The IRA as inflation reduction. By Matthew Yglesias

www.slowboring.com

11 - 14 minutes

The Inflation Reduction Act was signed just over a year ago, and the rate of inflation has fallen steadily and dramatically since then. I am not a shameless propagandist who will tell you that the inflation drop is primarily because of the IRA.

But monitoring the anniversary discourse, I think a lot of people have overcorrected and are underplaying the importance of inflation-reduction in passing the IRA. Paul Krugman wrote last week that IRA “isn’t actually about reducing inflation; it’s mainly a climate bill, using tax credits and subsidies to encourage the transition to a low-emission economy.”

From the standpoint of most of the members of Congress who voted for it, I’m sure that’s true. They were highly motivated to reduce greenhouse gas emissions, highly distressed by the collapse of Build Back Better talks, and ready to call the bill whatever Joe Manchin wanted if that would get the deal done. But when it comes to understanding why the deal got done, I think it was actually very important that the IRA scores as slightly reducing inflation. A lot of people have conveniently memory-holed this, but pre-IRA there was a tremendous discourse from the left centered around accusing Manchin of acting “in bad faith” on BBB negotiations, positing that his real goal was the protection of his personal financial investments in the coal industry.

What Manchin said he was concerned about, though, was that BBB’s structure was likely to be inflationary at a time when inflation was a big problem.

When BBB was reworked into IRA, it shifted from an inflationary bill to a disinflationary bill, while maintaining strong emissions reduction provisions. On the “bad faith” theory, Manchin should have continued to oppose the bill. But it turns out that addressing his stated concerns changed his mind — the very model of good-faith negotiating. It’s true that progressives didn’t really care about IRA’s disinflationary punch because, by the same token, they didn’t really care about BBB being modestly inflationary. But that was a big sticking point. The pivotal senator wanted a bill that addressed inflation, and by writing a bill that addressed inflation, they got the deal done.

A related point is that even though most of the IRA’s provisions are about climate, it also includes some very important changes related to prescription drugs. The one with the biggest short-term impact was capping the price of insulin at $35, but even though Kyrsten Sinema watered it down, beginning the process of letting Medicare negotiate bulk discounts on prescription drugs is a really big deal for health care policy.

Pharmaceutical companies are currently suing to try to get the Supreme Court to rule this unconstitutional.

In general, I wish that both the Biden administration’s work on this and the right’s efforts to overturn it got more attention, because this is a lot more popular than the clean energy stuff. And while a macroeconomist would tell you that forcing down the price of prescription drugs isn’t really fighting inflation, I think to most people, inflation is bad because it makes stuff more expensive — so making stuff cheaper is, in fact, fighting inflation. If the White House could get progressives to tweet as furiously about this litigation as they do about student loan litigation, they’d be in better shape politically.

But the “cheap stuff is good” philosophy is integral to understanding the climate provisions of IRA, too, because the bill actually represents a conceptual revolution in how to approach climate policy.

The original Obama-era idea was carbon pricing — making dirty energy more expensive — which failed in Congress only to be replaced by regulatory strategies like the Clean Power Plan that also aimed to make dirty energy more expensive. During the Trump years, activists and advocates continued to come up with more ways for the next Democratic administration to drive energy costs up. A big part of the push to declare Manchin a bad-faith actor was a sense that the White House was holding off on dramatic executive action in order to appease the West Virginia senator. If activists could convince Biden to give up on Manchin, then they could push him to do everything in his power to throttle fossil fuel production and drive the cost of dirty energy up.

But that’s not what happened. Instead, IRA achieves emissions reductions almost entirely by trying to lower the cost of clean energy and electric appliances, and while Biden has certainly done executive actions on environmental issues, we’re also on pace to set an all-time record in American oil production this year. That’s the actual energy policy Democrats ended up enacting — an abundance-oriented approach to the energy transition that focuses on driving costs down. That’s different from the policy they initially intended to enact, which was more focused on driving the cost of fossil fuels up. And the tension between those ideas continues to rattle around the progressive movement. The claim that IRA is “really” a climate bill suggests an inclination to treat the pivot toward cost reduction as an unfortunate political compromise reached with Manchin, versus a world where you genuinely embrace an ethos of energy abundance.

When you read accounts of Manchin raging about the way the White House has implemented the IRA, it’s important to keep that distinction in mind.

