Will the Inflation Reduction Act (IRA) Reduce Inflation?
Will the Inflation Reduction Act (IRA) Reduce Inflation?, Econospeak
Probably not, but it also will probably not increase it either. This is the judgment of the Congressional Budget Office and also the Penn Wharton Budget Model, as well as libertarian economist Tyler Cowen of George Mason, who is critical of much of its content. It has inflationary and disinflationary elements, and it looks that they about balance out, although in the longer run it is hard to know.
The obvious immediate issue is its impact from its aggregate character. So it increases spending on various things, although some of its health parts should lead to lower spending in the future. But it also increases taxes on corporations and through its funding of the IRS should lead to greater tax collections from wealthy individuals. Indeed, it is projected to lower the budget deficit. These elements are clearly offsetting to some extent.
In terms of its components, the most important are probably those related to climate. Certainly the subsidies for moving off fossil fuels are inflationary in the short run. But reducing external costs from global warming, as well as encouraging the development of more efficient clean technologies should be disinflationary in the longer run. This is not so clear cut.
Then we have the health front. Here it seems to be mostly disinflationary. Besides caps on how much people must pay for certain things, probably the most important item is allowing Medicare to negotiate with pharmaceutical companies over drug prices. This is something that should have been done long ago, especially given how high medical care costs are in the US.
I note that while many are pleased with the contents of the IRA, on many fronts it is much more limited than widely known. Thus it subsidizes electric cars only if they are fully produced in the US, this applying to only about 30 percent of them. Also, apparently Medicare can negotiate with drug companies about only 10 drugs. Obviously this law could have gone much further than it does.
Barkley Rosser
well, i wouldn’t take Tyler Cowan’s word for much of anything.
as for the “inflation reduction act” it’s one thing what the act says it is going to do, it’s another thing what it is going to do. the “climate” initiatives look to me to be grossly counter productive, but they spend money on things that will make people happy, so what’s not to expect?
i do have some trouble how increasing taxes will “reduce inflation”… taking money from people who might “save” it, and giving it to the government to spend looks like zero sum…unless of course the government “saves” it, whatever that means. maybe this is MMT in action?
I confess to reading Tyler’s blog. He has interesting links. But I don’t put any stock in his political or economic views.
The IRA will unfold over years. I think it’s hard to determine today the effect, especially for the climate pieces. Much will depend on who is running the government over the next ten years. If Republicans take back the White House, I think IRA will be dismantled.
What! The Inflation Reduction Act may not actually reduce inflation. What a bummer!
Hopefully it will at least make some people less hungry. Or warmer in winter and cooler in summer. Or less late for work on crowded highways. Or some at least wealthier. Maybe less drought & fewer hurricanes going forward, though that could take quite a while.