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Chartbook 221 The IRA (& the Fed) debate - bringing hegemony back in.
Also a response to Gabor and Mason.
What is the IRA? Is it a game-changing new industrial policy? Or is it the old wine of neoliberal de-risking in new bottles, in which the state stands ready to socialize the losses whilst capital privatizes the profits? The argument has gone back and forth in recent months. It is a debate about technical questions of policy. What tools of policy are these and what can we expect them to do? But it is about far more than that. The administration has made the IRA into centerpiece of what Jake Sullivan has dubbed the new "Washington consensus", making it the opening of a new era in economic policy. The skeptics, by contrast, see mainly continuity with the past. Nor is this merely a scholastic debate. The argument is ultimately about what we can reasonably expect from reformism. The IRA matters because as far as climate policy is concerned, it is the best that the American democratic process is likely to deliver any time soon. So, if you are skeptical about the IRA you must face the question of what you actually expect policy to deliver over the next thirty years, the thirty years that are decisive for addressing the climate crisis.
For a snapshot of the ongoing debate, I recommend again this fascinating discussion.
In an extremely helpful new blogpost, JW Mason proposes a taxonomy within which to clarify and locate some of the contending positions in the debate.
Mason's taxonomy focuses attention on two axes: how far is industrial policy driven by direct state engagement v. how far does it operate at arms-length through incentives? On the other hand, how far is green industrial policy broad-brush offering general financial incentives for green investment, as opposed to more fine-grained focus on key sectors and technologies?
Skeptics like Daniel Gabor, Mason suggests, can be seen as placing the focus on the form of policy action, prioritizing the question of direct versus indirect state action. Insofar as the IRA operates by way of tax incentives it remains within the existing, hands-off paradigm. A big green state would be far more directly involved. Those who see more promise in the IRA would not disagree with this judgment as to form but would insist that what makes the IRA different is that it engages in relatively fine-grained targeting of investment in key sectors.
It is tempting to see this as a distinction between economists who are more focused on issues of finance as opposed to those who are, at least in this case, more interested in the issue of prices, information and the mechanisms for resource allocation.
Mason’s taxonomy is very helpful, but because it remains at the level of the instruments and targets of policy it does not surface three other dimensions critical to understanding the stakes in the debate.
The three dimensions I have in mind are
The relationship of economic policy to the underlying balance of class forces.
The mediation of those forces through the electoral system by actors within the political system, specifically in the US case, the two parties, which each consists of at least three inner-party factions (the left-wing, Dem loyalist, blue dog, v. GOP “centrist” open to bipartisan deals, GOP loyalist, freedom caucus).
The agenda, expertise & de facto autonomy of state institutions, and their associated fields of expertise and societal interests, most notably those clustered around the Fed & the Pentagon and within the energy system.
Take all three dimensions together and you might say you have the question of hegemony. I take this question to concern both the domestic and global position of America’s liberal elite. And I take it not as an accomplished fact, but on the contrary as an open question and thus an absolutely overriding preoccupation of the Biden administration.
These three dimensions of thinking about economic policy in the current moment first surfaced for me in my exchange with Daniela Gabor and Josh Mason over Fed policy, which is now a few months back. Daniela and I went back and forth over the question of whether the Fed’s abrupt and, for many, unexpected hike in interest rates, constituted a significant break in the policy regime. I see the end of the so-called "Fed put", under which the Fed tacitly underwrote equity valuations, as highly significant both in itself and because it signifies how loosely knit any policy regime is. Faced with the shock of the polycrisis I see the Fed displaying a higher degree of autonomy than many credited it with, both in delaying the hike and then in delivering a shock more than any we have seen since the days of Paul Volcker. Gabor, by contrast, offered a sophisticated defense of the continuity between the current policy regime and the basic logic of a market-driven model of financialization.
If the current administration is, as Riley pointed out, not in the business of seizing the commanding heights of American capitalism, that leaves the question open of what the policy is actually about. To answer this question it seems to me that we need to go beyond Mason’s illuminating two by two typology, to address the underlying societal power balance, the logic of politics, and the agenda and autonomy of the state and its institutions.
To map either of these questions, to properly characterize either the Fed’s unexpectedly severe pivot, or the IRA we need to bring into focus not just the choice of instruments but the question of the underlying societal power balance, the logic of politics, and the agenda and autonomy of the state.
Before I say anything else I should add that I am fully aware that on all three of my added dimensions - class balance politics and state institutions - in raising the question of hegemony as I am, I am wading into very deep water and doing so quickly. So please take these points as suggestive rather than definitive. I am trying to widen the conversation not to end it.
