Moody's Talks - Inside Economics - Economic Update and Ellen’s Climate Top 5

Episode Date: August 19, 2022

Mark and Cris welcome Ellen Hughes-Cromwick, Senior Resident Fellow for the Climate and Energy program at Third Way, to discuss her views on climate risk in the Inflation Reduction Act (IRA) and her outlook on the vehicle industry.Full TranscriptFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by only one of my colleagues this week, Chris Duretis. Chris, how are you? Doing well, thanks. How are you doing, Mark? Where's Ryan? Ryan, it's at the Jersey Shore with his family. No, no, I thought he was going to Boston and see the Red Sox. He's at the New Jersey Shore. That was last week or the week before. He's like on perpetual vacation, that guy. Yeah. Yeah.

He's doing this part to support the economy here. Yeah. Do you know which part of the New Jersey Beach he's at? I don't know which beach specifically. It's not a family, so I'm thinking it's a family-friendly. Family-friendly one, yeah. Yeah, that makes sense. Well, I always go to the July 4th that week or the week after all my siblings and all their kids.

I've got four siblings and we each have three kids. We all go down to the Stone Harbor. and Avalon every year and hang out there for a week. And, you know, you have your normal family fight after day one, day two. Then everything kind of calms down in the week, very nice week at the New Jersey beat. So nice place to go. Won the Sandcastle competition this year. Oh, that's the other thing.

Yeah, there is a contest. We didn't play this year. I don't know why. Something came up timing or something. Yeah. But we have no talent. We're brute force, you know, meaning. We move a lot of sand.

I try to shock and awe, you know, strategy. The only one with any talent is my wife, Ava. But she, like, you know, builds something beautiful, but it's like so small, no one can see it. It's like, you know, why are you doing that? So anyway, we've won in the past, but thanks for asking that. That was kind of you to ask. Yeah.

I know it's nothing like your Italian Riviera, you know, kind of. You have a very interesting perspective. I have to pull back the curtains sometime and show you the reality. I like to see the village you guys are from, you know, at something. Nothing special. Oh, anyway, so we do have a guest. I'm not going to, she is sitting in the wings. A bit of a mystery.

We're going to bring her in. We're going to talk a lot about the Inflation Reduction Act and the climate provisions in the IRA. and she's an expert on climate-related issues. So looking forward to that. But we'll keep that over here on the side for just a minute because I do want you, Chris, because we're sitting here, this is Wednesday, August 17th, midday, and a little earlier than we normally do the podcast.

But we've gotten a number of economic releases this week. And I thought retail sales, housing, I thought I just kind of turn to you and give everyone a sense of those releases and what they're saying about the economy. Yeah, sure. So I'll start with retail sales, which came out this morning. I think the, I think the data continues this trend of mixed signals, right? Every data point seems to have, tell a different story when we're thinking about recession risks and the overall economy. So retail sales for the month were flat, right, from June to July, which at the headline level might be a bit concerning. But then you dig a little bit deeper. and a lot of that flatness, if you will, was due to gasoline and auto sales, which were down. And so the control retail sales, right, which exclude what gas, autos, restaurants, and building materials, were actually up 0.8% June to July.

So it does suggest that underneath it all, consumers still are willing to spend still out there contributing to the economy. but perhaps some of their trends or some of their preferences for spending are shifting. So I mentioned sales of gas stations were down, but that's largely due to the drop in gas prices. So hard to complain about that as a decline. There was a decline in motor vehicle and parts sales, right? So that perhaps is a bit more interesting in terms of all the pent-up demand that we think is out there for cars, still not being satisfied or perhaps consumers starting to pull back. So there's a little bit of mystery there in terms of how consumers are responding.

You had an increase in building materials sales and an increase in non-store sales, so internet sales. So on Amazon or Amazon Prime Day might have driven that. So a lot of moving parts here. Overall, though, I would still suggest that this is supportive of the idea that consumers are still confident enough in the economy to continue spending, but their patterns of spending may be shifting around. So the way I would put it is the firewall continues to hold. That is the American consumer is the firewall between the continued growing economy

and recession. And if you look at this report, you say that firewall is holding tough, right? Bottom line. Yeah, holding. I would say it's not accelerate. It's not that consumers are out there really. doing more of them. Right.

Yeah, exactly. And this motor vehicles is an interesting aspect. And again, it's one month of data. We always want to be cautious in terms of reading too much into a single data point. But the fact that it actually fell is interesting. It may point to some weakness, perhaps, in terms of durable goods or consumers. I doubt it. I doubt it.

