Is inflation destined to be our constant companion?
It sure feels like it. In April 2021, the consumer price index (CPI) jumped well above the Federal Reserve’s average 2% target for the first time since 2008 and hasn’t looked back. CPI reached a four-decade high toward the end of last year and has so far remained there.
As for the cost of inflation in actual dollars, the numbers are stark. Analysis by the Republican wing of the U.S. Senate’s Joint Economic Committee says that the average American household paid $717 more for goods and services last month than they paid in January 2021. The Republican JEC data also provides the disquieting projection that even if prices ceased climbing entirely, the inflation that already has occurred will cost the average American household slightly more than $8,600 through next July.
That’s a lot of inflation for households to contend with. And the data says they indeed are struggling. A July 2022 survey by Primerica found that the earnings of 75% of households with annual income in the $30,000 to $100,000 range are falling behind the cost of living. We also know that more than 60% of households (as of June) now live paycheck to paycheck – and that even the percentage of higher earners living that way has been increasing.
But has help arrived in the form of the newly minted law known as the Inflation Reduction Act (IRA)?
The notion we could be rid of inflation with one wave of the legislative-fiat wand makes me wonder why we didn’t do this last year. But as analysis of the new law suggests, it isn’t that simple. In fact, the Inflation Reduction Act likely will end up doing effectively nothing to tamp down consumer prices.
I’m getting ahead of myself. Before we discuss what the experts are saying about the anticipated impact of the IRA, we’re going to spend a little time trying to understand just how the law is supposed to rein inflation in at all.
And as we close out our discussion, we also will ponder if the Inflation Reduction Act is yet another example of the deceptive economic messaging that our leaders seem all too comfortable transmitting these days.
One of the ways the Inflation Reduction Act seeks to lower inflation is by reducing the deficit, which decreases the quantity of money flowing through the financial system. The IRA would reduce the deficit a couple of ways.
One way is by lowering government spending on pharmaceutical drugs. The law provides that – for the first time – Medicare can negotiate drug prices with pharmaceutical companies. As the government pays less for the drugs, the savings translates to a lower deficit. It is projected that Medicare drug negotiations will reduce spending by around $100 billion over the next 10 years.
Increasing tax revenue also reduces the deficit, and the Inflation Reduction Act features a variety revenue-generating initiatives. Among these is a 15% tax on domestic corporations that report annual income of more than $1 billion.
Lower Medicare drug prices and greater tax revenue also can serve to potentially relieve price pressures in ways other than whatever direct impact they might have on monetary inflation (through deficit reduction).
For example, seniors who pay less for prescription medication obviously would see price relief that way. According to the White House, Americans are paying between two and three times more for prescription drugs than citizens of other countries.
As for the net greater tax burden the government seeks to impose, it generally follows that higher taxes act to lower demand in an economy. A greater tax burden at the corporate level can lower demand in a variety of specific ways, but generally because it reduces investment and output. At the personal level, higher taxes decrease disposable income, which, in turn, has a negative impact on consumer demand.
There are other ways the new law seeks to reduce consumer price pressures. The enhanced Affordable Care Act (ACA) premium tax credit guidelines reflected in the American Rescue Plan now are extended through 2025. Without the extensions, a significant number of the 13 million Americans who receive subsidies on behalf of the ACA marketplace plans would see premiums rise.
Then there is the array of clean-energy initiatives that provide consumers with tax credits and rebates for purchasing such products as electric vehicles, energy-efficient appliances and solar roofs. According to Moody’s Analytics, the total of the IRA’s clean-energy provisions could lower the typical U.S. household’s energy expenses by more than $300 year (in today’s dollars). Moody’s also foresees savings though lower property and casualty insurance rates that would be realized as a result of moderation in environmental risks resulting from the law’s climate-change priorities.
How does all that sound to you? Can you clearly see how this new law will have a significant and beneficial impact on bringing down the onerous inflation plaguing us all right now?
Or not so much?
IRA Calls for Mere 2% Deficit Reduction Over 10 Years
If you feel let down by the Inflation Reduction Act’s actual potential to reduce inflation, I don’t blame you. For one thing, it’s clear that none of these measures are of a size and scope that will reduce currently soaring prices to any measureable degree anytime soon. And as it happens, there’s really nothing here that suggests the law could bring down inflation regardless of whatever time window you choose to look at.
Take the matter of deficit reduction, which is the only component of the Inflation Reduction Act that even sort of addresses monetary inflation. According to the respected Penn Wharton Budget Model (more about those folks in the next section), the IRA will reduce cumulative deficits by $264 billion over the next 10 years.
$264 billion sounds like a whole lot of money – until you realize how large the budget deficits are expected to be over the next decade. Not long before the passage of the Inflation Reduction Act, the Congressional Budget Office projected cumulative deficits from 2022 through 2031 at $12.1 trillion.
Assuming those numbers hold, we’re talking about a mere 2% reduction in cumulative deficits over 10 years that would be attributable to the IRA – the proverbial drop in the bucket.
This isn’t to say that meaningful reductions in spending cannot have an effect on inflation. But the remedies offered up by the Inflation Reduction Act suggest a subdued overall impact on inflation, to say the least.
