There has been much confusion and completely opposite arguments around the recently signed Inflation Reduction Act.
Let’s dive into what the important voices in Finance, Economy and Government had to say about the ‘green new bill’.
How it went down
On Aug 7, the bill was passed by the Senate and on Aug 16 signed by the President.
President Biden was accompanied by the bill sponsors, senators Joe Manchin and Chuck Schumer.
The bill is an official throwback to the Build Back Better bill introduced a year earlier, now significantly scaled down.
It’s also been given a catchy name that’s a source of quite some controversy and loads of jokes.
All Democrats voted in favor and the bill passed with ZERO Republican votes.
Which most Republicans proudly admitted, pointing to independent analyses that question the bill’s effectiveness in tackling inflation.
What’s in the bill? (a WH take)
The WH and POTUS Twitter accounts have been running PR campaigns on the potential benefits of IRA:
A large part of the bill focuses on the climate and green energy. It introduces many investment grants and subsidies for companies and consumers to use more green energy solutions.
It extends the Affordable Care Act for another 3 years (for now) and let’s Medicare negotiate cheaper prices for medications, capping monthly expenses for a few (10-20) drugs across some patient groups (which will take effect only from 2026).
It promises ‘fairer taxes’ by introducing a minimum 15% federal income tax on companies that make more than $1 billion in revenue.
The Inflation Reduction Act also aims to lower the budget deficit by raising more taxes from the rich and corporations without making households under $400,000 a year pay for it.
Democrats promised the bill was ‘already paid for’…
Although it would be more accurate to say it’s ‘budgeted in.’
It assumes that the IRS and cost savings will lead to revenue estimated by the CBO at $790 billion over 10 years. $485 billion of which will be spent, leaving approximately $305 billion “extra” counted as reducing the budget deficit. All numbers are forecasted based on various Aug 2022 data and other assumptions and are subject to change.
The Criticism
The Republicans bashed the bill for what they consider a vastly misleading name chosen to impress voters worried about inflation.
They warned about the legislature’s ability to increase inflation through higher government spending.
They also criticized it for repeating energy and taxation policies that the Republicans blame for the current inflation crisis.
Former President Donald Trump called on Democrats to reject the bill ahead of the vote, warning it would expand inflation.
He also mentioned its similarities to the Green New Deal, which hasn’t advanced to the Senate.
And indeed, even democrats agreed that the inflation act is an important climate bill.
All those opposing the Inflation Reduction Act quoted arguments directly opposite to the benefits put forward by the Democrats. Critics argued it could make America more and not less dependent on China manufacturing and in effect, energy-dependent.
They mentioned that the subsidies for electric cars and other renewables target the rich.
It came to light that Ford and other electric car producers are already preparing to take full advantage of the new subsidies.
Some pointed out that the bill already caused layoffs rather than creating jobs.
For example, it killed 3000 jobs at Ford in anticipation of the transition toward electric vehicle production.
The Congressional Budget Office (CBO) admitted that the bill would collect $20 billion in taxes from households below the $400,000 income, despite the promises Democrats and POTUS made to the public.
The Joint Committee on Taxation projections for 2023 seem to support that argument.
Critics of the Inflation Reduction Act also zoomed in on bill’s attempts to expand and strengthen the IRS by adding a projected 87k new hires over the span of a decade.
President Trump warned the senators and the public via Truth Social about the IRS law-enforcement training.
$80 billion of the IRA’s approved spending budget will be devoted to the IRS in the hope that the organization focuses on taxing the rich, which might not turn out to be the case.
Many people worry that the tax revenue might not come only from cracking down on the ultra-rich and corporations.
Other political voices, like Bernie Sanders, mentioned that according to CBO and other economic organizations, the “so-called” Inflation Reduction Act will have no effects on inflation.
While Robert Reich, the former finance minister under Clinton, and a Berkeley professor, hailed the IRA as a success that will raise $204 billion over 10 years and defended its support for the IRS.
The Economic Debate
The main drivers of the raging (bipartisan) debate:
1) Upcoming September elections that may rely on the current administration’s ability to curb inflation (or passing bills to that end)
2) The analysts and economists strongly disagreeing on what the bill might do.
Many independent bodies and universities predicted that the Inflation Reduction Act will have no impact on inflation.
Yahoo Finance quoted Oxford Economics economists who said that according to their preliminary analysis of “the 'Inflation Reduction Act' (IRA), a climate, tax, and health-focused bill, shows it will boost the level of GDP by about 0.2%-0.3% by the end of 2031 and, despite its name, will have no measurable impact on inflation."
The University of Pennsylvania’s Penn Wharton Budget Model (PWBM) estimated that the bill would have no statistically significant effects on inflation or GDP (if anything, it would slightly increase it till 2024) and would reduce the deficit by $248 billion (>$50 billion less than the CBO estimates).
Penn Wharton (PWBM) compared their budget deficit reduction results to the CBO’s numbers (Congressional Budget Office).
It also analyzed the inflationary impact under both Penn Wharton and CBO assumptions and said the change would NOT be detectable using the PCE (Personal Consumer Expenditure) inflation metrics.
In perhaps the most hilarious development, 126 esteemed economists and Nobel laureates sent a letter supporting the bill as historic legislation that “makes crucial investments in energy, health care, and in shoring up the nation’s tax system. These investments will fight inflation and lower costs for American families while setting the stage for strong, stable, and broadly-shared long-term economic growth”.
While another 200 economists sent a letter warning that the bill would increase inflationary pressures.
The Senate also received a Coalition letter from the Chambers of commerce and business organizations urging senators to reconsider as the corporate taxes could disincentivize rather than incentivize investment and development hailed by the IRA.
Many independent analysts also predicted that the additional government spending would actually increase inflation.
Why did all of the opinions and research vary so greatly?
Probably because we still lack robust, independent data to build reliable economic models and find out once and for all what causes inflation and how to remedy it. Economists continue to have vastly different ideas about it.
The budgetary forecasts are equally imperfect as they rely on uncertain assumptions and outdated information available presently but likely to change.
Seems we just have to wait and see.
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