With the mystery guest out there, we might press around this because he's got standing here, but it feels like sales are awfully low. And it's supply, I can't get a car because there's nothing in inventory. And as we get more production, more inventory, we'll see more car sales. But if there's anywhere where there's pen-up demand, you know, where people put off spending because they just couldn't buy, we'd be on the vehicle side. So I'm not too worried about that. Yeah, you would think. But yeah. One quick question. One quick question. I don't know if we've talked about this on the podcast, but the thing that's been curious to me is that the,

consumers have all this so-called excess saving, you know, extra saving they did during the pandemic because they were sheltering in place of not spending or lower middle-income households because they got a lot of government support. And it feels like they're, you know, it's by our calculation, it's still close to $2.5 trillion in excess saving, which is well over 10% of GDP. That's a lot of cash. And it's all sitting in people's checking checking checking checking deposit accounts are overflowing. And so we know that's where the cash is. So it's easy to get to. But people just aren't, you know, they're supplementing the hit to their income from the higher inflation, the higher gas prices, food prices, and everything. But they're not, it doesn't feel like they're spending beyond that, right?

And they're just going right up to that and saying, hey, I'm going to spend, but I'm not going to spend with abandon, which I find a bit surprising. I would have thought we'd see, it's fine. It allows economy to move forward, but I thought we might see some, you know, happy days or here again. We never really saw that. Well, I think it points to the confidence. Consumers are still very reticent in terms of the prospects of the future. So I think there's a lot of precautionary saving that's going on. Yeah, I might have that ability that nest egg is there, but I might need it.

I don't know if I'm really ready to spend with abandon. And that's why I thought maybe some of this, perhaps some of this delay in terms of spending on a new car may actually be real. People being a little cautious. Maybe they could afford it. Certainly the higher end consumer. still sticking to that. No matter what I say, you're still sticking out. Okay, fair enough. I got to mix it up here. I do want to, we're going to end the conversation soon so we can move on, but on housing, we got some pretty tough numbers there. Housing is clearly slowing, right?

Starts were down across the board. Permits were down on the single family side, actually up a little bit on the multifamily side. But overall, clearly the housing picture is darkening relative to where it was. a lot of talk about housing recession. I don't know if I'm prepared to go that far. Really? I mean, it's slowly. It's going backwards, right?

I mean, it is going back. It's construction. The starts are down. The next shoot of fall is prices. I can't feel like they're going to fall here too. Definitely slow. Yeah.

But still, we're at 2019 level, right? We're not. Well, recession. Hasn't falling out. All right. It depends how. So sure, recession, I would say, mild recession so far.

Okay. Is it a... Not a crash. Hair on fire recession? I don't think so. And I think there's still lots of demand out there. So I'm not quite at the point to declare that, you know, housing is never going to recover here.

So just to caution or... One interesting thing on that, though, I noticed is completions remain at a very high level. So starts are, you know, saying I'm starting, actually putting a foundation in the ground. Completion is what's already in the pipeline, you know, to, going towards, uh, you know, getting across the finish line, which has been a number of homes in the pipeline going to completion has been at a record level. Maybe it came down a little bit last month, I didn't check. But that means that completion, which actually I think is what matters for output, GDP, jobs,

the economy. That actually was pretty good in July. Actually rose, yeah. The rose in July, yeah. There's definitely a shift, though, towards away from single family, towards more multifamily. Yeah. Which you would expect given prices and rents. But given our conversation last week with John Burns, you know,

okay, very good. Anything else you want to bring up before we move on? No, I think everyone is waiting with beta breath here. Okay, yeah, beta breath. The mystery guest is Ellen Hughes Cromwick. Ellen, it's good to have you on Inside Economics. Thanks for joining us. And where are you speaking to us?

Are you in D.C.? Are you in D.C.? I am right now in Ann Arbor, Michigan. and enjoying a beautiful day here looking outside but staying in at my laptop. Sorry about that. You've got a fan base out there and you've got to speak to them. So it's very good to have you. And Ellen, you have a storied career.

