What’s Worse: Economic Nationalism or a Climate Catastrophe?

By Matthew McMullan
May 11 2023 |
Getty Images

A prominent economics columnist picks the latter.

A New York Times columnist has offered a new defense of the Inflation Reduction Act (IRA): So what if it ends up increasing economic nationalism around the world? Consider instead what it will do to limit the negative effects of climate change.

It’s an interesting argument as criticism against the law mounts. Some people who own large tracts of land don’t want to see wind turbines out their windows. Others say it’s too expensive. Others still worry it will damage American relations with allies in Europe. And then there are those who say it’s picking winners and losers.

The government! Picking winners and losers!

Anyway, Paul Krugman argues they’re all missing the fundamental point of the IRA:

The Inflation Reduction Act, unlike earlier proposed industrial policies, isn’t an attempt to accelerate economic growth by picking winners. It is instead about reshaping the economy to limit climate change. The main reason for doing this via subsidies and industrial policy, rather than through Econ 101-recommended policies like carbon taxes, is political. Emissions taxes were never going to pass an evenly divided Senate in which Joe Manchin had effective veto power, but legislation that would lead to a surge in manufacturing — which is already happening, by the way — was, if only barely, within the realm of the politically possible.

Emphasis added there at the end, because it’s just so nice to see manufacturing growth getting the credit for pushing that bill over the finish line.

But Krugman doesn’t work at the Alliance for American Manufacturing, though, so his focus isn’t on rebuilding domestic industry. If the détente between the U.S. and the European Union over the IRA’s subsidies for American-made clean energy products were to break down? He says so be it:

The main payoff to America’s new industrial policy will come, not from job creation or even improved technology but from limiting the damage from climate change.

And this is why a subsidy war with Europe, if it happens, will actually be a good thing. We want other countries to take action on climate, even if it involves some de facto protectionism.

That’s an argument we’ve basically made ourselves in months past, only we put our focus on what makes the IRA’s domestic content rules so crucial:

We’re using this moment, after approximately 30 years of trade and investment policy that basically encouraged deindustrialization, to reinvest in our productive economy. And this is why the domestic content rules in the IRA are so incredibly important: They’re going to make sure the next generation of energy production isn’t sold to us under the guise of “free” trade, like a solar energy supply chain riddled with credible accusations of forced labor. It’s going to make sure a lot of it is made here, and that Americans experience the economic benefit of that localization.

“We don’t want to find ourselves saying, ‘Well, we cooked the planet, but at least we preserved the rules of the World Trade Organization,’” Krugman writes as he winds down his argument. We couldn’t agree more. Read his whole column here.