The Inflation Reduction Act

On Sunday, after more than twelve hours of theater, the Senate passed the Inflation Reduction Act (IRA) on a party-line vote. That it even happened was stunning given that it was widely believed that Joe Manchin was no longer negotiating on anything energy related. In a surprise twist, he and Chuck Schumer announced a deal less than two weeks ago that included energy provisions. Virtually nobody saw that coming, including the Biden Administration.

The IRA is a huge bill. It includes provisions dealing with electric cars and household appliances, incentives for utilities to switch to clean energy, allowing Medicare to negotiate prescription drug prices, continuing expanded subsidies under the Affordable Care Act (ACA), creating a new 15% minimum tax on some corporations and increasing funding for the IRS to enforce existing tax laws. It achieves the long-sought goal Democrats have pursued of passing comprehensive legislation to deal with climate change. It is not the first bill to deal with climate change and it will not be the last, but it is the biggest by far up to this point.

Democrats have also long sought to let Medicare negotiate lower drug prices with pharmaceutical companies. That provision would not kick in until 2026 and would only apply at first to ten drugs. After that it would expand to cover more of them.

The IRA is much less than Democrats had initially hoped for. It only deals with energy and health care. It does not deal with housing, child care, paid parental leave or anything else. Realistically, that was always going to be the case. The fact that it was able to pass at all given how consequential it could be and the narrowness of the majorities Democrats have in Congress is nothing short of miraculous.

One fascinating dynamic has been the praise the IRA has gotten from some parts of the oil and gas industry. In addition to clean energy provisions, it also offers oil and gas some things. Congressional Republicans lobbied the oil and gas industry to fight against the IRA, but only with mixed success. The CEO of Exxon has even praised it as has Shell’s US division. Passage of the IRA will make it easier for oil and gas drilling permits to be issued as well as for new pipelines to be built.

Democrats have also agreed to pursue permitting reforms that will affect all kinds of energy production, including oil and gas and all kinds of clean energy. Permitting reform is arguably even more important than the IRA because of its potential to make every dollar spent go as far as it can. I have written before about the red tape that is preventing clean energy from taking off. The money the IRA gives it is great, but red tape could limit how far it goes. We need to finance and incentivize clean energy, but, even bigger, we have to cut the red tape standing in its way.

Needless to say, I am very glad the IRA passed. The House is scheduled to vote on it Friday where it is all but guaranteed to pass. Virtually every contingency of the Democratic Party has lined up in support of it. That includes everyone from the centrist wing to the far-left. It is not surprising that they are all supporting it, but it is surprising the more left-wing parts of the party are praising it. One big question the IRA has answered is whether the left could ever vote for something happily rather than kicking and screaming. It looks like the answer is yes.

It has also been encouraging to see virtually every environmental group line up in support of the IRA. That includes groups who I have been very critical of lately. It is great to see pragmatism winning out and that the left can take yes for an answer.

Even on the main issue environmental groups have with the IRA, the oil and gas provisions, I think they are mistaken. From a climate change standpoint, the building of more gas pipelines can be a good thing. If gas will be used to replace coal either in the US or elsewhere that is a positive. The same is true if gas is used to replace heating oil. With electric cars becoming more common, electricity demand will be much higher and gas will continue to play a role in producing it. Gas can also be used as a complement to wind and solar for when the wind is not blowing or the sun is not shining. People need reliable electricity and as long as wind and solar remain intermittent, there becoming more widely adopted will depend at least in part on gas.

Environmental groups and many Democrats have traditionally been focused almost entirely on wind and solar. That was a misguided approach. The goal should be to reduce carbon emissions. The particular technology used to do that should not be a concern. The IRA is technology neutral. It includes provisions to boost wind and solar, along with nuclear, battery storage, hydropower, geothermal and carbon capture. All of those should be tried. Some of them may not work out, but it would be unwise to put all our eggs in 1 basket.

