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Aetna Professor of the Practice of Economic Policy at Harvard University
Jason Furman [00:00:03] The way to think about industrial policy, whether it’s for the clean energy transition, for microchips, for anything else, is to ask yourself, would it be better for the economy if we take the 100 units of stuff we’re making or the 100 people were employing and shift two of it from what’s happening now to this new activity?
Jason Bordoff [00:00:25] Many governments around the world are increasingly turning to industrial policy, including in pursuit of stronger climate action, such as here in the U.S. through the Inflation Reduction Act. These targeted economic measures can build domestic, clean energy industries and increase security and resilience of supply chains. But there are risks to these approaches too, including higher costs and trade tensions. In the years ahead, policymakers will face a difficult balancing act as they strive to expand the availability of low cost, clean energy while boosting their own domestic economies. What does the shift toward green industrial policy mean for the energy transition? How has this shift manifested itself in the Biden administration’s approach to climate action and what new climate policies might be on the horizon? This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show. Jason Furman. Jason’s the Aetna professor of the Practice of Economic Policy at Harvard University. He’s a former colleague of mine in two different capacities, both in the Obama White House and at the Brookings Institution’s Hamilton Project. Prior to his appointment at Harvard, he served as an economic advisor to President Obama, including as the chair of the Council of Economic Advisors. Jason played a key role in implementing the major economic policy initiatives of the Obama administration, including the American Recovery and Reinvestment Act and the Affordable Care Act. Jason joined me to talk about the rise of green industrial policy, the outlook for the Inflation Reduction Act, and how economists think about climate change. We also discussed his previous work as a juggler, along with his unfortunate love for Boston sports teams. I hope you enjoy our conversation. Jason Furman, good to see you again. Thanks for being with us on Columbia Energy Exchange. Great to have you on once again.
Jason Furman [00:02:31] Great to be here.
Jason Bordoff [00:02:32] I want to start by offering sympathies for the Celtics, given that I know you’re a huge Boston sports fan, so apologies for the NBA finals.
Jason Furman [00:02:41] That’s all right. We now have very low expectations for the last place Red Sox. So it should all be fine.
Jason Bordoff [00:02:46] I don’t understand why you’re a Boston fan. You are a New Yorker. And these are supposed to be lifelong affinities that you built. So how did you switch? And like, why are you rooting for Boston fans so publicly on Twitter?
Jason Furman [00:02:58] I had stopped being interested in sports from about age 14, and then when we moved here, my wife said that I had to get my children interested in sports because she was afraid they’d get picked on in the playground if they didn’t know all the names of the players on all the different teams here. So I did this for the sake of my children and it overshot the mark.
Jason Bordoff [00:03:19] Yeah, you’ve bet you’ve been quite passionate about it. And I gave Ed Miliband a hard time on this podcast about the 1986 Red Sox and Mets, although I think since then Boston’s had a pretty good sports run in various places. So congrats to you on that. All right. Turning to the economy, energy and climate, this is an energy and climate podcast, so we’re going to focus on that. But that is not your day to day area of focus and expertise. So maybe I’ll just start for people listening with what is in the news. This will come out in a couple of days. So people will have already read a lot about the the deal to to raise the debt ceiling or to defer the debt ceiling. Maybe it will have passed and be signed by that point. But just your take on the deal and what it means for the economic outlook, what it means for this particular issue, which raises its head again and again.
Jason Furman [00:04:05] Yeah, Well, first of all, for listeners of this podcast, you already know there’s one piece of good news in terms of what’s not in the deal. Nothing that gets it. Any of the Inflation Reduction Act. And I’ve talked to people close to the Republicans and I think really a month ago they thought they were going to get something, you know, not the repeal of the Inflation Reduction Act, but they’d get some scalp, some token thing, some something. And the fact that they got nothing just emphasizes how passionate the Democrats are about that law were unwilling to undo any of the climate provisions. Now, I think it’s a problem. I wish there was a national consensus around that law. There isn’t. And so if you have a Republican president, there is probably going to be some effort to do something about it like there was with the Affordable Care Act. But that wasn’t in it in terms of what was in it. There were adjusted for inflation cuts in non-defense discretionary spending over the next two years. That’s where a lot of different things that the government does lives isn’t, I think, the ideal policy. But, you know, it’s reasonable in a divided government, you got something between the views of the two parties that are controlling that government. And then there were some other sort of odds and ends. The thing I found most galling is they’ll be $21 billion of funding for the IRS rescinded and that will increase tax cheating, increase the budget deficit. And as you know, unfortunate thing that I think the Democrats had to concede.
Jason Bordoff [00:05:45] Yeah, I guess that’s is that am I right? That’s part of the way that it seems like one side of the aisle is claiming there were cuts to spending made and another side saying not and there was some shifting going on including that IRS.
Jason Furman [00:05:56] Yeah, yeah. I mean, basically the legislation that Congress voted on formally to reduce the to to extend the debt limit through 2025, that does cut non-defense discretionary spending. But there was then a side deal that says we’re going to buy back the money we wanted with things like, you know, reducing IRS funding. And that side deal is one that is, well, enforceable because the law includes a fallback if you don’t come to an agreement at the next stage that would cut veterans, that would cut defense. And no one’s going to want to see that fallback going into effect.
