Thursday, August 25, 2022

Will the Inflation Reduction Act (IRA) Reduce Intlation?

 Probably not, but it also will probably not increase it either. This is the judgment of the Congressional Budget Office and also the Penn Wharton Budget Model, as well as libertarian economist Tyler Cowen of George Mason, who is critical of much of its content.  It has inflationary and disinflationary elements, and it looks that they about balance out, although in the longer run it is hard to know.

The obvious immediate issue is its impact from its aggregate character.  So it increases spending on various things, although some of its health parts should lead to lower spending in the future.  But it also increases taxes on corporations and through its funding of the IRS should lead to greater tax collections from wealthy individuals. Indeed, it is projected to lower the budget deficit. These elements are clearly offsetting to some extent.

In terms of its components, the most important are probably those related to climate.  Certainly the subsidies for moving off fossil fuels are inflationary in the short run.  But reducing external costs from global warming, as well as encouraging the development of more efficient clean technologies should be disinflationary in the longer run. This is not so clear cut.

Then we have the health front. Here it seems to be mostly disinflationary.  Besides caps on how much people must pay for certain things, probably the most important item is allowing Medicare to negotiate with pharmaceutical companies over drug prices. This is something that should have been done long ago, especially given how high medical care costs are in the US.

I note that while many are pleased with the contents of the IRA, on many fronts it is much more limited than widely known. Thus it subsidizes electric cars only if they are fully produced in the US, this applying to only about 30 percent of them.  Also, apparently Medicare can negotiate with drug companies about only 10 drugs.  Obviously this law could have gone much further than it does.

Barkley Rosser


Anonymous said...

The title of the bill is a misnomer at least in the short term even though it does good things long term. The transistion to electric cars will be interesting but the cars and charging stations are not cheap esp if they are fast chargers. Germany is ahead on this but it is not all smooth sailing. So slightly off topic but will Germany reverse its stance on nuclear power given the Russia gas situation and that wind power won't provide steady enough power to handle needs? said...


I saw a report that indeed Germany has decided not to shut down its remaining nuclear plants, a fairly recent development that did not get big headlines.