Regarding health care, the allowing of Medicare to negotiate prescription drug prices is one of the most popular things there is. It is absolutely the kind of substantive thing Democrats should be talking about ad nauseum regardless of where they are running. It is encouraging to see Democrats in tough races already campaigning on that. Not only is the IRA good policy, but it can also be good politics. While there is nothing wrong with Democrats campaigning on climate change, those running in tough races would likely be much better served by emphasizing the inflation fighting aspects of the IRA, especially drug pricing and taxing corporations.

The IRA is a product of elites, not grassroots

There is a big misconception among the left and environmental movement when it comes to why taking action on climate change is so hard. At its core, the misconception is that there is a huge grassroots movement demanding action on climate change. In this story, everyone is demanding that something be done about it. The only reason something does not happen is that greedy fossil fuel companies are paying off politicians. Joe Manchin in particular has been a regular source of ire from environmental groups for his ties to the coal industry in West Virginia. He is the single biggest villain preventing the planet from being saved in their eyes.

In reality, there is no grassroots movement for action on climate change. The few who protest demanding action tend to be all-purpose leftists and are wildly unrepresentative of the general public. Among the general public, climate change ranks extremely low in terms of what is considered the most important issue. Concern for climate change is heavily concentrated among political, cultural and business elites. While that is not at all how much of the left and environmental movement wishes things were, it is hardly an insurmountable problem.

The way that Joe Manchin was convinced to support the IRA was not by grassroots protesters yelling at him. It was by elites of all kinds talking to him. This article gives a great rundown of who spoke to him in the weeks leading up to his announcement of a deal. Those who spoke to him included CEOs, labor leaders, fellow Senators and Bill Gates. It was economists, including Larry Summers who I have to give kudos to here, who convinced him that the IRA would not exacerbate inflation and would in fact reduce it. All of those actors are elites if there was ever such a thing.

Climate change is difficult to deal with not because of evil fossil fuel companies, but because most people do not see it as a high priority. Democrats arguably put themselves at a political disadvantage by talking about it so much. It is easy for Republicans to call them out of touch, which, strictly speaking, is not wrong. Focusing on something the public does not view as a priority is the definition of being out of touch.

What can make the IRA good politics is not the climate change provisions. It is everything in it that can be credibly said to help reduce inflation. That is where talking about reducing prescription drug prices comes in handy. The IRA also raises on taxes on some corporations, which is a way to reduce inflation as is beefing up the IRS to go after those not paying what they owe.

Manchin is good, Sinema is bad

As expected, the success of the IRA came down to Kyrsten Sinema. The demands she made wound up being much smaller and less bad than I had feared, but they were still not good. In particular, she helped preserve carried interest, which allows private equity firm managers to treat the income they make from selling companies as capital gains. Capital gains are taxed much lower than ordinary income. It is indefensible and there is no reason for it to exist. Joe Manchin wanted to get rid of it. Kyrsten Sinema is the reason it survived.

In the grand scheme of things, carried interest is not a huge deal. The revenue that would have come from getting rid of it was tiny. The number of people affected by its repeal could probably all fit in a restaurant. But Kyrsten Sinema’s choosing to die on that hill is one more reason Democrats should not look to her as a model of centrism.

Joe Manchin showed the way forward. It was to push for increased energy production of all kinds while raising taxes on some corporations. The changes that he forced Democrats to make to the legislation were almost all good. He was also right to not support the bill passed by the House last year. His demands were clear: prioritize a few things and do them well. The bill passed by the House did not do that. It was a Frankenstein of every single Democratic fantasy with the funding for all of it being temporary.

In contrast, the IRA accomplishes what Joe Manchin said he would support. Although the ACA subsidies only last three years, most everything else is permanent or lasts for ten years. The bill passed by the House had all of its spending frontloaded with the tax increases only coming later. It most certainly would have exacerbated inflation and led to a backlash resulting in the whole thing expiring. The IRA spends money more gradually and matches it closely with tax increases, making its effect on inflation minimal or negative.

Kyrsten Sinema opposed all tax rate increases on corporations and individuals, unlike Joe Manchin. She had opposed Medicare negotiating drug prices before relenting some. The common thread in all her centrism is that rich people and corporations should not pay more in taxes. That is quite possibly the most unpopular position someone can take. Combine that with her standard cultural liberalism and that is a one-way ticket to irrelevance for Democrats.

