The good bad news about the Inflation Reduction Act

Now that Senator Sinema has signed on, the Inflation Reduction Act will pass by the scant majority of 51 to 50, including the Vice President’s vote.

Sinema had opposed closing the so-called carried interest tax loophole. Carried interest is treated as a long-term capital gain. Because it’s taxed at a lower rate than ordinary income, private equity, venture capital, and hedge fund operators benefit.

Presumably, she is in bed with those people.

Giving these over-paid number pushers an extra benefit is an anathema to anyone who wants the Gap between the rich and the rest narrowed. So, on that basis, the loophole should be closed.

But it is a federal tax, and federal tax dollars do not fund anything — they are destroyed upon receipt. So whatever reduces federal taxes (i.e., leaves more money in the private sector) benefits the economy.

The dollars you use to pay federal taxes are part of the M2 money supply measure. When those dollars reach the U.S. Treasury, they cease to be part of any money supply measure. Those dollars are destroyed.

When the government spends, it creates new dollars, ad hoc.

Because the Monetarily Sovereign Treasury has the infinite ability to create dollars, there is no answer to the question, “How much money does the Treasury have?” Thus, no measure includes Treasury dollars.

So, there is good and bad in that loophole, but on balance, including the loophole is good because it benefits the entire private sector.

If the Committee for a Responsible Federal Budget’s numbers are correct, and federal deficits are reduced by $305 billion, that would be recessionary.

**Reducing deficit growth causes recessions (vertical gray bars) which are cured by increased deficit growth.**

Even worse than deficit growth reduction is debt reduction. That leads to depressions:

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. A recession began 2001.

The CRFB predicts the federal debt would be reduced by nearly $2 trillion.

This means the federal government will take $2 trillion from the private sector (aka “the economy”) and destroy those dollars.

The most popular measure of an economy is Gross Domestic Product (GDP). It measures the total spending by the federal government everyone else in America, plus the net dollars flowing in from across our borders.

Mathematically, for GDP to grow, the private sector must have more dollars. A growing economy requires a growing supply of dollars; when the dollar supply shrinks, GDP shrinks. Simple arithmetic.

When GDP shrinks for two or more months, we call that a “recession,” and if the recession is exceptionally severe, we call it a “depression.”

[Depressions are often defined as recessions lasting longer than three years or resulting in a drop in annual GDP of at least 10 percent.]

The CRFB predicts a depression, though you wouldn’t know it from the tone of their article.

The Congressional Budget Office (CBO) just released its score of the Inflation Reduction Act (IRA) of 2022, legislation which would use Fiscal Year (FY) 2022 reconciliation instructions to raise revenue; lower prescription drug costs; fund new energy, climate, and health care provisions; and reduce the budget deficits.

Mixed bag:

Raising revenue is bad. That means “take more dollars from the private sector.” The federal government neither needs nor uses the dollars, while the private sector does both, need and use.
Lowering prescription drug costs would be good if it meant the government was going to pay. Unfortunately, it means the pharmaceutical companies will pay. Dollars will be shifted around in the private sector, and fewer will be available for research and development.
Fund new energy is good if “new energy” will mean “renewable” and “non-polluting.”
The climate and healthcare provisions seem good, depending on how they are implemented. One good thing, the Affordable Care Act will be strengthened financially.
“Reduce the budget deficits” is bad, bad, bad.

Unfortunately, getting the bill through the reconciliation process was legally and politically necessary. But reducing deficits does not reduce inflation.

Inflation is caused by shortages of crucial goods and services, most often oil and food. The only part of the Act that comes even close to reducing inflation is the “fund new energy” part, and again, we’ll have to see how that is implemented.

To call the bill the “Inflation Reduction Act” is both humorous and cynical, but that’s government.

Based on the CBO score, the legislation would reduce deficits by $305 billion through 2031 – including over $100 billion of net scoreable savings and another $200 billion of gross revenue from stronger tax compliance.

Again, that’s $305 billion taken from Gross Domestic Product at a time when the economy is in a recession and needs more, not fewer dollars.

Because the prescription drug savings would be larger than new spending, CBO finds the legislation would modestly reduce net spending by almost $15 billion through 2031, including by nearly $40 billion in 2031.

It’s unclear what the above paragraph is saying, but either $15 billion or $40 billion will be taken from pharmaceutical companies, a loss for the economy.

Once fully phased in, the plan would also slightly cut net taxes by about $2 billion per year – with expanded energy and climate tax credits roughly matching the size of new tax increases.

