This week’s congressional elections in the United States saw a historic shift toward Democrats, who won control of both the House of Representatives and the Senate, including wins in traditionally red states such as Texas, Kansas, and South Carolina. But with President Donald Trump still in the White House and Democrats still trying to give shape to their own agenda, the implications for economic policy remain unclear.
Was the election outcome primarily fueled by inflation? What are the implications for the AI industry? And what macroeconomic options do the Democrats now have?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: What is the relationship between a political event of this magnitude and mundane cost-of-living issues, which most Americans seem to have been bothered by? Is this the stuff that political tsunamis are made of?
Adam Tooze: The cost-of-living issue, and the continuous shocks of price increases and the felt experience of the exorbitant level of prices, has probably not been as pressing as it is in the current moment in many parts of the U.S. since the 1970s. So at that level, there’s a kind of epochal quality to this. And the other thing surely to say is that nor have we had a government, an administration and a supportive Congress, so blithely refusing to simply take seriously any of those issues in a meaningful way. And it’s that combination, I think, which creates this outcome. It would have been damaging to everyone’s sort of self-understanding as a rational political analyst if something like this outcome had not happened.
Because how can you have this level of dissatisfaction over prices and price increases and a government committed to protectionism, to starting a war, to incredibly unequal tax breaks, to promoting a growth model that is so K-shaped, that is so promoting a wealth inequality, and not get a backlash? That would have tested the ongoing debate about whether the ’90s formula, “It’s the economy, stupid”—this would really have put a stake through the heart of that theory with garlic on top if we had not seen this backlash.
CA: This kind of epochal shift inevitably sparks debates about new, or renewed, political taxonomies in the United States. The term that is now being used to describe many of the new senators and governors elected by Democrats in unlikely places is “prairie populism.” And I’m curious what that term might mean when it comes to economic policy?
AT: Going all the way back to the late 19th century, there has been a brand of radical, challenging, anti-status quo politics, in contrast to socialism, which was populism. Populism came out of the prairie, out of the Midwest of the prairie states of the agricultural constituency, because it was about the way in which the gilded age economy in the United States was rigged in the interests of coastal elites—basically New York and the East coast elite.
And that’s the echo that’s being picked up on in this sort of talk. It’s a little exaggerated because there’s a huge difference between present day consumer orientated cost of living type of politics and the sort of radicalism, the deep structural changes that late 19th-century populists were demanding—who were really challenging the fundamental structures of the American political economy of that moment. And I do think that’s one of the fundamental questions for the Democrats right now, is that coming out of the midterms of 2018—which were also a Democratic breakthrough, against the first Trump presidency, though not on the current scale—there was a real sense that the discourse of American politics shifted. You got figures like Jake Sullivan spiraling to the top of the democratic pile on an agenda that was an explicit break in neoliberalism.
And I don’t quite know where that goes right now, whether there is a mood on the large part of the Democratic Party to resume that kind of quite more fundamental questioning of the orthodoxies or whether we take all that for granted now and we’re going to just focus on trying to deliver. I think we haven’t quite got the bearings yet of what this victory means. It was predicted, but I haven’t so far seen on the part of the Democrats a kind of coherent, new, comprehensive agenda—even in the sense of defining what its limits would be and how far one wants to go—emerging at this point.
CA: Polls suggest that many voters in the United States share skepticism about artificial intelligence and the role it’s playing in the economy, specifically the proliferation of data centers. What is the future of AI potentially with this new Democratic-controlled Congress?
AT: It’s been quite something to behold, the anxiety running through Wall Street over the last couple of days and kind of climaxing last night about the potential threat to the data center build out. Because America’s path to the AI future is very compute heavy. It’s all about data center build outs. And if you look at the states where this is happening, apart from Virginia, Ohio, Pennsylvania, I think the central play is Texas. And there was a real lot of big tech money mobilized on this issue of trying to ensure that a group of AI friendly politicians were elected.
And on the contrary then, the groundswell of Democratic mobilization was around AI and data centers as kind of a bundling issue, right? It’s about local pollution from the noise and everything else. It’s about local electricity rates and the impact that these huge consumers have on local energy prices. And it’s about AI as AI, its direct role on the labor market. And it’s about AI as the symbol of an irresponsible, unanswerable kind of oligarchy that just stamps itself on the face of American society. And these were a very powerful combination.
