Democrats’ plan to fight inflation could drive down costs over time

President Biden said Thursday that an energy, tax and health care agreement reached with Sen. 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 with a bill that includes the remnants of the president’s broad domestic agenda.

Controlling inflation has become a top priority for Democrats and Biden, who has seen his approval rating drop as Americans face skyrocketing costs for food, gasoline, rent and other goods and services. With few political levers in his immediate control to roll back rapid price gains, Biden tried to cast the new package as an economic balm that would put money back in the pockets of consumers.

It remains to be seen to what extent the package, known as the Inflation Reduction Act, could ease the fastest price gains in 40 years. But many economists agreed that the tax and other provisions would likely help reduce price pressures somewhat, though the overall effect is likely to be modest and may not be felt for months or years.

The plan focuses on nearly $370 billion in tax incentives and spending programs intended to encourage consumers, businesses and electric utilities to switch to lower-emission energy sources on the roads and in electricity generation. It also includes nearly $300 billion in federal spending savings, to be achieved by giving Medicare the power to negotiate lower prescription drug prices and money to lower health insurance premiums for the 13 million people who get their insurance through of the Affordable Care Act.

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

The new spending and tax credits would be more than offset by a $313 billion tax increase on large multinational corporations that currently reduce their tax bills below an effective rate of 15 percent, along with a new campaign from the Internal Revenue Service against companies and senior officials. income of individuals who evade taxes. It would raise more than it spends, which would have the effect of reducing the federal budget deficit by $300 billion.

As a result, the bill could help mitigate inflation in two ways. Reducing the federal budget deficit should reduce the purchasing power of consumers in the economy, at least a little. In particular, it could take money from high-income earners, through increased taxation and 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, who has pushed lawmakers to support policies that reduce the deficit. “Almost all of these policies, by themselves, will fight inflation. And on the net, the whole package will surely do it.”

Mr. Manchin told reporters on Thursday that he had been assured by independent experts that the legislation would rein in runaway price increases. In comments at the White House, Biden said the bill “will actually reduce inflationary pressure on the economy,” adding that it “also makes our economy stronger in the long run.”

But many outside experts, including supporters of the bill, were conservative in their estimates of how much the package would reduce an inflation rate that topped 9 percent in June. They said the size of the deficit reduction is relatively small compared to the broader economy, noting that tax increases won’t start hitting people and businesses until next year at the earliest.

“This legislation will reduce 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 I’ll lower it much.”

White House and Treasury Department economists have yet to analyze the deal’s effect on inflation, senior administration officials said Thursday. An external projection, from the University of Pennsylvania’s Penn Wharton budget model, estimates the plan will add 0.05 percentage point to the nation’s inflation rate in 2024, but subtract a quarter of a percentage point annually in later years.

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

Cecilia Rouse, who chairs Biden’s Council of Economic Advisers, said in an interview Thursday that the plan would make “a significant contribution” to a wide range of ongoing government efforts to reduce inflation. That includes the administration’s work to clear pandemic-clogged supply chains and the Federal Reserve’s swift moves to raise interest rates, which are aimed at cooling the economy by making money more expensive to borrow. and spend.

Ms Rouse said the bill’s effects could start to show in economic data, which in turn could prompt the Fed to alter its rate hike path. “It might well make a difference in their own policy making,” she said, “because to the extent that they see inflation coming down, while employment remains strong, then we still have maximum employment or a strong labor market. . that makes life easier for them: they can start to moderate their own policies.”

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

“I see that it makes a very important contribution to reducing the cost of prescription drugs, which for many households is a very severe burden on their family budgets,” said Ms. Yellen.

The Treasury secretary added that the measures in the bill that would reduce the deficit are an “appropriate accompaniment” to interest rate increases by the Federal Reserve. Regarding the degree of impact the legislation would have on inflation and how quickly it would take effect, Ms. Yellen said that she had “no numerical estimates” to share.

The agreement surprised White House and Treasury officials Wednesday night and, to their dismay, did not include a measure that would bring the United States into compliance with the global tax deal that Ms. Yellen negotiated with more than 130 countries. of all the world.

That pact requires nations to adopt a global minimum tax of 15 percent. The proposed minimum corporate tax on the domestic “countable income” of large companies would not align the United States with that agreement, which Manchin says would put American companies at a competitive disadvantage.

Manchin’s willingness to back the legislation followed months of deliberations over the impact any bill would have on inflation. Democratic lawmakers, White House officials and outside advisers such as Lawrence H. Summers, a former Treasury secretary in the Obama administration, urged Manchin to back legislation they said could help ease rising prices.

“I have been in dialogue with Senator Manchin and other senators about inflation and inflation risk and how policy can promote inflation or reduce inflation,” Summers said in an interview. “I hope the conversations have been productive.”

Mr. Summers added that he believed the bill is “anti-inflationary” for supply, demand and price reasons.

“I think in terms of economic growth and efficiency, it promotes investment by reducing budget deficits,” Summers said. “It promotes efficient resource allocation by leveling the corporate tax playing field and promoting investment with clean energy incentives. I think fundamental progressive goals, it makes health care more affordable.”

But business groups have already voiced opposition to the tax changes, and some tax experts believe the legislation could actually increase inflation.

Rohit Kumar, 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 giving Americans more money in the form of tax credits. This dynamic, he suggested, could drive prices higher.

“It’s going to be more money over time, chasing fewer assets,” said Kumar, who was an aide to Republican Sen. Mitch McConnell of Kentucky.

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