THe New York Times
Republicans Claim They Can Tame Inflation, but Economists Have Their Doubts
Jim Tankersley and Emily Cochrane – October 26, 2022
WASHINGTON — Republicans are riding a wave of anger over inflation as they seek to recapture the House and the Senate this fall, hammering Democrats on President Joe Biden’s economic policies, which they say have fueled the fastest price gains in 40 years.
Republican candidates have centered their economic agenda on promises to help Americans cope with everyday price increases and to increase growth. They have pledged to reduce government spending and to make permanent parts of the 2017 Republican tax cuts that are set to expire over the next three years — including incentives for corporate investment and tax reductions for individuals.
They have vowed to repeal the corporate tax increases that Biden signed into law in August while gutting funding for the IRS, which was given more money to help the United States go after high-earning and corporate tax cheats.
“The very fact that Republicans are poised to take back majorities in both chambers is an indictment of the policies of this administration,” said Sen. Bill Cassidy, R-La., noting that “if you look at the spending that they did on a partisan basis, we certainly would be able to stop that.”
But while Republicans insist they will be better stewards of the economy, few economists on either end of the ideological spectrum expect the party’s proposals to meaningfully reduce inflation in the short term. Instead, many say some of what Republicans are proposing — including tax cuts for high earners and businesses — could actually make price pressures worse by pumping more money into the economy.
“It is unlikely that any of the policies proposed by Republicans would meaningfully reduce inflation in 2023, when rapidly rising prices will still be a major problem for the economy and for consumers,” said Michael R. Strain, an economist at the conservative American Enterprise Institute.
On Wednesday, Republicans on the House Ways and Means Committee held a virtual meeting where they detailed plans to make the 2017 tax law provisions permanent, billing the move as a crucial step toward improving the nation’s economy.
“As we look forward to the strong probability of an upcoming recession, there is new urgency to preserve these pro-growth policies,” said Rep. Vern Buchanan, R-Fla.
As they position themselves for the midterm elections, Republicans have also indicated that they might try to hold the nation’s borrowing limit hostage to achieve spending cuts. The debt ceiling, which caps how much the federal government can borrow, has increasingly become a fraught arena for political brinkmanship.
Multiple top Republicans have signaled that unless Biden agrees to reduce future government spending, they will refuse to lift the borrowing cap. That would effectively bar the federal government from issuing new bonds to finance its deficit spending, potentially jeopardizing on-time payments for military salaries and safety-net benefits, and roiling bond markets.
Biden has tried to push back against the Republicans and cast the election not as a referendum on his economic policies, but as a choice between Democratic policies to reduce costs on health care and electricity and Republican efforts to repeal those policies. He has accused Republicans of stoking further price increases with tax cuts that could add to the federal budget deficit, and of risking financial calamity by refusing to raise the debt limit.
“We, the Democrats, are the ones that are fiscally responsible. Let’s get that straight now, OK?” Biden said during remarks Monday to workers at the Democratic National Committee. “We’re investing in all of America, reducing everyday costs while also lowering the deficit at the same time. Republicans are fiscally reckless, pushing tax cuts for the very wealthy that aren’t paid for, and exploiting the deficit that is making inflation worse.”
The challenge for Biden is that voters do not seem to be demanding details from Republicans and are instead putting their trust in them to turn around an economy that voters believe is headed in the wrong direction. Polls suggest Americans trust Republicans by a wide margin to handle inflation and other economic issues.
In a nationwide deluge of campaign ads and in public remarks, Republicans have pinned much of their inflation-fighting agenda on halting a stimulus spending spree that began under President Donald Trump and continued under Biden, in an effort to help people and businesses survive the pandemic recession. Those efforts have largely ended, and Biden has shown no desire to pass further stimulus legislation at a time of rapid price growth.
Rep. Jason Smith of Missouri, the top Republican on the House Budget Committee, said in a statement that “the first step in combating inflation is to stop the historically reckless spending spree occurring under one-party Democrat rule in Washington, and that will only happen with a Republican majority in Congress.”
