Over the past several months, Americans have learned how bad a “good” economy can feel. On the one hand, wages are up and the country’s economy is growing at its fastest clip since 1984. The unemployment rate has fallen to just 3.8 percent.
But all those gains can’t make up for an ongoing, precipitous spike in the cost to live, eat, and drive. Used cars cost 41 percent more than they did a year ago; in some areas, the cost of a gallon of gas has reached $5. Thanks to a combination of supply chain crises, high energy costs exacerbated by the Russian invasion of Ukraine, and booming consumer demand, prices have jumped by 7.9 percent in the past year, a 40-year high. To paraphrase Biden’s State of the Union speech a few weeks ago, inflation is “robbing” Americans of any income gains.
Normally, when inflation is high, presidents turn to the Federal Reserve to raise interest rates or stop buying long-term bonds — both of which slow down the economy and cause Americans to buy less stuff. But in his State of the Union, Biden offered a different suggestion, one that he claimed could slow inflation and cut greenhouse gas emissions at the same time: invest in clean energy and American manufacturing.
It’s a strange idea, but one that economists and experts say could work — at least in the long-term. The argument is that while fossil fuels are inherently inflationary, clean energy sources like wind or solar power are inherently deflationary. Fossil fuels get harder to extract all the time, as humans deplete the most easily accessible oil and gas reserves; oil is also largely controlled by the Organization of Petroleum Exporting Countries, which can cut supply and raise prices at will. Renewable energy, on the other hand, has an initial up-front cost and then becomes virtually free — maintenance costs are minimal, and no one has to pay for the sun to shine.
“Fossil fuel prices have tended to go up over time,” said Geoffrey Heal, a professor of economics at the Columbia Business School. “But you put up a solar power station and then you have free electricity for the next 25 years. There are no running costs — there are no fuel costs that have to go up.”
Biden recently banned fossil fuel imports from Russia, and blamed inflation hikes on rising energy costs as markets react to the invasion. “In the long run,” he said in a statement, “the way to avoid high gas prices is to speed up – not slow down – our transition to a clean energy future.”
The transition from gasoline-powered to electric vehicles could have a similar effect. Gas prices are a huge driver of inflation: According to one analysis, rising oil prices have accounted for almost a third of excess price increases since the pandemic began.
“Electric vehicle growth will immediately reduce oil consumption,” said Paul Bledsoe, a strategic advisor for the Progressive Policy Institute and a former climate advisor for President Bill Clinton. That will also cut oil demand, taking the edge off one of the most inflationary commodities in the modern world. Meanwhile, EVs are already cheaper than gas-powered vehicles over the long-term due to lower fuel costs and lower maintenance costs (electric vehicle engines have fewer moving parts that need to be replaced, and no oil that needs to be changed).
Biden’s second argument — that American manufacturing can slow inflation — is more complicated. Two decades ago, according to Heal, it was significantly cheaper to manufacture goods abroad and import them into the U.S.; wages in China were low, and transportation costs were also low. But now, as fuel prices spike and supply-chain bottlenecks slow the movement of goods, that calculus is starting to shift. “Stuff used to come in six to eight weeks, and now it takes six to eight months,” Heal said. “You’re beginning to see a lot of companies seriously considering relocating manufacturing to the U.S. or Canada or Mexico.”
Some things are unlikely to shift to American manufacturing: clothing, for example, will likely continue to be made abroad. But Heal says that in sectors that require skilled workers — think electronics or cars — shifting to the U.S. could help cut costs.
But even if Congress passes legislation to boost American manufacturing or dole out money for clean energy, it won’t have an immediate effect on inflation. Building new solar farms or electric car factories will take time. “We’re talking about years, not months,” Heal said.
In the meantime, it will be up to the Federal Reserve to curb prices, if they can. But there, the Biden administration has run into problems — Republicans are blocking the nomination of several of Biden’s picks for the central bank, arguing that some of the nominees are too hawkish on climate.
And clean energy, to be clear, isn’t guaranteed to be inflation-free. Oil and gas have headlined the current inflation crisis, but in the long term, supply crunches for minerals like lithium, copper, or cobalt — key ingredients in batteries, solar panels, and wind turbines — could cause prices to rise in the renewable space as well. In the past few months, the cost of building a solar panel or lithium-ion battery has risen for the first time in years, as key ingredients become more expensive.
Though technologies for renewables are continually changing, said Ellen Hughes-Cromwick, former chief economist for the U.S. Department of Commerce and senior resident fellow for climate and energy at the D.C.-based think tank Third Way. Engineers, for example, are currently working to develop solid-state batteries that don’t require lithium.
Still, Bledsoe argues that framing clean energy as an anti-inflation tool could help the U.S. pass its biggest climate bill ever. He hopes that rising prices, combined with a newfound desire for energy security in the wake of the Russian invasion of Ukraine, will spur the Democratic Party to take action on the clean energy components of Biden’s “Build Back Better” agenda. And there are signs that the party is moving in that direction. Senator Joe Manchin of West Virginia, who previously blocked the Build Back Better Act, said recently that he was prepared to endorse a package with money for clean energy and prescription drugs.
“I think the president and the Democrats are going to emphasize the security and anti-inflationary benefits of clean energy tremendously over the next few weeks,” Bledsoe told Grist. “And I believe that will lead to the passage of the bill.”