Joe Biden’s Inflation Reduction Act may have little impact on inflation, experts say

United States.- With the inflation near its highest level in four decades, President Joe Biden on Tuesday enacted its historic Inflation Reduction Law. Its title raises a tantalizing question: Will the measure tame price increases that have inflicted hardship on American households?

Economic analyzes of the proposal suggest that the likely answer is no, not in the short term, anyway.

The legislation, which passed Congress last week, will not directly address some of the main drivers of rising prices, from gasoline and food to rent and restaurant meals.

Still, the law could save money for some Americans by lowering the cost of prescription drugs for the elderly, extending health insurance subsidies and lowering energy prices. It would also modestly reduce the government’s budget deficit, which could slightly reduce inflation later this decade.

The nonpartisan Congressional Budget Office concluded this month that the changes would have a “negligible” impact on inflation this year and next. And the University of Pennsylvania’s Penn Wharton budget model concluded that, over the next decade, “the impact on inflation is statistically indistinguishable from zero.”

Such forecasts also undermine arguments that have been made by some Republicans, such as House Minority Leader Kevin McCarthy, that the bill would “cause inflation,” as McCarthy said in a House speech.

Biden himself, speaking of the legislation’s effect on inflation, has referred to potentially lower prices in individual categories rather than reducing inflation as a whole. The president said the bill would “lower the cost of prescription drugs, health insurance premiums and energy costs.”

At the same time, the White House has announced a letter signed by more than 120 economists, including several Nobel Prize winners and former Treasury secretaries, stating that the law’s reduction in the government’s budget deficit, by an estimated $300,000 million over the next decade, according to the CBO, would put “downward pressure on inflation.”

In theory, lower deficits can reduce inflation. That’s because cutting government spending or raising taxes, which help reduce the deficit, reduces demand in the economy and thus relieves pressure on businesses to raise prices.

Jason Furman, a Harvard economist who served as one of the top economic advisers to the Obama administration, wrote in an opinion column for The Wall Street Journal: “Deficit reduction almost always reduces inflation.”

However, Douglas Holtz-Eakin, who was one of President George W. Bush’s top economic advisers and later head of the CBO, noted that lower deficits won’t be felt for another five years and won’t be very large. in the future. next decade considering the size of the economy.

“$30 billion a year in a $21 trillion economy is not going to move the needle,” Holtz-Eakin said, referring to the estimated amount of deficit reduction spread over 10 years.

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He also noted that Congress recently passed other legislation to subsidize semiconductor production in the United States and expand healthcare for veterans, saying those laws will spend more than the Inflation Reduction Act will save.