Back in the July 22 mailbag, BD Anders asked, “Have recent developments changed your prior generous evaluation of Joe Manchin and his negotiation style?”

I answered, “Yes.”

But as I explained in my July 24 Bloomberg column, the apparent breakdown of negotiations really surprised me. Contrary to all the whining and complaining from the left, it really seemed to me that Manchin had spent the past year pursuing a mostly consistent and mostly correct set of concerns with Democrats’ Build Back Better proposal. And as of early July, it seemed that Chuck Schumer was finally prepared to give Manchin what he was asking for: a bill based on the three-legged stool I described back in February of deficit reduction, health care, and technology-neutral energy investments. But having finally gotten what he wanted, Manchin killed it.

I remained hopeful that he would reconsider, then he did, and as of Wednesday evening, Senate Democrats have a deal that now needs to get through the House.

I have more in-depth thoughts on a few aspects below, but a few quick reactions:

• It’s very good legislation that both helps address an acute problem (inflation) and a significant long-term challenge (climate) while also continuing to move the ball forward on Democrats’ signature issue of health care.

• Even as Biden became quite unpopular over the course of 2022, there is essentially zero popular backlash or mobilization against these proposals. The Democratic Party has a bunch of short-term and long-term political problems, but all things considered, having these ideas front and center helps.

• This deal is not only far short of progressives’ February 2021 hope of sweeping social change (which I think was never realistic given the vote count); it’s a significantly less progressive deal than the one Manchin and Schumer agreed to in July 2021. The decision to back out of that deal in the hopes of pressuring Manchin from the left was a strategic and tactical debacle for which there ought to be accountability.

• Judged purely as a climate measure, this package contains many deviations from a pure groups-driven environmentalist bill. But the vast majority of those deviations actually make it a more potent emissions-reducing bill than a bill that simply did what environmentalists want.

• Climate is a very high priority for the high-SES liberals who dominate both the media and Democratic Party staff, but for persuadable voters, the health care and deficit reduction provisions of the bill are probably more appealing. And it’s important to try to encourage public discussion of that stuff so people realize it continues to be a significant divide between the parties.

Last but by no means least, with the framing of this proposal as the Inflation Reduction Act of 2022, I hope we can find our way to a more mature place in our understanding of the politics of fiscal policy.

During the 2009-2016 era of American politics, U.S. fiscal policy was consistently too tight and budget deficits were too low. Many people made that point at different times and in different ways, but in terms of Democratic Party factional infighting, it was largely the left — to its enormous credit — that made this point. But over time that curdled into the idea that “deficits should be bigger” was a per se progressive stance and that the whole way forward for left politics was to embrace the view that deficits never matter and economic orthodoxy should be entirely overthrown. This just never made sense.

“Should we expand or shrink the welfare state” is a left/right ideological conflict, but “should the deficit be higher or lower” is a pragmatic, conditions-based assessment. Joe Biden happens to be president at a time when reducing the deficit is, in fact, the correct course of action, and recognizing that is not an ideological betrayal.

The macroeconomics of deficit reduction

One of the central claims Democrats are going to make about this bill is that it will reduce inflation.

But when it comes to inflation, it’s best to think of the Federal Reserve as the ultimate decider. So while something like the American Rescue Plan certainly stimulated demand and increased inflationary pressure, on some level the reason we ended up with high inflation in 2022 is that the Fed allowed it to happen. Today, though, the Fed seems quite determined to recover its inflation-fighting credibility and is going to keep raising interest rates until inflation falls to target. That will be true whether or not IRA passes.

But if fiscal policy is draining demand from the economy, then the Fed can stabilize inflation with fewer interest rate hikes.

That’s important because high interest rates are essentially a tax on investment that can impair the economy’s long-term productive capacity. Republicans will say that the problem with IRA is that taxing the rich reduces investment and thereby impairs the economy’s long-term productive capacity. But while it’s certainly true that highly progressive taxes like the ones in IRA fall partially on investment, they also fall on rich people’s consumption. So given the inflationary circumstances, taxing the rich to reduce the deficit and diminish the burden on the Fed helps protect the inflation side of the economy while also protecting the lowest-income consumers.

