Joseph E. Stiglitz
Nobel Prize in Economics
The US Senate Democrats’ compromise bill, the Inflation Reduction Act (IRA) of 2022, addresses not only inflation but also several long-standing key issues facing our economy and our society.
There is a latent debate about the causes of current inflation; but whichever side one takes, the bill represents a step forward. For those concerned about excess demand, there is more than $300 billion in deficit reduction. And, on the supply side, the bill would mobilize $369 billion in investments in energy security and decarbonization. It’s help reduce energy cost – one of the main drivers of the current rise in prices – and would put the United States back on track to reduce its carbon dioxide emissions by about 40% (from 2005 levels) by 2030.
These investments will yield wide-ranging returns. The costs of climate-driven events (wildfires, hurricanes, tornadoes, and floods) will lower our standard of living even more than today’s inflation, falling disproportionately on the lowest-income households, people of color, and younger generations. future. These costs are much higher and more difficult to rectify than the costs of deficits.
Likewise, improving energy security has become essential. For too long, the authoritarian leaders of the petrostates have managed to hold the rest of the world hostage. Russian President Vladimir Putin has once again reminded us that energy interdependencies come hand in hand with serious risks (something I noticed more than 15 years ago). The weather may be changeable, but fossil fuel dictators are unreliable and downright dangerous.
The IRA too would help solve the rising costs of health care that have plagued the United States for some time, lowering the Affordable Care Act (Obamacare) premiums for millions of Americans and capping out-of-pocket drug costs for those on Medicare. The pharmaceutical industry has received tens of billions of dollars more in Medicare payments than it should have, simply because the government is prohibited from negotiating lower prices. This gift to the industry was finally rescinded, generating savings of almost 300,000 million dollars in ten years.
The United States is one of the world’s leading sources of pharmaceutical innovation, and much of the basic research behind these advances was paid for by US taxpayers. Nevertheless, Americans pay much more for prescription drugs than people in other countries, in part because pharmaceutical companies were given inordinate pricing power. Many of us have been fighting for years to curb the excessive market power of these companies. If the IRA becomes law, this provision alone would be a remarkable achievement.
On the other hand, the bill would offer Badly needed improvements to US tax policy. The wealthiest businesses and households do not pay their fair share of taxes. That not only erodes confidence in our democracy, it is also economically inefficient. Tax revenues are necessary to finance essential public expenditures without generating inflationary deficits.
Russia’s invasion of Ukraine has reminded us why defense spending is necessary. But to keep America competitive, we must also invest heavily in education, research, technology, and infrastructure. In this sense, the bill includes provisions that would raise more than 450,000 million dollars (in a decade) through a minimum corporate tax of 15%, higher tax collection and the introduction of a special tax of 1% to share buybacks.
The minimum corporate tax of 15% is especially important. The United States has led a global negotiation to curtail the practice of a few governments of sealing special agreements so that corporations can divert tax revenues and jobs from other countries and compete in a race to the bottom on tax rates – a race in which the only winners are international corporations. A minimum corporate tax of 15% in the United States will not only boost much-needed revenue enormously; it will also help curb this counterproductive global race. This is essentially important for the United States, because it spares American jobs from unfair competition.
Yet the landmark global deal the United States forged is unlikely to move forward if the United States itself fails to meet its conditions. From climate change and food security to the fight for democracy in Ukraine, there are many issues for which we need global cooperation. Like climate action, the minimum corporate tax in the United States is an important step in showing that we can be good global citizens.
Of course, some critics on the right (many of them drug company allies, others major corporations, and the wealthy too) will say that the IRA will be inflationary and will even produce models that “prove” that this is the case. But at this point we know that bad models generate bad predictions. Just look at the models that were organized in support of Ronald Reagan’s tax cuts for the rich (which, according to their false arguments, would increase incomes) or Donald Trump’s tax cuts for corporations (which, according to their false arguments, would would encourage additional investment).
These predictable arguments against IRA tax provisions are based on a flawed assumption: that corporations will “shift” the minimum tax burden by driving up prices and lowering wages. But economists long ago recognized that the current corporate tax regime in the United States – which allows companies to deduct virtually all costs, including labor and capital – closely resembles a pure profits tax. . And a longstanding assumption in economics is that a pure profits tax does not lead to higher prices or lower wages.
This also implies that these taxes can be increased without fear of adverse effects, either on inflation or on investment. The big distortions – and huge inequalities – in the tax system stem from inadequate collection and large loopholes, and the IRA is at least making progress on the first of these fronts.
While the full benefits of the IRA will materialize only gradually over the next few years – especially as we continue to invest in the green transition – some of its anti-inflationary effects could be felt almost immediately, particularly with regard to drug prices. Because markets are forward-looking (albeit imperfectly), the anticipation of increased renewable energy supply should lead to lower fossil fuel prices today. Also, according to some of the most prevailing theories, anticipations of future inflation are a key determinant of current inflation, so even the bill’s slower inflation-reducing provisions could have anti-inflation benefits today.
No bill is perfect. In America’s money-motivated 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 to promote equitable growth and fight inflation. But we cannot let the perfect be the enemy of the good. Definitely, IRA is a very important step in the right direction.
Copyright: Project Syndicate, 2022. www.project-syndicate.org
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Why the Inflation Reduction Act is a Good Deal