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Moody's Talks - Inside Economics

Episode 72
August 19, 2022

Economic Update and Ellen’s Climate Top 5

Mark and Cris welcome Ellen Hughes-Cromwick, Senior Resident Fellow for the Climate and Energy program at Third Way, to discuss her views on climate risk in the Inflation Reduction Act (IRA) and her outlook on the vehicle industry.

Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.

Mark Zandi:                      Welcome to Inside Economics, I'm Mark Zandi the chief economist of Moody's Analytics, and I'm joined by only one of my colleagues this week, Cris deRitis. Chris, how are you?

Cris deRitis:                       Doing well, thanks. How are you doing, Mark?

Mark Zandi:                      Where's Ryan?

Cris deRitis:                       Ryan is at the Jersey Shore with his family. 

Mark Zandi:                      I thought he was going to Boston to see the Red Sox, he's at the New Jersey Shore. 

Cris deRitis:                       That was last week or the week before. 

Mark Zandi:                      Oh, he's on perpetual vacation, that guy. 

Cris deRitis:                       He's doing his part to support the economy here. 

Mark Zandi:                      Do you know which part of the New Jersey beach he's at?

Cris deRitis:                       I don't know which beach specifically. He's got a family, so I'm thinking it's ...

Mark Zandi:                      Family friendly. 

Cris deRitis:                       Family friendly one, yeah. 

Mark Zandi:                      Yeah, that makes sense. Well, I always go to the July 4th, that week or the week after, all my siblings and all their kids, I've got four siblings and we each have three kids, we all go down to the Stone Harbor and Avalon every year and hang out there for a weekend. You have your normal family fight after day one and day two, then everything calms down in the week, very nice week at the New Jersey beach, so nice place to go. 

Cris deRitis:                       Who won the sandcastle competition this year?

Mark Zandi:                      Oh, yeah. There is a contest, we didn't play this year. I don't know why, something came up, timing or something. But we have no talent, we're brute force. Meaning, we move a lot of sand to try to shock and awe strategy, because the only one with any talent is my wife, Ava. But she builds something beautiful, but it's so small no one can see it. It's like, "Why are you doing that?" So anyway, we won in the past, but thanks for asking. That was kind of you to ask. I know it's nothing like your Italian Riviera. 

Cris deRitis:                       You have a very interesting perspective. I have to pull back the curtain sometime and ...

Mark Zandi:                      I liked to see the village you guys are from at some point. 

Cris deRitis:                       Nothing special. 

Mark Zandi:                      Anyway, so we do have a guest, she is sitting in the wings, a bit of a mystery. We're going to bring her in, we're going to talk a lot about the Inflation Reduction Act and the climate provisions in the IRA. She's an expert on climate related issues, so looking forward to that. But we'll keep that over here on the side for just a minute, because I do want you, Chris, because we're seeing here, this is Wednesday, August 17th, midday, and a little earlier than we normally would do the podcast, but we've gotten a number of economic releases this week, retail sales, housing. I thought I'd just turn to you and give everyone a sense of those releases and what they're saying about the economy. 

Cris deRitis:                       Yeah, sure. So I'll start with retail sales, which came out this morning. I think the data continues this trend of mixed signals. Every data point seems to have, tell a different story, when we're thinking about recession risks and the overall economy. So retail sales for the month were flat, from June to July, which at the headline level might be a bit concerning, but then you dig a little bit deeper and a lot of that flatness, if you will, was due to gasoline and auto sales, which were down. 

                                             So the control retail sales, which exclude gas, autos, restaurants and building materials, were actually up .8% from June to July, so it does suggest that underneath it all consumers still are willing to spend, still out there contributing to the economy. Perhaps, some of their trends or some of their preferences for spending are shifting. So I mentioned gas, sales at gas stations were down, but that's largely due to the drop in gas prices, so hard to complain about that as a decline. There was a decline in motor vehicle and parts sales, so that perhaps is a bit more interesting in terms of all the pent up demand that we think is out there for cars, still not being satisfied or perhaps consumers are starting to pull back. So there's a little bit of mystery there in terms of how consumers are responding. 

                                             You had an increase in building material sales and an increase in non-store sales, so internet sales. So on Amazon or Amazon Prime Day might have driven that. So a lot of moving parts here, overall though I would still suggest that this is supportive of the idea that consumers are still confident enough in the economy to continue spending, but their patterns of spending may be shifting around. 

Mark Zandi:                      So the way I would put it is the firewall continues to hold, that is the American consumer, the firewall between the continued growing economy and recession, and if you look at this report you say, "The firewall is holding tough." Right? Bottom line. 

Cris deRitis:                       Yeah, holding. I would say it's not accelerating, it's not that consumers are out there really doing more.

Mark Zandi:                      Right.

