Bidenomics and the New Political-Subsidy Economy
Category: Op/Ed
Via: vic-eldred • last year • 17 commentsBy: The Editorial Board of the Wall Street Journal
S E E D E D C O N T E N T
The White House is celebrating the first anniversary of the Inflation Reduction Act like it’s VE-Day, and you have to admire the political chutzpah. The Administration is spending literally trillions of dollars in taxpayer subsidies and calling the projects that result an economic miracle.
But government can always get more of what it subsidizes, and in this case it’s a gusher on politically favored industries. No wonder construction spending on factories has soared nearly 80% in the last year, according to the Census Bureau. Public works spending increased (13.6%), especially on electric power projects (36.7%), conservation and development (30.1%), and highways and streets (20.4%).
Wally Adeyemo, the deputy Treasury secretary, sent a memo to “interested parties” (i.e., the press) on Wednesday touting “nearly 200 new projects totalling over $110 billion of investment in building America’s clean energy economy.” That’s hardly surprising given the magnitude of new subsidies for big business and bigger government.
The 2021 infrastructure bill increased spending by $550 billion over five years, including $65 billion for broadband, $79 billion for the power grid, and $15 billion for electric vehicles. The Chips Act ladled out $280 billion over 10 years, which includes $39 billion and a 25% investment tax credit for chip factories.
The really big hitter is the Inflation Reduction Act (IRA), which includes $1.2 trillion in climate spending and tax credits over the next decade and another $400 billion in government loans. Apart from wartime, we doubt there has ever been a bigger splurge of government subsidies. All of this inevitably produces a surge in investment, at least in the short term. GDP will see a boost, much as it did from the welfare payments during the pandemic.
But the test of all this spending isn’t the number of new projects that break ground. It’s whether those projects will be more productive than those that would otherwise have gone ahead if government hadn’t directed the capital. The right public works can also increase productivity, but politicians invariably shower the money on projects that often don’t. We’re still waiting for the productivity bump from the 2009 stimulus’s shovel-ready projects.
The IRA’s $1.2 trillion in climate subsidies will invariably cause investment distortions and unseen economic damage. As 19th-century French economist Frédéric Bastiat explained, economic meddling produces effects that can be immediately seen—such as new factories—as well as harm that isn’t visible.
The IRA’s climate subsidies are so large that companies almost have to grab them, lest competitors get an edge. And what a windfall it is for corporations. Panasonic expects to pocket $2 billion in tax credits each year for its battery factories in Nevada and Kansas. First Solar will rake in $710 million from the government this year for its solar panels—nearly 90% of its forecast operating profit.
Oil and gas companies are plowing more money into subsidized green technologies because they can yield a higher return on investment than hydrocarbons. Exxon Mobil plans to invest $7 billion in hydrogen, carbon capture and biofuels through 2027. That’s $7 billion less that could be invested in oil and gas.
Most of these green-energy investments wouldn’t be happening if not for subsidies. Banks in the Federal Reserve’s lending survey reported tightening credit during the second quarter for commercial and industrial companies. Banks are asking for higher risk premiums and more collateral.
Yet green-energy businesses can borrow from the government at the Treasury rate. The IRA authorized the Energy Department to lend up to $400 billion for climate projects. “Everyone is getting on this action,” Energy loan office chief Jigar Shah recently noted.
After receiving a $9.2 billion DOE loan for two battery factories, Ford announced last month it is throttling back its electric-vehicle production targets amid mounting losses. In June it announced 3,000 layoffs to fund its EV transition. “The transition to EVs is happening. It just may take a little longer,” CFO John Lawler assured investors.
What happens if Americans don’t buy EVs? They may not have a choice as Democratic states and the Administration plan to punish auto makers if they sell too many gas-powered cars—penalties that will be paid by customers and workers. The EV transition will subtract from growth in coming years if auto sales and profits decline.
Money for these subsidies has to come from somewhere, and that means the private economy in higher taxes and more government borrowing. One early cost may be flagging private research and development. Since the first quarter of 2022, R&D’s contribution to GDP has averaged about half what it did from 2018 and 2021. One reason is the expiration last year of the immediate tax amortization for R&D. But some companies may also be shifting investment from R&D to subsidized activities.
