If you think inflation is sufficiently painful, gird your loins. The Biden administration is about to foist the “Inflation Reduction Act” upon us. The euphemistic name belies the high price we are going to pay for a likely political panacea rather than a policy solution.
The new spending bill is helpful — if you’re willing to give up more of your disposable income to higher taxes: It doubles the size of the Internal Revenue Service and pours $300 billion into climate solutions and something called “environmental justice” (which actually seems very unlikely to advance the cause of either the environment or justice).
It is also likely to drive up the cost of doing business. The bill levies tax hikes and onerous regulations against manufacturers, which will restrain supply, diminish production, and increase prices.
The University of Pennsylvania Wharton Budget Model estimates that the Inflation Reduction Act will fail to live up to its name — having no impact on lessening inflation. Other estimates indicate that the measure will increase budget deficits in its early years. And the bill’s promise to lower drug prices is not only unlikely to do so — it could also keep more than 340 new drugs from making it to market over the next two decades. Guess who will be paying for that with both our salaries and well-being?
In Pennsylvania, Gov. Tom Wolf is looking to pile on. His last-ditch attempt to redeem his legacy by offering $2,000 stimulus checks to every Pennsylvania household making less than $80,000 will cost us far more. How much more of our take-home pay are we willing to give for these “feel good” bills that not only fail to solve the problem but also exacerbate it?
Government spending at this level helped drive inflation. When the government poured trillions of dollars into the economy in the form of COVID-relief stimulus, people were incentivized not to work or were being compensated at a far greater level than the goods and services they were putting into the marketplace. That created a higher demand for fewer goods. Prices soared.
Economist Lawrence Summers warned about this in 2021 before a massive COVID-19 stimulus package was passed. The former Clinton administration treasury secretary and senior adviser to President Barack Obama noted that “there is a chance” that the stimulus “will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
To address inflation, the president needs to let the Fed do its job and allow the market to reorient itself. Then, three things must happen.