State swing: recognising Palestine

0:02The Economist

0:10Hello and welcome to The Intelligence from The Economist. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world.

0:24Not everyone agrees on the long-run effects of AI on economies. Silicon Valley types say we could be looking at staggeringly high growth. So we're going to game it out. What would the world look like if GDPs were to climb 20 or 30 % a year? And Tom Lehrer seemed bound for a glittering mathematical career. But he was just too full of song and satire. Our obituaries editor looks back on a songbook that, with a smile, skewered absolutely anything and anyone.

1:02First up, though.

1:10This week, another country announced plans to recognize a Palestinian state. Canada intends to recognize the state of Palestine at the 80th session of the United Nations General Assembly in September 2025. Prime Minister Mark Carney's move swiftly followed that of his British counterpart Keir Starmer, which came with conditions. I can confirm the UK will recognise the state of Palestine unless the Israeli government takes substantive steps to end the appalling situation in Gaza, agree to a ceasefire and commit to a long-term sustainable peace, reviving the prospect of a two-state solution. Last week, it was France's President Emmanuel Macron pledging recognition.

1:55This has made things a bit fraught with America, whose Middle East envoy Steve Witkoff is due to visit Gaza today. The diplomatic prospect of recognizing Palestine is, was some negotiating leverage for countries wanting to bring about a lasting peace. Question is, is this the right time, the right way to spend it? Famine is getting a grip inside Gaza. Peace still looks some way off, and every time you get it close to it, it seems to drift further away. Edward Carr is The Economist's deputy editor. And behind that, the idea of a two-state solution, one for the Palestinians and one for the Israelis, I don't think it's looked farther away for decades.

2:38So completely understandably, everybody's asking themselves, what can be done about this? And the answer from three Western countries and allies of Israel, France, Britain and Canada, is to talk about recognizing a Palestinian state. I completely share that desire to stop the famine, stop the war, and to preserve two states. But I have grave doubts as to whether this is the way to bring it about. In the sense that what they're doing doesn't matter, or they're doing it the wrong way? Well, many people say that what they're doing is a kind of futile gesture, including Donald Trump, who when asked about it said that France's, Macron's policy of recognising Palestine carried no weight were his terms.

3:26And there is something to that. We mustn't forget that of the UN countries, 147 out of the 193 members of the UN already recognise a Palestinian state. So you might wonder what the differences a few more make. But these are big names. These are G7 countries. Well, exactly. They do count for something. They're both France and Britain are permanent members of the Security Council. They're three G7 countries, you say. And I think there's something deeper than that, which is, in Britain's case, a certain historical role. Don't forget that in 1917, the Balfour Declaration said that there should be a homeland for the Jewish people and that Britain would do what it could to bring one about.

4:06So there isn't huge influence, but if you have any influence at all, then you really ought to use it. So I think you should look at this as, Well, you know, if we can do something, then we should. And that's a perfectly reasonable position. Well, let's look into what they're actually doing, though. What are the terms being put forth here on those three parts? There are three countries and three different approaches. France's is the most simple. Macron said that by the UN General Assembly in September, at that moment, he will recognize a Palestinian state. Then came Britain. The Prime Minister Skih Starmer said that Britain would recognise a Palestinian state unless Israel stopped the war, vowed not to annex parts of Gaza and parts of the West Bank and committed itself credibly to a two-state solution.

4:54And then came Canada, where the Prime Minister Mark Carney puts conditions this time on the Palestinians, asking that the Palestinian Authority, which is the body under the Oslo Accords designated to negotiate for the Palestinian side, said that there had to be governance reforms, including elections and pledges not to demand that Palestinians have their own security. So you've got these three slightly different approaches. And what do you make of the aims here? What are they exactly trying to do with these different sets of conditions? What they're trying to do is to shock the government of Benjamin Netanyahu into understanding that Israel is becoming isolated internationally and that it's in danger of becoming a prior state.

5:43All three of them were going to recognize a Palestinian state at the end of the negotiating process. By bringing this forward, they're trying to punish Israel to demonstrate that Israel's behavior comes with costs and therefore to try and shake it out of the path that it's on at the moment. I think that's a reasonable thing to try and accomplish. My problem is that it might not work and there's another possible outcome inside Israel, but also that it comes with costs in dealing with the Palestinians if negotiations ever really get underway. But in the nearer term, how do you think Israel will react?

6:21Will any of this act at the margins, as you say? I think there are many Israelis who are disturbed at the idea that they're losing support in the West. But the country that really counts for them is the United States. And I think the government in particular, which is actually what matters here, is very unlikely to feel that it would be wise for it to back down in the face of what France, Britain and Canada have threatened. Look at it this way. One thing is that there's a big expectation among the government that the Europeans and the Canadians will be critical of them almost whatever they do, and that to appear to give way to what they see as these demands now would only invite more demands in the future.