Now you're a third way. Third way is this wonderful, is it fair to call it a think tank? Third way meaning kind of down the middle of the road. Centrist think tank. and I'm working in the climate and energy program, and we're really all about doing analysis and understanding what the likely pathway is to net zero emissions by 2050. So we have many different experts across a variety of technologies and lots of work to do in this area. Yeah, third way is a great think tank. I'm trying to think of the economists there that I've

worked with in the past. to Jim, shoot. Jim Kessler. Oh, Jim Kessler, yeah. Yeah, he's one of our leaders, absolutely outstanding. Yeah. And we have Zach Moller and Gabe Horowitz in the economic program. They do just an incredible amount of work,

understanding these different policies and looking at what the opportunities can be for the future. Yeah, he's a great guy, great and a great think tank. But, Alan, you've had a long career before you found your way to third way. Do you want to just give us a sense of, you know, your journey, how you got to where you are today? Yeah, well, you know, as I think it's true for so many economists, we are, I think, in a profession that offers up a lot of different career pathways. And I certainly fit that mold. Having started after graduate school at the Council of Economic Advisors and then teaching, I went into banking for a little bit.

And in the course of that, just to have enjoyed a great career journey with my husband, who's a health economist. Well, I think I knew before you. Didn't I get to meet Paul? Yeah, I think so. Yeah, I got to know Paul before I got the minute. It was close. I'm not sure.

Yeah. So the magic number, we had three adult children now and just, you know, love family, love athletics and had been fortunate to, you know, work at Ford Motor Company for many years, which, you know, I think that both of you are going to understand this so well that when you work in a cyclical industry, it's like drinking from a fire hose in terms of macro. and all of the different elements of a supply chain that the auto industry represents. So it's a little bit of hedging,

you know, looking at commodities and marketing and sales and production programming and strategic planning, a little bit and sometimes a lot of it. And just incredible experience. So you were chief, how long, you were chief economist for Ford, When to When? Yeah, from 2004 to 2014.

So during the financial crisis. So that must have been a pretty cool time to be. That was exciting. Yeah. Very stressful, but exciting. Yeah. Would urge anybody listening out there for all our listeners today to really think seriously about getting into economics and business economics, it's just an incredibly satisfying,

rewarding career. See, Ellen, Chris, you see, she's a salesperson, always selling. Did you notice that? I like it. I'm convinced. She's actually really good at it. I like, oh, yeah, I want to do that too. Well, Mark, you are, Mark, you're, you're a star.

Come on. You can definitely sell better than I can. And I think all the different dimensions of your career are something that, you know, we think of as a role model. Oh, stop, stop. Oh, seriously. Oh, come on. Yeah.

Okay, you can come back on this podcast anytime you want, Helen. Any part. Hey, I did want to ask you one thing about the given your, and I might be pushing you in a place you don't want to go so you can say, hey, Mark, stop. But on this conversation we just had a minute ago on vehicle sales, I think we're at 13, 13.3 million annualized rate, which for context, before the pandemic, we're, 17 million. So we're like well south of that. Does it feel like to you that we're at so low because of demand, people who are can't, don't want to buy, or is it supply? They just can't find the cars

that they want to buy. Do you have a sense of that? I'm just curious. I'm out of the business of doing macro analytics for autos, but I would say 13 is low. So absolutely there's a supply constraint. You know, just looking around here in southeast Michigan, you know, a bit ago, we saw a lot of, you know, obviously in 2020 excess supply, but then, you know, with the chip shortage and parts problems, there's no question that we've got tight inventory here. So it's going to be a while for that recovery. But it'll come back because we know, you know, discretionary scrapage in the business is north of 11. And so, you know, we've got at least room to run here, I think, to see that.

I did not know that. Is that right? Well, let me, let me make sure I'm clear on that point. You know, when you disaggregate like Alan Greenspan used to do between discretionary and physical scrapage. Yeah. There's a certain wibble distribution, failure rate to vehicles. And so if they're, you know, running around 11 years old, they're getting to a point where they have to be, you know, have to be replaced.

But then you have that other piece, which is, hey, I want an electric vehicle. So the vehicle that you're putting in the used market in the funnel, you know, might have some life left to it, but you're moving on to a new, a new vehicle. So I, you know, some of that dynamic could be changing now in light of some of these, you know, shifts in the technology. Yeah. To that end, we have an economist, a good vehicle, a fellow who focused on the vehicle, and Mike Bristson, who's been on the podcast before. And he points out that, you know, that we're just, since the pandemic hit, we've all driven a lot less, right? So maybe there isn't as much kind of depreciation of.

the stock that typically, but still, that doesn't explain 17 versus 13. Yeah, absolutely not. Yeah. And then what about, you know, when you look at public transit drops and the fact that people aren't commuting offices, does that offer up additional incremental demand? Yeah. Yeah, a lot of dynamics there, but 13 sounds, yeah, it does sound low. And then you were at the chamber, you were the chief economist at the Chamber of, excuse me, at the Department of Commerce. I keep saying Chamber. Yes, that's right. And that was under President Obama.

