The Inflation Reduction Act was supposed to be “one of the most significant laws in our history”. When Joe Biden signed it into law last year, he heralded it as proof that “the American people [had] won and the special interests lost”. As it celebrates its first birthday today, are the American people still winning?
In its main goal — stimulating private investment, chiefly in the renewable energy industry — it has proven to be an outstanding short-term success. Unfortunately, however, on most other counts, this focus on green technology at the expense of other kinds of manufacturing has been a costly mistake. For all the fanfare that accompanied its launch, the IRA is unlikely to meaningfully close the gap in global markets between China’s clean energy exports and America’s, much less in manufacturing as a whole.
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In the aftermath of the Covid pandemic and the unveiling of the West’s industrial dependence on China, there was a chance to rally both parties around identifying and reshoring critical manufacturing supply chains. Instead, the Biden administration and its allies in the Democratic Congress decided to spend their limited political capital on creating a slush fund for investors in green energy companies.
One would not know it from the Democratic obsession with a “just transition” away from fossil fuels, but America’s contribution to global greenhouse gases is relatively small and has fallen rapidly over the past two decades. In other words, even if the US achieved Biden’s unrealistic decarbonisation goals, most global greenhouse gas emissions would be unaffected.
Politicians are always vulnerable to the tendency to try to promote multiple unrelated goals with a single piece of legislation. Franklin Roosevelt’s National Recovery Act (1933) had good elements, but collapsed because it tried to stimulate the depressed economy and restructure American industry at the same time. With the IRA, Biden and congressional Democrats indulged in a similar temptation. Here, just one piece of legislation was supposed to accelerate the “green transition” away from fossil fuels to Net Zero, onshore manufacturing supply chains that have been lost to China and other countries, create great numbers of well-paying new jobs, revitalise “left-behind” local communities, and promote racial and gender “justice”.
In practice, this was always going to be too sprawling, premised as it was on a fusion of technocracy and progressive ideology that is already having a surreal impact on the American landscape. In May, for instance, guidance from the Internal Revenue Service on the allocation of a 1.8GW bonus to “low-income communities” divided it up in a manner incompatible with an incentive-based, market-driven energy revolution: 700 MW for low-income communities, 200 MW for Native American communities, 200 MW for facilities on affordable housing properties, and 700 MW for “low-income economic benefit projects”. Elsewhere, the IRA also included $64 billion in funding for Obama’s signature health care programme, the Affordable Care Act. This is neither rational energy policy nor rational industrial policy; it is simply political patronage for Democratic client groups.
Politics, rather than industrial strategy, similarly dictates Biden’s recurrent focus on helping small businesses and new firms. In manufacturing industries characterised by increasing returns to scale — when output increases by a larger proportion than increases to input — bigger firms naturally dominate many sectors, including those the Biden administration seeks to promote, such as semiconductor and pharmaceutical manufacturing. But “big business” is unpopular with the American public and politicians love to shower favours on small business and start-ups, even though few of these have a chance in face-to-face competition with state-backed Chinese corporations and other multinationals.
Paradoxically, too, the attempt to force a shift from oil and gas and nuclear energy to favoured renewable technologies such as batteries, wind and solar panels increases rather than reduces America’s dependence on China. While 13 countries control only 40% of global oil, China is virtually a green energy OPEC by itself: today, more than 60% of the world’s wind turbines and 80% of solar panels and batteries are made in China, which also controls an estimated 90% of the production of rare-earth metals essential in batteries and other green technology.
The implementation of the IRA is helping Beijing in other ways, too, particularly when it comes to the participation of Chinese companies and foreign workers in federal-funded American projects. Members of both parties in Congress, for instance, have criticised Ford for partnering with a Chinese company, CATL, to build a new $3.5 billion battery plant in Michigan. Elsewhere, the Taiwanese firm TSMC, the world’s largest contract chipmaker, has outraged unions by announcing plans to bring hundreds of Taiwanese workers to its new factory in Arizona, which is estimated to be eligible for $15 billion in various federal subsidies derived from the IRA. And this fits in with a broader trend, whereby unionised American workers are being undermined, rather than empowered, by the IRA. Of the dozens of new factories whose construction was announced between August 2022 and March 2023, 83% have been in anti-union, anti-labour “right to work” states, many in the American South and West.
Contrast this with China’s green manufacturing industry, which, according to current estimates, will meet the goals of its plans for wind and solar energy development five years ahead of schedule. Despite the best intentions of the IRA and related initiatives such as the CHIPS and Science Act, in 2030 China will be responsible for 68% of global battery manufacturing, compared to only 15% by the US.
How likely is this to change soon? Not very, if the response of American consumers does not also change swiftly. As long as tax credits for purchases of electric vehicles (EVs) remain the main method of stimulating consumer demand, the beneficiaries will be the affluent, college-educated American overclass: the average EV purchaser in the US is a household with an income of $150,000, more than twice the median. Too expensive for most Americans, even with tax credits, EVs’ share of the US car market has plateaued at around 7%; gas auto sales, by contrast, have surged.
None of this is to doubt the impact of the explosion of investment in new factories as a result of the IRA, and the jobs they have created. After all, if a government pays companies to do things they would not do otherwise, many will gladly change course and accept this largesse. The danger here, however, is that the boom stimulated by the IRA may prove to have been just a sugar high. China is still racing ahead, and it seems unlikely that America will catch up soon. Amid the competitiveness of our new multipolar world, that will require investment in many manufacturing sectors — not just a Green New Deal for batteries, windmills, and solar panels.