The Implications of the Inflation Reduction Act and our Allyship with the EU

In the summer of 2022, the Biden Administration signed the Inflation Reduction Act (IRA) into law. This massive bill allocates federal spending towards reducing national carbon emissions, lowering healthcare costs, funding the Internal Revenue Service (IRS) and improving taxpayer compliance. One of the most significant aspects of this bill concerns clean energy and advancing climate technology. This aspect works in conjunction with the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS and Science Act. All three of these bills invest spending in manufacturing, job creation, infrastructure, and research and development in clean energy. The Inflation Reduction Act directs nearly $400 billion in federal funding to clean energy via tax incentives, grants, and loan guarantees. Clean electricity and transmission received the largest sum, followed by clean transportation, such as electric vehicles. The goal of the IRA, in addition to the IIJA and the CHIPS Act is to improve U.S. economic competitiveness, innovation, and industrial productivity while considering advancing clean energy efforts and encouraging investment. Leaders of the European Union have voiced their disapproval of the U.S. enacting the IRA for fear that it will disrupt the clean energy market, driving investment away from EU member states due to incentives offered by the U.S. However, the EU’s fears have no real merit. The U.S.’s commitment to clean energy generates a net positive on the global scale in terms of addressing climate change and puts no significant dent in Europe’s clean energy economic sector.  

Europe’s biggest concern in the IRA are the incentives it offers for private investment. The majority of funding for the bill is in the form of tax credits which are going primarily to corporations, approximately $216 billion of the nearly $400 billion bill. To be eligible for the full IRA tax credits, corporations must meet a set of criteria. These include prevailing wage and apprenticeship requirements, domestic-production, or domestic-procurement requirements, and in some cases a percentage of critical minerals that have been recycled, extracted, or processed in North America or a country that has a free trade agreement with the U.S. as well as being manufactured or processed in North America. EU leaders believe these incentives will encourage European corporations to relocate to the U.S. and their worries are not entirely unfounded.

During the World Economic Forum in Davos, U.S. governors from Michigan, Georgia, Illinois, and West Virginia Senator Joe Manchin attempted to lure European clean energy businesses to their states, promising cheaper costs of production. German, French, and Belgian leaders all denounced the U.S. politicians’ attempts to strip Europe of their clean energy producers. In response,  French President Emmanuel Macron has indicated that he believes the EU should introduce a comparable spending package to the IRA to bolster clean energy corporations in Europe. Some potential issues with this reaction is that the EU is unable to provide tax credits in the way the U.S. can, as only nation states have this authority. Many nation states do provide tax credits and Germany is already operating under a similar model to the IRA, however it is unlikely it would make a significant impact due to the smaller scale of their clean energy production market. Other EU leaders, such as Dutch Prime Minister Mark Rutte, believe throwing money at their existing system would make no difference, rather they should redistribute funding that already exists in clean energy investment. 

If the EU is content with the current state of the clean energy market, which considering their reaction to any possible shift they are, then they are realistically making a mountain out of a mole hill. Almost half of the funds provided by the IRA will be spent on upgrading, repurposing, and replacing the energy infrastructure and will be used as loans rather than subsidies. The biggest sector the EU may have concerns with is electric vehicles, however the EVs they are already manufacturing will most likely qualify for subsidies. Germany is the only major exporter of cars to the U.S. and Volkswagen is the only corporation that produces large numbers of electric vehicles. Its best-selling model is already being produced in Tennessee, making it qualify under the IRA as a corporation who will receive subsidies. Other major European automobile corporations such as Audi, BMW, and Mercedes already produce in North America as well. Because they all produce in either the U.S. or a nation with a U.S. free trade agreement, they will also qualify for subsidies. 

Concerning our transatlantic allyship, any significant shift would be an overreaction. Although these new subsidies concern European nations, the primary focus should be on coordinating with the U.S. on how to approach the clean energy market. Europe’s trade commissioner, Vladis Dombrovskis said as a reaction to the IRA that the fight against climate change should be done by “building transatlantic value chains, not breaking them apart”. Importantly, the U.S. and the EU need to ensure that they do not battle to drive away business and investment through distortionary subsidies and place reasonable boundaries on the support they are able to give to corporations. 