Now to be clear, it’s not the only thing that’s going on. Part of what’s happening is that Manchin obviously needs to put some distance between himself and Biden for 2024, so he’s going to be looking for fights to pick. And one major point of contention is about making leased Korean electric vehicles eligible for tax credits. The White House and Treasury say they have no discretion here and that Manchin’s beef with their ruling is really a beef with the actual legislative text. But if you believe there is discretion here, then what’s happening is that the administration took the path that makes electric cars more affordable, while Manchin wants them to make costs higher with more protectionism.

But on most fronts of the dispute, it tracks the question of costs.

If you read Jesse Jenkins’ account of how Democrats’ climate ambitions almost collapsed only to be rescued at the last minute, you’ll see that all the efforts to “pressure” Manchin this way or that came to nothing. What worked in the end was Manchin’s sincere conviction that legislation designed to promote new energy technology is a good idea. So he and Democratic leaders in the end wrote legislation that does just that. As Chuck Schumer characterized it last week, they ended up with a bill focused on lowering costs and creating jobs (I might say creating industries rather than jobs per se).

Republicans, of course, characterize this negatively as all just a shell game. But there’s also a progressive view that it’s all a shell game in a good way and that the thing to do is turn around and use regulatory levers to minimize the odds of any nuclear, carbon capture, DAC, geothermal, or whatever else actually coming to fruition. You just pocket the new subsidies for renewables and electrification, and then turn to the regulatory state to strangle the fossil fuel industry.

When you see activists urging Biden to “declare a climate emergency,” that’s what they are talking about in concrete terms. The idea is that by invoking emergency powers Biden could, through executive fiat, block fossil fuel infrastructure or fossil fuel extraction projects without relying on Congress. I think that this is a bit legally fantastical given the realities of the court. But it’s also a misreading of the relevant political constraint, treating the problem as “Joe Manchin won’t vote for it” rather than “Joe Biden can’t run for re-election saying he deliberately made your gasoline and home heat more expensive.”

I think it’s also wrong on the merits. Climate change is a serious problem and you can call it an “emergency” if you like, but that doesn’t change the fact that even very serious problems should be addressed in cost-effective ways. Explicitly pricing the externalities associated with burning fossil fuels is politically challenging because it makes energy more expensive, but it makes a good amount of sense on the merits. Achieving equivalent emissions reductions through supply-side measures has dramatically higher real-world costs, and its greater political feasibility strikes me as entirely illusory. The country could use a serious bipartisan conversation about deficit reduction, and carbon pricing deserves to be part of that conversation. But IRA implementation should take the inflation reduction part seriously.

The administration needs a more coherent approach to dealing with Manchin’s various complaints, and I think re-grounding in the idea of cost reduction offers a good framework for that.

First off, though, to concede the fussy macroeconomic point: right now, probably nothing Democrats do on energy will meaningfully impact inflation in a strict sense. The Fed’s interest rate policies will drive how quickly we converge to 2% and how costly the drive for further convergence is. What energy policy can do is help ensure that the inflation-adjusted rate of economic growth is higher rather than lower and minimize the extent and duration of high interest rates. But that should be the goal — strong real growth and moderate interest rates as the Fed does its thing.

And the president and the chief of staff should call together all the relevant people throughout the executive branch for a “come to Jesus” moment.

They should acknowledge that many of them come from a more left-wing place personally and have social and professional ties to environmental groups and activists who prefer a more left-wing policy. But they should also say that the position of the administration is clear — they are pursuing a technology-neutral effort to drive down the cost of zero-carbon energy and are not trying to destroy the domestic fossil fuel industry. The president cares a lot about foreign policy, and to the extent that the world still uses fossil fuels (which it clearly does), there is a major geopolitical advantage to those fossil fuels being made in the United States rather than Russia or Saudi Arabia or Iran or Venezuela. The president also cares a lot about working people’s real take-home pay, which is heavily influenced by the price of commodities and tradable goods, and he does not want the energy transition to unduly burden them.

When Manchin is, for eccentric reasons, asking for things that cut against this — the way he is on the cars — that offers a coherent basis for telling him no.

But when Manchin’s specific asks are aligned with those high-level principles, he should be treated not as an impediment to work around but as the voice of reason against activist groups who have lost perspective. This would bring the White House’s position closer to Manchin’s and would let him defend the IRA as an example of him defanging the climate left for the benefit of West Virginia. He would, of course, still need to find other topics to own the libs on, but it would make more sense for him to do that explicitly on stuff where there hasn’t been legislative action — shoot the assault weapons ban with an assault weapon! Call for bringing back school prayer! Whatever!

The point is, both sides really need to make this specific legislative collaboration work, and the best way to do that is with a genuine focus on the cost-reduction goal.