The US Supreme Court’s recent precedent-setting ruling against the Environmental Protection Agency has redrawn the regulatory landscape of the US. The decision restricts the regulatory powers of agencies by demanding that their authority be explicitly delineated in legislation for “major questions” of economic and political significance.

In theory, this enforces the separation of powers, confirming that the US retains strong independent institutions and adherence to the rule of law. In practice, however, it risks paralysing regulatory agencies and increasing the onus on an often-gridlocked Congress to resolve its most contentious issues in finer detail; an unlikely prospect, especially if the midterms return Republican majorities. New agency regulations are now open to lawsuits that will substantially delay their enforcement while states chaotically fill the gaps, entrenching regulatory uncertainty.

The ruling, part of a slew of decisions enshrining conservative positions after former President Trump decisively shifted the ideological balance of the court, serves as further confirmation that the US’s political dysfunction and polarisation now impact every level of governance. In the last decade, institutional conflict has made the US a less predictable operating environment, regardless of which party is in power. A stagnant legislative process and constrained executive will push more questions towards the quasi-policymaking Supreme Court, an inherently less accountable institution. This raises the stakes and feeds into the polarisation driving socio-political risks that compound rising operational concerns. 

For now, markets have not responded to these risks after being more sensitive to political risks during the Trump presidency. The US’s stability, predicated its enormous wealth and resources, remains the backstop of the global economy. But this stability also relies on its benign regulatory and democratic environment, backed up by a credible administrative state. A less governable US only increases the tail risks that would accompany the further decay, or even rupture, of its institutional fabric.  

This article first appeared in the Axco Flashpoints newsletter, which provides monthly analysis on country risk and geopolitics from our Global Risk team. You can sign up at https://www.axcoinfo.com/axco-flashpoints-signup.aspx