The Cozen Lens

• The state of the economy is unclear, with conflicting indicators of where it is heading. But this uncertainty isn't stopping Washington, DC from defining the economy for partisan gains.

• With regional banks remaining under stress, the Biden administration’s banking regulators continue to face a series of problems based around the government’s implicit guarantee of uninsured deposits.

• As artificial intelligence continues to attract attention from Silicon Valley to Washington, DC, policymakers in the executive branch and Congress are focusing on this emerging technology.

Which Economy Is It? And Does It Matter?

A Confounding Economy. Some are calling it a vibes recession, non-recession recession, or a job-full recession. It's an economy that's hard to define, with Americans feeling negative but also being driven by partisan views.

• Inflation – the top economic issue the past year – has ebbed but not subsided. Supply chain issues still linger. While the Federal Reserve is expected to pause interest rate hikes at the highest level in 16 years, it's keeping open the option for further rate hikes in the future if inflation remains sticky.
• The job market doesn't reflect a high interest rate environment. The unemployment rate is at its lowest level in 54 years. The Black unemployment rate is at its lowest level ever.
• America isn't in a recession but there's a Fed-induced credit crunch with yellow flags (e.g., commercial real estate) on the horizon. The debate between a soft vs. hard vs. no economic landing still lingers in DC.
• Americans aren't vibing with the economy. Less than 20 percent of Americans believe the economy is good, with a majority believing the country is already or about to be in a recession. Republicans have a more negative view of the economy than Democrats, the opposite from when President Trump was in office. 

Biden's Economic Vision. President Biden wants Americans to think the economy is back and that he's investing in the future. But his re-election is not one based on economic issues.

• Biden's economic approval rating is lower than his overall approval rating, the opposite from Trump. Presidents often don't win re-election when the economy is perceived as bad.
• Biden is embracing his populist, Scranton Joe roots on the economy. He's focusing on implementing an American industrial policy. He proposed tax hikes on the wealthy and corporations in his FY24 budget. He's attacking the GOP vision of the economy and the immediate threats to job gains if Republicans don't raise the debt ceiling.
• Biden's re-election is mostly focused on non-economic issues. His re-election launch video focused on freedom and democracy, not the economy. Winning over the "meh" Biden voters means reminding them why they chose him over Trump/MAGA in 2020.

GOP's Economic Vision. Americans trust Republicans more than Democrats to handle the economy. It's a message the GOP wants to highlight with the general electorate but may get lost in the priorities of the GOP base.

• Republican leadership wants to link the policies of Biden and Democrats to inflation and America's general malaise of the economy.
• Republicans are mixing traditional GOP economic policies with its own industrial policy. They want to cut Democratic spending and push work requirements in welfare, but also look to promote the domestic supply chain, particularly with fossil fuel production.
• The focus of top presidential Republicans is mainly on non-economic issues. Trump is focused on Trump and Governor Ron DeSantis (R-FL) is focused on fighting against "wokeism." Winning the GOP presidential primary is off message to the economic focus needed in a general election.

Deposit Insurance Problem Guaranteed to Stick Around

Mid-sized Banks Remain Under Pressure. The banking system continues to be stressed, particularly mid-sized banks, despite extraordinary interventions from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).

• The continued issues plaguing mid-sized banks are not entirely the same as those that hit Silicon Valley Bank (SVB), Signature Bank, and First Republic, but are more related to the still intractable market view that many banks are not too big to fail and are not safe for deposits over $250,000.
• This deposit uneasiness, coupled with challenges from investments and commercial real estate loans, is spurring the market to act as a “pack hunter” and single out the potential weakest banks.

New Realities Govern Any Regulatory Response to Bank Failures. The regulatory system is also under stress, creating a few new realities to govern any subsequent bank failures.

• The sale of First Republic to JP Morgan Chase shows that despite regulators opposing consolidation, particularly for banks judged “too big to fail,” they would rather oversee an orderly purchase of a failed bank to minimize losses to the deposit insurance fund than hold out hope for a more politically acceptable solution that ends up costing more money, as was the case with SVB and Signature.
• With more failures possible, regulators have no choice but to arrange a quick sale (like First Republic), or to declare a systemic exemption and back uninsured deposits (like with SVB and Signature). If they did anything else, the fear of a cascade of deposit outflows would return that could spark a true systemic crisis.
• Although the Biden administration has shown it can now cope with the largest banks winning a failed bank auction, it has not come around to allowing non-banks, such as asset managers or private equity, to participate, even as backers for another bank.

Implicit Guarantee to Remain Problematic. The FDIC’s implicit guarantee of deposits in excess of $250,000, which is in essence a market expectation based on the FDIC’s response to SVB and Signature, will remain a black cloud hanging over banks and regulators, as rule changes the Fed is contemplating will require a lengthy rulemaking process.