Cris deRitis:                       Yeah, exactly. Motor vehicles is an interesting aspect. Again, it's one month of data, we always want to be cautious in terms of reading too much into a single data point, but the fact that it actually fell is interesting. It might point to some weakness perhaps in terms of durable goods or consumers ...

Mark Zandi:                      I doubt it, I doubt it. With the mystery guest out there, we might press her on this, because she's got standing here, but it feels like sales are awfully low and supply, I can't get a car because there's nothing in inventory, so as we get more production, more inventory, we'll see more car sales. But if there's anywhere where there's pent up demand, where people put off spending because they just couldn't buy, it would be on the vehicle side. So I'm not too worried about that. 

Cris deRitis:                       You would think, but yeah. 

Mark Zandi:                      One quick question, one quick question. I don't know if we've talked about this in the podcast, but the thing that's been curious to me is that consumers have all this so called excess saving, extra saving they did during the pandemic because they were sheltering in place and not spending, or lower and middle income households because they got a lot of government support, it feels like by our calculation it's still close to two-and-a-half-trillion in excess saving, which is well over 10% of GP. That's a lot of cash and it's all sitting in people's checking accounts, and we know that because banks are reporting their checking deposit accounts are overflowing and so we know that's where the cash is. 

                                             So it's easy to get to, but people just aren't, they're supplementing the hit to their income from the higher inflation, the higher gas prices, food prices and everything, but it doesn't feel like they're spending beyond that, right? They're just going right up to that and saying, "Hey, I'm going to spend, but I'm not going to spend with abandon." Which I find a bit surprising, I would have thought we'd see ... It's fine, it allows the economy to move forward, but I thought we might see some happy days are here again. We never really saw that. 

Cris deRitis:                       Well, I think it points to the confidence. Consumers are still very reticent in terms of the prospects of the future, so I think there's a lot of precautionary saving that's going on. I might have that ability, that nest egg is there, but I might need it. I don't know if I'm really ready to spend with abandon. That's why I thought maybe some of this, perhaps some of this delay in terms of spending on a new car may actually be real. People, being a little cautious, maybe they could afford it, certainly the higher end consumer. 

Mark Zandi:                      You're still sticking to that, no matter what I say, you're still sticking to that? Okay, fair enough. 

Cris deRitis:                       Got to mix it up here. 

Mark Zandi:                      We're going to end the conversation soon, so we can move along. But on housing, we've got some pretty tough numbers there. 

Cris deRitis:                       Yes. Housing is clearly slowing. Starts were down across the board, permits were down on the single-family side, actually up a little bit on the multifamily side, but overall clearly the housing picture is darkening relative to where it was. A lot of talk about housing recession, I don't know if I'm prepared to go that far. 

Mark Zandi:                      It's going backward, right?

Cris deRitis:                       It is going backwards. 

Mark Zandi:                      Sales are down, construction starts are down, the next two to fall is prices. It feels like they're going to fall here too. 

Cris deRitis:                       Definitely slow, but still we're at 2019 levels.

Mark Zandi:                      Well, recession is ... Okay. 

Cris deRitis:                       It depends, so sure, recession, I would say mild recession so far. 

Mark Zandi:                      Not a crash. 

Cris deRitis:                       Hair on fire recession? I don't think so. I think there's still lots of demand out there, so I'm not quite at the point to declare that housing is never going to recover here. 

Mark Zandi:                      One interesting thing on that though I noticed is completions remain at a very high level, so starts are saying, "I'm starting, actually putting a foundation in the ground." Completion is what's already in the pipeline, going towards getting across the finish line, which has been a number of homes in the pipeline going to completion has been at a record level, maybe it came down a little bit last month, I didn't check. But that means that completions, which actually I think is hat matters for output, GDP, jobs, the economy, that actually was pretty good in July. 

Cris deRitis:                       It actually rose, yeah. 

Mark Zandi:                      It rose in July. 

Cris deRitis:                       Which is definitely a shift though towards, away from single-family, towards more multifamily, which you would expect given prices and rents. 

Mark Zandi:                      In our conversation last week with John Burns. Okay, very good. Anything else you want to bring up before we move on?

Cris deRitis:                       No, I think everyone is waiting with bated breath here. 

Mark Zandi:                      Okay, yeah. Bated breath, the mystery guest is Ellen Hughes-Cromwick. Ellen, it's good to have you on Inside Economics. Thanks for joining us. Where are you speaking to us from? Are you in DC? Are you in DC?

Ellen Hughes-Cromwick: I am right now in Ann Arbor, Michigan, and enjoying a beautiful day here looking outside, but staying in at my laptop. 

Mark Zandi:                      Sorry about that. You've got a fan base out there and you've got to speak to them, so it's very good to have you. Ellen, you have a storied career. Now you're at Third Way, Third Way is this wonderful, is it fair to call it a think-tank? Third Way meaning down the middle of the road. 

