About two years ago, President Biden signed into law the Inflation Reduction Act (IRA). It is a 10-year federal law that aims to reduce inflation by lowering the federal budget deficit, lowering prescription drug prices, and investing in clean energy and domestic energy production. The IRA also includes programs to support underserved farmers, ranchers, and foresters, support healthier communities, and help rural energy and utility providers.
More importantly, according to projections, the IRA is expected to cut greenhouse gas emissions by 40% by 2030, and families are expected to save an average of $1,000 per year in energy costs. Lastly, the IRA also includes changes to tax laws and funds to improve services and technology to make tax filing easier.
All these intentions and expectations from the IRA are obviously noble on paper, but the reality shows a completely different outcome since the implementation of this law. Interest rates remain high because the economy has not disinflated to the levels that Jerome Powell expected. While it is undeniable that inflation has decreased over the last two years—when the Fed hiked rates in early 2022 to tackle inflation that was around 9% at the time—Fed Chair Jerome Powell is convinced that inflation has decreased enough for central bankers to declare victory on it.
The IRA, on the other hand, which was designed to “reduce inflation,” has done no such thing, which clearly demonstrates its uselessness and more importantly, its irrationality. The IRA has clearly been very useless since its enactment because it has not been able to curb inflation. As Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” The IRA seeks to address inflation through fiscal policy whereas inflation is, first and foremost, a matter of monetary policy.
U.S. Government Deficit
Source: U.S. Department of the treasury, Congressional Budget Office
Using fiscal policy to reduce inflation includes higher taxes, lower transfer payments, and a reduction in direct government spending; in other words; applying contractionary fiscal policy. However, under the Biden administration and since the enactment of the IRA, government spending has increased considerably, which has consequently augmented the national deficit. When looking at the data, we clearly see that between 2021 and 2024, government deficit has consistently moved upward.
Government spending requires government to borrow more money from the Federal Reserve and other creditors, which means printing more money. The more money the Federal Reserve prints, the higher becomes inflation because there is more money in circulation than there is for goods and services. Thus, if the goal of the IRA is to reduce inflation, then it defeats the purpose by doing the very opposite of what’s necessary to decrease inflation. The amount of money printed in order to help Ukraine and Israel has also contributed to maintaining inflation at high levels.
We can ask ourselves, what is the point of the IRA if it does the very opposite of what it was designed to do? What’s the point of keeping such legislation enacted when it produces nothing?