Instead, the board of each regional bank picks its president, a structure designed to insulate the regional presidents from Washington politics. The five regional Fed presidents on the committee could band together with the three non–Trump appointees on the Board of Governors to prevent Trump’s appointees from exerting their will.

But there’s a catch: Every five years, the Fed’s regional presidents must be reconfirmed by a majority of the members of the Board of Governors. And the current five-year period just so happens to expire next February. If four Trump appointees decided to vote together, they could block the reappointment of any regional president who didn’t agree to cut rates.

What would happen next isn’t entirely clear. In the Fed’s 112-year history, a governor has never voted against the appointment of a regional president. In past cases when a governor had to step down voluntarily, they were replaced by an interim president, usually the vice president of the regional bank. But that interim president also needs to be confirmed by the Board of Governors. Moreover, the regional-bank presidents are technically “at will” employees of the Federal Reserve board who can be voted out for any reason by the Board of Governors. Ultimately, then, if Trump’s appointees hold a majority on the Board of Governors, they hold the power to decide who the rest of the voting members are.

Trump’s first-term appointees, Waller and Bowman, might not go along with such a dramatic power play. Like Powell, they are veteran central bankers with mainstream credentials, not Trumpian sycophants chosen explicitly for their personal loyalty to the president. But the pair have shown a willingness to break with norms before. In 2023, they became the first ever Fed Board governors to abstain from voting to confirm the appointment of a regional president—in this case, Chicago Fed President Austan Goolsbee, who had served as an economist in the Obama administration. (They also dissented from the Fed’s most recent decision not to cut rates—the first dual dissent since 1993.)

This time, they would face even more pressure. Trump could threaten to fire them if they don’t go along with his plan to cut the federal-funds rate to 1 percent. Or he could use carrots, not sticks. Trump has already announced his intent not to reappoint Powell next May, meaning both Waller and Bowman are in the running to be the next Fed chair. Winning that appointment will require gaining Trump’s favor.

In short, if the Supreme Court upholds Cook’s firing, then Trump’s path to completely taking over the Fed, and dramatically lowering interest rates, is extremely plausible.

[Rogé Karma: Meddling with the Fed could backfire on Trump]

The consequences of such a move are hard to predict, but history is not encouraging. In 1970, Richard Nixon, who wanted a rate cut to juice the economy ahead of his 1972 reelection campaign, tapped Arthur Burns, one of his top economic aides, as Fed chair. Under Burns, the Fed delivered. That move is now widely seen as contributing to the double-digit inflation spike that roiled the country during the ’70s and ended only after a new Fed chair came in and raised interest rates enough to trigger a recession.

More recently, from 2019 to 2022, Turkish President Recep Tayyip Erdoğan replaced three central-bank governors with loyalists who were willing to slash interest rates even as prices were rising. This caused inflation to spiral even higher (peaking at 85 percent), prompted a fire sale of Turkish-government bonds, and crashed the value of the Turkish lira. The crisis began to abate only when Erdoğan changed course in 2023 and brought in new central-bank leadership who raised rates to more than 45 percent.

The temptation for presidents to meddle with the central bank to further their political aims is precisely why Congress designed the Federal Reserve to be independent. We might soon find out what happens when that independence is lost.

COVID Revisionism Has Gone Too Far

2025-08-21T12:07:00-04:00

Pandemic revisionism has gone mainstream. More than five years after COVID-19 began spreading in the United States, a new conventional wisdom has taken hold in some quarters: Public-health officials knew or should have known from the start that pandemic restrictions would do more harm than good, forced them on the public anyway, and then doubled down even as the evidence piled up against them. When challenged, these officials stifled dissent in order to create an illusion of consensus around obviously flawed policies. In the end, America’s 2020 pandemic response undermined years of learning in schools, destroyed countless businesses, and led to any number of other harms—all without actually saving any lives in the process.

These sorts of claims were once largely confined to the political right. No longer. Two recent books by respectable left-of-center authors—In Covid’s Wake, by the Princeton political scientists Stephen Macedo and Frances Lee, and An Abundance of Caution, by the journalist David Zweig—take up versions of this skeptical narrative, each with its own twists. Both have received rave reviews in publications such as The Wall Street Journal, The Boston Globe, and even the overtly progressive Guardian. The flagship New York Times podcast, The Daily, devoted an episode to an interview with Macedo and Lee. The pair and their work were also featured on PBS NewsHour and CNN.

The books make some valuable points. Some pandemic restrictions remained in place for far too long, especially after vaccines became available, and public-health experts did make several costly mistakes. Their mass support for the George Floyd protests, at a moment when they were otherwise warning against any public gatherings, was particularly damaging to their credibility. But the broader revisionist narrative—that the people in charge imposed sweeping restrictions that they knew were pointless—is a dangerous overcorrection. The political right already believes that America’s pandemic response was illegitimate and is using that as a pretext for waging war on the country’s public-health apparatus. If the center and left succumb to the nihilism that runs through both of these books, no one will remain to defend sensible public-health measures the next time a pandemic comes around.

For the revisionists, the tragedy of America’s pandemic response goes back to the very beginning. According to Macedo and Lee, the “dominant view” within public health prior to 2020 was that so-called non-pharmaceutical interventions (NPIs)—such as school and office closures, stay-at-home orders, mass testing, and mask mandates—would be ineffective at containing a respiratory virus, but would cause widespread social and economic damage. “Mere months before Covid lockdowns, leading health agencies around the world recommended against the very policies that were widely embraced early in the Covid pandemic,” they write. Once the virus began spreading, however, public-health establishments around the world, enamored of China’s draconian efforts to suppress the outbreak, threw out decades of evidence and embraced society-wide lockdowns. (Right-wing COVID revisionists typically go even further, arguing that public-health officials endorsed lockdowns out of a cynical desire for power.)

[Jonathan Chait: Why the COVID reckoning is so one-sided]

As evidence that NPIs were pointless, Macedo and Lee point to Sweden, which refused to mandate masks or close schools, offices, and other public spaces. At first, the country was ridiculed and made into a global pariah for pursuing this strategy. But by the end of 2022, Sweden had one of the lowest rates of excess mortality in all of Europe. “Contrary to what was asserted by various experts in 2020, attempting to suppress and contain the Covid-19 virus was never the only option,” Macedo and Lee conclude.

Almost everything about this narrative is flawed, beginning with its characterization of the pre-pandemic consensus. Macedo and Lee’s account relies heavily on a September 2019 report from the World Health Organization. When I read the report for myself, I was surprised to find that, far from saying NPIs are useless, it actually recommends several, including face masks, school and workplace closures, and travel restrictions, depending on the severity of the outbreak. (The report does recommend against three specific policies—quarantines, border closures, and contact tracing—on the grounds that they are extremely onerous and lack concrete evidence of effectiveness.) Although the authors of the report acknowledge that NPIs can be “highly disruptive,” they arrive at the exact opposite conclusion as Macedo and Lee do. “The most effective strategy to mitigate the impact of a pandemic,” the report says, “is to reduce contacts between infected and uninfected persons, thereby reducing the spread of infection, the peak demand for hospital beds, and the total number of infections, hospitalizations and deaths.” The CDC’s 2017 pandemic-preparedness plan came to similar conclusions.