I am not a fan of hers and think she is a wannabe John McCain. That said, in the end she did the right thing. Despite her last second drama early Sunday afternoon, she was never going to sink the IRA. As long as Joe Manchin was blocking legislation from passing, she could get away with doing her thing. The IRA was his bill and once he signed off on it the ball was entirely in her court. She alone was not going to stop it from happening. Her whole approach to politics is bad, but I do not think she should get a primary challenge in 2024. Had she single-handedly sunk the IRA I would feel very differently. Luckily, that did not come to pass and I hope she is re-elected in two years although I would not mind if she chooses not to run again.

A rule for getting things done

If I could boil down what I think is the most important rule to adhere to in getting legislation passed it would be this: take what you can get and for the rest, live to fight another day. The IRA accomplished long sought goals Democrats had pursued on climate change and health care. It does nothing on anything else they wanted. That is always going to be the case. No legislation is going to solve every single problem in one fell swoop.

The alternative to passing the IRA was not to pass everything. It was to pass nothing at all. The same was true for the ACA. The alternative to it passing was not Medicare for All. It was nothing passing.

Priorities have to be set. When they are not set you get the Frankenstein that was passed by the House last year. Trying to do everything at once means it will likely be half-assed and poorly designed. Setting priorities can be tough because many people will have to be told they are not going to get what they have fought hard for. It is no fun to be the one to do that, but it has to happen. I wanted a lot more done than what the IRA does, but that is life.

Odds are Democrats will lose the House in November and maybe the Senate. It may be another decade before they have Congress and the White House again. But they should start planning and prioritizing now what they would like to do then. That is what happened after 1994 when Clinton tried to do health care reform and it blew up in his face. Once Obama took office in 2009, Democrats knew exactly what they were going to do and they succeeded.

Although it took a while, Democrats this time settled on climate change and to a lesser extent health care again. Obama had tried to get climate change legislation passed but was unsuccessful. Picking up where he left off and learning from what went wrong, Democrats prioritized climate change legislation and succeeded. I do not know what Democrats should prioritize next time they have a trifecta, but if they take to heart what went wrong this time, odds are they will be successful in getting enacted what they prioritize then.

Biden is succeeding

Since Biden took office last year, the following things have been enacted: the American Rescue Plan, the infrastructure bill, fixing the postal service, a gun bill, the CHIPS Act, expanded healthcare for veterans exposed to toxic substances and now the IRA. He has also nominated a slew of judges, including to the Supreme Court, got his entire cabinet confirmed and the Federal Reserve Board is now full for the first time in years. On foreign policy, he has successfully gotten large, bipartisan support for Ukraine. All this has been accomplished with the narrowest majority.

Unfortunately, all of that has been overshadowed by the economy. That has taken a toll on his approval rating and has deprived him of getting credit for his accomplishments. It may not be fair, but that is what you sign up for when you are president. It can be a thankless job at times. When people are unhappy about the economy, the president is going to suffer no matter how little they had to do with it.

No matter what happens in 2024, Biden has established himself as a consequential president who will be remembered long after he leaves office. He is poised to sign the first ever comprehensive climate change legislation in US history. The effects the IRA will have on the economy could be substantial, including potentially remaking the whole energy sector. The ability of Medicare to negotiate lower drug prices could save tons of money for millions and the extension of the ACA subsidies will allow more people to access insurance and for cheaper.

In addition to the IRA, the CHIPS Act could be a game changer in making the US a semiconductor powerhouse. The infrastructure bill will help with climate resiliency and help promote electric cars. It will also bring long overdue repairs and additions to roads, bridges and public transportation.

Biden is not getting much credit for any of that today, but in the future people will look back on him as being in the same league as Obama and LBJ. Making his accomplishments all the more impressive is that he did it with no room for error. Obama and LBJ both had much bigger majorities. Biden also had to defeat an incumbent president, which neither Obama or LBJ had to do. All that, as Biden would say, is a BFD.