Build Back Worse: The Inflation Reduction Act Won’t Reduce Inflation

Politicians aren’t great at making policy, though they can certainly come up with a good-sounding name. After all, what could possibly be better during a time of sky-high inflation than a bill called the “Inflation Reduction Act”?

This massive spending bill received not one supporting vote from Republicans in the House of Representatives, and required the Vice President’s vote to break a tie in the Senate, where the bill also had no Republican support.

In other words, this is about as far from a bipartisan effort as you’ll find in modern times. Now, it goes to Joe Biden’s desk, who will undoubtedly sign the bill into law. Thus, with midterm congressional elections coming up soon, the Democrats will at least have something to point to that looks like an accomplishment.

What’s actually being accomplished in the so-called Inflation Reduction Act, though? Certainly not the reduction of inflation. Sure, the July CPI reading of 8.5% was lower than June’s jaw-dropping 9.1%, but this bill has nothing to do with that.

While Biden’s FBI distracts the media with a raid at Mar-a-Lago, his 40% approval rating needs a pick-me-up ASAP. He’s calling this a “historic moment,” but as the old saying goes, the devil’s in the details.

For one thing, the bill will spend $80 billion of your tax dollars to make the government, and specifically the IRS, bigger. And even though economists disagree on this, we’re supposed to believe that the newly hired, ambitious IRS agents won’t target the middle class at all.

Courtesy: Bespoke Investment Group

There will be a tax on corporations, but whether this will benefit anyone is debatable. During Senate negotiations, Democrats snuck in an excise tax on stock buybacks. This will undoubtedly dis-incentivize share repurchases, so companies that are confident in their own business will be less likely to express this confidence through self-investment.

Since the Biden administration’s “Build Back Better” agenda was a non-starter, this was the best they could come up with apparently. The IRS expansion spending is just a drop in the bucket, though, compared to the record $369 billion in spending on the Democrats’ climate agenda.

On top of that, the bill forces American taxpayers to spend $64 billion on the Affordable Care Act, also known as Obamacare, whether they approve of it or not. Nowhere is there an explanation of exactly how any of this tax-and-spend policy is supposed to reduce inflation in the U.S.

Actually, it was rampant spending that got us here in the first place. The response to COVID-19 was to print up and spend unprecedented amounts of currency units. Indeed, more dollars were created in months than had been printed up in the prior several years.

And so, the government is doing now what it’s done for generations: using the thing that caused a problem, to try to solve that problem. It doesn’t pass the common-sense test, but the career politicians on Capitol Hill are apparently counting on the public being too distracted to read the fine print.

Even Mike Feroli, JPMorgan’s chief U.S. economist, had to acknowledge that the Inflation Reduction Act won’t actually change inflation – or GDP growth either, for that matter, during the next four to eight quarters. So, don’t be surprised if all of this spending results in a big “nothing burger” for a year or two.

Courtesy: Bespoke Investment Group

Really, though, a nothing burger wouldn’t be the worst possible outcome of this legislation. A ramp-up in federal-level spending could easily put inflation into the double digits. With that, 8.5% inflation will seem like a dream, a relic of better times in America.

Ultimately, even the Democratic voters won’t be satisfied with what’s in the bill. They failed to include Democrat priorities, such as universal pre-kindergarten, lower child care costs, paid family and sick leave, and the enhanced child tax credit.

At best, what the Democrats pushed through was a major compromise, which compromised their core principles. To quote Hawaii Democratic Senator Brian Schatz, “We just made a deal with Joe Manchin… I don’t think anybody should have expected that this is the bill I would have written.”

That’s what disappointment sounds like, but it doesn’t come close to the disappointment that Americans will feel when they discover that this “landmark” bill only make the inflation problem worse. The Democrats should be relieved, at least for the moment, that the impact of this will be felt after the midterm elections, and not before.