Critics Warn US Inflation Reduction Act Could Keep Prices High

President Joe Biden promised that his Cut Inflation Act would reindustrialize the US and create new jobs. What the law will not do, say economists and investors ranging from Bank of America to BlackRock’s Larry Fink, is reduce inflation.

The IRA includes $369 billion in subsidies to stimulate clean energy manufacturing and deployment nationwide. The Chips and Science Act, passed around the same time, offers more than $50 billion in incentives to refocus semiconductor production.

The scale of federal handouts has already provoked a investment boom. But now it is stoking fears that a fight for workers will trigger another bout of inflation, complicating the Federal Reserve’s efforts to cool the economy.

“We’re putting a lot of money into getting these companies to come to the US, to expand in the US, and there are no workers for that, and it’s not like they’re going to take workers out of McDonald’s,” Gary said. Hufbauer, a senior fellow at the Peterson Institute for International Economics.

Hufbauer estimates that the tight labor market and sourcing requirements will add 10 percent to project costs.

The United States will need an additional 546,000 construction workers on top of the normal hiring pace to meet the increased demand for projects driven by the IRA and other laws, estimates Associated Builders and Contractors. McKinsey consultants warn US The semiconductor push will exacerbate existing shortages of engineers and technicians, with companies across all industries expected to need an additional 300,000 engineers and 90,000 technicians by 2030.

“I am in favor of well-paid jobs. But then either the customers have to pay more, or you have to have higher productivity. . . and the easiest way to get more productivity is to use more automation,” said Willy Shih, a professor at Harvard Business School.

Developers have already pledged $200 billion for new projects since the IRA and Chips Act was signed into law last August. But the administration’s effort to break reliance on China by subsidizing domestic manufacturing will also keep prices high, BlackRock chief Larry Fink warned.

“You don’t hear the word globalization anymore,” Fink said at an energy conference at Columbia University this month. “We are building new chip factories in the United States, at what cost?”

Fink said the Biden administration’s efforts to refocus manufacturing would mean US inflation is unlikely to fall below 4 percent “anytime soon.”

While the IRA includes $369 billion worth of clean energy subsidies, the credits are “uncapped,” meaning the final bill to taxpayers could eventually exceed $1 trillion, according to Credit Suisse, Goldman Sachs and Brookings. Institution.

Analysts say the magnitude of the prospectuses will affect the markets.

“You are distorting free markets when you create these incentives and when you create rules that require you to buy from domestic companies,” said Ethan Harris, Bank of America’s head of global economics. “If it was the most cost-effective way to do something, you wouldn’t need a subsidy for it.”

Although Biden has made job creation a central theme of huge new spending commitments, the IRA is also part of the White House’s attempt to reduce emissions. But the pace of the decarbonization effort may also push prices up, analysts have warned.

“We need to move very fast to build clean energy. . . creating that much demand for wind turbine blades or whatever component you’re talking about is going to be inflationary,” said Jason Bordoff, director of Columbia University’s Center for Global Energy Policy. Bordoff added that the higher costs may be a price “worth paying” if it means an energy supply chain less vulnerable to geopolitical disruptions.

White House deputy press secretary Michael Kikukawa said fighting inflation and cutting costs was Biden’s “top priority.”

“[The Inflation Reduction Act] Invest in our workers and increase the productive capacity of our economy. Reduce the deficit by hundreds of billions of dollars. Reduce costs for prescription drugs, insulin, energy efficient appliances to lower utility bills, and electric vehicles. And it stimulates the production of clean energy to reduce energy prices,” said Kikukawa.

At the heart of the matter is the US attempt to break reliance on China, whose low-cost manufacturing base has driven down clean energy costs in recent years. The developers are skeptical.

Morris Chang, founder of the Taiwan Semiconductor Manufacturing Company, called US efforts to reorient semiconductor production a “very costly exercise in futility.” Production costs at TSMC’s Oregon plant were 50 percent more expensive than in Taiwan, he said in a conversation with Brookings last year.

In December, TSMC announced a $28 billion expansion of its Phoenix semiconductor factory, the largest foreign direct investment of its kind in the US.

“If you want to scale clean energy at the rate and magnitude that we need, you will continue to rely on China, for example, for significant parts of our supply chains,” Bordoff said.

A recent Brookings article provided an more neutral image of the IRA’s impact on prices, saying the bill’s clean energy incentives could reduce inflation by 3-6 basis points by 2030, assuming onerous US permitting is reformed and cuts supply chain constraints.

But both remain significant hurdles, as the Biden administration’s efforts to satisfy its geopolitical, industrial and decarbonization ambitions at the same time, while promising to cut costs, are causing alarm among some analysts.

“Once you go down the path of national security and you don’t strictly limit it, boy, it’s a killer for economic efficiency,” Hufbauer said.

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