The Green Transition: The Inflation Reduction Act, one year on

Weekly analysis of the shift towards a new economy.

Dear Reader,

Happy Friday. Hope you had a splendid week.

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Cheers and have a great weekend!

Jonny Ball – Associate editor, Spotlight on Policy, New Statesman

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IRA leads the way?

This week, US President Biden marked the first anniversary of signing the IRA into law. For any readers still mistaking the IRA for a paramilitary organisation that used to be in the news quite a lot, we actually mean the Inflation Reduction Act – a landmark piece of US domestic legislation heralded as the centrepiece of “Bidemonics”/ “securonomics” / “a post-neoliberal era” / “modern supply-side economics” [please delete as appropriate].

The Act’s impact on inflation is disputed, but it was introduced at a time of near-double-digit price hikes, so the title offered a handy way of signalling to American voters that the legislation was supposedly dealing with the problem, even if its effects on rising prices were secondary or tangential. But if a hefty signal that you’re doing something is what you want, then $500bn – according to McKinsey & Company – in new spending and tax breaks ought to do it.

The US Treasury Secretary, Janet Yellen, described the aim of the IRA as boosting “economic growth by increasing labour supply, raising productivity, and reducing inequality and environmental damage.” It involves subsidies for renewable energy, electric vehicle and battery production, and research and development into green technologies. It is projected to reduce US CO2 emissions to 40 per cent below 2005’s levels by 2030.

The IRA’s measures also contain another core component: a self-consciously pro-labour politics with pro-labour policies focused on expanding well-paid, unionised, long-term employment for American workers in new green manufacturing. This is about shortening supply chains and transitioning towards a less hyper-globalised world, towards national resilience over open markets, as well as national security, according to Yellen.

There are echoes of MAGA Trumpism’s rhetoric in this agenda. In basic terms, it is the left’s response to Rust Belt populism, with talk of making sure “tomorrow’s products are made in America”, as Biden said this week. Trump, too, tried to reshore manufacturing jobs with massive tax breaks. And, just like under Trump, thoughts of China’s rapid rise are never far from influencing US domestic economic policy. But Biden is keen to stress the differences. “The MAGA view”, he said, “is focused on corporate profits”.

A White House official communique claims that, since IRA, 170,000 clean energy jobs have been created. As intended, private money has started following the massive amounts of public investment: $110bn in clean energy manufacturing, including $70bn in electric vehicles. Related to the IRA, Biden’s Chips and Science Act also seeks to reshore the manufacture of semiconductors (used in renewable and electric vehicle technologies). The world’s largest manufacturer of semiconductors (the Taiwan Semiconductor Manufacturing Company) is spending $40bn on two new factories in Arizona.

So how are we doing back in Blighty? Rachel Reeves has latched the Labour Party on to “Bidenomics” (she prefers “securonomics”), and the party promises big investment in its Green Prosperity Plan. Just one catch: Labour will only ramp up investment when the fiscal rules allow.

Biden’s IRA included billions in tax rises, mainly targeted at corporations and the wealthy, but Reeves has ruled out new wealth taxes, a rise in capital gains, or any increase in the top rate paid by individuals on higher incomes. That means there’s unlikely to be much cash down the back of the sofa for IRA-style splurges. The IRA’s pro-union, pro-worker message also seems to be less directly translatable to a Labour Party that is reportedly watering down its commitments on strengthening workers’ rights – one of the few policy options that wouldn’t include immediate spending outlays.

The standard response from Labour to all this is that they will restore “growth, growth, growth” via planning law tweaks, removing some EU trade frictions, and promoting devolution. But if (or is that when?) big positive GDP figures don’t materialise, not least because of low levels of public and private investment, we’re unlikely to see a transformative stimulus programme like the IRA from Labour any time soon. Labour have talked themselves into a classic catch-22: you have to invest to stimulate growth, but, apparently, you can’t invest without growth. Meanwhile, in Conservative land, the trade minister, Kemi Badenoch, as well as the chancellor, Jeremy Hunt, have dismissed the IRA as “protectionist”.

Is that the sound of us getting left behind?

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In Brief

Solar power to the people!: Despite the relative lack of IRA-style programmes in the UK, the country has still recorded a big leap in the number of solar panels and heat pumps we’re using. Data from MCS, a charity providing grants for low-carbon and renewable energy solutions, shows that in the first six months of 2023, more than 120,000 certified solar panels, heat pumps and other renewable technologies were installed in UK homes, the highest number ever by this point in the year.

Windfall Tax? Just do it: New research by academics working for the Common Wealth think tank says that the common excuse for not imposing windfall taxes on oil and gas giants is hokum. Free marketeers often cite the fact that ordinary workers’ pension funds are tied up in investments for big energy producers, so it would only be normal pensioners that suffered. Common Wealth says that just ain’t so. They have a write-up in the New Statesman’s Spotlight on Policy section here.

The new superpower: The Economist has this interesting piece on how the green transition could transform Latin America into a commodities super-power. If last century’s dependence on oil and gas increased the fortunes of the Gulf States, the vast lithium, copper and silver deposits in the south of the American continent have the potential to change the fortunes of states that act wisely. All of these are essential minerals for use in renewable technologies. What’s more, the US is looking to alter its supply chains to benefit more friendly, dependable states than its Chinese superpower rival.

Thank you for reading, and please send any news or comments to: jonathan.Ball@newstatesman.co.uk

See you next week.

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