Post 6 (5 August 2023): The flaws of the Inflation Reduction Act
Discussing asset management and the submerged state, laborism, help for the Global South, and introducing the term “CLIMBY”
Here is Post 6. Sorry it’s five months later than expected. Bear with me.
Some remembrances
I’ve been an avid Wikipedian since 2008. I’m attracted to its user-friendliness and mission of providing free, reliably sourced information to all the users of the Web. Even if I haven’t gone as far as voting in many of the site’s elections, I have made over 12,000 edits, many of them minor. However, there are a few large inclusions you may have noticed.
Ever since I was a kindergartner, I was deeply aware of environmental issues and the drastic reforms of our energy sector needed. I won’t go deep into this origin story for now. Suffice it to say that it led me to foreground climate action, particularly green industrial policy, in developing my political views.
At about the same time, I was drawn to Wikipedia. It felt like getting lost in a library of delights. Naturally I wanted to be helpful to the broader Web. I started contributing at around age twelve, though it wouldn’t be until getting my first cell phone at eighteen that these contributions intensified.
Being an amateur policy analyst in my spare time, during my college attendance and the depressive episodes afterward, I gravitated to political coverage on Twitch. I kept track of the roller coaster of hope and dismay that was President Biden’s legislative agenda in 2021. When the Infrastructure Investment and Jobs Act was signed, I was disappointed by its size. I recalled the earlier, $2 trillion 21st-Century New Deal for Jobs Act, and thought this would not mean something in comparison. For example, earlier versions of the IIJA incentivized prioritizing maintenance spending over new construction, holistic planning for connectedness between housing and jobs, and lowering car speed limits, which Senate Republicans stripped out. (Also of note: The IIJA’s cousin, the Build Back Better Act, contained an e-bike tax credit, one which could have revolutionized transportation by letting Americans cut many of their daily, typically shorter-than-13-mile, car trips. It got stripped out of the replacement, the Inflation Reduction Act.) The IIJA also kicked the can down the road on streamlining regulatory approvals for long-distance electric power transmission, which the IRA glaringly kept up. More on that later.
The IIJA has some good tidbits, particularly on passenger rail funding (though more is needed), battery recycling and green hydrogen. The focus on onshoring makes it one of the most impactful Acts on America’s economic history. Yet it is lacking overall in improving America’s response to climate change.
The harsh winter and spring of 2022, with Joe Manchin shaping and then sinking the Build Back Better Act with its $555 billion for climate spending, was disappointing. Then, in late July as I was preparing for a reluctant move to the Philippines, Congress had passed a $280 billion bipartisan semiconductor and public R&D bill. I looked at its Wikipedia article, and was disappointed in its coverage’s sparseness. Logically, I thought it would be impactful for me to expand on it, clarifying what exactly it contains. I started with its NASA spending provisions. I thought that was enough, then after a while, realized it wasn’t. (In October, I worked from summaries by McKinsey and CSIS to fill out the rest of the bill’s provisions.) Till then, I had a little motivation to keep myself occupied during the summer of 2022.
Then Manchin and Chuck Schumer announced a deal for a bill, largely based on Ron Wyden’s clean energy tax credits bill, plus clauses allowing Medicare to negotiate drug prices and extending ACA insurance subsidies for three years. I didn’t closely follow the latter’s progress in Congress due to the move. But on August 16, when I first heard about its imminent passage, I was enthused. I decided that contributing extensively to Wikipedia on the Act was a good next step, particularly after science YouTuber Hank Green, long a treasured creator of mine, released a video summarizing the Act. This video was what spurred me on.
It was a joy to add it to Wikipedia.
But again, I still thought the Act was not enough. As early as August 1, energy analyst Leah Stokes called it a “first step”; by the bill’s passage, one Senator (was it Brian Schatz? I forget) called it “only the first step” during a presser in front of the Capitol, and Rep. Rosa DeLauro also put out a statement to that effect.
After nearly a year, here are my thoughts: Yes, it is a needed first step. But the Act has some major flaws vis-a-vis climate action and the macroeconomy. The first three of these I learned months later, while the last is an amalgam of flaws that were more immediately obvious. I thought it was more important to lead with those first three.
