Manchin’s energy and deficit-reduction bill can fight inflation — and Russia

President Joe Biden’s State of the Union address last week highlighted two of the greatest foreign and domestic challenges facing the United States. Russia’s invasion of Ukraine has undermined decades of peace in Europe, causing a humanitarian and geopolitical crisis while sending energy prices soaring. At home, inflation is rising at the fastest pace in 40 years and outstripping wage gains for many workers.

A new proposal offered by Sen. Joe Manchin (D-W. Va.) shortly after Biden’s address gives Democrats a strong approach for tackling both of these challenges — one that even has support from many progressives in the House with whom Manchin has often clashed. Manchin suggests Democrats pursue changes to the tax code and prescription drug pricing that would raise revenue without hurting our international competitiveness. He also recommends that this revenue be split evenly between deficit reduction and funding investments to expand domestic clean energy production, so America is less vulnerable to swings in energy costs.

This framework has elements in common with the Build Back Better Act that was passed last year by the House but stalled in the Senate without Manchin’s support, namely its substantial tax increases on the rich and investments in the clean energy economy. But that bill also included other social programs that could have cost up to $4 trillion over the next decade and would have increased budget deficits for at least the next five years. Although Biden argued in his address that these programs could help Americans compensate for higher costs, the reality is they would pump more money into the economy at a time of high inflation and risk further bidding up prices. A bill with significant deficit reduction, on the other hand, could help moderate demand and rein in inflation.

Targeted tax incentives for individuals and businesses to invest in clean energy can also reduce medium- and long-term inflation. Today, the United States still gets about 90 percent of its transportation fuel from oil, subjecting consumers to gasoline prices of now over $4 a gallon.  These prices may rise as the U.S. moves to approve a ban on Russian oil imports, and global supplies of Russian oil and gas supply are choked off in Europe and elsewhere. Incentives for consumers to purchase electric vehicle can help jumpstart widespread adoption of EVs, reducing both America’s demand for oil and vulnerability to oil prices over time. Electric vehicles are also far cheaper to fuel and operate than oil burning vehicles, so the transition would reduce total consumer transportation and energy costs.

Electrifying transportation will increase electricity demand in coming years, however. Fortunately, the prices of renewable electricity sources such as wind, solar and geothermal, as well as electricity storage, continue to fall dramatically. Additional incentives for deploying greater amounts of these low-cost electricity technologies will help reduce consumer costs and take pressure off other commodity prices. They will also reduce inflation by lowering greenhouse emissions, limiting the long-term and potentially enormous costs of U.S. climate change impacts that have already reached hundreds of billions of dollars each year.

Even with these measures, the clean energy transition cannot happen overnight. The United States will need domestic energy production in the near-term from all sources — including shale oil and gas — to fill the likely void left by Russia. But in addition to lowering domestic costs, a broad expansion of low-emissions electricity would help free up more U.S. natural gas to flow to Europe as liquified natural gas, displacing the 40 percent of European gas currently supplied by Russia. The United States will probably need to expand LNG export facilities and encourage our allies with oil and gas resources to increase their exports in the near-term, as well.

The deficit-reducing provisions in this framework also likely won’t have any significant fiscal effects until next year at the earliest. To combat near-term inflation in the broader economy, the Federal Reserve will need to raise interest rates soon. But by sending a clear message that U.S. fiscal policy will complement rather than counteract the Fed’s monetary tightening, Congress could reduce the overall rate increases needed to get inflation under control without causing a recession.

Democrats should level with the American people. Disruptions in oil and natural gas due to Russia’s invasion of Ukraine could exacerbate inflation originally caused by COVID-related supply chain bottlenecks and high stimulus spending from 2021. Some sacrifice and short-term pain may be necessary to defend democracy and our long-term economic strength. But by adopting an “Energy Security and Inflation Control Act” along the lines of Manchin’s recent proposal, Democrats can reassure the American people that we will emerge from this crisis stronger and more sustainably prosperous than before.

Paul Bledsoe is strategic adviser at the Progressive Policy Institute.

Ben Ritz is the director of PPI’s Center for Funding America’s Future.