Jason Bordoff [00:06:32] Yeah, I have. There’s a lot of things I’d like to ask you about the deal, but we will run out of time to talk about issues more near and dear to an energy and climate podcast. So one thing you said, again, not cut or pare back is the Inflation Reduction Act. But, you know, we don’t have national consensus on this. As you said, there had been a view that there was something more resilient, more robust, more durable about carrots than sticks. If you had a carbon tax, you could imagine one side of the aisle might pull that back immediately if they were in control. If we’re putting federal dollars to work to give subsidies to companies and create jobs and see renewable energy deployment, including in red states, you don’t have as much experience with tax benefits being rolled back by either party. But it sounds like with climate, you think maybe, unfortunately, that’s wrong.
Jason Furman [00:07:20] I think we don’t know yet. It is just such an incredibly polarized issue. I mean, 15 years ago, the Republican nominee for president was in favor of cap and trade. John McCain leading very conservative Republicans like Lindsey Graham would talk about climate change being a problem. And in the last 15 years, it’s become an issue that if you’re a Republican, you’re sort of not supposed to care about. And if you’re a Democrat, you care about it not just on a policy ground, but probably in all sorts of virtue signaling ways that might even turn Republicans off. Now, I do think that the subsidies for climate change are going to a set of players that are, you know, more politically powerful and better politically connected than the subsidies in the Affordable Care Act. The Affordable Care Act was going to a lot of poor people without children who just weren’t that powerful. But if they were powerful enough to ultimately keep the Affordable Care Act in place. You know, this one, you know, there’s a lot of businesses in Texas that are getting a lot of money from these subsidies and aren’t going to want to see them go away. So my hope is that the powerful interests will overcome the sort of ideological aversion. But I think the jury is out and this isn’t yeah, this isn’t obviously more politically sustainable than another route would have been.
Jason Bordoff [00:08:48] Yeah. And the other energy and climate thing, not in it, which probably would have been helpful and we’ll see if it is is is has legs in the next Congress is all this issue all the questions around permitting reform and whether we can get provisions in there, particularly around transmission lines for clean energy, which we need to build at a dramatic scale and speed we haven’t done before. So that was one other thing that might have been part of this, which was a little more modest in in the final form.
Jason Furman [00:09:15] Yeah, I think it’s disappointing that it was more modest in the final form. And and look, there are I think part of why that happened was there were a lot of Democrats who still are skeptical about some of the things you need to do to speed things up, that it applies to lots of different type of energy, shortens NEPA reviews and the like. And so I think, you know, I think it was a little bit more on the Republican wish list than the Democratic wish list. And I think the Republicans didn’t prioritize it on their wish list. So it’s going to take Republicans being a bit more passionate and those Democrats that remain skeptical, which is not all Democrats, but some Democrats are going to need to become a bit less skeptical for it to move forward.
Jason Bordoff [00:09:57] Yeah, we need to make it much easier to build transmission lines. There are, as you said, some particularly Republicans who want to make sure that extends to make it easier to build other pieces of an energy infrastructure like like oil and gas pipelines. And we do have to do that while preserving fundamental environmental protections. But surely there’s a way to make that process work more efficiently. At the same time, not easy to do, but we’ve got to figure out how to do both if we’re going to increase renewable energy and other forms of clean energy again at the scale and speed we need. The IRA will do a lot to help accelerate that. Our friend and colleague Brian Deese had an op ed in the New York Times a day or two ago. You tweeted about it and I think said it was you saw Brian taking a well-deserved victory lap for the IRA. So why do you think it is well-deserved? Why does the. From a climate standpoint or an economic standpoint, what how do you think about the Inflation Reduction Act as a piece of policy?
Jason Furman [00:10:55] Yeah, look, I mean, I wish we had really clear comparable over time numbers on the investment. If you look at the press releases and there’s a number of different websites that compile them, there are just an extraordinary number that are making announcements about different investments, different deployment.
Jason Bordoff [00:11:17] Different expenses are going to cost us 400 billion over a trillion that that’s your right.
Jason Furman [00:11:22] And then the latest estimates are that it’ll cost more, which is great news for climate change and less good news for that for the budget deficit probably. You know, I’d love to make progress on both, but I’m definitely more much more worried about climate change than the budget deficit. So I don’t I don’t mind.
Jason Bordoff [00:11:41] If the spending estimates are much larger for you. That’s a feature and not a bug.
Jason Furman [00:11:46] That’s a feature, not a bug. And by the way, I think it is very likely that some of the offsets that were helping to pay for the Inflation Reduction Act are coming in a saving more money than they were originally estimated to save. That includes things like the, you know, corporate minimum tax. The Joint Committee on Taxation assumed a much smaller tax base because they were working with a baseline that was a year old. And if they had even just updated their baseline, they would have gotten larger numbers for that. There was an excise tax on share buybacks. It looks like they’ll be less behavior that undoes some of the effects of that tax than maybe they were assuming. So I do think, you know, if you look back a decade after the Inflation Reduction Act, you’re probably going to find the costs were larger, the savings were larger, too. My guess is the costs were underestimated by more than the savings. So on net, it’s less deficit reduction than originally estimated. But you don’t want to just look at one half of it to, you know, assess what what what errors were made.
Jason Bordoff [00:12:54] As you said, if you’re with one believes, as I think we both do, about the urgency of tackling the climate change problem, you make trade offs maybe second or third best solutions are are acceptable because not everything is perfect. So there are a lot of values we have, including acting on climate. One of those is progressivity and distributional impacts of policy. You had a really interesting talk I saw recently where you noted that when we think about traditional approaches to maybe put a price on carbon, like a carbon tax, there’s a ton of analysis around the distributional impacts. How much does it impact low income versus high impact high income consumers? But you noted really very little analysis like that is done for policies based in subsidies. Can you talk a little bit more about that? And how progressive is the IRA from a climate standpoint?
