Joe Biden’s political prospects have just built back better. Last week’s passing of the Chips and Science Act by Congress breathed new life into the White House’s plans for industrial policy and support for US manufacturing.
Meanwhile, the famously intransigent West Virginia Democrat Joe Manchin, the king of coal country, performed a shocking turnabout on climate change. He agreed to back clean energy investment and healthcare subsidies to be paid for in large part by a 15 per cent minimum tax on big corporations.
Thus, in a week that was even more economically dismal than usual — with the Fed’s latest rate increase to battle inflation, dismal consumer confidence numbers and news that the US was now in a technical recession, Biden managed to score a big political win by doing something almost unheard of in Washington these days — orchestrating compromise. His win matters politically. The question now is what it might mean economically.
While the budget bill has yet to pass, and the Senate semiconductor support comes with far fewer strings attached for business than progressives would have liked (Senator Bernie Sanders has labelled it corporate “extortion”), there is a case to be made that simply getting to yes in Washington carries some economic benefits at present.
Chief executives have long complained that the uncertainty resulting from political gridlock, as well as a lack of adequate federal investment into things such as basic science research and workforce development, have curbed growth plans in the US.
The $280bn Chips and Science Act bill not only has strong bipartisan support but makes big investments into workforce training and basic science research, as well as supporting regional manufacturing hubs (something research shows has a disproportionately positive economic knock-on effect into local communities).
One can argue, as Sanders and progressives such as former Clinton-era labour secretary Robert Reich have, that companies like Intel don’t need lavish subsidies to stay in the US rather than moving more investment abroad. Many progressives believe that paying these now could set a dangerous precedent of giving taxpayer welfare to the richest corporations, which will result in them charging a future government ransom to stay in the US.
I’m not so sure. Silicon chips are unique, given that they are essential for pretty much everything else. The world needs more geographic diversity of supply in semiconductors. The fact that 92 per cent of high end chips are made in Taiwan, perhaps the second most politically contested country in the world after Ukraine, is worrisome for every nation, which is one reason Europe has its own chip regionalisation effort under way.
While it’s still possible for US companies such as Intel to move jobs and factories wherever they like, I suspect that stricter provisions around dual-use technologies coming down the legislative pike will make it harder to outsource strategic industries in the future. Regionalisation of supply chains, not unfettered globalisation, is the future.
The ramifications of the proposed budget bill, the name of which has been changed from Build Back Better to the Inflation Reduction Act, are more difficult to predict. The fact that the administration was able to push through a spending bill branded as a way to fight inflation is an impressive piece of political economy ju-jitsu (there is more than $300bn in deficit reduction for those worried about excessive demand, which helps a lot). But it’s still unclear whether the compromise will pass. Even if it does, its effect on short term inflation is very much up for grabs.
The upside of the bill is that it would enable the federal government to address rising healthcare costs. It would do so by helping poorer families to pay healthcare premiums, and also by capping out-of-pocket costs for drugs for those on Medicare. It will allow the US to do what most other rich countries do — negotiate with drug companies to reduce prices by using the power of the federal government (the largest buyer of prescription drugs in the world) to leverage scale to lower costs. That’s a no brainer that could save hundreds of billions of dollars in taxpayer money.
It also starts to address the outsized power of major lobbying industries such as Big Pharma. This, coupled with the fact that much of the bill would be funded by a 15 per cent minimum tax on big corporations goes a long way to fulfilling the administration’s promise to make the private sector pay its fair share in taxes.
Investment in clean energy is also welcome. I’m all for supporting investment in electric vehicles, wind farms, solar panels and lithium battery production. It is crucial to addressing climate change, which comes with its own huge economic costs. It’s the best way to encourage a “productive bubble” of widely shared private sector growth. Ultimately, it will lower the price of energy. But that process will take years.
No legislation is perfect. But last week represented an important first step toward bipartisan compromise on core bits of the Biden agenda that could have real economic impact. Restoring some sense of confidence that America can still govern itself comes with a reward beyond dollars.