Why the Inflation Reduction Act Needs a New Name

Economist Justin Wolfers suggests that the Inflation Reduction Act has the wrong name. Instead, it should have referred to investment.

The Inflation Reduction Act (IRA)

Yesterday, the IRA celebrated its first birthday. Its $393.7 billion (or so) in investment funding gives us lots of reasons to party:

Way oversimplifying a 700+ page piece of legislation that could cost $1.7 trillion (Credit Suisse) but also save $2 trillion (Committee for a Responsible Budget), we can say that its investment goals target clean energy and climate change. Its vast number of details include consumer tax credits for heat pumps and other devices that save energy. Correspondingly, zero carbon electricity generation, qualifying nuclear facilities, and sustainable aviation fuel receive support. Furthermore, the minerals that batteries require will need to have been recycled in North America or come from a country with whom we have a free trade relationship.

To achieve it all, corporate tax incentives are crucial:

So yes, while the Act also allocates many billions of dollars to recipients that range from the Internal Revenue Service to reducing healthcare costs, its investment goals should dominate its identity.

Below, you can see some of the spending categories:

Our Bottom Line: Investment

Thinking of investment, many of us direct our focus to Wall Street, to stocks, to bonds and their ROI (return on an investment). Here though, we are talking about a return on our investment in the factors of production–our land labor and capital. And even more precisely, we are looking at physical capital. Defined as the buildings and tools that are used to produce goods and services, the IRA requires massive shifts in investment. Indeed, one, two, and three decades from now, looking back, we will see the vast difference in our transportation and energy infrastructures.

Where does this leave us? The dollars and incentives on which the IRA depends make it impossible to predict its costs and benefits. Still, citing its investment priorities we can see how it could shape the future.

My sources and more: Sometimes handy for its facts, this McKinsey report ideally summarized the Inflation Reduction Act. However, remembering always to hedge our future predictions, Politico suggests the IRA’s expense is unpredictable.