President Biden has signed the Inflation Reduction Act (IRA), his attempt at delivering on his campaign promises of new investments to combat climate change, improve healthcare, and impose “fair” corporate taxes. The IRA is a revival of the now defunct and unpopular Build Back Better (BBB) Act, ushered in at a whopping $3.5 trillion. Penn Wharton estimates that the IRA will reduce cumulative budget deficits by $264 billion over the 10-year budget window. The Tax Foundation estimates come in at a $178 billion reduction—and both studies suggest a near-zero effect on inflation. The promise for the inflation reduction lies in the new spending being offset by increases in taxes, as well as promises to lower prices in healthcare and energy. But keep in mind that this just piles on to massive existing spending and the new student-debt relief, to the tune of $1 trillion.
But first, some basic principles. Inflation is the purview of the Federal Reserve. We need to remember the wisdom of Nobel laureate Milton Friedman (1970): “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” The Federal Reserve has historically followed a dual mandate: stabilize prices and maximize employment. Inflation, the persistent rise in prices, falls squarely within the domain of the Federal Reserve. And the Fed has not been pulling its weight. The newly released Consumer Price Index (CPI) data reveal an 8.3% inflation rate year over year. The Fed needs a renewed commitment to price stability by ensuring that money supply is in line with money demand. This means not getting further embroiled in the unorthodox monetary policies of the past several years, which have included nontraditional asset purchases and direct loans to businesses and to municipal and state governments, tactics that economist Alexander Salter deems “monetary mischief.” Getting inflation under control requires reining in the Fed, which means we will need not just temporary rate hikes but also a commitment to honest monetary policy. The IRA has nothing to do with the Fed, as such, and so it will fail, even if it does have a trendy name. Moreover, it is window dressing on the BBB Act, which was a Trojan horse of special interest perks and trendy boondoggles in healthcare and climate change.
There are several significant issues the IRA emphasizes, including corporate tax provisions, healthcare, and the ubiquitous climate. Uncoincidentally, these are of great importance to the elite progressive left, which fully intends to delegitimize corporations and instill greater federal governance. Just this week, Lindsey Graham offered to team up with Elizabeth Warren and Josh Hawley to spawn a new regulatory agency that would oversee and license companies like Twitter and Facebook. Bernie Sanders wants to make healthcare “free,” and AOC is pursuing a radical climate-change agenda to battle a crisis she asserts only the government can wage. Our brave new world has arrived.
The IRA establishes a corporate alternative minimum tax of 15%, which, according to the White House, is aimed at leveling the playing field by making corporations pay their “fair share.” It also imposes a 1% excise tax on the corporate net repurchase (buyback) of stock. It provides $79 billion in new IRS funding over the next 10 years, which will in part be used to hire more IRS agents. Biden promises that if you make less than $400,000 per year, you will face no new tax burdens. It leads one to wonder how all the new IRS agents will spend their time. Certainly, they will come after more than just the billionaires. The obvious answer to all this is to simplify rather than complicate the tax code.
The IRA allows Medicare to negotiate the prices of certain prescription drugs and extends the Premium Tax Credits of the Affordable Care Act. It also mandates rebates to Medicare from drug manufacturers that increase prices faster than inflation. It also caps out-of-pocket costs for insulin at $35 per month. The White House touts these as wins for ordinary Americans and views it as a heroic effort to tame the privilege of pharmaceutical companies. Let’s extend the benefit of the doubt and argue that their intentions are good. After all, we want diabetics to afford their insulin, and in general we want to increase the quality and availability of pharmaceuticals at decreasing costs to the consumer.
What the legislation misses, however, is the necessity of the market economy. Rather than living in a world where a giant health bureaucracy negotiates prices, why not let the market do that? If we reduce barriers to entry, we will encourage “start up” pharmaceutical companies and greater competition, which would do away with the current boutique pharma companies that use the regulatory process to make competition difficult. The regulatory process has a dismal track record because it possesses neither the knowledge nor the incentives to manage industries. The FDA has to manage both the safety and the efficacy of drugs, a difficult balancing act at times. In many cases, it has over-invested in safety, which has the unintended consequence of delaying safe and lifesaving drugs. We call this a Type II error—the drug should have been introduced but it was delayed. For example, the delayed approval of beta-blockers is estimated to have cost at least 250,000 lives.
The IRA also includes $368 billion for energy and climate programs, including tax credits and efforts to encourage domestic production of solar panels, wind turbines, and batteries. This is nothing more than old-fashioned mercantilism dressed up as modern industrial policy. Don’t worry if you can’t afford a high-end Tesla—there’s are subsidies for that, like the $7,500 tax credit for new electric-powered vehicles and $4,000 for used ones. We can see how well this is working in the climate-friendly state of California, which is phasing out the sale of gasoline-powered cars to force new purchases of electric cars while simultaneously asking electric-car owners not to charge their electric vehicles amid the current California heat wave. It’s a “let them eat drive cake” manifestation of technocratic planning.
The lessons we can learn from this are clear. It is good to have a tax code that is transparent and fosters innovation. Just because a corporation is large doesn’t make it bad (or good, for that matter). Market conditions determine firm size, so the best the government can do here is provide an environment of economic freedom that fosters innovation and problem-solving. It’s unquestionably desirable to have cheap, high-quality, and easily accessible drugs, but we need to free the market, not further bureaucratize it, to obtain that goal. Finally, stewardship implores us to care for the environment, but fostering what amounts to domestic subsidies will further fan the flames of special interest group politics. Even if this bill pays for itself through increases in taxes, we must look at whether it can even achieve its stated goals of lowering drug and energy prices and whether it will further entangle markets in corporate welfare through subsidies that generate petitions for ever-greater future subsidies, expanding the culture of corporate cronyism.
Just this week, Biden celebrated the IRA at the White House, calling it a bill that will cut costs for families, is pro-worker, and will raise taxes on “billion-dollar corporations.” This is hard to reconcile with pressing inflation and constant fears of a looming recession. This bill seems much more like a Hail Mary to pacify voters ahead of the midterm elections. We shouldn’t be fooled.