That must have been pretty cool as well. Yeah, that was exciting. We really accomplished a lot in that last period of his administration, a lot of work on digital flows, data flows between countries. Obviously, a lot of work on trade agreements that we did. did not get across the finish line, but are still extremely important, especially with Asia and Europe. I think as you look ahead to the future and the kind of trading partners, friends that will be expanding our relationships with. So that was a lot of groundwork that we did in that period.

Yeah, I guess the one disappointment, and maybe it wasn't, but from my perspective, the disappointment of that time was the train specific partnership, right? That was the true. trade deal, free trade deal with the Pacific Rim nations excluding China until China played by the rules, which they weren't, you know, everyone knew that they weren't doing. But that fell apart, unfortunately. So I'm sure you must have played a pretty active role in that. Secretary Pritzker, you know, she put her running shoes on. She was all over the place working diligently to get that across the finish line. You know, that was a disappointment. But again, you know, we have the fundamentals in place to really activate that aggressively. So I think it's something that future

you know, this administration or future administrations are going to get back to. Makes perfect sense, right? I mean, I never really understood that because, you know, it's a way to push back on China and say, hey, you want to be part of this free trade pact. You got to play by the rule. So it just confused me to know. And you look at the economic impacts on the U.S. that were pretty inconsequential. I didn't think. I think, you know, even not from a micro perspective. I didn't think it was going to be that big a deal. But anyway, that's the shame.

And then now you're at Third Way. And the Third Way is doing a lot on climate. In our conversations prior to the podcast, you were talking about some work you're doing with BCG, I think you mentioned. Did you want to talk about that a little bit, that kind of work you're doing? Well, we're going to be releasing a lot of the report outs from this study that we commissioned with the Boston Consulting Group, and we joined with Breakthrough Energy to lead this effort. And we've basically examined six clean energy technologies and the supply chains

for each of those. So this is really pathbreaking because we really haven't seen studies of this a scope that really drilled down in each of the supply chain segments for these technologies, and then, you know, measuring market size, looking at export market opportunities, and then measuring competitiveness of U.S. companies. And that, I think, is going to offer up a lot of, you know, good insights for the public. This will all be in the public domain. we'll be releasing it hopefully soon. And I think it's a good springboard for understanding how provisions in the

inflation reduction act, in the bipartisan infrastructure law, in other, you know, legislation. Look at the chips and science act. Yeah. You know, just to name a few, there are many ways that we're really accelerating now these clean energy technologies. and I think the U.S. is going to be a marked leader in many of these. That's encouraging.

Yeah, it's just amazing what has gotten across the legislative finish line here in the last year. I mean, back at you on that, were you surprised at these legislative efforts and the fact that we've had now a Congress that has really been able to march forward? forward on climate change and other issues. Totally. I mean, and it's also kind of snuck up on us, right? I mean,

because it, you know, it wasn't this one big, massive piece of legislation. It was a bunch of pretty big pieces of legislation that when you bring them all together, you go, oh, wow, this is pretty impressive.

The Inflation Reduction Act, which we're going to go into in a minute here. You mentioned the Chips Act. That's pretty cool. You know, that's going to go back to the auto industry and vehicle industry and secure our chip supplies,

which goodness knows, we need going back to China. And then you mentioned the bipartisan infrastructure bill. I guess that was back at the end of last year, almost a year ago now, you add all that up. I think the total amount of funding into the economy is something like $1.5 trillion. So this is a pretty significant. And a lot of that goes to the topic at hand, and that is climate risk mitigation, right? I mean, a significant amount of that. And they all help each other. They all kind of work together to do that. Well, it's really fascinating to see, you know, in the standard macro textbook, there's always the chapter about the fact that fiscal policy lags. It tends to be reactive. It ends up not

having the kind of positive spillover effects that, you know, would be intended by lawmakers. now we're seeing, I think, more astute policymaking that we're getting to a point where we've got the evidence base. I mean, remember a few years ago, the Evidence Act passed, which said, hey, you know, legislative leaders here, we have to measure the outcomes and make sure that we're implementing policies with a strong evidence base. And I think that is really now. starting to infiltrate the way that lawmakers are putting these packages together. So that's a, I think, you know, maybe we're seeing a new dynamic here in terms of more proactive policy.

