international analysis and commentary

The Inflation Reduction Act and the rebirth of US industrial policy

2,209

It is ironic how well-known the Inflation Reduction Act (IRA) has become in recent months, as the Biden administration trumpets its environmental and social measures, and Europeans complain of its protectionist features. Indeed, despite its name, the law has relatively little to do with “inflation”, at least not directly. At its core, it is a climate bill, with hundreds of billions of dollars allocated to investments and tax credits aimed at developing clean energy and reducing carbon emissions. Money is raised through both savings on prescription drugs and provisions aimed at hiking taxes on billion-dollar corporations and ensuring better tax enforcement.

 

The bill was originally a centerpiece of President Joe Biden’s “Build Back Better” agenda, seeking to spend $3.5 trillion on tax reform and climate measures, but political conditions suddenly became adverse, as Republicans and centrists in the Democratic Party alike attributed rising prices across the country to excessive spending to rescue the economy during the pandemic. While physical factors, such as outsourced production and supply chain interruptions, actually played a larger role, it was tough to get around the fear of feeding further inflation, which led West Virginia Senator Joe Manchin – a Democrat – to refuse to support the original bill. Thus, the White House did the politically savvy thing and simply changed the name, while scaling down the numbers to achieve passage. The new label may not have fooled many in Washington, but rebranding and negotiation ultimately worked, as Manchin got on board and the smaller package was passed in August of 2022.

On the one hand, the IRA was a nod to political reality, a set of measures that fell short of most Democrats’ original expectations, served up with a name aimed at appeasing worries about galloping inflation. In terms of economic measures, the administration had to give up on the Child Tax Credit and universal preschool, as well as significant investments in areas such as education and housing. As for the environment, scaling back meant going a bit lighter on everything, although the areas of intervention remained essentially the same: tax incentives for clean energy, electric vehicles, building efficiency and advanced energy manufacturing.

 

Read also: The uncertain state of the Biden economy

 

Yet getting to passage also meant a compromise on substance: Senator Manchin – who at times appears to be the most powerful “Joe” in Washington – extracted a pledge for the government to move forward with a series of offshore oil and gas leases, actually requiring new fossil fuel concessions to be granted as a condition for providing offshore wind leases as well. In addition, there is $30 billion in the Inflation Reduction Act for nuclear power, which is not exactly the darling of climate activists. It is not hard to find comments about “poison pills”[1] and “false solutions”[2] from environmental groups, although they generally welcomed the bill as moving in the right direction.

Ultimately, the final form of the IRA is consistent with a typically American path on climate, moving towards decarbonization by incentivizing new technologies, but also being careful to ensure energy security and diversity. This is not only a bow to political realities in Washington, but also a fairly accurate reflection of public opinion more in general, where there is widespread skepticism of claims of imminent catastrophe and exclusively human responsibility for climate change.[3]

There is little question that the share of “green” technologies will increase in the US economy, and the Biden administration will probably seek further restrictions on emissions from power plants and vehicles, and to raise efficiency standards for industry. Yet, between political opposition and legal challenges, it seems likely that overall, the country will follow a relatively pragmatic course in the coming years, mostly relying on improving technology to continue[4] to reduce carbon emissions, rather than setting harsh restrictions that could also slow economic growth.

Given this perspective, the most important short-term aspect of the IRA may be less about rapid change on the environment, and more about the law’s contribution to the return of industrial policy, in which the US government is doubling down on the shift away from the free-trade paradigm that was dominant for decades under the period of globalization. The trend began with Donald Trump’s trade wars and attempts to favor American industry, and – predictably[5] – has been accelerated and sharpened under Biden for both immediate economic needs and in response to geopolitical competition with China.

Listening to the President’s February 7th State of the Union Address, it was striking how Biden eschewed a defensive posture on the protectionist measures his administration has taken, which include elements such as Buy American provisions in public procurement, the CHIPS and Science Act to boost domestic research and the manufacture of semiconductors in the United States, and the IRA’s focus on promoting domestic production of items such as solar, wind and battery components. Biden seemed to respond directly to European disapproval on this issue when he said, “Folks, I know I’ve been criticized for saying this, but I’m not changing my view. We’re going to make sure the supply chain for America begins in America.”

 

Read also: Post-global America and the need for industrial policy

 

He did not stop there. When speaking of infrastructure investments he said, “and again, I get criticized for this, but I make no excuses for it — we’re going to buy American,” while chiding past administrations, both Democratic and Republican, for evading Buy American provisions, which he claimed are “totally consistent with international trade rules.”

We have come a long way from his Democratic predecessors, whether it was Bill Clinton’s embrace of NAFTA and financial deregulation, or Barack Obama’s willingness to accept austerity and promote flawed international trade deals. At the end of the 2020 Democratic primaries, Biden began to abandon his generally cautious, centrist economic views, and incorporate some of the policies expounded by his former opponents such as Elizabeth Warren. He succeeded in distancing himself sufficiently from what many voters see as extreme positions on the left – a “woke” social agenda and radical environmentalism – while incorporating a somewhat populist economic policy aimed at responding to middle class malaise. Furthermore, there is no indication he is looking back; rather, he seems convinced that this is the best way to seek re-election despite widespread concerns about his age.

With the IRA, the Biden administration seeks progress on environmental issues while emphasizing industrial policy that can create jobs in the United States and revitalize American industry – all in the context of global geopolitics, in particular the need to prevail in competition with China for dominance in the technological sectors of the future. This is likely to be the framework in which decarbonization efforts will move forward in the United States for some time.

 

 


Footnotes:

[1] https://biologicaldiversity.org/w/news/press-releases/manchin-poison-pills-buried-in-inflation-reduction-act-will-destroy-a-livable-climate-2022-07-28/

[2] https://www.greenpeace.org/usa/the-inflation-reduction-act-the-good-the-bad-and-the-ugly/

[3] Yale Program on Climate Change Communication, International Public Opinion on Climate Change, June 28, 2021.

[4] https://www.science.org/content/article/surprise-climate-bill-will-meet-ambitious-goal-40-cut-us-emissions-energy-models

[5] The author’s 2020 Italian-language book “Post-Global America” argued that important elements of the shift away from globalization seen in the period of Donald Trump’s presidency were here to stay, regardless of who followed him in the White House.