The Inflation Reduction Act… Minus the Inflation

The “Inflation Reduction Act” miraculously passed the Senate and the House. It aims to “make a historic down payment on deficit reduction to fight inflation.” The bill also seeks to “invest in domestic energy production and manufacturing and reduce carbon emissions by roughly 40 per cent by 2030.”  Lastly, it aims to combat pharmaceutical price abuses. Ambitious indeed, but many critics, especially from the right, cast some serious doubts on whether this will do what it says it will or if it's beneficial. This article will explore whether the bill is worth all the enthusiasm.

The relationship between deficit reduction and the fight for inflation rate goes like this. The monetarist states that an increase in budget deficit means an increase in money supply in the economy, leading to a rise in the inflation rate. In fiscal theory, a deficit means an increase in federal loans which means a rise in interest rates – a higher cost of borrowing.  As a result, inflation rises. However, data has never unconditionally supported such a relationship between budget deficit and inflation. As such, critics are justified in contesting the foundation of the bill. Furthermore, it's apparent that global commodities price idiosyncrasies are the primary factor causing inflation rather than government spending and monetary policy, which is the case in normal circumstances. It seems the use of word “inflation” is just a way to sway the public while the main aim of the policy is the tax, energy and price reform involved in it.

The most surprising and positive aspect is the price cap on pharmaceutical drugs, a rare loss by the industry. The bill will allow the government to negotiate the prices of 10 high-cost drugs for Medicare. If they don’t negotiate, they are burdened with a 95% sales tax on the drug. Additionally, Medicare beneficiaries have capped out-of-pocket drug costs at $2,000. Insulin will be capped for Medicare at $35 (2023). Most reforms aim to be implemented in 2025 or onward (except insulin), and as you know, many things could happen from now to then. In addition, reforms are aimed at Medicare beneficiaries, which insure 82 million Americans. However, many privately insured (177 million) and non-insured (35 million) individuals will not benefit from the bill. The second positive aspect is that there will be a 15% minimum tax on book income of $1billion+ revenue, ending a major loophole used to avoid tax.

The most talked about aspect of this bill is tax breaks, credits, and subsidies that aim to tackle the climate crisis. However, unfortunately, it seems it's not as positive and historical as many claim, even if we assume the ideal that the $369 billion spending and credit and tax breaks bring about a trillion in private spending. According to the calculations of Robert Pollin and others, they have estimated that for the USA to hit a 50 per cent CO2 emissions cut by 2030, it “will require about $400 billion in today’s economy and an average of $600 billion per year between now and 2050” (Pollin 2022), which is nowhere near the current funding. Furthermore, the bill was passed in exchange for many things. One of them is constructing a 300-mile-long gas pipeline in a mountain valley, which signifies that burning natural gas isn't targeted as a way to reduce emissions. But instead, I speculate that the USA aims to reduce emissions through channeling funds to carbon capture technology, as they did in the past. Carbon capture is clearly not developed yet to be commercially used, or even to be a viable option.

The inflation reduction act seems to be a scaled-down version of Biden's Build Back Better. The bill sounds good for headlines but, upon close inspection, is extremely limited. It will probably not have much impact on current inflation, nor will it help the USA reach its climate goal if funds are channeled to carbon storage technology. The major positives are the minimum corporation tax, the deficit reduction for reasons other than inflation, and the cost limitation on pharmaceutical drugs.