Jason Furman [00:13:46] Yeah. So this is something that’s long bothered me that yes, no one’s ever going to talk about a carbon tax without immediately jumping to, Oh, but who’s paying the carbon tax and is it regressive? The other thing about a carbon tax is it generates revenue and if you use that revenue, you can hand it out to people and make the thing as a whole progressive when it comes to the Inflation Reduction Act that we’re talking points of, like here’s how much a family will save in their electricity bill. But even those talking points didn’t take into account that a very large chunk of electricity that’s being subsidized is for commercial and industrial use, not for families that, you know, you do something like the tax credits for clean vehicles insofar as you can expand production as quickly as you might like, some of that’s going to go into higher prices and higher profits for the EV makers. And so there just was much, much less attention to what the distribution was. And I think a reasonable estimate of the distribution of the climate provisions was that they were somewhat regressive, giving unbalanced, larger benefits to high income households. A lot of that coming through the benefit that it had for companies. To be clear, I think things are a trade off. I still support the legislation, but I think that’s a downside of this approach and the fact that it lowers revenue and thus doesn’t really give you anything to compensate for that is a downside too. And, you know, I think it’s really important that we don’t let partial analysis substitute for comprehensive distributional analysis. You know, the talking point about your electricity going down or we have a new program that’s going to create 500,000 jobs installing, you know, solar panels or whatever it is, you know, 500,000 jobs. I made that number up, by the way, just for the sake of argument. But 500,000 jobs installing solar panels, You know, the bottom third of Americans, there’s 110 million people in the bottom third. You know, 500,000 jobs aren’t going to provide compensation to most of them. And by the way, in a full employment economy, you create jobs in one sector, you’re probably going to see somewhat higher interest rates and fewer jobs in other sectors. So I think it’s disappointing. And by the way, a place where it’s even more extreme is on regulatory approaches. If you require people to buy a clean microwave, they’re probably going have to pay more for that microwave. That may well be worth it given all the constraints we have in public policy. But we shouldn’t kid ourselves that, you know, electricity standards for appliances and for cars are somehow, you know, don’t have any distributional impact at all. They have one, and it’s probably an unfortunate one that should be on the negative side of the ledger when evaluating those approaches.
Jason Bordoff [00:16:56] And just so people understand why that is for a subsidy based policy like like the IRA that’s gonna let you make energy cheaper. And high income households probably tend to use more energy than low income. But I think what you’re referring to is what economists call the incidence of tax policy. If a tax benefit is for a company like a clean energy company, how much accrues to the benefit of that company, how much is passed on to consumers? Is that the point you making.
Jason Furman [00:17:21] Is two things. One is electricity subsidies help people, that is more electricity. But then the more important one was, yes, that second one of the tax incidence that if you’re subsidizing a company, that partly they’re going to capture it in the form of higher prices and higher profits, and partly they’re going to pass it along in the form of lower prices for consumers. And, you know, my guess is for things like the ITC and the pizza, most of that will be passed on. But I’m not sure. I think with the tax credits for vehicles, I think there’s a more plausible case that a larger share of that will be pocketed by companies that are able to raise prices because of these tax credits.
Jason Bordoff [00:18:07] So what does that concern about distributional impacts mean for how climate policy should be designed? The Biden administration is not pursuing putting a price on carbon. It’s it is tax credits, subsidies. And then also what you just said a moment ago, regulatory approaches like requirements for cleaner power plants or cleaner vehicles, which may impact the cost of those of those goods. How do you how do how should policymakers address what might be adverse distributional impacts in terms of progressive, progressive progressivity?
Jason Furman [00:18:37] The my most modest desire would be that people are honest and clear with themselves and. Just sort of stepping back from the particular. How would you address it here? I’m concerned that there was a view that a carbon tax is best. But these types of industrial policy and subsidy approaches are more politically feasible. So let’s go ahead. I am completely fine with that. But for some people that’s morphed into no, actually a carbon tax is a problem. It’s too slow, it’s too late. It raises costs for the wrong people. You know, it’ll be repealed a minute later, etc.. And so my modest thing would be to sort of don’t lie to yourself about it. My view in economic advising in general was I thought my job was to make sure President Obama knew, you know, here’s this idea, here’s the pros, here’s the cons, here’s another idea, here’s the pros, here’s the cons. He might decide idea A was better than idea B, but still go ahead would be because of political feasibility or some other consideration. That was fine. I just didn’t want him to be in a position where, you know, maybe he wanted to fight for a pay the cost of getting it done. And and then Discovery couldn’t. And, you know, and I think it’s important to understand we do not have any proof that the subsidy approach can work at the scale we need for climate policy. The what was just done in the Inflation Reduction Act is the biggest thing we’ve done in the history of this country. It’s also the equivalent of about a $15 a tonne tax on the electricity sector. Recent research by John Vaseline Neela Hoekstra and Catherine Wolfram found that if you modeled a $15 a tonne tax in the electricity sector, you would get about the same emissions reductions that you’re getting from the Inflation Reduction Act. You’d get them a bit differently. By the way, the the carbon tax would give you more of a shift from coal to natural gas, whereas the subsidies give you more of a shift from fossil fuels as a whole to wind and solar. But the net emissions reductions would be about the same. That’s useful because we know that first of all, we need reductions in all the sectors of our economy, not just the generation of electricity. And second of all, the social cost of carbon. You can sort of debate the set of assumptions used, but the numbers people are using now are numbers closer to $200 a tonne. So we’re just not yet at the scale that we need to be at. And I don’t know that we could afford to use the subsidy mechanism to get us all the way from the scale we are now to the scale we need to be. And so I’m not yet willing to say we’ve proven that subsidies work and carbon taxes don’t work. We’ve proven that subsidies work for something that is modest compared to the size of the problem. Probably modest, by the way, compared to what Europe is already doing through its carbon taxes. And so we still it’s still an open question of if you want to do this at the scale, we need to what is the politically feasible way to do that? And I would keep a carbon tax very much open and alive for that purpose.
