Because the law on reducing inflation is good business

Of

Joseph E. Stiglitz

Nobel Prize for Economics

The US Senate Democrats’ compromise bill, the Inflation Reduction Act (IRA) of 2022, addresses not only inflation but also several longstanding key issues in the face of our economy and our society.

There is a latent debate on the causes of current inflation; but whichever side it takes, the bill represents a step forward. For those worried about excess demand, there is over $ 300 billion in deficit reduction. And, on the supply side, the bill would mobilize $ 369 billion in investments in energy security and decarbonisation. IS help reduce energy costs – one of the main drivers of the current price increase – 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 it will produce wide-ranging returns. The costs of climate-induced events (fires, hurricanes, tornadoes and floods) will lower our living standards even more than today’s inflation, falling disproportionately on lower-income families, people of color and younger generations. 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 reminded us once again energy interdependencies go hand in hand with serious risks (something I noticed over 15 years ago). The weather may be changeable, but fossil fuel dictators are unreliable and downright dangerous.

Even the IRA it would help solve the rising costs of health care that have plagued the United States for some time, lowering Affordable Care Act (Obamacare) premiums for millions of Americans and limiting direct drug costs for those on Medicare. The pharmaceutical industry has received tens of billions of dollars in Medicare payments more than it should have, simply because the government is prohibited from negotiating lower prices. This gift to the industry has finally been revoked, generating savings of nearly $ 300,000 million over ten years.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 has been paid for by U.S. taxpayers. However, Americans pay a lot more for prescription drugs than people in other countries, in part because pharmaceutical companies have been granted excessive 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 an extraordinary achievement.

On the other hand, the bill would offer Absolutely necessary improvements to US fiscal policy. The wealthiest businesses and households do not pay their fair share of taxes. This not only erodes trust in our democracy, it is also economically inefficient. Tax revenues are needed to finance essential public spending without generating inflationary deficits.

The Russian invasion of Ukraine reminded us of this because defense spending is needed. But to keep America competitive, we also need to invest heavily in education, research, technology and infrastructure. In this sense, the bill includes provisions that would raise over $ 450,000 million (over a decade) through a minimum corporation tax of 15%, increased tax collection and the introduction of a special tax of 1. % for share buybacks.

The minimum corporation tax of 15% is particularly important. The United States conducted a global negotiation a reduce the practice of some governments of sealing special deals so that companies can divert tax revenues and jobs from other countries and compete in a race to the bottom on tax rates, a race where the only winners are international companies. A minimum corporation tax of 15% in the United States will not only hugely increase much-needed revenue; it will also help to curb this counterproductive global race. This is essentially important to the United States because it saves American jobs from unfair competition.

However, the historic US-forged global deal is unlikely to go ahead if the US fails to meet its conditions. From climate change and food security to the struggle for democracy in Ukraine, there are many issues for which we need global cooperation. Like climate action, the minimum corporation tax in the United States is an important step in demonstrating that we can be good global citizens.

Of course, some right-wing critics (many of them allies of pharmaceutical companies, other large corporations and even wealthy ones) will say that the IRA will be inflationary and will even produce models that will “prove” that it is. But at this point we know wrong models generate wrong predictions. Just look at the models 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 encourage additional investment).

These predictable arguments against the IRA tax clauses are based on an erroneous assumption: that companies will “shift” the minimum tax burden by raising 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 – looks a lot like a pure profit tax. And this is a long-standing assumption in economics a pure profit tax does not lead to higher prices or lower wages.

This also implies that these taxes can be raised without fear of negative effects, neither on inflation nor on investment. The major 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 former.

While all the benefits of the IRA will only materialize 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, in particular with regard to drug prices. As markets are forward-looking (albeit imperfectly), the anticipation of a greater supply of renewable energy should lead to lower fossil fuel prices today. Furthermore, according to some of the more prevalent theories, anticipations of future inflation are a key determinant of current inflation, so even the slowest inflation-reducing provisions in the bill could have anti-inflation benefits today.

No account is perfect. In American money-motivated politics, there will always be trade-offs with special interests. The IRA is not as good as the original Build Back Better bill, which would have done more to promote fair growth and fight inflation. But we cannot let the perfect be the enemy of the good. Decidedly, The IRA is a very important step in the right direction.

Copyright: Project Syndicate, 2022. www.project-syndicate.org