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The bill entitled the ‘Inflation Reduction Act,’ while largely ineffective at its stated purpose, is projected to reduce CO₂ emissions by 40% by 2030. It also takes a step towards reducing the price of prescription drugs and making the tax code just a little bit fairer. To put it simply, this is a big deal.

It is far from perfect. There is no attempt to create a carbon market or put a price on carbon. The tax policy sits atop the existing complicated tax structure. The minimum tax maintains an exemption for carried interest. Carried interest is a term for income paid to investment managers like private equity or hedge funds allowing them to count their fees as investment income rather than revenue (it is, in reality, performance-based revenue). It does nothing to curb inflation in the short run; that would require passing an unpopular tax on consumption. It is the best policy that could be achieved in the Senate.

Previous approaches to climate policy have always been narrow in scope or largely ineffective. In an ideal world, a cap and trade system would put a fair price on CO₂ and a decentralized infrastructure would come up organically to promote the most innovative ideas. Entrepreneurs do tend to be more creative than bureaucrats in creating solutions, after all. Sen. Joe Manchin (D – WV) would never accept a carbon price, though, and his vote was necessary to pass the bill. Instead, this bill relies on tax credits and subsidies to achieve climate goals. In the interest of funding some of the less established ideas, a ‘green bank’ is being seeded with $27 billion. 

Tax incentives are being used liberally for both the supply and demand side. All sorts of carbon-free technologies are being somehow incentivized. Even nuclear power, long cast aside, is making a triumphant return to the table. Wind, solar, hydrogen, and various forms of energy storage get their own pots. From the demand side, buildings are given incentives to use green energy and energy-efficient design. In total, the bill allocates $369 billion to energy and climate tech.

Concessions to fossil fuel production had to be made in order to assuage Senator Manchin. Drilling rights on public land are extended and off-shore drilling is back on the table. Prices for those leases were raised, though, and a small tax on imported petroleum will be used to fund relief for communities directly impacted by fossil fuel production and use.

The bill also spans healthcare and drug costs. For the first time, some drug prices will be capped, albeit in a very limited way. Medicare is also being given the ability to negotiate with pharmaceutical companies in an effort to lower drug prices. Restrictions do exist: negotiations will not begin until 9 years after the introduction of typical drugs and 13 years for the more complicated biologic drugs. Additionally, premium subsidies for Affordable Care Act insurance policies are being extended to help those hardest hit by inflation.

Fortunately, the IRA does not just dump money into the economy; it pays for itself and then contributes nearly $300 billion into deficit reduction over the next decade. The IRS is getting needed resources to enforce the tax code, raising an estimated $200 billion. A new tax is also being established so that large corporations will have to pay a minimum of 15% of earnings reported to shareholders. When accounting for all tax revenue generated by the bill, it is expected to raise almost $800 billion over the next 10 years.

If we were constructing a climate bill for maximizing effect while minimizing economic disruption, this would not be it. It does not have nearly enough flexibility for new innovations or changing economic conditions. Carrots abound, but sticks are conspicuously absent. The tax policy, rather than simplifying our obscenely complicated tax code, sits atop it, adding another layer of complexity. Still, it accomplishes more than we could have hoped for just a few weeks ago. What’s more, it does that without adding to inflationary pressures. It’s an impressive accomplishment from a beleaguered administration.

A sweltering heatwave languishing over the American Midwest is a physical reminder of the effects of climate change. Despite the heat and frequency of ‘once-in-a-century’ or even ‘once-in-a-millennium’ weather events, we collectively continue to belch carbon dioxide into the atmosphere. Few alternatives exist in the market today and no politician will plunge their constituents into darkness to prevent something that far into the future (nor should they). Today, I’d like to talk about carbon dioxide in transportation, the possibility of synthetic fuels, and how they would contribute to energy security.

The flavor of the week may be the electrification of vehicles, but that comes with its own set of issues. The most obvious is price; electric cars, even after subsidies, are frequently $10,000-20,000 more than equivalent gasoline-powered vehicles. Low power density of batteries makes them heavy as well. It makes it impossible to power anything airborne, trucks, and even trains. On top of that, the production of electric vehicles is actually somewhat damaging to the environment, partially negating their purpose. Rare earth metals are mined in destructive ways in mostly autocratic countries. To make matters worse, the supply chain is even more fraught than that of fossil fuels. China holds the largest deposits within its borders; they are not exactly friendly to the US.

