America in a Permacrisis
In 2023, Gordon Brown, Mohamed El-Erian and I wrote a book the publisher decided to title Permacrisis. The motivation and the main idea was that shocks from multiple sources — including pandemics, wars, climate change and geopolitical tensions — along with secular structural trends like aging, and — to complicate matters — parallel transformative breakthroughs in AI, technology, biomedical and life sciences, as well as green energy technology, were leading to permanent and consequential changes in the architecture and performance of the global economy.
A Complex and Uncertain Environment
That was the fall of 2023. The pandemic was ending and the Ukraine war was underway. Since the publication, we have had two further wars, and most significantly a dramatic shift in the directions of US economic policy with the election of President Trump. In addition, the world economy has experienced a sustained period of higher real interest rates, a huge energy shock — one of the largest ever, but with a still unknown duration — a shift in economic policy pretty much everywhere to a focus on resilience and security, and stunning (and at times frightening) progress in AI with the scope and power of the AI tool set exploding, all accompanied by an enormous investment boom associated with the development and deployment of AI. To put it mildly it is a complex environment with high degrees of uncertainty.
America’s Turning Point
US policy has been at the center of much of the turbulence. The Trump administration viewed the election as a mandate to upend and redirect both domestic and international economic and security policy. On the domestic side, deregulation in many areas, an aggressive reset of immigration policy and the pursuit of undocumented residents with ICE at the center, a largely hands-off approach to AI technology development and an abrupt stop to programs targeting green energy and sustainability.
On the international side, the most obvious has been raising tariffs across the board including against traditional trading partners and allies. This has been accompanied by withdrawal from a broad range in multilateral institutions, signaling a disinterest in and disregard for these long-standing approaches to managing international interdependence.
Polarization, Institutions and Executive Power
Internally, political and social polarization has only increased, though it preceded the Trump election. A wide range of institutions including universities have been criticized and penalized for elitism, DEI policies and failures to maintain environments of free speech. Threats include cuts to research funding, lawsuits and taxes imposed on endowment income. All of these have short- and long-term domestic and international effects.
Courts have resisted some of the Trump policies, both domestic and international, largely on constitutional grounds. Congress, where Republicans hold majorities in both the House and the Senate, have been largely more compliant. However, there is considerable resistance to the executive power to initiate war without Congressional oversight.
In early November of this year, the midterm elections will be held for both the House and Senate. These are consequential domestically, but also especially for the international community, because a change in majorities in one or both parts of Congress could shift the current balance of political power and lead to more constraints on executive action. There is little doubt that shifting power to the executive and specifically to the president has been an important policy theme in this administration.
Midterms and Political Uncertainty
There are a variety of views about the likelihood of this outcome. Polls indicate a notable shift in the attitudes of independents and swing voters away from Republicans: these are the voters who gave President Trump the victory in the last presidential election, as they expressed their dissatisfaction with economic and social conditions under the Biden administration. This change in sentiment is particularly noteworthy among the young who face a problematic job market. The Iran war is not popular as gas prices rise and inflation — with a significant energy component — has soared above 4%. On the other hand, there is frenzied activity involving both parties and the courts around redistricting (sometimes called gerrymandering) to try to shift the electoral playing field in their favor. Though some are confidently predicting a shift in the House of Representatives to the Democrats, I think it is fair to say that the outcome remains uncertain at this point with the balance of the odds probably favoring that result.
The impact of Democratic victories in the House and even the Senate would be significant on the one hand but easy to overstate on the other. While the Trump administration would face more resistance and budgetary constraints from Congress, it would not abandon its general approach to domestic and international policy. President Trump will not become a multilateralist overnight, or one who greatly values long-term relationships with traditional allies. A transactional approach to international relations seems set to continue. As to the constraining effect of a Democratic House, it is well to keep in mind that the Democrats are far from a homogeneous group with respect to cultural attitudes and policy.
Growth, Inequality and AI Risk
The US economy’s trajectory is complex. Growth is relatively high, powered in substantial part by a huge investment boom associated with AI frontier model building and deployment, energy capacity, data centers and the like. On the other hand, there is a notable, though not new, pattern of rising income and wealth inequality that is trending to extremes. These two trends, growth and distribution, are related. The polarizing impact of rising inequality is much larger in a low- or no-growth environment. The current growth momentum in the US is therefore a favorable factor with respect to political and social stability. But the attitudes toward AI are complex and far from uniformly positive. And concerning its economic impact, the trend is distinctly negative across a large part of the citizenry. If there is a major negative shift in sentiment among investors with respect to the long-run returns and benefits to AI investments, one can expect an economic, financial and social convulsion with far-reaching consequences across the entire global economy.
