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Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of Public Policy research for Morgan Stanley. Today I'll be talking about the relationship between affordability, the data center buildout and the midterm elections. It's Wednesday, February 18th at 10am in New York. Markets and voters continue to grapple with questions on AI, including its potential scope, impact and disruption across industries. That's been a clear theme on the policy side as voters seem to be pushing back against AI development and data center buildout. In particular in key states, voters are associating the rise in electricity bills with AI infrastructure, and we think that could be an important read across for the midterm elections in November. Now, to be sure, electricity inflation has stayed sticky at around 4 to 5% year over year, and our economists expect it to remain in that range through this year and next. Nationally, the impact of data centers on electricity prices has been relatively modest so far, but regionally the pressure has been more visible to that point. A recent survey in Pennsylvania found that nearly twice as many respondents believe AI will hurt the economy as it will help more than half 55% think AI is likely to take away jobs in their own industry, and 71% said they're concerned about how much electricity data centers consume. But this isn't just a Pennsylvania story. In other battleground states like Arizona and Michigan, voters have actually rejected plans to build new data centers locally. So what could that mean for the midterm elections? Think back to the off cycle elections in November of last year. Candidates who ran on this theme of affordability and actually pushed back against data center construction tended to do pretty well in their respective races. Looking ahead to the midterm elections later this year, we see two clear takeaways from a policy perspective. First, it's important to note that more of the policy action here will actually continue to be at the local rather than federal level. Some states with heavy data center buildout so Georgia, Michigan, Ohio and Texas, among others, are now debating who should pay for grid upgrades. Federal proposals on this topic are still pretty nascent and fragmented. Meanwhile, public utility commissions in states like Georgia, Ohio, Michigan and Indiana have adopted or proposed large load tariffs. These require data centers to shoulder more upfront grid costs or can reflect conditional charges like long term contracts, minimum demand charges, exit fees or collateral requirements, all of which are designed to prevent costs from spilling over to households. And secondly, because of that limited federal action, we expect the Trump administration to continue leaning on other levers of affordability policy, where the president actually does have some more unilateral control. We've been expecting the administration to continue focusing on broader affordability areas ranging from housing to trade policy. As we've said on this podcast in the past, that dynamic is especially relevant this week, as the Supreme Court could rule as soon as Friday on whether or not the President has the authority under IPA to impose the broad based reciprocal tariffs. The Administration thus far has been projecting a message of continuity, but we've noted that a decision that constrains that authority could give the President an opportunity to pursue a lighter touch tariff policy in response to the public's concerns around affordability. That's why we think the AI infrastructure buildout debate will continue to be a flashpoint into November, especially in the context of rising data center demand. Next week, when the President delivers his State of the Union address, we expect to hear plenty about not just affordability, but also AI leadership and competitiveness. But an equally important message will be around the administration's potential policy options to address its associated costs. That tension between AI supremacy and rising everyday costs for voters will be critical in shaping the electoral landscape into November. Thanks for listening. As a reminder, if you enjoy thoughts on the market, please take a moment to rate and review us wherever you listen and share thoughts on the market with a friend or colleague today.
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