Ellen Hughes-Cromwick: The first centrist think-tank and I'm working in the climate and energy program, and we're really all about doing analysis and understanding what the likely pathway is to net zero emissions by 2050. So we have many different experts across a variety of technologies and lots of work to do in this area. 

Mark Zandi:                      Third Way is a great think-tank, I'm trying to think of the economists that are there that I've worked with in the past. Jim ... Shoot. 

Ellen Hughes-Cromwick: Jim Kessler. 

Mark Zandi:                      Oh, Jim Kessler, yeah. 

Ellen Hughes-Cromwick: He's one of our leaders, absolutely outstanding. Zach Moller and Gabe Horwitz in the economic program, they do just an incredible amount of work understanding these different policies and looking at what the opportunities can be for the future. 

Mark Zandi:                      Yeah, he's a great guy, and a great think-tank. But Ellen, you had a long career before you found your way to Third Way. Do you want to give us a sense of your journey, how you got to where you are today?

Ellen Hughes-Cromwick: Yeah. Well, as I think it's true for so many economists, we are I think in a profession that offers up a lot of different career pathways, and I certainly fit that mold having started after graduate school at the Council of Economic Advisors, and then teaching. I went into banking for a little bit and in the course of that, just have enjoyed a great career journey with my husband, who is a health economist. 

Mark Zandi:                      Who I think I knew before you, didn't I get to meet Paul?

Ellen Hughes-Cromwick: I think so. 

Mark Zandi:                      I met Paul before, it was close, I'm not sure. 

Ellen Hughes-Cromwick: So the magic number, we have three adult children now and just love family, love athletics, and have been fortunate to work at Ford Motor Company for many years. Which you know, I think the both of you are going to understand this so well, that when you work in a cyclical industry it's like drinking from a firehouse in terms of macro and all of the different elements of a supply chain that the auto industry represents. So it's a little bit of hedging, looking at commodities, and marketing and sales, and production programming, and strategic planning. A little bit and sometimes a lot of it, and just incredible experience. 

Mark Zandi:                      So you were chief, how long, you were chief economist for four, from when to when?

Ellen Hughes-Cromwick: Yeah, from 2004 to 2014. 

Mark Zandi:                      So during the financial crisis, so that must have been a pretty cool time. 

Ellen Hughes-Cromwick: That was exciting. Very stressful, but exciting. I would encourage anybody listening out there, for all our listeners today to really think seriously about getting into economics and business economics, it's just an incredibly satisfying rewarding career. 

Mark Zandi:                      See, Ellen, of course she's a salesperson, always selling. Did you notice that?

Cris deRitis:                       I like it. I'm convinced, I'm convinced. 

Mark Zandi:                      She's actually really good at it. Oh, yeah. I want to do that too. 

Ellen Hughes-Cromwick: Mark, you're a star, come on. 

Mark Zandi:                      Oh, come on. 

Ellen Hughes-Cromwick: You can definitely sell better than I can, and I think all the different dimensions of your career are something that we think of as a role model. 

Mark Zandi:                      Oh, stop, stop. 

Ellen Hughes-Cromwick: Oh, seriously. 

Cris deRitis:                       For sure. 

Mark Zandi:                      Oh, come on. 

Ellen Hughes-Cromwick: Yeah. 

Mark Zandi:                      You come back on this podcast anytime you want, Ellen. Anytime. I did want to ask you one thing about, and I might be pushing you to a place you don't want o go, so you can say, "Hey, Mark, stop." But on this conversation we just had a minute ago on vehicle sales, I think we're at 13, 13-and-a-half million annualized rate, which for context, before the pandemic we were at 17 million, so we're well south of that, does it feel like to you that we're so low because of demand, people don't want to buy, or is it supply, they just can't find the cars that they want to buy? Do you have a sense of that? I'm just curious. 

Ellen Hughes-Cromwick: I'm out of the business of doing macro analytics for autos, but I will say 13 is low. So absolutely, there's a supply constraint. Just looking around here in Southeast Michigan, a bit ago we saw a lot of, obviously in 2020, excess supply. But then with the chip shortage and parts problems, there's no question that we've got tight inventory here. So it's going to be awhile for that recovery, but it will come back. Because we know discretionary scrappage in the business is north of 11, and so we've got at least room to run here, I think to ...

Mark Zandi:                      I did not know that. Is that right?

Ellen Hughes-Cromwick: Let me make sure I'm clear on that point. When you desegregate, like Alan Greenspan used to do, between discretionary and physical scrappage, so there's a certain libel distribution of failure rate to vehicles. So if they're running around 11 years old, they're getting to a point where they have to be replaced. But then you have that other piece, which is, "Hey, I want an electric vehicle." So the vehicle that you're putting in the used market, in the funnel, might have some life left to it, but you're moving on to a new vehicle. So some of that dynamic could be changing now in light of some of these shifts in the technology.

