Joseph Stiglitz is an American economist who has been around the block a time or two. He received the Nobel Memorial Prize in Economic Sciences in 2001 and was chairman of the Council of Economic Advisers during the Clinton administration. He was the senior vice president and chief economist of the World Bank. Today, he is a professor of economics at Columbia University. He is also the author of several books including Globalization and Its Discontents.
Economists, like many other professionals – doctors, lawyers, accountants, etc. Put five of them in a room, ask them a question, and you’ll get eight different answers. You may or may not be a fan of Joseph Stiglitz and his views on the shortcomings of the neoliberal policies that have dominated global economic policies for decades, but he has earned the right to speak his mind and be heard respectfully. .
As the Inflation Reduction Act lurches toward the finish line in Congress this week, much has been said and written about it online and in the press. Some worry that it gives too much support to fossil fuel interests or car dealers or other interest groups that don’t need government help. Others favor any policy that does not benefit the wealthy. Whatever your worldview, what Stiglitz has to say on the matter should matter to you.
This is one of those times when he tries to rephrase something, and so here is the full, unedited text of his remarks. My high school history teacher liked to say that the doors of history open on tiny hinges. The Inflation Reduction Act could be one of those little hinges.
Why the Inflation Relief Act is a big deal
If passed, the US Inflation Reduction Act would be a landmark legislative achievement. With provisions to accelerate America’s clean energy transition, control health care costs, and restore some sanity to the tax code, it will not only reduce inflation but also strengthen America’s long-term competitiveness.
The compromise bill passed by the US Senate Democrats, the Inflation Reduction Act (IRA) of 2022, addresses not only inflation, but several key challenges facing our economy and society.
The causes of today’s inflation are hotly debated; but regardless of which side it takes, this bill represents a step forward. For those worried about excess demand, there is more than $300 billion in deficit reduction. On the supply side, the bill would mobilize $369 billion in investment for energy security and decarbonization. This would help lower the cost of energy, one of the main drivers of current price increases, and put America on track to reduce carbon emissions by nearly 40% (from 2005 levels) by 2030.
These investments will bring great returns. The costs of climate-related events (wildfires, hurricanes, tornadoes, and floods) will reduce our standard of living by more than today’s inflation, and will be borne disproportionately by low-income families, people of color, and future generations. These costs are far greater than the costs of deficits and are more difficult to correct.
In addition, strengthening energy security has become important. For too long, the authoritarian leaders of the oil nations have been able to hold the rest of the world hostage. Russian President Vladimir Putin has reminded us once again that energy interdependencies come with serious risks (as I warned more than 15 years ago). The weather may be fickle, but fossil fuel dictators are unreliable and downright dangerous.
The IRA would help address rising health care costs that have long plagued America, both by reducing Affordable Care Act (Obamacare) premiums for millions of Americans and by limiting out-of-pocket drug costs for those on Medicare. The pharmaceutical industry has earned tens of billions of dollars more from Medicare payments than it would have otherwise because the government is prohibited from negotiating lower prices. This gift to industry will eventually be phased out, saving about $300 billion over ten years.
The United States is one of the world’s leading sources of pharmaceutical innovation, and much of the basic research behind these advances has been paid for by American taxpayers. However, Americans pay more for prescription drugs than people in other countries, in part because drug companies have been given unbridled power to set prices. Many of us have been fighting for years to curb the undue market power of these firms. If the IRA becomes law, this provision alone would be a signal achievement.
In addition, the bill would provide much-needed improvements to US tax policy. Corporations and the wealthiest households are not paying their fair share of taxes. This not only undermines confidence in our democracy, but is also economically inefficient. Tax revenues are necessary to finance basic government spending without creating an inflationary deficit.
Russia’s intervention in Ukraine reminded us why defense spending is necessary. But to maintain America’s competitiveness, we must also invest heavily in education, research, technology, and infrastructure. Here, the bill includes provisions that would raise more than $450 billion (over ten years) through a 15% minimum corporate tax, incremental taxation, and a 1% excise tax on stock buybacks.
The 15% minimum corporate tax is particularly important. The US has led global talks to curb the practice of several governments cutting special deals for corporations so they can siphon tax revenue and jobs from other countries and compete to lower tax rates. the winners are multinational corporations. A 15% US minimum corporate tax would not only raise much-needed revenue; it will also help stop this self-defeating global race. This is especially important for the United States because it protects American jobs from unfair competition.
But if America does not live up to its terms, an important global agreement that America has signed is unlikely to move forward. From climate change and food security to the struggle for democracy in Ukraine, there are many issues on which we need global cooperation. Like climate action, a minimum US corporate tax is an important step in showing that we can be good global citizens.
Of course, some right-wing critics (many of whom are allied with drug companies, other large corporations, and the wealthy) will claim that IRAs will cause inflation, and will even develop models that “prove” that this is the case. But we already know that bad models make bad predictions. Just look at the models supporting Ronald Reagan’s tax cuts for the rich (which they falsely claimed would raise incomes) or Donald Trump’s tax cuts for corporations (which they falsely claimed would spur more investment).
These predictable arguments against IRA tax provisions are based on a flawed assumption: namely, that corporations will “shift” the minimum tax burden by raising prices and lowering wages. But economists have long recognized that the current US corporate tax regime – which allows firms to deduct virtually all costs, including labor and capital – is close to a net income tax. A long-standing assumption in economics is that a net income tax causes neither higher prices nor lower wages.
It also means that these taxes can be increased without fear of negative effects on inflation or investment. The gross distortions and gross inequalities in the tax system stem from inadequate enforcement and large loopholes, and the IRA is making progress on at least the first of these fronts.
Although the full benefits of the IRA will only be realized gradually over the coming years — especially as we invest in the green transition — some of its anti-inflationary effects, particularly in the case of drug coverage, can be felt almost immediately. Since markets look to the future (albeit imperfectly), the expectation of increased renewable energy supply should drive fossil fuel prices lower today. Moreover, according to some more common theories, expectations of future inflation are a key determinant of current inflation, so that even the slower-moving inflation-reducing provisions of the bill may have anti-inflationary benefits today.
No bill is perfect. There will always be compromises with special interests in America’s money-driven politics. The IRA is not as good as the original Build Back Better bill, which did more to both promote equitable development and fight inflation. But we cannot let the perfect be the enemy of the good. Ultimately, an IRA is a very important step in the right direction.
Joseph Stiglitz made his case for supporting the Inflation Reduction Act, but some of you will have a different opinion. Therefore CleanTechnica there is a comment section. Feel free to share your thoughts with us and others.
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