Flaw 1: Asset Managers and the Submerged State
The majority of the Act’s climate provisions are dedicated to tax credits rather than direct spending: its biggest benefits are offered through the tax code. This was intentional, as it was meant to expedite the benefits’ rollout, given private companies might receive less scrutiny from public commenters than agencies. However, it also means one of the most politically contentious agencies at risk of budget cuts, the IRS, handles a huge swath of climate policy. Furthermore, based on research into the administrative efficiency of European child benefit programs compared to the Child Tax Credit, it is likely that those investing in IRA projects are jumping through more hoops at tax time when applying for credits, rather than just getting the money as needed or winning a competition.
As Ryan Cooper put it:
We are addicted to tax deductions, credits, and exemptions because this style of policy allows their recipients to pretend as if they are rugged individualists who don’t depend on government help, and as if taxes are a species of theft. The habit is so deeply ingrained that even when Democrats were passing major climate policy in the Inflation Reduction Act, nearly the entire energy investment program was camouflaged as a tax benefit, in the process adding even more paperwork headaches for the beleaguered IRS.
The reliance on tax credits has several knock-on effects:
While the U.S. overall has a very strong economy and a decently strong investment climate, this may change soon. Policy uncertainty, fluctuations in utility prices and risk evaluations may affect the impact of tax credits (caveat: this is from the Center for Global Development, so it’s more pertinent to Global South economies);
Tax credits drive wedges between entities with the same income based on ability to apply, shortchange those who may have benefited more from a neutral tax regime, and complicate tax law, and also do not come with accounting standards, often to the point of reducing transparency. (Source: June 2000 Urban Institute report)
More importantly, the Act’s tax credits help infrastructure that may be scooped up by asset managers, some of the world’s most rapacious financial institutions. Geographer and economist Brett Christophers, in an opinion responding to Brookfield’s U.S. projects in The New York Times, wrote that:
Asset managers are focused on optimizing returns on the assets they control by maximizing the income they generate while minimizing operating and capital costs. Many users of infrastructure that has come under asset manager ownership have suffered, as service rates have risen quickly and service quality has deteriorated.
Christophers notes the U.S. is seeing growth in asset management, with 250 such infrastructure funds clamoring for capital in 2020. He cites Britain and South Korea’s experiences with such infrastructure, alongside America’s with managed housing. He proclaims the IRA is therefore privatization by another name, not a sequel to the New Deal.
Additionally, as Nathan from the channel Save Money Save the Planet points out, even with the IRA, utilities, particularly investor-owned ones, have a vested interest in dissuading people from buying home solar and upgrading appliances, and will often do so by hiding them on their websites and lobbying to change net metering rules that greatly benefit owners of rooftop solar power:
All this leads to the third detrimental effect of tax credits:
The Submerged State. Devised by political scientist Suzanne Mettler in her 2011 book, it describes the trend of the federal government delegating through the tax code what ought to be its most visible duties to less transparent actors, thus obscuring the extent of its influence while exaggerating the market’s. As a result, the public only has companies and themselves to credit, and not the government, for the upsides of a given project.
There is an apparent paradox at work. Biden has been taking credit for the Act as though he were FDR, good political strategy for the Democrats as fears of recession abate. But the substance of the Act is not as though he’s giving people the higher salaries or building the turbines or generators, the way FDR’s administration structured it:
https://twitter.com/toddntucker/status/1669060292058161153
This is a weird situation of using neoliberal policies for Keynesian ends. Based on the arcane nature of the Act, the resolution is clear: that Biden push for more direct spending.
Fortunately, as Christophers says, the Act offers direct pay in lieu of tax credits to publicly-owned utilities for the first time in American history, and the Act also forgives debt held by electric cooperatives. He also points to the New York State Legislature providing a template in the form of the Build Public Renewables Act, which passed this May. The federal government already has its counterpart, the Tennessee Valley Authority, but the TVA has been slow to decarbonize. Biden should take swift and drastic action to accelerate the TVA’s transition, and there are methods out there, but not only should he advocate more strongly for public power. Biden should also expose and call out asset managers on the campaign trail.
It’s not just climate action where Biden can un-submerge the state and fight inflation. The real cores of high inflation at the moment are housing, child care, and car dependency. The answers are increasing supply of the former two and limiting the latter, and the private sector seems unwilling to pick up the slack in those three areas for the time being. With the federal government being the only nonprofit of such scale able to take risks, Biden should announce a spending push to build more public housing, daycares, and electrified, automated, rail-based transit, with help for transit drivers. Biden’s legacy depends not on to what extent he played austerity footsie with the Gluttons of Privilege. In the end, civilized people won’t worry about the cost, they’ll worry about the quality vs. their needs.