Mark Zandi:                      To that end, we have an economist, a good vehicle fellow who focuses on the vehicle, Mike Brisson, who's been on the podcast before, and he points out that since the pandemic hit, we've all driven a lot less. So maybe there isn't as much depreciation of the stock that typically ... But still, that doesn't explain 17 versus 13. 

Ellen Hughes-Cromwick: Absolutely not. When you look at public transit drops and the fact that people aren't commuting to offices, does that offer up additional incremental demand? A lot of dynamics there, but 13 sounds, it does sound low. 

Mark Zandi:                      Then you were at the chamber, you were the chief economist at the chamber, no, excuse me, at the Department of Commerce. I keep saying chamber. Department of Commerce. 

Ellen Hughes-Cromwick: That's right. 

Mark Zandi:                      That was under President Obama, that must have been pretty cool as well. 

Ellen Hughes-Cromwick: Yeah, that was exciting. We really accomplished a lot in that last period of his administration, a lot of work on digital flows, data flows between countries, obviously a lot of work on trade agreements that we did not get across the finish line, but are still extremely important, especially with Asia and Europe. I think as you look ahead to the future and the kind of trading partners, friends that will be expanding our relationships with. So that was a lot of groundwork that we did in that period. 

Mark Zandi:                      I guess the one disappointment, and maybe it wasn't, but from my perspective a disappointment of that time was the Transpacific Partnership, that was the trade deal, free trade deal with the Pacific Rim nations, excluding China, until China played by the rules, which they weren't, everyone knew that they weren't doing. But that fell apart unfortunately. So I'm sure you must have played a pretty active role in that. 

Ellen Hughes-Cromwick: Secretary Pritzker, she put her running shoes on, she was all over the place working diligently to get that across the finish line. That was a disappointment, but again, we have the fundamentals in place to really activate that aggressively. So I think it's something that future generations or future administrations are going to get back to. 

Mark Zandi:                      It makes perfect sense, right? I never really understood that, because it's a way to push back on China and say, "Hey, you want to be part of this free trade pact, you've got to play by the rules." So it just confused me to no end. You look at the economic impacts on the US that are pretty inconsequential, I didn't think, even from a micro perspective, I didn't think it was going to be that big a deal. But anyway, that's a shame. Then you, now you're at Third Way and Third Way is doing a lot on climate, and in our conversations prior to the podcast, you were talking about some work you're doing with BCG, I think you mentioned. Did you want to talk about that a little bit, that kind of work you're doing?

Ellen Hughes-Cromwick: We're going to be releasing a lot of the report outs from this study that we commissioned with Boston Consulting Group, and we joined with Breakthrough Energy to lead this effort. We've basically examined six clean energy technologies and the supply chains for each of those. So this is really path breaking, because we really haven't seen studies of this scope that really drilled down in each of the supply chain segments for these technologies, and then measuring market size, looking at export market opportunities, and then measuring competitiveness of US companies. 

                                             That I think is going to offer up a lot of good insights for the public. This will all be in the public domain, we'll be releasing it hopefully soon. I think it's a good springboard for understanding how provisions in the Inflation Reduction Act, in the Bipartisan Infrastructure Law, in other legislation. Look at the CHIPS and Science Act, just to name a few. There are many ways that we're really accelerating now these clean energy technologies, and I think the US is going to be a marked leader in many of these. 

Mark Zandi:                      That's encouraging. It's just amazing what has gotten across the legislative finish line here in the last year. 

Ellen Hughes-Cromwick: Yeah, back at you on that. Were you surprised at these legislative efforts and the fact that we've had now a Congress that has really been able to march forward on climate change and other issues?

Mark Zandi:                      Totally. It's also snuck up on us, because it wasn't this one big massive piece of legislation, it was a bunch of pretty big pieces of legislation that when you bring them all together, you go, "Oh, wow. This is pretty impressive." The Inflation Reduction Act, which we're going to go into in a minute here, you mentioned the CHIPS Act, that's pretty cool, it's going to go back to the auto industry and vehicle industry and secure our chip supplies, which goodness knows we need, going back to China. Then you mentioned the Bipartisan Infrastructure bill, I guess that was back at the end of last year, almost a year ago now. You add all that up, I think the total amount of funding into the economy is something like $1.5-trillion dollars. This is pretty significant, and a lot of that goes to the topic at hand, and that is climate risk mitigation, right? A significant amount of that, and they all help each other, they all work together to do that. 

Ellen Hughes-Cromwick: Yeah. It's really fascinating to see, in the standard macro textbook there's always the chapter about the fact that fiscal policy lags, it tends to be reactive, it ends up not having the kind of positive spillover effects that would be intended by lawmakers. Now we're seeing I think more astute policy making that we're getting to a point where we've got the evidence base, remember a few years ago the Evidence Act passed, which said, "Hey, legislative leaders here, we have to measure the outcomes and make sure that we're implementing policies with a strong evidence base." I think that is really now starting to infiltrate the way that lawmakers are putting these packages together. So that's, I think maybe we're seeing a new dynamic here in terms of more proactive policy. 