Well, now, don't get ahead of yourself, you know, get a little giddy there, I'd have to say. But good reason to feel good about things. I mean, a lot of progress has been made here. Well, let's dive into the Inflation Reduction Act. And the IRA, we've talked about that on the podcast. We've written about it. We did a macroeconomic impact analysis that we produced back a few weeks ago. But for this conversation, I think we'd like to focus on the climate risk provisions,

which at the end of the day, I think in my view, and I'm sure yours, that that is the most impactful part of the IRA. this is going to have an impact long into the future, not just this year, next year, or the year after, and it's a big deal. So with that as a bit of context, I'm not sure how we want to dive into because there's so many moving parts here. Maybe the way to ask it is, of all the different things climate related in the IRA inflation reduction act, what do you think you find, which is the most impactful? What do you think is the biggest deal in terms of affecting the climate emissions and the economy going forward? You're absolutely right. There is just a plethora of provisions in IRA, adding up to about $370 billion over a 10-year period. Let me just carry pick what I think might be the top five. Oh, oh.

Okay. Okay. Hey, Chris, write these down, Chris. Just write these down, write these down, okay, because we have to come back. Go ahead, right, all right, go ahead. I mean, apologies to our listeners who have their favorite provision in here because there's just absolutely so, so much that's beneficial. It just is a CODA, I might interrupt you along the way just to break it up and just to get our minds around it because there's a lot of things and they're all hard to get your mind around unless you think about this on a daily basis. So I might interrupt. I'm not being rude. I'm just, well, I am being rude, but, you know.

No, that's fine. That's fine. And again, truth and advertising, you know, I focused more on the electric vehicle and battery provisions. I am by no means an expert expert on offshore wind, for example. But I guess the top five, you know, I don't want to discount the fact that there's a lot of EJ40 provisions in here. They look like small dollar signs, but these are provisions that really try to build out. the equity of advancing toward a clean energy economy, whether they're grants in communities or there some kind of credit to take advantage of installing solar panels or buying energy efficient appliances or heat pumps. I mean, all of those measures doesn't rise to, you know, rise to, you know, dollar billions in terms of an EV tax credit.

But they will make a huge difference in a lot of disadvantaged communities. I mean, think about communities that are on the route to the inland empire in California. And now all of a sudden, you have some tax credits for heavy duty vehicles to clean them off. I mean, that's going to make a big difference in people's lives. And I think, you know, that is one of my top five. So I'll just throw that out there. There are many different provisions in IRA that have these equity considerations.

Oh, so you're kind of, there's a lot of small kind of line items that when you add it all up really has a meaningful impact, particularly on communities that lower income, disadvantaged communities that are under particular stress due to climate change. Yes, exactly. Climate change, but also, you know, expenditures for lower energy efficient appliances or their electricity spending. So they're really trying to, you know, help these households that are in disadvantaged communities that, you know, they have outdated appliances or their, um, they're,

electric grid is expensive for different reasons. And, you know, I like that intention in the legislation that they focused on that. It's interesting. We, Moody's were doing a lot of work in the climate area and we calculate these, as you can imagine, scores. I mean, the rating agency, we score everything. We create these scores for physical risk, physical climate risk, mostly acute. but also chronic, you know, heat and that kind of thing, flooding and fires and anything related to climate. And we do this for parcels. So if you give me your address, we could tell you what your score is for climate risk. And if you do a scatter plot of on the across, let's say, metropolitan areas or counties or pick a level of geography, on the X axis is the score, the higher the score, the higher the score, the more risk you are, the,

lower the score of the lower risk and compare that to the income level of that geography. It's amazing. You can, it's so clear that low income parts of the country are at much greater climate risk than higher income areas. And I just, I guess that's intuitive, but I was shocked at how strong a relationship that is. Pretty amazing. Exactly.

Mark, I'm so glad you're doing that work because measuring this is half the battle. right? It's only in the recent, maybe last 10 years that we've been able to get just better data to fully understand and make it transparent because, you know, if you don't measure it, you're not going to know about it. And I think getting that data out, especially for, you know, insurance, reinsurance, but also to focus policy more directly. Because, you know, in a sense, if you don't address this equity consideration. You're really missing a great opportunity for these individuals, people in these communities to reach their full potential. And that adds to productivity growth. It has dividends for the broader economy over time. So number one, top of the list is this

plethora of provisions that go to making sure that we address climate risk from a, from an, through the prism of equity, you know, trying to help communities that are under the most, that are lower income under the most stress. That's great. Yeah, absolutely. Number two. Yeah, number two. Yeah. Number two is one of my favorites. It's called the 48C manufacturing tax credit at a 30% rate. And I'm sure you all have looked at this pretty carefully, but it was funded at the 10 billion level. Now, why is this important? Well, it's going to apply to all kinds of manufacturing activities. And the reason I think it's critical is that, you know, we have a lot of factories in, you know, historic communities, especially in the Midwest, that if we can retool those,

