How easy money breeds bad thoughts

Article Author: Russ Greene Article Compiler: Block unicorn

In July 2024, economist Tyler Cowen published an article titled "The Change in Atmosphere - Why Does It Happen?" on his blog "Marginal Revolution." This article was released amidst Trump's campaign rally in Butler, Pennsylvania, where he faced an attack.

The fourth day after the attempted murder. Cohen first focuses on the Republican nominee, calling him "the clear frontrunner for the next election."

Kahn provided 19 answers to his questions, covering factors from the rise of social media, high inflation, and rising interest rates, to the declining credibility of higher education. Trump's election confirmed Kahn's viewpoint.

On the day of his inauguration, New York Times columnist Ezra Klein also agreed with Cohen's argument, stating that "popular culture is moving in Trump's direction," although Klein believed that the election result was a "narrow victory."

Klein focused on several of the same factors mentioned by Cohen: the Republican victory on social media, the potential rightward inclination of the business community, the revival of masculinity, the divide between large tech companies and the left, and the backlash against "wokeness."

In fact, the change in atmosphere has long been traceable. The most obvious example is that companies had already begun to retreat from diversity, equity, and inclusion (DEI) programs and environmental, social, and governance (ESG) initiatives before Trump was clearly established as the Republican nominee last year.

For example, according to AlphaSense data, mentions of "DEI" or "Diversity, Equity, and Inclusion" during corporate earnings calls peaked in the second quarter of 2021 and then sharply declined. The Los Angeles Times reported that, according to data from Revelio Labs analyzing public employment records, "large companies' spending on DEI positions" began to decline during the mass layoffs in the tech industry in 2022. By the end of 2023, CNBC reported on large tech companies' "retreat" from DEI. Google and Meta also cut some DEI staff and programs at this time.

The retreat of major tech companies from DEI does not seem to be primarily driven by ideology or ties to national politics. According to data from Felix Richter at the data analysis company Statista, "Apple, Microsoft, and Alphabet significantly underperformed the overall market in 2022," while Amazon and Meta saw their valuations drop by half and nearly two-thirds, respectively. It is reasonable for these companies to cut non-core positions as they adapt to a tougher macroeconomic environment and concerns about slowing profit growth.

It has been proven that 2022 was also a turning point for ESG. According to a report by Bloomberg in January of this year, "Since the beginning of 2022, as the emergency measures from the pandemic period (including the low rates at the crisis peak) began to fade, the S&P Global Clean Energy Index has lost about half of its value. During the same period, the S&P 500 Index rose by nearly 30%."

Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, told Bloomberg in January that "clean energy, clean technology and climate solutions don't perform well in a high-interest rate environment." ”

US ESG funds experienced a significant influx of capital between 2019 and 2021, with minimal changes in 2022, followed by capital outflows in 2023 and 2024. Despite the Biden administration's eagerness to encourage sustainable investments and the introduction of major legislation aimed at promoting the transition to "green" energy, this downward trend still occurred.

One explanation for this change comes from Peter Earle, a senior researcher at the American Institute for Economic Research. In March 2023, he argued that ESG investments are a product of "zero interest rate policy (ZIRP)." He wrote that low interest rates lead to bubbles, such as ESG, but "when interest rates normalize and rationality returns, the cost structure becomes apparent again. Companies return to their business fundamentals."

In other words: when funding is free, crazy ideas get funded. When funding has a cost, funders and investors want to see a direct connection to value. This means that ideologically favored projects are the first to be cut.

The explanation of interest rates is not all-encompassing. The concept still has its consequences. Some Americans sincerely believe in radical climate activism and broad progressive politics; they are not all speculating on the ESG bubble. There are several other important factors that help explain the shift in atmosphere, such as the Russia-Ukraine war that began three years ago, Elon Musk's acquisition of Twitter in 2022, and the attack on Israel on October 7, 2023.

Nevertheless, the disconnect between public opinion and elite institutions still needs to be explained. For a long time, progressives have been a minority on many issues such as climate and race. However, for about a decade, it seemed that progressive activists had control over almost all elite institutions. Now, that feeling is gone. This is the shift in atmosphere.

What needs to be explained is not why popular culture increasingly reflects public opinion, but rather why institutions were so disconnected from the public in the first place. For example, if expensive climate policies and explicit racial preferences are generally unpopular, why do so many institutions behave as if these policies are inevitable?

This is exactly the place where the unique political economy of the zero interest rate policy era comes into play. CEOs and other leaders in American life are rarely political ideologues. If an activist group asks a CEO to launch a new project, compliance may be easier than resistance, provided the costs are low. If it means they have to sacrifice their annual bonuses, that's a completely different decision.

The implicit assumption of free funds also defined the past political era. In the 2020 Democratic primary, candidates competed to incorporate universal healthcare, the Green New Deal, job security, and universal basic income into a national campaign. These numbers never increased, but it seemed more reasonable when interest rates were low and inflation was still a distant memory. However, high inflation and high interest rates have led Kamala Harris's 2024 campaign to overlook most of her past progressive commitments.

On the right, the era of zero interest rate policies has long been a hot topic regarding industrial policy and the exercise of administrative state power. The era of limited government has ended, Reaganism is outdated, and we are all social democrats now, so say the new right. These individuals are now confronting the practical implications of Trump's second term in the White House: a Republican Party more keen on eliminating government agencies, cutting taxes, and opposing European regulation, rather than combining leftist economic policies with right-wing social policies.

The economic driving force of the changing atmosphere seems to persist, even as certain Republican policies provoke social backlash. Federal Reserve Chairman Jerome Powell recently told Congress that he believes the neutral interest rate (the rate at which the economy operates at full employment and stable inflation) is now higher than before the COVID-19 pandemic. Inflation remains a problem, and the era of zero interest rate policies is completely over. CEOs and politicians who continue to act as if money is free will pay a high price. The atmosphere may have shifted, but the essence of America remains business.