To go back to Mason's grid, the most dismissive reading of the IRA hinges not just on the fact that it relies on indirect incentives, but that this technical choice reflects the power of class forces which in turn help to condition the limits of “realistic” political strategy. Acting indirectly by offering a generous program of subsidies – “bottomless mimosa” (Tim Sahay) - makes minimal demands on the state and enabled a majority to be built in Congress. Whilst delivering a significant change in energy policy, it effectively underwrites the status quo of the political economy. Nor should we expect anything else because there is really no reason to think that there has been any underlying shift in the class balance in American society, any time recently, and certainly not since January 2021 with the inauguration of the Biden-Harris administration.
Of course, the Biden administration takes climate seriously and they promise to deliver a (foreign) policy for the American middle class. But note that this is not a policy “by” or “of” the middle class but “for” them. It is a top-down agenda driven by the interest of the Democratic Party leadership in assembling majorities. Avoiding a repetition of Clinton's embarrassment at the hands of Trump in 2016 is the name of the game. For the Biden team, this is essential if American democracy as they cherish it, is to be saved.
The critics of the IRA contrast it to something far more ambitious, often described as “the big green state”. What this would entail is far more than an adventurous choice of policy instruments. For a “big green state” to be conceivable, we have to imagine not just different instruments of policy and a greater degree of state involvement, we have to imagine a shift in the balance of class power, or at the very least a shift in the basic intentionality of majority-formation. We have to imagine something like a Bernie Sanders-led Democratic party or a Corbynite Labour party that would assemble majorities with a view to restructuring the state and building institutions capable of counter-balancing or even shifting the underlying balance of class power. Beyond the instruments chosen and their targets, it is the fact that the IRA lacks this transformative ambition that leads the skeptics to see it broadly speaking as continuous with the previous regime of neoliberal de-risking rather than marking a profound break. In the absence of even prima facie evidence of a shift in the class balance or any radical break in the operation of politics or the state machinery, why would you expect anything else? The fact of a Democratic administration, after Obama and Clinton, predisposes them even more to this view.
The Big Green State is a hypothetical standard against which the IRA clearly falls far short. But does imply that the IRA is nothing more than a continuation of the old regime of neoliberal de-risking by other means? I would argue not.
First, we have to take seriously the political crisis - the threatened impasse of the two main American political parties and the Trumpist threat - that shaped the passage of the IRA and the urgency with which it has been appropriated and discursively enlarged by the Biden team so that it now stands for a new Washington consensus. One can be skeptical about the macroeconomic scale of the IRA or the conservatism of its policy instruments, whilst recognizing the significance and reality of the political crisis to which the Biden team is trying to address itself. After Trump, they are filled with a real sense that they cannot simply go on as before. Neoliberalism has hit a limit point. They do not buy the self-imposed discursive limits that defined the Obama administration and were personified by figures like Larry Summers. This is a significant break.
Second, the Biden folks are serious about climate. On this front as well they do not believe that things can go on as before. So, as Mason and others argue, it matters very much how the carrots are directed and what kind of investment is unleashed. Furthermore, though the use of tax benefits may be indirect, there is real expertise being built in the Department of Energy. Not a big green state perhaps, but in the hands of figures like Jigar Shah, director of the loan office at the Department of Energy, a little green state is taking shape.
Furthermore, if the Biden administration falls far short in its ambition of the Great Society, let alone the New Deal and if the benefits so far delivered for American organized labour have been modest, there is nevertheless a distinctive new vision of trying to build a new coalition of green capital, progressive environmentalism and organized labour. The aim of the game falls far short of the ambition of the Green New Deal, but this is real socio-political-economic engineering. The aim of the game is to build sufficiently powerful interest group coalitions to make important parts of the agenda proof against repeal. This was already in play in the passage of the IRA, which would probably not have happened if it had not been for the mobilization of the green energy lobby and unions. In short the box in Mason’s diagram which highlights fine-grained capital investment has empowered people, organizations and businesses building expertise and interest in it.
Finally, if it is abstract and ahistorical to ignore this wider agenda behind the IRA that makes it more than merely the continuation of derisking in another guise, it is abstract and ahistorical also to ignore the remarkable fusion within the Biden administration between economic policy and the national security state. As Grey Anderson points out in a brilliant contribution in Sidecar, it is a sign of the times that the programmatic statement on economic policy of the Biden administration should be made by the National Security Advisor. Meanwhile, the Treasury Secretary gives speeches on economic relations with China, framed by the question of whether the two countries can avoid war. And the connection runs all the way down the hierarchy. Last week Jigar Shah, of the Department of Energy, tweeted out an image of Rosie the Riveter framed by wind turbines, with an appeal for Americans of today to emulate the greatest generation, who in a matter of a few short years turned American from a military non-valeur into the greatest superpower the world has ever seen.
He endorses a call for America to declare war on climate change.