Jason Bordoff [00:22:10] Yeah, I think you make a really good point, which is there’s a political economy politically feasible. We got the IRA done. We couldn’t get a cap and trade done, and maybe that proves that success. But but they ask the question is, will it be will it be effective and how effective can it be in in getting the scale and speed of emission reductions we need? And I think there’s a lot of promise in it now we’ve got to execute and implement. That’s hard and that raises a bunch of other things I want to come back and talk to you about. You mentioned a few phrases I’m jotting down like jobs and industrial policy and social cost of carbon, and I want to come back to all of those and more. You mentioned jobs. You made up the number, 500,000 jobs. This is often something politicians point to as benefits. When President Biden says when I think climate, I think jobs is green jobs a sensible way to measure the effectiveness of climate policy?
Jason Furman [00:23:03] No, not at all. If we were in a deep recession right now, so in 2009, when we did a set of stimulus, including green jobs, that probably was net creating jobs in the current moment and generally where the economy is, we have an unemployment rate of about three and a half percent. And the Fed, if anything, is trying to raise that unemployment rate, not lower it. And so if you create more jobs in one sector, that’s going to add a little bit of pressure to inflation. And the Fed’s going to undo that by raising interest rates a little bit more and costing jobs in another sector. Another way of looking at that is basically sort of most everyone who wants to work is working right now. And so we’re roughly at capacity as an economy. And so the way to think about industrial policy, whether it’s for the clean energy transition, for microchips, for anything else, is to ask yourself, would it be better for the economy if we take the hundred units of stuff we’re making or the 100 people were employing and shift two of it from what’s happening now to this new activity? Is investing, you know, is the clean energy transition better than the alternative? Is microchips better than the alternative? I think, by the way, the answer to that is almost certainly yes.
Jason Bordoff [00:24:30] But better better in terms of the quality of jobs. I mean, one thing.
Jason Furman [00:24:35] Know about in terms of all the jobs that are in terms of like the well-being of us as an economy. Oh, I don’t think it’s better in terms of the quality because.
Jason Bordoff [00:24:42] Because I was going to say one of the responses, I imagine some sitting in your former office you ran CTA and elsewhere might say in response to what you just said is, but there are better jobs. They pay more. Maybe they’re unionized. Is that.
Jason Furman [00:24:55] I think we have no idea if that’s true. And frankly, if that’s true, that’s probably a bit of extra upward pressure on inflation and even more of an increase in interest rates. So unless you’re talking about this activity somehow being higher productivity than the activity that’s replacing, I don’t see why you’d presumptively think it was higher wages. And by the way, it was higher productivity. We wouldn’t have needed all these subsidies in the first place. So I don’t think I’m quite confident it wouldn’t raise the quantity of jobs. I think it’s not that plausible. It would raise the wages and certainly no one’s proven that. And then there’s the last issue, by the way, which is any time you’re accelerating reallocation in the economy, that might on net actually raise the unemployment rate. If you are increasing the number of jobs lost in coal and oil and you’re increasing the number of jobs gained in wind and solar, there’s something in the labor market called the matching function that matches people who are looking for jobs and employers that need jobs. And in a circumstance like that, the matching function starts working less well. And you might actually have consistent with any given inflation rate, you might need a higher unemployment rate. So I think if anything, it is more plausible that by increasing reallocation in the economy, this will on net result in a steady state, slightly higher unemployment rate than would otherwise have been the case. And to be clear, I don’t think that’s very large. But if you had to ask me my guess for the sign of the effect this would have on jobs, it would be negative, not positive.
Jason Bordoff [00:26:41] The other phrase you used was industrial policy, which seems to be back in vogue. And I think you tell me when you are climbing the economic policy ranks. A decade or two ago, you know, a neo liberal economic consensus would have been to frown upon whatever one might mean by industrial policy. What do you mean by industrial policy? And has that changed? Is there a different way of thinking about economic policy now, particularly on the Democratic side of the aisle? Is that a good thing or a bad thing?
Jason Furman [00:27:07] Yeah, some of it’s semantic. You know, investments in roads and bridges and ports. This administration puts under the heading of industrial policy. I put that under the heading of public goods provision. And, you know, President Obama was enthusiastic about it. President Biden is enthusiastic about it. I think that aspect of it has not changed. Same thing subsidizing wind and solar. That basically is about, you know, an externality that’s a very classic. Goes back over 100 years. Peruvian tax or Peruvian subsidy because there’s some externality. So I don’t think trying to reorient how we make our electricity is industrial policy. I think where it veers into industrial policy is when you have by American rules, when you have more rules about where the electricity is made, how it is they do their contracting with their workers, where the batteries are sourced from, and then in some other domains, I think the microchip effort is almost entirely industrial policy, and that is the government giving money to companies to, you know, to to do stuff. So I think that, you know, to some degree, my guess is, especially in the climate space, most of what’s happening I’m enthusiastic about and don’t actually think it’s that new a paradigm and think the sort of industrial policy, blah blah is being oversold. I think insofar as the industrial policy is not being oversold and is real and new, then I think it’s probably more of a negative than a positive. So I guess the short version of that would be, you know, when it comes to industrial policy and the climate change, you know what? You know, a lot of it’s not new and, you know, some of it’s not good.
