How easy money breeds bad thoughts

Article Author:Russ GreeneArticle Compilation: Block unicorn

In July 2024, economist Tyler Cowen published an article titled "The Change in Atmosphere—Why Did It Happen?" on his blog Marginal Revolution. The article was published four days after Trump's assassination attempt at a campaign rally in Butler, Pennsylvania. Cowen began by focusing on the Republican nominee, calling him the “clear favorite for the next election.”

Cowen offered 19 answers to his question, covering factors ranging from the rise of social media, high inflation and rising interest rates, to the declining credibility of higher education.

The election of Trump confirmed Cowen’s point.

By Inauguration Day, New York Times columnist Ezra Klein echoed Cowen’s thesis, agreeing that “popular culture is moving in Trump’s direction,” even though Klein considered the election a “narrow win.”

Klein zeroes in on several of the same factors Cowen mentions: Republican victories on social media, a latent desire in the corporate world to move rightward, a resurgence in masculinity, a rift between Big Tech and the left, and a pushback against “wokeism.”

In fact, there were signs of a shift in tone. The most obvious example: Companies were already backing off on diversity, equity, and inclusion (DEI) programs and environmental, social, and governance (ESG) initiatives before Trump became the clear Republican nominee last year.

For example, according to AlphaSense data, mentions of “DEI” or “diversity, equity and inclusion” on corporate earnings calls peaked in the second quarter of 2021 and have since fallen sharply. The Los Angeles Times reported that “large corporate spending on DEI positions” began to decline in 2022, when the tech industry was experiencing mass layoffs, according to data from Revelio Labs, which analyzes public employment records. By the end of 2023, CNBC reported on

Big tech’s pushback on DEI doesn’t appear to be primarily ideological or tied to national politics. According to Felix Richter of data analytics firm Statista, "Apple, Microsoft and Alphabet have significantly underperformed the overall market in 2022," while Amazon and Meta have seen their valuations fall by half and nearly two-thirds, respectively. It makes sense for these companies to cut non-core jobs as they adjust to a tougher macroeconomic environment and concerns about slowing profit growth.

2022 is also proving to be a turning point for ESG. “The S&P Global Clean Energy Index has lost about half its value since the start of 2022 as pandemic-era emergency measures, including crisis-low interest rates, have begun to fade. The S&P 500 has risen nearly 30% over the same period,” Bloomberg reported in January. “Clean energy, clean tech and climate solutions haven’t performed well in a high-rate environment,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, told Bloomberg in January. U.S. ESG funds experienced big inflows between 2019 and 2021, little change in 2022, and then outflows in 2023 and 2024. The decline comes despite the Biden administration’s eagerness to encourage sustainable investing and major legislation aimed at spurring a transition to “green” energy.

One ​​explanation for the change comes from Peter Earle, a senior fellow at the American Institute for Economic Research. In March 2023, he argued that ESG investing is a product of “zero interest rate policy (ZIRP).” Low interest rates can lead to bubbles, such as ESG, he wrote, but “when rates normalize and sanity returns, the cost structure re-emerges. Businesses are back to business.”

In other words: When money is free, crazy ideas get funded. When money has a cost, funders and investors want to see a direct link to value. That means ideological pet projects are the first to go.

The explanation for the interest rate is not all-encompassing. Perceptions still have consequences. Some Americans sincerely believe in radical climate activism and progressive politics broadly, and they are not all speculating on the ESG bubble. There are several other important factors that help explain the shift in tone, such as the Russo-Ukrainian war that began three years ago, Elon Musk's acquisition of Twitter in 2022, and the attack on Israel on October 7, 2023.

Still, the disconnect between public opinion and elite institutions needs explanation. Progressives have long been in the minority on a wide range of issues, from climate to race. Yet for about a decade, it felt as if progressive activists had control over nearly all elite institutions. Now, that feeling is gone. That's the shift in tone.

What needs explaining is not why popular culture increasingly reflects public opinion but why institutions are so out of touch with the public in the first place. If expensive climate policies and explicit racial preferences are broadly unpopular, for example, why do so many institutions act as if these policies are inevitable?

This is where the unique political economy of the ZIRP era comes in. CEOs and other leaders of American life are rarely political ideologues. If an activist group asks a CEO to launch some new project, it may be easier to comply than to resist, but only if the cost is low. If it means they have to sacrifice their annual bonus, that’s an entirely different decision.

The implicit assumption of free money has also defined past political eras. The 2020 Democratic primary candidates raced to spin Medicare for All, the Green New Deal, a jobs guarantee and a universal basic income into a national movement. The numbers never added up, but it seemed more plausible when interest rates were low and inflation was still a distant memory. Yet high inflation and high interest rates have caused Kamala Harris’ 2024 campaign to ignore most of her past progressive promises.

On the right, the zero interest rate policy era has been hot for years about industrial policy and the exercise of executive state power. The era of limited government is over, Reaganism is outdated, and we are all social Democrats now, so the New Right says. These people are now facing the realities of a second Trump White House: a Republican Party more interested in deleting government agencies, cutting taxes and fighting European regulation than in combining left-wing economic policies with right-wing social policies.

The economic drivers of the shifting tone appear set to persist, even as some Republican policies spark a 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 it was before the pandemic. Inflation remains a problem, and the era of zero interest rate policy is well and truly behind us. CEOs and politicians who continue to act like money is free will pay a high price. The tone may have shifted, but America is still about business.