WASHINGTON — With inflation raging near its highest level in four decades, the House on Friday gave final approval to President Joe Biden’s landmark Inflation Reduction Act. Its title raises a tantalizing question: Will the measure actually tame the price spikes that have inflicted hardships on American households?
Economic analyses of the proposal suggest that the answer is likely no — not anytime soon, anyway.
The legislation, which the Senate passed earlier this week and now heads to the White House for Biden’s signature, won’t directly address some of the main drivers of surging prices — from gas and food to rents and restaurant meals.
Still, the law could save money for some Americans by lessening the cost of prescription drugs for the elderly, extending health insurance subsidies and reducing energy prices. It would also modestly cut the government’s budget deficit, which might slightly lower inflation by the end of this decade.
The nonpartisan Congressional Budget Office concluded last week 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 undercut the arguments that some Republicans, such as House Minority Leader Kevin McCarthy have made, that the bill would “cause inflation,” as McCarthy said in a speech on the House floor last month.
Biden himself, in speaking of the legislation’s effect on inflation, has cautiously referred to potentially lower prices in individual categories rather than to lower inflation as a whole. This week, the president said the bill would “bring down the cost of prescription drugs, health insurance premiums and energy costs.”
At the same time, the White House has trumpeted a letter signed by more than 120 economists, including several Novel Prize winners and former Treasury secretaries, that 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.”
In theory, lower deficits can reduce inflation. That’s because lower government spending or higher taxes, which help shrink the deficit, reduce demand in the economy, thereby easing pressure on companies to raise prices. Jason Furman, a Harvard economist who served as a top economic adviser in the Obama administration, wrote in an opinion column for The Wall Street Journal: “Deficit reduction is almost always inflation-reducing.”
Yet Douglas Holtz-Eakin, who was a top economic adviser to President George W. Bush and later a director of the CBO, noted that the lower deficits won’t kick in until five years from now and won’t be very large over the next decade considering the size of the economy.
“$30 billion a year in a $21 trillion economy isn’t going to move the needle,” Holtz-Eakin said, referring to the estimated amount of deficit reduction spread over 10 years.
He also noted that Congress has recently passed other legislation to subsidize semiconductor production in the U.S. and expand veterans’ health care, and suggested that those laws will spend more than the Inflation Reduction Act will save.