There’s a lot of money out there. No one wants to clean it up.
So in some signs that there might still be some life left in the American democratic machine, the US Senate passed the hotly contested “Inflation Reduction Act”.
Will it reduce inflation?
No, not really?
Will it fix the environment? Yeah, about that…
But hey, they got a thing done, and in the cluster-fuddle of American politics, this is about as much as you can hope for.
The Democrats and President Biden are selling it as a tool for combatting inflation. Not because it’s going to be particularly good at that, but because that’s what sells right now.
Inflation has become the number one hot-button topic in the nation.
As it stands, inflation is running at 8.5% in America (maybe giving us a picture of where we might be heading).
8.5% hurts. You’re going to feel that right in the hip pocket.
In terms of purchasing power, the average American household is $US6144 (A$8656) worse of that this time last year, thanks to inflation.
A survey by Statista showed that 44 per cent of US adults now think inflation is the most pressing issue. A Pew Research Centre found that 70 per cent of Americans think inflation is a very big problem.
And so how is the Inflation Reduction act going to fix that problem?
By spending $370bn.
And that fixes inflation by… because… economics something-something.
No, it is contractionary, sorta.
While it is promising to spend $370bn, on things like:
- Energy security and climate change ($369 billion),
- Health Care ($64 billion); and
- Funding for drought relief ($5 billion)
It’s planning to raise a whopping $739bn in new taxes. It’s going to do that by:
- imposing a minimum 15% corporate minimum tax rate for large companies ($313 billion),
- prescription drug price reform to lower prices, ($288 billion),
- increased tax enforcement and funding for the IRS ($124 billion); and
- imposing a 1% excise tax on stock buybacks ($73 billion)
So when you put those together, you have over $300bn left over to start paying down debt.
That, in and of itself, should take some money out of the system, and therefore help lower inflation.
But, and this is the thing, the timing is a little bit off.
The Penn Wharton Budget Model projects that the bill will increase the deficit during the next four years. Almost 90 per cent of the deficit reduction would happen from 2029 through 2031, which in political terms, is out in the never-never.
But inflation is too high now. It’s already a problem.
Saying you’re going to fix it in 7 years is just kinda ridiculous.
But if Congress isn’t going to do anything, then the Fed will.
If the inflation doesn’t star coming down on its own (given the rate hikes we’ve already had), then there will need to be more rate hikes.
And this is all makes me wonder how it’s going to play out here. We have the same problem. Fiscal policy was just way to stimulatory for too long.
But once the money is out there, its very hard to get it back.
Which pushes all the heavy lifting on to the RBA…
… and then on to us.
So yeah, another great day for democracy.
JG.