When I brought up these points to Macedo and Lee, Lee acknowledged that there “was definitely debate in the field at the time” but insisted that “strong proponents of NPIs were a minority perspective,” citing a 2019 report published by Johns Hopkins University and a 2006 study by four epidemiologists. Those documents are indeed more equivocal about NPIs, but even they are far from being opposed to the use of them. The 2019 report, for instance, states that “a multitude of factors will likely determine how effective NPIs will be, such as the size and geographical range of the outbreak, the specific pathogen, the timing of the outbreak, and the country of occurrence,” and includes several recommendations for how to implement certain measures most effectively.

Nor is Sweden the promising counterexample that Macedo and Lee (and many other COVID revisionists) make it out to be. Sweden finished 2020 with an excess mortality rate that was five times that of Finland and 12 times that of Norway. The Swedish government’s own postmortem report on its pandemic response concluded that “earlier and more extensive pandemic action should have been taken, particularly during the first wave.”

Sweden’s pandemic performance did eventually surpass those of most other European countries—but this was only after it embarked on one of Europe’s most successful vaccine rollouts in spring 2021. (By contrast, several of its neighbors, such as Finland, botched their vaccination efforts.) In other words, Sweden appears to have ended up with a relatively low death rate despite its lack of restrictions, not because of them. It probably could have saved even more lives by adopting NPIs earlier in the pandemic. “People love to cite Sweden as a success story of the hands-off approach,” Ashish Jha, the dean of the Brown University School of Public Health, told me. “But if anything, it shows the exact opposite.”

The COVID revisionists are on much stronger ground when they claim that the U.S. kept certain pandemic restrictions, above all school closures, in place for too long. Schools are the focus of Zweig’s An Abundance of Caution. As he documents at length—and argued persuasively at the time—the risk of severe illness among children was low, and schools themselves do not appear to have been a major source of transmission to the broader community. Yet 74 of the 100 largest school districts in the U.S. began the fall 2020 semester with remote-only instruction, and only 40 percent of schools nationwide offered the option of full-time in-person education. This was a genuine failure. Children who were kept out of school longer experienced much higher rates of learning loss and worse mental-health outcomes. Learning loss was especially severe for poor and minority children.

Where the revisionists go too far, however, is in their explanation of why schools remained closed for so long. In Zweig’s telling, public-health experts, the media, and teachers’ unions constituted a “laptop class” of liberal elites who indulged in pandemic groupthink. It was clear by summer 2020, he argues, that schools could safely be reopened, because several European countries had already done so. But the overwhelmingly liberal public-health establishment continued to sow fear about in-person learning—in part because Donald Trump was in favor of it—and their credulous allies in the media disseminated the message.

“Acting in concert—as a tribe, if you will—and aided by social media, these powerful factions exerted considerable control over school policy and the public narrative around it,” Zweig writes. This climate of fear led teachers’ unions to rebel against the prospect of reopening, at the expense of both children and parents, especially those from underprivileged backgrounds. “No other group of essential professionals en masse fought—and succeeded—to not have to show up for work,” he writes of teachers.

[David Zweig: The disaster of school closures should have been foreseen]

Zweig has a point, but he leaves out some important parts of the story. First, elite opinion on school reopenings was much more divided than he lets on. Throughout 2020, the question was the subject of extensive public debate. The National Academies of Sciences, Engineering, and Medicine came out in favor of reopening in July of that year. Prominent public-health experts argued for reopenings in publications including The Atlantic, The Washington Post, and the Journal of the American Medical Association.

Second, perhaps even more important, a crucial reason that teachers’ unions were able to resist reopening is that they faced relatively little public backlash. Why? Because much of the opposition to school openings came from parents, who were terrified of COVID and didn’t want to put their children, or themselves, in harm’s way. When I put that to Zweig, he countered that parents supported remote learning only because they had been misled by the so-called experts. “Whether or not those people are fearful has to do with—and I know this is a loaded term but I’m using it purposefully—misinformation by the public-health establishment and the media,” he said.

No doubt media coverage influenced parental attitudes. But if that were the entire story, opposition to in-person schooling would presumably have been concentrated among wealthy, white, highly educated households—Zweig’s laptop class—who on average pay the most attention to the news and expert opinion. In fact, the opposite was true. Support for remote learning was most pronounced among Black, Hispanic, and low-income parents. One nationally representative survey by the University of Southern California found that a majority of low-income families believed schools should remain closed for the 2020–21 school year, compared with only 27 percent of the wealthiest families. Other polls found similar results. What Zweig attributes to media indoctrination is more adequately explained by real-world experience: Poor and minority families were far likelier than wealthy white households to have lost loved ones to the pandemic and to have health conditions putting them at higher risk. They had perfectly good reasons to be afraid, regardless of what The New York Times was saying.

Macedo and Lee extend the blame-the-elites style of argument beyond school closures, arguing that other pandemic restrictions remained in place for far too long because the public-health establishment elevated ideology over science. “One of our central issues is that debate became unwelcome beginning in April 2020,” Macedo told me. He and Lee dedicate a chapter to the debate over the Great Barrington Declaration: a one-page document written by three lockdown-skeptical scientists in October 2020 that called for most people to “resume life as normal” while governments deployed a strategy of “focused protection” concentrated on the most vulnerable individuals, namely the elderly.

This proposal, Macedo and Lee write, was an “earnest appeal by serious scholars” that “deserved a respectful hearing” but instead became the victim of a vicious, coordinated assault by the public-health establishment. They point to a private-email chain in which Dr. Francis Collins, then the director of the National Institutes of Health, called for a “quick and devastating takedown of its premises,” and a counter-memorandum signed by 7,000 public-health experts that argued that the herd-immunity approach was based on “a dangerous fallacy unsupported by scientific evidence.” Macedo and Lee write, “The reaction to the Great Barrington Declaration represented one of the key episodes in the moralization of dissent during the Covid crisis.”

Let’s start with the merits of the proposal itself. The idea of “focused protection” sounds great in theory, but would have been almost impossible to implement in practice. In 2020, about 90 million people in America were either older than 65 or had a preexisting condition that made them vulnerable to the coronavirus. The notion that we could have isolated close to a third of the country’s residents while allowing the virus to spread unimpeded through the rest of the population was a fantasy. “In basically every country that tried something like this, we saw infections spill over to the vulnerable,” Adam Kucharski, an epidemiologist at the London School of Hygiene & Tropical Medicine, told me. (When I put that critique to Macedo and Lee, Lee said, “The idea that focused protection would be more difficult than to protect everyone is hard to wrap my mind around.”)

On top of that, in October 2020, the world was a few months away from having highly effective vaccines. “Why needlessly risk the lives of so many people when vaccines were right around the corner?” Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, asked me. Osterholm had been an early lockdown skeptic—Macedo and Lee cite him approvingly at several points—but the imminent possibility of vaccination had made him change his tune. “This was the moment when it made the least sense to take away NPIs,” he said.