Flaw 2: Labor Issues
The Act invests more in red states than it does in blue states. This is overall smart politics for Biden, and strengthens his case that he is better at bipartisanship than the prospective GOP nominees for federal office in 2024. But it’s still his case, not necessarily mine.
It’s crucial to recognize that the states with the biggest investments from the Act’s incentives, particularly Arizona, Georgia, and South Carolina, have so-called “right to work laws”, which allow non-member workers to not pay union dues in workplaces. They were legalized by the Taft-Hartley Act of 1947, and have been proven to lead to lower wages and worse unionization rates.
Union leaders have given interviews about their struggles with organizing in these places. Much of the coverage I’ve read focuses on the CHIPS Act, but the IRA has this problem too.
First, a side note: “YIMBY”, meaning “yes in my backyard”, is derived from a 1980s paper about “locally unwanted land uses”. Across North American cities, local activists, in their self-interested opposition, lumped multifamily housing and public transit in with landfills, highways, and prisons as things they did not want in their neighborhoods, to the detriment of the broader cities’ social fabric, and were described as having a “not in my backyard” viewpoint; hence, “YIMBY” was coined.
In 2005, and more recently, Bill McKibben applied that thinking to wind turbines and long-distance transmission lines. He said it was nobler, not to mention urgent, for environmentalists to sacrifice some aesthetic considerations in service of the energy transition. After all, it’s not just my backyard, but ours as humans, and idealists need realists to turn their hopes into action. In short, he endorsed YIMBYism in service of a livable climate.
But who profits from these turbines and lines? The answer is almost inevitably Big Business. (See Flaw 1.) As another example, safety problems at Tesla factories remain largely unaddressed, in the Fremont factory’s case, years after they were first reported, while Tesla’s stockholders profited from buying and selling carbon credits to the tune of $1.78 billion last year.
This leads me to the crux of the article: Robber barons with their obsession with profit are not going to solve the energy transition, and union leadership must step in.
Perhaps we should move to a model beyond climate YIMBYism. The Green New Deal has echoes of the labor movement embedded in its foundations, but its third rail status leaves it dead at the moment. That doesn’t mean the IRA is bad at trying to make up for it; it does reward select manufacturers who pay prevailing wage and provide apprenticeships. It’s a reminder that American politics needs to move towards what I call “CLIMBYism”, or “climate laborism in my backyard”.
The purpose is to create good jobs, since that empowers people to help local economies. There’s added urgency in that too: David Dayen in The American Prospect recently defended CLIMBYism, even if he didn’t call it such, against pundit Ezra Klein’s concerns over too many requirements for pleasing too many interest groups stifling Biden’s economic progress. (I note that Klein supports good pay and union empowerment, and that Dayen might be deliberately misrepresenting Klein’s arguments. Still, he raises a very good point here that Klein apparently has yet to address:) Dayen pointed out that United Auto Workers, a quite large union and a key Michigan political player, recently said it would delay its presidential endorsement while Trump aggressively courts it, unless Biden tells automakers to give expanded benefits packages to electric vehicle builders.
To test the power of CLIMBYism, here are two prospective battlegrounds: In Lordstown, Ohio, complaints of poor worker pay, frequent retaliations and unsafe conditions including risk of electrocutions on the LG-GM joint venture Ultium’s battery assembly lines there led the plant, which was not covered by UAW until last year, to become fertile ground for a strike:
Additionally, the unions UE Local 506 and 618 in Erie, Pennsylvania are leading a strike against locomotive manufacturer Wabtec, with their demands including building more clean (diesel, but still cleaner than present) locomotives. It has just passed the 30-day mark.
The easiest thing to do for President Biden, a noted gearhead and railfan who needs to win Pennsylvania and Michigan in 2024, is to show support for the UAW and UE’s striking workers.
The next thing he should do, though no doubt much harder, is push for the repeal of Taft-Hartley in full. This would pre-empt right to work laws, legalize closed shops that allow unions to make hiring decision and card check that makes it easier to vote on unionizing, and allow secondary strikes and boycotts. It would contribute to more cooperation between unions overall, and help the IRA achieve its potential to create good jobs.
