Will the Inflation Reduction Act actually reduce inflation? And if so, how? : Planet Money Congress just passed the biggest, most ambitious climate bill in history. And it's called ... the Inflation Reduction Act of 2022. What's with that branding? And what can the bill teach us about actually fighting inflation? | Subscribe to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.

Inflation Reduction Actually

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This week, President Joe Biden signed into law the Inflation Reduction Act of 2022.


And it was a long, hard journey to get there. In fact, parts of this legislation are on their second or third or millionth life.

GUO: Because it's mostly built out of stuff scavenged from last year's Build Back Better bill. And many of those ideas have been kicking around for years, even decades.

CHILDS: Legislators recycled and upcycled all those parts and gave them new life. And this refurbished Frankenstein bill arrived on the president's desk thanks in large part to a modern makeover. It's being branded as this big antidote, the cure to the problem plaguing our economy right now - inflation.

GUO: Because as we all know, inflation has been running very hot for the past year. So it sounds good to do something right now that will help with this big, scary, combustible problem.

CHILDS: So this bill, which was not actually written to fight inflation, is telling us it's fighting inflation. So OK - is it?


CHILDS: Hello, and welcome to PLANET MONEY. I'm Mary Childs.

GUO: And I'm Jeff Guo. Today on the show, the Inflation Reduction Act of 2022 - a bunch of old, recycled parts all made new.

CHILDS: We are going to take it apart, look at the big sections in the bill. We got taxes, we got health care, we got climate. And we're going to talk to some economists to figure out if - and how - this thing inflates or disinflates our economy.


CHILDS: The Inflation Reduction Act - this Frankenstein bill full of all these random, recycled parts that allege to help reduce inflation - we wanted to kick the tires.

GUO: So we called four economists. And we're going to start where it's not very contentious - the definition of inflation.

LAURA TYSON: It's just like, well, when demand is stronger than supply, prices rise.

GUO: Laura Tyson is a distinguished economics professor at Berkeley Haas School of Business and a former adviser to President Bill Clinton. And she's like, yeah, too much money chasing too few goods - that's inflation.

TYSON: It's, like, the first thing you teach in econ one...


TYSON: ...Literally, OK? But the basic framework is a framework that people agree upon.

CHILDS: OK. We all know that prices are going up at a rate, and we all think that's not good.

TYSON: We all think that's not good.


TYSON: People do not enjoy - it creates uncertainty, and people don't like it. They really don't like it.

CHILDS: Everyone also generally agrees about what to do about inflation.

TYSON: Economists believe - and the historical evidence is absolutely consistent with the fact - that one way to bring inflation down is to reduce the rate of growth of demand. OK, so how do you reduce the rate of growth of demand?

GUO: How do we slow down demand? Get people to stop spending so much money - that's one way to bring down inflation. And that's always going to be painful.

DOUGLAS HOLTZ-EAKIN: Once you have inflation, you have only bad choices.

CHILDS: This is Douglas Holtz-Eakin. He's an economist and former adviser to John McCain's presidential campaign.

HOLTZ-EAKIN: You get to live with the inflation. I think we don't like that possibility. Or you can slow the economy, which means fewer houses get built, fewer people get hired, maybe we lose some jobs, retail sales don't grow as fast. That all sounds like bad news. And that's where we are right now.

GUO: We are in the bad news. Now, to slow the economy, take money out, the first way - the big, blunt, classic way - is monetary policy, the Federal Reserve raising interest rates, making it more expensive for everyone to borrow money. So when people go to get a mortgage or a car loan, they're like, whoa, that monthly payment is - let me just keep this old car a little longer.

CHILDS: And the Fed has been doing that. This year, they've hiked rates more and faster than they have in decades.

GUO: But elected officials don't control the Fed. So if they want to get in on fighting inflation, they have a different tool - fiscal policy. It's somewhat more targeted. So they're, like, spending less here, taxing more there, but with the same goal of taking money out of the economy.

CHILDS: So OK, let's look at the actual bill. I printed it out.


CHILDS: It's right here. I am just kidding. It is 273 pages. I am not printing that out. I'm trying to save trees and money here. So that was an instruction manual that I found on my desk.

