WASHINGTON — With inflation nearing its highest level in four decades, the House of Representatives on Friday finally approved President Joe Biden’s landmark inflation-reducing bill. Its title begs a tantalizing question: will this measure really control the price spikes that have been causing trouble for American families?
Economic analysis of the proposal shows that the answer is unlikely – at least not any time soon.
The bill, passed by the Senate earlier this week and now heading to the White House for Biden to sign, won’t directly address some of the top causes of price increases — from gas and groceries to rents and restaurant meals. .
Still, the law could save some Americans money by lowering the cost of prescription drugs for the elderly, increasing health insurance subsidies and lowering energy prices. It will also marginally reduce the government’s budget deficit, which could moderate inflation slightly by the end of this decade.
The bipartisan Congressional Budget Office concluded last week that the changes will have a “negligible” effect on inflation this year and next. And the budget model by Penn Wharton of the University of Pennsylvania concluded that over the next decade “the impact on inflation is statistically indistinguishable from zero.”
Such projections also refute the argument that some Republicans, such as House Minority Leader Kevin McCarthy, have said the bill “will cause inflation,” as McCarthy said in a House speech last month. .
Biden himself pointed to the law’s effect on inflation, which may lower prices in individual categories rather than reducing inflation overall. This week, the president said the bill would “reduce the cost of prescription drugs, health insurance premiums and energy bills.”
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, claiming that the lack of funding from the legislation is reducing the government’s budget deficit — an estimated $300 billion over the next ten years. According to CBO – will “pressurize inflation”.
In theory, a smaller deficit could reduce inflation. That’s because lower government spending or higher taxes that help reduce the deficit reduce demand in the economy and reduce the pressure on businesses to raise prices.
Jason Furman, a Harvard economist who served as a top economic adviser in the Obama administration, wrote in an op-ed column for the Wall Street Journal: “Deficit reduction is almost always inflation-reducing.”
Still, Douglas Holtz-Eakin, President George W. Bush’s chief economic adviser and later director of the CBO, said the reduced deficit would not begin until five years ago and would not be much larger than last year. Looking at the size of the economy over the next ten years.
“In a $21 trillion economy, $30 billion a year isn’t going to move the needle,” Holtz-Eakin said, referring to the projected amount of deficit reduction spread over 10 years.
He also points out that Congress recently passed other legislation to subsidize US semiconductor production and expand health care for veterans, and suggests that these legislation cost more than the Inflation Reduction Act. Will do.
Additionally, Kent Smeters, director of the Penn Wharton budget model, said the law’s health subsidies could drive inflation. The legislation would cost $70 billion over 10 years to expand tax credits to pay for health insurance for 13 million Americans under the Affordable Care Act.
These subsidies would free up money for recipients to spend elsewhere, potentially increasing inflation, although Smeters said he thinks the effect would be much smaller.
While the law may have the benefit of bringing millions of households more savings on drug and energy bills, it is unlikely to have a major impact on headline inflation. Prescription drugs cost just 1% of the US CPI; Expenditure on electricity and natural gas is only 3.6%.
Beginning in 2025, the law will pay Medicare beneficiaries up to $2,000 a year for their medications. It would empower Medicare to negotiate the cost of certain high-priced drugs — a long-awaited goal that even President Donald Trump has promised. This would limit Medicare beneficiaries’ co-payment for insulin to $35 per month. Insulin prescriptions averaged $54 in 2020, according to the Kaiser Family Foundation.
“This is a historic shift,” said Leigh Purvis, director of health care costs at the AARP Public Policy Institute. “It allows Medicare to protect beneficiaries from higher drug prices in a way it hasn’t done before.”
A Kaiser study found that 1.2 million Medicare beneficiaries spent an average of $3,216 on drug prescriptions in 2019. Purvis said recipients using the most expensive drugs could end up spending as much as $10,000 or $15,000 a year.
The law authorizes Medicare to negotiate the prices of 10 expensive drugs starting next year, though the results won’t take effect until 2026. 60 drugs could be subject to interactions by 2029.
Holtz-Eakin argued that the provision could reduce the cost of some Medicare drugs, but it would discourage new drug development or reduce new venture capital investments in start-up pharmaceutical companies.
The energy requirements of the Inflation Reduction Act can also bring savings, but the amount is likely to be significantly lower.
The bill provides a $7,500 tax credit for new EV purchases, although most EVs are not eligible because the law requires them to contain US-grade batteries.
And the law expands the tax credit for homeowners who invest in energy-efficient appliances from the $500 one-time credit to $1,200 a homeowner can claim each year. This will allow homeowners to make new energy-efficient investments for years to come, said Vincent Barnes, senior vice president of policy at the Alliance to Save Energy.
But for all Americans, including those who don’t own a home, the impact is likely to be limited. The Rhodium Group estimates that the bill’s provisions will save homes an average of $112 annually through 2030 as gas and electricity become cheaper, more Americans drive electric vehicles, and homes become more energy efficient.