Don't expect Congress to step up and help with inflation
- Congress is increasingly unlikely to help the Fed in its fight against inflation.
- Democrats have proposed ideas for taxes that could curb price hikes, but the measures lack ample support.
Americans' wallets are still hurting from skyrocketing prices, but there probably won't be much relief from a Congress holding its breath through midterms.
Inflation has been on Americans' minds — and eating away their wages and budgets — for the last year. It's got them feeling increasingly dour about the economy, even as the labor market continues to boom.
There are a few ways that lawmakers can tame high prices, but it's mostly been left up to the Federal Reserve.
The Federal Reserve is doing its part in cooling the price surge. The central bank raised interest rates by another 0.75 percentage points on September 21, extending its fastest hiking cycle since the 1980s. Such increases lift borrowing costs throughout the economy, making everything from mortgages to credit-card debt more expensive. Projections published alongside the September rate decision signal additional larger-than-usual hikes will arrive before the end of the year, and that the Fed will keep at it through 2023 to curb demand and ease inflation.
Rate hikes are what some call a blunt instrument, warning that the fallout means job losses and income hits for America's most vulnerable workers. That's because as interest rates rise, it becomes more expensive for companies to invest in anything, so they tend to cut costs in the form of reducing payroll. Fed officials' own economic projections see the unemployment rate climbing to 4.4% next year and staying there through 2024. Should the estimate prove correct, that will mean another 1.5 million Americans will lose their jobs in the coming years, a hit that the Fed is treating as unavoidable.
But right now that's the only immediate action that lawmakers seem willing to take.
That's because a hyper-divided Congress with a razor-thin Democratic majority is unlikely to take up anything to directly pare down costs. Some senators have tried: Sens. Bernie Sanders and Ed Markey, along with New York Rep. Jamaal Bowman, proposed legislation that would put a 95% tax on companies' beefed-up profits during inflation. Similarly, Rep. Ro Khanna and Sen. Sheldon Whitehouse have proposed imposing a windfall profits tax on oil and gas companies — and use that money to send out quarterly checks.
American companies posted record profits in 2021, even as consumers struggled to keep up with prices shooting up from inflation. Corporate pretax profits surged 25% year over year to $2.81 trillion, the Bureau of Economic Analysis said in March. According to the Federal Reserve Bank of St. Louis, that's the largest annual increase since 1976. And oil and gas companies are posting their best profits ever. Executives are seeing a healthy cut of that, with the median salaries for top CEOs up by $20 million last year.
That duo of potential boon-targeting taxes isn't a new concept. President Richard Nixon backed a similar windfall profits tax in the 1970s.
But passing any sort of new tax hike is risky business right now. Sen. Kyrsten Sinema, a key centrist Democrat, repeatedly torpedoed any attempts to pass tax hikes on the wealthy and corporations to offset the costs of spending on things like paid leave and affordable childcare. Even in the Inflation Reduction Act — which passed through the simple majority reconciliation process, and is expected to bring down some prices in a few years — Sinema nixed proposals to close up loopholes for wealthy investors.
Yet lawmakers face the same pitfalls that the Fed does: curbing Americans' demand could pull the entire economy into a tailspin. Consumer spending counts for roughly two-thirds of all economic activity, and shopping has already been cooling off since the spring. A tax hike that aims to slow Americans' spending spree could help bring supply in line with demand, but it also ups the chances of a self-induced recession.
And the clock is ticking for Congress to take any action on inflation. Republicans are expected to wrest control of the House after the midterm elections in November. That would effectively kill any attempt from Democrats to pass a tax hike or other inflation-killing policies, as such measures tend to be highly partisan.
The odds of a sudden bipartisan effort to counter surging prices aren't zero, but as elections loom and the economic outlook worsens, the chance of any cooperation is fading fast.
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