Green Growth: How US Policy is Transforming the Economy

US economic policy is headed in a new direction. While recent economic growth has been dominated by the information technology and service sectors, industry and infrastructure have stalled. A long-term transition to a service-based economy is a hallmark of advanced economies, reflected in the total number of people employed in service-producing industries (for example, serving food), outpacing the total number of people employed in goods-producing industries (for example, growing food). More recently, technology firms like Apple, Microsoft and Meta have been the loudest stories of economic success, coming to dominate equities markets. Meanwhile, much of the US electric grid we use today has aged dramatically, factory towns with closed-down factories have become familiar stories and supply chains have stretched thin across the globe.

However, as climate change looms, it has become clear that widespread infrastructure investment is needed to reduce emissions. Recent major economic policies in the US have made this investment the cornerstone of a broader economic agenda. It looks to grow the economy through renewed manufacturing, construction and energy sectors, requiring new strategies and providing new opportunities for finance and consulting professionals with clients in these sectors.

The Inflation Reduction Act and the Infrastructure Investment and Jobs Act

The most transformational piece of Joe Biden’s economic policy came in 2022 with the passing of the Inflation Reduction Act (IRA), so named as it came about amid — and claimed to address — the rampant inflation that came with the reopening of the economy following the COVID-19 pandemic. Critics doubted the bill’s actual disinflationary effect and it hasn’t been considered a major driver of the decline in inflation rates since then. While the longer-term impact of the bill may make the US economy more resistant to inflation by lowering energy costs, strengthening supply chains, increasing domestic production and lowering some drug costs through Medicare negotiations, the name of the bill was largely political. The bulk of the spending included in the bill (which also included measures to pay for this spending) was focused on combating climate change.

The IRA includes long-term and wide-ranging tax credits, subsidized loans and grants aimed at fighting climate change, all totaling hundreds of billions of dollars. Tax credits are available to domestic producers (e.g., solar panel, electric car and wind turbine manufacturers or solar and wind farm operators producing clean energy), consumers, and entities that aren’t typically eligible for tax credits (e.g., local governments, nonprofits and community benefit organizations) through direct payment. Additionally, subsidized loans will be administered through a newly established green bank. Importantly, beyond just making clean energy cheaper, the IRA ties incentives to domestic production and wage and apprenticeship requirements, all in an effort to create a robust domestic industry that supports the green energy transition.

The IRA came on the heels of the Infrastructure Investment and Jobs Act (IIJA), which was a historically large investment in US infrastructure but represented less of a radical new direction in economic policy. The $1.2 trillion IIJA includes $550 billion in new spending (the rest of the bill repurposes existing federal investments) on transportation and other core infrastructure. Aiding the administration’s climate goals, the IIJA includes funding for electric vehicle charging infrastructure, public transit, power transmission lines, clean energy technology and climate resiliency infrastructure.

So far, the major impact of these bills has been to spur larger projects in manufacturing, construction and energy. Huge investments in clean energy projects have been announced across the country. For example, a new “battery belt” has been dubbed in the Southeast of the US, as several battery production facilities have been opened or announced in the region. Outside of the region, Michigan (the historical hub of the auto industry), has also been benefiting from investment in facilities supporting the electric car manufacturing supply chain. This onshoring of climate-related industries and supply chains is a main goal of the IRA.

Most immediately, these projects positively impact the construction sector; before a factory can produce anything, it needs to be built. Many of the administration’s aims involve expanding the nation’s built environment. Beyond factories, construction crews are needed to build solar and wind farms, put up power lines and renovate inefficient buildings. After these projects are finished, manufacturers and power producers will be able to operate an attractive business, thanks to subsidies included in the IRA.

A criticism of the administration’s policies has been how difficult it is to qualify for the IRA’s subsidies. Having to meet wage and apprenticeship challenges raises the barriers to entry to green industry and will, therefore, slow progress towards a net zero economy. This is a result of competing priorities; the administration is looking to fight climate change, but also build industry and have a positive social impact. Further issues include the number of regulatory hurdles in place across the country in the way of any construction activity, labor shortages (of all skill levels) and a lack of immigration to meet that labor shortage. The core idea of subsidizing domestic industry has led to criticisms that the US is turning its back on free trade, an idea it had championed in previous decades, which could raise geopolitical tensions.

The CHIPS Act and US Trade Policy

CHIPS is a smaller bill that, like the IRA, looks to build up domestic supply chains for important industries. In this case, the bill specifically funds domestic semiconductor manufacturing and research, as well as some other scientific research. CHIPS came to be during a global semiconductor shortage that highlighted the importance of semiconductors in the modern world and the sparseness of their supply chain, with the bulk of the world’s chips being produced by TSMC in Taiwan. Moreover, US firms have ceased manufacturing the world’s most advanced semiconductors, which they had from when semiconductors were invented in the US in the 1950s, until 2018, when TSMC surpassed Intel’s ability to produce the most compact chips. The CHIPS Act was also explicitly discussed as a way to counter China, both the security threat the nation poses to Taiwan (and therefore the semiconductor industry) and the economic threat it poses as it works to build out its own semiconductor industry.

