The IRA will be net deflationary, because the tax increases are larger than the spending by about 300 billion. That said, it's not going to be a detectable effect, just because the package isn't big enough. 30 billion a year is only about 1.5% of the Recovery Act, and that was all delivered in just one year. So maybe a 0.1% decrease in the inflation number.
I agree the green vortex effect is likely to be much bigger. Developing industrial hydrogen could be a HUGE win because the ever-plummeting cost of solar means the energy cost of green hydrogen will get very small soon. If the capital costs of electrolysis can be brought down substantially, green hydrogen could obliterate natural gas and most coal in industrial processes, and there goes another big slice of CO2 emissions.
The unfortunate reality for us is there are few good tools to fight inflation in the short run. The best tool is raising interest rates, and while this effectively reduces demand it tends to push us into recession. We have a few big hammers to fight inflation in the short run. We do have lots of scalpels which can help in the medium term, which is what this bill pulls out.
We shall see how well Jay Powell does, I am hoping he can be a second Paul Volcker (maybe with a softer landing).
I don't expect the economic models capture this, but in my experience over the last 10 years there has been an inverse correlation between the rate at which new renewables come onto the grid, and wholesale power prices, which can be seen at the state level. I put this do to the fact that renewables have a low marginal cost, always dispatch, and often (in recent times) aren't owned by the dominant utility in the area.
It’s discouraging to read so much about “green energy” without mentioning nuclear. In 1972, Nixon’s “Project Independence” proposed construction of 1000 nuclear power plants by the year 2000. None has been built. The impact of this failure -- in part at the hands of the environmental movement -- dwarfs by 10x all of the benefits ascribed to the IRA. It’s also sadly ironic that Greens argue against nuclear as “too expensive,” while touting the learning curves and cost reductions associated with the increasing pace of investment in renewables. Those curves would equally have applied to a truly serious nuclear effort. Yes, there are a few billion dollars in the IRA for prolonging the lives of a handful of existing nuclear plants, but nothing for the proposal that Nixon made FIFTY years ago.
When you think through the nuclear issue, please remember learning curves and also the extraordinary proliferation of regulatory over-reach that might bias the judgment of “cheaper than everything else.”
All well and good, but given most solar panels/batteries are now coming from China, and a good number of rare mineral mines are controlled by China -- and, now China is scarily aggressive (see Taiwan).
How in the world can laws/policies that make us more dependent on China be good....?
This one will not. We can and will develop alternative sources of rare earth metals. As for solar panels and batteries coming from China, that's not bad as long as we maintain some capacity that can be rapidly scaled up in the event of a war.
Just this minute a military guy on CNN said the Chinese maneuvers presage a relatively imminent threat of war ("within a few years, if not sooner"). Therefore, a plan for future scaling up and sourcing sounds a little late to this game. Perhaps it is most prudent to ramp up first before we switch over any key portions of our economy.
I fear we are tethering ourselves to the CCP-Chinese, just like Angela Merkel tethered Germany to Putin.
After decades of being prone before the Arab oil suppliers, it is insane to seek another, even more unkind master in China.
Unless the U.S. is self-sufficient in batteries & green tech, why should we give up oil for Chinese solar panels...? Blind faith does not keep bad actors in check, the Euros already tried that with Putin and now they're burning coal. And, Xi's power and plans leave Putin in the dust, it now appears.
What green earth do we gain if we lose our freedom...?
Yes, these types of critical questions are what we need. I have read several articles on the act today and still have yet to read anything that resembles objective, skeptical coverage. What is actually being invested in? And what will it incentivize?
Those types of questions were absent in 2021 and have completely vanished as the MSM ramps up the push for Democrats in 2022.
I will go out on a limb and say this article will not age well
“The revenue increases in the IRA will be disinflationary, because lower deficits and higher taxes reduce aggregate demand.”
Higher taxes are disinflationary when they’re on the demand side. Since the IRA tax hikes are corporate taxes, I don’t see how that could be disinflationary. Raising costs for producers is textbook inflationary, no?
Shouldn't be inflationary, no. I mean, by this logic rate hikes would be inflationary because they raise companies' cost of capital. But we know rate hikes are not inflationary...
Do you also think that the Fed's interest rate decisions have opposite effect on individual and corporate contributions to inflation? It is generally believed that most of the interest rate-change impact on inflation is through discouraging corporate investment (making interest payments higher).
Help me understand this logic: “Targeting tax hikes selectively at more profitable companies will weaken monopoly power, since monopoly power increases profits.”
I get that as monopoly power increases, profits increase. But is it necessarily the case that reducing profits also reduces monopoly power?