Although Collins regrets using the intemperate phrase quick and devastating takedown in that email exchange, he is adamant that public-health officials made the right call in coming out forcefully against the Great Barrington Declaration. “If this proposal had been implemented, it would have led to the deaths of tens of thousands of people,” Collins told me. “There was no way we could just sit around silently and let that happen.”

They didn’t sit around; nor did they silence the Great Barrington Declaration or try to banish its authors to the scientific wilderness, as Macedo and Lee suggest. Yes, the authors of the Great Barrington Declaration came in for some personal abuse, usually by individual epidemiologists on social media. The official response, however, came in the form of a carefully argued article published in an academic journal that responded to the proposal’s central claims, offering loads of counterarguments backed by scientific studies. What Macedo and Lee characterize as a subversion of public debate looks more like an example of the marketplace of ideas in action.

At times, the revisionist narrative seems to exist in an alternate history in which the United States implemented a heavy-handed, centralized response to the pandemic. In reality, Donald Trump, who was president in 2020 (many COVID revisionists somehow overlook this), spent most of that year downplaying the severity of the pandemic, undermining public-health messaging, and refusing to implement or support the policies that public-health experts, doctors, and much of the country were begging for. The result was a shambolic and porous state-by-state patchwork rather than a unified national strategy to deploy the full resources of the federal government.

Macedo and Lee nonetheless look back at that time and conclude that the U.S. did too much, not too little. In their view, there is no evidence that any of the various measures employed to control the virus, other than vaccines, saved any lives. They cite multiple analyses, including their own, that find no difference in pre-vaccination COVID mortality rates between blue states, which had tighter and longer-lasting restrictions, and red states, which had looser restrictions and ended them earlier. Although Macedo and Lee are careful not to explicitly conclude from these analyses that “nothing worked,” it is hard to come away from their discussion of the evidence with any other view. “We have to be honest with ourselves,” Lee told me. “There are a lot of medical interventions that we think will be successful and then they don’t work. Sometimes the evidence doesn’t bear out what you expect to see.”

[David Frum: Why the COVID deniers won]

But the analyses that Macedo and Lee rely on fail to account for differences in the timing of when different states experienced their highest COVID death counts. Several blue states, including New York, New Jersey, and Massachusetts, were hit hard early, and the virus spread before they could implement much of an organized response. By one calculation, the Northeast experienced 56 percent of all U.S. COVID deaths from February through May 2020 despite containing just 17 percent of the country’s population; the South, meanwhile, experienced just 17 percent of deaths. In the subsequent months, that dynamic reversed: Northeastern states saw their death rates plummet, while southern states saw their death rates spike. Blue states got hit earlier and harder, but once the pandemic went national, they performed much better.

In our conversation, Macedo and Lee countered by pointing to examples of states that experienced the pandemic at similar times and had similar 2020 age-adjusted mortality rates, despite the fact that some (such as California) kept restrictions in place longer than others (such as Florida). But these cases run into a further complication: Although state-level analyses find no pre-vaccine difference in COVID deaths, they do estimate that the most restrictive states experienced about 30 percent fewer infections than the least restrictive ones, which is the precise outcome that NPIs are supposed to achieve. That is why Thomas Bollyky, the lead author of one of the state-level studies that Macedo and Lee cite, told me that he was shocked to hear his work being used to shed doubt on the effectiveness of NPIs. “I feel like I’m having an Annie Hall–type moment,” Bollyky told me. “These interventions were designed to reduce infections, and that’s exactly what they did.”

Why didn’t they show an obvious impact on mortality, then? One possibility, Bollyky said, is that a long list of intermediating factors—including age, preexisting conditions, and health-care access—determines whether an infected person will die from COVID. These might be impossible to fully control for in state-by-state comparisons. Another is that the elderly, who were most at risk of dying from infection, were likely to voluntarily adhere to social-distancing policies even when official mandates went away. For example, although Florida was one of the first states to entirely lift restrictions, Bollyky and colleagues found that Florida residents, who are disproportionately elderly, stayed home and wore masks at higher rates than people in most other states. Lockdown policies might have been so effective at changing behavior that people kept following restrictions even after they were lifted, creating the false impression that policy didn’t matter in the first place. (There were also plenty of Californians who disobeyed the orders that remained in place in their state, making those policies seem less effective.)

Whether restrictions prevented the spread of COVID is a different question from whether they were worth the cost. Macedo, Lee, and Zweig are right that America’s pandemic response was marked by a failure to properly weigh trade-offs. As they document at length, public-health officials often framed saving lives from the virus as the only legitimate objective of public policy, without considering the potential damage that would stem from the pursuit of that goal. Most public-health experts now seem to share that assessment. In July 2023, for instance, Collins expressed regret for what he called “a public-health mindset” in which officials “attach infinite value to stopping the disease and saving a life” and “zero value to whether this actually totally disrupts people’s lives, ruins the economy, and has many kids kept out of school in a way that they never quite recovered.”

The COVID revisionists are right to criticize this tendency, but at times they fall victim to a mirror image of the same mindset: Lockdowns were all costs, no benefits, and thus should have been discarded. “There is just no evidence that any of these measures actually prevented death,” Lee told me. “So we have to ask ourselves: Should we really take the kinds of actions where the benefits are uncertain but we know the costs will be severe?” Zweig is even more direct. “In the end, there was no benefit to keeping schools closed for so-called safety reasons out of ‘an abundance of caution,’” he writes. “And there were no reasonable trade-offs in doing so. There were just harms.”

[From the March 2025 issue: Why the COVID deniers won]

If ignoring the costs of lockdowns led in some cases to an overly restrictive response, ignoring the benefits could lead to an overly loose one. In many ways, we were lucky last time. The next virus—and there will be a next one—could be far deadlier. It could disproportionately target children or be much harder to vaccinate against. If all restrictions are off the table, the scale of the disaster could be unprecedented.

The revisionist narrative also has the potential to become a self-fulfilling prophecy. If people are convinced that public-health measures don’t work in the first place, they will be less likely to follow them, which, in turn, will render them even less effective. This dynamic could even undermine the one measure that the non-right-wing COVID revisionists generally support: vaccines. After all, if people are convinced that the public-health establishment is full of lying ideologues, why make an exception for vaccines? Unchecked COVID revisionism, in trying to correct the errors of the last pandemic, might leave us even less prepared for the next one.

So, About Those Big Trade Deals

2025-08-08T07:00:00-04:00

If there’s anything Donald Trump loves more than tariffs, it’s a deal. So you can understand his excitement lately. Over the past few weeks, the president has announced tariff-related deals with three major trading partners—the European Union, Japan, and South Korea—that have been hailed as major victories for the United States. In each case, America’s partners agreed to accept 15 percent tariffs on their exports to the U.S. while lowering trade barriers on American goods and promising to invest hundreds of billions of dollars in the U.S. economy—in essence paying Trump to impose trade restrictions on them. “Europe Caves to Trump on Tariffs” read a representative New York Times headline.

