A year of the Inflation Reduction Act

This is an audio transcript of the FT News Briefing podcast episode: ‘A year of the Inflation Reduction Act’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, August 16th, and this is your FT News Briefing.

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Investors were not happy. Consumer spending in the US beat expectations, and Beijing and local governments are squaring off over debt. Plus, it’s been a year since the US passed major clean energy subsidies. The FT looked into what states are benefiting the most. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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US stocks hit a five-week low yesterday. Bank shares fell after comments by an analyst from Fitch. They said the agency is considering lowering the credit ratings of multiple lenders. Investors were also concerned by strong US retail sales data that came out yesterday. That signalled that the economy is resilient, which could mean that the Federal Reserve will keep interest rates higher for longer.

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There’s a growing unease about public finances in China. Local governments are struggling with high levels of debt. So Beijing has sent out debt squads to deal with the overleveraged regions. I’m joined now by the FT’s China economics reporter, Sun Yu. Hey there.

Sun Yu
Hi.

Sonja Hutson
So tell me about these debt squads. What exactly are they doing?

Sun Yu
It’s basically the regulators, which would include the central bank, and the idea is for them to send a group of professionals to local governments and to work with them to figure out just how serious the problem is. Because many local authorities have accumulated not only the debt that’s on the balance sheet, but also the off-balance sheet debt as well.

Sonja Hutson
So why has this debt become such an issue for the central government?

Sun Yu
Local authorities have borrowed so much over the past few years. The expectation is that they borrow a lot, and they will be able to repay the debt by either selling the land or generating more tax revenue. But the situation has changed to the extent that China’s real estate market has basically plunged and there’s no sign that it will recover to the previous high. And that’s making it very difficult for the local authorities to sell land. Secondly, the dramatically declining domestic demand means that the local governments are finding it harder to keep the tax revenue, and that means they have to count on the central government to solve the problem.

Sonja Hutson
Is the debt straining the relationship between the central government and these local governments?

Sun Yu
So the central government has made it clear that each local government, whether on a provincial or city level, should try to resolve the debt problem on their own. So here comes the tension, right? Basically, the central government would like the local authorities to sell assets or to raise capital on their own. By contrast, the local governments are asking the central government to either issue Treasuries or to have centrally owned policy banks issue low-interest loans to bail out local authorities. And that’s something that the central government is very reluctant to do.

Sonja Hutson
What are you going to be looking out for next?

Sun Yu
I think it’s becoming pretty obvious that this debt problem will not be solved without a rescue plan from the central government. Local authorities are simply can’t resolve the problem on their own. So it will be worth watching, (a) what the actual implementation or enforcement plan will be and, (b) whether the central government will provide real money to solve the problem.

Sonja Hutson
Sun Yu is the FT’s China economics reporter. Thanks so much.

Sun Yu
Thank you.

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Sonja Hutson
In the US, it’s been about a year since Democratic president Joe Biden signed two pieces of landmark legislation into law. The Inflation Reduction Act and the Chips and Science Act provide subsidies for clean energy projects and semiconductor manufacturing. Companies have announced several large projects since then, and the FT has been tracking where they’ve ended up. Eighty per cent have gone to Republican-controlled areas. The FT’s Amanda Chu has been reporting on this, and she joins me now. Hey, Amanda.

Amanda Chu
Hi, How are you?

Sonja Hutson
Doing well, thanks. So why do we care about the political leanings of the areas where this investment is headed?

Amanda Chu
It’s a really big deal because both of these laws received very little support from the Republican party. And so, one, it’s going to present a growing conundrum for Republicans as they want to welcome these projects and these jobs in their own districts. But in Washington, they are launching efforts to repeal or water down pieces of the IRA. The second part of it is that Biden is really sort of struggling to take credit for these projects and jobs. He was on a tour this summer to manufacturing sites across the country, often attacking the GOP lawmakers in those districts for voting against the bill that helped spur these projects.

Sonja Hutson
I mean, why is there such a huge disparity about where this money is going? I mean, 80 per cent is going into these Republican districts. That’s a huge number.

Amanda Chu
It’s surprising, but it’s also unsurprising because when you think about the industrial areas of the US, places where you can find lots of cheap available land, cheap labour, it’s often in rural, often conservative areas. At the same time, though, a lot of Republican districts are also working actively to compete for these projects, offering very lucrative incentive packages to try to win projects to their state.

Sonja Hutson
So it seems like Republicans are walking kind of a fine line here. How are they deciding to message this? Have they figured it out yet?

Amanda Chu
I don’t think that they’ve figured it out yet. The one that comes most to mind is Georgia’s governor, Brian Kemp. Georgia’s a leading state in terms of securing these manufacturing projects. Governor Kemp has been very critical of the IRA since its passage. But at the same time, he said that he wants Georgia to be the electric vehicle state of the country. And it really does look like an electric vehicle is going to emerge in the south-east of the US. And so I don’t think that there really is a playbook yet for how to navigate this discussion.

Sonja Hutson
Do we have a sense of how voters are viewing the Inflation Reduction Act and the Chips Act and the local investment happening in their areas?

Amanda Chu
Yes. So when it comes to voter awareness, a recent poll that came out last month from the University of Maryland and The Washington Post, I think, found that less than half of voters were aware of the IRA and that, you know, most voters disapprove of president Biden’s climate record, even though he passed arguably the most significant piece of climate legislation in US history. And so it really hasn’t trickled down into voters’ mindsets.

Sonja Hutson
That’s the FT’s Amanda Chu. Thanks, Amanda.

Amanda Chu
Thanks.

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Sonja Hutson
Before we go, Pink Floyd has struck a chord with neuroscientists. Researchers at the University of California, Berkeley, reconstructed the song “Another Brick in the Wall”, using brain waves of people listening to it.

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Sonja Hutson
So not exactly a perfect recreation, but the breakthrough could help people who can’t talk communicate better. Right now, devices that speak for people tend to have a kind of robotic quality. That’s because they vocalise words one by one. The hope is that newer devices will speak with more human tone and rhythm, even if they’re not singing.

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You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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