Joe Biden signing the Inflation Reduction Act, August 16, 2022
On August 16th, Joe Biden officially signed the Inflation Reduction Act, passing the most comprehensive government climate action in years. By many, it is considered the largest U.S. investment in the climate, ever. It was enacted with the goal of "bringing down consumer energy costs, increasing American energy security, and reducing greenhouse gas emissions [1]." However, what will the true impact be, given the act seems not to be promoted on its economic agenda, but on its effect on the climate and healthcare? As of August*, inflation sits at 8.3% and despite decreases over the last few months, remains at the highest levels since 1981 [2]. How will investments in climate action ease inflation?
In his analysis of the IRA, Jerry Haar of the Wilson Center described the act as "a Rorschach inkblot... one sees in it what one wants to and interprets it accordingly [3]." This cannot be more true, given that the bill was passed unanimously by Democrats in both the house and senate, and was also opposed unanimously by Republicans in both chambers** [4]. While this can be largely attributed to the partisan environment that the government is currently operating in, it is undeniable that each party sees what they want to in the act.
On the side of the Democrats, the positives that they see include raising $737 billion in revenue over the next ten years***. The act also allocates $437 billion towards climate incentives and healthcare subsidies [5]. In terms of climate investment, the bill aims to reduce 2005 emission levels 40% by 2030 through investment in energy infrastructure, along with the addition of new or expanded clean energy tax credits for both consumers and generators [3].
The main criticism by Republicans regards the increased support of the IRS, claiming that it would allow the government to "hire tens of thousands of new IRS agents" and "shake you down for every last cent [6]." However, when looking at the allocation of funds, there is no mention of the hiring of new agents [7]. The purpose of the increased IRS funding listed in the act is to improve the government's revenue stream from taxation. Any individual who pays their taxes should not be impacted by the act.
Nevertheless, some legitimate concern exists about the name of the act itself. Many financial analysts agree that while the IRA will help reduce the national deficit by roughly $300 billion, it will have a marginal impact on inflation itself [5] [6]. Moody's estimates the country will only see a 0.33% decrease in inflation and 0.2% increase in real GDP due to the act by Q4 2031 [8]. As a consequence, associated attacks from the Republicans have left Democrats scrambling to redefine their message, quickly shifting from economic value to healthcare improvement, and now finally to environmental impact [9]. Through this, they have only served to muddy the waters, and confuse potential voters ahead of a critical midterm election [9].
Regardless of the sound bites, it is undeniable that the main focus of the act is climate, healthcare, and the means of paying for it. The name "Inflation Reduction Act" is clearly a marketing tool, albeit a misleading one. The limited effects on both inflation and the economy simply do not justify this labeling. However, this should not undermine the overall positive impact of the act. In terms of the energy industry, the act has the potential to drive a complete paradigm shift, and better position the country for the future. As a country, we should not permit inherently political actions to determine our opinion of legislation, but instead we must look deeper at the true impacts that they might have.
*Most recent available data at the time of publish
**4 Republican representatives abstained from the vote
***Ways to raise this revenue include a15% corporate tax on companies earning over $1 billion in profit, improved IRS enforcement, a 1% tax on stock buybacks, and changes in the way Medicare officials can to negotiate prescription drug prices [5].
References
[1] "Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022," Senate Democrats, 7 Aug. 2022.
[2] "United States Inflation Rate," Trading Economics, 13 Sept. 2022.
[3] Hughes, Risi, Haar, Goto, Kennedy, Rudman, "Wilson Center Expert Analysis of the Inflation Reduction Act," Wilson Center, 15 Aug. 2022.
[4] "H.R. 5376: Inflation Reduction Act of 2022," Govtrack, 16 Aug. 2022.
[5] Pandit, "How will the Inflation Reduction Act impact the economy?" J.P. Morgan, 17 Aug. 2022.
[6] Romm, "House passes Inflation Reduction Act, sending climate and health bill to Biden," The Washington Post, 12 Aug. 2022.
[7] "Inflation Reduction Act boosts IRS funding for enforcement and modernization," EY, 19 Aug. 2022
[8] Zandi, Yaros, Lafakis, "Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022," Moody's Analytics, Aug. 2022.
[9] Gleckman, "Who Will Win the Battle Over Framing The Inflation Reduction Act?" Forbes, 23 Aug. 2022.
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