If that’s true, by what processes is it true? Is it that the incentive to merge decreases as the potential profit of merging is capped by taxes? Is it that, as profits are taxed away, the cash to execute mergers is no longer available to corporations? It seems like it can be, but isn't necessarily, true; so I'm not sure I agree with the logic.
If monopsony causes high rents, why do economist keep getting mad when lefties say corporate greed adds to inflation? Isn't it just another way to say corporations are able to take more profit than of there was truly competitive market.
I think it's more about the lack of evenhandedness with how the corporate greed narrative has been articulated. For example, Dems routinely omit important context when lambasting oil companies as greedy for not ramping up capacity in the short-term to curb the supply shock from Putin's war.
Oil companies face serious headwinds from renewables, as Noah explains in his Aug 14th post. As such, their fiduciary responsibility to shareholders will necessarily constrain significant investment in oil production capacity because it will not be needed in the long-run. The IRA acknowledges this conundrum in the short-term by subsidizing oil extraction as a bridge to (hopefully) fully transitioning to renewables in the long-term.
The insulin price cap for private insurance failed. People are pinning their hopes on Newsom/California's plan to manufacture insulin and sell it cheaply. I wonder whether this is the right approach. Would it not be better to contract out the production to some place that is good at making cheap medicine, like India or Belgium? I don't understand why this wouldn't be a less risky and faster route to where they want to go.
Put another way, there's a risk that California builds an insulin factory and then gets undercut by Mark Cuban buying it cheap on the international markets. Or is there no functional market for him to buy it at?
California doesn't need FDA approval if it's made by the state and just used in California. We have a very respectable biotech industry - we are very capable of making human-grade insulin.
Well - sort of? I think it's accepted that a state doing business within its own boundaries isn't covered by the Interstate Commerce Clause and so Congress hasn't the authority to regulate it. And it's not like it has created any big problems in the past, nor would Cali making its own insulin likely cause any problems either.
The IRA will be net deflationary, because the tax increases are larger than the spending by about 300 billion. That said, it's not going to be a detectable effect, just because the package isn't big enough. 30 billion a year is only about 1.5% of the Recovery Act, and that was all delivered in just one year. So maybe a 0.1% decrease in the inflation number.
I agree the green vortex effect is likely to be much bigger. Developing industrial hydrogen could be a HUGE win because the ever-plummeting cost of solar means the energy cost of green hydrogen will get very small soon. If the capital costs of electrolysis can be brought down substantially, green hydrogen could obliterate natural gas and most coal in industrial processes, and there goes another big slice of CO2 emissions.
Yep, I tend to agree with all of this.
The unfortunate reality for us is there are few good tools to fight inflation in the short run. The best tool is raising interest rates, and while this effectively reduces demand it tends to push us into recession. We have a few big hammers to fight inflation in the short run. We do have lots of scalpels which can help in the medium term, which is what this bill pulls out.
We shall see how well Jay Powell does, I am hoping he can be a second Paul Volcker (maybe with a softer landing).
I don't expect the economic models capture this, but in my experience over the last 10 years there has been an inverse correlation between the rate at which new renewables come onto the grid, and wholesale power prices, which can be seen at the state level. I put this do to the fact that renewables have a low marginal cost, always dispatch, and often (in recent times) aren't owned by the dominant utility in the area.
It’s discouraging to read so much about “green energy” without mentioning nuclear. In 1972, Nixon’s “Project Independence” proposed construction of 1000 nuclear power plants by the year 2000. None has been built. The impact of this failure -- in part at the hands of the environmental movement -- dwarfs by 10x all of the benefits ascribed to the IRA. It’s also sadly ironic that Greens argue against nuclear as “too expensive,” while touting the learning curves and cost reductions associated with the increasing pace of investment in renewables. Those curves would equally have applied to a truly serious nuclear effort. Yes, there are a few billion dollars in the IRA for prolonging the lives of a handful of existing nuclear plants, but nothing for the proposal that Nixon made FIFTY years ago.
I'm going to write a post about why nuclear is, sadly, out of reach now.
But it's OK because renewables arrived and became cheaper than everything else.
When you think through the nuclear issue, please remember learning curves and also the extraordinary proliferation of regulatory over-reach that might bias the judgment of “cheaper than everything else.”
All well and good, but given most solar panels/batteries are now coming from China, and a good number of rare mineral mines are controlled by China -- and, now China is scarily aggressive (see Taiwan).
How in the world can laws/policies that make us more dependent on China be good....?
This one will not. We can and will develop alternative sources of rare earth metals. As for solar panels and batteries coming from China, that's not bad as long as we maintain some capacity that can be rapidly scaled up in the event of a war.