Mark Zandi:                      Now, don't get ahead of yourself, getting a little giddy there, I have to say. But good reason to feel good about things, a lot of progress has been made here. Well, let's dive into the Inflation Reduction Act and the IRA, we talked about that on the podcast, we've written about it, we did a macro economic impact analysis that we produced back a few weeks ago, but for this conversation I think we'd like to focus on the climate risk provisions, which at the end of the day I think in my view, and I'm sure yours, that is the most impactful part of the IRA. This is going to have an impact long into the future, not just this year, next year or the year after. It's a big deal. 

                                             So with that as a bit of context, I'm not sure how we want to dive into it, because there's so many moving parts here. Maybe the way to ask it is, of all the different things climate related in the IRA, Inflation Reduction Act, what do you think you find, what's the most impactful? What do you think is the biggest deal in terms of affecting the climate emissions and the economy going forward?

Ellen Hughes-Cromwick: You're absolutely right, there is just a plethora of provisions in IRA adding up to about $370-billion over a 10-year period. Let me just cherry pick what I think might be the top five. 

Mark Zandi:                      Uh-oh. Hey, Chris, write these down, Chris, write these down. Write these down, because we have to come back. 

Cris deRitis:                       I'll get the pen out. 

Mark Zandi:                      All right, go ahead. 

Ellen Hughes-Cromwick: Apologies to our listeners who have their favorite provision in here, because there's just absolutely so, so much that's beneficial. 

Mark Zandi:                      Just as a coda, I might interrupt you along the way, just to break it up and just to get our minds around it. Because there's a lot of things and they're all hard to get your mind around, unless you think about this on a daily basis. So I might interrupt, I'm not being rude, well, I am being rude. 

Ellen Hughes-Cromwick: No, that's fine. Again, truth in advertising, I focus more on the electric vehicle and battery provisions, I am by no means an expert on offshore wind, for example. But I guess the top five, I don't want to discount the fact that there's a lot of EJ-40 provisions in here. They look like small dollar signs, but these are provisions that really try to build out the equity of advancing toward a clean energy economy, whether they're grants in communities or they're some kind of credit to take advantage of installing solar panels or buying energy efficient appliances or heat pumps. 

                                             All of those measures doesn't rise to dollar billions in terms of an EV tax credit, but they will make a huge difference in a lot of disadvantaged communities. Think about communities that are on the route to the Inland Empire in California, and now all of a sudden you have some tax credits for heavy duty vehicles to clean them up. That's going to make a big difference in people's lives, and I think that is one of my top five. So I'll just throw that out there, there are many different provisions in IRA that have these equity considerations. 

Mark Zandi:                      So there's a lot of small line items that when you add it all up really has a meaningful impact, particularly on communities that, lower income, disadvantaged communities that are under particular stress due to climate change. 

Ellen Hughes-Cromwick: Yes, exactly. Climate change, but also expenditures for lower energy efficient appliances or their electricity spending. So they're really trying to help these households that are in disadvantaged communities, that they have outdated appliances or their electric grid is expensive for different reasons. I like that intention in the legislation that they focused on that. 

Mark Zandi:                      It's interesting, at Moody's we're doing a lot of work in the climate area and we calculate these, as you can imagine, scores, rating agency scores, we score everything. We create these scores for physical risk, physical climate risk, mostly acute, but also chronic heat and that kind of thing, flooding and fires and anything related to climate. We do this for parcels, so if you give me your address, we could tell you what your score is for climate risk. If you do a scatter plot across let's say metropolitan areas or counties or a level of geography, on the X-axis is the score, the higher the score, the more risk you are, the lower the score, the lower risk, and compare it that to the income level of that geography, it's amazing. 

                                             It's so clear that low income parts of the country are at much greater climate risk than higher income areas. I just, I guess that's intuitive, but I was shocked at how strong the relationship that is. Pretty amazing. 

Ellen Hughes-Cromwick: Mark, I'm so glad you're doing that work, because measuring this is half the battle, right? It's only in the recent, maybe last 10 years that we've been able to get just better data, to fully understand and make it transparent. Because if you don't measure it, you're not going to know about it. I think getting that data out, especially for insurance, reinsurance, but also to focus policy more directly. Because in a sense, if you don't address this equity consideration, you're really missing a great opportunity for these individuals, people in these communities to reach their full potential. That adds to productivity growth, it has dividends for the broader economy over time. 

Mark Zandi:                      So number one, top of the list is this plethora of provisions that go to making sure that we address climate risk through the prism of equity, trying to help communities that are under the most, that are lower income, under the most stress. That's great. 