we're going to be off to the races. And I'm thinking specifically around EVs, although there are many different types of manufacturing facilities that could apply for this. And I think it's going to be a huge help for companies as they look at their capital allocation and figure out, you know, how do I get this done? Because you have to, as you know, spend a fair amount to retool a facility, that that 30% credit is going to be extremely valuable. Now, 10 billion isn't going to go, a long way. I can't give you an exact estimate if you were retooling, you know, Wayne Assembly plant on Michigan Avenue, you know, how much is that going to cost if you want to make that entirely an EV plant, all battery electric vehicle plant? But, you know, could come

in it around a billion or so. That 48C tax credit may be one piece of how you, you put together a plan for retooling. Just maybe way deep in the weeds, but how does that tax credit get allocated? Do you know? I mean, is it first come first serve kind of thing? Or do you know how that works? You know, I don't believe that they have issued the guidelines for that. Yeah, we're just now getting some guidelines.

Like this morning, we just got some guidelines from the Department of Energy and IRS on the EV tax. credits. So this will be coming out and we'll get better definition on that on that over time. Got it. The third, the third one on my top five are the EV tax credits. Yeah. I think the most important aspect of this EV tax credit is that they did retain the 7,500 level of that credit, which is critical. you know, that we get, that we have something that's close to the cost spread between an ICE and an EV. Now, it's- I-C-E-E-Bing internal combustion engine for those.

Yes. Yes. And an EV. Now, you know, that's shifting, obviously, as we see battery costs coming down, especially for an iron phosphate battery chemistry. you know, it's not perfect, but I think that's probably the right amount of a credit. And, you know, it will provide a significant boost on the demand side to get us hopefully close to that 50% target of EVs in the U.S. by 2030. There are some provisions in there that do require sourcing for battery components.

And the components think about a cathode and anode, electrolyte, an electrolyte, separator. Those are the big four battery components. And also some requirements on the battery critical. minerals and the sourcing of that. So there are some very onerous requirements that come into play after 2024 for some and after 2023 for others. Let me ask you on that one because that's that's where I've seen some criticism of the legislation that you have these very severe constraints in terms of eligibility to get the tax credit. And sourcing is a big part of that.

I mean, you've got to get the materials that go into building these batteries and here, not somewhere else. And that's an impediment because a lot of these minerals are in China. They're in different parts of Africa, Latin America, other parts of the world. If you were a king for the day, would you have done that? Would you have put in those sourcing requirements? Or do you think that that is really a problem here in terms of? of this. Yeah, and I know I was waxing eloquently about fiscal policy.

Yeah. A little more proactive. But, you know, in some sense, this is a very strategic component of the credit. For example, the provision around foreign entity of concern for battery components starts after the end of 2023. In other words, prior to December 31st, 2023, that provision is not active. So it does provide a bit of a runway for companies to start looking ahead. And of course, as you know, Mark, really well, when you put together a sourcing plan,

you're looking out at least three to five years for any product program. Sure. So will they have some flexibility as they get into year two, three, four, and five? Yes, I think companies will start to respond to this and we'll see investments in the U.S. for the production of battery components. So, you know, it does provide that incentive, hey, let's get that sourcing, you know, more diversified. It's been centered in certain countries. And, you know, we really need to have a.

better supply chain. You know, the saying about, hey, let's not, you know, kind of have a crisis that we can't find an opportunity. And, well, in some sense, COVID and the supply chain bottlenecks gave us a bit of a wake-up call about supply chains and how vulnerable they are. And so I think that legislation is going to be beneficial. It's going to give a nudge to redirecting sourcing and really stand up a battery cell industry in the U.S. and our allied countries. So it sounds like if you were king, you would have done it roughly the same way. Hey, Chris, if you're king, would you have done it the same way? Or would you have? And I guess you're saying, because you are king,

you're going to show some flexibility here. December 31, 2023 comes around. Maybe we'll stretch this a little bit to make it work, as what you're saying. Chris, do you have a different take on that? I mean, do you have any views on that? Well, if I'm king, then you're king. I'm a free trade.