Jason Bordoff [00:29:05] Yeah. So help us out. Help us understand what concerns you about it. When you look at what I think might might be called industrial policy, say, in China over the last, say, 15, 20 years. And as a result, most of the world solar panels are made there. Most of the world’s batteries come from there. If one were to say we see a lot of growth in clean energy industries and we want those industries, we want those firms to be American, we want the economic benefits to accrue here. What concerns you about that?
Jason Furman [00:29:39] You know, first of all, China has had its successes, and I think solar and batteries are some. China’s had a lot of other things in its industrial strategy over the years that haven’t worked out that well. And I think in particular, the tech sector doesn’t lend itself to industrial policy, and they’re more likely to mess that up than to succeed. So I think it’s an open question as to whether China can get to anything close to American standards of living by pursuing this type of industrial policy. It did the easy part with it. And by the way, our government is very different from China’s government. China set central goals, but they actually do a lot of these policies at the provincial and city level. And there’s actually a lot of political competition in China in a way that there isn’t here where if you do a good job as mayor, you know, you get promoted, etc.. So the fact that China managed to pull something off does is not, to me, a proof that the United States can pull it off, first of all. Second of all, I guess I just don’t share the goal. I want us using as many solar panels and wind turbines as we can in this country. And I don’t really care where they’re made. And it goes back to the conversation we’re having before, you know, if you don’t think it’s going to change the unemployment rate, where these things are made and you think that if we’re better at something in this country and higher productivity, that you don’t really need to redirect your subsidies towards it, then you’re just talking about risking creating new jobs and new sectors. They’re actually worse than the jobs you were creating before.
Jason Bordoff [00:31:25] And as part of your concern that if you require they be made in the U.S. or elsewhere, they may be higher costs. I think you I’m paraphrasing something you said once If you believe climate is existential, you might care less about where solar panels are made than how cheap they are. And how quickly we can deploy as many of them as we can. So is there an assumption in what you’re saying that those buy American provisions probably raise costs?
Jason Furman [00:31:47] Yes, I think by American provisions, almost by definition, raise costs. And, you know, there are a very special set of assumptions called infinite industry that you, you know, have higher costs upfront, but you’re a bit later on. Those assumptions really are quite special. And, you know, we’re in a country where if you have a startup business with some visionary idea that’s going to pay off 20 years in the future. There are a lot of people willing to invest in your business. And so the plausibility of an infinite industry argument when there’s all this venture capital and private equity chasing green innovations that aren’t going to pay off for a long time, I think it’s just that much less plausible than the argument ever was in in the first place. And so, yes, it sounds great to make the solar panels, But, you know, Americans are also, you know, we’re even better at making services than we are at manufactured goods. There’s more jobs in services than in manufacturing. I don’t think I think we should care a lot about where electricity comes from because the market’s not going to get that right. But you know, where stuff is made. There’s nothing special about solar as compared to where patio furniture is made or where, you know, where where exercise equipment is made. I don’t think we care if that’s made in the United States or China. I don’t know. I don’t think solar panels are any different.
Jason Bordoff [00:33:19] Yeah, well, you’re raising I think the second are you know, we’ve been talking about one argument for industrial policy, which is domestic economic benefits, jobs and then another security resilience. Jake Sullivan gave a speech a few weeks ago at Brookings where he highlighted the security and resilience reasons to diversify supply chains to maybe think differently about heavy dependance on China for imports than maybe we have in the past. You heard Joe Manchin in the course of the negotiations over the Inflation Reduction Act say, I don’t want to go from dependance on oil, from OPEC to dependance on China for batteries. Is there a is there an argument there? And is it should it be a concern if 90 plus percent of your batteries, your solar panels, your critical minerals are made, produced, refined or processed in China?
Jason Furman [00:34:08] I think resilience is worth thinking about. I think, again, in the microchip case, there’s a very good argument for you don’t want your advanced microchips. You know, if OPEC wants to shut off oil, it can do that in a heartbeat. And within you’d know better than me, but within whatever number of months you’d run through your inventories.
Jason Bordoff [00:34:30] No one can Inventories that are lower today because of the administration’s approach to the spark.
Jason Furman [00:34:35] But no one can shut off the wind or shut off the sun. And it’s not like the flow of, you know, new solar panels or the flow of new wind turbines is anything resembling the flow of oil. You’re sort of each day pulling the oil out of the ground you need to use. Like for the next day. I may realize it’s refined, but to sort of replace the stuff that’s refined it sort of oil is almost like a just in time production system. And that’s not the way renewables are. So I think the you know, China could shut off our cell phones by not selling us anymore iPhones. They could do it with clothing and shoes. They could do it with lots and lots of different things. And the oil analogy, I think, is really, really strained when you’d still have the capacity to make the energy from the existing wind and solar. Now, one should be thoughtful about it, though. Certainly something like. You know, some of the minerals that are key to all of these different things. Yeah, I think that is probably worth figuring out how to diversify this rare earths in a lot of different places on the planet Earth. We shouldn’t have to get all of them from China.