Cutting taxes benefits the private sector.

The legislation would generate nearly $300 billion of net revenue over a decade.

Translation: The legislation would generate nearly $300 billion of net loss for the economy over a decade.

Unlike prior versions of this reconciliation bill, such as the House-passed Build Back Better Act, this legislation would reduce deficits. Along with other elements of the bill, it is likely to reduce inflationary pressures and thus reduce the risk of a possible recession.

The above paragraph is wrong. Reducing deficits does not reduce inflationary pressures, and it absolutely does not reduce the risk of a possible recession.

Federal deficits (blue) do not correspond with inflation (red).

SUMMARY Inflation, i.e., a general price increase, is caused by shortages, not federal deficit spending.

Federal deficit spending can cure inflation when the spending helps cure the shortages. Example: Deficit spending to fund more oil/gas production.

Deficit reductions mathematically lead to GDP reductions by taking dollars from the private sector.

The Inflation Reduction Act will do many things, some good and some bad, but it will not reduce inflation.

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[No rational person would take dollars from the economy and give them to a federal government that has the infinite ability to create dollars.]

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

Monetary Sovereignty describes money creation and destruction.
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

A tale of two leaders: Powell vs. Biden

Fed Chairman Jerome Powell and President Joe Biden both wish to reduce inflation, prevent (or cure) a recession, and grow the economy. Both receive the advice of top, uh, well-paid economists. Yet both favor precisely the opposite policies.

See the source image — **Powell admitted he doesn’t have the right tool but insists on continuing with the wrong tool.**

Powell recently said, “I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well. This is a very strong labor market … it doesn’t make sense that the economy would be in a recession with this kind of thing happening.” Translation: He doesn’t understand what’s happening but denies it’s a recession. Yet he raised interest rates by 0.75 percentage points for a second consecutive time to “cool” the economy. By “cool,” he means the economy is growing too fast, which causes inflation. He wishes to slow economic growth, which in his opinion, will cure inflation but not cause the recession he denies already is happening. Apparently, Powell thinks the opposite of “inflation” is “recession.” But the two can occur together in what’s called “stagflation.” Prices are a function of supply and demand. Inflation occurs when there is an imbalance: Too little supply to meet the demand. Today’s inflation, and indeed all inflations through history, are not caused by demand growth but by supply shrinkage. Historically, demand increases are not sudden, but supply decreases can come overnight. So markets can adjust to the former but struggle to adapt to the latter. Today, we have the confluence of many shortages: Oil (energy), food, transportation, computer chips, autos, lumber, appliances, homes, labor, and many items related to the basic shortages. In terms of inflation, the single most crucial shortage is the oil (energy) shortage. Since the cause of inflation is shortages, curing inflation requires curing shortages. But Powell’s interest rate increases do not address shortages. They do not increase supply. Interest rate increases reduce both supply and demand. They reduce supply by making borrowing by manufacturers more expensive. They reduce demand by making borrowing by consumers more expensive. Powell hopes that his rate increases will cut demand more than supply. He has no way to know or control whether this will happen. It’s just a hope. But Jerome, be careful what you hope for; cutting demand impoverishes the supplier section, which leads to a recession. To quote the Wall Street Journal:

Inflation is a global phenomenon inflicting significant financial pain on families everywhere. Rising costs are an urgent problem, and interest rates play a key role in maintaining price stability.

But urgency is no excuse for doubling down on a dangerous treatment.

As with any illness, the right medicine starts with the right diagnosis.

Unfortunately, the Fed has seized on aggressive rate hikes—a big dose of the only medicine at its disposal—even though they are largely ineffectiveagainst many of the underlying causes of this inflationary spike.

It’s a global problem, as is COVID, but the U.S. can solve this problem within our borders if we use the correct solutions. As we often have said, the Fed has been tasked with a problem for which it has no tools — shortages of crucial goods and services. Only Congress and the President have the tools to cure shortages.

Mr. Powell has acknowledged this. He noted that elevated interest rates likely wouldn’t bring down gasoline or food prices. “There are many things we can’t affect,” he admitted —namely, the key causes of today’s inflation.

This is a monumental admission. The man tasked with curing inflation has admitted he doesn’t have the tool to do the job. Still, he persists in using that one tool that will lead to recession.

Higher interest rates won’t end skyrocketing energy prices caused by Vladimir Putin’s war on Ukraine. They won’t fix supply chains still reeling from the pandemic.

And they won’t break up the corporate monopolies that Mr. Powell admitted in January could be “raising prices because they can.”

