Sunday, August 7, 2022

Inflation Reduction Act is bad for the economy

Over the years I've learned that whenever politicians pass laws that impact the economy, the results, with few exceptions, end up being not only perverse but opposite to the supposed aims of the legislation. The Inflation Reduction Act currently being considered is a perfect example of this. It won't do anything to lower inflation, but it will do lots of things to weaken the economy.

If you want a good analysis of why the Inflation Reduction Act is harmful, just read this analysis by Casey B. Mulligan, a great economist associated with The Committee to Unleash Prosperity. I'm a proud supporter of CTUP, by the way. Reading this analysis is a great way to understand how the real world works.

A short summary:

The Inflation Reduction Act contains multiple negative incentives on work and investment that will have substantial negative effects on the U.S. economy. These negative effects include 1) the reduced incentives for businesses to invest because of the corporate tax increase and the increased tax rate on certain investments (carried interest); 2) the negative effects on work due to the expansions in health care subsidies under the Affordable Care Act - subsidies not tied to working; 3) the negative impact on new drug development due to new federal price controls on the pharmaceutical industry.


wkevinw said...

Price controls that are government mandates always end up in shortages- shortage of the product, which leads to shortage of earnings of the firms, its employees and so on.

In addition, the shortage of earnings leads to a shortage in many kinds of spending, such as capital investment and R&D. So, fewer new medications.

There are many people who don't know this, obviously.

If there is an imbalance in the market, such as "high prices", (often originating from an unintended consequence from government meddling in the first place), the government can make some regulations to increase/improve competition in that market. Again, there are lots of people who don't know this.

Salmo Trutta said...

"reduced incentives for businesses to invest" inevitably lead to a reduction in:

Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Employed Persons (PRS85006092)

Tek Phou said...

The 2-10Y spread is at -0.44 prior RTH, which was two decade lows. This implies the bond market is very skewed towards a strong recession (pricing in terms of demand destruction in oil, lowering of real yields, higher gold/silver; excluding equities) Would you say that the bond market is a little over bought, on long term debt ?

Scott Grannis said...

The yield curve is inverted, but I don't think that means a recession. Money is not tight, inflation pressures are cooling, and so the Fed is going to be raising rates less than expected and it won't be long, perhaps, until they lower rates or keep them flat. The economy is not terrible, but Biden's IRA will definitely create headwinds to future growth. It's almost as if Biden is doing everything possible to weaken the economy.

Mr Twinkie said...
This comment has been removed by the author.
Mr Twinkie said...

maybe the acts aim is to put a lid on food and energy prices as to avoid more homeless folks on the street or social unrest of a combo of both.

Scott Grannis said...

Price controls such as putting a lid on food and energy prices may temporarily limit prices on those items, but they cannot possibly limit overall inflation. But price controls DO lead to shortages and other market distortions.