Southwest Virginia – and perhaps Southside, too – are about to be experimented upon.
Whether that’s in a Mayo Clinic kind of way or a Dr. Frankenstein kind of way might be a matter of opinion, but, in either case, it’s an experiment.
I’ve been writing recently about the so-called Inflation Reduction Act that Congress (more precisely, the Democrats in Congress) recently passed. It’s also been variously called a climate bill; a “landmark” climate bill; an energy bill, a health bill and a taxes bill all in one. Those latter descriptions are certainly true; the former is debatable. There’s much dispute among economists whether the measure will really reduce inflation. Democrats say it will because it will lower energy and health care costs; Republicans say it won’t. There’s a lot in this act, so both sides get to pick out things to talk about, pro and con. Republicans especially like talking about how the bill will supposedly add 87,000 IRS agents – although Vox reports that’s not quite so, although the bill does include funding for more IRS employees generally. If you’re into the details of that, I commend this Vox story to you.
My focus has been laser-focused on two other things that seem to strike closer to home:
First, the provision that sets aside $4 billion for tax credits for clean energy companies that locate in an “energy community,” which is defined as any place that in the past 22 years has had coal mining, or oil and gas drilling, or has had a coal plant retired in the past 22 years. That obviously brings in all of Virginia’s coal counties, plus some moreBuckingham County qualifies because Dominion Energy converted the coal-burning Bremo Bluff station to natural gas in 2014 and then closed it altogether in 2019. Giles County qualifies because Appalachian Power closed its coal-fired plant at Glen Lyn in 2015. Mecklenburg County qualifies because Dominion shut down the coal-fired plant in Clarksville in 2019. Halifax County will eventually qualify. The coal-fired plant in Clover – a joint project of Dominion Energy and the Old Dominion Electric Cooperative – could close in 2025. (Disclosure: Dominion is one of our donors, but donors have no say in news decisions; see our policy. You can be one of our 1,300-plus donors and have no say in news decisions, too.)
Second, the provisions aimed at producing more components for electric vehicles in the United States, with particular emphasis on the batteries (since electric vehicles are basically big batteries on wheels). The act mandates that a certain percentage of the components come from the United States – or friendly countries that we have trade deals with – with those mandated percentages rising to 100% by 2028. I wrote that this requirement increases the chances that the Southern Virginia Mega Site in Pittsylvania County will land a big employer; it just missed out on landing an 8,100-job Hyundai plant that would have made batteries for its electric vehicles. That plant instead went to Savannah, Georgia. Automakers are rushing to increase production of electric vehicles. If there’s now a mandate that those parts be made in the United States, that means we’ll see more battery plants – and if Southern Virginia was in the running for one already, it stands to reason it’ll be in the running for others.
The Washington Post recently wrote about much the same thing, using West Virginia as its backdrop: “West Virginia coal country will test power of Democrats’ climate bill.” More to the point, will the bill succeed in building a new economy in (former) coal country?
The Post story framed the matter this way: “The approach reflects a newfound consensus in Democratic policymaking – one that echoes former president Donald Trump’s promises to rebuild the industrial heartland, but with more money and a focus on the planet. The urgency of making U.S. manufacturing not just cleaner, but bringing it back on shore was amplified by the coronavirus pandemic and Russia’s invasion of Ukraine, which cemented perceptions in Washington that the United States was unacceptably dependent on imports from foreign adversaries. Changing that is central to the Inflation Reduction Act and to Biden’s other key economic measures — such as the anti-China legislation Congress passed last month and the bipartisan infrastructure law adopted last year — in which the federal government is putting enormous money into making the U.S. economy more independent.”
That led up to the money quote, as they say: “’This bill is industrial policy masquerading as energy and climate policy,’ said Robbie Orvis, senior director of energy policy design at Energy Innovation, a nonpartisan think tank that provided input on the legislation for Democratic lawmakers. ‘If you only cared about climate, you would not necessarily do it this way. But Democrats have bigger ambitions – bringing back a certain type of employment and reducing dependency on foreign energy.’”
That’s the line that caught my eye: “This bill is industrial policy …”
The interesting thing is Orvis seemed to be saying this in either a neutral or positive way, while industrial policy has often been maligned in one way or another – so let’s look today at just what industrial policy is, and how this particular piece of industrial policy fits into history.
The short version is that industrial policy is a government policy to promote a certain type of industry. One of the early proponents of industrial policy was Alexander Hamilton of Broadway musical fame. The “10 dollar founding father without a father” believed that the infant United States should impose tariffs on imported goods as a way to build up domestic manufacturing, which he felt was the key to the nation’s economic health and, ultimately, preserving its independence. That put him in opposition to Thomas Jefferson and much of the South, which depended on exporting cotton grown by enslaved laborers – and importing other things, which Hamilton now wanted to make more expensive. In Lin-Manuel Miranda’s musical, the song “Cabinet Battle #1” is ostensibly about Hamilton and Jefferson arguing over whether to establish a national bank but is really an argument over industrial policy.
