President Joe Biden promised that his Inflation Reduction Act would reindustrialise 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 $369bn in subsidies to spur domestic clean energy manufacturing and deployment. The Chips and Science Act, passed around the same time, offers more than $50bn in incentives to reshore semiconductor production.
The scale of the federal handouts has already sparked an investment boom. But it is now stoking fears that a scramble for workers will trigger another bout of inflation, complicating the Federal Reserve’s efforts to cool the economy.
“We’re pouring a lot of money into getting these firms to come to the US, expanding in the US, and there aren’t workers for that, and it’s not like you’re going to pull workers from McDonald’s,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.
Hufbauer estimates the tight labour market and sourcing requirements will add 10 per cent to project costs.
The US will need an additional 546,000 construction workers on top of the normal hiring pace to meet increased demand for projects pushed along by the IRA and other bills, estimates Associated Builders and Contractors. Consultants at McKinsey warn the US semiconductor push will exacerbate the existing shortfall of engineers and technicians, with companies across industries expected to need an additional 300,000 engineers and 90,000 technicians by 2030.
“I’m all for high paying jobs. But then either 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 $200bn for new projects since the IRA and Chips Act became law last August. But the administration’s effort to break dependence on China by subsidising domestic manufacturing will also keep prices high, warned BlackRock boss Larry Fink.
“You don’t hear the word globalisation anymore,” Fink told an energy conference at Columbia University this month. “We’re building new chip factories in the United States — at what cost?”
Fink said the Biden administration’s efforts to reshore manufacturing would mean US inflation was unlikely to fall below 4 per cent “anytime soon”.
While the IRA includes subsidies for clean energy worth $369bn, the credits are “uncapped”, meaning the final bill for taxpayers could eventually exceed $1tn, according to Credit Suisse, Goldman Sachs and the Brookings Institution.
Analysts say the sheer scale of the handouts will put a wrench in markets.
“You’re distorting free markets when you create these incentives and when you create rules that require you to buy from domestic firms,” said Ethan Harris, head of global economics at Bank of America. “If it was the most cost efficient way to do something, you wouldn’t need a subsidy for it.”
Although Biden has made job creation a central theme of the huge new spending commitments, the IRA is also part of the White House’s attempt to slash emissions. But the pace of the decarbonisation effort may also push up prices, warned analysts.
“We need to move so 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, head of Columbia University’s Center on Global Energy Policy. Bordoff added that higher costs may be a price “worth paying” if it means an energy supply chain less vulnerable to geopolitical disruptions.
White House assistant press secretary Michael Kikukawa said that fighting inflation and reducing costs was Biden’s “top priority”.
“[The Inflation Reduction Act] invests in our workers and increases our economy’s productive capacity. It reduces the deficit by hundreds of billions of dollars. It lowers costs of prescription drugs, insulin, energy efficiency appliances to lower utility bills, and electric vehicles. And, it spurs clean energy production to lower energy prices,” Kikukawa said.
The crux of the issue is the US attempt to break dependence from China, whose low-cost manufacturing base has driven down clean energy costs in recent years. Developers are sceptical.
Morris Chang, founder of Taiwan Semiconductor Manufacturing Company, called US efforts to reshore semiconductor production a “very expensive exercise in futility”. Production costs at TSMC’s Oregon plant were 50 per cent more expensive than in Taiwan, he said in a conversation with Brookings last year.
In December, TSMC announced a $28bn expansion of its semiconductor factory in Phoenix, the largest foreign direct investment of its kind in the US.
“If you want to scale clean energy at the pace and magnitude we need you’re still going to be dependent on China, as one example, for meaningful parts of our supply chains,” said Bordoff.
A recent Brookings paper provided a more neutral picture of the IRA’s impact on prices, saying the bill’s clean energy incentives could shave inflation by 3-6 basis points by 2030, assuming the US’s onerous permitting process is reformed and supply chain constraints abate.
But both remain significant obstacles, while the Biden administration’s efforts to satisfy its decarbonisation, industrial and geopolitical ambitions at the same time — all while promising to drive down costs — are causing alarm among some analysts.
“Once you go down the national security path and don’t narrowly constrain it, boy, it’s a killer to economic efficiency,” Hufbauer said.
Source: Economy - ft.com