Of course, the talk in Washington in the first half of 2023 has been all about war, but what has been top of the agenda is war with China, not climate policy.
Beyond neoliberalism, in conditions in which the grip of financial capital on power is loosened, when the state elite faces a challenge like the rise of China, we should expect policy innovation. But we should not expect economic policy to harken only to progressive impulses. To bolster their political coalition, to conduct an innovative new policy on a wafer-thin majority, to pursue their deeply held commitment to American leadership, the Biden economic technocrats turn to national security, to the Pentagon and the think tanks of the Beltway as natural partners.
There is a big green state in the United States, the biggest the world has ever seen, with an annual budget rising towards $ 1 trillion, but it wears fatigues and its preferred shades of green are camouflage and khaki.
In a much less politically dramatic but more economically consequential key, I would see the Fed’s pivot in similar terms, as a display of autonomy by a state institution in the face of a threat to one of its core agenda items i.e. price stability. It has done so at the price of inflicting huge losses on bonds and other financial assets. And the stability lending it has put in place to prop up the banks, is no more than a series of stabilization measures to enable it to force through its agenda of price stabilization whilst avoiding a major financial crisis. As Gabor has argued, at some rather abstract level this may still conform to a basic vision of market-based and price-driven finance. But it is a long way removed from the go-go partnership between the Fed and the markets, first initiated by Alan Greenspan. In terms of the internal class politics that mesh the investing class and upper-middle-class owners of 401ks with the Fed, it has come as a considerable shock.
In a very different world, central banks would be pursuing a green agenda of disciplining private capital and driving the energy transition both by penalizing dirty lending and encouraging capital to flow into the green energy investment. This is what some of us once imagined might be possible as the monetary backstop to a green new deal. That hope has been disappointed. Instead, the IRA, as its title suggests, was introduced in combination with a program of tax hikes that were intended, at least notionally, to reduce the Federal deficit. The fact that the fiscal conservatism of the IRA has attracted so little attention, compared to the structure of its financial subsidies, is indicative of a broader disconnect in the discussion between the IRA and macroeconomics.
As I have noted in a previous Chartbook, whatever the political economy of the IRA, the most significant thing about it from the point of view of the energy transition is not that it is shaped in the form of tax benefits and does not realize the Big Green State, but that it is simply not big enough. It is not just conservative in its form. It is also conservative in its dimensions.
That is explicable only in terms of the dimensions of politics and class power that I am highlighting in this post. Biden wanted to do a much larger version of Build Back Better. The Sanders camp wanted a program that was an order of magnitude larger. It was not possible given the resistance put up by lobbies and by Joe Manchin’s veto. It was possible to pass the bill even in its current modest dimensions only because it was twinned with “pay-fors”.
This question of the IRA’s quantitative dimension though crude, is important to its wider interpretation in two key respects.
On the one hand, it further emphasizes the crucial significance, stressed by Mason and others, of targeting. The IRA’s measures have to be targeted because they were so tightly hedged around by political and financial constraints. This is not some scattershot liquidity measure in which hundreds of billions can be tipped into a repo market in a matter of weeks. It is a carefully calculated gamble on the likely take-up of EV when middle-class Americans are offered an inducement of $7500 on the right models. It is likely the first piece of legislation that has ever been benchmarked in this way.
Secondly, the fact that the Biden team are willing to hang their hats to this degree on a measure that is so modest in its size is indicative of the underlying political impasse that in turn marks the historical specificity of the IRA. As no one knows better than Daniela Gabor, the IRA is not how financialized neoliberalism looks when it is operating in its element. When the Fed is in its pomp, it does genuine revolutions, on the scale of trillions and it does them completely silently. Fashioning the three mangled pieces of legislation that emerged from the last session of Congress - the bipartisan infrastructure bill, the CHIPS Act and the IRA - into the basis for a new Washington consensus, is, by comparison, a truly audacious act of political marketing. We should not forget the mood of desperation that filled the halls of Congress twelve months ago, when it seemed as though the efforts to corral the Democratic majority would fail, America would miss its opportunity to pass significant climate legislation for the third time and the Democrats were headed for certain defeat in the mid-terms. If the IRA is a continuation of anything it is a continuation of the act of defying gravity which Tim Geithner described as the basic condition of American liberal elites since the 1990s. But since then, on all three fronts - climate, China and the struggle over the future of America’s political system - the stakes have only gone up.
There are, as Gabor rightly reminds us underlying structures of neoliberal capitalism, which shape the form of policy. There are also, as Mason’s taxonomy usefully highlights, the strategic intentions of the planners in the Biden administration. There may even be something like a little green state emerging. But, ultimately, what we see expressed in the Biden administration’s new industrial policy is America’s liberal elite struggling to craft a policy and a narrative that goes with it, to justify their claim both to domestic and global hegemony.
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