As it turns out, there’s no shortage of agreement on that assessment – including from an esteemed economist whose historical reviews of the president’s fiscal agenda have been quite complimentary.
That expert is Mark Zandi, chief economist at Moody’s Analytics. Zandi has been referred to as “President Biden’s favorite economic forecaster” because of his tendency to provide favorable reviews – economically speaking – of the Biden agenda. Indeed, Zandi wrote a commentary for CNN roughly a month before the 2020 presidential election in which he explained “why the economy would be stronger under Biden than Trump.”
True to form, Zandi’s formal, written assessment of the Inflation Reduction Act is positive, overall:
Broadly, the legislation will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government’s budget deficits.
Wait a second. In his zeal to paint the IRA in a favorable light, did Zandi just admit the new law merely will “nudge” inflation in the right direction?
He sure did. In fact, when discussing the measure’s anticipated effect on inflation earlier this month, Zandi at one point made clear his opinion that “it’s not a game-changer by any respect.”
So, just how little of an impact does Zandi think the new law will have on inflation?
“Through the middle of this decade the impact of the legislation on inflation is marginal, but it becomes more meaningful later in the decade,” Zandi and his team wrote. OK. That sounds at least a little promising – until you learn that Zandi’s definition of “meaningful impact” in this case is a 0.33% reduction in CPI by the fourth quarter of – wait for it – 2031.
And that’s the analysis of someone who generally seems to approve of the president’s fiscal agenda.
Then there’s the evaluation of the new law by the Penn Wharton Budget Model, a nonpartisan economic think tank that has as its mission the analysis of public policy in terms of anticipated fiscal impact. Penn Wharton’s summary of the Inflation Reduction Act as an inflation-reducer is hardly inspiring:
The Act would reduce annual inflation by around 0.1 percentage points in about five years, once major deficit-reducing provisions of the legislation are fully implemented, but the Act would have no measurable impact on inflation after 2028. All these point estimates are not statistically different from zero, indicating a low level of confidence that the legislation would have a measurable impact on inflation.
Once again: “All these point estimates are not statistically different from zero.” In other words, in the estimation of Penn Wharton, the law will have no impact on inflation.
Vocal IRA Proponent Joe Manchin Admits Law Does Nothing to Contain Current Inflation
Even Joe Manchin, the Democratic senator from West Virginia whose support for the legislation was key to its passage, has admitted the new law would do nothing to alleviate the crushing inflation Americans have been dealing with for many months now.
When recently asked by a Fox News reporter if the law’s name is misleading given that it won’t serve to lower prices right now, Manchin responded, “Why would it?”
“We’ve never [said] anything would happen immediately,” Manchin added, “like turn the switch on and off.”
So one of the law’s highest-profile proponents says it won’t do anything to tame current inflation. And economists – including those who’ve been supportive of the Biden agenda, historically – say it will do effectively nothing to reduce inflation over the intermediate and longer terms.
I’m not going out on much of a limb, then, to say it doesn’t appear the Inflation Reduction Act will lower inflation. And if it so obviously appears the measure will do nothing to lower inflation, then it seems reasonable to ask this question: Is the Inflation Reduction Act meant to be a genuine effort at trying to bring down prices – or just another example of insincere White House messaging about the state of the economy?
Regular readers of my blog know that I’ve been critical of the recent messaging coming from national leaders on the economy, particularly in the areas of unemployment and consumer spending. The reason I’ve been irritated is that the communications clearly seem at least disingenuous – and even deceptive. In my opinion, the Inflation Reduction Act is one more example of this deceptive messaging.
As I said, the White House keeps talking up the low unemployment rate. At 3.5%, it is as low as it’s ever been in the last 50 years. But the labor force participation rate also is low as it has been in the last 45 years (excluding the height of pandemic restrictions). The number of Americans working two full-time jobs is at its highest point since that particular measure was first tracked (1994). And according to the Ludwig Institute for Shared Prosperity, an economic think tank headed by a former U.S. Comptroller of the Currency, the true rate of unemployment is 22.3% right now if one counts among the jobless those Americans who are working but not earning a living wage.
We also hear from Treasury Secretary Janet Yellen about how solid consumer spending has been. But it’s no secret that real wages have been languishing in negative territory for more than a year now. And as I discussed last week, Americans have been tearing through personal savings and borrowing at record rates to keep spending – hardly signs of an organically strong economy.
The White House knows perfectly well the rest of the story regarding the seemingly positive numbers. But they appear more than content to keep that part quiet when addressing the condition of the economy with the American people.
And now there’s the Inflation Reduction Act, a law explicitly titled in such a way to convey the impression it will apply immediate and significant downward pressure to soaring prices. But it won’t, of course, as even the most optimistic analysis reveals.
For earnest Americans simply trying to do the best they can as consumers and retirement savers, it is the latest – and maybe the most egregious – example of willfully deceptive messaging coming out of the White House. And it therefore may be the best example so far of why it’s so important for all of us to hold our leaders accountable when it comes to what we’re being told about the state of the economy.
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