Manchin Says Inflation Bill Can Curb Rising Prices. ‘Ridiculous,’ Some Say.

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Inflation is a political problem for Democrats. A woman grocery stores in Alhambra, Calif.

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Frederic J. Brown/AFP via Getty Images

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Democratic Sen. Joe Manchin whiplashed the markets Wednesday night when he announced he would be joining his party in voting for an expansive spending bill designed to curb inflation, just weeks after negotiations appeared to stall. But now that the surprise has worn off, experts are questioning whether the bill might just have the opposite effect.

On Wednesday, Manchin, a West Virginia Democrat, announced he and Senate Majority Leader Chuck Schumer of New York reached an agreement on a funding bill, called the Inflation Reduction Act of 2022. The measure includes $369 billion in funding for energy security and climate change initiatives, as well as provisions aimed at lowering the cost of prescription drugs, and $300 billion allocated to deficit reduction.

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“The Inflation Reduction Act of 2022 will address record inflation by paying down our national debt, lowering energy costs and lowering healthcare costs,” Manchin said in a statement.

Since Manchin’s about-face, there has been growing questions over whether the bill can live up to its name and reduce inflation, which rose at a 9.1% annual rate in June.

Proponents argue that reducing the budget deficit reduces demand on the economy, which could help cool inflation. In addition, the bill increases supply by stimulating energy production and supporting energy transition to renewables, said former Treasury Secretary Lawrence Summers, speaking on CNN.

“Less demand, more supply, and direct better bargaining for lower prices, those are the things that are involved in reducing inflation,” Summers added.

Opponents are skeptical. American Institute for Economic Research economist Peter C. Earle invokes the “iron law” of legislation titles: “pretty much whatever a bill or an act is called, it tends to do the opposite,” he said. Earle believes the government will eventually have to keep printing more money to fund the spending bill, which will prove more inflationary, rather than less.

“For me this should be called the inflation production act,” Earle added.

The bill proposes several measures to pay down the deficit and finance the climate change and healthcare provisions. These include a new 15% corporate minimum tax, enhanced funding for tax collection enforcement, and a plan to close the interest loophole, which allows private-equity partners to pay the lower capital-gains tax rate on income rather than ordinary income-tax rates.

“This notion that this is somehow going to magically reduce inflation is ridiculous,” says Nancy Tengler, CEO and CIO of Laffer Tengler Investments. Instead, the bill could have the opposite effect, given the potential influx of money that will flow toward the clean energy sector.

Kim Wallace, analyst at 22V Research, agrees, writing that the bill isn’t likely to have much effect on near-term inflation or the longer run fiscal balance.

For others, the jury is out until the Congressional Budget Office releases its scoring for the bill, or at least until a final version finishes winding its way through Congress. It also remains unclear whether Democratic Sen. Kyrsten Sinema, another moderate holdout, will support the bill, or if House progressive and moderates will be able to find a common ground.

Even if the measure passes, experts estimate that it could take over a year for the full impacts of the legislation to kick in. By that point, the economy could be in a very different position than it is today, said Tim Mahedy, senior economist at KPMG. If inflation is lower than it is today, or the economy is in a prolonged recession, some of the bill’s components wouldn’t be as inflationary, he added.

“It really is too early to assess all the potential implications of the bill,” said Ken Kim, senior economist at KPMG. “I just think we need more time for it to harden and see what more probable impact might be going forward.”

Write to Sabrina Escobar at [email protected]

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Credit: www.marketwatch.com /

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