In the days following the European Union deal announcement, the White House released a fact sheet quoting all the positive coverage. On Thursday, Jamieson Greer, Trump’s top trade official, published a New York Times op-ed boasting that, with the completion of these deals, the administration had successfully “remade the global order.” But upon closer inspection, Trump’s trade deals aren’t nearly as impressive as they sound. In fact, they aren’t really trade deals in the traditional sense, and they might not benefit the U.S. at all.

Trump did prove the doubters wrong in one important way. When the president originally announced his “Liberation Day” tariffs, other countries threatened to respond in kind, leading many economists and journalists (myself included) to conclude that the tariffs would lead to a spiral of retaliation. With a few exceptions (notably China and Canada), that didn’t happen. Instead, Trump has gotten key trading partners to back down.

But simply avoiding retribution was never the goal of tariffs. The whole point of Trump’s dealmaking strategy was supposedly to get foreign countries to lower their existing trade barriers—the classic purpose of a trade agreement. In his Liberation Day announcement, Trump complained at length about what he considered to be the excessive restrictions that other countries had imposed on American goods—including not only tariffs but also currency manipulation, value-added taxes, and subsidies to domestic firms—and vowed not to back down on tariffs until those countries lowered them.

[Scott Lincicome: What the U.K. deal reveals about Trump’s trade strategy]

The announcements of the new deals purport to have delivered on this promise, giving Americans “unprecedented levels of market access” to Europe, “breaking open long-closed markets” in Japan, and making South Korea “completely OPEN TO TRADE with the United States.” But the details of the deals, which remain sparse, tell a very different story. None include agreements by trading partners to meaningfully reform their tax or regulatory codes, strengthen their currencies, or reduce the barriers that have long been major sticking points in prior trade negotiations. Instead, the announcements are full of vague statements of intent—“The United States and the European Union intend to work together to address non-tariff barriers affecting trade in food and agricultural products” (my emphasis)—and references to things such as “openings for a range of industrial and consumer goods.”

The main concrete action that the EU agreed to was to eliminate its tariffs on American industrial products. This sounds impressive unless you’re aware that the average EU tariff rate on nonagricultural goods prior to the deal was just 1 percent. The main difficulty in trade negotiations with the EU has long been its barriers on agricultural products, which appear to have been untouched by these deals. South Korea and Japan, meanwhile, agreed to allow more American-made cars into their markets—which also sounds great until you realize that the main reason American companies don’t sell a lot of cars to those countries is the fact that almost nobody wants to drive a truck or SUV in Tokyo or Seoul. Lower trade barriers won’t change that.

What about the investments? According to the announcements, South Korea, Japan, and Europe have respectively pledged to invest $350 billion, $550 billion, and $600 billion in the United States (In an interview with CNBC, referring to the EU investment, Trump claimed that “the details are $600 billion to invest in anything I want. Anything. I can do anything I want with it.”) The EU has also agreed to purchase an additional $750 billion of American oil and gas. Those are big numbers, but they might not add up to much in the real world. The EU has no authority to require European companies to invest in the U.S. or buy its products. What the Trump administration touted as “commitments” were mostly rough numbers based on what European companies were already planning to invest and buy. “We can’t force the company to do anything, nor will be able to pretend that we can, but we can talk to them, we can get their intentions, and we can transmit that as a faithful indication to our partners in the U.S.,” Olof Gill, a spokesperson for the European Commission, the EU’s trade-negotiation body, said after the deal was announced.

The “investments” from Japan and South Korea, meanwhile, might not be investments at all. Shortly after the deal with Japan was announced, the country’s top trade negotiator said that he anticipated only 1 or 2 percent of the $550 billion fund would come in the form of direct investment; the rest would mostly consist of loans that would need to be repaid with interest. South Korean officials have made similar statements. “These numbers bear no relation to any conception of reality,” Brad Setser, a senior fellow at the Council on Foreign Relations who served as a trade adviser to the Biden administration, told me. “Everyone has figured out that Trump really likes big numbers to sell his trade deals and doesn’t need much substance to do so.” Recent history supports this view. As part of Trump’s first-term trade deal with China, Beijing agreed to increase its annual purchasing of American goods by $200 billion. In the event, it didn’t increase its purchasing at all.

If America’s trading partners didn’t agree to meaningfully lower barriers to U.S. imports, and if their promises of investment are likely vaporous, then the only real concession that Trump’s tariffs have won is … the right to impose tariffs. This means that the value of the deals comes down to the value of the tariffs.

Tariffs can help domestic producers by making their foreign competitors’ products more expensive. But tariffs can also hurt them, by raising the costs of the inputs they import to make their products. Several studies of the tariffs imposed during Trump’s first term, which were much smaller and more targeted, found that manufacturing employment either stayed level or actually fell as a result. The ultimate result of the current wave of tariffs is yet to be determined, but so far, since Liberation Day, the manufacturing sector has shed tens of thousands of jobs and investment in new factories has fallen. A quarterly survey conducted by the National Association of Manufacturers in May found that optimism among manufacturing firms had fallen to its lowest point since the height of the coronavirus pandemic; trade uncertainty and raw-material costs were cited as top concerns.

[Rogé Karma: The mystery of the strong economy has finally been solved]

The new deals should at least give companies some much-needed certainty about tariff rates, which will help them make investment decisions. But in other ways, the deals actively undermine key American industries. Foreign cars, which represent the single largest American import from Japan and South Korea and the third largest from the EU, will face 15 percent tariffs. That is far lower than the rate American car companies have to pay to import car parts, which are tariffed at 25 percent, and crucial car-building materials like steel and aluminum, which are tariffed at 50 percent. As Jim Farley, the CEO of Ford, said in a recent interview, foreign competitors such as Toyota now have a $5,000 to $10,000 cost advantage over American-made vehicles. Ford projects that it will lose $2 billion in profits this year alone because of higher tariffs; General Motors forecasts losses of $4 billion to $5 billion by the end of the year.

The deals announced so far are only the beginning. The Trump administration is currently in the midst of negotiations with several trading partners, including China, Mexico, Switzerland, and Taiwan, and just yesterday implemented a new round of tariffs on about 90 countries, the ostensible goal being to bring those nations to the bargaining table too. If recent events are an indication, any future pacts will be framed as historic milestones in the quest to remake the global trade system in America’s favor. The White House will issue pronouncements of eye-popping investments, drastically reduced foreign-trade barriers, and major concessions to American industry. When that happens, remember to look closely at the details.

Does the Stock Market Know Something We Don’t?

2025-08-07T09:23:00-04:00

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Can anything stop the stock market? The U.S. economy recently weathered the worst pandemic in 100 years, the worst inflation in 40 years, and the highest interest rates in 20 years. Yet from 2019 through 2024, the S&P 500 grew by an average of nearly 20 percent a year, about double its historical average rate. Despite President Donald Trump’s erratic economic policies, which include the highest tariffs since the 19th century, the market is already up by about 8 percent in 2025.

As the stock market soars ever higher, the theories of why it rises have suffered the opposite fate. One by one, every favored explanation of what could be going on has been undermined by world events. The uncomfortable fact about the historic stock-market run is that no one really knows why it’s happening—or what could bring it to an end.

