In his State of the Union address, President Joe Biden told Americans that he had a realistic plan for bringing down inflation. The agenda he laid out, however, has little chance of doing so.
Consider, for example, the president’s remarks about the high price of prescription medicine. It’s undoubtedly the case that U.S. consumers are forced to pay for drug research and development for the rest of the world. That needs to change.
But a cap on prescription drug prices is not the way to go about it. In reality, the proposal amounts to a tax on pharmaceutical companies.
The basic idea is that if drug companies attempt to charge prices above some government-set maximum, the federal government will simply tax the difference. Although this proposal is scored as a major revenue increase by the Congressional Budget Office, even many liberals are worried that it will stymie innovation.
The president also had some ideas designed to help workers: increases in the minimum wage, additional regulations targeting pay discrepancies and legislation designed to give unions the upper hand when organizing new workplaces. These are all controversial measures that, whatever their merits, are likely to raise costs for U.S. businesses — and increase the problem of inflation in the short term.
And then there was his worst proposal of all, at least from an inflation standpoint: his promise that the federal government will “Buy American.”
The pledge goes far beyond simple set-asides for U.S. business and seemingly requires all federal procurements to be, in the president’s words, “made in America from beginning to end, all of it.” This radical commitment to essentially ban the purchase of foreign products would raise costs for the U.S. government and lead to worsening inflation.
There are smart ways to develop U.S. capacity. A blanket ban on the purchase of foreign goods is not one of them.
In fact, Biden’s best idea of the night was a proposal that would help increase U.S. manufacturing capacity. He was right to tell Congress to pass the Bipartisan Innovation Act.
The bill would do two things: First, it would provide billions in congressional funding to help build semiconductor manufacturing in the U.S. It’s become evident over the course of the pandemic that the lack of this capacity could hold the U.S. economy hostage.
Second, the bill would provide several hundred billion dollars in basic research funding. This is the type of government funding that has the biggest chance of sparking a true breakthrough and creating the scientific basis for technology that the private sector can put to good use.
As potentially helpful as this bill is, however, it is not likely to do much about inflation anytime soon. Basic scientific research tends to take decades before it bears fruit. It’s crucial that the U.S. make these investments — but they need to be paired with a more broad-based growth agenda. That’s what was missing from the president’s speech.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.