The Inflation Reduction Act (IRA) was a ‘landmark’ in the fight against climate change. The CBO estimated that it would reduce deficits by $238bn over a decade (2022-31): the legislation includes $738 billion of offsets to fund roughly $499 billion of new spending and tax breaks.
There is a legitimate debate with regards to the reliability of these offsets. Funding immediate spending increases with the promise of future savings has so often in the past proved problematic.
The IRA included nearly $400 billion in federal funding to clean energy. The point estimates of the multipliers are 1.1–1.7 for renewable energy investment and 0.4–0.7 for fossil fuel energy investment. Given the US is operating well below its NAIRU, the IRA could conceivably be contributing to higher real yields, despite ostensibly lowering deficits over a 10-year period.
On top of federal subsidies, US states are touting “shovel-ready” projects to lure investment. US states are ‘flush with cash’.
Companies have announced more than 100,000 new clean energy jobs since the passage of the IRA, according to a report by Climate Power. Researchers at the University of Massachusetts Amherst project that the IRA could generate 9.1 million jobs over the next 10 years. To be clear, this latter figure does not refer to ‘net’ job creation. Jobs will be created in green industries, that would otherwise have gone to different sectors.
A modest conclusion to be drawn, nevertheless, is that the green energy transition will keep labour markets very tight over the next couple of years, preventing a major recession in the US, and making it more challenging for the Fed to raise the unemployment rate above its longer-run estimate (4.0%).