Jason Bordoff [00:35:56] And that is I mean, I think you’re making a point, well, that your colleague at Harvard, Megan O’Sullivan, and I, I think made in Foreign Affairs, which was the difference between sort of flow and and a finished good. Right. An input to a finished good is different than the daily flow of energy itself. If somebody cuts off like Russia weaponizes gas exports to Europe, you know, there’s a risk of freezing in your home in Europe. If you were to cut off exports of solar panels, you would raise the cost of new solar installations. It wouldn’t affect the electricity you’re consuming today with solar installed on your roof. The same for electric vehicles and everything else. But but I presume you do think or tell me if you think that. Coming out of COVID on all sorts of supply chains, including energy. But other things, too. Companies are thinking differently about diversification and resilience, whether it’s geopolitically motivated or a cyberattack or a severe, you know, natural disaster. If you’re 90% dependent, whether it’s iPhones or solar panels, maybe, maybe that is a concern. Does that take you to some of the stuff, say, Jake was talking about in his Brookings speech or the talk of friend shoring? Do we should we care? Where is it important that we import from a more diverse set of players? And is it important that we have good diplomatic relationships with with the people we’re importing from? Or, again, if China makes the cheaper solar panels and we want cheap solar, you know, so be it.
Jason Furman [00:37:25] Yeah. So, yes, I think there is something to all of that. I think there’s a disconnect between what the administration says and what they do. If you took resilient supply chains and all of that seriously, you would reengage with the Trans-Pacific Partnership, a trade agreement that included a lot of countries in the Pacific. A lot of countries, you know, on both sides of the Pacific and that President Trump pulled us out of and that, you know, President Biden has been hostile to. He has an Indo-Pacific economic framework that is just really, really timid compared to any set of, you know, frameworks that we’ve seen before. There have continued to be trade fights with all sorts of our allies. So frankly, I’ve been disappointed that I thought this administration would be better than the Trump administration in that they would, like the Trump administration, understand the China problem, but unlike the Trump administration, would not be trying to sort of wage economic war on every ally simultaneously and within less than more against China. And I think that really hasn’t happened, and that’s been disappointing to me. So I don’t think you pull back from free trade, you know, the Buy American thing, we’re not endearing ourselves to Europe. And, you know, when it comes to, you know, batteries for our cars and, you know, I think Europe overreacted and they’re like overly mercantilist about where they make stuff. But, you know, I think they’re sort of right. They just care more than they probably should. So I think there’s a real disconnect between some of the correct things the administration saying and what we’re doing.
Jason Bordoff [00:39:11] To paraphrase, I hear you saying that there are legitimate concerns to excessive dependance on China for clean energy, maybe for other things, too. And you would want to see the response or maybe a bit less toward make everything at home and a bit more toward more trade agreements with allies, more free trade agreements, more partnerships. And actually, free trade seems to be in disfavor on both sides of the aisle right now.
Jason Furman [00:39:32] Right. And you have to have. Yes, I agree with that. And you have to have a very broad notion of friend. It can’t be that your friend is like Canada and the United Kingdom. I mean, they’re wonderful friends. Don’t get me wrong, your friends have to be basically every country on earth other than China. And so, you know, India, we don’t have an incredibly tight alliance with India, but we have good relations with them. And it’s just a form of diversification, because what are the chances things go wrong simultaneously with four different countries? Or, you know, if India has an interest in exporting to the United States, it’s going to be pretty reluctant to not do that. Even if they were friends with China, which I didn’t want them to. So I think this is a little bit less friend shoring, which to me is too narrow and more diversifying. But, you know, look, part of why these companies are in China, though, is China is a huge market and China’s really good at this stuff and has good infrastructure and good workers, etc.. So Apple, for example, has, you know, found that it’s hard to do things with anything close to the efficiency. It can do them in China. And so to some degree, I think this is the government needs to do things, but an awful lot of what the government needs to do is create set of rules and then businesses are going to make these decisions. And if we had more trade agreements around the world, businesses would probably make a different set of decisions than some of them are making right now.
Jason Bordoff [00:41:00] Are the your concerns about sort of tying things to Made in America? Does that extend, you know, the Inflation Reduction Act? And it even started obviously with the Green New Deal, which was let’s solve let’s kill a lot of birds with one stone. We’re going to make progress on climate. And that can also help advance goals of equity and justice and labor standards and unionization and worker rights. Is that how do you think about that way of thinking about about policy targeted at certain problems like climate change?
Jason Furman [00:41:27] I think there’s just this sort of problem that Democratic administrations like to do. Industrial policy and Democratic administrations attract people whose background is less in. Industry and more in trying to make the world a better place in lots of different respects. And I think if you want to do industrial policy well and a Democratic administration wants to establish a new paradigm, they need to be just relentlessly focused on the goal. And if that goal is emissions reduction, that’s the goal. If you try to add six other goals, you’re going to make it harder to get them done. And the thing that bothers me most is when I hear people arguing that all these goals go together, you know, oh, if we have child care and we have union labor and we hire disadvantaged workers and we do it in this location, the you know, we’re going to do that much better in terms of emissions reduction. You know, these businesses are run by people that are pretty good at figuring out how to maximize their profits. If your background is developing policy on child care and you come into government, it’s not like you figured out some new insight for how businesses can, you know, attract workers and increase their profits. You know, if people in the government wanted to say, you know what, we’re going to get 5% less emissions reduction, but we’re going to advance these six other goals and on balance, it’s worth it, then maybe I’d say, okay, let’s sort of haggle about the numbers. You know, what’s the correct percentage reduction on emissions? How costly is that for us as a society? How good are the other goals? But when I hear people say, Oh, there’s no tradeoffs here at all, by doing these six things simultaneously, we’re going to make everything happen better. That I really, really don’t trust the rigor that went into any of that thinking.
