Why the US Inflation Reduction Act is a very big deal

The Inflation Reduction Act of 2022 (IRA) is a landmark law which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing into domestic energy production while promoting clean energy.

There is a simmering debate about the causes of today’s inflation; but regardless of what side one takes, IRA represents a step forward. For those worried about excessive demand, there is more than $300 billion in deficit reduction.

And on the supply side, the bill would mobilise $369 billion of investments in energy security and decarbonisation. That will help bring down the cost of energy — one of the main drivers of current price growth — and put America back on track to reduce its carbon dioxide emissions by some 40% (from 2005 levels) by 2030.

These investments will yield far-reaching returns. The costs of climate-driven events (wildfires, hurricanes, tornadoes, and floods) will reduce our standard of living even more than today’s inflation will, and they are disproportionately borne by lower-income households, people of colour, and future generations. These costs are far larger and more difficult to rectify than the costs of deficits.

The IRA also would help address the rising health-care costs that have long plagued America, both by lowering Affordable Care Act (Obamacare) premiums for millions of Americans and by capping out-of-pocket drug costs for those on Medicare.

The pharmaceutical industry has received tens of billions of dollars more from Medicare payouts than it otherwise would, simply because the government is prohibited from negotiating for lower prices. This gift to the industry will finally be rescinded, yielding savings of almost $300 billion over ten years.

The US is one of the world’s leading sources of pharmaceutical innovation, and much of the basic research behind these advances was paid for by American taxpayers.

Yet, Americans pay much more for prescription drugs than people in other countries, partly because drug companies have been given an unbridled power to set prices. Many of us have been fighting for years to curb these firms’ undue market power.

Furthermore, the bill will deliver sorely needed improvements to US tax policy. Corporations and the wealthiest households are not paying their fair share of taxes. That not only erodes confidence in our democracy, but also is economically inefficient. Tax revenues are necessary to finance essential public expenditures without generating inflationary deficits.

To preserve America’s competitiveness, we also must invest heavily in education, research, technology, and infrastructure. Here, the bill includes provisions that would raise more than $450 billion (over a decade) through a 15% minimum corporate tax, increased tax enforcement, and the introduction of a 1% excise tax on stock buy-backs.

The 15% minimum corporate tax is especially important. The US has led a global negotiation to curtail the practice of a few governments cutting special deals for corporations so that they can siphon tax revenues and jobs from other countries and compete in a race to the bottom in tax rates — a race in which the only winners are the multinational corporations.

A 15% US minimum corporate tax will not only raise badly needed revenue; it will also help stop this self-defeating global race. This is especially important for the US, because it spares American jobs from unfair competition.

But the landmark global agreement that America forged is unlikely to move forward if America itself does not abide by its conditions. From climate change and food insecurity to the fight for democracy in Ukraine, there are so many issues for which we need global cooperation. Like the climate measures, the US minimum corporate tax is an important step in showing that we can be good global citizens.

Of course, some critics on the right (many of them allied with drug companies, other major corporations, and the wealthy) will argue that the IRA is inflationary, and they will even produce models “proving” that that is the case. But we know by now that bad models give bad predictions.

While the full benefits of the IRA will be realised only gradually over the coming years — especially as we invest in the green transition — some of its anti-inflation effects could be felt almost immediately, particularly in the case of the drug-pricing provision.

Since markets are forward-looking (even if imperfectly so), the anticipation of increased renewable-energy supply should lead to decreased fossil-fuel prices today.

Moreover, according to some of the more prevalent theories, anticipations of future inflation are a key determinant of current inflation, so even the bill’s slower-moving inflation-dampening provisions could have anti-inflationary benefits today.

No bill is perfect. In America’s money-driven politics, there will always be compromises with special interests. The IRA is not as good as the original Build Back Better bill, which would have done more both to promote equitable growth and to fight inflation. But we can’t let the perfect be the enemy of the good. Ultimately, the IRA is a very important step in the right direction.

Project syndicate

Joseph E. Stiglitz is an American economist, a public policy analyst and recipient of the Nobel Prize in Economics