Political Editors / August 9, 2022

In Brief: What the Inflation Reduction Act Will Really Do

In short, the Democrats’ latest spending spree will fuel even more inflation for a long time to come.

We’ve covered the so-called Inflation Reduction Act passed by the Senate over the weekend, but Heritage Foundation budget policy analyst Richard Stern sheds the light of his expertise on the legislation.

As Senate Democrats achieve their goal of jamming through the so-called Inflation Reduction Act, reality is becoming clear: The bill will likely increase near-term inflation, depress household incomes, and produce the long-term deficits that fuel long-term inflation.

Using the Congressional Budget Office’s latest scoring, estimates of the most recent changes, and accounting for very expensive gimmicks, it’s likely that the bill will produce deficits.

The cumulative deficit would be around $52.5 billion over the next four years, at least $110 billion through fiscal year 2031, and more beyond. That would mean adding to near-term and long-term inflationary pressures, in contrast to what proponents such as Sen. Joe Manchin, D-W.Va., claim.

In short, the bill is about as far away from a genuine Inflation Reduction Act as possible. Though it would be harmful under any circumstances, signing it into law during a period of stagflation would be the worst possible timing.

No congressional legislation would be complete without using gimmicks to disguise its cost, and this bill is no different. Stern highlights some examples before continuing about the deficit and its effect on inflation:

The deficits created by the bill, and the fact that they are front-loaded, would increase federal net interest costs by more than $14 billion—a fact that is not reflected in the formal CBO estimates.

In total, the bill would add at least $110 billion to the federal deficit through fiscal 2031.

To put that level of spending in perspective, $110 billion is roughly four-and-a-half times NASA’s annual budget, or nearly the cost of the ships in six U.S. Carrier Strike Groups. In this case, however, the $110 billion will be used to buy more inflation.

When the federal government runs a deficit, it eventually must be paid back. That’s either done through job- and wage-killing taxes or by way of the Federal Reserve printing new money to finance the deficits.

During the height of the COVID-19 pandemic, the Fed financed 56% of new federal debt with trillions upon trillions of newly created dollars. Those dollars devalued paychecks and Americans’ lifetime savings.

When the federal government attempts to print its way out of fiscal irresponsibility, it does so by imposing an inflation tax on every American household.

Stern has plenty more about how this bill will “bleed the bank accounts of American families.” He concludes:

In reality, this bill is a litany of policies aimed at scoring political points that has been recklessly and hurriedly slapped together. If it’s signed into law as expected, long after the press conferences and congressional pats on the back have faded into distant memory, it’s inflationary, tax, and other burdens will continue to haunt every American household.

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