Like the IRA, CHIPS has led to the announcement of several projects across the country but has run into regulatory roadblocks and labor shortages. Semiconductor manufacturing requires a high number of workers with particular technical skills that are lacking in the US. Still, the build-up of American semiconductor research and manufacturing capacity will provide opportunities for the technology sector over the coming years, particularly as the AI race demands ever-greater computing power.

The protectionist streak to these major Biden administration economic policies is not new. The Trump administration previously placed sweeping tariffs on Chinese goods. The Biden administration ultimately decided to keep these tariffs in place and added some more, targeted at similar industries to the IRA and the CHIPS Act. Specifically, new policies include an up to 100% tariff on Chinese electric cars, along with other tariffs on semiconductors, critical minerals, batteries, steel, aluminum and ship-to-shore cranes.

These tariffs will give budding domestic industries targeted by the IRA and the CHIPS Act a fighting chance on the world stage as they work to establish themselves over the coming years. The risk here is that this could escalate into a trade war, which could lead to other types of war. However, the Biden administration claims that it is responding to China’s unfair trade practices and leveling the playing field. Regardless, without the tariffs, at least in the case of EVs, US manufacturers wouldn’t be able to compete with the incredibly cheap Chinese vehicles that have already flooded other international markets.

Strategies for success for finance professionals

Broker long term clean energy deals

A main barrier to building clean energy projects, namely solar and wind farms, is securing financing. Solar and wind projects require a large amount of up front capital, then slowly pay off that cost (then turn a profit) over the lifetime of the project. The problem with this model is that energy prices are fickle, and federal policies don’t guarantee future prices. A risk is that, if enough energy projects are completed, energy prices could be driven too low to pay off costs. However, with risk comes opportunity. Deals with a long-term power purchase agreement at a set price can be the key to a project’ progress. These agreements can, therefore, be for steeply discounted energy. Subsidies included in the IRA make these deals more attractive by driving down upfront costs.

Invest in industries targeted by tax credits and deductions included in the IRA

The Inflation Reduction Act (IRA) includes a long list of tax credits and deductions targeted at certain industries and technologies, making them more attractive investments. These include long shot technologies, like clean hydrogen, that may otherwise not have been attractive to investors. The CHIPS Act includes further funding for scientific research. Investing in long shot technologies could be key to maintaining a portfolio in a world where fossil fuel investments lose their value.

Leverage industry research to enhance insights

To make informed investment decisions in emerging technologies and the energy sector, finance professionals should leverage comprehensive industry research. Monitoring innovations like clean hydrogen and advanced battery storage uncovers new growth opportunities, while understanding regulatory changes (like the IRA and CHIPS Act) predicts market shifts. Benchmarking against industry leaders and engaging with a broader industry view offers deeper insights. Professionals can navigate economic complexities and make strategic decisions by integrating this research into investment strategies.

Strategies for success for consultants

Recommend onshoring or nearshoring

A main goal of recent economic policies is to shift manufacturing facilities and supply chains to the US or countries with which the US has free trade agreements. Tax incentives have made this move more financially attractive in order to achieve that goal. For example, for an electric vehicle to be eligible for maximum tax credits, critical minerals and battery components in the vehicle must come from the US or its free trade partners, while the vehicle itself must undergo final assembly in North America. It follows that clients involved in the electric vehicle supply chain, or another industry targeted by tax credits in the IRA, should consider onshoring or nearshoring.

Utilize ESG risk reports to create client strategies

Consultants can effectively utilize ESG (Environmental, Social and Governance) risk reports to enhance client strategies. ESG risk reports can provide crucial insights into how environmental regulations, social impacts and governance practices affect industries that are targeted by initiatives like the Inflation Reduction Act and the Infrastructure Investment and Jobs Act. Consultants can analyze ESG factors to identify potential risks and opportunities associated with green infrastructure projects, including solar and wind farms, or semiconductor manufacturing. By integrating ESG considerations into client assessments, consultants can advise on mitigating environmental impacts and ensuring compliance with governance standards.

Ensure clients meet wage and apprenticeship requirements

Consultants should provide services to ensure clients operating in industries targeted by tax credits included in the IRA are meeting prevailing wage and apprenticeship requirements. These requirements are the most significant of a handful of bonus tax credits included in the IRA. Complying would mean, for example, a solar panel manufacturer paying their labor above a certain rate and employing apprentices. Wind or solar facilities can also earn a bonus tax credit if located in low-income communities or on Indian land.