Ellen Hughes-Cromwick: Yeah, absolutely. So number two is one of my favorites, it's call the 48C Manufacturing Tax Credit, at a 30% rate. I'm sure you all have looked at this pretty carefully, but it was funded at the $10-billion dollar level. Now, why is this important? Well, it's going to apply to all kinds of manufacturing activities and the reason I think it's critical is that we have a lot of factories in historic communities, especially in the Midwest, that if we can retool those, we're going to be off to the races. 

                                             I'm thinking specifically around EVs, although there are many different types of manufacturing facilities that could apply for this. I think it's going to be a huge help for companies as they look at their capital allocation and figure out, "How do I get this done?" Because you have to, as you know, spend a fair amount to retool a facility, that 30% credit is going to be extremely valuable. Now, $10-billion isn't going to go a long way, I can't give you an exact estimate, if you were retooling Wayne Assembly Plant on Michigan Avenue, how much is that going to cost if you want to make that entirely an EV plant, all battery electric vehicle plant? But it could come in around at a billion or so, that 48C Tax Credit may be one piece of how you put together a plan for retooling. 

Mark Zandi:                      This may be way deep in the weeds, but how does that tax credit get allocated, do you know? Is it first come, first served kind of thing? Do you know how that works?

Ellen Hughes-Cromwick: I don't believe that they have issued the guidelines for that yet. We're just now getting some guidelines, like this morning we just got some guidelines from the Department of Energy and the IRS on the EV Tax Credit, so this will be coming out and we'll get better definition on that over time. 

Mark Zandi:                      Got it, got it. 

Ellen Hughes-Cromwick: The third one on my top five are the EV Tax Credits. I think the most important aspect of this EV Tax Credit is that they did retain the $7500 level of that credit, which is critical that we have something that's close to the cost spread between an ICE and an EV. 

Mark Zandi:                      ICE being internal combustion engine, for those ...

Ellen Hughes-Cromwick: Yes, yes. That's shifting obviously, as we see battery costs coming down, especially for an iron phosphate battery chemistry. It's not perfect, but I think that's probably the right amount of a credit. It will provide a significant boost on the demand side to get us hopefully close to that 50% target of EVs in the US by 2030. There are some provisions in there that do require sourcing for battery components, on the components, think about a cathode, an anode, electrolyte separator, those are the big four battery components, and also some requirements on the battery critical minerals and the sourcing of that. So there are some very onerous requirements that come in to play after 2024 for some, and after 2023 for others. 

Mark Zandi:                      Let me ask you on that one, because that's where I've seen some criticism of the legislation, that you have these very severe constraints in terms of eligibility to get the tax credit, and sourcing is a big part of that. You've got to get the materials that go into building these batteries here, not somewhere else. That's an impediment, because a lot of these minerals are in China, they're in different parts of Africa, Latin America, other parts of the world. If you were king for the day, would you have done that? Would you have put in those sourcing requirements or do you think that is really a problem here in terms of this ...

Ellen Hughes-Cromwick: No, I know I was waxing eloquently about fiscal policy ...

Mark Zandi:                      Yeah.

Ellen Hughes-Cromwick: ... proactive, but in some sense this is a very strategic component of the credit. For example, the provision around foreign entity of concern for battery components starts after the end of 2023. In other words, prior to December 31st, 2023, that provision is not active. So it does provide a bit of a runway for companies to start looking ahead and of course, as you know, Mark, really well, when you put together a sourcing plan, you're looking out at least three to five years for any product program. 

Mark Zandi:                      Sure.

Ellen Hughes-Cromwick: So will they have some flexibility as they get into year two, three, four, and five? Yes, I think companies will start to respond to this and will see investments in the US for the production of battery components. So it does provide that and says, "Hey, let's get that sourcing more diversified." It's been centered in certain countries, and we really need to have a better supply chain. The saying about, "Hey, let's not have a crisis that we can't find an opportunity in." Well, in some sense, COVID and the supply chain bottlenecks gave us a bit of a wake-up call about supply chains and how vulnerable they are. So I think that legislation is going to be beneficial, it's going to give a nudge to redirecting sourcing and really stand up a battery cell industry in the US and our allied countries. 

Mark Zandi:                      So it sounds like if you were king, you would have done it roughly the same way. Hey, Chris, if you were king, would you have done it the same way? Or would you have ... I guess, you're saying because you are king, you're going to show some flexibility here. December 31, 2023 comes around, maybe we'll stretch this a little bit to make it work, is what you're saying. Chris, do you have a different take on that, any views on that?

Cris deRitis:                       Well, if I'm king, I'm up for E-Trade. 

Mark Zandi:                      I can take that right away from you, but you're king at the moment. 

Cris deRitis:                       So yeah, I wouldn't put that restriction in. 

Mark Zandi:                      You would not have?

Cris deRitis:                       No.

Mark Zandi:                      Oh, interesting. 

Cris deRitis:                       If we're not the lowest cost producer, why force it. Now, you could argue certain countries, certain areas, some preferential treatment, but just to blanketly force, try to force an industry in the US, I don't know how effective that's going to be. 

