62 Comments
Jan 17Liked by Noah Smith

In addition to the three problems, it may may be a knowledge problem. The players simply don't have the technical and managerial capability. And don't know it!

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In my experience, this is especially true for leading-edge industries. It takes a while to build the capacity in government to understand/regulate/grant.

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Jan 17·edited Jan 17Liked by Noah Smith

Very good overview, thanks.

The CHIPS act and the infrastructure bill make some sense and could easily have passed years ago except Pelosi controlled the House and wouldn’t allow it under Trump. The CHIPs act was a bipartisan effort started in Congress during the Trump years but had very little to do with either Trump or Biden (a rare example of a good concept actually backed by key players from both parties in congress). I think it is largely a waste of money in normal times (as the plants being built in the US by TSMC aren’t for their most advanced chips) and the idea of the US fabricating even more commoditized chips flies in the face of comparative advantage. However, it does make sense from a national security point of view, as do some of the limitations on sales to China.

The IRA seems to be a boondoggle that is less industrial policy and more paying off donors. I think this leads to a gross misallocation of resources as using some of your “best” skilled labor and mechanical engineers, construction engineers to assemble largely Chinese parts using Chinese IP in old tech (lithium batteries) doesn’t seem to be the optimal use of these scarce resources. I know the IRA is about more than EVs, but a lot of it about EVs. Time will tell. As you note, early days yet.

Manufacturing has effectively been in a recession over the past year, but I believe much of this is a hangover from subsidized overconsumption of real goods during Covid, particularly 2021-2022. I believe this is cyclical rather than an implicit criticism of the effectiveness of recent donor handouts. We should hopefully see a bit of rebound this year and next. Maybe not in autos as at these interest rates fewer people can afford car loans.

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The other issue with the IRA is that it came at the cost of effectively gutting the largely US-established free trade order (WTO, NAFTA).

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Certainly violates the spirit of the WTO, but not anything China and the EU haven’t already done (though much larger scale than anything the EU has done ex-Airbus). It may be helping Mexico as China is expanding three as part of its content washing arbitrage operations

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NAFTA is largely eviscerated in the automotive sector. The US subsidies are so vast that Mexico and especially Canada have had to distort the market even further with budget-busting subsidies to retain their automotive industries. It's a mess.

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Yes, and? I didn't claim that the industries are shrinking, but that they're distorted and heavily subsidized.

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Sure, sure.

You also seem unaware that EV assembly subsidies under the IRA are awarded to Canadian and Mexican plants.

A bigger issue for Mexico are the wage rules for the auto sector negotiated by Trump under the revised NAFTA. Makes Mexico less competitive at the margin relative to the US and Canada.

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The WTO, sure (tho I’d argue it’s been a defunct body for like 15 years) but the IRA explicitly exempts Mexico and Canada leaving NAFTA intact

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This is more a matter of degree, but the subsidies in the IRA are so huge that they have to be matched. Free trade in autos is effectively defunct. Historically, that was a key industry for creating the CUSFTA in 1989 (pre-cursor to NAFTA, replaced the 1965 Auto Pact).

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Manufacturing is in a recession because inflation problems are still acute throughout much of the world, and it's hampering U.S. exports.

The biggest effect of the IRA on EVs was changing the calculation for the $7,500 tax credit. Previously, there was a cap on output so Teslas and GM vehicles no longer qualified. Now, the cap was removed and Teslas fully qualify. Also, the $7,500 is divided into two parts: $3,750 for vehicle assembly in the U.S., and $3,750 for battery assembly in the U.S. or a friendly country (basically not sourced from China or Russia).

There were also MSRP limits to avoid the appearance of subsidizing rich people's toys.

Tesla is able to stay under the caps and sell cars for the $7,500 credit. Ford got screwed, because it had a hit on its hands with the F-150 Lightning, but due to the income caps and only qualifying for the $3,750 credit, a lot of buyers canceled their deposits. A lot of the full-fat F-150 EVs were going to be business vehicles.

The Asian carmakers were frozen out completely. Hyundai (which owns Kia) took a different tack. It's encouraging leasing of its EVs and PHEVs and giving lessees up to $7,500 in discounts. This is to keep up its electric sales, as well as buy it some time until it has a U.S. factory ready to qualify for the rebates. Hyundai was building a factory in Savannah, GA, but due to the IRA is retooling it to build its Ioniqs. Hyundai is also building a a battery plant in Savannah. Kia also plans to build its EVs in western Georgia.

TechCrunch published a list of American battery plant investment commitments one year after the passage of the IRA.

https://techcrunch.com/2023/08/16/tracking-the-ev-battery-factory-construction-boom-across-north-america/

There are maps of where the plants are going as well as commitment by automaker.

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I don’t think inflation around the world has anything to do with manufacturing recession and the US is not a big exporter of manufactured goods. Inflation is also lower now than when manufacturing was doing better.

Container volumes were 15 percent higher during the 2021-22 period vs pre-Covid due to subsidized excess consumption and changes in consumer preference (goods vs services) as a result of government decrees and the pandemic. If you bought a new fridge you don’t need another one for awhile.

