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The numbers are in, and it is now undeniable that the Inflation Reduction Act (IRA) is having an enormous impact. In April 2023, total construction spending on manufacturing stood at just over $189 billion. Adjusting for inflation, this represents a 94 percent rise in manufacturing construction spending over the previous year. This is by far the largest increase on record. These numbers mean that American industrial policy is working, perhaps better and faster than many may have predicted.
There is absolutely no doubt that this is proof of concept for industrial policy. A well-designed, fully funded industrial policy can work insofar as it can encourage the expansion of the manufacturing base. But it is important that we take the correct lessons from this interesting experiment. The impressive headline numbers and the partisan rhetoric that has surrounded them should not distract us from the core lessons.
On the partisan rhetoric front, Democrat-supporting economists like Paul Krugman are already muddying the water. Eager to show that President Joe Biden has succeeded where President Donald Trump failed, Krugman engages in more than a little mythmaking. He uses the success of the IRA to claim that Biden's subsidies are accomplishing what Trump's tax cuts did not. But the reality is that most of the IRA consists of tax credits, with $216 billion in corporate tax credits and $43 billion in consumer tax credits, but only $82 billion in grants. Industrial policy is successful when tax credits and grants are structured and funded properly, and the issue cannot be reduced to a crude taxation-versus-spending debate.
Krugman also takes the Trump administration to task for its tariff policies and trade wars. He is right to highlight that these policies did not lead to promised results and created tensions on the geopolitical scene that are detrimental to American prosperity. Yet Biden has arguably been even more of a trade warrior than Trump was, and his policies on the trade front are undermining his policies on the domestic front.
For example, the Biden administration's aggressive ban on selling high-end semiconductors to China, imposed late last year, has incurred a response from Beijing, which is placing restrictions on buying semiconductors from American chipmaker Micron, an action that could seriously damage the company's ability to grow. The reality is that the Biden administration's strategy on semiconductors is incoherent. What it gives with the IRA and the CHIPS Act, it takes away with aggressive trade war policies.
The biggest issue when judging the IRA's success, however, is in the composition of the investment it promotes. Data show that the largest increases in investment are in transportation equipment and computers and electronics, but beyond that we do not really know what is being built. This is an important question because, despite protestations to the contrary, the IRA is more a green energy program than industrial policy.
For every dollar that the IRA allocates to manufacturing, it allocates more than six to green energy and the environment. While the IRA does have an industrial policy buried within it, for the most part it is the infamous Green New Deal dressed up in industrial policy garb.
Some have argued that green energy policy is industrial policy because it means producing more stuff. But this claim is highly misleading. The core goal of a serious industrial policy is to close a country's trade deficit. By reshoring manufacturing domestically, the country reduces the need to buy from abroad and so the trade deficit shrinks. Yet the United States simply does not have a problem with energy imports. The country runs a trade surplus in energy. Meanwhile, it runs a very large trade deficit in manufacturing.
Why would an industrial policy target a sector where the country already runs a surplus? It is hard to escape the obvious answer: because the IRA is not primarily an industrial policy, but a green energy policy. Any impact the IRA has on industry and the trade balance is secondary to the goal of changing the energy consumption composition of the country. Its aim, in short, is to greenify America and any changes to the industrial structure of the country that emerge from it are secondary.
This is a big problem. The United States is now at a critical juncture. With alliances shifting and new trading blocs developing, not to mention the fact that China is no longer rising but has already risen, America needs to get its house in order when it comes to industry and trade. There is not that much time left on the clock. It is crucial that the country gets its industrial policy right in the next decade if it is to remain at the top of the global pack.
Yet the evidence suggests that all the energy that should be going into an all-hands-on-deck approach to industrial policy is instead being expended on a dubious quest to reach green nirvana. This creates an opening for Republicans to be the adults in the room. Many are already dubious of what former Democratic speaker of the House Nancy Pelosi once referred to as the "green dream." Yet rather than formulate their own approach to industrial policy, many Republicans are simply pushing for minor carve outs for fossil fuel companies. A new approach is urgently needed before the country awakens from its green slumber in 10 years' time only to realize that the world has changed beyond recognition and America's position is no longer what it was.
Philip Pilkington is a macroeconomist with nearly a decade of experience working in investment markets, he is the author of the book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.
The views expressed in this article are the writer's own.
