The ‘Inflation Reduction Act’ is on its way to impoverishing the West
Opinion by Dan Hannan
In 1930, Congress decided that the answer to an economic downturn was to back American producers against foreign competitors. The Smoot-Hawley Tariff Act imposed levies on some 20,000 imported goods. It horrified economists, as well as President Herbert Hoover, who described it as “vicious, extortionate, and obnoxious.” But such was the public mood that Hoover felt he had no option but to sign it into law.
In consequence, U.S. trade fell by some two-thirds. Erstwhile allies, notably Canada, retaliated with tariffs of their own. Prices surged, leaving people with less to spend and causing the economy to cramp up. The recession, which had been showing signs of coming to an end, was instead deepened and prolonged. Unlike Britain, which stuck to free trade and enjoyed a decade of impressive growth, the United States condemned itself to the Great Depression.
Last year, Congress again chased the will-o’-the-wisp of government-sponsored domestic production. This time, its instrument is the hilariously misnamed Inflation Reduction Act, whose stated purpose was to encourage growth through green technology but whose effect will be to put up trade barriers, raise prices, and shrink household budgets.
The legislation, it need hardly be said, will not reduce inflation. The way to cut prices is to shrink the amount of money in circulation, something outside the scope of this legislation. In fact, the bill will push prices up by making energy more expensive. Energy is not simply one among many commodities; it is the vector of economic growth. Almost nothing is made, let alone brought to the shop shelf, without it. When energy costs rise, so does the price of everything else.
There may, of course, be a separate argument for stimulating green technologies. Climate change is what economists call an externality — a cost borne not by the producer but by the general population. The task of preserving congenial human habitats (or saving the world, if you prefer the more dramatic formulation) thus falls in large measure to governments. Fine. But let’s not kid ourselves. Carbon reduction is a duty, not an opportunity. When politicians talk of “creating green jobs,” they are engaging in economic primitivism of the worst kind. They might as well argue that replacing excavators with gangs of men carrying spades would “create jobs” — which it would in the sense of making people work longer hours to wind up poorer. Jobs are a cost, not a benefit. We should not confuse higher living standards, which everyone wants, with the number of man-hours required to attain them.
The worst aspect of the Inflation Reduction Act is that, like the Smoot-Hawley Tariff Act, it is already setting off a chain of beggar-my-neighbor retaliatory measures. The European Union has announced that it will relax its state aid rules, and there are signs that it intends to create an equivalent slush fund of its own. Eurocrats always enjoy spending money since the taxation is done on their behalf by national authorities, but the grants can be used to purchase the loyalty of key groups.
In a world where China, the EU, and the U.S. are all subsidizing domestic production, there is pressure for others to follow suit — even the countries traditionally most hostile to protectionism, such as the United Kingdom, Singapore, and Australia. A manufacturer of electric vehicles in Britain, effectively frozen out of both the European and American markets by the grants given to local firms, will lobby for an equivalent subsidy. In the current mood, what government will dare refuse?
The mastodons of industry, gathered recently for their annual name-dropping festival in Davos, Switzerland, are slavering at the prospect.
“It’s a call to arms,” says Aditya Mittal, head of the ArcelorMittal steel conglomerate. “The [Inflation Reduction Act] is incredible legislation, and matching it is nonnegotiable for Europe. Otherwise, it is going to be very difficult for investment.”
“My first reaction was, ‘Oh my God, it’s protectionist,’’’ says Ilham Kadri of the Belgian chemical giant Solvay. “But then I realized that it’s the best thing that can happen to Europe. We need a Euro-[Inflation Reduction Act] as well and an industrial policy of our own.”
Davos might have been specifically designed to illustrate Adam Smith’s rule that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The Inflation Reduction Act favors big corporates over startups. It favors producers over consumers. It will worsen deficits, weaken competition, and reduce growth. Oh, and it will fragment the Western alliance, needlessly alienating American allies. I can see why the Davos rent-seekers love it. But why does anyone else?
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