The IRA is the heart of Bidenomics, which is about creating a new political-subsidy economy. Perhaps all of this will effloresce into a brilliant green future. More likely hundreds of billions in misallocated investment will reduce future productivity gains and translate into slower economic and income growth. Let’s hope President Biden’s subsidies don’t boomerang like pandemic transfer payments, leaving all Americans poorer.
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In Europe, certain governments are subsidizing the purchase of electric cars.
Planned economies never work right.
We should stop giving that $20B a year to the fossil fuel companies too. World wide they got $1T in subsidies in 2022 and posted a $4T profit.
Odd as it may seem, gas prices have a profound effect on the voters.
True. Too bad the continued subsidies to big oil don't translate into lower gas prices. Maybe you can convince McCarthy to push through a bill to seize private land and funding for new refineries? It's about time we stop exporting domestic oil and importing the stuff we refine for fuel now. That might reduce the cost of gas. Maybe. Ahhh probably not. They would just reduce production again.
You know what would really reduce the price of gas? Less people using gas by driving more EVs. And before you go there - we all know electricity for charging has a cost too and infrastructure would have to keep pace. These things are a given and will happen as the need increases as it always does.
If those go away, the price would go sky high. You want the same prices that they enjoy in Europe and GB as well as other countries? I sure as hell don't. Talk about fucking up the US economy...............
Would it? Companies can only charge what the market will bare. Do you think people would pay $10 a gallon overnight OR would maybe fuel companies pivot and adapt as auto owners also adapt? There might be a little wiggle room in an industry that sees a $4T annual profit.
I agree to an extent but how much of the $4T profit would get eaten up with no subsidies?
Not all that much according to the Senate Budget Committee. See @ 1.1
My point is not really that we should, or even that we shouldn't subsidies energy companies. It's to point out the hypocrisy of Vic's point of "planned economies never work' towards EV specifically. Our government has been subsidizing all kinds of businesses for all sorts of reasons. Some good and some bad.
I doubt that EV's will ever gain a predominate share of the market for the average consumer.
They are simply too expensive for ordinary folks, and the battery fire problem is as of yet resolved.
Is It Time to Ban Electric Vehicles? (townhall.com)
You are talking the here and now. Since EV's were introduced they have become less expensive, safer, and more reliable. In another 20 years, they may even become the majority. And that is despite the efforts of republican lawmakers to make it more difficult, or even impossible, to get EV's.
Senate Republicans want EPA to drop plan to cut emissions, boost EVs
The red-state backlash against electric vehicles is incoherent — and gaining steam
Republican infrastructure counteroffer slashes Biden’s electric vehicle and climate spending
Trump takes aim at EV industry during speech to Michigan Republicans
Wyoming lawmakers push for electric-car ban and to limit sales by 2035
These Six GOP Lawmakers Want to Ban Electric Cars
The number of EV sales in the US increased 65% from 2021 to 2022.
What? They sold two more?
The significant number is how many ICE vehicles have been replaced by EVs. But there isn't any incentive to report the significant number.
If we're selling a lot of EVs then we should see fewer ICE vehicles on the roads and see a reduction in sales of fossil fuels. Or are EVs only intended to make profit and not address climate change. So far, the glowing reports about EV adoption has only been about the money.
Exactly, 5.7% of vehicles sold last year were EVs.
You seem confused, thinking your statement in any way invalidates evilgenius's.
Too soon to say. Ordinary folks aren't typical early adopters of new technology. It's going to take 20-30 years before EV technology matures enough to be considered mainstream. We really have no idea what vehicles will be like in 20 years.
In 2010, I bought a "clean" diesel, VW TDI Jetta and got a $3,500 federal tax credit. If I remember correctly, i got a state tax credit as well. Four years later, VW was caught with cheating on emissions test and a class action suit forced them to buy back these cars at the blue book value at the time they were caught even though I continued to drive it until 2018. They also paid me a penalty fee. That was some sweet deal and I loved the torque in that engine.
The irony is that VW then sold those used cars to Mexico and other countries that don't give a shit about the environment. So the emission continued, just not in the USA.