Grading Biden’s Big Climate Law

The costs, and the benefits, of the I.R.A.

In the past 24 hours, President Biden has taken questions (and heat) on his age, memory and mental fitness. But the one economic issue that is most likely to generate scrutiny from the business community and beyond over the next several months is the biggest bill he has passed, the Inflation Reduction Act, which he hailed at his news conference last night.

Big questions still hang over the law, which many Americans appear not to know exists. How much will it add to the federal deficit? And can the law survive a potential Trump second term?

The I.R.A. is expected to cost more than $800 billion through 2033, the Congressional Budget Office said, up from the $391 billion price tag assessed when it was passed in 2022.

One reason: There’s huge demand for the credits and subsidies created by the law for building solar, hydrogen and nuclear energy projects, as well as discounts for buying electric vehicles. (An analysis by Goldman Sachs last fall showed that the law led to about $282 billion in investment and roughly 175,000 jobs in its first year.)

The green transition won’t come cheap. The I.R.A., which aims for steep emissions cuts, is expected to add $250 billion more to the deficit than initially forecast, according to the C.B.O., despite cost-saving promises by the White House.

That said, the math isn’t set in stone. The Treasury Department forecast this week that additional tax-collection resources provided by the I.R.A. would help the I.R.S. gather up to $851 billion more in tax revenue over the next decade. That raises the question of whether this is actually a deficit-paring law.

It’s also stoking geopolitical tensions. Chinese solar energy giants have rushed to take advantage of the law’s tax breaks to build solar panel factories in the U.S., seemingly undermining the goal of creating a homegrown greentech industry.

And the I.RA.’s popularity has dented relations with American trading partners including the E.U., which has been working on its own version of the law.

The future of the I.R.A. looks unclear. Donald Trump has said he would overturn it if re-elected. That prospect has worried business leaders who have warned that such a move would drastically hurt American industry.

HERE’S WHAT’S HAPPENING

Wall Street braces for new inflation data. The Commerce Department is set to publish its annual revisions to the Consumer Price Index on Friday morning, an update that’s taken on added importance in an election year. Investors worry that a hotter-than-expected reading would prompt the Fed to hold off cutting interest rates for longer.

President Biden defends his mental fitness. At a hastily called news conference, the 81-year-old president shot back at a special counsel report into his handling of classified documents that called him a “well-meaning, elderly man with a poor memory.” The president later mixed up the leaders of Egypt and Mexico in an exchange with reporters. The issue of Biden’s age has weighed heavily on his approval ratings.

Donald Trump picks up more delegates, and has a good day in Washington. The former president won the uncontested Nevada Republican caucuses. The victory came hours after the Supreme Court justices signaled they’d probably overturn a Colorado Supreme Court ruling that Trump cannot appear on the ballot in the state.

Vladimir Putin calls on the U.S. to broker a Ukraine peace deal. In an interview with the former Fox News host Tucker Carlson, Russia’s president challenged the U.S. “to make an agreement” that would force Ukraine to cede territory to Russia and end the two-year-old war. The interview is seen as a victory for Putin, who has been seeking to win over Western support and thwart the flow of U.S. aid to Kyiv.

OpenAI’s trillion-dollar dream

OpenAI is already a leader in the race to advance artificial intelligence, with its technology helping to propel enormous growth for itself and its biggest investor, Microsoft.

But the start-up behind ChatGPT and its C.E.O., Sam Altman, have bigger ambitions, including reshaping the global semiconductor industry to the tune of several trillion — yes, with a T — dollars to bolster A.I. chip production, according to The Wall Street Journal:

​​Such a sum of investment would dwarf the current size of the global semiconductor industry. Global sales of chips were $527 billion last year and are expected to rise to $1 trillion annually by 2030. Global sales of semiconductor manufacturing equipment — the costly machinery needed to run chip factories — last year were $100 billion, according to an estimate by the industry group SEMI.

The amounts Altman has discussed would also be outlandishly large by the standards of corporate fund-raising — larger than the national debt of some major global economies and bigger than giant sovereign-wealth funds.

