Biden’s Inflation Reduction Act – perhaps misnamed – is still a success

Although the law hasn't significantly impacted inflation in the past year, its future implementation might have a more noticeable effect.

The Inflation Reduction Act, crafted by Sen. Joe Manchin (D-W.V.) and Senate Majority Leader Chuck Schumer, is proving to be a success. According to the White House, Biden signed the Inflation Reduction Act into law in August 2022, “marking the most significant action Congress has taken on clean energy and climate change in the nation’s history. With just one signature, the president redefined American leadership in confronting the existential threat of the climate crisis and set forth a new era of American innovation and ingenuity to lower consumer costs and drive the global clean energy economy forward.”

Critics at the time were quick to condemn the law as nonsense and a waste of time. The White House said the $750 billion law would address inflation in two key ways: by lowering energy and health care costs for families and by helping to bring down the deficit, but detractors pushed back against this claim, saying it was an unrealistic goal

While it is true that over the past year price increases have cooled — the inflation rate dropped from 9 percent to 3.2 percent — most economists say the law had little to no effect on this change. However, this doesn’t mean the law isn’t actually working

Although the law hasn’t significantly impacted inflation in the past year, its future implementation will have a more noticeable effect. In conjunction with the CHIPS Act, there’s evidence that the Inflation Reduction Act contributed to approximately $500 billion in corporate commitments for new factory investments. This could have bolstered the job market, counteracting the expected inflation-driven recession that many economists foresaw. Contrary to those predictions, the recession, as anticipated by Biden, has yet to occur.

Economists say inflation declined due to three primary factors: a drop in oil and gasoline prices, actions taken by the Federal Reserve, and an improvement in supply chain issues. Last year saw a significant surge in gas prices, with a 60% increase in June 2022 compared to the previous year. This spike was largely due to Russia’s invasion of Ukraine. However, from that peak, gas prices dropped and only began to rise in January without reaching their earlier highs.

The Federal Reserve took a proactive step in raising its benchmark interest rate. This move increased the cost of borrowing, thereby reducing the heightened demand that was contributing to higher prices. As a result, mortgage rates nearly doubled, leading to a decrease in home sales and a slight reduction in home prices over the past year. This also affected rental costs. Furthermore, industries that are sensitive to interest rates, like the auto sector, experienced a drop in prices following their steep rises during the pandemic.

The supply chain disruptions, which were a significant concern during the pandemic, have been largely addressed. The Federal Reserve Bank of New York has even indicated that the level of supply chain issues is now below what it was before the pandemic. This improvement is reflected in the reduction of shipping costs.

Biden has admitted he would have liked to have chosen a different name for the bill, since it is meant to address generating economic growth as opposed to reducing inflation.

“I wish I hadn’t called it that because it has less to do with reducing inflation than it has to do with providing alternatives that generate economic growth,” Biden said Thursday at a fundraiser in Utah. However, he added that he still believes that with the law “we’re literally reducing the cost of people being able to meet their basic needs.”

In the lead-up to the 2024 presidential campaign, the law has become central to President Biden’s appeal to the electorate. While inflation is no longer at the forefront of pressing issues, Biden is shifting his focus and underscoring the vital components of the law designed to address climate change, stimulate job creation, and reduce healthcare expenses for the public. This pivot highlights the administration’s commitment to sustainable growth and the well-being of its citizens.