Its moniker begs the question, “Will this method actually curb the price increases that have burdened American families?” It is a fascinating possibility to consider.
Today, the House of Representatives gave its final approval to President Joe Biden’s landmark Inflation Reduction Act, which comes at a time when inflation is nearing its worst level in over four decades.
The plan’s economic analyses indicate that the answer is unlikely to be affirmative, at least not shortly.
The legislation, which was passed by the Senate earlier this week and is now on its way to the White House for President Biden to sign, would not directly address some of the key issues that are pushing up prices, such as the cost of gasoline and food, as well as rent and restaurant meals.
Despite this, the bill has the potential to save certain Americans money by cutting the prices of energy and prescription drugs for the elderly, boosting health insurance subsidies, and reducing the total cost of energy.
In addition, it would result in a moderate reduction of the federal government’s budget deficit, which could lead to a reduction in the inflation rate by the end of this decade.
Last Monday, the nonpartisan Congressional Budget Office determined that the revisions would have a “negligible” impact on inflation both this year and next.
In addition, the University of Pennsylvania’s Penn Wharton Budget Model concluded that “the impact on inflation is statistically indistinguishable from zero” during the subsequent decade.
These forecasts also debunk the statements that some Republicans, such as House Minority Leader Kevin McCarthy, have made, specifically that the legislation will “cause inflation,” as McCarthy asserted in a speech he delivered a month ago on the House floor.
When asked about the potential impact of the Act on inflation, Vice President Biden pointed circumspectly to the likelihood of price drops in specific product categories, rather than a reduction in inflation generally.
The President stated earlier this week that the proposal will “down the price of prescription drugs, health insurance premiums, and utility costs.”
At the same time, the White House has been making a lot of fuss over a letter signed by more than 120 economists claiming that the law’s reduction of the government’s budget deficit — by an estimated $300 billion over the next decade, according to the CBO — will exert “deflationary pressure.” Several Novel Prize winners and former Treasury secretaries signed this letter.
In theory, cutting deficits has the potential to reduce inflation. This is because reducing government spending or increasing taxes, both of which contribute to a smaller deficit, reduce demand in the economy, hence reducing the pressure on businesses to raise prices.
In an opinion piece for The Wall Street Journal, Harvard economist Jason Furman, who also served as a major economic adviser to the Obama administration, asserted, “debt reduction is almost always inflation-reducing.”
However, Douglas Holtz-Eakin, a former top economic adviser to President George W. Bush who later became a director of the CBO, noted that the lower deficits won’t take effect until five years from now, and even then, given the size of the economy, they won’t be particularly large over the next decade. Holtz-Eakin was the CBO’s director.
According to Holtz-Eakin, “$30 billion a year in an economy worth $21 trillion won’t move the needle,” which is a reference to the predicted amount of deficit reduction over ten years.
In addition, he stated that Congress had recently passed additional laws to boost the production of semiconductors in the United States and to improve health care for veterans, and he suggested that these measures would ultimately cost more than the Inflation Reduction Act would save.
In addition, the director of the Penn Wharton Budget Model, Kent Smetters, claimed that the law’s health care subsidies will cause costs to rise.
Extending the tax credits currently available to help 13 million Americans pay for health insurance under the Affordable Care Act would cost $70 billion over a decade under the proposed plan.
These subsidies would free up funds for recipients to spend elsewhere, which may conceivably lead to a rise in inflation; nevertheless, Smetters believes the effect would be quite modest.
The measure may help millions of households save more money on the costs of medications and energy, but it is unlikely to have a significant impact on inflation as a whole.
Only 1% of the money spent on the consumer price index in the United States is spent on physician-prescribed drugs, and only 3.50% is spent on electricity and natural gas.
Beginning in 2025, the act limits the amount Medicare enrollees are responsible for paying for prescription medications to $2,000 per year.
It grants Medicare the right to negotiate the prices of some of the most expensive pharmaceuticals, a long-sought objective that President Donald Trump has contemplated pursuing.
In addition, it would limit the monthly maximum out-of-pocket cost for insulin for Medicare beneficiaries to $35. According to the Kaiser Family Foundation, the average price of a prescription for insulin in 2020 was $54.
According to Leigh Purvis, director of health care costs at the AARP Public Policy Institute, “This is a monumental shift.” This makes it possible for Medicare to protect beneficiaries from the high expense of prescription medications in a manner not previously achievable.
According to a survey done by Kaiser in 2019, 1,2 million Medicare recipients spent an average of $3,216 on prescription medications.
According to Purvis, individuals who fill the most expensive prescriptions may spend as much as $10,000 or $15,000.
Beginning in 2020, the new law grants Medicare the right to negotiate the pricing of ten extremely expensive medications, but the results of these agreements will not take effect until 2026. Up to sixty different treatments may be under consideration by 2029.
Even if the provision were to reduce the cost of some Medicare prescriptions, Holtz-Eakin claimed that it would have the unintended effect of discouraging the development of new drugs and decreasing the amount of new venture capital investments in start-up pharmaceutical companies.
It is exceedingly doubtful that the energy provisions of the Inflation Reduction Act would result in considerable cost savings.
The law will provide a $7,500 tax credit for the purchase of new electric vehicles; however, the majority of EVs will not be qualified for the credit, as the legislation requires their batteries to be manufactured with domestically sourced components.
Under the new legislation, the tax credit for homeowners who invest in energy-efficient equipment increases from a $500 one-time credit to a $1,200 credit that may be claimed annually.
This is a substantial increase in credit. According to Vincent Barnes, senior vice president for policy at the Alliance to Save Energy, this would enable households to make longer-term investments in energy-efficient devices.
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However, the impact will likely be minimal for the vast majority of Americans, even those who do not own their own homes.
The Rhodium Group estimates that by the year 2030, the provisions of the bill will save households an average of up to $112 per year.
This is because the price of gas and electricity will decrease as more people in the United States drive electric vehicles and as houses become more energy efficient.