This was the big economic debate way back in 1993 when Republicans swore that Bill Clinton taxing the rich would crush investment and economic growth while Clinton argued (correctly) that deficit reduction to reduce interest rates would be good.

It is worth saying that everything on the inflation-fighting front needs to be balanced with other concerns. Probably the single most potent anti-inflation fiscal measure you could adopt would be a huge, across-the-board cut in Social Security benefits. Elderly people tend to consume a very high share of their income because there’s no need to save for retirement, so this would really take a bite out of consumption while having a minimal impact on investment. The problem is it would be cruel and inhumane. Taxing the rich to fund a mix of direct public sector investment and deficit reduction is anti-inflationary in a way that has side benefits. Don’t take my word for it, ask inflation hawk Larry Summers.

John Berman @JohnBerman

JUST NOW: "This bill is fighting inflation, and has a whole lot of collateral benefits as well --an important endorsement and declarative statement from @LHSummers on Manchin/Schumer deal.

11:46 AM ∙ Jul 28, 2022

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Meanwhile, on the investment side, the bill would do a lot to increase American energy production while also making it cleaner.

Unleashing American energy

On energy, this bill is a really big deal. Jesse Jenkins, my go-to source for emissions modeling, says it will push American greenhouse gas emissions down to 40 percent of their 2005 level.

But I also think it’s worth discussing this on a more abstract level. I don’t want to rehash these pieces, but relative to mainstream environmentalist views I think:

• Making energy more abundant is much more important than promoting conservation of energy.

• Curbing domestic fossil fuel production is an inordinately costly way to reduce pollution.

• At the current margin, natural gas reduces rather than increases emissions.

This is, I think, roughly the worldview that Joe Biden campaigned on in 2020. His positioning on climate and energy reflected a greater engagement with labor union views than the other candidates, and it’s not surprising that he did a lot better in the primary with working-class Democrats than with more upscale post-materialist types.

Since taking office, though, the Biden administration has seemed torn between implementing Joe Biden’s campaign platform and implementing Elizabeth Warren’s, with internal staff fights breaking out over things like support for carbon capture and blue hydrogen. The really good news is that what emerged from negotiations with Manchin is a truly Bidenist climate agenda, one that is technology agnostic and supportive of carbon capture and sequestration, direct air capture, nuclear, geothermal, and hydrogen along with solar and wind. This is going to be characterized in a lot of the press as a compromise between environmental groups’ asks and Manchin’s views. And that’s correct. But it’s important to understand that this means the bill is a more potent emissions reducer than it would be if the environmentalists weren’t forced to compromise.

The same is true, I think, of the as-yet-somewhat-vague side bargain that Manchin apparently reached with Nancy Pelosi on permitting reform.

Manchin’s main interest in this, as I understand it, is that he’d like to build pipelines to bring West Virginia natural gas to New England and East Coast LNG export terminals. Environmentalists don’t like these ideas, but factually speaking, building those pipelines will reduce emissions by displacing heating oil (in New England) and coal-fired power plants (in Europe). Permitting reform should also make it easier to build zero-carbon power sources.

For a sense of scale, it’s worth noting that this bill’s climate investment is substantially larger than the EU’s comparable package from last year. And I think it’s also qualitatively better. The Europeans largely focused on promoting energy efficiency; that’s fine, and if I were in Congress I would support energy efficiency spending. But climate change is a global problem, and the building retrofits doesn’t scale globally. By contrast, if we can generate a technological breakthrough in seasonal electricity storage, geothermal power, nuclear power, or carbon capture, that would reduce global emissions. So if I had to pick one approach or the other, I would choose the American approach.

The other climate bill

I saw urbanist Twitter express disappointment that the bill includes tax credits for buying electric cars but not for buying e-bikes, and I agree that it would have been better to be technology-agnostic here.

But some people spun that out into a larger complaint that the bill really doesn’t do much to address the energy consumption of our transportation and land use patterns. Here I think it’s important to remember that we did the Infrastructure Investment and Jobs Act just last year. IIJA (formerly known as the Bipartisan Infrastructure Framework) features both the biggest investment in passenger rail ever and also the most generous transit/highway split of any surface transportation bill.

