Some are already beginning to worry about the Inflation Reduction Act “crowding out” investment by the private sector. Yet the private sector is seeing things differently. In the most recent earnings call from major US steel producer Cleveland Cliffs, spending from the IRA was explicitly cited as a reason to justify potentially increasing investment.

From the Cleveland Cliffs Q1 Earnings Call:

Sean Wondrack: Hi. Good morning, Lourenco and Celso. Just first question when you think about sort of green energy and some of the opportunities you're pursuing, do you see any other tangential opportunities, whether it's within solar or wind or even charging infrastructure that we could look forward to in the next few years? Thank you.
Lourenco Goncalves: Yeah. Look, we sell to clients in this submarket, and we are seeing demand coming from them. We believe that monies coming from inflation Reduction Act and the Infrastructure Bill will support more and more investment in these areas, but at this point, it is still at the very beginning of the development of this submarket. One thing that I believe will pick up steam very quickly is the deployment of capital in charging stations because the states are starting to move faster on that, and that will create more opportunities for us, not only for grain-oriented electrical steels, obviously, but also for other types of steel because the charging stations consume steel, not only electrical steels, like normal carbon steel that we produce and sell. So these are mainly the best points of increased consumption that we see right now.

“Crowding Out” and “Crowding In”

Here we see the process by which forthcoming policy-driven investments can “crowd in” further private investment. Industrial policy is meant to catalyze a “crowding-in” effect that creates positive feedback loops between upstream and downstream investment. We can see in the above quote that as a result of projected IRA spending, some producers of upstream materials expect federal support for investment in downstream decarbonization products to lead to an increase in demand for their own products, and are considering investing in growing capacity accordingly.

By demonstrating to firms that the market incentives provided by the government will lead to higher demand, and thus justify further investment across the value chain to keep up, industrial policy can achieve a kind of investment multiplier effect. As capacity increases, costs usually fall. It is even better to see the upstream of the supply chain proactively get ahead of expected demand increases: the more capacity available when orders start coming in, the less chance we see the kind of bottleneck that can substantially raise project costs stemming from domestic steel production.

So why have economists and critics traditionally argued that government investment programs “crowd out” private sector investment then? Although the mechanism isn’t always specified, most accounts boil down to the argument that government investment financed by deficit spending will mechanically increase interest rates by increasing the demand for scarce “loanable funds” within the economy. This increased demand against constant supply of loanable funds then raises the “price” of borrowing: the rate of interest. These critics can cite rising fiscal spending followed by increases in interest rates from the Federal Reserve as evidence that this dynamic is holding, and then extrapolate to the impacts of higher interest rates on investment.

Yet this account misses something key. The high interest rates are a policy choice by the Federal Reserve — not an immutable economic consequence of government investment. If the economy slows because the Fed is raising interest rates to slow the economy, that is a claim about decisions the Fed has made — not evidence that this “crowding out” dynamic is a general fact about market economies. If one argues that the Fed has had no choice but to raise interest rates as a consequence of high inflation, then that is a claim about the institutional setup of the American economy, not an example of the kind of natural law that theories of “crowding out” usually put forward.

In the case of steel, this crowding-in dynamic even has the potential to supercharge certain aspects of the IRA. Included in the bill are domestic content requirements that, if met, unlock extra tax credits. Increased investment in the production of domestic content that will be used by IRA-led investments is an example of the market successfully following incentives built into the bill itself.

Nearly everything needed for electrification is going to require a substantial volume of different kinds of steel. At the same time, many IRA-related projects that will be major users of steel also stand to see an additional +10% subsidy from meeting certain requirements with respect to domestic content. So what we would like to see at the outset is increases in domestic production of raw materials used in decarbonization infrastructure so that the +10% additional tax credit for use of domestic content is easier for more firms to achieve on more projects.

The message from the Cleveland-Cliffs earnings call is clear: so far so good. We look forward to continuing to track IRA-led investment across the domestic capital stack.