7:09And I think, you know, you do hear some some Israelis saying, well, we know that this is going to be unpopular. And if it's going to be unpopular, we might as well do what we have to do now and then try and rebuild relations later. And I don't think the extent to which there's one chance to play this card of recognition, if you play it now and it doesn't work, then I think you've lost a little bit, to the extent you had any negotiating strength at all, you've lost it over Israel. So I think it's unlikely to have much effect. And if it does have any effect at the margins, I think once you've played the card, well, there'll be people in Israel who say, well, we just might as well do what we were going to do anyway.

7:49So this is a mistake in your view of timing rather than tactic? It's all about timing. It would be more valuable to play it when the talks have begun, which might not be for some years yet, when it's both a possible leverage over Israel, but also a possible reward to the Palestinian side. So you're sacrificing your leverage at that point in order to get what I think is nothing very major now. And you can be sure that if negotiations start, there will be tricky moments. There will be roadblocks and sticking points where the negotiations aren't moving forward and where this might actually be more useful, this prospect of a reward for the Palestinians and leverage over Israel.

8:34But one gets the sense of dominoes starting to fall. other countries are talking about doing the same thing. In looking at what's been proposed by these three countries, is there a better way to do this, in your view, at the wrong time? What one needs to understand here is who is the actor who really has influence over Israel, rather than the marginal influence that France and Canada and Britain have, and that is the United States and it's Donald Trump. So I think the right way to act here is to work through and on Donald Trump to get him to put pressure on Benjamin Netanyahu. And we know that that is a perfectly sensible and reasonable aim because Trump himself has made it clear that he's very unhappy with the famine inside Gaza.

9:22We know that he actually, although he has in public spoken out to support Netanyahu, in practice, actually, the two men's relationship is not fantastic. And so I think the idea that you could work through Trump is more sensible. And if anything, you've seen his comments after this happened and the comments from the State Department and from the White House spokesmen have been very critical of Canada, Britain and France. Trump mentioned Canada's move when he raised tariffs against Canada this week. So rather than antagonize Trump, I think it would have made more sense to put all the diplomatic effort in working with him and encouraging him to put pressure on Netanyahu.

10:13That, to my mind, was a sensible way of acting. I do find it notable that each time we do a story on this war, it does seem to end with that notion that there is one way, one man, essentially, who can put an end to all this. To those of us who followed this story for many years, peace, a real peace, I don't just mean a ceasefire, feels further away than ever. There are a couple of things that could change that might make it better. One is that in a bit of the Arab world, Saudi Arabia and the Gulf countries, there is a determination to try and improve the conditions of the Middle East through economic development rather than through perpetual recycling of politics.

10:50And Saudi Arabia is emerging as an important force. This week, for instance, with France, it held a meeting at the UN about not Palestinian statehood. Its engagement's absolutely essential. And the normalizations of relations with Israel is something that Israelis think is important. So I think you could see with American participation, a slightly different route opening up here. But nothing is possible until the nightmare in Gaza is solved. That's why we need food in Gaza. We need a cease fire in Gaza that's permanent, and then we need to pick up our thoughts. It will be some time before the Israeli public, let alone the hard right government of Netanyahu, which I don't think really wants peace with the Palestinians, but it'll be some time before the Israeli public comes round to that idea.

11:42But there is really no other long-term answer to the question about the Israelis and the Palestinians, apart from perpetual, repeated bouts of war, there is no other answer apart from two states. And that seems very remote right now. But I think because it's the only answer, it will come back. And when it comes back, it'll come back in a different context that one has to hope will allow for some sort of progress. Edward, thanks very much for joining us. Very nice to be with you, Jason.

12:35In 1700, it would have seemed natural that economies only ever stood still. Henry Kerr is our economics editor. In the Common Era up to that point, global output had expanded by just 0.1 % per year on average, a rate at which it takes nearly a millennium for production to double. Then, spinning jennies started whirring and steam engines began to puff. Global growth quintupled to 0.5 % between 1700 and 1820. By the end of that century, it had reached 1.9%. And in the 20th century, global growth averaged 2.8%, a rate at which production doubles after just 25 years. The long history of the world economy is one of explosive growth, expansion at an increasing rate.