I can take that right away from you, but you're king at the moment. So, yeah, I wouldn't put that restriction in, right? We would not have put that restriction. No. Oh, interesting. For not the lowest cost producer, why force it? Now, you could argue certain countries, certain areas, right, some preferential treatment. But just to blanketly force, try to force an industry in the U.S., I don't know how effective

that's going to be. Yeah. Yeah. Well, I guess, go ahead. On the critical minerals, the foreign entity of concern doesn't kick in until after December 31st, 2024, by the way. So there's a little bit of a different runway for the critical minerals. Again, recognizing, you know, we do not have sufficient mining for lithium here in the U.S., which is, you know, a very critical component for the cells. And yes, this does provide

a little bit of a stick. The carrot is the 7500. The stick are these restrictions. Yeah. Yeah. Well, it would be very interesting to see how this plays out, you know,

because it is a little bit different than what a kind of a traditional economist would do. But of course, that's kind of a silly statement in the context of legislation because you've got all these political constraints as well,

and I'm sure that played a role in their decisioning around all of this. Yeah. Chris, if we could implement a carbon tax and some energy standards that really kind of set the stage for that, you know, obviously as an economist that does make sense. but we just aren't in that world. And so that's why I think, you know, strategically a little bit of a carrot and stick in the way that they structured this credit probably makes some sense. You should know, Ellen, Chris is this one of these, you know, out in the universe,

out in the universe optimists, you know, I keep bringing them in. Not very practical. Just the opposite. Okay, so that's three, number four. Yes, number four has to do with, I'm sure you have looked at this, which is the loan programs office at the Department of Energy. Right. And the loan program office has over $40 billion available for loans and loan guarantee authority.

They have three programs in there. and the IRA increases the loan authority for these programs, and it appropriates some additional funds in the program to run it, especially the credit subsidy cost. And it does also establish a new program in LPO, loan programs office at the Department of Energy, which is focused on reusing energy infrastructure. So I think, you know, I think that's going to have a lot of bang for the buck.

You know, there's a lot of interest and applications coming in there. And I look to see that as being a useful way of looking at investment and capital coming in for these projects. Yeah, I think that does have a lot of. of potential juice, you know, particularly to provide the financing necessary to do a lot of this investment in development. I think that's going to be really critical here. So very important. I recall, you know, Tesla did receive a loan from in 2009. Ford Motor Company also received a loan. But, you know, that was the beginning of Tesla's rise, was getting some low-cost funding through this LPO program. I didn't know that. That's interesting. Great. So that's number four.

We're down to number five. Yes, number five. I think it has to do with kind of, again, this is more strategic. This is long run. This is patient capital, which is some funding for nuclear fuel sourcing and a nuclear tax credit. Again, we have all. lot of innovation happening in this field. You may have heard about small modular reactors. Again, this is an area that Third Way has a lot of expertise in. It's not my field, but what I understand from their research is that these small modular reactors can be manufactured at a facility and then installed on site. Think of, you know, maybe a steel plant. that has associated with it carbon-free fuel coming out of a nuclear facility, a small modular

reactor or other types of manufacturing companies that co-locates such a small modular reactor. So I think this funding is going to be really important to start that effort and to get that rolling out. Of course, these are long-lived assets that require substantial effort to get to a point where the installation and operation is taking place. But it seems to be the kind of optionality we need if we're on some curve to get to net zero emissions by 2050. We have to be thinking long run

and to have options to trigger different types of technology. And lots of technologies we don't even know about yet, but we should have that optionality to help fund that. Yeah. So I do want to ask you what you absolutely did not like. I know this almost feels, I know you've been so active in helping put this legislation together, particularly on the EV side.

It feels a little bit like your baby, but I'm going to press you in a second about what you didn't like about the legislation. But just I want to provide a little bit of context. and see your reaction. And I don't know if you've done work in trying to take all of these provisions and translating it into emissions and then macroeconomic impacts. And we've done a little bit of work there. And just to give you a sense of it,

if currently there's roughly 4.5 billion metric tons of emissions, a CO2 emissions in the U.S., 4.5 billion. billion. If there had been no policy action, there was no IRA and nothing else, then by 2100, we'd still see a reduction in emissions because of rising cost of carbon and we were assuming some improvements in technology. We'd be at roughly three billion metric tons, which by the way would be a disaster because temperature rise at that point would be quite significant in the damage to our economy very serious. But with the IRA, we're calculating that emissions by 2100 will be somewhere around 2.4, 2.5 billion metric tons. So that's that, you know, when you think about it,

you go, oh, well, that's still far from net zero. We got a long way to go. But conversely, you think about that, given this upfront investment we're making today, $380 billion over 10 years, and we're getting that kind of lift, that's a big deal. And if you try, translate that reduction in carbon emissions to what it means for physical risk, economic loss due to hurricanes and flooding and economic loss due to chronic physical risk like sea level rise or heat stress, GDP we found, is higher by 2.7% in 2100, 2.7% higher in 2100. So that's, that's a big deal in my mind. That's meaningful. Have you done any of that kind of work or did you have you gone down that path trying to connect those dots back to the macro

