The latest “historic” bill, H.R. 5376, passed out of Congress and signed Tuesday by the President, is formally titled “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.” It is called the “Inflation Reduction Act” because the politicians supporting it want it known that way. But it contains no items that actually reduce inflation.
It is not a complex bill, which makes it easier for both “experts” and average people with less time to understand. It contains seven fairly straightforward concepts which are:
1. An extension of American Care Act tax credits set to expire in 2023;
2. A significant variety of green energy provisions, primarily tax credits and new programs;
3. A minimum 15% tax increase on income of large corporations;
4. A 1% tax on corporations that buy back their own stock;
5. An extension of the limit on how much in business losses people can claim on their taxes (which increases taxes);
6. a) Mandatory Medicare drug price “negotiation” on older drugs, b) caps on Medicare drug price increases, c) caps on out-of-pocket drug costs for those on Medicare; and
7. Expanded funding for more IRS agents/enforcement (along with a program to create an e-file system similar to TurboTax, etc.).
Note: you may have seen a provision about a “carried interest loophole.” This was dropped from the final package.
Leaving opinions about the need for the above provisions and leaving any “experts” out of the analysis, scan the list for yourself. Do you see any inflation reduction? No? That’s because there isn’t any inflation reduction. What you do see easily is spending (1, 2, 6c, 7) and taxes (3, 4, 5).
The area that is not obvious is the net price tag which is what is “maybe, sort-of, kind of, could be” linked to less inflation. The net price tag is negative in the beginning and positive later. The act brings in slightly more tax revenue than it spends — but according to the UPenn Wharton Business School not until 2027, when the deficit reduction averages $68 billion/year from 2027-2032. But it adds an average $19 billion/year to the deficit from 2023-2026. The idea here is that reducing the annual budget deficit starting in 2027 is a responsible fiscal measure which should theoretically reduce inflation.
But there is a small technical inconsistency and a major political inconsistency with this “deficit reduction equals less inflation” conclusion.
First the technical inconsistency: The federal government spends significantly more than it takes in almost every year (not even counting the over $5 trillion in pandemic spending). The U.S. has had a balanced budget only four times since 1968. In 2021 for example, the U.S. spent $6.8 trillion but only had revenue of $4.0 trillion which, as irresponsible as usual, required the federal government to borrow the difference. This was $2.8 trillion in 2021 according to the Congressional Budget Office or a “don’t let the children see” huge 41% of spending. You wouldn’t survive financially for long if you handled your own life that way.
Since 1960, inflation ranged as high as 13.55% in 1980 to below 0% in 2009, with it being reliably under 4% since 1992. So, consistent deficits do not equal inflation — there are too many factors at play in the economy. A balanced budget full of bad policies such as overtaxing and counter-productive spending, for example, while yielding a $0 deficit would lead to an unhealthy economy including inflation (think pandemic spending). Still, using an “all things being equal” approach, low or no deficits generally equal a healthier economy, which is what is actually linked with inflation.
Now the much more significant political inconsistency, a.k.a. disinformation (the title and characterization of the Act could really rise to the level of outright lie). Even leaving aside the deficit increase from 2023-2026, the Act’s annual deficit reduction of $68 billion starting in 2027 is only a 2.4% reduction in the embarrassing inability of federal office-holders to control budget imbalance. The CBO does, however, forecast lower deficits in the next ten years independent of H.R. 5376 so the percentage reduction would be higher than 2.4% except that the farther one gets from the current year, the less reliable forecasts become.
Who knows what inflation will be like in 4-5 years? A 2.4% change in the deficit, even if it were to occur, will be rendered meaningless by other future economic and political policies and factors. A reliable ten-year forecast of federal spending and revenues is impossible (although it is a worthy budgetary endeavor).
So, given all the above, how the heck is this “inflation reduction?” You may applaud many, perhaps all, of the provisions in the Act. That is your right and you wouldn’t be wrong, although I would have to question the sensibility, if not objectivity of someone who does not question at least some of these policy provisions. But regardless, it is not an Act that reduces inflation. The notion borders on absurd.
And finally, the “experts” think so too. The highly respected non-conservative University of Pennsylvania Wharton Business School reports that the Act’s inflation effects are “not statistically different from zero, indicating a low level of confidence that the legislation would have any measurable impact on inflation.” Meanwhile the CBO (undeniably non-partisan) reports that the Act would impact inflation in 2023 by “between 0.1 percentage point lower and 0.1 percentage point higher” leading to their obvious conclusion that it “would have a negligible effect on inflation.”
Maybe you doubt self-serving national Washington politicians already so this is all no surprise. But you would be wrong because Governor Lamont, genius multi-millionaire businessman, here in Connecticut, disputes the Wharton School’s assessment and thinks the Act will make “a big difference [on inflation] not just this year but at least the next few years.”
Oops, never mind all that number/analysis/common sense stuff.
If Governor Lamont spent any time looking at it he knows that the Act does nothing about inflation. He tells you what a party official is supposed to tell you to strengthen the party and the corrupt system that supports it.
But even with another abuse of the truth by party politicians, you still want to affiliate with a party? When will affiliated voters finally see that the parties serve themselves with power, patronage, jobs, influence and those who fund them. The average citizen (most of you) is a distant afterthought.
The most impactful thing you can do as an individual to change the way Hartford and Washington works is to un-affiliate and un-donate. The most impactful big-picture policy area you can pursue is to remove the money from politics which removes the incentive for elected people to serve their parties first. Now, basically good, positively motivated, people cannot get elected without the money of a party machine. Once they make that Faustian bargain, their policy and decision-making is their own no longer.
Reducing the power of parties increases your power not only systemically but also individually, in helping at least, to be more objective and thoughtful and less polarized since you won’t have that natural emotional response when “your party” gets criticized.
Alan Calandro is a life-long independent and former director of the Legislature’s nonpartisan Office of Fiscal Analysis. More of his commentary can be found here.