All global manufacturers (Germany, China et al) are suffering from this cyclical hangover. Things should improve from here unless we get full on economic recessions (maybe one happening in EU now).

Good color on EV/battery subsidies - thanks!

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I recommend a reading a history of massive government funding, without which there are no railroads, Silicon Valley, etc. The IRA is in keeping with a successful history of government providing the money to take risks that private capital refuses to make. Donors have little to do with this. Google was funded by the intelligence agencies in its infancy at Stanford. Stanford itself was a byproduct of government funding to build-out railroads. The list goes on and on. This is like complaining about the Solardyne failure during the Obama administration, conveniently leaving out the fact that the government during the same time period bailed-out ($4 billion) a startup company named Tesla as it was on the brink of bankruptcy. Big Tech, Big Pharma, Big Ag, Big Defense -- name a major business sector that hasn’t been subsidized with billions of taxpayer dollars. This is how shit gets done in America. Of course, the billionaires and their bros would have you believe nobody helped them, as if they fell to Earth from another planet. Paul Krugman once wrote: “The U.S. is an insurance company with an army.” I think that captures the core of capitalism.

“A little learning is a dangerous thing.”

-- Alexander Pope

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Too little learning is very dangerous, indeed.

Tesla received a $465 million loan to build the Model S. You added on some extra zeroes- I suggest an arithmetic refresher. And that loan wasn’t a bailout (in fact only solvent companies could apply for these loans - see link)

https://www.cbsnews.com/news/tesla-gets-465-million-government-shot-in-the-arm/

Paying people under the IRA to assemble existing Chinese IP and components (not new technology) and then paying people to purchase the assembled product is an attempt at forced consumption and job creation, not anything to do with basic research nor new tech nor defense applications (like the examples you cited).

The objective is to create union jobs and reward donors and change consumer behavior (subsidize rich people to buy EVs, which are not a new technology). Just call it what it is.

It isn’t the internet or the microwave or radar or anything like that.

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Without that bridge loan Tesla’s cash burn would have flamed-out. The Billionaire Brethren act as if they receive no government money. Again, without the government money there were no railroads, no Stanford, no Silicon Valley. INTL HP, et alia all received government money. Whether you call it a loan, subsidy, or reward for still being solvent, it’s government funding. If Musk is a libertarian, why didn’t he borrow the money from the private sector? I’ve listened to a billionaire libertarian on a call gripe about the government, shortly after the DOE gave his company $3 million, followed by the first customer: U.S. Army. Needless to say, he didn’t return the money. I lived in Palo Alto back in the days when Bechtel, INTL and HP were the biggest concerns and Apple was just beginning. Tidal waves of government money washed in, for good reasons, military and intelligence agencies to name just two. But it was the same story. Executives acting as if they had no financial assistance whatsoever. Governor Reagan had to meet with George Schultz to get Bechtel’s blessing before getting the nod to run for President. Small wonder Schultz was in the Reagan cabinet.

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These woes make US weapons procurement look genius by comparison.

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Jan 17·edited Jan 17Liked by Noah Smith

Totally on point. We have developed government atherosclerosis. The Republicans want to kill the patient, like SCOTUS dismantling Chevron. Progressives proceed in denial. Both are unwilling, incompetent and unable to do driven problem solving. FDR PROBLEM solved.

I really like this: I call it Darwinian Driven productivity (in learning, product development, market iteration, manufacturing productivity)

"These are two very important examples of a very important principle: New economic approaches need to iterate, actively learning from their mistakes and making course corrections."

Rule 1 of productivity and the learning curve is that only works to level their is a driving force. Equilibrium, laziness, comfort are the stasis of 99% of people.

Rule 2 - Someone has to lead and drive Productivity and results.

FDR. Leslie Groves. Sony, Toyota 1980s for decades. US automotive is the best at this here. I'd hire a hot shot 45 yr old and empower that person to drive and rule over all regulations, barriers. Decisively

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Jan 17Liked by Noah Smith

Brad Templeton went into a lot more detail about the problems with how the EV charger subsidies were designed in an article here: https://www.forbes.com/sites/bradtempleton/2023/12/01/does-the-dept-of-transport-know-what-to-do-with-7b-for-ev-charging/

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author

Thanks!

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Excellent overview...... In general, the machinery of government is best for long Horizen immutable themes. That is, it is better to direct regulations and even investment with broad themes (innovation, governance, national security, etc) vs very specific highly volatile industrial markets. It is very very easy to "miss" and create perverse incentives... one need only look at the healthcare/education sectors to see these in action.

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Jan 17Liked by Noah Smith

Thank you for your analysis, Noah.

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From a pure theory basis, to subsidize investment with a higher deficit ought to be mainly a wash. The increased deficit (supposing the Fed has an inflation target) means, ceteris paribus, less private investment.

