President Joe Biden asserted that his Inflation Reduction Act would reindustrialize the country and generate new jobs.
Larry Fink of Bank of America and Larry Fink of BlackRock are among the economists and investors who believe that the law will not reduce inflation. The IRA includes $369 billion in subsidies to encourage domestic production and deployment of clean energy technologies.
Inflation and Shortage of Labor
The Chips and Science Act, which was passed around the same time, provides more than $50 billion in incentives for the reshoring of semiconductor production. The magnitude of federal handouts has already sparked a boom in investment.
As a result, the Federal Reserve’s efforts to cool the economy are hampered, and it is feared that the scramble for workers will spark another bout of inflation. Associated Builders and Contractors estimates that an additional 546,000 construction workers will be required to meet the increased demand for projects spurred by the IRA and other bills.
Since the IRA and Chips Act became law last August, developers have already pledged $200bn for new projects. However, the administration’s efforts to reduce its reliance on China by subsidizing domestic production will also keep prices high.
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Potential Cost to Taxpayers Exceeds $1 Trillion
While the IRA includes clean energy subsidies worth $369 billion, the credits are uncapped, meaning the final cost to taxpayers could exceed $1 trillion.
According to analysts, the sheer magnitude of the handouts will disrupt the markets. “You distort free markets when you create these incentives and rules that require you to purchase from domestic firms,” said Ethan Harris, head of global economics for Bank of America. “If it were the most economical method, there would be no need for a subsidy.
The crux of the matter is the United States’ attempt to end its reliance on China, whose low-cost manufacturing base has driven down the price of clean energy in recent years. Developers are skeptical. Morris Chang, the founder of Taiwan Semiconductor Manufacturing Company, referred to US efforts to restore semiconductor production as an extremely costly exercise in futility.
In a conversation with Brookings last year, he stated that production costs at TSMC’s Oregon facility were 50 percent higher than in Taiwan.
A recent paper published by Brookings painted a more neutral picture of the impact that the IRA will have on prices. The paper stated that the bill’s clean energy incentives could reduce inflation by 3 to 6 basis points by the year 2030. This, of course, is predicated on the assumption that the cumbersome permitting process in the United States will be reformed and that supply chain constraints will be alleviated.
Analysts are alarmed by the Biden administration’s efforts to simultaneously achieve its decarbonization, industrial, and geopolitical goals while promising to reduce costs.
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