The Inflation 'Creation' Act
In an attempt to control the rise of inflation across the U.S., new legislations are going in place to increase taxes on businesses and electric vehicles.
The latest piece of Orwellian legislation from Washington, D.C., claims to lower inflation by reducing some drug prices for seniors while taxing businesses. Right. As if new taxes on businesses, which aren’t people, ever stay where they were intended. Eventually, taxes on businesses are paid by consumers and investors, every single time. But horse trading in politics is the thing, and getting lower prices for seniors by spreading the cost among a large group of investors and consumers might be worth it—just don’t call it “inflation reduction,” and while you’re at it, don’t count on that new semiconductor subsidy bill to give us a boost, either. Recently, we’ve turned the corner from lower costs through innovation, digitization, and globalization to a period of rising costs, as we try to shift burdens within the economy while clawing back production. We might get some of what we want, but it will be expensive.
Beyond the drug costs and taxes in the Inflation Reduction Act, the legislation also calls for more tax credits on electric cars, both old and new. But there’s a problem. None of our cars qualify. To qualify, cars made in 2024 and beyond must be built with parts from American companies or by companies in countries with which we have bilateral trade agreements. This would mean sourcing metals like lithium and cobalt from places like France and Germany, which don’t mine such things, instead of from China and the Democratic Republic of the Congo.
For more information on car sales in relation to the overall economy, watch this video by Rodney Johnson
There’s a reason that the U.S. and other Western nations don’t mine such minerals. It’s dirty, nasty work. Our environmental agencies have not allowed and likely will not allow it to happen, but we’re clearly willing to buy the mined minerals from others. Chances are that that Congress will pass some sort of “get-out-of-jail-free” card to bypass this requirement as we get closer, because the odds of the U.S. approving massive new domestic mining operations appear slim. Unfortunately, this will keep us tethered to some of the same economic forces we’re trying to avoid—namely, China, which can slow-roll or even eliminate our supplies of things like battery components whenever it wants.
As for the semiconductor subsidies, I’ve noted before that there’s a reason that we produce so few in the U.S.: it’s expensive. We’re much better off building plants in other countries that have lower costs for things like labor and already have specialized knowledge in the field rather than trying to create more of that here. That is, as long as we’re certain of long-term trade. If we think our supply of something as vital as computer chips could be threatened by a military dustup in Taiwan, which produces more than 60% of all chips on the planet, then we should be making other plans, which will be expensive.
This logic applies to almost anything that we’ve outsourced for specialization, from energy to hats. The more we try to unwind the global trade markets, the less efficient we make all producers. There’s a reason Adam Smith’s specialization of labor makes everyone wealthier; we get to focus on the few things we do best and outsource all the rest, which increases quality and lowers costs. But it only works if everyone keeps playing the game. When trade fails, nations react by protecting supply lines, which builds in redundancies and costs and makes everything more expensive.
The receding tide of globalization is obvious, and it will be expensive. Perhaps it had gone too far and we needed more supply assurances in domestic markets, but that won’t change the equation. We’re at the beginning of a long trend of “doing less with the world,” which will cost us more at home. Economically, we’re going from win-win to lose-lose, even though it might be the right geopolitical choice.
Written by Rodney Johnson The Rodney Johnson Report
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. The information presented is not to be considered advice you can or should act upon for investment, tax or estate planning purposes without consulting with a professional to discuss your own set of unique circumstances. This article is designed to provide you with information regarding investing and planning for or during retirement. You must seek professional advice separately before acting on any items discussed in this article. The views expressed are those of Rodney Johnson and not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Rodney Johnson is not affiliated with Mutual Advisors, LLC or California Retirement Advisors.