The proof of the value of the subsidies is the ROI of the investments (counting as part of the return the value of the CO2 emissions avoided). I'm rather pessimistic on the green energy investments because the subsidies are given for the investment, not in proportion to the net CO2 emissions avoided. Tariffs also give more room for inefficiency and can lower the economic rate of return. This is a perverse legacy of the Trump era.

The real value in these projects could be in learning how to remove regulatory impediments to investment.

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Jan 17Liked by Noah Smith

My blood is boiling

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I think people only really learn from painful mistakes. We're in for a world of hurt before we get it right. Time can march soo slowly when we want a change in direction

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It's also worth noting that Biden did nothing to remove a major impediment to manufacturing, the fiscal deficits that attract foreign capital and overvalue the dollar making imports cheaper and exporting more difficult, in addition to the drag on private investment generally. Another unfortunate holdover from Trump.

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Just put the charging stations in Buccee's, truck stops, and rest areas. Why is that so hard?

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In an EV future, we won't need stand-alone fueling stations. The chargers themselves are small; a home wall-mounted unit is about the size of a pay phone. In parking lots, they are small enough to fit in the island between parking spaces.

They just need more time to park and charge. Even the fastest Tesla chargers take far longer than gas-up-and-go fuel pumps. Public chargers will be for places like office garages and shopping centers, where drivers will park their car for long periods anyway at the destination.

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How can government be bold when it is being undermined from without and within by toxic actors? Our system is broken. We need to admit that before anything will happen to fix it. Christian nationalism and people like Tommy Tuberville, Paul Gosar, and Mike Johnson are destroying government from inside government. Trump and his cult are waiting on the sidelines. No matter who is elected in the upcoming Presidential race, things are going to get much worse before the possibilities start to look positive.

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I would like to propose “budgetism” as a replacement for “checkism.” It makes me think of “checks and balances,” as in too much red tape. Plus Gen Z doesn’t know what a check is ;)

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As I point out in this article on Australia, lack of state capacity isn't an inherent fact about the state it's the inevitable end-product of neoliberalism, and, in particular, New Public Management https://www.themonthly.com.au/issue/2021/september/1630418400/john-quiggin/dismembering-government

Rebuilding state capacity is part of the iterative process you describe.

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I did read Osborne and Gaebler in college as assigned text for a public administration and policy analysis class. This was also during the Clinton administration, and Vice President and "inventor of the internet" Al Gore did take up the reinventing government mantle. The "ReGov" authors advocated public sector managers and employees to be more entrepreneurial in the sense of less reliance on consultants and waiting on policymakers to give them directions. They wanted something more along the lines of a practice in Europe where domain-knowledge experts would produce white papers about policy initiatives.

New Public Management is more along the lines of Thatcherization, which is to privatize anything that involves issuing a payroll check to the civil service. The UK was under the gun because its public debt was a structural crisis and circumstances called for it. This is what has become the synonym for neoliberalism.

The accounting logic for privatization was that public expenditures are largely fixed costs (see: Baumol's cost disease). So expenses are effectively overpaying for government. The "magic" of privatization was to transition from fixed costs to some per-unit cost of government that would be variable, and private companies would put in tenders to compete on that per-unit costs. Green-eyeshade government leaders would then get a bottom line figure and buy back government services much like a small-merchant shopping at Costco.

For about 20-25 years, neoliberalism did deliver. Government costs were reduced, largely by reducing wages of workers to the tradeable, for-profit sector equivalent as well as taking much of the fixed costs off of the public ledger. (This largely enticed bondholders of public debt.) However, that frontier was a generational dividend and neoliberalism can no longer make those claims. Many of those private companies are now exclusively in the business of government contracting, closing off nimble innovators and creating a closed loop of established bidders (i.e., contract cartels). These contractors are now taking on the features of the public services they supplanted, a fixed-cost bureaucracy that's not on the public ledger.

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One problem with the "learning" idea: change of administrations. If Raimondo stays in her post through 2028 and if she's as sharp as touted and if ..., by the end of 8 years she may have learned some lessons and begun to apply them. But few cabinet officers stay on the job for 8 years, and even if they do, either their politically appointed subordinates or superiors don't.

Another problem is that each of the contracting and permitting hurdles has a history, often one where a political power and an interest group combine to push it and write it into law. There's no "sunset" provision for such provisions, and few politicians or bureaucrats get much credit for killing obsolete, ineffective, or perverse provisions..

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The U.S. also has a unique problem in a cultural aversion to expertise. In terms of military affairs, the division of expertise and lay policymaking is a good one -- civilian control is necessary because of the ever-present danger of military experts using their capabilities to turn their men and guns on the government. For non-war purposes, it's counterproductive.

In contrast, a European approach is for the political process to reward expertise. France is famous/infamous for les Grandes Ecoles, and European nations have similar institutions like the U.S. Ivy League to cultivate elite talent for public service. These do at least produce subject matter experts, who if given a ministerial task must have relevant academic and field experience. The U.S., at the federal and subsidiary levels, treat such appointments as classic patronage with separation between policymaking and organizational administration.

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