The Inflation Reduction Act: Some initial thoughts
Good enough on climate/energy, good on health care, needs more housing
Well, Joe Manchin wasn’t intent on completely destroying Joe Biden’s economic agenda after all. After the bipartisan CHIPS Act passed, the recalcitrant West Virginia senator immediately announced that he was open to a reconciliation bill. The Inflation Reduction Act that Manchin and his fellow senator Chuck Schumer have proposed falls far short of Biden’s original Build Back Better agenda in many areas, but that was inevitable. Overall, we’re looking at a pretty good bill here. A few preliminary thoughts, keeping in mind that we don’t know what sort of final bill will actually pass:
The triumph of the Investment Caucus
Biden’s initial economic agenda was about job provision in care industries, redistribution via cash benefits, and increasing investment. In a post a couple of weeks ago, I argued that the first two of these were just not going to happen anytime soon, for several reasons. Care job provision throws government subsidies at already-overpriced service industries. Cash benefits turned out to be less popular than I had anticipated. And most importantly, providing jobs and handing out cash are both inflationary, and inflation is our big economic problem at the moment. So I advocated keeping only the third part of Bidenomics — investment — since this would be deflationary in the medium-term.
It looks like that’s exactly what has happened. The well-named Inflation Reduction Act contains a large amount of government investment, mostly in the energy space. But it also has a lot of revenue-raising measures. Overall, the bill is predicted to reduce the deficit by $306 billion over the decade. Deficit reduction is disinflationary. Government investment is inflationary in the short term and deflationary in the medium term, but the tax increases should more than cancel out the short-term inflationary piece. In other words, this bill probably will help fight inflation (though I still think the Fed is the front line of defense).
(As a side note, Larry Summers has to get a bit of the credit for this. Rumor has it that he helped convince Manchin that government investment would help fight inflation. Summers was very early in advocating the need for Biden’s spending bills to focus on investment rather than on handing out cash. So this definitely helps rehabilitate his image as a Democratic policy advisor, after he mistakenly argued for a smaller stimulus in 2009!)
So the Inflation Reduction Act confirms a shift in Democratic policy priorities toward rebuilding government investment after a long drought:
That is a good thing.
Beating Russia while kickstarting the Green Vortex
In another recent post, I argued that progressives’ hopes for a big crackdown on greenhouse emissions was bound to be disappointed, and that the alternative was to focus on reducing the price of renewables. The Inflation Reduction Act confirms this general approach, but if it passes, it means renewables will get a boost from government after all. The proposal has only a very few provisions focused on cutting emissions directly (a tiny $1.5 billion for reducing methane emissions), but it has a lot of money for subsidies to clean electricity, electric vehicles, green agriculture, and lots of other stuff that we need in order to halt climate change. David Roberts has a good thread breaking it down:
Crucially, the bill sells climate action the way I’ve argued will be the most successful: Focusing on abundance from clean energy rather than telling people to curb consumption to save the planet. Here’s the WaPo:
New and extended credits will incentivize solar, wind, hydropower and other sources of renewable energy…The goal? To make new green energy production cheaper for utilities to build than fossil fuel plants are…
Buyers of new electric vehicles would get a $7,500 tax credit applied at the point of sale…If consumers claim the subsidies in the bill, they could save as much as $1,840 on their annual energy bill on average[.]
This is great, because it frames green energy as being about cheap energy rather than about sacrificing consumption.
Here are some really good details about what consumers would get if the bill passed. It’s basically an upgrade to a technologically advanced modern home.
Now, the Inflation Reduction Act also has considerable support for fossil fuels. This is inevitably going to make some climate activists mad:
But this was inevitable, for three reasons — 1) Manchin is beholden to fossil fuel interests, and second, 2) we need more oil and gas in the short term to defeat Russia, and 3) Americans are mad at high gas prices and want these to come down right now.
So there was never any chance of this bill being the kind of grand assault on fossil fuels that many activists have been pushing for. Instead, it supports fossil fuels in the short term in exchange for doing things that will make renewable energy very cheap in the medium and long term. Given America’s political economy, that’s how it has to be done. Luckily, many activists realize this and are supporting the bill.
The assault on costs
One really good aspect of the Inflation Reduction Act is that it attacks the biggest barrier to investment in America: Ruinous costs. If we’re going to create an age of abundance, we’re going to need to build things cheaply, and currently we simply can’t.
Manchin and Schumer’s proposal attacks costs in both energy and health care. In energy, the bill would reform the way permits are granted for new projects, making it harder for NIMBYs to use environmental excuses to block construction. That’s going to make a lot of legacy environmental groups very mad, but that’s fine — in recent years, they’ve been using their clout to block renewable projects of every kind, all over the country. Solving climate change involves giving the government the power to override local NIMBYism, even NIMBYism that cloaks itself in the mantle of environmental protection. And hopefully, permitting reform will become a fad — we could also use it in the case of transit projects.
In addition to energy and transportation, another thing Americans grievously overpay for is health care — our cobbled-together private-public Frankenstein system produces results about as good as other rich countries but at twice the cost. The best solution to this is to have a national health insurer that can negotiate down prices for every health service, the way Medicare currently negotiates down prices for the subset of services it buys. Another possible solution is price controls for health services, like those employed in Japan.
The Inflation Reduction Act would take steps toward doing both of those. Again from the WaPo:
The deal allows Medicare to negotiate drug prices for the first time and would prevent future administrations from refusing to do so…
The bill also includes other policies aimed at curbing the sky-high cost of drugs. For instance, it caps seniors’ drug costs under Medicare to $2,000 per year, forces drug companies to pay a rebate if they increase prices faster than the rate of inflation and provides free vaccines for seniors. The drug-pricing components are a key money saver — congressional scorekeepers estimate these policies would reduce the deficit by nearly $288 billion over a decade.
The proposal would increase Affordable Care Act subsidies, which, all else equal, would tend to push up health prices (though offering relief to the needy). But drug price negotiation and price caps will counteract that side effect.
If we’re going to rebuild this country, we have to make it cheaper to do so. It is essential that we force down the ruinous costs of energy, infrastructure, and health care, and this bill takes important steps in that direction.
One big thing that’s missing
There’s one big important piece of investment that’s missing from the original Build Back Better agenda, though: Housing. Remember that the four main material goods that the Abundance Agenda aims to make cheaper are energy, transportation, health care, and housing. Of these, housing is probably the most important, and pro-housing activism is probably the most important burgeoning grassroots movement in the progressive coalition.
Singapore is the country that has done the best with regards to housing, by having the government build homes and sell them cheaply en masse. Biden’s initial Build Back Better plan had a pilot program for a similar idea — it would have built 100,000 homes on government-owned land and sold these off cheaply to households and to nonprofits. BBB also contained a plan to incentivize local zoning reforms. These wonderful ideas unfortunately make no appearance in the Inflation Reduction Act, even though it’s something we desperately need — and now more than ever, since housing construction has collapsed due to the Fed’s efforts to fight inflation.
Hopefully other bills will fill the gap in housing policy. But if Manchin and Schumer make any big additions to the Inflation Reduction Act before its passage, housing should be their top priority. A country without affordable places to live is an angry, unstable country.
On the whole, though, the Inflation Reduction Act is a very good bill, and I’m very excited to see it pass. I didn’t think I’d be saying this, but kudos to Joe Manchin.