If the Fed’s interest-rate hikes won’t address many causes of today’s inflation, it’s worth asking: What would they do?

When the Fed raises interest rates, increasing the cost of borrowing money, it becomes more expensive for businesses to invest in their operations.

As a result, employers will slow hiring, cut hours and fire workers, leaving families with less money. In the bloodless language of economists, that’s referred to as “dampening demand.”

It also is referred to as “causing a recession.”

But make no mistake: If the Fed cuts too much or too abruptly, the resulting recession will leave millions of people—disproportionately lower-wage workers and workers of color—with smaller paychecks or no paycheck at all.

But that is the whole plan. Make lower-wage workers and workers of color pay to stop inflation. The general sends the poor to the front, not caring how many die.

Mr. Powell has even conceded that the Fed’s actions may lead to a downturn, saying recession “is not our intended outcome at all, but it’s certainly a possibility.”

If all you have is a hammer, every problem looks like a nail. Who cares whether it works or not?

Despite these warnings, the Fed chairman still has cheerleaders for his rate-hiking approach. Chief among them is Larry Summers. “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” the former Treasury secretary recently told the London School of Economics.

You read that correctly: 10% unemployment. This is the comment of someone who has never worried about where his next paycheck will come from.

What can I say about Larry Summers that I haven’t said here, here, here, here, here, and here? The man has my admiration for his ability to fail into better jobs repeatedly. Summers is a magical example of the Peter Principle: Being promoted to his level of incompetency is his sole success. What next, Larry? Kill the elderly to cut Social Security costs?

If Messrs. Powell and Summers have their way, the resulting recession will be brutal.

As in past downturns, Republicans in Congress will press for austerity—tax cuts for giant corporations and the rich, weaker regulation on big businesses, and little economic support for the most vulnerable.

Democrats should be ready to reject the Republican playbook and prepared to help working families survive.

Well, maybe, just maybe, the Dems are listening, especially if Sen. Joe Manchin remembers he’s a Democrat. From Axios:

One big thing: Biden success story

Playing the long game. Winning despite all odds.

President Biden has slowly but substantially re-engineered significant parts of the American economy — achievements obscured by COVID, inflation and broad disenchantment. e domestic semiconductor industry, and accelerated U.S. viral research and vaccine production capabilities.

He might be on the cusp of the biggest domestic clean-energy plan in U.S. history.

Interestingly, it all has an America First twist— drilling more oil here … fixing infrastructure here … moving chip-making here … increasing manufacturing jobs here … creating vaccines here.

The $280 billion CHIPS and Science Act provides grants, tax credits and other incentives to manufacture computer chips in the U.S. The White House says it’ll eventually lower the price of cars, dishwashers and computers.

Biden could get another huge win with the climate plan secretly negotiated by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin. The package would provide new tax credits for buying EVs — plus rebates for buying efficient appliances and weatherizing homes, and tax credits for heat pumps and rooftop solar panels.

Biden’s $1 trillion infrastructure bill to rebuild roads, bridges and rail is one of the biggest packages signed by a president ever.

The Biden administration said it’ll pour $3 billion into the vaccine supply chain, creating thousands of U.S. jobs, and helping prepare for future threats.

Electric-vehicle manufacturing is growing in the U.S., with GM and Ford announcing plans for massive vehicle and battery plants across the Midwest and Appalachia. Fun fact: GM’s Mary Barra, who also chairs the Business Roundtable, is the CEO this White House has hosted most often.

These developments required bipartisanship (remember that?) — something Biden promised but gets little credit for, since these thin bands of Republican support look nothing like traditional bipartisanship.

Not only did Biden land these economic measures and a gun-control bill, but same-sex marriage protection is getting close — baby steps, but in a once unthinkable direction.

Biden has only a bare 50-50 Senate “majority” (depending on Sens. Manchin and Sinema). Even then, he is limited by reconciliation to avoid a purely political GOP. It has no ideas for anything but will filibuster everything the Dems submit. Somehow, Biden managed to accomplish far more than Trump ever dreamed of. This is partly because Trump is an incompetent, corrupt psychopath, who cares only about himself, and the GOP is a crooked election machine. But much credit belongs to “weak, timid” Biden, who plays the long game, insults no one, closes no doors, knows how to negotiate, and doesn’t whine about everyone else being at fault. Whereas Trump split his time evenly among golf, tweeting insults, and self-aggrandizement, Biden moved slowly, quietly, but surely to accomplish, accomplish, accomplish. Now, if only Powell would stand up and say, “I don’t have the right tool. Interest rates won’t cure shortages. Congress must pass spending bills to end key scarcities. That would end inflation and enrich the economy. And the people would thrive.” That bit of honesty would send more shock waves through Congress than the attempted coup did. Rodger Malcolm Mitchell Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

Monetary Sovereignty describes money creation and destruction.
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

Exactly the wrong way to cure inflation, but the best way to cause a recession.