Why China’s supply chain isn’t broken

The pandemic and rising tensions between Washington and Beijing have prompted many companies to diversify their supply chains away from China. The results of that push are growing more evident, including data showing the U.S. imported more goods from Mexico than from China last year.

But the Lunar New Year holiday, which begins tomorrow, shows why China is likely to remain a global manufacturing powerhouse for years to come.

The country’s migrant workers are still its secret weapon. Roughly 300 million workers leave their homes in rural areas and towns to work in the country’s manufacturing hubs in southeastern China. The only time most of them go home is for the Lunar New Year, creating the world’s biggest annual mass migration event.

Chinese state media estimate that nine billion trips will take place over a 40-day holiday period, which began late last month.

Apple’s operations in China illustrate the challenge of replacing that manufacturing base. The tech giant makes the vast majority of its hardware in China, after having spent decades building its networks of suppliers and infrastructure. Its biggest iPhone factory, in Zhengzhou, employs about 300,000 people.

So do its efforts to expand in India. Apple and its main manufacturing partner, Foxconn, are building factories in Tamil Nadu, a southern state with about 72 million people. Overall, India produced about 13 percent of the world’s iPhones last year.

But there are hurdles. India doesn’t have a work force able to move en masse across the country to manufacturing hubs; major differences in languages spoken there add a layer of complexity; and production quality is lagging, with some Indian suppliers reporting a 50 percent defect rate, far short of Apple’s target of zero.

And even the Mexico import data belies the reality of Chinese manufacturing. Chinese companies were early movers in diversifying supply chains, investing heavily in Mexico and across Southeast Asia, according to Agatha Kratz, a China expert at Rhodium Group, an advisory firm. And much of the manufacturing growth in Mexico was for final assembly of products to get around Trump-era tariffs on Chinese-made goods.

A fight over Goldman Sachs’s many hats

A new lawsuit over M.&A. is taking aim at how Goldman Sachs juggles multiple, and sometimes competing, clients.

KSFB, a celebrity management firm whose executives have worked for Madonna and Beyoncé, has accused the Wall Street giant of deception when it agreed to shop it around to potential buyers while also negotiating the sale of a bigger client and former partner, Focus Financial Partners.

The back story: In 2018, the showbiz management firm NKSFB (formerly known as Nigro Karlin Segal Feldstein & Bolno) sold its assets to Focus, a wealth management firm. NKSFB’s principals continued to provide services to Focus but formed KSFB as well.

In 2022, KSFB’s executives hired Goldman, which had promised to pursue a joint sale of KSFB and the NKSFB business, according to the lawsuit filed in New York on Thursday. But unbeknown to them, the lawsuit contends, Goldman, which was also working to sell Focus, wanted to keep NKSFB within the larger firm to fetch a higher price.

KSFB accuses Goldman of stringing it along, gaining valuable information about the business while delaying its potential sale to benefit a larger client. Focus was eventually sold to the private equity firm Clayton Dubilier & Rice for $7 billion in a deal completed this past August. (Focus and its co-founder, Lenny Chang, are co-defendants in the lawsuit.)

Goldman denied the allegations, saying in a statement that it “acted fairly and honestly” in its dealings with KSFB. A Los Angeles court dismissed a lawsuit filed by KSFB last year after Goldman argued that the case should be heard in New York.

The case casts a spotlight on banks’ juggling of complicated duties. It’s an issue that has dogged Goldman before: The firm drew scrutiny last year when it advised Silicon Valley Bank on efforts to raise capital while also buying $21 billion worth of the embattled lender’s debt. That deal that ultimately raised concerns about Silicon Valley Bank’s health.

Though a bank’s handling multiple clients or roles for clients isn’t necessarily improper — so long as there are safeguards in place — it can create awkward relationships and, at the least, the appearance of conflicts.

THE SPEED READ

Deals

• Aramco, the Saudi state-owned oil giant, is said to have hired banks including Citigroup and Goldman Sachs to advise on a secondary stock offering that could raise $20 billion. (Bloomberg)

• Creditors of WeWork are reportedly dismissing an effort by Adam Neumann, the co-working company’s former C.E.O., to buy it out of bankruptcy. (FT)

Policy

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