WASHINGTON (AP) — With inflation raging near its highest level in four decades, the House of Representatives on Friday gave final approval to President Joe Biden’s landmark Deflation Act. The headline raises a tantalizing question: Will the measure really tame the price spikes that have caused hardship for American households?
Economic analyzes of the proposal suggest that the answer is probably no – at least not anytime soon.
The legislation, which passed the Senate earlier this week and now heads to the White House for Biden’s signature, would not directly address some of the main drivers of rising prices, from gas and food to rent and restaurant meals.
Still, the law could save some Americans money by reducing prescription drug costs for seniors, expanding health insurance subsidies and lowering energy prices. It will also reduce the government’s budget deficit modestly, which may slightly reduce inflation by the end of this decade.
The nonpartisan Congressional Budget Office concluded last week that the changes would have a “marginal” impact on inflation this year and next. And the University of Pennsylvania’s Penn Wharton Budget Model concludes that over the next decade, “the impact on inflation is statistically indistinguishable from zero.”
Such predictions also undermine arguments some Republicans, such as House Minority Leader Kevin McCarthy, have made that the bill will “cause inflation,” as McCarthy said in a speech on the House floor last month.
Biden himself, speaking about the legislation’s effect on inflation, cautiously referred to potentially lower prices in individual categories rather than lower inflation overall. This week, the president said the bill would “reduce the cost of prescription drugs, health insurance premiums and energy costs.”
At the same time, the White House released a letter signed by more than 120 economists, including several Nobel Laureates and former Treasury secretaries, arguing that the law would reduce the government’s budget deficit by about $300 billion over the next decade. , according to the CBO — will put “downward pressure on inflation.”
In theory, lower deficits can reduce inflation. This is because lower government spending or higher taxes that help shrink the deficit reduce demand in the economy, thereby easing the pressure on companies to raise prices.
Jason Furman, a Harvard economist who served as the Obama administration’s chief economic adviser, wrote in an opinion column for The Wall Street Journal: “Deficit reductions almost always reduce inflation.”
Still, Douglas Holtz-Eakin, who was a top economic adviser to President George W. Bush and later director of the CBO, noted that lower deficits won’t start until five years from now and won’t be very large in the next decade given the size of the economy.
“$30 billion a year in a $21 trillion economy is not going to move the needle,” Holtz-Eakin said, referring to the projected size of the deficit reduction spread over 10 years.
He also noted that Congress recently passed other legislation to subsidize U.S. semiconductor manufacturing and expand health care for veterans, and suggested those laws would spend more than the Deflation Act would save.
In addition, Kent Smeters, director of budget modeling at Penn Wharton, said the bill’s health care subsidies could lead to higher inflation. The legislation would spend $70 billion over a decade to expand tax credits to help 13 million Americans pay for health insurance under the Affordable Care Act.
Those subsidies would free up money for recipients to spend elsewhere, potentially increasing inflation, although Smeters said he thought the effect would likely be very small.
While the act may have the benefit of increasing savings for millions of households on pharmaceutical and energy costs, it is unlikely to have much effect on headline inflation. Prescription drugs account for only 1% of spending in the US Consumer Price Index; electricity and natural gas costs are only 3.6%.
Starting in 2025, the law would cap the amount Medicare recipients will pay for their prescription drugs at $2,000 a year. It would authorize Medicare to negotiate the price of some expensive pharmaceuticals — a long-sought goal that President Donald Trump has also proposed. It would also cap Medicare recipients’ out-of-pocket insulin costs at $35 per month. Insulin prescriptions averaged $54 in 2020, according to the Kaiser Family Foundation.
“This is a historic change,” said Lee Purvis, director of health care spending at AARP’s Public Policy Institute. “This allows Medicare to protect beneficiaries from high drug prices in a way that did not exist before.”
A Kaiser study found that in 2019, 1.2 million Medicare recipients spent an average of $3,216 on prescription drugs. Purvis said recipients who use the most expensive drugs can spend up to $10,000 or $15,000 a year.
The legislation allows Medicare to negotiate prices for 10 high-cost pharmaceuticals starting next year, though the results won’t go into effect until 2026. Up to 60 drugs could be up for negotiation through 2029.
Holtz-Eakin argued that while the provision could lower the cost of some Medicare drugs, it would discourage new drug development or reduce new venture capital investment in drug startups.
The Inflation Reduction Act’s energy provisions could also create savings, although the amounts would likely be much smaller.
The bill would provide a $7,500 tax credit for new purchases of electric vehicles, although most EVs would not be eligible because the legislation requires them to include batteries made of American materials.
In addition, the legislation significantly expands the tax credit for homeowners who invest in energy-efficient equipment, from a one-time credit of $500 to $1,200 that a homeowner can claim each year. Vincent Barnes, senior vice president of policy at the Energy Savings Alliance, said it would allow homeowners to make new energy-efficient investments over several years.
But for all Americans, including those who are not homeowners, the impact is likely to be limited. The Rhodium Group estimates that by 2030, the bill’s provisions will save households an average of up to $112 a year as gas and electricity become cheaper as more Americans drive electric cars and houses become more energy efficient.
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