Biden’s Inflation Reduction Act: What will it help lower prices?

The legislation, which will be finally approved and then put into effect on Friday, will not directly address some of the main reasons for rising prices.

WASHINGTON — As inflation rages near its highest level in four decades, Congress is poised to approve the Inflation Reduction Act signed into law by President Joe Biden. Its title begs a tantalizing question: will the measure actually tame the price spikes that have been wreaking havoc on American households?

Economic analysis of the proposal suggests that the answer is likely no – at least not anytime soon.

The legislation, which will receive final approval in the House of Representatives on Friday and then become law, will not directly address some of the key drivers of rising prices – from gasoline 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, extending health insurance subsidies and lowering energy prices. It would also slightly reduce the government’s budget deficit, which could slightly reduce inflation by the end of this decade.

The bipartisan Congressional Budget Office concluded last week that the changes would have a “negligible” impact on inflation this year and next. And the University of Pennsylvania’s Penn Wharton Budget Model concluded that over the next decade “the impact on inflation is statistically indistinguishable from zero.”

Such forecasts also refute arguments put forward by some Republicans, such as House Minority Leader Kevin McCarthy, that the bill would “cause inflation,” McCarthy said in a House speech last month.

Biden himself, when discussing the impact of the legislation on inflation, has pointed to potentially lower prices in individual categories rather than lower 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 trumpeted a letter signed by more than 120 economists, including several novel laureates and former Treasury secretaries, claiming that the bill will reduce the government’s budget deficit by an estimated $300 billion over the next decade, according to the CBO – would “put inflation under pressure”.

In theory, lower deficits can reduce inflation. That’s because lower government spending or higher taxes that help reduce the deficit reduce demand in the economy, thereby reducing the pressure on firms 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.”

But Douglas Holtz-Eakin, who was a top economic adviser to President George W. Bush and later director of the CBO, noted that the lower deficits will not start for five years and will not be very large beyond the next decade given the size of the Business.

“$30 billion a year in a $21 trillion economy isn’t going to move the needle,” Holtz-Eakin said, referring to the estimated amount of deficit reduction spread over 10 years.

He also pointed out that Congress had recently passed other legislation to subsidize US semiconductor production and expand health care for veterans, implying that these legislation would spend more than the Inflation Reduction Act would save.

In addition, Kent Smetters, director of the Penn Wharton Budget Model, said the bill’s health subsidies could push up inflation. The legislation would spend $70 billion over a decade to expand tax credits to help 13 million Americans pay for health insurance under the Affordable Care Act.

These subsidies would free up money for recipients to spend elsewhere, potentially increasing inflation, although Smetters said he thinks the effect would likely be very small.

While the law could have the benefit of increasing savings for millions of households on drug and energy bills, it is unlikely to have a major impact on headline inflation. Prescription drugs account for just 1% of spending in the US CPI; Expenditure on electricity and natural gas accounts for only 3.6%.

Beginning in 2025, the law will limit the amount Medicare beneficiaries would pay for their prescription drugs to $2,000 per year. It will empower Medicare to negotiate the cost of some high-priced drugs — a long-awaited goal that President Donald Trump also promised. It would also cap Medicare beneficiaries’ out-of-pocket expenses for insulin to $35 a 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. “This allows Medicare to protect beneficiaries from high drug prices in a way it didn’t have before.”

A study by Kaiser found that 1.2 million Medicare beneficiaries spent an average of $3,216 on drug prescriptions in 2019. According to Purvis, recipients using the most expensive drugs can spend as much as $10,000 or $15,000 a year.

The legislation authorizes Medicare to negotiate the prices of 10 expensive drugs starting next year, though the results won’t take effect until 2026. Up to 60 drugs could be negotiated by 2029.

Holtz-Eakin argued that while the provision may reduce the cost of some Medicare drugs, 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 could also bring savings, but the amounts are likely to be significantly lower.

The bill provides a $7,500 tax credit for new EV purchases, though most EVs are not eligible because legislation requires them to contain batteries made with US materials.

And the legislation also significantly expands the tax credit for homeowners who invest in energy-efficient appliances, from a one-time $500 credit to $1,200 a homeowner can claim each year. Vincent Barnes, senior vice president for policy at the Alliance to Save Energy, said this would allow homeowners to make new energy-efficient investments over a period of several years.

But for all Americans, including those who aren’t homeowners, the impact will likely be limited. The Rhodium Group estimates that the bill’s provisions will save households an average of up to $112 per year through 2030 as gas and electricity become cheaper as more Americans drive electric vehicles and homes become more energy efficient.

https://www.king5.com/article/news/nation-world/inflation-reduction-act-could-do-little-to-impact-inflation/507-974d59a6-ea75-4c81-9ab5-0342d0bf262c Biden’s Inflation Reduction Act: What will it help lower prices?

Alley Einstein

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