And I think Wall Street analysts were counting 40 or 41 local referenda, local motions that are being passed. All of which I think went to the anti-AI side. And in Texas, we’re talking about 60 gigawatts of buildouts, so an absolutely gigantic buildout valued at $200 billion, I think. And now the Democrats have a much more powerful hold on Texas politics than any time recently. And as we know, in the regional political economy of the United States, Texas and Florida are two great red state counter-examples to the New York and California visions of America’s future. And so for this break to happen is really very dramatic.
And it does form a connection between this electoral result and the market. On the morning after the election, though the S&P 500 as a whole was doing fine, Tesla had sold off, CoreWeave, all of these cloud companies have sold off quite hard. Trump’s media platforms are down, unsurprisingly. So it does look as though there is a selective shakeout happening across stock that are very exposed on the AI issue, very exposed to this blowback and are, in any case, over the last couple of months, looking increasingly fragile from a financial point of view.
CA: Democrats are promising to make life for ordinary Americans more affordable, but how they’ll do that is still somewhat of an open question. On a macroeconomic level, could finding a way to lower interest rates be something that Democrats in Congress turn their attention to?
AT: I think this is a really interesting question. I mean, there’s a real tension between projects of trying to address the cost of living crisis through concrete interventions on particular prices and market structure and price gouging on drugs and microeconomic policy strategies and the bigger macroeconomic picture.
And of course, Congress doesn’t shape that bigger macroeconomic picture. Really except through fiscal policy. It doesn’t have a direct influence on interest rates. If it wants to see interest rates come down, the way to do that, presumably, would be to adopt tough fiscal policy. It doesn’t necessarily mean you slash spending, but you would need to raise taxes and you’d need to actually build a coalition that was willing to do that. And there’s lots of ways of doing that in a progressive way. But that’s not something the Democrats have been keen to do recently, really, is to push redistributional taxes. Or you have to put the Fed in a position where it has no option but to do various very unconventional interventions. Which again is perfectly logical and sensible from a left Keynesian point of view. But it’s a breach of the kind of orthodoxy which the Democrats have embraced all the time outside moments of absolute crisis.
So I do think this question of what the agenda of the Democrats is really, macroeconomically, is quite unclear. Because we’re clearly no longer in the Larry Summers Bill Clinton 1990s era. We left that behind in the Biden administration. What the agenda, what the paradigm now is I think is very open-ended. Take the issue of AI. One of the effects of the AI boom is to suck foreign money into the American equity markets. It’s one of the fundamental ways in which the American balance payments now currently balances. If that goes away—and there’s very good reasons for wanting to embrace that as American’s future, slow this down, try and close the two legs of the K-shaped economy—the most likely prediction is that the dollar depreciates, the dollar devalues.
And again, you’ll find people saying, Well, that will be great for industrial policy, that’s exactly what we need, American producers are more competitive, who needs tariffs if you have a devaluing dollar? But the dollar is also American purchasing power. And so if the dollar devalues appreciably, seriously, this raises the price of American imports. It raises the cost of buying foreign goods for American consumers. It isn’t a way to increase purchasing power and address the cost-of-living crisis. It does the opposite, right? It restricts imports by way of raising the price of foreign goods.
Now, this isn’t one-to-one or simple, but there’s just a series of tensions here that are not squarely addressed at the current moment. There hasn’t been any cause to address them, though I also think there was an agenda around the Biden administration that pretty clearly spelled out some of the trade-offs here. For instance, we would intentionally slow down the renewable energy surge in the U.S. because it involved Chinese solar panels and that wasn’t the top priority, actually.
So what are the new priorities? What is the new set? If the cost of living is the absolute priority over everything else, then you would think that a radical free trade agenda would be the way to go. But Congress can’t do that without a compliant White House. And which Democrat is actually going to run on that, given what we know the Biden administration did, which was to maintain Trump’s tariffs from the first administration? And big parts of the Democratic coalition, notably what’s left of the blue collar trade unions, are, shall we say, pro-tariff, broadly speaking. Not Trump’s crazy ones, but they are not interested in ensuring that American consumers can have the cheapest possible affordable family car. That’s not their agenda. So there’s a whole series of really quite complicated trade-offs here that will have to be faced again.
