'Planet Money': Will the Inflation Reduction Act really fight inflation?
A MARTÍNEZ, HOST:
The recently signed Inflation Reduction Act has a lot of provisions for things such as tackling climate change and health care costs. But whether it really fights inflation is a little less clear. Mary Childs of our Planet Money team wanted to take the act at its word and find out what effect will all of these new provisions have on rising costs. Mary, all right, so first off, how does one go about reducing inflation?
MARY CHILDS, BYLINE: So this is one area where economists basically agree. Inflation is a mismatch between supply and demand for all the goods and services in the economy - too much demand, not enough supply. So the main way for the government to fight inflation is to slow down demand, to get everyone to stop spending so much money, even removing money from the economy.
MARTÍNEZ: And does this law do that?
CHILDS: Well, yes and no. It takes money out of the economy in a few ways, most notably through new taxes on big companies. It also ramps up tax enforcement, enabling the IRS to, for example, investigate people who haven't been paying their taxes. The government itself is also spending less, namely in health care through Medicare. This law lets Medicare haggle with pharma companies to get lower drug prices and gives other new mechanisms to keep drug prices down. But the new law also spends a lot in health care, too, by providing new subsidies and caps on prescription costs for people covered by Medicare. And so all this so far does save more than it spends in the end for a grand total of $660-ish billion out of the economy over the next 10 years, which is good to fight inflation.
MARTÍNEZ: All right. Now, there's another part of this law, so tell us about the climate stuff.
CHILDS: Yes, so it's a lot of spending. It's more than $350 billion on clean energy alternatives and technologies and other things. And it's great if you're worried about climate change, but if you are thinking narrowly about inflation, it's a lot of credits and subsidies to encourage people to go buy things, which means more demand, more money into the economy right now, which is what we don't want when it comes to inflation. So the net savings in the law are too small to make much of a difference in fighting inflation. All the economists we talked to and also researchers at the University of Pennsylvania's Wharton School of Business say that this law's overall effect from an inflation standpoint is basically zero.
MARTÍNEZ: So, Mary, I am not a Wharton School graduate...
CHILDS: (Laughter) Yet.
MARTÍNEZ: ...But it definitely sounds like the climate section is a tough sell as inflation-reducing.
CHILDS: That's right, yeah, at least in the short term. But there is this kind of other element to it that's harder to price, and indeed, a lot of the analysis that you'll see doesn't take this into account because, yes, those subsidies mean spending now and soon, but they can also help create a larger market for the things being subsidized. They can spur innovation, create greater supply, all of which should help bring costs down, which is good to fight inflation. But also, everyone having more energy-efficient things will mean less spending on energy in the long term.
So as an example, say you use the tax credit in the law to go spend money on new energy-efficient windows. So that's bad for curbing inflation now. You're spending money now. But your house will retain heat better for years, so your energy bills will be lower. And that's going to be disinflationary, just not right away.
MARTÍNEZ: All right, that's Mary Childs from Planet Money. Mary, thanks.
CHILDS: Thank you.
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