Congress Could Help Contain Inflation In The Lame-Duck Session. It Won’t.

Lawmakers are willing to horse-trade more in the final days of the year, making it easier to extend tax cuts and boost spending.

In ad after ad during the fall, congressional candidates decried inflation. Republicans said it was the Democrats’ fault, while Democrats said they had taken steps to fix it by passing the Inflation Reduction Act in August.

So with last month’s midterms over and control of the House and Senate decided for the next Congress starting in January, one might think there would be widespread support for not making inflation worse. Not exactly.

Instead, Congress will give a bipartisan stamp of approval to at least tens of billions, and possibly hundreds of billions, in tax cuts or extra spending that will inject more cash into the economy. Much of that additional money will end up being spent — and, in turn, drive costs higher, even as the Federal Reserve is trying to slow down price increases.

“We are at very real risk of recession because we’re making the Fed go it alone while fiscal policy is making their job harder,” said Marc Goldwein, the senior vice president of the nonpartisan and nonprofit Committee for a Responsible Federal Budget.

“It’s really a shame that so many politicians are paying lip service but aren’t willing to do the hard things to make it [inflation] better and, in fact, are continuing to do the things that make it worse,” he added.

The CRFB in November issued a warning about the potential for year-end tax cuts and a subsequent spending extravaganza.

Two measures of inflation have shown a slower rate of growth in prices recently compared with earlier in the year.
Two measures of inflation have shown a slower rate of growth in prices recently compared with earlier in the year.
via Associated Press

A handful of targeted tax breaks were due to disappear or be limited as part of a 2017 GOP-backed bill that had overhauled corporate taxes and lowered rates. But there’s a push to delay reining in those tax breaks, an option that the CRFB says would add about $95 billion to the deficit within a year.

Similarly, on the spending side, a 2% cut in Medicare provider payments could be avoided if lawmakers revive a pause in annual reductions that had been in effect at the height of the coronavirus pandemic. While averting that cut would cost significantly less than delaying the tax provisions from kicking in, Goldwein said it could add more to inflation.

Congress could also boost inflation by approving a year-end catchall spending bill called an omnibus, which could provide an increase of as much as $100 billion over the previous funding level. Democrats are pushing for more social spending, while Republicans want more money to go to the Pentagon.

Members of Congress have until Dec. 16 to work out a deal on an omnibus, though they could pass a short stopgap bill to give themselves more time — a possibility that gained steam Tuesday after Senate Minority Leader Mitch McConnell (R-Ky.) said an extension might be needed.

“Congress continues to do what Congress does, which is spend money now and promise to pay later. That is directionally inflationary, and the only question is how big will it be,” said Douglas Holtz-Eakin, the president of the conservative American Action Forum think tank.

“We will stay the course until the job is done.”

- Federal Reserve Chair Jerome Powell

Inflation has shown signs of receding after running ahead at a breakneck pace earlier in the year. The Labor Department said it increased 7.7% in October 2022 compared with the same month in 2021, slower than the 8.2% year-over-year rate in September. The personal consumption expenditure price index, a separate measure watched by the Federal Reserve, rose 4.3% in the third quarter of this year, compared with 7.3% in the second quarter.

Meanwhile, Federal Reserve Chair Jerome Powell, faced with the biggest surge in prices since the 1970s, has vowed to keep raising interest rates until they gain some traction against inflation.

“We will stay the course until the job is done,” Powell said in a speech last week.

Tax cuts could affect that goal, however.

As a general rule, every $100 billion in tax cuts or spending in the first year would add about 0.2% to inflation, according to Goldwein. But the composition of stimulus matters more.

While putting the Medicare cuts on pause again may cost much less than postponing the business tax provisions, Goldwein said, the fact that Medicare service provider prices offer a benchmark for private sector pricing means the move has the potential for a much bigger inflationary kick.

“It’s basically the difference between saying an X-ray costs $100 versus an X-ray costing $102,” he said. “Effectively, this is saying, ‘We’re gonna increase the cost of all X-rays by an additional 2%.’”

Federal Reserve Chair Jerome Powell has said the central bank will "stay the course" until inflation falls closer to the Fed's target rate.
Federal Reserve Chair Jerome Powell has said the central bank will "stay the course" until inflation falls closer to the Fed's target rate.
Chip Somodevilla via Getty Images

Sen. Ron Wyden (D-Ore.), the chairman of the Senate Finance Committee, said in a statement to HuffPost that he wants to see any health care changes be paid for.

“I am working hard on a bipartisan basis to ensure health care priorities for American families and health providers are addressed while not adding to the deficit,” he said.

Rep. Kevin Brady (R-Texas), the outgoing ranking member on the House Ways and Means Committee, did not respond to a request for comment on the possibility that some tax breaks targeted for extinction or limits in the 2017 overhaul law may instead be extended.

But in an appearance on CNBC Thursday, Brady made an appeal for the tax breaks, even though they were meant to partially offset the cost of lowering corporate tax rates in the 2017 bill.

“They don’t cost a lot, but they get a big bang really for the buck, especially on the tax side,” Brady said of the expensing and research tax breaks.

“We’re working to try to find some common ground with the Democrats here before we leave,” he said. “It’s going a little slower, frankly, than I would hope. But we still have some time if we can pull this together.”

Holtz-Eakin said the lame-duck environment makes for “the worst vote in many ways.”

“You’re in lame duck and you have to get to ‘yes,’ so you vote for some things that you don’t uniformly love,” he said.

“And then people point out it’s slightly hypocritical. Yeah, it is, because you don’t get everything you want in bipartisan legislation that’s done quickly. You just never will.”

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