Democrats may head into the midterms touting the CHIPS Act and the new Green Energy and Health Care Act, dubbed the Cut Inflation Act, but those forays into industrial policy will likely fuel inflation and distort capital investment.
As passed, the Cut Inflation Act is expected to raise revenue and cut Medicare drug spending by $767 billion and spend $437 billion on climate change and Affordable Care Act subsidies until 2025. The subsidies will likely be extended, bringing the act’s total spending to $587 billion.
Spread over 10 years, budget deficit reductions of about $18 billion against a saving of $25 trillion 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 union wages to be paid on government-backed construction projects.
The industry is already facing a severe shortage of engineers and technicians. Construction of the Taiwan Semiconductor Manufacturing Co. foundry in Arizona has been delayed for months due to staffing issues.
Our universities produce lots of engineers, but too many are international students and leave, in part because of the failure of the Trump and Biden administrations to support immigration reform focused on skill-based permanent visas and naturalization. .
Wage pressures will drive up potato chip prices.
The auto industry is struggling to produce enough electric vehicles to meet demand, due to manufacturing and battery supply issues. These are linked to structural shortages of lithium and other critical metals.
The Cut Inflation Act will increase subsidies for the purchase of electric vehicles for families earning less than $300,000, with larger subsidies for vehicles made in union factories. The latter discriminates against Tesla and Toyota.
Stimulating demand with subsidies for electric vehicles with structurally limited supply and limiting competition from two major automakers can only drive up prices.
Increasing health insurance subsidies will increase demand and drive up the prices of coverage.
The bill requires Medicare to negotiate prescription drug prices with Big Pharma, but manufacturers could compensate by increasing what they charge Americans under 65.
The Cut Inflation Act has broad incentives to encourage utilities to move more quickly to wind turbines and solar panels, but like the auto industry, they face severe supply constraints.
In 2022, power plant developers plan to install 17.8 gigawatts of new capacity, but in the first six months of this year only 4.2 GW of that capacity came online due to power issues. pandemic-related supply and labor shortages, high component prices and difficulties. obtaining permits and testing equipment.
More subsidies will only increase the dollars that seek scarce workers and photovoltaic and wind equipment, and increase the cost of electricity. Similarly, the Cut Inflation Act incentives to increase US sources of supply for this equipment will displace cheaper imports.
China is a major supplier of lithium and other materials vital to the electric vehicle and green energy industries, creating a similar strategic vulnerability to EU issues with Russian natural gas.
Too much of the new revenue will come from taxing capital formation and increasing red tape and litigation.
Share buybacks are an effective way for markets to reallocate risk capital from mature companies with more profits than they can productively invest into new ventures, allowing shareholders to reap capital gains and to make new bets. The new 1% tax on stock buybacks will be akin to sewing weights into the running shoes of US Olympic athletes.
The law will increase IRS funding by $80 billion, or about 60%. Much of the money will be spent on auditing the S Corporations. Many small businesses cannot afford to sue the IRS, even though in most cases the plaintiffs prevail – an indication that too many audits are creating inappropriate new tax liabilities.
Federal tax formalities already occupy the equivalent of 3.6 million American workers. The Inflation Reduction Act could raise that figure 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 the Inflation Reduction Act, these ultimately put America on the offensive in the war of dominance with China in microprocessors, solar panels, wind turbines, artificial intelligence and other high-tech activities.
President Donald Trump’s policies – tariffs and export controls on high-tech equipment – were largely defensive and can too often be reversed by currency devaluation and the diversion of sales via third-country suppliers. But improving America’s competitiveness could surely have been done in better ways than tossing out indiscriminate subsidies, boosting unions, allowing inappropriate IRS audits and taxing capital formation.
Pierre Morici is an economist and professor emeritus of business at the University of Maryland, and a national columnist.