Today, the House of Representatives granted its final approval to President Joe Biden’s historic Inflation Reduction Act, which comes at a time when inflation is raging near its worst level in nearly four decades.
The phrase “will actually tame price spikes that have inflicted hardships on American households” raises an intriguing question. Will the measure actually be able to tame the price spikes?
The economic studies of the plan point to the conclusion that the answer is probably not going to be yes, at least not any time soon.
The legislation, which was approved by the Senate earlier this week and is now on its way to the White House for President Biden to sign, will not directly address some of the primary factors that are driving up prices, such as the cost of gas and food as well as rent and the cost of meals in restaurants.
Despite this, the bill has the potential to save certain Americans money by lowering the prices of energy and prescription drugs for the elderly, expanding subsidies for health insurance, and reducing overall energy costs.
Additionally, it would result in a moderate reduction of the federal government’s budget deficit, which could lead to a somewhat reduced rate of inflation by the end of this decade.
The non-partisan Congressional Budget Office reached the conclusion last week that the adjustments would have a “negligible” influence on inflation both this year and the following year.
In addition, the Penn Wharton Budget Model from the University of Pennsylvania came to the conclusion that “the impact on inflation is statistically indistinguishable from zero” over the following decade.
These projections also undermine the claims that certain Republicans, such as House Minority Leader Kevin McCarthy, have made, namely that the measure will “create inflation,” as McCarthy stated in a speech he gave on the floor of the House of Representatives a month ago.
When asked about the potential impact of the Act on inflation, Vice President Biden has circumspectly pointed, rather than to a reduction in inflation overall, to the possibility of price decreases in specific product categories. The President made the statement earlier this week that the plan will “bring down the cost of prescription medications, health insurance premiums, and energy bills.”
At the same time, the White House has been making a lot of noise about a letter that was signed by more than 120 economists and asserts that the law’s reduction in the government’s budget deficit — by an estimated $300 billion over the next decade, according to the CBO — would put “downward pressure on inflation.” This letter was signed by several Novel Prize winners and former Treasury secretaries.
In theory, reducing deficits can have the effect of lowering inflation. This is because lowering government expenditure or increasing taxes, both of which contribute to a smaller deficit, diminish demand in the economy, which in turn eases the pressure on businesses to raise prices.
In an opinion essay for The Wall Street Journal, Harvard economist Jason Furman, who also served as a key economic adviser in the Obama administration, stated that “deficit reduction is nearly invariably inflation-reducing.”
However, Douglas Holtz-Eakin, who was a top economic adviser to President George W. Bush and who later became a director of the CBO, pointed out that the lower deficits won’t kick in until five years from now, and that even then, they won’t be very large over the next decade given the size of the economy. Holtz-Eakin was a director of the CBO.
According to Holtz-Eakin, “$30 billion a year in a $21 trillion economy isn’t going to move the needle,” which is a reference to the expected amount of deficit reduction spread out over ten years.
He also mentioned that Congress had recently approved other legislation to support the production of semiconductors in the United States and to increase health care for veterans, and he argued that those measures would spend more money than the Inflation Reduction Act would save in the long run.
Furthermore, Kent Smetters, the head of the Penn Wharton Budget Model, stated that the law’s health care subsidies would cause prices to rise.
Extending tax credits to help 13 million Americans pay for health insurance under the Affordable Care Act would require the spending of $70 billion over a decade under the proposed plan.
These subsidies would release money for recipients to spend elsewhere, which may potentially lead to an increase in inflation; nevertheless, Smetters expressed his belief that the effect would likely be extremely minimal.
Although the act may help millions of households save more money on the prices of pharmaceuticals and energy, it’s not very likely that it would have much of an impact on inflation as a whole.
Only one per cent of the money spent on the consumer price index in the United States is spent on physician-prescribed medications, and only three and a half per cent is spent on electricity and natural gas.
The act establishes a limit of $2,000 per year on the amount that Medicare participants are responsible for paying for their prescription medication beginning in 2025.
It will give Medicare the authority to negotiate the prices of some of the most expensive drugs, which was a long-sought goal that President Donald Trump had also considered pursuing.
In addition to this, it would set the maximum out-of-pocket payment for insulin for Medicare participants at $35 per month. According to the Kaiser Family Foundation, the typical cost of an insulin prescription in the year 2020 was $54.
According to Leigh Purvis, who works as the director of health care costs at the AARP Public Policy Institute, “This is a historic change.” In a way that was not possible in the past, this makes it possible for Medicare to safeguard beneficiaries from the high cost of prescription drugs.
According to the findings of a study conducted by Kaiser in 2019, 1.2 million people receiving Medicare spent an average of $3,216 on their drug prescriptions.
According to Purvis, users who use the costliest prescriptions may spend as much as $10,000 or $15,000 annually on their medication.
The new law gives Medicare the authority to negotiate the pricing of ten particularly pricey drugs beginning in the year 2020, but the results of those negotiations won’t take effect until 2026. By the year 2029, up to sixty different medications might be up for discussion.
Holtz-Eakin stated that even if the provision were to cut the cost of some Medicare pharmaceuticals, it would have the unintended consequence of discouraging the development of new drugs and reducing the amount of new venture capital investment in start-up pharmaceutical companies.
The energy provisions of the Inflation Reduction Act may also result in cost reductions, although it is highly unlikely that the amounts will be significant.
The measure will provide a tax credit of $7,500 for new purchases of electric vehicles; however, the majority of EVs will not be eligible for the benefit since the legislation requires them to feature batteries that are made with components sourced from the United States.
A tax credit for homeowners who make investments in energy-efficient equipment goes from being a one-time credit of $500 to a credit of $1,200 that a homeowner can claim each year under the new legislation.
This is a significant expansion of the credit. According to Vincent Barnes, senior vice president for policy at the Alliance to Save Energy, this would make it possible for households to make additional investments in energy-efficient technologies over several years.
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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.
