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Peter Morici: Biden’s green energy subsidies will boost inflation, distort investment

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Democrats can head into the midterms touting the CHIPS Act and new green-energy and health-care legislation, dubbed the Inflation Reduction Act, but these forays into industrial policy will likely stoke inflation and distort capital investment.

As passed, the IRA should increase revenue and reduce Medicare drug spending by $767 billion and devote $437 billion to climate change and Affordable Care Act subsidies through 2025. The subsidies will likely be extended, bringing total IRA spending to $587 billion.

Spread over 10 years, budget deficit reductions of roughly $18 billion set against a $25 trillion dollar economy will not have a statistically significant impact on inflation.

The CHIPS Act will spend about $280 billion to subsidize the construction of new semiconductor factories and other high-tech activities and requires that union wages be paid on government-supported construction projects.

The industry already faces acute shortages of engineers and technical workers. Construction of the Taiwan Semiconductor Manufacturing Co.
2330,
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foundry in Arizona is months behind schedule owing to staffing problems.

Our universities produce lots of engineers but too many are foreign students and leave, in part, owing to Trump and Biden administrations’ failure to support immigration reform focused on skills-based permanent visas and naturalization.

Pressures on wages will push up prices for chips.

The auto industry is struggling to produce enough electric vehicles to meet demand, owing to problems manufacturing and procuring enough batteries. These relate to structural shortages of lithium and other critical metals.

The IRA will boost subsidies to purchase EVs for families earning less than $300,000, with larger subsidies for vehicles made in union factories. The latter discriminates against Tesla
TSLA,
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and Toyota
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-1.40%
.

Boosting demand with subsidies for EVs with structural-constrained supply and limiting competition from two leading auto makers can only drive up prices.

Boosting subsidies for health insurance will increase demand and push up prices for coverage.

The bill does require Medicare to negotiate prescription drug prices with Big Pharma but manufacturers could compensate by raising what they charge Americans under 65.

The IRA has broad incentives to encourage utilities to move faster into windmills and solar panels but, like the auto industry, they are running into severe supply constraints.

In 2022, power plant developers plan to install 17.8 gigawatts of new capacity but during the first six months of this year only 4.2 GW of that capacity came on line because of pandemic-related supply issues and labor shortages, high prices for components, and difficulties obtaining permits and testing equipment.

More subsidies will only increase the dollars chasing scarce workers and photovoltaic and windmill equipment, and raise the cost of electricity. Similarly, IRA incentives to increase U.S. sources of supply for this equipment will displace less expensive imports.

China is a significant supplier for lithium and other materials vital to the EV and green energy industries, creating a strategic vulnerability similar to EU problems with Russian natural gas.

Too much of the new revenue will be raised by taxing capital formation and adding to paperwork and litigation.

Stock buybacks are an efficient way for markets to reallocate risk capital from mature businesses with more profits than they can productively invest to new ventures by permitting shareholders to reap capital gains and make new bets. The new 1% tax on stock buybacks will prove akin to sewing weights into the running shoes of U.S. Olympic athletes.

The IRA will increase IRS funding by $80 billion—about 60%. A good deal of the money will be spent auditing S Corporations. Many small businesses can’t afford to take the IRS to court even though in most cases plaintiffs prevail—an indication that too many audits are creating inappropriate new tax liabilities.

Federal tax paperwork already takes up the equivalent of 3.6 million American workers. The IRA could increase that to at least 5 million and exacerbate the problem of inappropriate taxation of small businesses.

To President Joe Biden’s credit and in defense of the CHIPs Act and IRA, those finally put America on the offensive in the war for dominance with China in microprocessors, solar panels and windmillsartificial intelligence and other high-tech activities.

President Donald Trump’s policies—tariffs and export controls on high-tech equipment—were largely defensive and too often can be subverted by currency devaluation and diverting sales through third-country suppliers. But improving U.S. competitiveness surely could have been done in better ways than indiscriminately throwing around subsidies, boosting unions, enabling inappropriate IRS audits, and taxing capital formation.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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