As inflation continues to climb, making it harder for Americans to afford things like rent or food at the grocery store, much of the focus has been on the Federal Reserve.
That’s because the central bank is tasked with keeping prices stable. For months, the Fed has been trying to bring inflation under control by aggressively raising interest rates, which effectively makes borrowing money more expensive. By doing so, the Fed is trying to reduce consumer demand, which should eventually lead to slower price growth.
The Fed’s policy is the main and most influential factor, but economists say there are ways that Congress can help tackle inflation, which is up 8.2 percent from a year ago. Lawmakers have already passed the Inflation Reduction Act, which includes provisions that would cut the cost of prescription drugs, provide tax credits to encourage the use of renewable energy, and impose a 15 percent minimum tax on the profits of large corporations. Congress also passed the CHIPS Act, which President Joe Biden has said would help alleviate rising costs by boosting the country’s ability to manufacture semiconductors and strengthening the domestic supply chain.
With the economy top of mind for many voters ahead of the midterm elections next week, there will be pressure on incoming lawmakers to help Americans cope with rising prices. But economists say most fiscal policies that Congress could pass would be longer-term solutions, meaning that lawmakers probably can’t do much about inflation in the next few months. And Democrats and Republicans have diverged in their proposals for taming inflation, making it unlikely that many would gain bipartisan support.
“I don’t know that Congress has a huge arsenal of tools to deal with inflation over a six-month horizon,” said Michael Madowitz, the director of macroeconomic policy at the left-leaning Washington Center for Equitable Growth. “But Congress has a lot they can do about longer-term inflation. In fact, probably more than the Fed can do.”
Here are some ways that Congress could address inflation.
Rising housing costs have been a major contributor to overall inflation. Shelter prices make up about 30 percent of the Consumer Price Index, a key measure of inflation. Housing prices soared earlier in the pandemic as more people shifted to working from home and record-low mortgage rates led to potential buyers flooding the market.
Economists say that easing local regulations could help increase the supply of available homes, by allowing more spaces to be converted into residential properties or by making it easier for builders to construct new homes. That could in turn lead to lower prices as supply is better able to meet demand.
Dean Baker, a senior economist and co-founder of the liberal-leaning Center for Economic and Policy Research, said that Congress could offer grants to local governments to encourage the conversion of empty office spaces into residential homes, which would require relaxing some regulatory codes at the local level. Baker said that officials could relax some regulations while still keeping properties safe, such as by requiring fewer windows in certain units.
“There are a lot of land use regulations really everywhere that are overly restrictive,” Baker said.
Michigan Democratic Sens. Debbie Stabenow and Gary Peters have previously introduced legislation that would create a 20 percent tax credit for expenses to convert office buildings into residential or commercial properties. Sens. Amy Klobuchar (D-MN), Rob Portman (R-OH), and Tim Kaine (D-VA) have also proposed legislation that would provide funding to localities to develop plans to build more homes and remove local barriers to housing development.
Steeper medical care costs have also been a significant driver of overall inflation. In addition to cutting the cost of prescription drugs, the Inflation Reduction Act also includes provisions that would lower the cost of health insurance.
Lawmakers could further address rising health care costs by regulating the price of medical equipment or encouraging the easing of professional licensing regulations among health care workers, Baker said. Some lawmakers have proposed legislation that would remove barriers in the Medicare and Medicaid programs that limit the services that advanced practice nurses are trained to provide, for instance.
“There are a lot of situations where you could have a professional who could do more work than they’re allowed to do now, and that certainly could lower costs,” Baker said.
Employment and savings
Economists say that policies aimed at expanding the labor force could help tamp down inflation. Many companies have struggled to deal with worker shortages during the pandemic, which has led to higher labor costs and made it harder to supply goods and services.
Shai Akabas, director of economic policy at the Bipartisan Policy Center, said Congress could, for instance, eliminate the retirement earnings test, which temporarily withholds some Social Security benefits if an individual earns an income over a certain threshold and claims benefits before the full retirement age. Eliminating the test could encourage older workers to stay in the workforce for longer if their benefits weren’t withheld, Akabas said.
Congress could also pass legislation that would encourage people to save more money, which could lower consumer demand and spending, Akabas said. Lawmakers are already considering expanding the saver's tax credit, which can be claimed by low- and moderate-income taxpayers who contribute to a retirement account, he said.
Sens. Ron Wyden (D-OR) and Mike Crapo (R-ID) have introduced the Enhancing American Retirement Now Act, which would include several upgrades to the saver's tax credit. The legislation would make the tax credit refundable and deposit it directly into a worker’s IRA or 401(k) account rather than lump it into a tax refund, which could increase the interest and earnings accumulated.
“Since many of them don’t owe any net taxes anyway, they’re not eligible to receive a credit because they don’t have any tax liability,” Akabas said. “Making that credit refundable or otherwise expanding the credit in terms of the amount that is available would give more of an incentive to moderate and sub-middle income people to put aside more money in their savings.”
Antitrust and corporate profits
Policies aimed at breaking up concentrated industries could also lead to lower prices. Lindsay Owens, executive director of the progressive Groundwork Collaborative, said Congress could pass legislation that would boost competition among industries such as food and consumer goods. Those companies tend to have few competitors and make essential goods, meaning that they have more pricing power than other industries, Owens said.
Congress could pass policies that would block certain mergers and acquisitions, prevent loopholes for collusion, or crack down on price gouging, she said. Rep. Katie Porter (D-CA) recently proposed legislation that would close loopholes in antitrust laws and better hold large corporations accountable if they engaged in “coordinated price hikes.”
Owens also said lawmakers could disincentivize price markups, such as by imposing an excess profits tax on oil and gas companies.
“These companies are really bringing in truly windfall profits,” Owens said. “Tax that back and maybe ship it out in the form of rebates.”