The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.
This edition was written by Adriana Adames Acosta, Chesapeake Dowdy, Zixun Tan, and David Wessel
Kristen Broady at the Federal Reserve Bank of Chicago and co-authors compare employment and wage changes between 2019 and 2024 across occupations with varying exposure to generative AI and risk of automation. Employment in occupations with the highest AI exposure increased 4% over the period, while employment in occupations with the lowest exposure ended slightly below the 2019 level; wages increased in both groups. Occupations with high and moderate automation risk experienced average employment declines, but outcomes varied widely across occupations. The authors argue that measures of AI and automation exposure are better viewed as indicators of potential changes in an occupation’s tasks and skill requirements than as direct predictors of job loss.
Aaron Graybill of Stanford and Kyle Mangum of the Philadelphia Fed examine whether elevated mortgage rates—which have coincided with low sales volumes, short time-on-market, and sustained price growth—are responsible for housing market tightness. Higher rates reduce the number of potential sellers because homeowners are reluctant to give up favorable existing mortgages, a phenomenon known as "lock-in." But they also reduce the number of prospective buyers by making home purchases less affordable. Using Cotality transaction and listings data from 2000 to 2024, the authors estimate the seller response by comparing homeowners whose mortgages were originated or refinanced at different times and who therefore face different gaps between their existing and current rates. They infer the number of prospective buyers from listings and time-on-market data and estimate how buyer inflows respond to mortgage rates. The authors find that buyers are more sensitive to mortgage rates than sellers are to lock-in. Had mortgage rates remained at end-of-2012 levels, sales volumes would have been about 20% higher, but buyer inflows would have risen more than seller inflows, increasing the buyer-to-seller ratio by about 25%.
Using U.S. fiscal data from 1800 to 2023 and a long-run panel of 12 advanced economies, Barry Eichengreen of the University of California, Berkeley, and Maxime Menuet and Gregory Donnat of Université Côte d’Azur find that primary surpluses are more closely associated with debt-service costs than with debt levels. In both datasets, debt-service costs predict primary surpluses, while debt levels have little predictive power once debt-service costs are accounted for. In the U.S., a 10% increase in debt-service costs is associated with about a 2.8% increase in the primary surplus. The intuition is that when debt-service costs rise, governments may raise revenue or restrain spending to limit further increases in debt. In their estimates, the relationship between debt-service costs and primary surpluses is stronger when interest rates exceed economic growth, and it is statistically significant only in those periods. U.S. history illustrates this pattern. After World War II, the debt-to-GDP ratio fell from a very high level without large primary surpluses, as rapid growth and low financing costs eased the burden of the debt. In the early 1980s, by contrast, sharply higher interest rates created much greater pressure on the federal budget even though the debt was far lower. The authors conclude that fiscal sustainability depends less on any particular debt threshold than on financing conditions and the government’s ability to absorb debt-service costs. High debt still matters because it leaves the government more exposed if interest costs rise, but it need not trigger immediate fiscal tightening when borrowing remains cheap.
"[T]he supply shock of AI has an effect on demand and supply. We see the effect on demand much more quickly. We see it in the capital investment I referenced. We see it in the prices of chips that are going up," says Kevin Warsh, chairman of the Federal Reserve.
"We're inferring, which is just a fancy word for guessing, when the effects will happen on the supply side of the economy. I don't view a one-time change in prices as necessarily being inflationary, because I think there's a supply response. In that way, this is different from a foreign conflict... which tends to reduce the supply side of the economy. Will it increase measured prices over the course of the next 12 months? I suspect it will. But whether that's inflationary or not, that's up to the Federal Reserve. And we're going to have something to say about that...
"I believe that this is a long-term job creator. But will it be disruptive, and will some people have their jobs at jeopardy because of the new technologies? On that, I can't offer any sort of guarantee or comfort."
Join us for an event
The Hutchins Center on Fiscal and Monetary Policy invites you to attend the 15th Annual Municipal Finance Conference on Tuesday, July 21, from 9:30 a.m. to 6:30 p.m., and Wednesday, July 22, from 9:00 a.m. to 12:45 p.m. EDT. Both in-person and livestream attendance options are available.
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