Unfortunately, IIJA is not expected to generate large emissions reductions. That’s because experts are generally plausibly pessimistic that even large amounts of transit/rail spending will actually generate large increases in ridership.

But note that this is a pessimistic forecast about implementation, not an iron law of the future. If Amtrak spends its money on smart things rather than dumb things, then people will ride trains more. If Los Angeles upzones around its metro stations, then its metro system will get more riders. Pre-pandemic LA was an outlier in terms of the scope of its metro system versus its actual usage, but today, thanks to remote work, New York, Chicago, Boston, D.C., and San Francisco all have substantial spare transit capacity too. And four out of the five could clearly generate more transit-oriented development with zoning reform, and even though I’m pessimistic about Chicago, the Windy City might prove me wrong, too.

All of which is to say that most of America’s transportation system upside is under the control of blue cities and state legislatures. Advocates should not waste their time looking to the United States Senate to solve these issues.

SALT of the earth

Speaking of blue states, with Manchin now on board, it looks like the biggest possible stumbling block is the commitment of a handful of Democrats — especially from New Jersey — to the idea that a reconciliation bill ought to address the State and Local Tax Deduction (SALT).

The story here is that people used to be able to fully deduct the taxes they pay to their state and local government from their federal income tax bill. This provision was extremely regressive for two reasons. One is that all tax deductions are regressive because the nature of a deduction is that the value of a $100 deduction is higher when you’re in a higher tax bracket. But what made this one especially regressive is that rich people have higher state and local tax bills.

Then along came the Tax Cuts and Jobs Act. The main purpose of TCJA was a gigantic deficit-financed corporate income tax cut. But moderate Senate Republicans insisted on limiting how much deficit financing could be used, so Paul Ryan designed TCJA to be partially paid for by eliminating certain tax deductions. One of those pay-fors was limiting SALT to $10,000. The argument for this was bog standard conservative tax policy analysis: conservative economists think that marginal tax rates are a really big deal, and the SALT deduction, like all tax deductions, gives people a tax break while doing nothing to lower their marginal tax rate. In theory, conservative economists would favor totally eliminating all tax deductions and plowing the revenue into cutting rates for the rich.

Real-world politics is, of course, somewhat different, so in this case Ryan sold his caucus on limiting the SALT cap with an exaggerated argument that this would really stick it to blue states, which are richer on average and also have higher taxes.

Then because of polarization, Democrats were invested in the idea that if Paul Ryan thinks something is bad, it must be good, so some of them started defending SALT. And even though the SALT deduction is extremely regressive, TCJA as a whole was even more regressive. Flash forward a few years and Josh Gottheimer and Bob Menendez are acting like raising the SALT cap makes them huge fighters for the New Jersey middle class. But note that not only is SALT inherently regressive, but thanks to other TCJA provisions, fewer people than ever itemize their tax reductions at all. And the $10,000 SALT deduction that remains isn’t peanuts — the vast majority of people are either not itemizing or else are able to deduct their state and local taxes fully.

The upshot, per this analysis from the Institute on Taxation and Economic Policy, is that even in New Jersey the vast majority of households receive no benefit from lifting the SALT cap.

Long story short, this would be a total nonsense complaint to hold up important legislation over.

A small dose of recriminations

Not to end on too much of a downer note, but I really do think it’s worth recalling that this deal ultimately involves Schumer settling in July 2022 for less than Manchin was willing to do in July 2021.

In part that’s Manchin being a bit ornery and in part it’s the inflation situation changing over the past year. But it illustrates, I think, the relatively high price of the Democratic Party’s failure to set priorities. How priorities get set is a somewhat mysterious thing. The United States doesn’t have a very strong formal party system. Everyone is elected separately and accountable to their own constituents. But still, there are people with leadership roles — both formal roles in elected office and informal roles at party-aligned institutions.

And I think those people did build a rough consensus that climate was a higher priority than welfare state expansion,

The result was that they wound up settling for a pretty small investment in health care affordability when the opportunity existed a year ago to get more done.

I think the IRA as written is a really good bill, and I don’t want to spoil the vibes by dwelling too much on what might have been. Coordination and priority-setting in America’s highly decentralized system are objectively difficult, and I’m glad they got something important done. But it really would be good next time to try harder on prioritization.