Here’s how much the Inflation Reduction Act will reduce inflation by: zero.
Actually, it is likely to increase inflation a bit in the near term.
The supposedly game-changing legislative breakthrough that brought together Sen. Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) after months of negotiations over Build Back Better failed is cynically branded as a measure to counter the budget deficit. This makes sense in a crass political way because inflation is the number issue facing American families and is plunging the economy into a stagflationary recession.
“He frustrates the devices of the crafty,
So that their hands cannot carry out their plans.” Job 5:12
The first hint that this is not going to be an inflation reducing piece of legislation is that the bill includes a massive expansion of government spending. There is roughly $385 billion in spending on energy and climate change, according to the nonpartisan Committee for a Responsible Budget. There is $100 billion of new spending for health care in the form of expanded Obamacare subsidies and expanded prescription drug and vaccine coverage.
These new spending measures, which come on top of the already bloated government budget, will operate to increase aggregate demand in the economy. They may increase the supply of some goods and services but will not likely increase aggregate supply. Rather, the subsidies for green energy and clean manufacturing tax credits will shift supply sources without leading to a net increase.
The bill purports to reduce the budget deficit by increasing taxes and controlling some drug costs. The Committee for a Responsible Budget estimates these will produce cost savings and revenue of $470 billion. Unfortunately, none of that is likely to reduce inflation.
At its core, inflation is a problem of too many dollars chasing too few goods and services. This makes it very difficult to control through legislation, especially in the near-term. Tax hikes can do the job but only if they are targeted at those most likely to spend the money into the real economy on goods and services.
Since the wealthy tend to save a large portion of their income, taxing the rich does not get the job done.
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