Democrats’ plan to fight inflation could cut costs over time

President Biden said Thursday that an energy, tax and health care sector Agreement Reached with Senator Joe Manchin III of West Virginia would ease inflation and lower the cost of living for American families. That key promise helped get the centrist senator on board for a bill that carries the remnants of the president’s expanded domestic agenda.

Taming inflation is a top priority for Democrats and Mr. Biden, who has seen his approval rating plummet as Americans have faced rising costs for food, gas, rent and other goods and services. With few policy levers under his direct control to curb rapid price increases, Mr. Biden sought to portray the new package as an economic salve that would put money back into consumers’ wallets.

To what extent could the package, the so-called Inflation Reduction Act, provide the most relief? rapid price increases in 40 years remains to be seen. But many economists agreed that the tax and other regulations would likely help ease price pressures somewhat, though the overall effect is likely to be modest and may not be felt for months or years.

The plan revolves around nearly $370 billion in tax breaks and spending programs intended to encourage consumers, businesses and electricity companies to switch to low-emission energy sources on the road and in electricity generation. It also includes nearly $300 billion in federal savings, achieved by giving Medicare the power to negotiate lower prices for prescription drugs, and money to lower health insurance premiums for 13 million people who receive their insurance through the Affordable Care Act. .

Mr Biden said the health savings from those moves would amount to $800 per family per year, and the energy supply would lower the family’s energy bills “by hundreds of dollars.”

The new spending and tax credits would be more than offset by a $313 billion tax hike for large multinational corporations that are currently cutting their tax bills below an effective rate of 15 percent, along with a new crackdown by the Internal Revenue Service against corporations and high-profile companies. people who evade taxes earn. It would bring in more than it spends, which would reduce the federal budget deficit by $300 billion.

As a result, the bill could help reduce inflation in two ways. Reducing the federal budget deficit should at least slightly reduce consumer purchasing power in the economy. In particular, it could take money from high earners, through increased tax enforcement, and from large corporations. Its investments in emerging low-emission energy sectors could accelerate growth and help the economy run more efficiently.

“To fight inflation, we want policies that increase supply or reduce demand. And this does both,” said Maya MacGuineas, president of the Center for a Responsible Federal Budget in Washington, which has pressured lawmakers to support policies that reduce the deficit. “Almost all of these policies will fight inflation on their own. And on the net the whole package will certainly do that.”

Mr Manchin told reporters on Thursday that he had been assured by independent experts that the legislation would tame rampant price growth. In comments to the White House, Mr. Biden said the bill will “effectively reduce inflationary pressures on the economy,” adding that it “strengthens our economy in the long run as well.”

But many outside experts, even supporters of the bill, were hesitant in their estimates of the extent to which the package would reduce an inflation rate that was more than 9 percent in June. They said the magnitude of the deficit reduction is relatively small compared to the general economy, noting that the tax hikes won’t affect people and businesses until next year at the earliest.

“This legislation will lower inflation,” said Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers under former President Barack Obama. “I don’t think it will decrease much.”

White House and Treasury Department economists have not yet analyzed the effect of the agreement on inflation, top officials said Thursday. An external projection — from the University of Pennsylvania’s Penn Wharton Budget Model — estimates that the plan will add 0.05 percentage points to the country’s inflation by 2024, but subtract a quarter of a percentage point annually in later years.

“This isn’t a ton of money compared to the economy as a whole,” said Alexander Arnon, associate director of policy analysis at the budget model. “From an inflation perspective, it’s quite small.”

Cecilia Rouse, chair of Biden’s Council of Economic Advisers, said in an interview on Thursday that the plan would make “a meaningful contribution” to a wide range of ongoing government efforts to reduce inflation. That includes the government’s work to clean up pandemic-clogged supply chains and the Federal Reserve’s swift moves to raise interest rates, which are designed to cool the economy by making money more expensive to borrow and lend. to give.

Ms. Rouse said the bill’s effects could show up in economic data, which in turn could cause the Fed to change its course of rate hikes. “It could very well make a difference to their own policy making,” she said, “because as far as they see inflation falling while employment remains robust – so we still have maximum employment or a strong labor market that makes their lives easier.” – they will be able to moderate their own policies.”

At a news conference on Thursday, Treasury Secretary Janet L. Yellen urged Congress to pass the legislation “immediately,” which she says would help cut costs for American families.

“I see that as a very important contribution to reducing the cost of prescription drugs, which is a very heavy burden on their household budget for many households,” said Ms Yellen.

The Treasury Secretary added that the measures in the bill that would reduce the deficit are an “appropriate addition” to the Federal Reserve’s rate hikes. As for the degree of impact the legislation would have on inflation and how soon it would take effect, Ms Yellen said she had no “numerical estimates” to share.

The agreement blinded White House and Treasury officials Wednesday night, and to their dismay, it contained no measure that would bring the United States into compliance with the global tax treaty. Ms. Yellen mediated with more than 130 countries around the world.

That pact requires countries to introduce a global minimum tax of 15 percent. The proposed minimum corporate tax on the domestic “book income” of large companies would not bring the United States into line with that agreement, which Mr Manchin said would put American companies at a competitive disadvantage.

Mr Manchin’s willingness to support the legislation followed months of deliberations about the impact a bill would have on inflation. Democratic lawmakers, White House officials and outside advisers such as Lawrence H. Summers, the former Secretary of the Treasury in the Obama administration, urged Mr. Manchin to support legislation they believe could help alleviate rising prices .

“I’ve been in conversation with Senator Manchin and other senators about inflation and inflation risk and how policies can promote or reduce inflation,” Mr Summers said in an interview. “I hope the talks have been productive.”

Mr Summers added that he believed the bill is “anti-inflationary” on the basis of supply, demand and pricing.

“I think that on the basis of economic growth and efficiency, it promotes investment by reducing budget deficits,” said Mr Summers. “It promotes efficient resource allocation by leveling the corporate tax playing field, and it promotes investment with clean energy incentives. I think it makes healthcare more affordable, based on fundamental progressive goals.”

But business groups have already opposed the tax changes, and some tax experts believe the legislation could increase inflation.

Rohit Kumar, the head of PwC’s tax policy group in Washington, said the new minimum tax would make it more expensive for manufacturers to invest in factories and equipment, while Americans would get more money in the form of tax credits. These dynamics, he suggested, could push prices up.

“It will bring in more money over time and chase fewer goods,” said Mr. Kumar, a former aide to Republican Senator Mitch McConnell of Kentucky.