The largest stumbling block to the electric car as our solution to transportation, though, is the existing stock of gasoline and diesel vehicles. Other issues could be overcome, but there are nearly 1.5 billion internal combustion engine vehicles currently in use. Humanity is not going to collectively abandon the tens of trillions of dollars of investment that they represent. Vehicles are durable goods, replaced infrequently. We do have alternatives, though. Manmade fuel is one promising example.

Biodiesel can be used in any diesel-powered vehicle on the road. One promising avenue for creating biodiesel involves harvesting algae (something that will only become more pervasive on a warming planet). The beauty of algae is that it reproduces incredibly quickly and it uses photosynthesis. This means we’d be sucking carbon dioxide out of the atmosphere to create the fuel that will later return it to the atmosphere. It’s carbon neutral. As a bonus, the byproduct could be used as a highly nutritious feed for livestock, allowing farms to spend more resources growing food for us humans.

Wait, you may be thinking, but gasoline powers my car. It powers most ICE vehicles on the road, in fact. Not to worry: gasoline can be made out of water and air. A recent pilot on a US naval vessel demonstrated the concept. Carbon dioxide is converted to carbon monoxide and electrolysis separates the hydrogen atoms from oxygen in water. After that, something called the Fischer-Tropsch process is used to combine the hydrogen and the carbon monoxide into liquid hydrocarbons (including, but not limited to, gasoline). We could use solar or wind energy to perform electrolysis and capture and convert carbon dioxide. Combining them actually gives off energy, so that could theoretically be recaptured by the grid for immediate consumption during peak hours or some other energy storage system (hydrogen via electrolysis, perhaps?).

Another perk is that those synthetic fuels could be produced in a distributed fashion, saving transportation costs and preventing future supply chain disruptions from spiraling out of control. If we can produce the fuel where we use it, we will have a much more flexible system. The key now is driving down costs.

After a multi-decade winter, nuclear power is starting to heat up. Countries that had previously been actively cutting nuclear plants are beginning to reverse course. COP26, the global environmental conference, had leaders talking about how they could bring it back. The future appears to be small, modular reactors that don’t face the same sort of opposition as the big ones and have much lower regulatory costs. At the same time, the growing presence of wind and solar in the grid is driving home the variability of that source and the fragility of the supply chain for fossil fuels is becoming glaringly apparent (look no further than rolling blackouts in China because of coal shortages or eyewatering price increases for natural gas in Europe). With all that in mind, I thought it would be a good time to touch back on the benefits of reactors.

Nuclear is by far the most reliable source of energy while also delivering electricity at lower cost than any other source at the moment. Let’s return to Europe for an illustration by comparing Germany to France. Germany has achieved a great deal over the past decade in the implementation of wind and solar, but they still are paying nearly double for electricity and emitting far more CO2 per unit of energy created. Why? Germany cut out all nuclear energy production after the Fukushima disaster while France keeps nuclear for over 70% of its energy production.

Nuclear has a bad name because of Chernobyl, Fukushima, and Three Mile Island. Two of those events, though, were much less significant than is widely believed and the third happened at a Soviet powerplant that doubled as a uranium enrichment facility. Three Mile Island, despite gross mismanagement, released enough radiation to give people in the immediate vicinity about as much radiation as a chest x-ray. It was, despite the widespread panic, a non-event. Fukushima released even less radiation than that and there would have been no issue at all if they had followed American or French safety protocols. There are detailed records of complaints of lax safety standards well before the earthquake and subsequent tsunami that sparked the leak at Fukushima. Chernobyl’s meltdown was, however, a real disaster by any definition of the word. It caused an exclusion zone that will not be lived in by humans for generations. The cause of that disaster involved some of the mechanics of the core, which was only designed that way in the interest of creating enriched uranium for usage in the manufacture of bombs. It would not have been replicable in any powerplants ever used in the US.

For an example of successfully implemented safety standards, we have 6,000 combined nuclear reactor years in the US Navy aboard ships with precisely zero incidents of failure. People are able to work in close proximity to extremely powerful engines with no ill effects because of the efficiency of nuclear. By contrast, fossil fuels cause millions of premature deaths every year by damaging the lungs of everyone in a huge radius and cost hundreds of billions of dollars in damage in the form of climate change.