Jason Bordoff [00:43:18] You mentioned the social cost of carbon before the kind of metric government policymakers used to evaluate. Is it worth paying for a certain regulation to the benefits justify the cost? And when we served together in the Obama administration was around $50. Now you said it’s around 200. I’m wondering if you think. Economics has sufficient tools to evaluate things like that. We can argue about global versus domestic values and what the discount rate should be. But when you think about 20, 30, 50 years from now, what climate change might entail really, really potentially severe impacts on food security, on migration, on water scarcity globally, the kind of first chapter of ministry for the future with mass casualty events. Do we do do economists know how to assess that or do we need a different toolkit to figure out what to do about it and what policies are sensible?
Jason Furman [00:44:14] Yeah, when Ministry of the Future got to the point where we needed student loan debt relief in order to solve climate change, I started to think that maybe this was some sort of, you know, intersectional exercise of a set of policies rather than relentless focus on the one that was highlighted in the excellent opening chapter of that of that book. But we can talk about that another time or later in this in this discussion. I think the social cost of carbon is a really useful construct. Again, we can debate about what the right number is. Of course, it’s not truth, but it says let’s put down, you know, 20 different assumptions. How much will a tonne of carbon force in terms of, you know, change in temperature? How much will that temperature do to agriculture, how much will it do to lives, etc.? Each one of those assumptions you’re writing in pencil and then a new paper comes out and you are race that pencil and pencil and something that’s a little bit more accurate. And that’s the process that’s been happening since the social cost of carbon was first launched over a decade ago. And I don’t know any way to sort of not do something like that. You know, I think it also helps that there’s very few regulations that are out there that depend like really precisely on the number. You know, they work with that number and they don’t work with some other number. You know, if you had to ask me, by the way, my own hunch, my guess is because of adaptation, the true social cost of carbon is going to be lower than what they have, that they probably insufficiently model that although they take some adaptation into account, as are the cost of dealing with climate change, will probably end up being lower too, that some of the cost estimates are based on sort of a fixed technological menu and that technological menu will improve a lot. So I am optimistic that the costs of stopping climate change and the cost of climate change both might pleasantly surprised us in the same direction.
Jason Bordoff [00:46:28] The you talked earlier about how sending the right price signals makes a lot of sense. People conserve energy, they make different choices. Businesses do as well. This administration’s undertaken enormous efforts to try to keep the price of energy, particularly gasoline, lower, not higher from the standpoint of good policy, not politics. Do we want oil prices to be higher or lower?
Jason Furman [00:46:52] Oh, we want them to be higher. We want the price of gas, including.
Jason Bordoff [00:46:55] When you think about the concern not just on climate, but macroeconomics, when you’re as an economic policymaker, you’re concerned with the growth of the US economy. You want you want oil prices to be higher.
Jason Furman [00:47:05] I like oil prices to be higher. I’d like us to be less dependent on oil because it is a geopolitical vulnerability. It’s a sort of cyclical macro vulnerability for the economy. And of course, it is carbon emissions and the like. You know, I have a huge amount of compassion for where the administration ended up on that. I mean, people voters are really passionate in the United States and around the world about the price of gasoline. It is hard to have anything resembling a rational, coherent conversation. There are days when I think the very best thing electric cars will do for us is get us out of the like, ridiculous politics around, you know, gasoline prices. I mean, every year as you approach Memorial Day and gasoline prices are going up because that’s what they do as a seasonal matter and the parties start pointing their fingers. I mean, I just want to live in a world that’s more rational and sane than that, also one with lower emissions. So, yeah, the policy here is clear, but the politics, unfortunately, I think are correctly perceived and clearly in the opposite direction.
Jason Bordoff [00:48:14] And in terms of the economic impacts of higher oil prices, they obviously affect people at the pump, whether we’re importing or exporting in a similar way as a global price of oil. But if we’re a net exporter of oil, is it a positive from from a macroeconomic standpoint, is it good for GDP if oil prices are higher? Is that how is that now the new world we’re in? Because the U.S. is such a large producer.
Jason Furman [00:48:37] Right? When it comes to GDP, broadly, an increase in the price of oil raises business investment. It lowers consumer spending on everything outside of oil. And the net effect on GDP is pretty small, and it’s hard to tell whether it’s positive or negative. It does redistribute, though. So if you look at sort of 90% of people are worse off, 10% are much better off. And so that would be the reason GDP stays the same. So even if GDP stays the same, it would be undesirable. And by the way, made up that 9010 and probably it’s more like 97 three or 99 one. So it’s it’s the, you know, as much the redistribution that is undesirable as the aggregate, you know, macro impact it put an oil price nation. Put another way inflation goes up when oil prices go up and that affects 100% of consumers and then it benefits the owners of oil companies and the people they hire. So even if that’s a net neutral for GDP, I think we’d still rather. You know, avoid that vulnerability.
