Rising prices and falling output
The “Inflation Reduction Act” of 2022 was one of our more inappropriately named pieces of legislation. (And there’s plenty of competition—recall FDR’s National Industrial Recovery Act.)
The Financial Times has a new piece entitled:
Critics warn US Inflation Reduction Act could keep prices highA scramble for workers might complicate the Federal Reserve’s efforts to cool the economy
“You don’t hear the word globalisation anymore,” Fink told an energy conference at Columbia University this month. “We’re building new chip factories in the United States — at what cost?”Fink said the Biden administration’s efforts to reshore manufacturing would mean US inflation was unlikely to fall below 4 per cent “anytime soon”.While the IRA includes subsidies for clean energy worth $369bn, the credits are “uncapped”, meaning the final bill for taxpayers could eventually exceed $1tn, according to Credit Suisse, Goldman Sachs and the Brookings Institution.Analysts say the sheer scale of the handouts will put a wrench in markets.“You’re distorting free markets when you create these incentives and when you create rules that require you to buy from domestic firms,” said Ethan Harris, head of global economics at Bank of America. “If it was the most cost efficient way to do something, you wouldn’t need a subsidy for it.”
[T]he Biden administration’s efforts to satisfy its decarbonisation, industrial and geopolitical ambitions at the same time — all while promising to drive down costs — are causing alarm among some analysts.“Once you go down the national security path and don’t narrowly constrain it, boy, it’s a killer to economic efficiency,” Hufbauer said.