We're going to look at the bill online alongside the analysis of the Congressional Budget Office - the CBO - which analyzes nearly every single bill that Congress passes or might pass to see what it would do to the government's budget, how much money is going to go into the economy or come out.

GUO: The biggest way the Inflation Reduction Act takes money out is through new taxes on big companies. This will pull back spending by about $300 billion over the next 10 years.

CHILDS: And there are two separate taxes to talk about here. One is a new tax of 1% when a company buys back stock - pretty standard way companies give money back to shareholders. The other tax, the bigger part - the bill will make the largest companies in the U.S. - companies with more than a billion dollars in income - your Wells Fargos (ph), your Alphabets, your Procters, your Gambles - this bill will make them pay a minimum tax of 15% so they can only use so many loopholes and deductions.

GUO: We ran this by Doug. He actually used to run the CBO. And he says, sure, these taxes do fight inflation - to some extent.

HOLTZ-EAKIN: Three hundred billion over 10 years is 30 billion a year. It's a $21 trillion economy. It's a headwind, but it's not the stiffest headwind you've ever seen.

GUO: But the taxes will have some effect. And he says it won't just be on those big companies. Instead, the taxes will filter through the economy, and they're going to tamp down demand along the way.

HOLTZ-EAKIN: A corporation's going to get tax bill for, you know, say, $10 billion. And they're not going to just pay it and say, hey, no big deal. They've got shareholders they're responsible to, so they're going to try to pass the price of that tax along in higher prices to consumers, or they're going to give fewer raises in the future and take it out of the cost of their doing business. And so when you cut the wages for workers, they're not going to spend as much. And so you are in some way slowing down the demand in the economy, which is what you need to do to fight inflation.

CHILDS: And this runs into some classic foundational conservative economic thought, which is taxing companies is bad because then they're going to charge more, innovate less, invest less.

GUO: Companies investing less is basically the risk Tyler Goodspeed sees. He's at the Hoover Institution and briefly headed Donald Trump's Council of Economic Advisers.

TYLER GOODSPEED: Today, you invest in equipment, in factories, in plants, and that in the future yields output-producing equipment and factories.

CHILDS: So you do a thing today that makes you money in the future.

GOODSPEED: Yes, that gives you output in the future.

CHILDS: Uh-huh. And so because of more taxes, businesses will make fewer things that will make them money that will make them outputs in the future.


CHILDS: Less future output, less supply - bad for inflation. But this is an area where economists don't all agree. Like, Laura Tyson agrees about the risk of lower investment, but she doesn't think that it's likely that companies will cut wages or raise prices.

So those are the new corporate taxes that are supposed to zoop (ph) out about $300 billion.

GUO: But there are also all these existing taxes that haven't been getting paid. And so to deal with that, the Inflation Reduction Act makes a big investment in enforcement - more tax cops.

CHILDS: It gives the IRS $80 billion to, among other things, investigate people who haven't been paying. The CBO says that should net something like $130 billion out of the hands of tax evaders. So that's money they can't spend anymore - dollars out of the economy.

GUO: Just like the corporate taxes, this is a way of discouraging businesses and people from spending - by taking money away from them, which should bring down inflation.

CHILDS: But it's not just people and businesses that spend money. The government does, too. So if you want to fight inflation by reducing spending, that's another thing that can help - make the government spend less. And the place where this new law makes that happen is in health care.

GUO: Through Medicare, Medicaid and the VA, the government is an enormous buyer of health care, of doctor's visits and surgeries and drugs. And this bill gives the government - well, Medicare - new ways to save money on prescription drugs. First, Medicare is going to haggle real hard. It's going to negotiate prescription drug prices with drug companies, which it's never been allowed to do before. Now, Medicare cannot only negotiate, but it can impose penalties when drug companies don't bargain in good faith.

CHILDS: Second, the law says that if pharmaceutical companies raise prices for any prescription drugs faster than the rate of inflation, Medicare just won't pay. The drug companies will have to make up the difference by giving a rebate. All of that should save the government as much as $200 billion, according to the CBO's early estimate.

GUO: So that's $200 billion that the drug companies won't be getting. But there are different views of how these government savings will end up affecting the rest of the economy.

CHILDS: For example, Tyler argues that because all this drug price reduction stuff only applies to Medicare and not to people with private insurance or people with no insurance, drug companies will find somewhere else to make up the difference.

