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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and Louise Sheiner.
Rising market power in the U.S. has renewed public interest in antitrust enforcement. Tania Babina of Columbia and co-authors examine all 3,055 antitrust lawsuits filed by the Department of Justice (DOJ) from 1971 to 2018 and find the lawsuits led to increased economic activity in the targeted industries. The authors compare economic activity in industries that were subject to antitrust enforcement to economic activity in those same industries in states that were not targeted. They find that antitrust enforcement led to increases in employment, business formation, and wages; sales increased but the increase was small and not statistically significant. The authors argue that the combination of increased employment with proportionally smaller effects on sales "strongly suggests that these DOJ antitrust enforcement actions increase the quantity of output and simultaneously decrease the price of output."
Tight monetary policy can depress innovation by disincentivizing risky ventures and reducing demand, which limits the profitability of new inventions. Yueran Ma of the University of Chicago and Kaspar Zimmermann of the Leibniz Institute for Financial Research find that in the one to three years after a 100-basis-point monetary policy tightening shock, research and development expenditures by public firms decline by 1% to 3% and venture capital investment falls by up to 25%. In addition, patenting in the technology sectors most commonly discussed during company earnings calls declines by up to 9% in the two to four years after a rate hike. The authors estimate that, after five years, these reductions in innovation lower output by 1% and productivity by 0.5%. Monetary policy discussions should consider potential effects on the productive capacity of the economy, they conclude.
Serkan Arslanalp of the IMF and Barry Eichengreen of Berkeley argue that forces that reduced debt to GDP ratios in the past are unlikely to be as effective going forward. The authors argue that real interest rates are unlikely to fall while economic growth is likely to slow, putting downward pressure on government revenues. Inflation, they say, will not reduce debt burdens; only unanticipated inflation can lower debt to GDP ratios. And political imperatives, such as maintaining current levels of government services and addressing climate change, make debt reduction through sustained periods of primary surpluses unlikely. Finally, the rise of private lenders and sovereign lenders outside of the Paris Club – a group of creditor countries that coordinates debt relief – significantly complicates the prospect of helping emerging market and developing economies in debt distress. "For better or worse, high public debts are here to stay," they conclude.
"Since the pandemic, the European and global economies have undergone three shifts which are changing global markets – and which are playing out over different time horizons. First, we are seeing profound changes in the labour market and the nature of work…..Second, we are undergoing an energy transition, which in tandem with accelerating climate change is triggering profound transformations in global energy markets….Third, we are facing a deepening geopolitical divide and a global economy that is fragmenting into competing blocs. This is being accompanied by rising levels of protectionism as countries reconfigure their supply chains to align with new strategic goals," says Christine Lagarde, President of the European Central Bank.
"These shifts – especially those related to the post-pandemic environment and energy – have contributed to the steep rise in inflation over the last two years. They have restricted aggregate supply while also directing demand towards sectors with capacity constraints. And these mismatches arose, at least initially, against the backdrop of highly expansionary macroeconomic policies to offset the effects of the pandemic, requiring a rapid policy adjustment by central banks..."
"Whether all these various shifts will prove to be permanent is not clear at this stage. But it is already evident that, in many cases, their effects have been more persistent than we initially expected."
The Brookings Institution, 1775 Massachusetts Ave NW, Washington,DC, 20036
