Thank you congress for passing the IRA, which did nothing but further increase inflation.
Long term, the IRA will reduce energy prices. Energy is a huge component of inflation.
1: https://www.slowboring.com/p/tax-increases-are-the-best-cure...
Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics.
Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.
I don't doubt it, but I'm curious about how it works:
If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation.
If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect?
I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves.
EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?
The first part is tax. The second spend. There is no obligation for the government to tax everything it spends, or spend everything it taxes.
In practice, governments will spend what they tax which is why we need an independent central bank.
True, but I don't see how that impacts inflation. They do spend it, as you say, which returns us to my original question.
1: https://www.federalreserve.gov/econres/notes/feds-notes/fisc...
Also remember the time impact. Taxes went up immediately, whereas the bulk of the IRA rebates will happen in a few years.
And now many states are planning to "fight inflation" by literally sending people "inflation relief checks." :/
I mean, inflation wouldn't double as a result of giving the bottom 25% additional money, but unless there was a matching increase in the supply of goods and services, the additional money would make prices rise.
I dont like the recent inflation, but as someone one the upper end of the income distribution (likely true of many HN readers), my life isn't fucked up by it. Merely my discretionary income.
What makes you say inflation wouldn't double? It's not clear to me that there's a linear relation between money supply/money velocity and inflation. In addition, I think there's a large psychological component to inflation: people spending money sooner than they would otherwise, i.e., quick buy it now before prices go up more; and, demanding increases in wages to match the expected increases in prices.
I believe Michigan has north of $5B 'extra' money sitting around, which is anticipated to grow close to $10B by end of year. Maybe there will be a one-time refund check to citizens/taxpayers there, but is that marketed as 'inflation relief'? I wouldn't think so.
You're out of touch with reality if you think people who need inflation relief are the ones driving inflation.
It is easier certainly to call out the IRA (even though it is doing a lot to drive a transition to a cleaner economy) because it happened, as opposed to “what ifs,” but not touching taxes as far as slowing the economy should be called out imho.
The CBO called out the IRA for being ineffective because the IRA only reduced the deficit by a few hundred billion dollars, when trillions in relief were needed.
Sure, trillions of dollars in increased taxes would have killed the economy, but interest rate rises are also killing the economy.
Can you justify the "very effective" part of that statement?