It’s been a bad week for economic indicators. Consumer spending increased by a percentage point in June, owing to the rising cost of services even as spending on nondurable goods and durable goods declined. In sum, inflation is rising, and the public is putting off discretionary purchases. Gross Domestic Product contracted by nearly a percentage point—the second consecutive quarter of negative growth, which is the conventional indication that the economy is in recession. That assumption is supported by the collapse of gross private domestic investment, which fell by more than 13 percent. On Wednesday, the Federal Reserve raised interest rates again by three-quarters of a point, with more hikes likely in the fall. And the week’s not over yet. On Friday, we will learn just how much disposable income Americans had in June, which, if it tracks with recent months, isn’t going to be much.
The Democratic response to the unenviable conditions over which they’re presiding has so far been entirely semantic. On Wednesday night, however, the party in power secured for itself a talking point with more persuasive potential than their efforts to argue you out of the impression that this is an honest-to-goodness recession. The cavalry arrived in the form of Sen. Joe Manchin, who announced that he had reached a breakthrough deal with his fellow Senate Democrats on a bill that addresses… climate change.
Of the $433 billion in new spending that Democrats hope to rush through via reconciliation before Congress recesses for the month of August, $369 billion will be devoted to progressive environmental goals. It will include “incentives” to increase the production of renewable power sources, like wind and solar, while rewarding companies that reduce their emissions. It includes means-tested subsidies for prospective electric-car buyers and provides tax rebates for homeowners who install heat pumps. Manchin won concessions on fossil-fuel permitting, which actually could reduce energy costs down the line. But given the prohibitive focus of this legislation, it makes sense that media outlets from CNN to the New York Times to Vox.com have homed in on the bill’s ambitious climate goals as its primary concern.
But the bill is not called the “Emissions Reduction Act.” It’s the “Inflation Reduction Act.” What, you ask, is anti-inflationary in this bill? A clever debater may cite the legislation’s attempt to reduce health-care costs by allowing Medicare to negotiate prescription drug prices, which the White House argues will reduce the deficit (over the very long term) and “helps to counter inflationary pressures.” That’s arguable. What is beyond dispute is that this measure will include tax increases. While theoretically de-inflationary as a deficit reduction measure, those tax hikes would be coming online at the worst possible moment for Americans stung by rising consumer costs.
“To pay for the package, Manchin and Schumer also settled on a series of changes to tax law that would raise $739 billion over the next decade,” the Washington Post reported. The plan would impose a 15 percent minimum corporate tax on billion-dollar firms’ book income, cutting off the ways in which some big businesses can evade the current 21 percent corporate tax rate. The deal would also overhaul the so-called “carried interest loophole,” which is utilized primarily by the investment class, and it boosts the Internal Revenue Service’s budget to help the agency capture uncollected tax revenue.
The merits of each of these proposals are subject to debate. But Manchin is not supporting the imposition of new taxes on corporations because they are anti-inflationary. It is improbable that this measure will do much to decrease consumer prices since the firms that must now fold these new costs into their operating budget are more likely to pass that burden on to you, the consumer. Manchin is justifying this project in the name of “fairness.”
“Tax fairness is vital to our nation’s economic future,” Manchin said. In a pugnacious appearance on West Virginia radio, Manchin spoiled for the political fight over what he waved off as a plan that simply “can’t be inflationary.” There’s every reason to believe, however, that introducing billions of dollars into an overheated economy in the form of environmental subsidies while increasing corporate overhead at the same time will not ease inflation. Just the opposite, in fact.
We’re left with one of two conclusions. Either Joe Manchin was never serious when he spent the last 18 months insisting that he could not support legislation that made inflation worse, or this deal is on shakier ground than we’ve been led to believe. Given the obstacles to passing a reconciliation bill before the August recess, including the razor-thin Democratic majority that is routinely truncated by periodic waves of Covid infections, that’s not easily dismissed. Moreover, Manchin’s steadfast insistence on reforming the carried interest loophole—a provision he insists he won’t budge from but which Sen. Kyrsten Sinema opposes—may be more of a stumbling block than its modest $14 billion in revenues would suggest.
If Manchin is fully on board, we can conclude that he was persuaded by the laughably unserious effort to call this extremely stripped-down version of Build Back Better the “Inflation Reduction Act.” If that’s this bill’s value proposition, this insult to the public’s intelligence won’t go unanswered.