According to textbook economics, the stock market’s value reflects what are known as “fundamentals.” An individual company’s current stock price is derived from that firm’s future-earnings potential, and is thus rooted in hard indicators such as profits and market share. The value of the market as a whole, in turn, tends to rise and fall with the state of the broader economy. According to the fundamentals theory, the market can experience the occasional speculative bubble, but reality will bite soon enough. Investors will inevitably realize that their stocks are overvalued and respond by selling them, lowering prices back to a level that tracks more closely with the value justified by their fundamentals—hence the term market correction.

The fundamentals story held up well until the 2008 financial crisis. Within six months of the U.S. banking system’s collapse, the market fell by 46 percent. In response, the Federal Reserve cut interest rates to almost zero and pushed money back into the economy by purchasing trillions of dollars in securities from financial institutions.

The Fed’s goal was to get the economy going again quickly. This didn’t happen. For most of the 2010s, corporate earnings were modest, GDP and productivity growth were low, and the labor market remained weaker than it had been before the crisis. In other words, the fundamentals were not great. Yet the stock market soared. From 2010 to 2019, it tripled in value.

[Rogé Karma: The Federal Reserve’s little secret]

This gave rise to what became known as the “liquidity” theory of the market. In this telling, the force driving the ups and downs of markets was the Federal Reserve. As long as the central bank was willing to keep flooding the financial system with cash, that money would eventually find its way into the stock market, causing valuations to rise regardless of what was happening in the real economy.

The apotheosis of the liquidity theory came in early 2020: The stock market crashed when the coronavirus pandemic hit, and the Fed once again responded by turning on the money taps. By mid-summer, unemployment was still above 10 percent, but the stock market had already rebounded past its pre-pandemic peak.

But the liquidity theory’s run was short-lived. In 2022, as inflation replaced unemployment as the economy’s biggest problem, the central bank reversed course, quickly raising interest rates and selling its securities. As the liquidity theory would predict, the stock market took a nosedive, falling by close to 20 percent. Then something strange happened. The Fed continued to raise interest rates over the course of 2023, to their highest levels in two decades, and kept them there in 2024. It also drained about $2 trillion of liquidity from the financial system. Yet the market took off once again. The S&P 500 rose by nearly 25 percent in both 2023 and 2024, making it the market’s best two-year run of the 21st century. “Between 2008 and 2022, the view on Wall Street was we were experiencing a liquidity-driven market,” Mohamed El-Erian, an economist and the former CEO of the asset-management firm PIMCO, told me. “That wasn’t at all the case in ’23 and ’24.”

The stock market’s performance in those years was unusual for another reason. More than half of the S&P 500’s total growth in 2023 and 2024 was driven by the so-called Magnificent Seven companies: Apple, Amazon, Alphabet, Meta, Microsoft, Tesla, and Nvidia. During those two years alone, Tesla’s value rose by 286 percent, Meta’s by 355 percent, and Nvidia’s by 861 percent. The biggest firms have always been responsible for a disproportionate share of the market’s growth, but never had the gains been so acutely concentrated. The phenomenon couldn’t be explained solely by superior business performance; the Magnificent Seven’s stock prices had begun to exceed earnings by record amounts, implying that their valuations had more to do with expectations about future growth.

This gave rise to a new theory: The stock market was being supercharged by the coming AI revolution—or, at least, by belief in it. The Magnificent Seven’s extreme surge began in early 2023, shortly after the release of ChatGPT, which kicked off a wave of interest and investment in the AI sector. The seven companies seem especially well positioned to prosper from the emerging technology, either because they provide crucial inputs to the development of AI models (Nvidia), are investing heavily in building their own models (Meta, Microsoft, Alphabet), or stand to benefit significantly from automation (Amazon, Tesla, Apple).

To some experts, the situation has all the markings of a speculative bubble. In a recent blog post, Torsten Sløk, the chief economist at the asset-management firm Apollo, pointed out that the top 10 companies in the S&P 500 today are more overvalued—meaning their stock prices exceed their earnings by larger factors—than the top 10 companies at the height of the 1990s dot-com bubble were.

Take Nvidia, the chipmaker that recently became the first company in history to hit a $4 trillion valuation. Historically, the average price-to-earnings ratio for a company in the U.S. market has been about 18 to 1, which means that to buy a share of stock, investors are willing to pay $18 for every $1 of the company’s yearly earnings. Nvidia’s current price-to-earnings ratio is 57 to 1.

AI boosters argue that these valuations are justified by the technology’s transformative potential; skeptics respond that the technology is far from being adopted at scale and, even if it eventually is, that there’s no guarantee that these seven specific companies will be the ones to rake in the profits. “We’ve seen this story play out before,” Jim Bianco, an investment analyst, told me, pointing to the dot-com crash of the early 2000s. “Just because there’s a truly revolutionary technology doesn’t mean stocks are correctly pricing in that reality.”

If the current market froth is indeed an AI bubble, then a day must come when the bubble bursts. For a moment, that day appeared to have arrived on April 2, when Trump announced his “Liberation Day” tariffs. Over the next week, the stock market fell by 12 percent, and the Magnificent Seven took even steeper hits.

But then, on April 9, Trump backed down from his most extreme tariff proposals and, a few weeks after that, de-escalated what seemed like an imminent trade war with China. The market swiftly recovered and launched into a bonanza even wilder than those of the previous two years. The S&P 500 has risen nearly 30 percent since its post–Liberation Day low, setting all-time records, and the Magnificent Seven have come roaring back. This gave rise to the concept of the “TACO trade,” as in “Trump always chickens out.” The idea is that Trump hates falling stock prices and will back off from any proposal that puts the market in jeopardy. So rather than sell their stocks every time the president threatens to impose crippling trade restrictions, investors should continue to pour money into the market, confident that the proposals Trump ultimately leaves in place won’t do much damage.

The flaw in the TACO theory is that Trump hasn’t completely chickened out. Tariffs are the highest they’ve been in more than a century, and the president is announcing new ones all the time. Still, the market appears largely unfazed. When Trump announced “trade deals” with the European Union and Japan that set the tariff on most goods arriving from those places at 15 percent, the stock market actually rose. Even last week, when the president announced a sweeping new set of global tariffs—an announcement immediately followed by a brutal jobs report suggesting that tariffs were weakening the economy—the market suffered only a blip. As of this writing, it is higher than it was before the announcement.

This leaves a final theory, one that has nothing to do with Trump, AI, or the Federal Reserve.

Thirty years ago, almost all of the money in the U.S. mutual-fund market was actively managed. Retirees or pension funds handed over their savings to brokers who invested that money in specific stocks, trying to beat the market on behalf of their clients. But thanks to a series of regulatory changes in the late 2000s and early 2010s, about half of fund assets are now held in “passive funds.” Most retirees hand their savings over to companies such as Vanguard and Fidelity, which automatically invest the money in a predetermined bundle of stocks for much lower fees than active managers would charge. The most common type of passive fund purchases a tiny share of every single stock in an index, such as the S&P 500, proportional to its size.