13:30If you believe the inhabitants of Silicon Valley, the world economy is about to be transformed, and that's because AI is going to get so powerful that it is going to be able to carry out all sorts of tasks that are currently carried out by humans and eventually all tasks. And the implication of that is that you get completely explosive economic growth. We're used to growth of 2 % or maybe 3%. Some of these models churn out numbers like 20 % or 30 % growth if AI becomes as powerful as Silicon Valley says it's going to. How do we get from a 2%, 3 % world to a 20%, 30 % world? What does the middle of that journey look like?

14:11I think the best way to answer that is to think about what enabled humanity to go from the very low growth pre-industrial revolution to the 2 % to 3 % growth norm today. And part of that picture early on was the so-called accumulation of labour. The size of the economy was very closely linked to the size of the population. And a bigger population led to the creation of more ideas because you have more people sitting around thinking and more output enabled death rates to come down and enabled birth rates early in the industrial revolution to go up a little bit because richer people got married younger.

14:46So population, the number of workers and growth were tightly linked. In theory, if your labour force, as you might call it, is made up of lots of AI agents who are really capable, in theory, you don't have to wait around for generations to pass for your workforce to grow in the same way as you would have done in the earlier era. So the people who come up with these kind of numbers talk about the accumulation of AI workers being far more rapid than the accumulation of human workers. So what starts to happen is you get massive investment in the production of AI agents, data centres, energy and so on.

15:25That pays off and produces a lot of growth because it automates so many tasks. And then that payoff is reinvested into still more AI power. And that loop can turn really quickly, unlike when you're looking at population accumulation, where it takes a while for that to happen. So two things there. One is that for the people who work in automatable tasks, they are then going to have trouble more quickly. But that still leaves a bunch of things that AIs can't do. AI plumbers don't yet exist. Yes. So there are various extremes to which you can push this thought experiment. So in the limit, and lots of people in Silicon Valley believe this, superintelligence basically replaces everybody.

16:02You have an AI that makes itself better. You have an AI that solves all robotics engineering challenges, and you don't need humans anymore. In reality, what you're much more likely to see is intermediate phases, which last a very long time, in which there are bottlenecks. That might be bottlenecks to how fast the AIs can improve, or how much investment in AI can take place. Or it may simply be things like regulatory bottlenecks to having robots displace humans, or it might be that there are fundamental limits to what AIs and robots can do. Typically what's happened in the history of the world economy is that when you have very rapid productivity growth in one type of activity and not much productivity growth in another type of activity, then the low productivity growth sectors still see wages go up a lot.

16:48And this is referred to as cost disease. But if you're a worker being displaced by an AI and you're having to find a new job, you might quite like cost disease because it means there's lots of highly remunerated stuff still around for you to do. But that's still a lot of a disruption happening if you have workers moving from one sector to another as AIs expand and displace more of the labour force. And if you look at the valuations of some of these AI companies, it's clear that some people are buying into this vision. I guess my question for you, with your vision, with your thought experiment, should I be training to be a plumber or should I buy into these companies?

17:19Well, I wouldn't become a plumber just yet on the basis of a thought experiment. You could buy into the companies. There are a lot of people in Silicon Valley who think that's essential because in the long run, they think labour is not going to have any value. The only thing that's going to have any value is owning capital, having a stake in these AI companies and things that are complementary to them. But it's a little bit complicated by the fact that those economic models also show that in an explosive growth scenario, interest rates should go up a lot. And one way of thinking about this is if you're going to have explosive economic growth and you're going to have AI powering that, you need a ton of data centres, you need a lot of energy production.

17:55If you're going to have a bigger economy, you need more infrastructure. So there's all sorts of demands for capital. But you have a lot of people who think they're about to get rich because of AI sending economic growth to the moon. And so no one really wants to save because why save for tomorrow if you're going to be rich tomorrow? A reduced demand to save, increased demand for investment means there's a capital shortage that pushes up interest rates. And what do higher interest rates tend to do? They tend to reduce asset prices. So you can tell the story multiple ways here. It's not entirely clear, even if you got capital, exactly what you should buy if what you think is going to happen is explosive growth, because it depends on these obscure parameters in the models, which economists and finance professors disagree about.

18:36So coming out of the models and looking at the real world, what to watch? How do you sort of figure out which end of things we're going to actually see as some of this stuff does or maybe doesn't come to fruition? I think the interest rate story is quite important here because although it is the case at the moment that you have this very extreme ebullience in the US stock market, high valuations of AI firms, which would seem to suggest the market buying into the thesis somewhat, in the money markets you do not have the pricing in of explosive economic growth and a big increase in interest rates.