On May 20th, we posted, “”First do no harm.” How ‘Dr.’ Jerome Powell will worsen the inflation and cause a recession.”

Bingo!

**No problem. You haven’t hit the ground yet, so we won’t call it a “fall.” We’ll say it’s a step in the plan.**

Today, Powell and his cronies debate whether to call where we are “a recession.” He’s worried about semantics as the economy tanks.

Please let me know if there is a more damaging, less effective way to fight inflation than what Powell now is doing.

Consider this: What action should the government take when there is a food shortage, causing food prices to rise?

Government price controls over food? Or,
Reduce federal benefits to the poor, so they will buy less food, thus curing the shortage. Also, reduce farm aid, so there will be even less food produced? Or,
Fund federal aid to farmers so they can produce more food and give people money so they can buy food?

Number 1 never works. It always leads to more shortages and a reduction in Research and Development, forcing even more shortages.

A classic example is rent controls, which reduce the number of new apartments and cause existing apartments to fall into neglect.

Yet politicians without knowledge of history or economics often turn to price controls.

Number 2 leads to recessions and depressions. Today, we have shortages of oil, food, housing, computer chips, and labor, and these shortages are causing prices to rise, what we call “inflation.” All those who are not rich starve.

Amazingly, the Federal Reserve has chosen solution #2. Raising interest rates makes many goods and services even less affordable, starving the poor and middle classes to cure inflation. Higher interest rates also make increased production more difficult, exacerbating shortages.

The federal government should provide aid to industries whose products are in short supply and to consumers so they can afford those products. Approach #3 is the only correct approach. Cure the shortages, and you cure the inflation.

- Shortage of food: Federal aid to farmers. Education. Equipment. Insurance. Tax breaks.
- Shortage of oil: Aid to drillers. Aid to electric car/truck makers. Support for R&D alternative energy
- Shortage of labor: Eliminate FICA. Reduce tax rates on salaries. Provide Medicare for All.
- Shortage of lumber: Aid growers. R&D for alternatives. Tax breaks for alternatives
- Housing shortage: Aid home & apartment builders. Cut interest rates. Tax breaks for renters.

The Enduring Appeal of Leeches | historyrevealed.com — **Powell: If she lives, I cured her. If she dies, I did everything I could.**

Notice how curing inflation, i.e., fixing shortages, requires more federal spending, not less.

Of course, the expenditures must be targeted toward eliminating the scarcities.

Powell’s interest rate increases only make reducing shortages more difficult.

Those higher rates impoverish consumers and hinder the ability of suppliers to produce.

Powell has found the ultimate way to increase shortages, worsen inflation, and cause a recession.

In effect, Powell is applying leeches to cure anemia.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

……………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

Monetary Sovereignty describes money creation and destruction.
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

Federal drug-price controls or divide pharmaceutical companies?

Should we have government drug-price controls? A good article exploring this subject is titled, “Government Regulated or Negotiated Drug Prices: Key Design Considerations.” This is from that article:

What process should HHS use to set the price for a drug?
Will the new system set prices only for a limited number of high-cost drugs that lack therapeutic alternatives or more broadly by including drugs that compete with other medicines?
Does the specified price represent the actual price for all sales of a drug, or is it a “ceiling” price, with payers retaining the ability to negotiate lower prices?
Will drug prices set by HHS apply to a narrow or broad population (e.g., only Medicare Part B or Part D beneficiaries or all patients, regardless of their insurance coverage)?
How would HHS assess and incorporate the value of a drug when establishing its acceptable price?
How should HHS select drugs for lowered prices?

The answers are complex, filled with “It depends” and “Maybes.”

The truth is we already have quite a bit of federal price controls, some helpful, some not. The question arises because many people now favor government negotiation of pharmaceutical prices.

Consider this brief video. It shows a woman weeping. She was suffering because the cost of a lifesaving drug was beyond her ability to pay.

In response to many thousands of similar, heart-rending stories:

U.S. Sens. Cory Booker (D-NJ) and Mark R. Warner (D-VA) reintroduced legislation to help lower the costs of needed medical care and prescription drugs for children.

