Legislating against inflation?

Published August 11, 2022, 12:05 AM

by Diwa C. Guinigundo


Diwa C. Guinigundo

There’s an interesting anti-inflation strategy emerging in the United States. The US Senate calls it Inflation Reduction Act (IRA), and they consider it a major achievement for the Democrats after spending over a year to craft what should have been President Joe Biden’s broad economic agenda. Approved by a hairline, it is headed to the House of Representatives for approval.

IRA is admittedly a more modest package compared to the original Build Back Better Act (BBBA) that would have cost the American people some $2 trillion.

Wall Street Journal described it as “a bill spending hundreds of billions of dollars on climate change and healthcare programs while raising taxes on large, profitable companies…” The Republicans opposed the package “arguing that it would do little to address decades-high inflation and would worsen the nation’s fiscal picture.” The non-partisan Congressional Budget Office believes the impact on inflation could be negligible in the next two years.

So, are we going to see inflation finally coming down after the House clears this piece of legislation?
Based on the US Senate’s summary document, the IRA fights inflation by reducing the fiscal deficit and investing in domestic energy production and manufacturing, while reducing carbon emissions by roughly 40 percent by 2030. Inflation will also be tackled by allowing Medicare to negotiate for prescription drug prices and extend the expanded Affordable Care Act program for three years until 2025. Energy measures will cost $369 billion and $64 billion for health.

The idea is to fund these anti-inflation measures by raising revenues by $739 billion through one, imposing 15 percent corporate minimum tax; two, prescribing drug pricing reform; three, enforcing the tax code; and four, closing tax loopholes on carried interest.
But the political dynamics of legislation is proving to be less promising.

We can grant that strategic investment in clean energy production may help lower the cost of energy and create hundreds of thousands of jobs. By expanding the renewable energy infrastructure as well as granting tax credits for individuals buying electric vehicles and efficient home heating and cooling systems, IRA becomes an effective inflation buster only if more Americans switch to favored energy sources which could be initially costly.

But some quarters also argue that “while it contains important renewable-energy funding, the bill’s commitment to massive federal oil and gas expansion is dangerously at odds with scientific reality.” Back to square one of vulnerability?

On health, IRA makes prescription drugs more affordable. The federal health secretary can negotiate the prices of certain expensive drugs annually for Medicare. The big catch is that not everyone and not all prescription drugs would be covered. The pace is glacial, 10 drugs are expected to be covered only by 2026 and another 10, three years later.

The bill could have been heaven-sent to poor Americans. For instance, the original intent of keeping the price of insulin at $35 per month in the medical bill was deleted by the Republicans. They also went full blast against both Medicare and private insurance. At best, the bill capped at $2,000 any out-of-pocket prescription drug costs for patients on Medicare. But the catch, again, is the effectivity date which is yet in 2025.

Needless to say, the pharmaceutical giants also opposed these initiatives aimed at easing the cost of medical care in the United States. They would be required to pay rebates to the federal government if their price adjustments are excessive.

Good, the Republicans acceded to the three-year extension on healthcare subsidies in the Affordable Care Act of 2021. That single act alone could keep the premiums at $10 per month or lower for many Americans covered by public money. Without this, we might be looking at a sick and dying America, a paradox of extreme wealth and poverty in its journey of two and a half centuries since independence and technological breakthroughs.

The Republicans’ other beef is the financing of these initiatives. A 15 percent minimum tax for corporations making $1 billion or more in income is expected to produce over $300 billion. But at this time when income inequality in the US continues to widen, this kind of tax could actually be a good mitigant. There is a space for policy tweaking of this size.

The Congressional Budget Office may therefore be correct that the bill’s anti-inflation bias could be negligible in the next two years. The benefits from drilling and fast-tracking pipeline construction to increase the available fuel supply and hopefully reduce the cost for the average consumer could come only after two years. Limiting the price adjustment of drugs to inflation could be self-defeating now that inflation is approaching 10 percent.

The Republicans who opposed the bill are the ones responsible for eroding its benefits including its price effects. It’s incredible that they claimed the legislation would have little meaning in taming inflation given their own objections to the very provisions to bring this about.

Was there more space for the Democrats to be less desperate to compromise? As The Washington Post observed: “Many Democrats emphasized the need to overlook the losses and savor the gains in a package that weeks earlier had seemed out of reach.”

Legislating in the US today is definitely more burdensome. Unlike in the US Congress, the Marcos government enjoys supermajority. Therefore, it should be able to pass its budget and fiscal consolidation plan with only some minor snags. Various parties now consider themselves part of the administration boosting its firm hold on the legislative process. Yes, it is the BSP that conducts monetary policy, but Congress can also legislate against inflation. All it needs are good policy proposals and the heart to champion them on the floor.