Biden’s CHIPS Act: Business Investment for Inflation Reduction
TL/DR –
The US Treasury Department has reported strong business investment in the years following the COVID-19 pandemic, attributing this to the Biden administration’s industrial policies in the Inflation Reduction Act (IRA) and CHIPS Act. However, the evaluation of these policies and their effect on the economy is disputed, with concerns over the baseline used for measuring investment growth and the focus on industry-specific investment rather than overall productivity growth. Broad tax changes are suggested as more effective drivers of investment growth, with policies such as the TCJA’s reduced corporate tax rate and 100 percent bonus depreciation offering incentives across all sectors rather than favoring specific industries.
The Treasury Department has praised strong business investment in the post-pandemic period. The agency credits the Biden administration’s industrial policies, specifically the Inflation Reduction Act (IRA) and the CHIPS Act, for this uptick.
The Treasury Department correctly emphasizes the importance of capital investment, which drives long-term growth, increases productivity, and boosts wages. However, the Department’s analysis of policy drivers has raised some concerns. The analysis may overlook significant factors such as suspect baselines, industry-specific investment that doesn’t necessarily increase overall productivity, and the influence of broader pro-investment policies.
Treasury’s choice of baseline is questionable
The Treasury Department’s analysis compares actual business investment with the Blue Chip Economic Indicators’ projections. The October 2022 survey was chosen as the baseline, which predicted a 0.5 percent annualized investment growth rate in 2023. However, the actual growth rate was significantly higher at 4.3 percent, leading to the baseline being potentially misleading. The Congressional Budget Office (CBO) provides an alternate baseline comparison, which projected a 4.0 percent average annualized investment growth from Q3 2022 to Q4 2023. In reality, investment grew by 3.9 percent over the same period.
Industry-specific investment might not equal overall productivity growth
Investment growth has been primarily concentrated in a few industries. Approximately 40 percent of the growth is due to investment in manufacturing structures. While this might sound promising, it’s worth noting that a large portion of the investment surge in electronics manufacturing occurred before the introduction of the CHIPS Act and the Inflation Reduction Act.
High spending doesn’t necessarily translate into real production. Regulatory hurdles and a shortage of specialized workers may limit the output generated from subsidized semiconductor fabs or new clean energy projects. Even completed projects could prove unproductive if they were economically unviable without subsidies.
Broad investment incentives are needed
CHIPS and the IRA have their justifications, but they are not substitutes for wide-ranging economic policymaking. The US economy is broad and multifaceted, and targeting a few specific industries with support is not a recipe for shared economic growth. Instead, increasing investment incentives across the board is crucial.
The post-TCJA economy is a good example of this. The TCJA increased investment incentives across all sectors, mainly due to lower corporate tax rates and 100 percent bonus depreciation for short-lived assets. This led to investment growth outpacing pre-law projections in the eight quarters following the law’s enactment.
Despite the current robustness of the US economy, proposals such as raising the corporate tax rate to 28 percent could reverse some of the gains made in recent years. The current tax code can hinder investment while providing offsetting subsidies for favored industries.
Share
Share this article on Twitter, LinkedIn, or Facebook. Or, send it via email.
—
Read More US Economic News