Democrats heading into midterms can tout President Biden’s green energy and health care legislation and the CHIPS Act. But these forays into industrial policy will stoke inflation and slow capital formation and growth.
The former, dubbed the Inflation Reduction Act, promises to raise revenue and reduce Medicare prescription drug spending by $767 billion over 10 years and “invest” $437 billion in climate change and Affordable Care Act subsidies through 2025. The latter will prove politically difficult not to further extend, but doing so will boost IRA spending to $587 billion.
On a macroeconomic level, annual budget deficit reductions of roughly $18 billion set against a $25 trillion dollar economy will have an impact on inflation less statistically significant than Vice President Kamala Harris’ vote tallies in the 2016 Democratic presidential primaries.
The CHIPS Act will spend about $280 billion to subsidize the construction on new semiconductor factories and other high-tech activities and requires that union wages be paid on government-supported construction projects.
The industry already faces acute shortages of engineers and technical workers. Construction of the Taiwan Semiconductor Manufacturing Company foundry in Arizona is months behind schedule owing to staffing problems.
Our universities produce lots of engineers, but too many are foreign students and leave, in part, owing to Mr. Biden’s failure to support immigration reform focused on skill-based permanent visas and naturalization.
Predictable pressures on wages will push up prices for microchips.
The auto industry is struggling to produce enough electric vehicles to meet demand owing to longer-term problems manufacturing and procuring enough batteries. These relate to structural shortages of lithium and other critical metals.
The IRA will boost subsidies to purchase electric vehicles for families earning less than $300,000, with larger subsidies for vehicles made in union factories. These cut out Tesla and Toyota.
Boosting demand with subsidies for EVs with structural-constrained supply and limiting competition from the best automakers will only drive up prices for the biggest consumer purchase after a home and perhaps a college education.
Boosting subsidies for health insurance without broad-based reforms will keep American health care costs nearly double that in Germany or the Netherlands, which also have private insurance.
The bill does require Medicare to negotiate prescription drug prices with Big Pharma but does little to address wider overpricing. Manufacturers can shift to what they charge to Americans under 65 with private and government-subsidized health plans.
The IRA has broad incentives to encourage utilities to move faster into windmills and solar panels but like the auto industry, it’s running into severe supply constraints.
In 2022, power plant developers plan to install 17.8 gigawatts of new capacity but during the first six months of this year only 4.2 GW of that capacity came on line because of pandemic-related supply issues and labor shortages, high prices for components and difficulties obtaining permits and testing equipment.
More subsidies will only increase the dollars chasing scarce workers and photo voltaic and windmill equipment and raise the cost of electricity. Similarly, IRA incentives to increase U.S. sources of supply for this equipment will displace less expensive imports.
Too much of the new revenue will be raised by taxing capital formation and adding to paperwork and litigation.
Stock buybacks are one of the most efficient ways markets reallocate risk capital from mature businesses with more profits than they can productively invest to new ventures by permitting shareholders to reap capital gains and make new bets. Putting a 1% tax on stock buybacks will prove akin to sewing weights into the running shoes of U.S. Olympic athletes.
The IRA will increase IRS funding by $80 billion — about 60%. A good deal of the money will be spent auditing S Corporations — the entities that small businesses use. Many can’t afford to take the IRS to court even though, in the majority of cases, small businesses prevail — an indication that too many audits are just shakedowns.
Federal tax paperwork already takes up the equivalent of 3.6 million American workers. Putting IRS audits on steroids should take that to at least 5 million. It might be more honest to bring in loan shark collectors to bend the arms of software engineers, Uber drivers and journalists working on a contract basis.
To Mr. Biden’s credit and in defense of the CHIPS Act and IRA, those finally put America on the offensive in the war for dominance with China in microprocessors, solar panels and windmills, artificial intelligence and other high-tech activities.
Former President Donald Trump’s policies — tariffs and export controls on high-tech equipment — were largely defensive and too often can be beaten with currency devaluation and pressuring third country suppliers. But improving U.S. competitiveness surely could have done it in better ways than mindlessly throwing around subsidies, kowtowing to unions, empowering the thugs at the IRS, boosting inflation and taxing capital formation.
• Peter Morici is an economist, an emeritus business professor at the University of Maryland, and a national columnist.