GOODSPEED: The tricky thing is then there's a risk - or probably a probable risk - that companies then raise prices for uncovered individuals. So you're lowering prices for Medicare recipients or for drugs for individuals enrolled in Medicare, and then you're just going to get higher prices for those not covered.

GUO: Another person we talked to, Skanda Amarnath, says he's used to hearing this kind of argument from the drug companies. It's sometimes called balloon theory.

SKANDA AMARNATH: Now, pharmaceutical sector will say, actually, you're squeezing on one end of the balloon. If we get less from the government, we're going to have to ask for more from private payers.

CHILDS: Skanda is the head of Employ America, a think tank that's focused on getting to full employment. And he says the evidence he's seen, including after the passage of the Affordable Care Act, doesn't support the idea that drug companies will just raise prices elsewhere.

AMARNATH: I mean, in some ways it's always plausible to go with that story, but actually, what we see in a lot of the reforms - for example, in the ACA in the 2010s, where there were a lot of reforms of how the government bargained for health care - where we see that government are able to bargain for lower prices, the private insurers and private payers are the ones who - their bargaining power also tends to go up as a result.

CHILDS: So drug price negotiations, rebates - that's how the health care part of this new law takes money out, which should help deal with inflation. But the law also has a ton of spending in it, including on health care. For example, on prescription drug costs, the law sets a cap. Now, people covered by Medicare will pay at most $2,000 in any given year. So if their medicine costs are, I don't know, say, $10,000 in a year, the government will pay that difference, that $8,000.

GUO: To Doug, the former CBO McCain guy, this is a long time coming.

HOLTZ-EAKIN: It used to be the case that you could pay 5% of your drug costs to infinity. I mean, there was no cap whatsoever. So that's long overdue - probably never should have been that way to begin with. So I think that's a good use of the taxpayers' money.

GUO: However, in the context of reducing inflation, this does the opposite. Doug says it's basically handing money to people which they can then go spend. So that's more dollars, more demand in the economy.

CHILDS: Laura Tyson at Berkeley basically agrees - this amounts to more spending.

TYSON: I suppose you could say that, if you don't have to spend that $8,000 - OK? - that means that that $8,000 of your discretionary income that you had to spend on drugs is available for something else, OK? But it does mean that that $8,000 that you spend on something else, that Medicare's going to have to cover that missing $8,000 to the drug company. Somebody's going to have to do it. So in that sense, there's extra demand coming through Medicare. I think that is a fair point.

GUO: The new law is also going to spend money to help people buy health insurance under the Affordable Care Act. A pandemic-era subsidy was about to expire, and the new law extends it through the end of 2024.

CHILDS: And there's this thing about this provision, and it shows up in how the CBO scores it. It says that it adds money to the economy in a way that's particularly inflationary - because this subsidy goes to lower-income people. And lower-income people are more likely than rich people to have to go spend that money right away.

GUO: Tyler from the Hoover Institution agrees that this is not going to help with inflation.

GOODSPEED: It's going to increase demand for insurance and, you know, maybe longer run, that would bring down other health costs. You know, I don't know that we would get the longer run benefits if it is indeed only for two years.

CHILDS: He says in the short run, keeping insurance costs lower should increase demand for insurance, so more spending. But there might be longer-term savings because people who get health care presumably have lower medical bills over time. For now, the extension is only until the end of 2024. So Tyler's saying the benefits don't really have time to kick in. Like, two years of being able to afford medical care maybe does not entirely cure all of your ills and result in those lower health costs and spending down the road.

GUO: So this Inflation Reduction Act - let's tally up everything so far. The new taxes on corporations should pull $300 billion out of the system. Getting money from tax evaders - that's another $130 billion out. Then there's a grab bag of other tax provisions that take out 50 billion more.

CHILDS: So then, the law helps the government spend and save on health care, saving more than it spends, for a net total of about $180 billion out. So that's a grand total of $660-ish billion out of the economy, which is good to fight inflation. Congratulations to us.


CHILDS: But there is one more big section of the Inflation Reduction Act - the climate section. It's expensive. That's after the break.