19:10And I think that interest rate story is quite compelling in theory. So the thing you should watch for whether or not markets are really starting to believe an explosive growth story would be the long-term bond yields, which should rise quite a lot if explosive growth is coming. If it's just really valuable AI companies, well, you can explain that, I think, with a story where, yes, these companies are really profitable and AI is the next big thing, but the economy as a whole isn't exploding. It's just that AI is the latest technology that keeps the economy on a normal growth path. It happens to be AI today, just like in the past it would have been manufacturing automation or the internet, and today it's going to be AI.

19:48So watch the bomb markets, I'd say. At the mention of the internet, there was as much froth around the notion of the internet when it was new and how it was going to change the world, change the markets, change the economies and so and kind of didn't in the long run. Is that instructive to your mind or is AI a sufficiently different technology that we should consider it differently? Yes, well, I found myself hesitating when I mentioned the internet there for precisely this reason. It's clear that the internet both transformed the world and did not impact economic growth all that much, at least in a way that's observable.

20:17And some people do tell this story where AI will be a similar sort of thing. Lots of disruption, not much measured economic growth. And the economists who studied this in the 2010s tended to come up with estimates where essentially all the benefit of the internet and social media, free services, went to consumers, but not in a way that shows up in your measured economic output. I think with AI, it's possible to imagine something similar happening. If AI makes internet search much better, it's a similar sort of thing. If it makes just the access of knowledge easier, then again, it's a similar sort of thing.

20:51The key question here, as it is for the explosive growth scenario more generally, is does AI help humanity really push forward the frontier of knowledge? And if it does, if it can be creative, come up with research ideas, accelerate the pace of transformation, then you have potentially quite powerful impact on long-run living standards from that in a way that perhaps the internet, at least in an observable way, didn't bring about. Henry, thanks very much for joining us. Thanks, Jason. To hear more about what would happen if AI puts millions of us out of work, and how we'll find meaning in that potentially bleak world, listen to Money Talks, our subscriber-only weekly show on business, finance, and economics.

21:35In this week's episode, it's an interview with Dario Hamadei, the boss of Anthropic.

21:53When Tom Lehrer seemed to stop singing for good, people got rather worried about him, wondered whether he was dead. Anne Rowe is The Economist's obituaries editor. He was really just being lazy, he said. He liked to call himself lazy. And it seemed a very laid-back attitude when he'd been very, very famous in the 1950s and 60s. His sarcastic songs had really taken America by storm. First we got the bomb and that was good because we love peace and motherhood. Then Russia got the bomb, but that's okay because the balance of power is maintained that way. Who's next? He began by simply recording them for his friends, in fact, just writing them because he had a funny idea.

22:43And then he recorded them in a little homemade studio, more or less, and sent them out by post to anyone who was interested. He was very surprised, really, that people would pay good money and laugh a lot at a very clean-cut, nerdy-looking Harvard graduate pounding away on a piano. It was what he sang that made the hymn so popular. Nothing to him was sacred. Everything was fair game for his sarcasm. He approved greatly of National Brotherhood Week. Oh, the white folks hate the black folks And the black folks hate the white folks To hate all but the right folks Is an old established rule But during national...

23:26Where, of course, everyone was encouraged to love their neighbour and you could find nothing wrong with that. So he wrote a little song that ended It's only for a week, so never fear. Be grateful that it doesn't last all year. As long as you don't let them in your school

23:48The main theme of his songs, although he made great fun of it too, was actually the threat of World War III. After the Second World War, everybody was feeling very nervous about the continuation of the elimination of mankind. It was as vivid to them as the war they'd just been through. He went out to Los Alamos for a time, describing it as where the scenery is attractive and the air is radioactive. He also went to the National Security Agency, which was an outfit for spies, which he called No Such Agency. And he did his army service there, which made him laugh a lot at army life, and also to look in more detail at what World War III might really mean.

24:37One of his songs featured a soldier going off to war and telling his mother not to stay up for him. He was just going to drop the bomb and he'd be back when the war was over about half an hour from now. He did see, however, that there might be one blessing in nuclear war. And that was because everyone was going to fry or bake or burn together. In fact, there would be no more funerals and no more grieving. There'd be no one left to mourn. As his song said, we'll all go together when we go. We are the folk song army. Every one of us cares. We all hate poverty, war and injustice. Unlike the rest of you squares.

25:26This attitude to war, however, gradually changed in America. And people in the 1960s were beginning to think much more about present war in Vietnam. The subject of war was getting very serious, and he felt he couldn't joke about it. And so, gradually, the songs began to die out. He was also very much not in key with the new counterculture. He was left-wing, he campaigned for McGovern, but he was also a very fastidious person, a collar and tie man. He didn't like the shagginess and the general carelessness of the counterculture. Aesthetically, it offended him. Remember the war against Franco? That's the kind where each of us belongs.