Paul Krugman: The Inflation Reduction Act Is “A Very Big Deal” For The Climate

Paul Krugman is excited. The 2022 Inflation Reduction Act (IRA) seems certain to pass the US House of Representatives and be signed into law by President Joe Biden. The package, which represents the largest climate investment in the nation’s history, is “mainly a climate change bill with a side helping of health reform,” according to Krugman.

Acknowledging that “the act isn’t, by itself, enough to avert climate disaster,” the New York Times media columnist feels, nonetheless, that “this is a very big deal.”

Who is Paul Krugman?

Paul Krugman is an international trade theorist with a special interest in economic geography. He is renowned for founding or co-founding several new disciplines in international economics, from New Trade Theory and New Economic Geography to models of financial crises and exchange rate movements.

Krugman is a Neo-Keynesian economist — a believer that prices and wages are “sticky,” causing involuntary unemployment and monetary policy, both of which have a significant impact on the economy. In 2008, Krugman was the sole recipient of the Nobel Memorial Prize in Economic Sciences “for his analysis of trade patterns and location of economic activity.” This Nobel Prize is awarded yearly to individuals making exceptional contributions to the field of economics research that have been validated over time.

The Evolution to the Inflation Reduction Act

The IRA was formerly known as the Build Back Better Act (BBB). For about 18 months, Biden’s climate agenda was in question, as the White House and Democrats held fiery negotiations with Senator Joe Manchin III (D-Coal) over the BBB.

Krugman originally was worried about the consequences if the original BBB didn’t make it, commenting that there would “be huge human and, yes, economic costs if Biden’s moderate but crucial spending plans” fell apart. The confluence of a better future for the US was “resting on a political knife edge” instead of grabbing onto the highly productive environmental investments that would, in all likelihood, pay for themselves over time.

“Reducing our dependence on fossil fuels wouldn’t just reduce emissions of greenhouse gases,” Krugman wrote in late 2021. “It would also reduce other forms of pollution, notably nitrogen oxides and sulfur, that have negative effects on death rates, illness, and crop yields.”

Like Joseph Stiglist, Krugman believes the passage of the IRA will be a huge step in that right direction, partially because it opens up possibilities for the future.

• It will catalyze progress in green technology.
• Its economic benefits will make passing additional legislation easier.
• It gives the US the credibility it needs to lead a global effort to limit greenhouse gas emissions.

Discounting “cynics eager to denigrate the achievement,” Krugman says that “actual experts on energy and the environment are giddy over what has been accomplished.”

Serious economists — like Krugman — aren’t worried about the effect on inflation. Why is that?

The environmental side: Krugman acknowledges that many people assume that President Biden’s BBB environmental agenda has been greatly watered down in the IRA legislation. With concessions to Manchin and giveaways to fossil fuel interests (like aid for a controversial natural gas pipeline), the new version must be a mere fraction of the BBB vision. Or so lots of people think.

Actually, Krugman explains, energy analysts believe that any adverse climate effect from these concessions will be more than offset by gains from tax credits for clean energy. The REPEAT Project, which provides independent environmental and economic evaluation of federal energy and climate policies as they’re proposed and enacted, offers a side-by-side comparison of emissions cuts under the IRA and the earlier House version of BBB. They have calculated that, by 2035 the IRA will produce more than 90% of the emissions reductions that BBB would have achieved. Krugman concludes that, “after all that legislative drama, Biden’s climate policy has emerged essentially intact.”

The integrity of the IRA isn’t a nice coincidence. The Biden administration chose to articulate its climate policy in positive incentives to do the right thing, not penalties for doing the wrong thing. Krugman says this strategy has “been vindicated,” as it’s politically feasible in a way that another approach, such as implementing a carbon tax, wouldn’t have been.

Political dividends for the future: Citing an August, 2022 study of green energy jobs, Krugman summarizes the authors’ findings: “The growth of renewable energy leads to the creation of relatively high paying jobs, which are more often than not located in areas that stand to lose from a decline in fossil fuel extraction jobs.” Today’s transition to a low-carbon, resource-efficient economy requires systemic changes that will result not only in new products and services but also in changes in production processes, business models, skills required, and tasks involved in existing occupations. Green jobs will foster green skills — those attributes that comprise the knowledge, abilities, values, and attitudes needed to live in, develop, and support a sustainable and resource-efficient society.

• The IRA is a “victory for working people,” according to the AFL-CIO.
• The BlueGreen Alliance finds that the more than 100 climate, energy, and environmental investments in the IRA will create more than 9 million good jobs over the next decade—an average of nearly 1 million jobs each year.
• The Center for American Progress states that the IRA will spur domestic production of batteries, solar panels, wind turbines, and more, setting the US up to compete in the global clean energy economy and creating millions of clean energy jobs.

Final Thoughts on Paul Krugman, the IRA, & Progress toward Zero Emissions

The title of the original Krugman New York Times editorial poses the question, “Did Democrats Just Save Civilization?” With sweeping potential for good job creation, renewable energy fixes, and tools to mitigate climate change, Democrats have delivered on their climate promises, “more or less in full,” Krugman argues.

According to a summary released by Senate Democrats, some of the funding aimed at consumers includes:

• $9 billion in home energy rebate programs to help people electrify their home appliances and for energy-efficient retrofits, with a focus on low-income consumers
• 10 years of consumer tax credits to make heat pumps, rooftop solar, electric HVAC, and water heaters more affordable, which make homes more energy efficient
• $4,000 in consumer tax credits for lower- and middle-income individuals who buy used electric vehicles and up to $7,500 tax credits for new EVs
• $1 billion grant program to make affordable housing more energy efficient

Yes, in order to win Manchin’s approval, the IRA thrust an olive branch of concessions to oil and gas production. Yet the legislation, which no Senate Republican supported, “passed in spite of their spite,” Krugman noted.

“And the world is a more hopeful place than it was just a few weeks ago.”

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