[Annie Lowrey: Could index funds be “worse than Marxism”?]

Some experts believe that this shift is the best explanation for the otherwise inexplicably resilient performance of the stock market. “The move to passive funds is a radical shift in the structure of financial markets,” Mike Green, the chief strategist at Simplify Asset Management, told me. “To think that wouldn’t dramatically impact how those markets behave is just silly.”

Active investors are highly sensitive to company fundamentals and broader economic conditions. They pore over earnings reports, scrutinize company finances, and analyze market trends, and will often sell at the first sign of an economic downturn or poor company performance, which causes markets to “correct.” Passive investors, on the other hand, typically just pick a fund or two when they set up their retirement accounts and then forget about them, meaning they are automatically buying stocks (and rarely selling), no matter what. In June 2020, for example, Vanguard released a statement bragging that fewer than 1 percent of its 401(k) clients had tried to sell any of their equities from January to the end of April, even as the economy was melting down.

Thus, whereas a market dominated by active investors tends to be characterized by “mean reversion”—in which high valuations are followed by a correction—a market dominated by passive investors is instead characterized by “mean expansion,” in which high valuations are followed by even higher valuations. “When there’s a constant flow of passive money coming in, betting against the market is like standing in front of a steamroller,” Green said. “You’d be crazy to do it.”

A market dominated by passive investors also naturally becomes more concentrated. Active investors tend to avoid larger stocks that they believe might be overvalued, but the opposite is true for passive investors. Because they allocate funds based on the existing size of companies, they end up buying a disproportionate share of the biggest stocks, causing the value of those stocks to rise even more, and so on.

The explosion of passive funds over the past 15 years could explain why the market has become less sensitive to real-world downturns, more likely to keep going up no matter what, and dominated by a handful of giant companies. Or that theory could end up being disproved by unforeseen events. It wouldn’t be the first.

The Mystery of the Strong Economy Has Finally Been Solved

2025-08-01T16:02:00-04:00

The Trump economy doesn’t look so hot after all. This morning, the Bureau of Labor Statistics released revised data showing that, over the past three months, the U.S. labor market experienced its worst quarter since 2010, other than during the first year of the coronavirus pandemic. The timing was awkward. Hours earlier, President Donald Trump had announced a huge new slate of tariffs, set to take effect next week. He’d been emboldened by the fact that the economy had remained strong until now despite economists’ warnings—a fact that turned out not to be a fact at all.

After Trump announced his first sweeping round of “Liberation Day” tariffs, in April, the country appeared to be on the verge of economic catastrophe. The stock market plunged, the bond market nearly melted down, expectations of future inflation skyrocketed, and experts predicted a recession.

But the crisis never came. Trump walked back or delayed his most extreme threats, and those that he kept didn’t seem to inflict much economic damage. Month after month, economists predicted that evidence of the negative impact of tariffs in the economic data was just around the corner. Instead, according to the available numbers, inflation remained stable, job growth remained strong, and the stock market set new records.

The Trump administration took the opportunity to run a victory lap. “Lots of folks predicted that it would end the world; there would be some sort of disastrous outcome,” Stephen Miran, the chair of Trump’s council of economic advisers, said of Trump’s tariffs in an interview with ABC News early last month. “And once again, tariff revenue is pouring in. There’s no sign of any economically significant inflation whatsoever, and job creation remains healthy.” A July 9 White House press release declared, “President Trump was right (again),” touting strong jobs numbers and mild inflation. “President Trump is overseeing another economic boom,” it concluded.

The seemingly strong data spurred soul-searching among journalists and economists. “The Economy Seems Healthy. Were the Warnings About Tariffs Overblown?” read a representative New York Times headline. Commentators scrambled to explain how the experts could have gotten things so wrong. Maybe it was because companies had stocked up on imported goods before the tariffs had come into effect; maybe the economy was simply so strong that it was impervious to Trump’s machinations; maybe economists were suffering from “tariff derangement syndrome.” Either way, the possibility that Trump had been right, and the economists wrong, had to be taken seriously.

[Annie Lowrey: Start budgeting now]

The sky’s refusal to fall likely influenced the Trump administration’s decision to press ahead with more tariffs. In recent months, Trump has imposed 25 percent tariffs on car parts and 50 percent tariffs on copper, steel, and aluminum. He has threatened 200 percent tariffs on pharmaceuticals. Over the past week, Trump announced trade deals under which the European Union, Japan, and South Korea agreed to accept a 15 percent tariff on exports to the United States. Finally, this morning, he announced a sweeping set of new tariffs, a sort of Liberation Day redux, including a 39 percent levy on Switzerland, 25 percent on India, and 20 percent on Vietnam. These are scheduled to take effect on August 7 unless those countries can negotiate a deal.

Then came the new economic data. This morning, the BLS released its monthly jobs report, showing that the economy added just 73,000 new jobs last month—well below the 104,000 that forecasters had expected—and that unemployment rose slightly, to 4.2 percent. More important, the new report showed that jobs numbers for the previous two months had been revised down considerably after the agency received a more complete set of responses from the businesses it surveys monthly. What had been reported as a strong two-month gain of 291,000 jobs was revised down to a paltry 33,000. What had once looked like a massive jobs boom ended up being a historically weak quarter of growth.

Even that might be too rosy a picture. All the net gains of the past three months came from a single sector, health care, without which the labor market would have lost nearly 100,000 jobs. That’s concerning because health care is one of the few sectors that is mostly insulated from broader economic conditions: People always need it, even during bad times. (The manufacturing sector, which tariffs are supposed to be boosting, has shed jobs for three straight months.) Moreover, the new numbers followed an inflation report released by the Commerce Department yesterday that found that the Federal Reserve’s preferred measure of price growth had picked up in June and remained well above the central bank’s 2 percent target. (The prior month’s inflation report was also revised upward to show a slight increase in May.) Economic growth and consumer spending also turned out to have fallen considerably compared with the first half of 2024. Taken together, these economic reports are consistent with the stagflationary environment that economists were predicting a few months ago: mediocre growth, a weakening labor market, and rising prices.

The striking thing about these trends is how heavily they diverge from how the economy was projected to perform before Trump took office. As the economist Jason Furman recently pointed out, the actual economic growth rate in the first six months of 2025 was barely more than half what the Bureau of Economic Analysis had projected in November 2024, while core inflation came in at about a third higher than projections.

[Rogé Karma: Meddling with the Fed could backfire on Trump]

The worst might be yet to come. Many companies did in fact stock up on imported goods before the tariffs kicked in; others have been eating the cost of tariffs to avoid raising prices in the hopes that the duties would soon go away. Now that tariffs seem to be here to stay, more and more companies will likely be forced to either raise prices or slash their costs—including labor costs. A return to the 1970s-style combination of rising inflation and unemployment is looking a lot more likely.