Jason Bordoff [00:49:47] Yeah. With all the attention paid to inflation in recent months and in the last year or two, how big a role does energy play in the outlook for inflation and concerns about inflation?
Jason Furman [00:49:59] Right. Energy has played a really big role in headline inflation, where you’re measuring the cost of everything. If you look at what’s called core inflation and strip out food and energy, I think it’s played relatively small role in core inflation. Not everyone agrees with me, but I think I’m right and I’ll explain why. You know, and just to understand, core inflation is currently growing at about four and a half percent. Prior to all of this, it was growing at 2%. And it’s still growing at that pace, even though over the last year energy prices have fallen. Even though Brant is currently at about $75 a barrel, Brant oil, which is only a little bit above what it was before COVID and in fact, adjusted for inflation, Brant Oil is cheaper now than it was before COVID. So energy, just if you look at the last three and a half years, it had a big up, but then it had a big down and on balance it stayed about the same. And yet we still have a lot of inflation. The reason I think it doesn’t bleed through as much to core inflation as some people think is you get two different effects. When the price of oil goes up, jet fuel goes up, and so airfares go up. So core inflation rises, but families are paying so much more for gasoline that maybe they can’t afford to eat out or can’t afford to buy as much clothing or whatever. And so price increases in other areas are lower. And so when you take the mechanical pass through plus the the behavioral impacts of higher oil prices, I think the evidence bears out that it has a relatively small pass through to core inflation, but has a very big direct role in inflation.
Jason Bordoff [00:51:50] Is pushing a faster energy transition, inflationary or deflationary?
Jason Furman [00:51:55] It’s neither. Inflation is whatever the central bank wants it to be. If you have a shock in a given year, yes, that could be inflationary or deflationary. But if you talk about anything on a time horizon of five, ten, 15, 20 years, it’s going to affect the real economy, jobs, growth, productivity. The nominal economy is is what the central bank wants it to be.
Jason Bordoff [00:52:19] And oil prices have been sliding. There’s question now about whether OPEC will cut again, partly because of concerns about the macroeconomic outlook. So do you have a crystal ball and what is the outlook for the U.S. economy after this debt ceiling deal and the global economy? China, elsewhere.
Jason Furman [00:52:34] A crystal ball on OPEC. I would call up you and find out what you thought.
Jason Bordoff [00:52:40] Well, if you tell me what they what the economy is going to do or tell them, I might have more certainty about which direction they’ll go.
Jason Furman [00:52:46] But I think there’s going to. Be On balance, the global economy will stay the same or maybe get a little bit stronger. China’s doing quite well and is quite growth oriented. China does not have much inflation and so it has real room to step on the gas. I think the US economy, on the other hand, will probably weaken some, although, you know, I remain more concerned about inflation than I am about recession for the United States.
Jason Bordoff [00:53:21] I surveyed everyone here on what to ask you, and the most popular question was why you learned how to juggle. Do you still juggle and how has that been useful to you in your life?
Jason Furman [00:53:33] I was in Bryant Park, New York, and saw a bunch of people juggling and started sort of doing it with them and then ended up in a whole group of jugglers that met twice a week in downtown New York. Pretty much the best jugglers in the city. I spent lots of time every day on it. I certainly used to make a lot of money adjusted for sort of inflation in the late 1980s. I’m not sure it’s, you know, quite as much as I’m paid on my job now, so I’m not really tempted to leave. And do I do it now only for my children’s birthday parties.
Jason Bordoff [00:54:09] This is unfortunately an audio podcast. If it were a video and we would get a demonstration, but we’ll have you back maybe in person at Columbia to demonstrate in person. Jason Furman, always fascinating to talk to you. Thanks for teaching me so much over the years and today, I appreciate your time.
Jason Furman [00:54:25] Great talking to you.
Jason Bordoff [00:54:31] Thank you again. Jason Furman Thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. The show is hosted by me, Jason Bordoff, and by Bill Loveless. The show is produced by Stephen Lacy and Aaron Hardwick from Post-Script Media. Additional support from Jon Elkind, Noah Kaufman, Sara Time, Sahar Daniel, Natalie Volk and Q Lee Roy Campanella engineered the show. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy, Columbia Dot edu or follow us on social media at Columbia U Energy. And please, if you feel inclined, give us a rating on Apple Podcasts. It really helps us out. Thanks again for listening. We’ll see you next week.
Governments around the world are increasingly turning to “industrial policy” in pursuit of stronger climate action such as the Inflation Reduction Act. These targeted economic measures can build domestic clean energy industries and increase security and resilience. But there are risks to this approach, including higher costs and trade tensions. In the years ahead, policymakers will face a difficult balancing act as they work to expand the availability of low-cost clean energy while boosting their own domestic economies.
What does the shift towards green industrial policy mean for the energy transition? How has this shift manifested in the Biden administration’s approach to climate action? And what new climate policies might be on the horizon?
This week host Jason Bordoff talks with Jason Furman about the rise of green industrial policy, the outlook for the Inflation Reduction Act, and how economists think about climate change.
Furman is the Aetna professor of the practice of economic policy at Harvard University. He is a former colleague of Jason Bordoff in two different capacities, both in the Obama White House and at the Brookings Institution’s Hamilton Project. Prior to his appointment at Harvard, Furman served as a key economic advisor to President Obama, including as the chair of the Council of Economic Advisors. He played a key role in implementing the major economic policy initiatives of the Obama Administration, including the American Recovery and Reinvestment Act and the Affordable Care Act.
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