As they took control of Congress at the beginning of 2021, Democrats eyed the opportunity for an enormous increase in public spending to rebuild the post-pandemic American economy. It has taken almost 18 months for them to assemble an agreement. Yet, though rising inflation has forced Democratic leaders to scale back their ambitions significantly, the various provisions of the Inflation Reduction Act remain largely unaltered from a time when inflation was the least of their concerns.
On April 28, 2021, Joe Biden stood before a joint session of Congress to propose “a once-in-a-generation investment in America.” The president promised to “put engineers and construction workers to work building more energy-efficient buildings and homes” and reward “farmers planting cover crops so they can reduce the carbon dioxide in the air and get paid for it.” Biden pledged federal funds to guarantee affordable childcare and four extra years of public education for every American. He vowed to give $7,200 to all households with two kids under age six, in addition to paying for “12 weeks of paid leave and medical leave.” Biden called for Congress to “expand Medicare coverage benefits” and to hike Obamacare subsidies.
The combined cost was estimated at around $7.5 trillion over the next decade, once budget gimmicks were accounted for—slightly more than $5,700 per U.S. household per year. But Biden asserted that he would “not impose any tax increase on people making less than $400,000” because he deemed the middle-class to be “already paying enough.” To cover the cost, it would only be necessary for “corporate America and the wealthiest 1 percent of Americans to just begin to pay their fair share.”
Moderate Democrats were already skeptical of this supposed fiscal math, and these concerns have been deepened by an overheating economy. As unemployment has fallen from 6.0 percent to 3.6 percent, inflation has surged from 0.4 percent to 8.6 percent—a 40-year high. Understanding that voters had little appetite for enormously costly proposals that would further inflate the deficit and inflation, the administration has been forced to downsize on the original plan.
The bill is certainly in better shape for being a small fraction of its original size. The 2021 progressive wish-list has been pared back to a focus on health care and climate policy. Whereas earlier proposals to cap or tax American carbon emissions would have served to push industry abroad, the current proposal simply attempts to aid the development of cleaner technologies. Whereas Biden in 2020 promised to lower the age of Medicare eligibility to 60 and establish a public option for all ages, the Inflation Reduction Act attempts merely to patch cracks in existing coverage options.
Yet, while most of last year’s proposed Build Back Better Act was discarded, the sections from it that made it into the Inflation Reduction Act remain remarkably unaltered from a time when stoking demand rather than reducing inflationary pressure was the supposed goal.
Instead of revising the Obamacare regulations that caused insurance premiums to rise by more than double, the proposal simply increases the share of premiums covered by subsidies—even though these subsidies serve to inflate underlying costs further. Rather than acting to reduce the growth of hospital costs, which are the main driver of health-care expenses, the legislation reduces payments for newly developed drugs—even though drug development is the one element of health care that reliably reduces costs over the long run.
The “Energy Security and Climate Change” section, which accounts for the bulk of the bill’s enumerated expenditures, was clearly not designed with the objective of reducing inflation. As economist Tyler Cowen has noted, big new tax credits for the purchase of electric cars are likely to drive up their price, as demand is already buoyant and production highly supply-constrained. Tax credits for households, manufacturers, farms, and utilities to purchase cleaner technologies are likely to do similarly little to reduce prices—though they may achieve more success in further reducing carbon emissions.
Democrats understand that voters fear rising prices more than rising emissions, and so they have strained to tell a tale whereby the bill reduces the deficit, and hence inflationary pressures, regardless of the nature of its specific provisions. Yet the bill is likely to swell the deficit on balance for the first five years. Once its budgetary gimmicks are accounted for, its supposed $300 billion, ten-year reduction of the federal deficit all but vanishes. Much of the cost of additional spending is financed through higher taxes on businesses, which will be passed on to workers and consumers.
While most Democrats believe that nudging the economy away from fossil fuels is worth it, this will surely increase the expenses that Americans will have to bear. And it hardly offers the solution to inflation that they claim to be looking for.
Photo by Jabin Botsford/The Washington Post via Getty Images