The Trump administration has found itself caught between deflecting blame for the weak economic numbers and denying the numbers’ validity. In an interview with CNN this morning, Miran admitted that the new jobs report “isn’t ideal” but went on to attribute it to various “anomalous factors,” including data quirks and reduced immigration. (Someone should ask Miran why immigration is down.) And this afternoon, Trump posted a rant on Truth Social accusing the BLS commissioner of cooking the books to make him look bad. “I have directed my Team to fire this Biden Political Appointee, IMMEDIATELY,” he wrote. “She will be replaced with someone much more competent and qualified.” He then went on to argue, not for the first time, that Federal Reserve Chair Jerome Powell should be fired for hamstringing the economy with high interest rates. These defenses are, of course, mutually exclusive: If the bad numbers are fake, why should Trump be mad at Powell?

In these confused denials, one detects a shade of desperation on Trump’s part. Of course, everything could end up being fine. Maybe economists will be wrong, and the economy will rebound with newfound strength in the second half of the year. But that’s looking like a far worse bet than it did just 24 hours ago.

Meddling With the Fed Could Backfire on Trump

2025-07-23T09:03:00-04:00

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Donald Trump has so far gotten his way on tariffs and tax cuts, but one economic goal eludes him: lower interest rates. Reduced borrowing costs would in theory make homes and cars cheaper for consumers, help businesses invest in creating jobs, and allow the government to finance its massive debt load at a steep discount. In the president’s mind, only one obstacle stands in the way of this obvious economic win-win: the Federal Reserve.

Trump has mused publicly about replacing Fed Chair Jerome Powell since before he even took office, calling him “Too Late Powell” (as in waiting too long to cut rates) and a “numbskull.” Those threats have gotten more serious recently. In a meeting with House Republicans last Tuesday, the president reportedly showed off the draft of a letter that would have fired the Fed chair. Trump later claimed that it was “highly unlikely” that he would fire Powell, but he left open the possibility that the chair might have to “leave for fraud.” To that end, the administration has launched an investigation into Powell’s management of an expensive renovation of the central bank’s headquarters. (Any wrongdoing would, at least in theory, offer a legal pretext for firing him.)

This plan is unlikely to succeed in the near term. The administration’s legal case against Powell is almost certainly specious, and the Fed sets interest rates by the votes of 12 board members, not according to the chair’s sole discretion. Even if the president eventually does get his way, however, and installs enough pliant board members to slash government interest rates, this could have the paradoxical effect of raising the interest rates paid in the real world. If that happened, mortgages would get more expensive, businesses would have a harder time investing, and government financing would become even less sustainable.

Trump seems to have a simple mental model of monetary policy: The Federal Reserve unilaterally sets all of the interest rates across the entire economy. The reality is more complicated. The central bank controls what is known as the federal-funds rate, the interest rate at which banks loan one another money. A lower federal-funds rate means that banks can charge lower interest on the loans they issue. This generally causes rates on short-term debt, such as credit-card annual percentage rates and small-business loans, to fall.

But the interest rates that people care the most about are on long-term debt, such as mortgages and car loans. These are influenced less by the current federal-funds rate and more by expectations of what the economic environment will look like in the coming years, even decades. The Fed influences these long-term rates not only directly, by changing the federal-funds rate, but also indirectly by sending a signal about where the economy is headed.

[Rogé Karma: The Federal Reserve’s little secret]

What signal would the Fed be sending if it suddenly slashed the federal-funds rate from its current level of about 4.5 percent to Trump’s preferred 1 percent? Typically, an interest-rate cut of this magnitude would be reserved for a calamity in which the Fed drastically needs to increase the money supply to give the labor market a big boost. (This is what happened after the 2008 financial crisis.) Today’s economy has a very different problem: Unemployment is low, but inflation remains above the Fed’s target and has risen in recent months. In this environment, most economists predict that a dramatic increase in the money supply would send prices soaring.

Last week, in response to Trump flirting with the possibility of firing Powell, a key measure of investors’ long-term-inflation expectations spiked dramatically. The mere prospect of higher inflation is “kryptonite” for lenders and bondholders, Mark Zandi, the chief economist at Moody’s Analytics, told me, because it creates the risk that any debt paid back in the future will be worth a lot less than it is today. In such a situation, Zandi explained, banks and investors would likely impose a higher interest rate up front.

Many experts, including former Fed chairs, believe that cutting rates simply because the president demands it could have an even more profound consequence: It would tell the world that the U.S. central bank can no longer be trusted to credibly manage the money supply going forward. Investors would “get really nervous about holding U.S. Treasuries,” the economist Jason Furman told me, and demand a far higher return for buying them to make up for the higher risk—which would, perversely, drive interest rates higher, not lower. As evidence, Furman pointed out that, on several occasions, including last week, the interest rates on 10- and 30-year government bonds have shot up in response to Trump threatening to fire Powell. (In fact, the gap between short- and long-term rates jumped to its highest level since 2021 last week in the less-than-one-hour window between when reports surfaced about Trump planning to fire Powell and the president’s denial of that plan.) Because most long-term interest rates, including those for home mortgages, student loans, and auto loans, are directly pegged to the rate on government bonds—which serves as a sort of base rate for the entire financial system—all of those other rates would rise as well.

[Jonathan Chait: What Trump’s feud with Jerome Powell is really about]

The precise consequences of a move as drastic as what Trump has suggested are impossible to forecast with certainty. And the predictions of economists have been proved wrong many times. (Remember the inevitable recession of 2023?) Still, recent history has not been kind to populist leaders who try to forcibly lower interest rates. Between 2019 and 2022, Turkish President Recep Tayyip Erdoğan replaced three central-bank governors with loyalists who were willing to slash interest rates even as prices were rising. This caused inflation to spiral even higher, at one point reaching 85 percent. Foreign investors panicked, prompting a fire sale of Turkish government bonds. Long-term interest rates spiked, the Turkish lira crashed in value, and the country appeared on the verge of hyperinflation. The crisis began to abate only when Erdoğan changed course in 2023 and brought in new central-bank leadership who raised interest rates to above 45 percent in a desperate effort to restore credibility. (Inflation has since fallen considerably but remains very high.) “When investors start running for the hills, you get into really dangerous territory,” Zandi told me.

A path exists to persuade the Fed to cut interest rates without such a high risk of backfiring. The problem for Trump is that it would require a complete reversal of the highest-priority economic policies of his second term. Last September, the Fed began cutting interest rates and signaled that it would continue to do so. Then Trump entered office and threatened sky-high tariffs on every country on the planet. In response, the Fed has refrained from cutting rates further, terrified that Trump’s policies will unleash another bout of inflation.

There is some debate, including within the Fed itself, over whether tariff-induced price increases will in fact lead to sustained higher inflation. But for now at least, the central bank doesn’t appear willing to take any chances. “In effect, we went on hold when we saw the size of the tariffs and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs,” Powell said on July 1. The One Big Beautiful Bill Act, which passed days later and includes trillions of dollars of unpaid-for tax cuts, has only made Powell’s case stronger.

