On Capitol Hill, the belief in the medieval art of alchemy remains strong.
Members of Congress believe that they can appropriate hundreds of billions of dollars and create policy gold, lower inflation, and produce a measurable impact on climate change. Oh, and all while stemming Chinese Communist economic imperialism. Except for raising taxes on America’s most productive and innovative firms, the woefully named Inflation Reduction Act will do little harm. Two provisions, guaranteeing oil and gas leases and the promise of energy infrastructure permitting reform, could actually produce net positives for the economy.
The problem?
Tax credits for the purchase of American-sourced electric vehicles will accomplish little of substance except contributing to inflation and exacerbating existing supply chain difficulties in the electric vehicle space. Domestic manufacturers remain unable to secure sufficient supplies of semiconductors necessary to build electric vehicles. That matters because today’s electric vehicles are computers on wheels. The credits will add to demand while doing nothing for the existing semiconductor supply. More importantly, the tax credits will raise demand for electric vehicle batteries, which are already supply constrained. The U.S. electric vehicle battery industry is investing in battery capacity, but critical inputs, lithium, and graphite, especially, remain very hard to obtain. It will be a few years before adequate supplies of lithium and graphite are secure. A lithium mine is being developed in Nevada. Graphite facilities are planned for Alabama and Michigan.
But the electric vehicle manufacturers are smiling. In response to increased demand, the tax credits, and an already tight supply of semiconductors and batteries, the manufacturers will raise prices. Already, prices for these vehicles are up double digits year on year. The so aptly named Inflation Reduction Act will just increase electric vehicle price inflation and overall vehicle inflation. Moreover, beneficiaries of the tax credits will be the more affluent. The typical electric vehicle buyer earns over $100,000 a year.
So the Inflation Reduction Act is really an income transfer scheme from workers at major manufacturers to the EV manufacturers and more affluent white males. The practice of alchemy is alive and well in Washington.
James Rogan is a former foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