Mark Zandi:                      Yeah. Well, I guess ... Go ahead. 

Ellen Hughes-Cromwick: On the critical minerals, the foreign entity of concern doesn't kick in until after December 31st, 2024, by the way. So there's a little bit of a different runway for the critical minerals, again, recognizing we do not have sufficient mining for lithium here in the US, which is, as you know, a very critical component for the cells. This does provide a little bit of a stick, the carrot is the $7500, the stick are these restrictions. 

Mark Zandi:                      Well, it will be very interesting to see how this plays out, because it's a little bit different than what a traditional economist would do. But of course, that's a silly statement in the context of legislation, because you've got all these political constraints as well and I'm sure that played a role in their decisioning around all of this. 

Ellen Hughes-Cromwick: Chris, if we could implement a carbon tax and some energy standards that really set the stage for that, obviously, as an economist, that does make sense. But we just aren't in that world, and so that's why I think strategically a little bit of a carrot and stick in the way that they structured this credit probably makes some sense. 

Mark Zandi:                      You should know, Ellen, that Chris is one of these out in the universe optimists. I have to rein him in, not very practical. Just the opposite. Okay, so that's three, number four?

Ellen Hughes-Cromwick: Yes, number four has to do with, I'm sure you have looked at this, which is the Loan Programs Office at the Department of Energy. The Loan Program Office has over $40-billion dollars available for loans and loan guarantee authority, they have three programs in there and the IRA increases the loan authority for these programs and it appropriates some additional funds in the program to run it, especially the credit subsidy cost. It does also establish a new program in LPO, Loan Programs Office at the Department of Energy, which is focused on reusing energy infrastructure. So I think that's going to have a lot of bang for the buck. There's a lot of interest and applications coming in there, and I look to see that as being a useful way of looking at investment and capital coming in for these projects. 

Mark Zandi:                      Yeah. I think that does have a lot of potential juice, particularly to provide the financing necessary to do a lot of this investment and development, I think that's going to be really critical here. 

Ellen Hughes-Cromwick: Recall Tesla did receive a loan from ...

Mark Zandi:                      Did they?

Ellen Hughes-Cromwick: In 2009, Ford Motor Company also received a loan, but that was the beginning of Tesla's rise was getting some low cost funding through this LPO program. 

Mark Zandi:                      I didn't know that. That's interesting, wow. Great, so that's number four, we're down to number five. 

Ellen Hughes-Cromwick: Yes, number five. I think it has to do with, again, this is more strategic, this is long run, this is patient capital, which is some funding for nuclear fuel sourcing and a nuclear tax credit. Again, we have a lot of innovation happening in this field, you may have heard about small modular reactors, again, this is an area that Third Way has a lot of expertise in, it's not my field, but what I understand from their research is that these small modular reactors can be manufactured at a facility and then installed onsite. Think of maybe a steel plant that has associated with it carbon free fuel coming out of a nuclear facility, a small modular reactor or other types of manufacturing companies that co-locates such a small modular reactor.

                                             I think this funding is going to be really important to start that effort and to get that rolling out. Of course, these are long lived assets that require substantial effort to get to a point where the installation and operation is taking place, but it seems to be the kind of optionality we need if we're on some curve to get to net zero emissions by 2050. We have to be thinking long run, and to have options that trigger different types of technology, and lots of technologies we don't even know about yet, but we should have that optionality to help fund that. 

Mark Zandi:                      Yeah. So I do want to ask you what you absolutely did not like. I know this almost feels, I know you've been so active in helping put this legislation together, particularly on the EV side, it feels a little bit like your baby, but I'm going to press you in a second about what you didn't like about the legislation. But just I want to provide a little bit of context and see your reaction, and I don't know if you've done work in trying to take all these provisions and translating it into a mission and then macro economic impacts, and you've done a little bit of work there, and just to give you a sense of it, currently there's roughly 4.5 billion metric tons of emissions, CO2 emissions in the US, 4.5 billion. 

                                             If there's no, if there had been no policy action, there was no IRA and nothing else, then by 2100 we'd still see a reduction in emissions, because of rising costs of carbon and we're assuming some improvements to technology. We'd be at roughly three billion metric tons, which by the way would be a disaster, because temperature rise at that point would be quite significant and the damage to our economy very serious. But with the IRA, we're calculating that emissions by 2100 will be somewhere around 2.4, 2.5 billion metric tons. So when you think about it, you go, "Oh, that's still far from net zero, we've got a long way to go." But conversely, you think about that, given this up front investment we're making today, $380-billion dollars over 10 years and we're getting that kind of lift, that's a big deal. 