If the president were serious about lowering the cost of borrowing for families and businesses, he would be wise to leave Powell alone and simply stop enacting wildly irresponsible policies. Trump tends to prefer a different approach to people and institutions refusing to do his bidding: force them into submission. But America’s central bank isn’t like most other institutions; it is the central node in a highly complex chain of interactions that undergirds the entire global economy. Even one seemingly small error or misstep can result in disaster. If Trump manages to break the Fed, he will likely regret it.

The Most Perverse Part of the ‘Big, Beautiful Bill’

2025-07-03T12:45:00-04:00

Of all the elements of the One Big Beautiful Bill Act, perhaps none is as obviously self-defeating as getting rid of tax credits for clean energy. That decision will not simply set back the fight against climate change. Congressional Republicans could also be setting America up for the worst energy-affordability crisis since the 1970s. Unlike then, this time we’ll have imposed it on ourselves.

Electricity demand in the United States is rising faster than it has in at least two decades. AI data centers are using huge amounts of power to train new models. More Americans are plugging their electric cars and hybrids into the grid. Rising temperatures mean more air-conditioning use. Failure to meet this rising demand with adequate supply results in higher prices. From 2000 to 2022, U.S. electricity prices rose by an average of about 2.8 percent a year; since 2022, they have risen by 13 percent annually.

Fortunately, the timing of this demand spike coincided with a boom in renewable energy. According to the federal Energy Information Administration, 93 percent of the electricity capacity added to the grid this year will come from a combination of wind, solar, and battery storage. That trend was set to accelerate dramatically in the coming years thanks to the Inflation Reduction Act, which provided tax credits that made building clean power sources cheaper. Investment in those sources has accordingly spiked, and hundreds of new projects could begin generating power over the next decade. The IRA is generally seen as a climate bill, but it was also an energy bill. It provided a jolt to the American power sector at a moment when the sector desperately needed new supply.

Or so it seemed. The Senate version of Donald Trump’s One Big Beautiful Bill repeals the clean-energy tax credits in the IRA for all wind and solar projects that don’t begin construction within a year of the bill’s passage or become fully operational by 2028. (And even if a project begins construction in the first half of 2026, it will need to meet extremely onerous domestic-sourcing requirements that many experts believe will be nearly impossible to satisfy.) As a result, future clean-energy projects, including many that have been announced but not yet built, will cost about 50 percent more than those that received the credits, according to an analysis by Jesse Jenkins, who leads the Princeton ZERO Lab. The inevitable result is that far fewer will come into existence. “It’s hard to think of a bigger self-own,” Jenkins told me. “We’re effectively raising taxes on the country’s main sources of new power at a time when electricity prices are already rising.”

[Jonathan Chait: They didn’t have to do this]

The purported justification for these cuts is that renewables are unreliable energy sources pushed by woke environmentalists, and the country would be better served by doubling down on coal and natural gas. “More wind and solar brings us the worst of two worlds: less reliable energy delivery and higher electric bills,” wrote Energy Secretary Chris Wright in an op-ed last week. In fact, renewable energy is cheap and getting cheaper. Even without the tax credits, the price of onshore wind has fallen by 70 percent, solar energy by 90 percent, and batteries by more than 90 percent over the past decade. The IRA, by making these sources even more affordable, was projected to save American consumers an average of $220 a year in the decade after its passage.

The cost savings from renewables are so great that in Texas—Texas, mind you—all of the electricity growth over the past decade has come from wind and solar alone. This has made energy grids more reliable, not less. During the summer of 2023, the state faced several near failures of its electricity grid; officials had to call on residents to conserve energy. The state responded by building out new renewable-energy sources to stabilize the grid. It worked. “The electrical grid in Texas has breezed through a summer in which, despite milder temperatures, the state again reached record levels of energy demand,” The New York Times reported last September. “It did so largely thanks to the substantial expansion of new solar farms.”

In fact, the energy secretary’s description of wind and solar—as unreliable and expensive—is more aptly applied to fossil fuels. Coal is so costly relative to other energy sources that investment in building new plants has dried up. The natural-gas industry is facing such a crippling supply-chain crisis that the wait time for a new gas turbine—the combustion engine that converts natural gas into usable energy—can be as long as seven years. “What we’ve consistently heard from the industry is that, right now, there is just no way to get a new natural-gas plant running before 2030, and quite possibly even later,” Robbie Orvis, the senior director for modeling and analysis at the think tank Energy Innovation, told me. The cost of actually building one of those plants, meanwhile, has more than doubled in the past few years, pushing utilities to invest heavily in renewable sources, which can be built much faster and often at a lower cost.

Now Congress has decided to kneecap the energy sources that could meet rising demand. Orvis predicts that this could result in one of the fastest, sharpest rises in energy prices since the Arab oil embargo of the 1970s, which featured record-high oil prices, long lines and rationing at gas stations, and a nationwide inflation spike. An Energy Innovation analysis of an earlier, similar version of the bill found that, by 2035, the average yearly energy bill will be $473 higher in Michigan, $590 higher in Maryland, $668 higher in California, and $777 higher in Texas than it would have been if the IRA credits had remained in place. (Several other sources have produced similar results, including analyses of the final Senate bill.)

Blackouts and grid outages will become more frequent. Power-intensive industries such as AI and manufacturing will struggle under the weight of higher energy costs. China will solidify its dominance over clean-energy supply chains. “Just think of Trump’s own priorities: lower energy prices, becoming an AI superpower, reindustrializing America, outcompeting China,” Princeton’s Jenkins said. “Getting rid of these credits hurts all of those goals.”

But there is one priority missing from that list: owning the libs. Partisan polarization around clean energy has grown so extreme since the passage of the IRA that Trump and many other Republicans apparently see destroying it as an end in itself. An earlier version of the Senate bill went further than repealing subsidies. It included an excise tax on solar and wind energy—the Republican Party, taxing energy—that would have added an additional 10–20 percent cost onto most projects. That provision was scrapped after a handful of moderate senators objected, but the fact that it ever existed is stunning enough. As the bill headed to the House of Representatives for final consideration, some members claimed that they wouldn’t support it without even harsher restrictions on clean energy. Representative Chip Roy of Texas attacked the Senate bill for not targeting clean-energy tax credits more aggressively, calling it “a deal-killer of an already bad deal” and setting up the absurd possibility that the IRA would be saved only by Republicans’ inability to agree on how badly to eviscerate it.

[Jessica Riedl: Congressional Republicans might set off the debt bomb]

The desire to stick it to liberals is so intense that Republicans are evidently willing to inflict disproportionate economic pain on their own voters. The Energy Innovation analysis found that the states that will experience the sharpest increase in electricity costs as a result of the bill are Kansas, Texas, Oklahoma, South Carolina, Missouri, and Kentucky. A separate analysis found that of the 10 states that will lose the most total renewable-energy capacity as a result of the repeal, nine voted for Trump last year.

Congressional Republicans might be betting that the consequences of their legislation will take long enough to materialize that they won’t be blamed. Thanks to the numerous clean-energy projects in the pipeline today, the sharpest energy-price increases won’t come into effect until after 2030. By that time, a Democratic president could very well be in office, stuck with the higher energy costs sown by their predecessor, reaping the political whirlwind.