If it is the cheapest form of energy, it’s environmentally responsible, and it’s safe, why are nuclear power plants becoming uncompetitive in the US? Obtaining a permit and building the powerplant might be prohibitively expensive, but surely if running the powerplant was cheap, they would continue to maintain existing plants. Unfortunately, annual regulatory costs PER PLANT range from $7.4 to $15.5 million. Most of this is spent on paperwork compliance. Essentially, we are regulating our best form of power out of business out of needless fear.

The bright spot in this mess is a new(ish) form of nuclear reactor. Small modular reactors are designed to be manufactured at a factory and sent to their new site to be put into commission. Costs are dramatically lower because after one unit is licensed, subsequent licenses should be much simpler. There are also economies of scale resulting from the construction of the reactors in a designated plant; equipment used to build the reactor can be reused many times over. Some are even designed to house the nuclear waste as well; they are placed in the ground, plugged into the grid, and burn fuel until they no longer work, at which point they are self-contained waste containers.

The future could be bright – both literally and figuratively – if we allow it to be. The inflation of energy costs over time is one of the great tragedies of our time and can be laid almost exclusively at the feet of regulation without thought to the burden placed on producers. Deregulated markets will help create healthy competition among producers, but leaving existing regulatory burdens in place would prevent nuclear from competing on even grounds. France provides us with a way forward on nuclear. We can make it distinctly American with some healthy competition by utilizing our deregulated grid and encouraging more development.

After ups and downs and what appeared to be a vanishing likelihood of success, the House passed the bipartisan infrastructure bill the Senate negotiated. It will be signed by President Biden in a matter of days. Included in the $1 trillion package is a wide variety of upgrades and renewals. They include:

• Roads and Bridges: $110 billion
• Public Transit: $39 billion
• Passenger and Freight Rail: $66 billion
• Electric vehicle charging stations: $7.5 billion
• Internet access: $65 billion
• Grid modernization: $65 billion
• Airports: $25 billion
• Water and waste: $55 billion

Much of this is vital to our future competitiveness and some will help expand opportunities for people from all walks of life. It should be a cause for celebration. Yet, the timing is a cause of consternation for economists. The supply chain, already groaning under the weight of restricted supply and booming demand, could well crack and send the price of raw materials skyward. The claim of 2 million good jobs sounds great on its face, but, at a time when employers are struggling to fill empty positions, the federal government will be strangling them. 

To illustrate the effects of the $1 trillion flood of infrastructure improvements on the economy, imagine you have just planted a garden. Tiny green shoots are sprouting from the ground. They appear delicate and you wish to help them grow into something sturdier that will one day bear fruit. Mulch has helped your plants grow in the past, so you decide to add some of that to your soil. There’s only one problem: you have added too much at the wrong time, piling the nutrient-dense material over the sprouts. The plants will suffocate or rot under the weight of all that organic material. Rather than helping them grow, you have killed them.

Pouring all that money into today’s economy is a little bit like that. Perhaps we can entice some people to come back out of retirement (there was an enormous bump in retirement last year, helping to trigger this labor shortage), but, on net, we are adding more openings to an economy that already has the biggest positive gap between openings and unemployed ever. Meanwhile, supply chain issues for everything from beef to copper are well documented. Investments in durable goods by firms, long languishing, are currently exploding. Plopping a federal-government-sized gorilla on the scales will exacerbate that problem. With CPI at the highest level in more than 30 years, we cannot afford to do that. 

Homebuilding is declining again, not because of a lack of demand, but because builders are simply unable to procure the supplies they need to build the houses. We want to nurture private industry and infrastructure is essential to that in the long term, but if we plow into this too quickly, we will tear up the soil and render it barren. Instead, the Biden Administration should create a plan that involves easing into this bill. Let the economy breathe for another six months to a year before doing anything. Perhaps it would even help to tap the brakes a little bit.

Some higher taxes on spending could help stave off just enough of the buying frenzy to allow supply chains to catch up. Incorporating prices on carbon may not be the most popular thing politically, but it helps achieve the goal of lower emissions and the stimulus of the freshly passed infrastructure bill will help offset any pain. If it is sold as a way to give money back to the middle class via an expanded Earned Income Tax Credit and a permanent addition of the expanded Child Tax Credit, it will become much more palatable. One thing is certain: if care is not taken, inflation will spiral out of control.

