Politics, Policy, and Economic Incentives: Weekend Update March 15, 2026

Newsom’s Israel rhetoric, California’s EV strategy, student debt and housing, and warning signs for Democrats in Texas and Montana.

This week’s update examines several debates where political messaging and economic incentives collide—from Gavin Newsom’s rhetoric on Israel and California’s EV rules to the role student-loan repayment policy may be playing in housing affordability. It also looks at political signals emerging from races in Texas and Montana and highlights several new Economic Memos papers on marriage penalties in AGI-linked programs and risks building in private credit markets.

Newsom on Israel: Substance or Political Signaling?

California Governor Gavin Newsom referred to Israel as an “apartheid state,” a characterization motivated more by his view of the 2028 primaries than reality. Within Israel’s recognized borders, roughly 1.7–2 million Muslim citizens live in the country—about 20% of the population. They vote in national elections, hold seats in the Knesset, worship in over 400 mosques, and can and do volunteer to serve in the IDF. (They are not subject to the draft.)

The more serious debate concerns Israel’s control of the West Bank and Gaza and the repeated failure of a two-state settlement. Since the 1993 Oslo Accords, negotiations tried to move forward incremental creating a Palestinian state while delaying harder issues for future negotiations. The failure of these negotiations and the current situation in Israel had more to do with the Palestinian leadership positions than the Israeli leadership positions.

https://www.jns.org/bill-clinton-reflects-on-oslos-failure-and-the-current-gaza-war/

Newsom is not well positioned to move the ball forward on a two-state solution, unless it involves Michigan and Arizona.

Newsom on Emissions: Environmental Policy or Political Signaling?

California is in the news this week after the Trump administration filed a lawsuit challenging the state’s aggressive vehicle-emission rules and electric-vehicle mandates. California has historically relied on a special provision in the Clean Air Act allowing it to seek federal waivers to set stricter vehicle standards than national rules. The waiver pathway is now uncertain because of the 2025 Congressional Review Act.

If the goal is to reduce gasoline car ownership, why rely on federal waivers and regulatory mandates at all? California has clear authority over its own taxes and vehicle registration fees. A gradually rising annual registration fee on gasoline-powered cars—phased in over five or ten years—could push the market in the same direction while avoiding a federal preemption battle.

This approach was successfully used by Norway which imposed steep registration fees and taxes on gasoline powered vehicles only. Only seven petrol-powered cars were sold in Norway in January 2026.

https://www.whichcar.com.au/news/just-seven-traditional-petrol-powered-cars-sold-norway-last-month

The policy worked in Norway not because drivers were ordered to buy EVs, but because the economics made them the obvious choice. If the objective is to move the market rather than fight regulatory battles with Washington, that model suggests California may be pursuing the more complicated path.

Housing Affordability: Is Student Debt the Real Problem?

The Trump administration also issued executive orders this week aimed at improving housing affordability. The directives focus largely on supply—reviewing federal regulations that slow housing construction, encouraging faster permitting, and expanding access to federally backed mortgage credit through agencies such as Fannie Mae and Freddie Mac. These steps address long-standing bottlenecks in housing supply.

But they do not address the largest financial constraint facing many younger households considering a home purchase: unaffordable student-debt obligations tied to the Trump administration’s Repayment Assistance Plan (RAP). Mortgage underwriting treats required student-loan payments as fixed obligations, directly reducing how much first-time buyers can borrow.

The Trump RAP program will kill housing opportunities for many young adults with student debt as discussed extensively on this web page.

· Payment brackets apply to total AGI, not just marginal income, creating abrupt jumps in required payments when borrowers, cross thresholds.

· Payment thresholds are not indexed to inflation, meaning normal wage increases can push borrowers into higher payment tiers even when real purchasing power is unchanged.

· Combined household income can create a marriage penalty, sharply increasing required payments once two borrowers marry.

· Repayment periods can extend up to 30 years, keeping loan obligations on household balance sheets through the years when families typically buy homes.

· Interactions with retirement-saving decisions (such as tax-deferred contributions that reduce AGI) can reduce payments initially but lengthen repayment and increase total lifetime cost.

Texas Reality Check for the Democratic Party

Another signal about the national political landscape comes from Texas’ 23rd Congressional District, where the Republican nominee will almost certainly be firearms-industry YouTuber Brandon Herrera after incumbent Rep.

Tony Gonzales dropped his reelection bid after the close first-round result amid a major personal scandal. Gonzales admitted to an affair with a staff member who later died by suicide.

Herrera himself has generated controversy after videos resurfaced showing him discussing owning Nazi memorabilia and joking about Holocaust themes, which he has said were intended as satire.

The broader strategic question for Democrats is simple: if the party cannot compete even in a race defined by scandal and a controversial opponent in a majority-Hispanic district long viewed as competitive, they have a problem and should like the main character on the show Silicon Valley “Look Inward.”

Democratic Party Reality Check in Montana:

Another interesting political development comes from Montana, where an independent candidate is entering the Senate race, raising the possibility that Democrats could finish third behind both the Republican nominee and the independent.

Political reality can be uncomfortable, but it should not be ignored. If Democrats cannot compete in a state at the Senate level, the strategic question becomes whether staying in the race helps or simply splits the non-Republican vote.

The challenge for any third-party candidate is that success cannot be built merely as a proxy for “not Republican”—it must stand for something distinct. The actual path to durable third-party influence likely runs through the House of Representatives, where smaller races, lower fixed costs, and the closely contested votes for Speaker of the House make coalition plausible.

Authors Note: This is a very busy and productive time at www.economicmemos.com.

I wrote several papers this week on how two AGI linked programs – the ACA premium tax credit and the RAP student loan program impact marriage incentives through implicit marginal tax rates. Start with either of these papers.

I wrote an article on how private credit markets are imploding for investors while Washington considers deregulations which would expand their use to more retail brokerage accounts and retirement accounts.

I wrote a articles on wealth tax proposals. Here is one.

Most of the material is free but some is behind a paywall. Free subscribers get one post behind the paywall free.