• Fed Vice Chair for Supervision Michael Barr noted in the Fed’s autopsy of SVB that any changes to liquidity or capital rules would go through the "normal notice and comment rulemaking and have appropriate transition rules, and thus would not be effective for several years." This time horizon, coupled with the expiry in March of next year of the Bank Term Funding Program (BTFP) that the Fed created in the wake of the SVB and Signature failures, means the Fed will either have to extend the BTFP or at least keep in mind the acute risk of a system-wide run starting again.
• The FDIC will also continue to advocate before Congress in support of its report recommending higher deposit insurance for business payroll accounts, with any additional bank failures keeping this issue front and center.

Whole-of-Government Approach to AI

The White House. The Biden administration may shift from voluntary guidelines to regulation in its approach to artificial intelligence (AI).

• To date, the White House has largely focused on elective frameworks to guide AI development. In January, the National Institute of Standards and Technology released an AI Risk Management Framework and in October the White House announced its Blueprint for an AI Bill of Rights. The Biden administration has made recent moves that indicate how this posture could change.
• Last month, the Consumer Financial Protection Bureau, Federal Trade Commission (FTC), Department of Justice, and Equal Employment Opportunity Commission released a joint statement declaring that their existing authority extends to AI. What makes this release notable is the coordination of agencies suggesting a whole-of-government approach to AI and raising the potential for the administration to propose binding AI regulation.
• The executive branch is also seeking public input on AI that could possibly inform future rules. Last month, the National Telecommunications and Information Administration released a request for public comment on AI accountability, and last week, the White House Office of Science and Technology Policy (OSTP) announced that it would seek public comment on “the automated tools used by employers to surveil, monitor, evaluate, and manage workers.” This move aligns with the White House’s overall pro-labor stance.
• The White House is engaging with industry. Last week, Vice President Harris met with the CEOs of Alphabet/Google, Microsoft, OpenAI, and Anthropic, an AI startup, about AI risks.In conjunction with the meeting, the White House announced a three-step plan to address AI concerns. First, leading AI developers including those attending Thursday’s meeting have agreed to participate in a public evaluation of their AI systems in August’s DEFCON 31 hacking conference. Second, the National Science Foundation will use $140 million to launch seven new National AI Research Institutes, with the intention of sponsoring “responsible innovation.” And third, the Office of Management and Budget plans to solicit public comments on draft policy guidance this summer on how the federal government should use AI systems to “ensure their development, procurement, and use of AI systems centers on safeguarding the American people’s rights and safety.”

The FTC. Under its Democratic majority, the FTC is staking out a stronger position in favor of AI regulation and enforcement.

• In a New York Times op-ed published last week, FTC Chair Lina Khan called for regulation of the technology. Khan highlighted the potential of AI to help big tech firms retain outsized market shares through unfair competition and collusion to raise prices. She also highlighted the risk of AI-driven discrimination and raised the possibility of generative AI being used for fraud. Khan noted that the FTC will take a broad approach to fraud enforcement in the AI space. “We will look not just at the fly-by-night scammers deploying these tools but also at the upstream firms that are enabling them,” she wrote.
• The FTC has also put companies that use AI on notice for compliance with the agency’s existing rules. Last week, the FTC published a blog post warning companies not to use generative AI to manipulate consumers into making choices that harm them. In March, the FTC warned companies in blog posts not to make unsubstantiated claims about AI in advertising their products and highlighted the use of AI for deceptive purposes, such as deepfake videos, voice clones, and fake websites.

Congress. Lawmakers are also paying closer attention to AI, but divided government poses an obstacle to passing legislation.

• Senate Majority Leader Chuck Schumer (D-NY) released plans last month laying out the scope of a bill intended to regulate AI. His three goals are: (1) building a flexible and resilient AI policy framework across the federal government that can adapt as the technology continues to advance; (2) allowing for innovation and continued US leadership in the development of this critical technology; and (3) enhancing security, accountability, and transparency. How successful the legislation will be depends on gaining support from within his own party as well as from Republicans to clear the Senate’s 60-vote filibuster threshold, but the fact that it is sponsored by the majority leader ensures that AI will be a priority for the upper chamber.
• Late last month, Rep. Yvette Clarke (D-NY) introduced a bill that would require disclosure of generative AI use in political ads. This came after the Republican National Committee released an ad critical of President Biden’s re-election bid that was created with AI. Senator Michael Bennet (D-CO) recently introduced the Assuring Safe, Secure, Ethical, and Stable Systems for AI (ASSESS AI) Act to set up a task force to evaluate the federal government’s approach to AI and make recommendations grounded in civil liberties.