Inflation has been a common theme on here these past few months, and it is with good reason. Global supply chains have not been repaired yet; instead, the pain has become more acute with shortages in many core areas. Meanwhile, despite higher unemployment, firms are having an extraordinarily difficult time filling positions. Piling more demand into the economy at this time could put us in a precarious place. Think of it as a bathtub with a faucet that is pumping water just a little bit more quickly than it is draining. Eventually, water will spill over onto the floor. It’s here that the analogy fails because we cannot simply turn the faucet off, either. Sudden hawkish moves in monetary policy can bring an economy to its knees. Large shifts in government spending aren’t much better. We have gotten a preview with deficit ceiling brinkmanship in the past as the federal government shut down. The good news is that we still have time to do something about it. 

Let’s back up for a second. Supply chain strains will eventually catch up to demand, right? Why are so many people worried about a temporary price increase? Short answer: the length of the backlog is just too long. It will be years before chip supply catches up to demand. Inventory of raw materials critical to production – such as copper – are back on their lows. Despite the solid levels of demand, industrial output is flatlining. That is sending price increases up the supply chain and those prices, unlike commodity prices, are sticky (in other words, they don’t tend to change very often).

OK, so we’ve established that prices are increasing and that it is now much less likely to be temporary. The danger, then, of passing a multi-trillion dollar (15% of GDP) spending package under the guise of infrastructure, is becoming clear. By injecting enormous amounts of cash into the economy now, we are filling the bathtub past the brim and the water is spilling onto the floor. The economy can no longer handle the extra cash (or, as you may see on CNBC, ‘excess liquidity’). The government would be giving consumers more than they could spend without breaking supply chains. At the same time, we’d be bidding on raw materials for physical infrastructure against private companies looking to expand their own capacity. With that competition from the government, producers will have a much harder time getting their products in the hands of consumers, who will have to pay yet higher prices to obtain scarce goods and services. This could quickly get out of hand, and suddenly inflation could be hitting an annual rate of 10%.

Nipping spiraling prices in the bud now would be far better than trying to fix it later. If inflation does spiral out of control, the Federal Reserve may have to quickly hike interest rates and the government will undoubtedly have to cut back on spending. Although debt will shrink relative to GDP, costs of servicing the debt will skyrocket with higher interest rates. Some of the items in the ‘Build Back Better’ plan are important to the long-term growth of our country’s economy, so we do not want to abandon the idea altogether. Instead, we could scale back on the immediate implementation of the bulk of the items and place them over a large timeframe. Infrastructure improvements are needed, but they are long-lived. We can postpone their implementation for a year or two. Other things, such as student debt forgiveness, should be flushed down the toilet. By directly taking away an expense for a significant portion of American households, we’d be causing a bout of inflation. Instead, we should immediately end the moratorium on those payments. It would help reduce the velocity of money (how quickly dollars make their way around the economy – high velocity is like a game of hot potato with money) in the short term and ease supply constraints. 

The path ahead is treacherous. Congress is not known for its farsightedness and delaying a spending package means that elected officials would have a harder time touting their successes to their constituents on the campaign trail. If the wrong things are cut – such as job training – we would handicap ourselves in the future – throw the baby out with the bathwater, so to speak. However, this is too important not to do now.

As we walked, blinking, into the sunlight, after a year in the darkness of a lockdown, our wallets seemed to open all on their own. People rushed into restaurants, bars, and retail stores. They rushed to buy a car to get to those places, sending prices skyward. Due to a lingering and generous unemployment boost, people did not rush back to work. In fact, we have a plethora of policies from several different government agencies. As the economy recovers, the need for some of these has evaporated and, in fact, they become detrimental to our economic health. 

Perhaps most glaringly, the CDC just extended the federal moratorium on evictions. That moratorium was redundant when it was created, but, at this point, it is a terrible blunder. Many of the people who are taking advantage of this policy are simply living rent-free because they can’t be evicted. It’s a punishment for landlords who often struggle to get paid through the government programs preventing eviction. It makes it nigh on impossible to evict even the most difficult of tenants. Horror stories abound of destructive behavior or tenants making their neighbors’ lives difficult. The CDC, for what it’s worth, has no business interfering in the housing market. If we want to guarantee housing for people on the brink of homelessness, there are far better ways of doing it as well.