                                             If you translate that reduction in carbon emissions to what it means for physical risk, economic loss due to hurricanes and flooding and economic loss due to chronic physical risk like sea level rise or heat stress, GDP we found is higher by 2.7% in 2100, 2.7% higher in 2100. So that's a big deal in my mind, that's meaningful. Have you done any of that kind of work or have you gone down that path trying to connect those dots back to the macro economy? Or is it something you ... What do you think of that? What's your reaction to that?

Ellen Hughes-Cromwick: Yeah. I guess I'll react to it, that is out of scope right now for what I'm working on. 

Mark Zandi:                      It sounds like something we could collaborate on, to me. 

Ellen Hughes-Cromwick: I would love to, because I think the economic implications of this are critical. I was talking with an economist at CEA recently and one of the things that they're pointing out is that the longer you wait, the higher the cost and therefore the lower the GDP. So in other words, you're going to have a more adverse impact on GDP the longer you delay these actions. These are not cost free decisions that Congress is making, that we as Americans are making today. To the extent that we can measure that and quantify that, I think then we'll get more resonance, we'll understand that these investments that you've made today have more impact, more bang for the buck than if you just simply wait and delay action. 

                                             The fact that there's potential for bipartisan action going forward, beyond IRA, speaks to that particular observation. How many states, Mark, that you see that are impacted now by the climate challenge? Pick your favorite state and look at the situation. So that's something that's bringing the reality forward I think to people, and I think for us, for the economics profession, I really hope that we really make this kind of analysis more mainstream in our assessments and try to lengthen out beyond the next couple years what we see in terms of how these risks materialize. It really is a solid case for building scenarios and I do really appreciate that you and your team have taken this on. 

Mark Zandi:                      Yeah. That's so key, because going back to fiscal policy, it's always been judged, or at least in recent decades, by the 10 year budget horizon. What does it mean ... So when I say $380-billion dollars, that's over the 10 year budget horizon. The mindset is that's what the Congressional Budget Office, the folks that look at this for the budget purposes look at, but for climate risk and actually for a lot of other policies that matter a lot, like Social Security just to pick one, it's really important to look beyond the 10 year budget horizon because if you don't, you're going to make some pretty bad decisions around what we should be doing and not be doing. 

                                             I know we're running out of time, I do want though to ask, of all of the provisions in the legislation, what is at the bottom of the list that you didn't like? What would you have done differently?

Ellen Hughes-Cromwick: Well, I guess I'll come back to the EV Tax Credit. I heard Chris loud and clear. My issue is with the price caps for these vehicles. I know this has been unpopular that we don't want to give money to high income individuals, but my experience in the auto sector is that when initial new products hit job one, that is they're now going to be coming down the assembly line, that often those initial runs of a brand new vehicle unfortunately have to be higher priced because you're running low volume. So you're at the top of the average cost curve in that period. 

Mark Zandi:                      Good point. 

Ellen Hughes-Cromwick: You're at the top of the demand curve, and it's just simply because if you've got a factory with a lot of capital in it and you're only making 20,000 units, when the capacity for the facility is 200,000 units, it's just going to be costly. It's going to be more costly than when you get to peak volume for the facility, which for autos tends to be around 200,000-plus, although Tesla has been innovating, I don't know if you've seen this recently, but the Fremont, California plant could be reaching as much as 500,000 units. 

Mark Zandi:                      Yeah.

Ellen Hughes-Cromwick: So you're working down the average cost for getting to the bottom of that curve pretty quickly, now that they're on third, fourth generation product. But when you're just starting out and you've got all these companies that are just starting their product releases on EVs and they're low volume, it's just going to be higher costs. So that's just the way it is, and providing an incentive, regardless of what the price is for those initial runs, I would just say suck it up, it's not perfect, but that would get the demand stimulus. Because for a company where you're making capital investments that have long lives and it takes you three years from the start before you even see a product coming off the assembly line, three or four years, you've got to just give them that expectation that demand is going to be there. So I guess that's my spiel on the price caps for ... It's $80,000 max for vehicles, cars and vans, and then $80,000 I'm sorry for SUVs and pickups, and $55K for cars. 

Mark Zandi:                      Well, that makes a lot of sense to me and I like the suck-it-up, spoken like a mom with three kids. "Suck it up." Three highly successful kids. Well, we've run out of time, that happened pretty fast, I'd have to say, and we didn't get to the game, Ellen, you got off the hook, because we play this statistics game, but we're not going to do it this week. But we're definitely going to have you, if you're up for it, you're going to come back and Chris is going to show you ... Well, at that time, we'll have Ryan. Ryan wasn't able to make it, as we pointed out, but he's really, really good at the data. So we'll have you back and play the game, if that's okay. 

Ellen Hughes-Cromwick: That sounds great. 

Mark Zandi:                      Thanks so much. 

Ellen Hughes-Cromwick: Thanks a lot, thank you. 

Mark Zandi:                      Oh, yeah. This is great. Learned a lot and appreciate the time that you took with us. With that, dear listener, we're going to call this a podcast and talk to you next week.