Otherwise, this quote could very well describe the end of his presidency:
Flaw 3: Lack of Aid to the Global South
I live in the Global South, not entirely of my own accord. Specifically, I live in the Philippines, a nation of over 100 million people that was formerly a U.S. colony, a group of islands separated by deep straits and punctuated by long, sinuous and steep mountain ranges, with endemic corruption and NIMBYism from Spain’s era preventing public works, such as reforming sanitation, building resiliency in the grid, straightening road curves and building a comprehensive rail network, from being implemented.
The country’s energy prices are among the highest in the world. Yet, few substantial grid upgrades have taken place since their construction in the 1970s. As a result, even when it is incredibly vital to keep air conditioners running to reduce the humidity and temperature of air, blackouts are still frequent.
The country’s only substantial rail transit is concentrated in the capital region, Metro Manila, on three light rail lines. In the provinces, 20-mile (32-km) commutes take an hour or more. The previous status quo wasn’t better. Intercity trains were common in Luzon in the 1980s. But they were slow, infrequent and on circuitous routes that fell into disrepair. Eventually, reverence of cars became the main focus of Philippine transportation policy.
The point is: America could have done more for its former colony, here, by building faster, straighter railways throughout the provinces, and by providing cheap rooftop solar exports that are a subject of growing interest among Filipino homeowners. It could have done more for the Global South, which it last held a substantial meeting with in 1981. The Global South, after all, originated many of America’s immigrants, my parents included, and are the new kingmakers of geostrategy.
There is an obvious need for greater investment in trains and clean energy in Global South countries, since they have the fast-expanding working age populations most vulnerable to climate change. In addition, China is dialing back on foreign aid, and rich countries have a window of opportunity to contest China’s aid lead. America, with its mineralogical richness and industrial base, must retool its economy to improve exports of trainsets and clean energy generators to developing countries. Unions can help here by shaping the world trade order in their favor, working across borders to edit harm reduction for them into trade deals. At the same time, America must pass a bill to fund not only loss and damage to help developing countries recover from extreme weather events, but also climate reparations to make up for its cumulative effects on climate.
The Act’s emphasis on EVs and clean energy generators will raise demand for cobalt, nickel and rare-earth minerals, which will grow extractive (some would say neocolonial) industries. (The Philippines, being rich in nickel, is not immune.) Great care is needed to avoid this neocolonial mentality. Research shows that such a mentality can be circumvented, simply by promoting mass transit and reducing individual car use altogether.
So far, the Biden administration has not fulfilled its pledge to send $11 billion a year in climate finance to developing countries by 2024, let alone one estimate of America’s fair share of $47 billion. This is shaping up to be his biggest failure on the world stage.
Flaw 4: The obvious ones
The last few flaws in the Act, and the most fatal and obvious ones in the short term, I think, are as follows:
Lack of incentives to invest in new grid transmission. The more clean energy generators there are, the more grid transmission is needed to take the pressure off them and storage methods. The Act was stripped of a transmission investment tax credit early on so that Manchin could try bipartisan permitting reforms. Fortunately, there are a litany of proposals coming out on the floors of Congress in this area. My personal favorites, and the most ambitious ones, are Martin Heinrich’s FASTER Act, Ed Markey’s CHARGE Act, and the Institute for Progress’ PROGRESS Act.
Not enough funding for transit, which is more space and fuel efficient than cars. I’ve explained this already.
No price on carbon. Taking money from the people to blame is good politics. Economists also love it because it sends a clear signal to markets. EPA rule-making as a stick can only go so far.
The fossil fuel permitting deal (Sections 50261-65), allowing oil and gas leases on public lands to be requested before renewables. The science is clear that this should not happen.
Conclusion: Solidarity 5eva
The point of my criticisms here is not to sink the Act. The Act does wonders for labor and clean tech, but it privileges the wrong people: asset managers, strike breakers, car makers, skeptics of foreign aid and antipoverty efforts in the Global South, and Big Oil.
This is very much a first step. Fortunately, we know the next ones: reclaim the public’s control over infrastructure, and build an ethos and politics of solidarity, with unions of all nations at the helm. The benefits of green growth must be shared by all.