Bidenomics and the New Political-Subsidy Economy

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%).

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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

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

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.

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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.