Policy- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- Interest rates are rising as the Federal Reserve attempts to combat inflation by slowing down the economy.
- In response, Democrats are pushing the Inflation Reduction Act, which aims to address the inflation crisis in a new way.
Last week, Senate Democrats shocked political observers when they made a surprise announcement: Senator Joe Manchin of West Virginia and Senate Majority Leader Chuck Schumer had quietly hammered out a budget deal called the Inflation Reduction Act (IRA).
It's a catchy name that's garnered a lot of media attention, but the political risks of tying the bill directly to the inflation crisis could damage the Democratic Party in the midterm elections. If, for instance, the inflation rate continued to skyrocket in September and October after the passage of the IRA, voters would likely continue to question the economic stewardship of the Democratic Party.
But on the flip side, the potential political payoff is massive, especially for a package that's a dramatic shift in how politicians, even Democrats, approach economic policy and inflation.
The 2 approaches to addressing inflation
Right now, there are two major economic schools of thought about solving inflation. The first is what's currently happening: The Federal Reserve is raising interest rates in an effort to slow down the economy and decrease consumer demand, which has been the mainstream response to inflation since the stagflation crisis ended in the early 1980s. But by raising interest rates, the Fed is making it harder for individuals and companies to borrow money, which even Fed Chair Jerome Powell acknowledges would likely result in millions of Americans losing their jobs — and which already seems to be forcing the housing market into decline.
A growing number of economists believe that because the current inflation crisis was inspired by both pandemic-related supply-chain issues and runaway corporate greed, the Fed's actions are unnecessary and will cause an avoidable recession.
Wealthy people have typically profited from recessions while ordinary people suffer, and studies show that the majority of Americans permanently lost anywhere from one-quarter to three-quarters of their wealth during the Great Recession. The Federal Reserve appears to be beholden to trickle-down orthodoxy by favoring the wealthiest Americans over everyone else.
So while the Federal Reserve tried to combat inflation by raising interest rates against the better wishes of the American public, Senate Democrats are rejecting the Fed's trickle-down method and taking a new tack to combat inflation with IRA.
What's inside the IRA?
In order to study its effects, we need to explore what's in the Inflation Reduction Act. While it's not even a fifth the original size of the proposed Build Back Better (BBB) legislation that Congressional Democrats failed to pass last year, IRA preserves many of the most important policies from the BBB. The Center for American Progress has broken out 11 of the most potentially consequential benefits of the IRA as it stands, but really the policies fall into three major buckets:
- First, it addresses out-of-control healthcare costs by allowing Medicare to negotiate lower drug prices from Big Pharma and putting a cap on drug-price hikes.
- Second, it combats the climate crisis by encouraging Americans to switch away from fossil fuels for their home-energy costs, incentivizing job creation in the green energy space, and cleaning up the parts of the country that have suffered the most from pollution.
- And third, it adds significant funding to the IRS in order to find and punish wealthy tax cheats, and raises the corporate minimum tax rate to 15%.
In a report issued on August 1, the economics team at corporate consulting firm Moody's Analytics argues that "broadly, the legislation will nudge the economy and inflation in the right direction" by taxing big corporations, reining in skyrocketing drug prices, and adding a fifth of a percentage point to the Gross Domestic Product in the next 10 years through strategic investment in the green economy.
A better solution for ordinary Americans
The Fed's strategy of reducing consumer demand by shrinking the economy has successfully worked in the past, but at massive costs. Taxing corporations and increasing funding to catch multimillionaire tax cheats through IRA will similarly slow the economy down — but it does so in a way that doesn't harm ordinary Americans the way that interest-rate hikes do.
Because inflation has been low for decades, much of our understanding on how to combat inflation comes directly from the trickle-down Reagan 1980s, when the solution to every problem seemingly involved shrinking the government and returning funds to wealthy people and corporations. The Biden Administration is beginning to uncover a new way to combat inflation — one that doesn't sacrifice the intergenerational wealth of millions of American families in the name of economic growth for a moneyed few.
And to return to the potential political ramifications of all this for the midterms, the successful passage of IRA could catapult Biden's poll numbers in a matter of weeks, just as public perception of President Reagan's economic policies improved throughout his first term. But unlike the Reagan era's trickle-down inflation solutions that improved outcomes in the short term, Biden's prioritizing of ordinary Americans is likely to leave us in better economic shape for decades to come.