At first glance, it is reasonable for Europe to approach the enactment of the Inflation Reduction Act with a degree of hesitancy. It appears to threaten their existing clean energy market and disrupt this sector of the economy. Their fears were validated by U.S. politicians attempting to lure these corporations stateside with the appeal of subsidies, tax credits, and easy access to loans. Upon further analysis, however, it is highly unlikely Europe’s clean energy market will be disrupted at all by the IRA. The corporations which draw the most concern are manufacturing in the U.S. and already qualify for most of the IRA’s benefits. It is necessary for European leaders to take a less reactionary stance on the bill and focus on further coordination with the U.S. on how to approach clean energy and climate technology efforts moving forward.

A Case to Update How America Measures Poverty

Millions of Americans experience poverty each day. The idea to measure poverty for the purpose of allocating government resources came about in the 1960’s during Lyndon B. Johnson’s “War on Poverty.” The Office of Economic Opportunity needed a statistical measurement and relied on Mollie Orshansky at the Social Security Administration to provide that equation. In 1967, the United States government officially adopted Orshansky’s measurement as the Official Poverty Measure. With this measure, the government created a threshold of who – based on income – qualifies as experiencing poverty and who does not. The Poverty Threshold is the minimum amount of income needed to avoid poverty, and that threshold can vary for families of different sizes, ages, and members. However, for each size of a family, the threshold throughout the U.S. is constant. For example, in 2018 the Poverty Threshold for a single person was $13,064, but that number will alter when evaluating a family of four. The measurements and subsequent thresholds are used to determine eligibility for government services and track trends in poverty. However, there has been little change to how poverty is measured in the United States since the 1960’s, despite how greatly the nation’s economic context has changed. Therefore, poverty in the United States has been mismeasured for years. There are changes that can be made to the poverty measurement in order to account for needs in the 21st century, and to include those who were previously excluded from the equation.

The Current Poverty Measurement

The measurement that President Johnson’s administration created compared pre-tax income of a family unit to three times the minimum food basket of 1963. To gauge the economic makeup of the country, the Official Poverty Measurement draws upon data from the Current Population Survey Annual Social and Economic Supplement, where 100,000 households are surveyed annually during the months of February, March, and April. However, the income that is calculated within the poverty measurement is not just income earned from work. According to the United States Census Bureau, income can include: “Earnings, Unemployment compensation, Worker’s Compensation, Social Security, Supplemental Security Income, Public Assistance, Veteran’s Payments, Survivor Benefits, Pensions, Interest, Dividends, Rents, Royalties, Income on estates, Trusts, Educational assistance, Alimony, Child support, and other qualifying sources. Qualifying income in comparison to the average annual cost of food is adjusted for inflation using the Consumer Price Index for All Urban Consumers (CPRI Urban), meaning that “it measures the changes in the price basket of goods and services purchased by all urban customers.” Therefore, changes in an urban family’s regular spending habits are accounted for, but expensive expenditures and geographic diversity are not.

This measurement accounts for 88% of the United States population but does not adequately account for sudden and costly expenditures: such as healthcare.  However, some analysts suggest adjusting poverty measurements to the Chain Consumer Price Index. The Peter G. Peterson Foundation “argues that the chained CPI provides a more accurate estimate of the changes in the cost of living by reducing the substitution bias, which occurs when consumers substitute one good for another as prices rise.”  The Chained CPI reflects what people buy before and after a price change, and therefore can provide a more accurate estimate of poverty in the United States based on how people are able to withstand economic changes: to not fall under the poverty threshold.

Gaps in the Official Poverty Measurement

The current threshold is created based upon if a family falls above or below the Official Poverty Measure. One’s total income is taken and divided by the threshold. While this measure heavily relies on food, it is not an adequate representative of how a family in 2022 allocates their funds. The Annie E. Casey Foundation notes that while families previously spent one-third of their budget on food in 1963, it is certainly not the case anymore as housing; utility; and technological cost put a heavier burden on American families. Due to holes in the poverty measurement itself, poverty within the United States is under-estimated and therefore excludes many individuals from obtaining fiscal assistance.