Economists largely agree that the Federal Reserve is most responsible for fighting inflation, which policymakers are trying to do with rapid interest rates increases. But they say Congress could plausibly help the Fed by reducing budget deficits, in order to slow the amount of consumer spending power in the economy.
One way to do that would be to significantly and quickly reduce federal spending. Such a move could result in widespread government layoffs and reduced support for low-income individuals — who would be less able to afford increasingly expensive food and other staples — and could prompt a recession.
“The amount of cuts you’d have to do to move the needle on inflation are completely off the table,” said Jon Lieber, a former aide to Sen. Mitch McConnell of Kentucky who is now the Eurasia Group’s managing director for the United States.
Still, Lieber said that likelihood would not sully the Republican pitch to voters this fall. “Midterm votes are a referendum on the party in power,” he said, “and the party in power has responsibility for inflation.”
Biden administration officials contend that the Republican plans, rather than curbing inflation, could worsen America’s fiscal situation.
Administration economists estimate that two policies favored by Republicans — repealing a new minimum tax on large corporations included in the Inflation Reduction Act and extending some business tax cuts from Trump’s 2017 legislation — could collectively increase the federal budget deficit by about $90 billion next year.
Such an increase could cause the Federal Reserve to raise rates even faster than it already is, further choking economic growth. Or, alternatively, it could add a small amount to the annual inflation rate — perhaps as much as 0.2 percentage points. Fully repealing the Inflation Reduction Act would also mean raising future costs for prescription drugs for seniors on Medicare, including for insulin, and potentially raising future electricity costs.
“Their plan to repeal the IRA and double down on the Trump tax cuts for the wealthy will worsen inflation,” said Jared Bernstein, a member of Biden’s Council of Economic Advisers. “On top of that, they’re also explicit that they’re coming for Social Security and Medicare, making this a terribly destructive agenda that starts by fighting the Fed and moves on to devastating vulnerable seniors.”
Conservative economists say the inflation impact of extending Trump’s tax cuts could be much smaller, because those extensions could lead businesses to invest more, people to work more and growth to increase across the economy. They also say Republicans could help relieve price pressures, by following through on their proposals to reduce federal regulations governing new energy development.
“Those things are going to be positive for investment, job creation and capacity” in the economy, said Donald Schneider, a former chief economist for Republicans on the House Ways and Means Committee and the deputy head of U.S. policy at Piper Sandler.
A budget proposal unveiled this year by the Republican Study Committee, a conservative policy group within the House Republican conference, included plans to permanently extend the Trump tax cuts and to impose work requirements on federal benefits programs, in hopes of reducing federal spending on the programs and increasing the number of workers in the economy.
“We know for a fact that federal spending continues to keep inflation high, which is why a top priority in next year’s Republican majority will be to root out waste, fraud and abuse of taxpayer money,” Rep. Kevin Hern, R-Okla., said in a statement. Hern, who helped devise the budget, called it “one of many proposals to address the dire situation we’re in.”
As they eye the majority, top Republicans have suggested that they will consider an economically risky strategy to potentially force Biden to agree to spending cuts, including for safety-net programs. Rep. Kevin McCarthy of California, who is the minority leader and is seen as the clear pick to be speaker should Republicans win control of the House, suggested to Punchbowl News this month that he would be open to withholding Republican votes to raise the federal borrowing limit unless Biden and Democrats agreed to policy changes that curb spending.
How to use that leverage has divided Republicans. Some, like Rep. Nancy Mace of South Carolina, who fended off a Trump-backed primary challenger, are supportive of that option.
But other Republicans — particularly candidates laboring to present a more centrist platform in swing districts held by Democrats — have shied away from openly supporting cuts to safety-net programs.
“Absolutely not,” Lori Chavez-DeRemer, a Republican and former mayor running in Oregon’s 5th Congressional District, said when asked if she would support cuts to Medicare and Social Security as a way to rein in federal spending. “Cutting those programs is not where I, as a Republican, see myself. I want to make sure that we can fill those coffers.”