Patrick Semansky/AP Photo
President Joe Biden speaks about his infrastructure agenda, under the Clay Wade Bailey Bridge, January 4, 2023, in Covington, Kentucky.
In our last “Politics and Power Hour” (open only to Prospect members, what are you waiting for?) I was asked about a recent piece from Columbia professor Adam Tooze about the Biden administration’s industrial policy. Tooze questions whether the major legislation on infrastructure, clean-energy investment, and semiconductor manufacturing will actually amount to much in the big picture. How can we square what the administration touts as an investment boom with the generally tepid numbers for overall investment in the country? How can we be in an industrial boom, when industrial production is down?
This question can be answered, and indeed Tooze answers it in the course of his writing. We are at different stages in the industrial cycle; slower demand is reducing output at the same time that opportunities for investment are increasing at the early stage of manufacturing construction. And this front-end spending is helping the economy hold up against the assaults on it from the Federal Reserve. You might be able to chalk up the soft landing, if we get one, to the economic activity built into the Biden agenda.
Gross domestic product increased only 1.1 percent in the first quarter of 2023, and expectations for Q2 aren’t much higher. The labor market has also softened in 2023; continuing unemployment claims are now 30 percent higher than they were last year. “It is one of the intended effects of jacking up interest rates to fight inflation,” Tooze points out correctly.
While interest rate hikes started last March, they are known for having a long and variable lag. We’re just now starting to see the tangible effects. Last week’s Fed pause was welcome, given the expectation that inflation, already cut in half, will come down further in subsequent months. But the damage has already been done. That’s why the industrial sector is slowing down; there is simply less demand for finished goods than there was a couple of years ago. Production lines ramp up or down based on that demand.
But the industrial-policy bills have mitigated the damage. Primarily, they have kept construction markets tight, both for factory and infrastructure development. It takes a while to repair a bridge, wire a town for broadband, or build a semiconductor facility. At this stage, the impact of those bills is mostly going to be felt on the front end (though electric-vehicle sales are moving up, thanks to more widely available tax rebates).
Tooze points to the straight-line boom in manufacturing construction, with huge increases in computer electronics (a nod to the semiconductor factory building, buoyed by subsidies from the CHIPS Act) and transportation equipment (likely from a boost in electric vehicles and their components, thanks to tax credits in the Inflation Reduction Act). But it was already on the way up a year before CHIPS and the IRA passed, thanks to the infrastructure bill.
Unlike what orthodox macroeconomic modeling would predict, the public spending has crowded in private investment.
This extra $200 billion in manufacturing construction over a two-year period is a fraction of overall investment in structures. But even at around half of 1 percent of total GDP, that’s the difference between the meager growth we have and essentially no growth. Add to that the continued strength of the U.S. consumer that is in part the legacy of the series of pandemic supports, and you have the Biden agenda swimming against a powerful tide created by the Fed, and at least allowing something of a stalemate.
Tooze reports that fiscal policy is currently neutral, but there’s a lag here as well. Because the IRA in particular works through the tax code, the actual benefits aren’t realized until the following year. The IRA passed in August of 2022; most of the tax credits that will be claimed thus far won’t get paid off until next year.
But unlike what orthodox macroeconomic modeling would predict, the public spending (through the tax code) has crowded in private investment. When Tooze cites modelers who estimate a minor effect to the IRA, they are invariably operating in a world where the public sector crowds out the private sector, and more public spending gets offset by muted private spending. That is manifestly not the case here; there has been well over $200 billion in private manufacturing investments announced since CHIPS and the IRA passed. The modeling didn’t get this right.
That modeling is also old, conducted right when the IRA got through Congress. We now know that utilization of the uncapped tax credits is running about three times higher than expected. This could provide enough acceleration that the Fed’s emergency brake won’t be as damaging as it otherwise would have.
IF TOOZE IS MAKING THE POINT that the federal support that eked through a 50-vote Senate isn’t robust enough to change the world and reverse the trajectory of a central bank determined to deliberately slow down the economy, I don’t disagree. But I don’t think GDP is the sole lens through which we should be looking at these investments.
The primary lens should of course be whether carbon emissions drop, in line with global climate goals. That seems likely based on the ways in which the advancement of clean energy has already taken hold. Tooze generously acknowledges that assessing the impact of legislation at its earliest stages is premature; other industrial revolutions took a while to get going. But the signs are already apparent.
Wind and solar deployment reached a record percentage of global power generation in 2022, and this year, solar investment is on track to outpace oil production spending for the first time in history. Crucially, this is happening because it’s now cheaper to build a solar or wind production facility than to maintain an existing fossil fuel plant, even without the subsidy support. Add that subsidy and it’s cheaper to build solar and wind components in the U.S. than to import them. You can’t even stop clean-energy deployment in Texas because of these economic realities.
Incidentally, that’s one reason why the GDP impact of clean-energy investment is reduced: It’s cheaper to build, and therefore, by the way we measure GDP, it’s not as impactful. But in climate terms, the impact is far greater.
There are other ways to measure the Biden bills. One major one is whether they create good-paying jobs, or just shift workers from a low-paying service sector to a low-paying manufacturing sector. We have been tracking that progress and will continue to do so; the unionization at a large electric bus factory in the South is a good sign. The UAW’s looming fight over electric vehicles at the Big Three automakers will be another fulcrum point.
You could also measure them by how resilient the concept of diversifying supply chains makes the economy as a whole. It’s worth being concerned that this diversification effort is being paired with punitive restrictions on technology to China that risk greater geopolitical disorder. War hurts the climate far more than renewable deployment would help it.
Tooze is right to be skeptical of the world-changing ability of a set of public-funding bills that are demonstrably minor in the grand scheme of the U.S. economy. It’s important to note that the legislation does not represent the only tools available; powerful implementations of rulemaking authority and the Defense Production Act would help. And given that climate change is a global crisis, diplomatic efforts are a necessary component. But the overall goal here is not solely to push growth forward an inch or two. The energy transition should offer economic opportunities, but if it just saves the world from the brink of catastrophe, that would be more than sufficient.
