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Washington Watch

Aug. 13, 2022, 10:54 a.m. EDT

Will the Inflation Reduction Act actually reduce inflation?

By Chris Matthews

The Biden administration is poised to earn a political victory with the impending passage of the Inflation Reduction Act, but the debate over whether the law will actually do much to lower the cost of living for Americans remains unsettled.

The House of Representatives is set Friday to vote on the measure, already passed by the Senate , and send the bill to President Joe Biden to sign shortly thereafter.

See: House set to pass Inflation Reduction Act: What Democrats’ bill does for climate, drug prices and taxes

The bill would raise roughly $790 billion over 10 years in new revenue through tax increases on corporations, stock (S&P:SPX) buybacks, increased IRS enforcement and by allowing Medicare to negotiate directly with pharmaceutical companies (PSE:PJP) over drug prices, according to an analysis from the nonpartisan Committee for a Responsible Federal Budget.

The legislation would also enact $485 billion in new spending on investments to combat climate change and to expand subsidies for individuals to purchase health insurance on Affordable Care Act exchanges.

Here’s what economists are saying about the effects of the bill:

Joseph Stiglitz , Nobel Prize-winning economist and former chairman of President Bill Clinton’s Council of Economic Advisers wrote in MarketWatch Monday that the legislation “represents a step forward” in the battle against inflation.

“The bill would mobilize $369 billion of investments in energy security and decarbonization. That will help bring down the cost of energy — one of the main drivers of current price growth,” he wrote. “The IRA also would help address the rising health-care costs that have long plagued America, both by lowering Affordable Care Act (Obamacare) premiums for millions of Americans and by capping out-of-pocket drug costs for those on Medicare.”

Glenn Hubbard , who chaired President George W. Bush’s economic council, however, argued on Bloomberg TV Friday that the legislation is “crazily named” because “to a first approximation it has no impact on inflation,” because the deficit reduction in the bill is at most just $30 billion per year over the next decade.

Hubbard also told the New York Times that even significant deficit reduction has no “simple-minded” link to inflation, and that rising prices are more a result of imbalances in the economy than the federal budget deficit.

Former Congressional Budget Office Director Douglas Holtz-Eakin agreed in a Bloomberg radio interview that the deficit reduction in the act will have a “trivial impact on the U.S. economy” because the projected savings is so small relative to the $23 trillion American economy.

Former Democratic Treasury Secretary Larry Summers , who has previously been critical of the Biden administration’s and the Federal Reserve’s efforts to combat inflation, believes the bill will actually reduce the deficit more than projected.

“The tendency of this bill will be to reduce inflation, because over time it reduces demand by bringing down budget deficits,” he told the Harvard Gazette on Tuesday . “I think the revenue estimates for the IRS enforcement effort… is substantially low. I think we will do significantly better on revenue.”

He added that it will also bring down energy prices by “augmenting the supply of key commodities” and reduce healthcare spending by “using the government’s purchasing power more effectively to procure at low costs.”

Some Wall Street and other outside analysts are more skeptical, with Joel Prakken, co-head of U.S. economics at S&P Global Market Intelligence, arguing in a Wednesday analysis that the bill would “have relatively minor impacts on real GDP growth, headline inflation and budget deficits over the coming decade.”

Penn Wharton’s Budget Model, closely watched in Washington, is similarly doubtful that the bill will significantly reduce inflation.

Their simulation, released Friday , shows that the bill will reduce deficits by just $264 billion over ten years. “The impact on inflation is statistically indistinguishable from zero,” according to a Friday report written by the model’s senior economist, Jon Huntley.

Link to MarketWatch's Slice.