KENNY MALONE, BYLINE: Hey, Kenny Malone here with a quick heads-up. If you are a subscriber to Planet Money+, we have started a little movie club where we're going to watch and discuss movies that have something to do with finance or the economy. First up, we will be discussing "Brewster's Millions," the 1985 movie in which Richard Pryor has to spend a lot of money in a very short amount of time. That is in our subscriber-only episode coming out Monday. And if you're not a subscriber, it is really easy to sign up at the link in our episode notes. And thanks.

GUO: So there's one enormous part of the bill left - the most enormous. It's the most the U.S. government has ever done to fight climate change and invest in green energy. It's deploying more than $350 billion largely toward cleaner, like, energy and technologies and other stuff.

CHILDS: Which - if you're worried about climate change and the globe catching on fire, this is great. This is so good. If you're only narrowly interested in dealing with inflation, well...

HOLTZ-EAKIN: All the, quote, "climate provisions" are really just tax-based subsidies to go buy stuff...

GUO: This is Doug, the ex-CBO, ex-McCain guy, again.

HOLTZ-EAKIN: ...Whether that stuff is solar or wind or whatever it may be - a clean, electric vehicle. But it's really an invitation to go buy stuff. And when you're trying to fight inflation, you're trying to tell people to not go buy so much stuff.

CHILDS: The subsidies are explicitly to catalyze near-term spending - so more money into the economy, more demand - which from an inflation standpoint is exactly what we are trying to not do - big, immediate yikes.

GUO: All this climate spending is why budget analysts say the law is only going to save less than $300 billion over the next 10 years, which relative to our economy is a rounding error. It's, like, a 10th of a percent. So when you tally it all up, the overall effect of the law from an inflation standpoint - it's basically zero. All the economists we talked to and also researchers at the University of Pennsylvania's Wharton School of Business - they say that this bill is unlikely to have much of an impact on inflation anytime soon.

CHILDS: But there is this other element of the climate part that's kind of harder to price. And, in fact, the CBO has not even tried to give this a verdict because, yes, those subsidies mean spending now and soon. But if everybody goes out and buys a bunch of solar panels and induction stoves and electric cars, the idea is that maybe the planet will be habitable, but also, those subsidies will generate long-term savings, less spending in the future.

TYSON: If you do provide these kinds of subsidies and you do encourage investment, over time, the cost of clean energy alternatives will come down. So electric vehicles will come down. That cost of battery storage will come down.

GUO: That was Laura again, from Berkeley. And not only do subsidies help to create a larger market for those things and spur innovation, which should ultimately bring costs down, but also, everyone having more energy-efficient things will mean spending less on energy overall.

CHILDS: Like, say you go out and buy an electric heat pump for your house and maybe also get some new energy-efficient windows - all in this bill. That's money into the economy now. But for years to come, you're going to be using less energy overall. So you save money for years.

GUO: Which is big because we spend a lot of money on energy. Skanda from Employ America says high energy prices are, of course, a big part of what's driving inflation right now.

AMARNATH: It has a really meaningful impact on particularly those who have lower incomes in terms of utility bills and electricity bills. The extent to which you can promote a type of investment that allows supply to catch up in ways that have a lot more scale touch to it - it's actually going to be really important.

CHILDS: Really important because inflation is an imbalance between supply and demand - not enough supply and too much demand. So to make inflation less, you can make demand less, but you can also make supply more. That's another way that all this climate spending could be disinflationary in the long run.

AMARNATH: The best time to start is now. But it's the kind of thing where I think it's going to be a bumpy ride, and that's going to hurt a lot of Americans.

GUO: The latest numbers show inflation is maybe starting to cool a bit. But Skanda says - and actually, everyone we talked to says - that inflation is going to persist for a while. Nothing in this law stops that in the immediate or near future.

CHILDS: Maybe the most effective thing in this law in the immediate or near future is that cute little rebrand. Since so much of inflation is driven by expectations of inflation, maybe all we need is for the government to do a thing called inflation reduction.


CHILDS: Are you trying to reduce inflation? Email us at planetmoney@npr.org. We are on all of the social places - Facebook, TikTok, Instagram. We are @planetmoney.

GUO: This show was produced by Willa Rubin, edited by Molly Messick and engineered by Gilly Moon. Our executive producer is Alex Goldmark.

CHILDS: A little extra thank you to Meredith Rosenthal. I'm Mary Childs.

GUO: And I'm Jeff Guo. This is NPR. Thanks for listening.

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