The passing of iconic Supreme Court Justice Ruth Bader Ginsburg has ignited a political battle over whether the Republicans should nominate and ensure a successor to her Supreme Court position before the election, and therefore the media and pundit class are breathless with chatter about an unprecedented crisis.
It’s a combustible political moment to make certain , but deeper analysis shows a real picture that’s more sober—and ultimately more alarming. The chaos and uncertainty of the instant , as arresting though they’re , actually align with and exacerbate two long-term trends in U.S. political economy: a stark increase within the United States’ Institutional Risk, and a corresponding rise in Social Polarization Risk.
These indicators are tracked by the models of my firm, GeoQuant. Institutional Risk includes such components as “Rule of Law” and “State Capacity” alongside “Institutional Stability.” Social Polarization Risk measures the extent and alter in social divisions along political, ethno-religious, and economic lines, also as social pressures from migration and population dynamics.
They highlight what we call the “EM-ification” of U.S. politics: the transformation of America into a rustic during which political and social stability is like what we expect in emerging markets. Such countries have institutions too weak to obviously define or enforce the principles , increasing political, social, and economic uncertainty—and thus the danger of constitutional crises, social unrest, and market volatility—around key processes like elections and appointments to the supreme court .
These dynamics will hold no matter who comes out on top in November, and our models show any “Ginsburg effect” on the election outcome itself may be a wash. Indeed, as we’ve since April, we still forecast President Donald Trump will lose to Democratic challenger Joe Biden .
This stems from a relatively high level of U.S. Government Instability Risk going into the election, and a correlated and equally significant increase in Social Instability Risk, driven partially by persistent fallout from the Covid-19 pandemic. the previous trend favors a turnover of power in any country, while its close alignment with the latter so on the brink of the election suggests further polarization and unrest will ultimately work against the incumbent.
To be sure, a more sympatico Supreme Court does increase already significant incumbency advantages, and even a weak president like Trump should be ready to push a nominee through the GOP-controlled Senate before January. At an equivalent time, Trump’s popular support continues to trend negatively into the election, suggesting anti-Trump voters are going to be even as mobilized, if less , by a nomination battle as their pro-Trump counterparts.
More to the purpose , U.S. Institutional Stability Risk was already approaching a peak heading into the 2020 election. Ginsburg’s passing—triggering heightened fears of civil rights restrictions and minority rule on one side of the aisle, and of retaliatory “court packing” on the other—simply crystallizes that fact. And while risk is currently forecast to say no somewhat after the election, it’ll remain above 2020 levels for the rest of 2021, indicating high levels of institutional conflict are here to remain no matter the result .
Even an institutionalist like Biden are going to be hard-pressed to resist pressure for dramatic and institution-altering moves like increasing the amount of Supreme Court justices, eliminating the filibuster. A re-elected Trump, meanwhile, will likely maintain self-serving and hyper-politicized policies and check out to erode the independence of the country’s bureaucratic, judicial and economic institutions.
These institutional risks extend beyond politics, chatting with concerns about the U.S. role within the global economy and therefore the reserve currency status of the U.S. dollar. Another index we track, U.S. Institutional Stability Risk, shows an increasingly positive relationship with EUR/USD in our daily statistic since 2015, a dramatic change from only one year prior, once they were inversely correlated. Notably, this relationship has gotten especially strong in 2020 as Institutional Stability Risk has increased, while VIX futures forecasting market volatility round the 2020 election are priced because the market’s worst-ever event risk given concerns around a contested election and potential social unrest. Keep this in mind: election season market volatility is traditionally far higher in emerging markets, in large part thanks to the uncertainty generated by weak political institutions.
Of course, any discussion of the economics of the U.S. dollar must take under consideration the economics of its alternatives, including the huge depth of U.S. markets compared to potential rivals and therefore the refore the breadth of the dollar and the U.S. Federal Reserve System in flow of worldwide assets. But at the top of day central banks (and many would argue, currencies and markets) also are political institutions, and a sustained trend of institutional decay won’t bode well for the U.S. dollar’s reserve currency status.
Neither will the change in U.S. Institutional Risk relative to other countries. Within GeoQuant’s economics framework, the country’s overall Institutional Risk (which includes such components as “Rule of Law” and “State Capacity” alongside “Institutional Stability”) has increased markedly over almost eight years of daily data—on par with less stable emerging markets like Hungary and Thailand, but faraway from developed market peers like Germany or Australia.
In short, the political fire ignited by Ginsburg’s passing is far more symptom than explanation for U.S. institutional decay, the risks from which can persist—and weigh down our polity, society and economy–regardless of who occupies the White House next year.