Jefferson’s character sings:
Don’t tax the South ’cause we got it made in the shade
In Virginia, we plant seeds in the ground
We create, you just wanna move our money around
To which Hamilton’s character retorts:
How do you not get it, if we’re aggressive and competitive
The union gets a boost, you’d rather give it a sedative?
A civics lesson from a slaver, hey neighbor
Your debts are paid ’cause you don’t pay for labor
“We plant seeds in the South. We create.” Yeah, keep ranting
We know who’s really doing the planting
Hamilton’s economic theories also put him in opposition to Adam Smith, who believed that a free market – and free trade – would allow each nation to develop the industries that it’s best at. Here’s where poet T.S. Elliott has some relevant things to say:
Between the idea
and the reality …
… falls the shadow
In other words, sometimes things don’t work out the way we’d like. Why are so many things made in China? Because the labor is cheap, and we Americans don’t want to pay the higher cost of American-made labor. In some ways, that’s Adam Smith in action (well, maybe Adam Smith on the American side; the Chinese and lots of other countries have engaged in their own version of industrial policy for a long time to build up certain sectors by subsidizing them). Now, though, we’re coming around to realizing that a) we’ve hollowed out the employment base in much of the country and b) maybe we shouldn’t be so dependent on China.
These thoughts aren’t original; they’ve been around a long time. For a long time we associated industrial policy with those left of center while conservatives typically derided that as government intervention in the economy (which, of course, it is) to pick winners and losers (which maybe it is, maybe it isn’t). The lines, though, haven’t always been quite so clear-cut. We think of Ronald Reagan as the classic free-market conservative but it was the Reagan administration that initiated a study of what might be considered industrial policy. Project Socrates was conducted under the auspices of the Defense Department’s intelligence office because the nation’s lagging economic competitiveness was considered a defense liability. Reagan signed off on a National Technology Based Strategy designed to encourage more U.S.-based technology. That’s not quite the same as a formal industrial policy but it’s not exactly classic Adam Smith, either.
Reagan, who had earlier minimized the White House of Science and Technology, was said to be so enamored of Project Socrates, and so concerned about declining American competitiveness, that “in the closing days of his administration, President Reagan had an executive order drafted to create a new government agency – the first new federal agency since the creation of NASA in the 1950s,” writes former defense analyst Michael Sekora, who headed Project Socrates. “Why would a president who built his reputation on reducing the size of the government want to create more government?” The new agency to promote technology never happened, though, and the George H.W. Bush administration that followed Reagan considered Project Socrates to be, indeed, industrial policy and canceled it.
The standard criticism of industrial policy is that markets know better than governments what works. The counterargument is that it’s vital to national security that we have the capability to produce – insert whatever you want to insert. During the pandemic, Canada found itself dependent on foreign suppliers because it had no pharmaceutical manufacturers capable of making vaccines, leading Prime Minister Justin Trudeau to conclude that wasn’t a good position to be in. In April, he announced that Moderna will build a vaccine production facility in Quebec. In June, a separate vaccine production facility was announced in Saskatchewan. Likewise, the United States began to understand anew during the pandemic just how dependent it is on other countries for microchips – hence the recent CHIPS-Plus Act designed to spur domestic production of semiconductors. All those are examples of industrial policy. Microchips from Asia might be cheaper but microchips from the United States are better for national security.
What’s unusual with these provisions in the Inflation Reduction Act is that they marry industrial policy with what some might call “the Green New Deal” – the notion that the transition to renewable energy ought to produce not just clean energy but also jobs. That makes this a classic Democratic plan but its origin has some Republican roots. Democrats won’t like me saying this but Democrats’ interest in rural America was heightened by Donald Trump’s election in 2016 – that exposed for all to see the great rural-urban divide that’s been opening up for a long time. I’ve spent a lot of time thrashing Democrats for not paying enough attention to rural issues, particularly in coal country. Virginia’s Clean Economy Act, for instance, does a great job of promoting renewables over fossil fuels but doesn’t do much to encourage that any new clean energy jobs be located in the communities where government policy is helping squeeze out fossil fuel jobs. By contrast, here’s an attempt to use government policy to encourage clean energy companies to create a new economy in the communities most impacted by the loss of coal jobs. The question is whether this plan will work. A pot of $4 billion in tax credits seems a pretty powerful incentive but tax policy hasn’t always been successful in producing the type of economic behavior that the government would like to see. Republicans (and sometimes Democrats) have been big on “enterprise zones” where taxes are lowered for businesses who locate there. The results of those have been mixed, at best. Will this be just another, bigger form of an enterprise zone? Or will this help jumpstart the creation of a whole new job sector in coal country?
We don’t know exactly what type of jobs clean energy companies might have to create so we don’t know what kind of labor pool is required – and we know that a skilled workforce is one of the key factors in where jobs go. Does coal country have the workforce that clean energy companies want? The InvestSWVA economic development group has been working on trying to capture part of the wind energy supply chain for Southwest Virginia – a study showed a lot of overlap between the skills present in Southwest Virginia and the skills required for wind energy manufacturing, so the answer could well be yes. That leaves me more optimistic than The Washington Post seemed to be about West Virginia.
As experiments go, this seems a pretty good one to try. Now let’s hope it works.