How To Think About The Inflation Reduction Act?
It is hard to know what to think about the (still pending!) Inflation Reduction Act.
Here is a great primer if you are interested in its details.
But the long list of policies isn't really the issue, is it? What is critical is how to think about it - what really matters and why.
Below we try to do that while also contrasting this piece of legislation to the previously highly hyped (and now thankfully defunct) Build Back Better plan.
We give you one great positive, two disappointments/don't be fooled and one big worry going forward. All in all, not so bad for something cooked up by the US Congress!
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The first thing to say is rather counterintuitive though essential to understanding how the political system in this country works:
We have no idea about whether this legislation will work as it has been currently constituted.
Just because something has been made a law of the land doesn't mean it will happen.
Furthermore, even before we get to the squishiness of "the law," the proposed legislation is obviously very new, and not yet on the books. That means things can still change, of course.
But they might change after the fact anyway! There is a long and very impressive precedent of the US passing legislation that says one thing very definitely but can end up being implemented as something else entirely.
A classic example of this is when clear cut provisions are simply waived for a number of years to allow an industry to adapt and when that time period elapses, simply waived again. Sadly, this happens far more often than the average busy American woman on the street realizes.
Nothing says America like when you run out of political road, you simply agree to build more land!
The problem with this approach is a) it's undemocratic and b) eventually, like Wile E Coyote, you look down and realize you are no longer over Terra Firma.
You remember the gag(s), I am very sure:
Anyway, our first instinct on the Inflation Reduction Act in its present form is something like:
Pretty good! And certainly as good as we can expect in this day and age, and so we should take it and run (though hopefully not off a cliff).
First off, by far the most positive aspect of the Inflation Reduction Act is that it largely avoids the gimmicks and VERY optimistic assumptions that went into raising the bulk of the revenue contained in the now thankfully unnecessary Build Back Better proposal.
Those Build Back Better measures were terrifying because they pretended that we could magically raise revenue in the future and, when those funds inevitably didn't materialize, we would have to scramble to find revenue somewhere, quickly, or the policies themselves might just become deeply unpopular.
That is a terrible way to govern and legislate and an even worse sign of long term health and trajectory of a state.
One of the most reliable indications of Great Power (or imperial) decline are states borrowing today and crafting totally fictitious narratives around ever paying it back. So, avoiding another step down this road (especially after the excessive pandemic spending) is great news.
It will never happen but dare we say that the Democrats should be rather thankful for Senator Joe Manchin's old fashioned stance of probity and prudence? Too much to hope for?!
Regardless of whether thanks are forthcoming, we here at Pebble HQ have royally enjoyed the mainstream media twisting themselves into knots to now glorify the same man they vilified for months over his stubborn (and dare we say principled?) refusal to pass the BBB.
It is true that the deficit isn't everything but in an age where the cost of servicing US debt is rising swiftly and we have just had a powerful lesson that breezy assumptions around borrowing and spending can have real downsides, the turn to some sense of fiscal responsibility is very welcome.
And make no mistake, this turn is real. The Inflation Reduction Act promises $300 billion of deficit reduction over the next decade. Most of that is likely to happen, more or less.
See a fabulous compare & contrast found here. Red is spending, black is revenue raised.
If a lower deficit is one clearly positive outcome, it doesn't even really address the main double-barreled point of the legislation however. In theory at least the Act is about getting inflation down while significantly pushing the US to lower our carbon emissions.
Here is a simple (though hopefully not simplistic) way to think about the Act and its potential implications going forward.
There are two broad takeaways that bear thinking about:
It is highly doubtful that the Act will lower inflation, over the short or even long term. We like the name as much as anyone but the connection between these measures and inflation is at best marginal and at worst highly suspect.
Similarly, it isn't clear that the legislation will achieve much versus rising global carbon dioxide levels. What is very evident is there is A LOT of funds and subsidies earmarked for green projects and renewable investing.
On the first point, even the nonpartisan Congressional Budget Office says that the Act will be “negligible at best” at lowering prices. They are also not alone. The Bipartisan Policy Center says that it will have “small impacts one way or the other” and the Penn Wharton Budget Model came to the conclusion that it will be “statistically indistinguishable from zero.”
I guess that is that then.
Even more likely, however, is the point about climate change.
Yes, it is important for the US to lead by example and take real measures to combat climate change. And, yes again, this legislation has a lot of funds devoted to real loans, subsidies and projects. These will have a measurable impact over time, we hope.
But the big, big picture is, as this year has underlined a) we will continue to rely on fossil fuels b) global emissions will continue to rise.
As anyone with even a passing acquaintance with the issue will tell you, the globe (and the West) will need massive cooperation from the likes of India, China and other developing countries if we are to have a hope in
This isn't a terribly optimistic thing to say but we here at Pebble HQ have our doubts about the Chinese Communist Parties commitment there.
Something about the fact that they are:
Still building and expanding coal power with 60 (!) new coal power plants being built at present (30 gigawatts of power!)
Immediately watered down its climate transition goals as economic growth has slowed recently.
And are facing higher costs for renewable projects that rely on pricier raw materials which will change the calculus in a country that is still very far from wealthy.
Doesn't inspire confidence.
All this to say, please begin preparing yourself. In a few years it may appear that a) inflation isn't yet beaten and b) climate change and rising global emissions continue.
This will mean that, surprise, surprise, we will be moving the goal posts and more will have to be done. This was always going to be the case but we do find the tone of triumphalism to be quite something. As with inflation, this is really the first step towards winning
Lastly, the Inflation Reduction Act contains one rather significant worry, at least for us.
The big question, not much discussed it seems, is what this piece of legislation will do to investment.
Private sector investment, especially by corporations, is an incredibly vital part of the US economy and, most especially, the reasons it remains so productive and innovative.
And make no mistake about it, this plan changes the incentives for how companies think about investing "bigly" as our former President might say.
We don't have a strong lean here one way or another but this should be a real area to watch in the years ahead. We are all about streamlining the tax code and raising revenue but have real questions about just how the investment cookie will crumble now.
What is clear is that this is an absolute bonanza for green companies, initiatives and products. El Dorado has nothing on the wall of cash that is crashing down upon these industries.
That will mean a lot of investment, a lot of purchases and, eventually, the realization that there has been wastage, fraud and excess. Don't worry, you won't need to write and tell us, we will be here and will make sure to let you know when - gasp - we discover there is gambling going on in the casino.
And there is a real tension there. Will these funds be spent responsibly and will the new taxes, subsidies and 80,000 IRS achieve the necessary to help pay for the carbon transition and get lower fossil fuel usage.
There are some big question marks about each one of the above clauses and we will have to see. It is a very big unknown, however.
As with the semiconductor bill what is sure is that there will be profits aplenty and it makes sense to think very carefully about how your portfolio (or even your regular day job!) can position itself to take advantage of the new funding.
There is a reason that, after energy, utilities is the only sector in the green this year.
In conclusion, the Inflation Reduction act may not reduce inflation and it may not solve the climate crisis but it will make a lot of green investors, companies and products, very rich.
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