Inflation Reduction Act may have little impact on inflation

At the same time, the White House has trumpeted a letter signed by more than 120 economists, including several Novel Prize winners and former Treasury secretaries, that asserts that the bill’s reduction in the government’s budget deficit — by an estimated $300 billion over the next decade, according to the CBO — would put “downward pressure on inflation.”

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In theory, lower deficits can reduce inflation. That’s because lower government spending or higher taxes, which help shrink the deficit, reduce demand in the economy, thereby easing pressure on companies to raise prices.

Jason Furman, a Harvard economist who served as a top economic adviser in the Obama administration, wrote in an opinion column for The Wall Street Journal: “Deficit reduction is almost always inflation-reducing.”

Yet Douglas Holtz-Eakin, who was a top economic adviser to President George W. Bush and later a director of the CBO, noted that the lower deficits won’t kick in until five years from now and won’t be very large over the next decade considering the size of the economy.

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