Commentary: The Inflation Reduction Act leaves out #inflation

Today, President Joe Biden heaped praise on Senator Joe Manchin, Democrat of West Virginia, and Senate Minority Leader Mitch McConnell, Republican of Kentucky, for their agreement on H.R. 5376, the Inflation Reduction Act. The following is a synopsis of what the bill provides.

“This bill provides funding, establishes programs, and otherwise modifies provisions relating to a broad array of areas, including education, labor, child care, health care, taxes, immigration, and the environment. (The bill is commonly referred to as the Build Back Better Act.)

For example, the bill provides funding for

  • management of the National Forest System;
  • job placement and career services;
  • safe drinking water and energy-efficiency projects;
  • electric vehicles and zero-emission, heavy-duty vehicles;
  • public health infrastructure and supply chain resiliency;
  • housing, rental, and homeowner assistance programs;
  • cybersecurity programs;
  • tribal infrastructure, environmental, and health programs;
  • wildfire prevention, drought relief, conservation efforts, and climate change research;
  • small business assistance and development;
  • transit services and clean energy projects in low-income communities; and
  • infrastructure and administration of the Department of Veterans Affairs.

The bill also includes provisions that

  • provide free child care for children under the age of six;
  • provide free universal preschool services;
  • establish a methane fee for certain petroleum and natural gas facilities;
  • expand Medicare to cover hearing care;
  • allow certain aliens who entered the United States prior to January 1, 2011, to temporarily remain and work in the country;
  • provide up to four weeks of paid family and medical leave per year;
  • restructure and increase taxes for certain corporations and high-income individuals (e.g., individuals with income over $400,000); and
  • require the Department of Health and Human Services to negotiate maximum prices for certain brand-name drugs under Medicare.” Source:

Mr Biden hopes that the bill reduces the budget deficit beyond the alleged $1.7 trillion reduction already experienced this year.  Mr Biden hopes that the spending under the bill will result in a reduction in inflation as well.

Politically, this is a continued attempt to get Mr Biden’s Build Back Better initiative across the goal line.  Two problems stand out.

First, there are no guarantees that a further reduction in the deficit will result in a reduction in inflation given the high levels of inflation American consumers are already seeing at current deficit levels.  The US Treasury will have to issue debt to raise funds for the investment. 

Second, Mr Biden’s plan does not discuss the causes of inflation.  The upward change in the average price level of a basket of consumer goods is caused by changes in the money supply.  The imbalance reflected when the supply of money exceeds demand and too much money chases too few goods, creates the increase in price levels.  If Mr Biden wants to crush inflation, his fiscal plan is the wrong tool.

As political optics, the cooperation between Manchin and McConnell looks good.  By the time the spending from this bill, if passed, moves through the economy, Mr Biden’s first term will be over and he likely will not experience the new fiscal challenges brought on by the bill in 2025.

Whatever the gross domestic product print may be in the next ten hours, Mr Biden may have been afforded some political cover from the “goodwill” exchanged between Republican Senate leadership and the moderate wing of the Democratic Party.  Will Mr McConnell be able to bring along a few Republicans will be the next challenge. 

Alton Drew

27 July 2022

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