In spite of having won the US president’s election in November 2020 by an ultra-slim margin, President Biden has launched a major multidimensional agenda leading America into a “post neo-liberal” age, representing a radically different direction from the last decades. Since Reagan became President in 1981, the governing political and economic philosophy of the both Republican and Democratic Administrations has been neo-liberal, the view that the less the government was involved in the economy, the better, free markets know best, the government’s role should be to stay out of economic guidance to let markets operate freely. This approach also favored international trade, globalization and limiting the growth of US federal debt.
Biden has radically changed this governing philosophy, for example by passing four major legislative Acts, the last was the $800 billion Inflation Reduction Act (“IRA”). Passed with zero Republican votes in August 16, 2022. It is the pared down version of a more ambitious Build Back Better Act initially proposed by Biden, which included $3.5 trillion in social and climate change expenditures. It is with this bill that the vulnerability for the Biden Administration’s limits of having to deal with a 50-50 Senate became the most apparent. Knowing that not a single Republican Senator would vote for it, they needed for this Reconciliation bill to pass the vote of every single Democratic Senator, giving enormous power to each Senator and at least two Senators, Joe Manchin of West Virginia and Kristen Sinema of Arizona were opposed to a large majority of the social expenditures in Build Back Better. This led to long, drawn-out negotiations between Senate Majority Leader Chuck Schumer and Senator Joe Manchin of West Virginia, to produce a smaller, but still enormous bill, with few of the social programs Biden had hoped to include but many of the Biden agenda on climate initiatives and some of the tax increases.
There is disagreement on whether the inappropriately named Investment Reduction Act will in fact contribute to reduce inflation, the non-partisan Committee for a Responsible Federal Budget (CRFB) as well as Moody’s Analytics believe the IRA will reduce inflation whereas the non-partisan Congressional Budget Office (CBO) estimates the IRA will have no statistically significant effect on inflation, although they all agree it will reduce federal deficits.
The act includes measures strongly opposed by Republicans, for example provisions for a gradual right for Medicare to negotiate lower prices for prescription drugs, a subject that has in the past been blocked by effective lobbying by the pharmaceutical industry, a new 15% minimum income tax for companies with more than $1 billion in annual financial statement income, a 1% tax on corporate stock buybacks, an extension of a tax cap on business losses and funds for the government to improve tax collection. About half of the funds, $391 billion, will be invested in energy security and climate change programs, a huge federal investment to bring the US closer to its commitments made under the Paris accords. Significant amounts will also be applied to fund healthcare subsidies, to lower the cost of prescription drugs including putting a cap on the cost of insulin, with the remainder applied to reduce the federal deficit.
The IRA has disappointed many who had hoped Biden would be able to pass the numerous social initiatives in Build Back Better, but environmentalists recognize that it is the first comprehensive climate law in US history, with its massive commitment to invest in Biden’s climate agenda, principally on cleaner electricity. This concrete step should allow America to regain some credibility as an international leader in climate initiatives. Like the other major Acts passed by the Biden Administration, the IRA advances the idea of government-led industrial policy, in this case where state support is used to promote industries to de-carbonize electrical production. It is interesting to note that the US is emulating Chinese industrial policy, where state support is fundamental to the growth of specific sectors of the economy.
The IRA also pursues a protectionist policy, for example to aggressively promote production of batteries and components of solar devices to create on US soil competitors in sectors currently dominated by Chinese producers or in providing subsidies for the purchase of electric cars assembled in North America. Finance Ministers from 27 European countries have recently complained that they believe many aspects of the IRA might threaten European industry in violation of World Trade Organization rules.
The IRA is another concrete steps the Biden Administration has taken to change the direction of US economic policy, from a previous laissez faire, small government, market fundamentalism approach that the US has pursued over the past 40 years, to the passage of four major pieces of legislation that promote active and forceful government intervention through massive federal government spending to implement a protectionist industrial policy to promote a Transformative Biden Agenda. Will this approach be successful?