economy or is it something you or what do you think of that what's your reaction to that yeah i guess i'll react to it that that is out of scope right now for for what i'm working on sounds like something we collaborate on to me i would you know i would love to because i think the economic implications of this are critical i was talking with an economist at um cea recently And, you know, one of the things that they're pointing out is that the longer you wait, the higher the cost and therefore the lower GDP. So in other words, you're going to have a more adverse impact on GDP, the longer you delay these actions. These are not, you know, cost-free decisions that Congress is making that we as Americans are making today. And, you know, to the extent that we can measure that and quantify that, I think then we'll get more resonance.

We'll understand that these investments that you make today have more impact, more bang for the buck than if you just simply wait and, you know, delay action. The fact that, you know, there's potential for bipartisan action going forward beyond IRA speaks to that particular observation that, you know, these, how many, how many states, Mark, that you see that are impacted now by the climate challenge, you know, pick your favorite state and look at the situation. That's a, that's a, you know, that's something that's bringing the reality forward, I think, to people. And I think for us, for the economics profession, I really hope that, you know, we really make this kind of analysis more mainstream in our assessments and try to lengthen out beyond the next couple of years what we see in terms of how these risks materialize. It really is a it's a solid case for building scenarios and I do really appreciate that you and your team have taken this on.

Yeah, I mean, that's so key because going back to fiscal policy, it's always been judged or at least in recent decades by the 10-year budget horizon. You know, what does it mean? So when I say $380 billion, that's over the 10-year budget horizon. And that's what the mindset is. That's what the congressional budget office, the kind of the folks that look at this for the budget purposes look at. But for climate risk, and actually for a lot of other policies that matter a lot,

like Social Security just to pick one, it's really important to look beyond the 10-year budget horizon because if you don't, you're going to make some pretty bad decisions around what we should be doing and not be doing. I know we're running out of time. I do want, though, to ask, you know, of all of the provisions in the legislation, what is at the bottom of the list that you didn't like?

What would you have done differently? Well, I guess I'll come back to the EV tax. Okay. I heard Chris loud and clear. My issue is with the price caps for these vehicles. And I know this has been unpopular that we don't want to. to give money to high income individuals. But my experience in the auto sector is that when initial new products hit job one, that is, they're now going to be coming down the assembly

line, that, you know, often those initial runs of a brand new vehicle, unfortunately, have to be higher priced because you're running low volume. So you're at the top of the average cost curve. point. In that period, you're at the top of the demand curve. And it's just simply because, hey, if you've got a factory with a lot of capital in it and you're only making 20,000 units when the capacity for the facility is 200,000 units, you know, it's just going to be costly. It's going to be more costly than when you get to peak volume for the facility, which, for, for autos tends to be around 200,000 plus, although Tesla has been innovating, I don't know if you've seen this recently, but the Fremont California plant could be reaching

as much as 500,000 capacity. So you're working down the average cost curve and getting to the bottom of that curve pretty quickly now that they're on third, fourth generation product. But when you're just starting out and you got all these companies that are just starting their product releases on EVs and their low volume, it's just going to be higher costs. So that's just the way it is. And providing an incentive, regardless of what the price is for those initial runs, I would just say, you know, suck it up. You know, it's not perfect, but that would get the demand stimulus because for a company,

where you're making capital investments that have long lives, and it takes you three years from the start before you even see a product coming off the assembly line, three or four years. You know, you've got to just, you know, give them that expectation that demand is going to be there. So that, I guess that's my spiel on the price caps for, It's 80,000 max for vehicles, cars and vans, and then 80,000, I'm sorry, for SUVs and pickups in 55K for cars. Well, that makes a lot of sense to me, and I like to suck it up. It's spoken like a mom with three kids. Suck it up, you know. Yeah, three highly successful kids.

Well, we've run out of time. That happened pretty fast, I'd have to say. And we didn't get to the game, Alan, you got off the hook because we play this statistics game, but we're not going to do it this week. But we're definitely going to have you, if you're up for it, you know, you'll come back. And Chris is going to show you, well, at that time we'll have Ryan. You don't, Ryan wasn't able to make it as we pointed out, but he's really, really good at the data. So we'll have you back and play the game if that's okay.

That sounds great. Good. Thanks so much. Thank you. Oh, yeah. This is great. And learned a lot. and appreciate the time that you took with us.

And with that, dear listener, we're going to call this a podcast and talk to you next week.