Allison Bailey/NurPhoto via AP
Senate Majority Leader Chuck Schumer (D-NY) cheers while speaking at a press conference in which Democratic senators demanded passage of the Inflation Reduction Act.
Senate Democrats appear to be having an epiphany. On Sunday night, the party approved their second major piece of economic legislation in two weeks, this time pledging $370 billion for domestic manufacturing and green energy production, money that will support everything from new solar panels to electrical grid upgrades to electric vehicles. It is a stunning turn of events. Only last month, Joe Biden’s presidency was whimpering into oblivion, doomed by the obstinance of self-styled moderates in his own party to consider serious investments in the country’s economic future. But with the sudden, unexpected support of Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), Democrats seem to have at last turned the page on a quarter-century of dysfunctional trade policy and established a new model for green industrial policy in the United States. This is the kind of serious, ambitious economic policymaking that Biden called for in early 2021, and it arrives not a moment too soon.
The two pillars of this breakthrough are the CHIPS Act, which Biden signed into law on August 2nd, and the Inflation Reduction Act, which now heads to the House after Democrats unanimously approved it in the Senate. Together, the two bills would make more than $630 billion in new investments, including more than $50 billion for the production of semiconductors, $60 billion to develop green energy infrastructure including new solar panels and wind turbines, and hundreds of billions for new scientific research. Homeowners will be eligible for rebates on the purchase of new energy-efficient heat pumps and solar panels. Perhaps most promising is the Manchin-approved EV program, which is designed to make everything about EV production cheaper and better. As a result of this legislative breakthrough, we’ll have more domestically mined lithium for EV batteries, tax breaks for domestic EV manufacturing and assembly, and tax credits for consumers who buy an EV—$7,500 for bringing home a new one. This is not only great news for the EV market, it’s a potential model for other climate-friendly manufacturing reforms in the future.
Both the CHIPS Act and the IRA aim to alleviate specific costs that have hit households hard over the past two years. The COVID-19 pandemic caused a severe shortage of semiconductors that quickly led to a shortage of new cars, which typically require dozens of computer chips per vehicle. With new cars in short supply, prices soared. Between March and December of last year, the price of used cars jumped by about 27 percent, while the price of a new car climbed by about 14 percent over the course of 2021. By making more semiconductors, the government can help auto manufacturers relieve that price pressure and help strengthen the global economy against other unforeseen shocks to production.
The semiconductor predicament was just one of the drawbacks to the big bet on globalization that American policymakers made in the 1990s. Globalized supply chains concentrated production of essential inputs in a tiny number of factories, demanding ultra-thin margins and just-in-time delivery standards that lowered prices by injecting fragility throughout the production process. Enthusiasts of free trade and deregulation heralded the savings globalization helped secure for American consumers as proof of its wisdom, arguing that whatever hit the American middle class took from manufacturing job losses was more than made up for by the lower prices Americans paid for manufactured goods. Walmart was a progressive success story.
But of course this narrative ignored an awful lot of what actually matters in economic life. We saved at the checkout counter until we didn’t. When the pandemic caused prolonged production disruptions in a host of sectors, prices started climbing, and orders for all kinds of consumer goods were subjected to seemingly endless backlogs.
Still more alarming has been the political fallout. Shock therapy for U.S. industry bred political instability, with the “blue wall” of the Upper Midwest transforming into a stronghold for a particularly lunatic brand of Republican politics. Globalization did improve living standards in China, but the Communist government has only intensified its authoritarian grip as the country has developed economically, and diplomatic relations between China and the United States have never been worse.
The fact that Biden is passing far more ambitious proposals with 50 votes than President Obama did with 59 shows how far the party has come.
CHIPS and IRA chart a productive way forward. America will invest directly in expanding the supply of both domestic energy and manufactured goods, seeking to fight inflation with more jobs and more economic activity, rather than by deliberately shrinking production and laying people off—the traditional remedy of the past 40 years.
Two domestic manufacturing bills will not transform the international economic paradigm on their own, but they do demonstrate a remarkable change in the conventional wisdom surrounding trade policy. There’s a reason why free-trade maximalists like Scott Lincicome of the libertarian Cato Institute are decrying the CHIPS Act as “corporate welfare”—lawmakers are not thinking about the global economy the same way they were just a few years ago.
To be more specific, centrist lawmakers have changed their thinking. As frustrating as it is for the left to watch Manchin and Sinema play hero after dealing out so much damage to Biden’s presidency, their change in tune is ultimately good news for progressive politics. The fact that Biden is passing far more ambitious proposals with 50 votes than President Obama did with 59 shows how far the party has come.
Sure, it was gross to watch Sinema pirouette for private equity by very publicly saving the carried interest loophole—an embarrassing tax giveaway to some of the richest people in the world. But her slate of changes is probably an improvement on the draft Manchin and Schumer had produced. She replaced the $14 billion carried interest reform with a $70 billion tax on stock buybacks, and secured additional money for drought relief. Both Manchin and Sinema are signing off on a bill that will limit out-of-pocket prescription drug costs for patients on Medicare to $2,000 a year, no matter how many drugs they need. It’s OK for these odd ducks to quack like moderates, so long as they walk like progressives.
Some of the messaging accompanying the IRA is less than ideal. An early summary of the bill distributed by Senate Democrats said that the IRA “enacts historic deficit reduction to fight inflation,” which is a dose of pure economic confusion. Deficits can either reduce or limit inflation—it depends on how they’re structured. The most important inflation-fighting aspect of both the CHIPS Act and the IRA is the spending—the bills are designed to reduce prices by increasing supply and shifting demand away from fossil fuels. The new tax revenue enacted to cut the deficit—higher taxes on rich people and corporations—really doesn’t have much to do with inflation.
But those tax provisions are still good policy. Rich people and corporations need to be paying more in taxes. And the IRS needs the funding boost provided by the IRA to perform basic tax enforcement.
In short, Democrats have decided to try winning for a change. Good news is good.