The Fair Drug Prices for Kids Act would give states the ability to purchase prescription drugs at the lowest price possible, reducing the cost of prescription drugs for children who receive coverage through the Children’s Health Insurance Program (CHIP) and generatingimmediate savings for states and the federal government.

Actually, it’s not “the lowest price possible.” It’s the lowest price being offered, anywhere. And it’s state governments that would negotiate.

But that is a digression from our real question. Should the federal government determine prices for pharmaceuticals?

Senior living: Medicare could get to negotiate drug prices under Democratic bill By KAISER HEALTH NEWS | PUBLISHED: July 25, 2022 Democratic senators recently took a formal step toward reviving President Joe Biden’s economic agenda, starting with a measure to let Medicare negotiate prices with drugmakers and to curb rising drug costs more broadly.

A similar proposal died in December when Sen. Joe Manchin, D-W.Va., decided to oppose Biden’s $1.9 trillion Build Back Better bill, which also included provisions allowing for Medicare drug negotiations.

Reining in drug costs has long been wildly popular with the public, with more than 80% of Americans supporting steps such as allowing Medicare to negotiate and placing caps on drug price inflation.

The bill revealed in early July would do both. It would also limit annual out-of-pocket drug costs for Medicare beneficiaries to $2,000, make vaccines free for people on Medicare and provide additional help for lower-income seniors to afford their drugs.

The heart of the bill is the negotiation provisions.

Under the legislation, Medicare could start the new pricing procedures next year, with the secretary of Health and Human Services identifying up to 10 drugs subject to bargaining. The resulting prices would go into effect in 2026. As many as 10 additional drugs would follow by 2029.

The use of the word “negotiate,” when talking about the federal government, is ludicrous if one side has all the power.

The federal government arbitrarily can set an unprofitable price for any drug. But, that drug won’t be sold, which is unacceptable to the public or drug companies.

The populace, which has a limited amount of money available for any spending, always wants, often needs, feels it deserves, and usually will vote for, lower prices.

The federal government, being Monetarily Sovereign, has an unlimited amount of spending money.

With no more effort than to touch a computer key, it can pay the full, asking prices for any drugs, or it can set prices by law. Clearly, when people are made to suffer from high prices, market forces are not working.

So why not either:

Have the federal government pay the asking price for all drugs and offer them free to the people or,
Have the government set an “affordable” price for all drugs, despite what the drugmakers want.

Solution #1 has problems: Healthcare providers, including pharma makers, would jack up prices to astronomical levels, and simply feed off the government’s trough.

There would be no profit motive for the Research & Development of new drugs, because the current drugs would provide infinite profits.

Government price-setting is a risky business. It often has the opposite results from what one would hope. Rent controls are a perfect example.

Limit rents, and landlords will refuse to maintain or upgrade apartments.

Research & Development World — **Costly, time-consuming, not itself profitable.**

Limit profits, and fewer people will become doctors; fewer hospitals will upgrade ; fewer new drugs will be created; fewer patients will be served.

Solution #2 also has problems. It too would not provide the profits needed for the Research & Development of new drugs, especially drugs for rare diseases and low-profit categories (anti-biotics, for example).

Since the Orphan Drug Act was signed into law in 1983, the FDA has approved hundreds of drugs for rare diseases, but most rare diseases do not have FDA-approved treatments.

The FDA works with many people and groups, such as patients, caregivers, and drug and device manufactures, to support rare disease product development.

In one sense, Medicare already does #2.

Without negotiation, it sets the healthcare prices it is willing to pay, on a take-it or leave-it basis with healthcare practitioners.

That policy has generated the “concierge doctor” system. For annual fees, primary care (usually) doctors can limit their practices to a manageable 600-800 patients, allowing plenty of time to devote to each patient.

This compares with the more typical 2500+ patient load, characterized by quick, robotic diagnoses, treatments, then on-to-the-next.

There is a commonality to the problem of all federal price setting. It doesn’t pay for improvements.

When rents are controlled, landlords don’t maintain or upgrade. When doctor’s fees are controlled, doctors are not rewarded for being better doctors. They are not rewarded for doing the daily “R&D” to keep themselves up to date with the latest procedures. Nor are they rewarded for taking more time with patients.

When the primary reward is numbers sold — how many apartments, how many patients, how many sales — hospitals, convalescent homes, pharmaceutical companies, etc. are rewarded for more, but not for better.

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