Hey folks, on point re: this discussion.
WSJ article on Uyghur labor used in solar panels productions & trade issues.
https://www.wsj.com/articles/u-s-solar-shipments-are-hit-by-import-ban-on-chinas-xinjiang-region-11660037401?mod=hp_lead_pos5
Just this minute a military guy on CNN said the Chinese maneuvers presage a relatively imminent threat of war ("within a few years, if not sooner"). Therefore, a plan for future scaling up and sourcing sounds a little late to this game. Perhaps it is most prudent to ramp up first before we switch over any key portions of our economy.
I fear we are tethering ourselves to the CCP-Chinese, just like Angela Merkel tethered Germany to Putin.
After decades of being prone before the Arab oil suppliers, it is insane to seek another, even more unkind master in China.
Unless the U.S. is self-sufficient in batteries & green tech, why should we give up oil for Chinese solar panels...? Blind faith does not keep bad actors in check, the Euros already tried that with Putin and now they're burning coal. And, Xi's power and plans leave Putin in the dust, it now appears.
What green earth do we gain if we lose our freedom...?
Yes, these types of critical questions are what we need. I have read several articles on the act today and still have yet to read anything that resembles objective, skeptical coverage. What is actually being invested in? And what will it incentivize?
Those types of questions were absent in 2021 and have completely vanished as the MSM ramps up the push for Democrats in 2022.
I will go out on a limb and say this article will not age well
“The revenue increases in the IRA will be disinflationary, because lower deficits and higher taxes reduce aggregate demand.”
Higher taxes are disinflationary when they’re on the demand side. Since the IRA tax hikes are corporate taxes, I don’t see how that could be disinflationary. Raising costs for producers is textbook inflationary, no?
Shouldn't be inflationary, no. I mean, by this logic rate hikes would be inflationary because they raise companies' cost of capital. But we know rate hikes are not inflationary...
Do you also think that the Fed's interest rate decisions have opposite effect on individual and corporate contributions to inflation? It is generally believed that most of the interest rate-change impact on inflation is through discouraging corporate investment (making interest payments higher).
I think higher rates discourage corporate investment and also discourage consumption, but the investment effect dominates.
Help me understand this logic: “Targeting tax hikes selectively at more profitable companies will weaken monopoly power, since monopoly power increases profits.”
I get that as monopoly power increases, profits increase. But is it necessarily the case that reducing profits also reduces monopoly power?
If that’s true, by what processes is it true? Is it that the incentive to merge decreases as the potential profit of merging is capped by taxes? Is it that, as profits are taxed away, the cash to execute mergers is no longer available to corporations? It seems like it can be, but isn't necessarily, true; so I'm not sure I agree with the logic.
This is important shift.
Still best IRA would have been something to address housing costs. Still not mainstream Dem policy push.
If monopsony causes high rents, why do economist keep getting mad when lefties say corporate greed adds to inflation? Isn't it just another way to say corporations are able to take more profit than of there was truly competitive market.
I think it's more about the lack of evenhandedness with how the corporate greed narrative has been articulated. For example, Dems routinely omit important context when lambasting oil companies as greedy for not ramping up capacity in the short-term to curb the supply shock from Putin's war.
Oil companies face serious headwinds from renewables, as Noah explains in his Aug 14th post. As such, their fiduciary responsibility to shareholders will necessarily constrain significant investment in oil production capacity because it will not be needed in the long-run. The IRA acknowledges this conundrum in the short-term by subsidizing oil extraction as a bridge to (hopefully) fully transitioning to renewables in the long-term.
The insulin price cap for private insurance failed. People are pinning their hopes on Newsom/California's plan to manufacture insulin and sell it cheaply. I wonder whether this is the right approach. Would it not be better to contract out the production to some place that is good at making cheap medicine, like India or Belgium? I don't understand why this wouldn't be a less risky and faster route to where they want to go.
Put another way, there's a risk that California builds an insulin factory and then gets undercut by Mark Cuban buying it cheap on the international markets. Or is there no functional market for him to buy it at?
I think that the issue is finding a cheap alternative -that has received FDA approval-.
It costs a lot of money and time even for generics to get that approval.
But the Californian factory will have to get that approval too. So they have to do that work, but also build a factory?
California doesn't need FDA approval if it's made by the state and just used in California. We have a very respectable biotech industry - we are very capable of making human-grade insulin.
So it's an FDA approval loophole?
Well - sort of? I think it's accepted that a state doing business within its own boundaries isn't covered by the Interstate Commerce Clause and so Congress hasn't the authority to regulate it. And it's not like it has created any big problems in the past, nor would Cali making its own insulin likely cause any problems either.