Multipliers

Monday 21 August 2023

LA Metro construction, beneficiary of the Bipartisan Infrastructure Bill

The Inflation Reduction Act is so quickly embedding itself into the US economy that its terms are unlikely to be altered by any future administration. To investors and observers outside the United States—who’ve witnessed American policy succumb over decades to the dramatic push-pull between the two major political parties—this proposition may sound risky. But the IRA has a number of organic protections now gathering around its base. By the time the next window of policy risk arrives, after the 2024 election, the benefits of the policy will simply be too widespread. Few, if any, will dare to disrupt it.

The most powerful and enduring feature of the IRA is that it’s acting, and will continue to act, as a catalyst for investment capital that’s now arriving from the rest of the world. The Gregor Letter has sounded out this theme previously, pointing out the strong advance in FDI starting in 2021, and explaining the IRA was set to trigger an enduring multiplier effect. Many are now starting to quantify that effect. Earlier this year, Goldman Sachs speculated that the legislation could wind up attracting $11 trillion of infrastructure investments by the year 2050. More recently, the Financial Times estimated that the IRA, in conjunction with the CHIPS Act, had already unleashed over 110 large scale industrial announcements, amounting to more than $224 billion in projects. And of course, we’re just getting started.

Republicans have been blindsided by the unexpected way in which the IRA, the CHIPS Act, and the Bipartisan Infrastructure Bill have rolled out. They did not expect the bulk of investments, so far, would have such an outsized impact on their own congressional districts, in deep red states. But neither did they expect the suite of legislation to act like a powerful attractor to private capital. In this, they were not alone, and it’s worth explaining why. You see, the United States is a country that’s neglected to build needed infrastructure for forty years now. Whatever muscle was built up in the late 19th and 20th centuries has completely atrophied. We don’t even know how to talk about infrastructure, how to cover it journalistically, how to promote its return on investment, or to analyze the losses to US GDP from the infrastructure deficit, and its crimp on productivity. This is all reflected in the country’s inability to build anything well, from bike lanes to rail, without an enormous struggle resulting in sky high costs that lie completely outside the norm in the rest of the developed world. The atrophy is so widespread that the problem is actually obscured from the day to day American vision. The shock into reality typically comes, however, when Americans return home to confront their defunct airports, non-existent public transportation, and chaotic, poorly designed streets.

If you actually talked to infrastructure professionals the past decade—professors, engineers, policy wonks—they would have told you that for the country to get moving again it would never be sufficient for states, or private capital, to spark the needed change on their own. No. The federal government is crucial, because the logjam of regulation and rules, when busted at the federal level, finally creates a safe path for private capital, which typically fears project completion-risk. US politicians have lived for many years in a linear world, therefore, thinking about spending in static, zero-sum terms. With this sequence of legislation, the US has created for itself a kind of ongoing, countercyclical safety net that will plow through the next recession, and several recessions to come.

Now of course we have the rather hilarious spectacle of politicians in red states celebrating the job gains even though, as Republicans, they voted against all of these programs. Tim Scott, Republican from South Carolina and presidential candidate, has been singing the praises of material recycler Redwood Materials, and its decision to open operations in his state. But Redwood did so in part because of the IRA, and more generally the company has benefited from additional direct investments from the Department of Energy. Scott voted against the legislation, as a senator. And it’s worth recalling: not a single Republican member of the House voted for the IRA. Indeed, red states are so overwhelmingly the beneficiaries of this legislation that any future retorts to the IRA from electeds in these states will be composed entirely of hot air. The set-up is reminiscent of Obamacare: it was all well and good to rail against President Obama, but when actual Republican members of congress made their move to act against Obamacare, they got blowback.

Over 80% of investment flows have so far gone to red states, according to analysis from the FT. Over time, that mix will probably start to balance out. But it’s worth understanding another feature of the US landscape, when thinking about the real versus the perceived risk that anti-green politicians will try to attack the IRA in the future: many red states suffer from above average poverty. Indeed, red states are also victims of the forty year drought in US domestic investment. So, if you start parachuting semiconductor, battery, and EV plants into South Carolina, Tennessee, Mississippi, and Kentucky the economic sensitivity to that investment is going to be high. For future politicians who propose to halt that pipeline? Well, good luck.

Republicans need to find a new candidate to run for President in 2024, because the prospect that Trump improves on his 2020 performance is remote. Consensus analysis continues to scamper back to the heuristics of 2016, in which Trump upended the conventional wisdom and won 304 electoral votes (EV) despite losing the popular vote by 2.8 million. Very obviously, 2024 is not 2016 and it’s not 2020 either, in which Trump lost the popular vote by 7 million. The next twelve months meanwhile are set to be brutal for Trump’s political prospects, and that too remains insufficiently discounted. Public trials have a long history of shifting sentiment because courtrooms have a nasty habit of airing out the facts, while stomping on the nonsense. Courtrooms are where bullshit goes to die.