The Inflation Reduction Act is Not Designed to Reduce Inflation

by Benjamin Studebaker

As the midterms approach, the Biden administration is looking to pass some part of its Build Back Better plan. Biden managed to fund $550 billion in new traditional infrastructure spending. But the American Society of Civil Engineers argues that we have an infrastructure funding gap of $2.59 trillion. The bipartisan infrastructure bill barely makes a dent in that. The rest of the administration’s proposals have continually run aground. Various senators threaten to withdraw their support all too quickly, and this has caused the administration to water down its proposals over and over again. Now there is a new version of the human infrastructure bill, called the Inflation Reduction Act. This bill claims to raise over $700 billion in new revenue in an effort to fight inflation, reduce the deficit, and fund new investments in energy. It sounds like a significant achievement, but it’s not. Here’s why.

If you actually look at this thing, this legislation only raises $739 billion over the next decade. This means that on average, each year, it only raises around $73.9 billion. This is not as much money as you might think. The US spends around $782 billion on defense each year. Last year alone, the federal government spent $6.8 trillion.

We’re looking at less than 10% of the defense budget, 1% of the federal budget, and about 0.3% of GDP. How is the federal government meant to combat inflation with a new tax that is smaller than a third of a percentage point of the economy? The purpose of the bill is to be seen to be doing something. The Biden administration needs something to run on in the midterms.

To fight inflation, the government would need to be doing some combination of three things:

It could actively work with other countries to unblock supply chains or establish replacement trade links.

This might involve, say, talking to the Venezuelans or the Iranians and normalizing relations with them in a bid to drive down oil prices. Or it might involve asking our trade partners in East Asia to relax their zero-COVID policies to reduce interruptions in production. The federal government won’t do these things, because it is loathe to admit to Venezuela, Iran, China, and other countries that it needs their help. It has no desire to make any concessions to any of these states. It would rather allow American workers to suffer than look so sheepish. It certainly would rather let inflation run loose than negotiate with the Russians on an end to the war in Ukraine.

It could embark on a longer, slower project of creating new industries in the United States to alleviate the cost of living crisis.

For instance, the government could start a publicly run energy company and use that energy company to offer energy to ordinary Americans at a subsidized cost. Mexico has a state-owned oil company, called Pemex. Because Pemex belongs to the Mexican state, Mexico can subsidize the oil Pemex drills, offering immediate relief to Mexican consumers. We could do something similar here. Private oil companies would not like having an American state-owned competitor, and the political obstacles would be sizable. But a president serious about alleviating pain at the pump could use this crisis to mobilize the public. Once prices are alleviated, a public energy company could be a source of future revenue, and it could lead to the creation of a sovereign wealth fund. Norway does something similar. No one in American politics seriously discusses any of these possibilities, because no one is serious about actually helping Americans deal with the cost-of-living crisis. The Democrats are happy to use higher gas prices to push Americans to buy electric cars, while the Republican strategy is to open nature preserves to private drilling. Neither will make any near-term difference to inflation.

It could dramatically raise taxes on wealthy oligarchs, and use the revenue to fund the above.

Conservatives like to propose tax cuts during periods of high inflation, because they think taxes discourage the private sector from expanding production and resolving supply chain issues. But sometimes the private sector isn’t capable of resolving supply chain issues in a timely manner, and state investment is necessary to bring immediate relief. It must also be remembered that wealthy people have contributed to inflation by bidding up the value of all sorts of assets. They’ve dumped money into the stock market and the housing market, and their speculation has fueled a series of bubbles in things like cryptocurrencies and NFTs. Too much investment chasing too few profitable sectors leads to bubbles and herd behavior. It would be much better if the state took some of that money and used it to solve the actual, existing supply chain problems. In the long run, private investors would have better opportunities if the state acted in a more proactive manner.

None of this is going to happen. The American government only pretends to be interested in solving problems. In point of fact, the prevailing attitude these days is that only the private sector can do anything about supply chain issues. We are supposed to be polite and patiently let the rich fleece us until the profit motive compels them to make these investments of their own accord. Then, we are supposed to thank the Biden administration for its trivial, meaningless Inflation Reduction Act.

Ordinary Americans will do no such thing. They will very likely punish the Democrats for doing so little while prices went so high. In my home congressional district, the Republicans are pumping in a vast amount of money to challenge Frank Mrvan. Mrvan’s district has been blue since the 1930s. The district includes many of the poorest suburbs of Chicago, including Gary, East Chicago, and Lake Station. Many of these suburbs are majority African-American. Nevertheless, the Republicans think they can win this year. Why? These municipalities are so poor that there is little functioning public transit. To get around, people in these towns have to drive. They can’t afford new electric cars. They have to buy gas, and they have to buy it often.

So, the GOP has nominated Jennifer-Ruth Green, a black female air force veteran. Americans for Prosperity is helping her travel from gas station to gas station, subsidizing the cost of gas back down to $2.38–the price when Joe Biden took office. What would she do if elected? She’d cut taxes on the rich and throw money at private oil companies to drill virgin wilderness. But if you’re broke and Green’s helped you save $20 on gas, you might not care. Maybe if she wins, she’ll run again in two years, and you’ll save another $20. Why would you expect anything more? It’s not as if the Democrats will give it to you.

And so, under Joe Biden the country continues to move to the right, as more people grow frustrated with its uselessness and turn to the Republicans. You had to vote for Joe Biden to stop the Republicans, but Joe Biden’s policies–or lack thereof–create new Republicans.

The bigger issue is that the United States suffers from a chronic lack of state capacity. It struggles to pass all but the most paltry legislation. It cannot get out in front of its problems and it cannot even solve crises as they arise. So, it papers over its dysfunction by measuring spending in decades rather than in years, by sticking that extra zero on the end of every number. Seven hundred billion sounds much better than seventy billion. It almost sounds like somebody’s doing something. But it’s the sound of silence.