One reason that poverty is under-estimated in the United States is that many people experiencing poverty are ignored in official government measurements. When calculating pre-tax income, non-family housemates are calculated separately than the rest of the family, skewing the scale of need. Furthermore, those in institutions such as prisons, nursing homes, college dormitories, military barracks, foster homes, and experiencing homelessness are not surveyed at all in the poverty measurement: leaving out many who are in need. Additionally, the measurement fails to gage the depth of income. The Official Poverty Measurement has not kept pace with the changes in healthcare policies, tax regulations, and other laws. Furthermore, it fails to account for other social programs families receive such as the Child Tax Credit and the Supplemental Nutrition Assistance Program (SNAP). However, one of the core issues opponents note with the Official Poverty Measurement is how there is no variation amongst geographic regions. The cost of living in a rural area is not the same as in a city. For this reason, the lack of geographic variation within the poverty measurement is one of its main faults.

Supplemental Poverty Measure

The federal government has known about gaps in the Official Poverty Measure since only a few years after it was created. However, research is conducted continuously in order to keep up with a rapidly changing economy. In 1970, members of the Census Bureau, the Bureau of Labor Statistics, and the Department of Health and Human Services formed the Interagency Poverty Task Force to re-evaluate how the United States measures poverty. In 1990, the National Academies of Sciences met again to evaluate the true scope of poverty in the United States. After finding a higher rate of poverty than the Official Poverty Measurement, the Supplemental Poverty Measurement was created. The Supplemental Poverty Measurement accounts for modern needs in a way that the Official Poverty Measurement does not. It includes expenses for food, clothing, shelter, and utilities. Additionally, the equation makes geographic adjustments and benefits, which is one of the core issues with the original measure. The equation adds cash income and non-cash benefits and subtracts work expenses; medical expenses, and child support from the previous total.

However, this new equation is not a full-proof solution. First, the Supplemental Poverty Measure does not account for the value of benefits. For example, one’s housing unit may not be stable, and access to healthcare does not mean that an individual has a comprehensive plan. Another concern is that the new measurement is prone to human error due to its base in a family’s spending habits and its data collection method. It is based on survey results, which may not be accurate. The American Enterprise Institute suggests that a new poverty measure “will use administrative data to improve the accuracy of survey responses, include a fuller set of resources, reflect actual spending, and recognize some of the issues regarding poverty thresholds.” Finally, there are advantages to living in a high-cost urban area, such as access to more job opportunities and diverse culture. Overall, the concerns with the Supplemental Poverty Measure come from the quality of living being quantified.

Despite its errors, the Supplemental Poverty Measure takes steps closer to truly understanding poverty in the United States. It accounts for a family’s average expenditures over five years, rather than annually. With knowing how many people  and expenditures are excluded from the Official Poverty Measure, the higher poverty rate the new methodology uncovers is widely accepted as a more realistic measure. Furthermore, it gives critical insight to social and economic patterns to further understand how poverty touches American lives.

Moving Forward

Four out of every ten Americans cannot financially manage a $400 emergency such as an ambulance ride, flood, or car accident. Before the COVID-19 pandemic, 50 million Americans faced food insecurity, with that number rising since the start of the pandemic. With 43.3% of Americans identifying as poor or low-income, a measurement that under-estimates poverty makes it seem like an odd socio-economic phenomenon, further stigmatizing the experience: which is harmful.

In a modern economy, Americans pick up more than one job to keep their family above the poverty threshold. With food taking up less than a quarter of a household’s budget, a modern measure is needed to adapt to a changed economy. Shawn Fremstad, a senior policy fellow at the Center for Economic Policy and Research, states that “A better, more modern measure of poverty would set the threshold at half of median disposable income — that is, median income after taxes and transfers, adjusted for household size, a standard commonly used in other wealthy nation.” This is because median income changes faster than the rate of inflation, so a new measure based upon those estimates can keep up with the changing economy more than the current measurement can. Flexibility and inclusivity are key going forward.

Conclusion

An understanding of poverty in the United States is critical to create policy that helps those experiencing it. Policymakers need to recognize that poverty touches every aspect of an individual’s life, from housing to school and healthcare. A new and improved poverty measurement must consider the aforementioned different aspects of poverty, as well as the different groups of people experiencing it — such as those excluded from the Official Poverty Measurement and diverse geographic factors. Without a change in how poverty is measured, the standards of living for an individual can decline without acknowledgement, and they can be barred from crucial social programs. The poverty measure has a long and stagnant history in the American economy, and it is worth the effort to question where there is room for improvement, so more people can thrive.