Tying Domestic Manufacturing to Clean Energy Tax Credits Is a Good Idea

We tried outsourcing industry for a couple decades. It hasn’t worked out so well!

Some of the Biden administration’s major political achievements have been in industrial policy.

There’s the Infrastructure Investment and Jobs Act (IIJA), the big infrastructure bill that tightens and expands Buy America rules attached to federal infrastructure spending.

There’s the CHIPS Act, that puts forward billions of dollars into the domestic manufacture of semiconductor chips – the little computer brains necessary to power every electronic device from supercomputers to the modern microwave.

And then there’s the Inflation Reduction Act (IRA) – so named because that’s among the things it took to get Joe Manchin on board – that is by far the world’s largest investment in clean energy in history. The IRA provides a huge amount of money in the form of tax credits to incentivize American consumption of clean energy products from solar panels to electric vehicles to heat pumps, and it ties rules – like apprenticeship, prevailing wage and domestic manufacturing requirements – to the companies that want their products to qualify for these credits.

This is a good thing.

Not everybody thinks so, though. There are lots of interested parties that want climate spending decoupled from incentives tying capital to the country. Not foreign countries who want EVs made by their workers to qualify for them, naturally. And, also naturally, not Washington Post economics columnist Catherine Rampell:

“Like many of Biden’s other industrial policies, the Inflation Reduction Act has become a pack mule for all sorts of unrelated agenda items, including lots of beggar-thy-neighbor protectionism.”

For what it’s worth, she’s consistent. As recently as last week Rampell criticized requirements that semiconductor companies taking CHIPS Act money follow Buy America rules and provide their employees with quality child care. Last year, she took a swing at blaming tariffs for high inflation (they are and were not, in fact, responsible for inflation).

But I digress. Rampell’s complaints are ultimately about efficiency. What does making it in America have to do with an economy-wide clean energy adoption?

I’ll take a brief stab at answering that question.

For one, it reflects the reality of popular opinion on international trade and commerce in 2023. In the name of efficiency, U.S. policymakers spent a couple of decades allowing U.S. companies to plant their factories wherever they wanted. In return for this hands-off approach to industrial regulation the United States got marginally cheaper consumer goods … that many Americans have found hard to appreciate because their livelihoods were upended by a wave of import competition.

The fact that efficiency doesn’t always turn out to be efficient for the underemployed consumer was further underscored when the Covid-19 pandemic hit and the economy was beset with shortages because all of our favorite U.S. multinational companies had offshored most of their manufacturing capacity… in the name of efficiency. No personal protective equipment and no ventilators, and also no toilet paper, no tampons, no aluminum cans, and no baby formula. And lest we forget: There is a huge country that practices a massive amount of industrial policy with very little concern for the confines of market principles. For the past few decades it has served as the world’s de facto factory floor, and this is not because globalization naturally developed in this direction. A very involved state led it there, and that has had a huge effect on how efficient the international market is today.

“There is a direct through line between the (Chinese) state and expression in the economy,” said U.S. Trade Representative Katherine Tai in a recent interview. “And that is a really important aspect of another shared challenge we have with our European friends and other partners around the world in terms of a sustainable path to economic growth and development. In a version of globalization where the field is not level, we are having to figure out how to adapt. We will need to adapt together.”

Adapting together, in this case, means giving American workers some purchase when the federal government incentivizes purchasing these energy products.

And secondly, it works. Rampell argues that Buy America rules “ultimately raise the cost of producing these critical clean-energy technologies, and will slow their adoption.” But without them, we wouldn’t have a clean energy program at all because it wouldn’t have passed Congress. This may shock some readers (and other Washington Post columnists) but the loss of millions of U.S. manufacturing jobs was not well received by the American public. And the more they hear about the IRA the more they like it.

Meanwhile, the IRA is cajoling more companies to place their production in the United States. And more of the money is rolling out into local manufacturing economies that need it.

Americans don’t want a new generation of critical technologies simply sold to us; we want to make some of it themselves, too. Industrial policy wins some agency for American workers in the burgeoning industries that will drive the future economy. That agency is equally as important as efficiency, which has proven not to be so efficient.