🔋Inflation Reduction Act
The inflation reduction act a continuation of arbitrary government distortion of markets and could even cause the antithesis of the intended effect.
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Inflation Reduction Act
Congress finally agreed on a version of the Build Back Better bill, this time under the Inflation Reduction Act (IRA) name. I don’t care for politics much, but this isn’t the first time I’ve discussed a government policy. The first was with the Between A Rock And A Hard Place, where I discussed the use of the defense production act for strategic battery materials. I point out that the goals of the act are desirable, but the US slid down the path it found itself in over the course of decades and the policy sets an ugly precedent for central planning of resources.
Moving to the recent bill, the IRA involves more than just batteries or climate change. It addresses healthcare, climate change, corporate taxes, tax loopholes, prescription drugs, and the budget deficit. Politician’s promoting the bill advertise it reduce inflation and emissions significantly. Moody’s Analytics predicts that the bill will lower inflation over the course of the decade, albeit slightly. Others don’t share the optimism because of the spending provisions and other studies that have come out.
Much of the bill is “paid for” through the tax increases, the eventual collection of more taxes through the increase in funding of the IRS, and drug pricing reforms. This helps offset the climate and energy spending. The tweet below is a good graphic of where the funds for the infrastructure bill last year and the inflation reduction act are going. Here is a detailed look at what is in the bill.
Most notably are the loans for utilities to adopt renewable energy and tax credits for manufacturers of solar, wind, batteries, and other energy storage. One of the big pieces that effects consumers is the extension of the EV tax credits to purchase an electric vehicle (EV). The issue is that it only applies if the automaker sources the batteries from a country the US has a free trade agreement with. Currently this infrastructure does not exist and will not for many years unless there is massive mines and processing facilities built or exceptions to the rule are made. I have talked about the reliance on other countries, particularly China, for vital battery and rare-earth materials in the past and how this is an issue. From Benchmark Mineral Intelligence,
China also dominates global lithium refining and processing. The US and Canada currently refine only 3% and 3.5% of the world’s lithium and cobalt and compared to 59% and 75% for China, according to Benchmark’s Lithium Forecast. By 2030 the US and Canada will contribute about 7% and China 46%.
Regardless of the challenge of this tax credit even getting extended in practicality, prices remain a concern. The trend so far is that higher rates of adoption of wind/solar for grid electricity production, the higher the cost of electricity for consumers. This is seen domestically in the US, but also in Europe. So far this is an unpleasant statistic contradicts the name and purpose of the bill. The ability of the bill to significantly change emissions is also seriously questioned, even though it is one of the main goals.
Government Intervention
Government subsidies, spending, and tax breaks often inflate the cost of the underlying product, where the government pays the rest of the cost. Good examples of this are healthcare and college education. When government steps in to help lower prices, the real prices go higher, not lower.
Not only has wealth inequality gotten worse, but the cost of these services has skyrocketed compared to the real purchasing power of the people buying them. Since the cost is not getting passed down to the consumer, the bulk of the cost is covered by government spending. We know this is an inflation of prices and does not contributing to better healthcare based on the poor life expectancy vs healthcare expenditure compared to other countries.
This likely is the case with the healthcare and climate portions of the bill. Government spending would have an initial benefit of lower consumer or manufacturer prices of healthcare or renewables, but over time the base prices get inflated and paid for by the government. Proponents of modern monetary theory would have you believe that the government has room to spend as much money as they deem to support these morally justified projects and encourage economic growth and prosperity, but unfortunately that spending indeed has its cost. When in the form of monetary inflation, it hurts the average person by devaluating the money he has and earns into the future (since the creation of the central bank, the dollar has fallen over 99% in value). Even though the bill is advertised to be covered by tax increases to balance the budget of the bill, the initial spending has to come from somewhere. That somewhere is through new money, which has a tendency to inflate the things they are attempting to reduce the cost of, and create a snowball effect.
Factor in potential slowing economic conditions from higher taxes and thus lower consumer disposable income or capital for businesses, and all of a sudden there is less revenue than projected. Factor in a potential reversal of tax policy with a switch in political power and the spending remains, but the 10 year budget projections no longer balance out. Factor in the potential for electricity prices not getting cheaper as the bill is designed to and there are many reasons why this won’t reduce inflation.
Thoughts
Big drivers to inflation we are having inflation right now are fiscal stimulus during COVID which boosted demand by giving consumers extra money and a lack of investment in natural resources leading to supply issues with energy and many manufacturing materials.
We do not need more government spending and subsidies that not only contribute to inflation, but distort market dynamics. People already have an incentive to get a hybrid or electric vehicle because it can be cheaper in the long run. Government spending, most of which is not paid for through tax revenue, is paid for through monetary inflation aka printed money. This printed money like I’ve mentioned above and in the past devalues the dollars in existence and is redistributive of the value of the money from everyone in the economy to select areas and business that the government deemed suitable.
In the All-In podcast (skip to 36:33), David Friedberg speaks to this point very well, and also makes the point that government subsidy can stifle innovation where new and better technologies come around and can’t compete because the legacy system is propped up by the government artificially. Now even though it is hard to picture going a different direction than full EVs, I have argued that the government policies have already massively distorted the transportation sector with their arbitrary EV target. Focusing on plug-in hybrids with a 30-40mi range would abate most emissions that commuters drive and not distort the market of what cars manufacturers should make or flip the battery supply chain sideways. Car makers should make cars based on what sells and what they think will sell into the future, however they are pushed to put full electric vehicles at the forefront of their plans regardless of what the market is telling them.
While I’m not in favor of the manipulation of markets and arbitrary government spending, especially when as unnecessary as this bill, it is nice to see the change in guidance toward more domestically sourced materials and nuclear energy. While not as exuberant as the four trillion Build Back Better bill, it is a stretch to put it nicely, to in good faith call this the Inflation Reduction Act.
See you next week!
-Grayson
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