Another bizarre decision was the Biden Administration’s move to extend student loan forbearance. The pandemic has affected different people in different ways, but most workers in white-collar jobs have been able to simply work from home. Most holders of college degrees – and student loans – work white-collar jobs. This means we are subsidizing those who are largely unaffected by the pandemic with a pandemic response policy. It simply does not make sense. 

The delta variant of COVID will likely create problems for our healthcare system due to the large unvaccinated population, but, despite fears of a retraction to a pandemic economy, does not appear to be impacting the economy. Data remains strong and inflation, while lower than the previous measure, sits at a robust 5.4%. With that in mind, the stimulus deal that just passed the Senate becomes less pressing. Still, the impact on the budget deficit is relatively minor (see below) and much of our physical infrastructure is desperately in need of an update. However, the additional spending called for by House Speaker Pelosi (D-California) et al would be exceptionally poorly timed. A large deal may make sense as an automatic measure if economic measures hit a certain level, but the economy is already running hot, and spending all our resources on pumping up a hot economy is irresponsible at best.

Some modifications to our welfare system are long overdue, but the ways in which the Biden Administration has gone about expanding the social safety net have been haphazard and have not utilized the power of markets at all. Subsidies are much less effective than cash and an eviction moratorium taxes property owners to pay delinquent renters a housing subsidy. Targeting those most in need, also important, has seemingly been completely neglected. We are at a critical juncture, so errors made now are magnified in their importance. President Biden needs to do better if he actually wants to ‘Build Back Better.’

Three months ago, when you could still buy a used car for a reasonable price, the debate on inflation was on whether or not it was real. Now, we have moved onto whether this inflation is a ‘transitory’ effect of the lifting of COVID restrictions or if it will be more sustained. The best indication that it is likely going to be a longer-lasting level. Managing the ramifications of that inflation is where things get hairy. 

Unprecedented levels of both fiscal and monetary policy were helpful in stabilizing an economy in free fall, but they also pumped unprecedented amounts of money into the market. After the financial crisis, loose monetary policy resulted in a booming stock market and widescale employment, but it never really brought about rising wages and thus consumer goods’ prices stayed relatively stable. This time around, the federal government stuck money directly into the pockets of consumers. On top of that, generous unemployment benefits have kept many out of the workplace unless induced by higher wages. Low-wage workers have experienced their fastest raises in decades.

Unemployment levels have not yet reached the lows of 2019, so the economy is not suddenly exploding with double-digit growth. Wages, however, unlike consumer goods, are what economists like to call ‘sticky.’ People who make higher wages are generally unwilling to accept lower ones. That means, when people DO go back to work, they will probably be making more money. More money in the hands of consumers, especially the lowest-income consumers, means higher spending and, you guessed it, inflation.

There are two questions remaining: 1) will wages continue to rise? and 2) will wages rise more quickly than the cost of living? If people start blasting off applications at the same time, supply of labor will balance with the demand and wages will stop rising. Less cash flooding consumer goods markets and housing markets will mean slower inflation. Asset prices, however, will continue to climb and inequality will climb even higher (wealthier people tend to hold more financial assets, which benefit from loose monetary policy even as wages stagnate).

Even if the supply of labor returns a bit more slowly, real wages could decline, though, if inflation comes too quickly. Soaring prices on everything from vehicles (in part due to a shortage of silicon chips) and coffee (due to poor yields, probably from climate change) can individually be explained by temporary factors. However, the whiplash on supply chains could prove an enduring problem, especially with the continued protectionist behavior by countries across the globe. If supply issues take years to resolve, the higher prices can hardly be called transitory. 

The economy will have to be monitored closely to determine the proper course of action. If labor supply is tight, spending $1 trillion on infrastructure may put too much pressure on it, crowding out private companies. If, instead, people return to work rapidly, we could experience a recession while waiting for Congress to hammer out the details of a package. The best possible way forward would be to put automatic releases on projects based on economic benchmarks like total employment and real wage growth. Spending too rapidly could cause everything to come crashing down around us, but the same could be true of an overly miserly approach. It was true three months ago and it’s truer now: this is a high-risk economy, but we could come out of it in better shape than we have been in for a long time if we can manage it well.