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 Elijah Asdourian, Sam Boocker, Georgia Nabors, Comfort Oshagbemi, and David Wessel.
Policymakers have introduced two measures to lower pharmaceutical prices: permitting drug imports from Canada and allowing bargaining between the Centers for Medicare and Medicaid Services and drug companies to determine the price Medicare pays for a limited set of prescription drugs. Kate Ho of Princeton and Ariel Pakes of Harvard find that widespread adoption of these policies could cause an almost 20% decrease in pharmaceutical firm profits. Reduced drug prices under these policies would benefit low-income and elderly populations but reduce research and development (R&D) expenditures. Implementing a single international price for drugs across high-income countries would halve U.S. drug prices while increasing prices in other countries by up to 300%. The authors argue that this approach would maintain R&D incentives while lowering costs for American consumers.
Using market rent data from CoreLogic from 24 metropolitan statistical areas throughout the United States, Christopher Cotton of the Boston Federal Reserve shows that the market-shelter gap—the gap between market rent (direct rental costs) and the price of shelter in the Consumer Price Index (CPI)—rose to a high of 12.8% during the pandemic. Examining data from 2004 to 2019, he finds that market gaps do close over time, but the convergence is slow: after one year, gaps have closed just 25%. Convergence is nearly complete after five years. The author’s model predicts that the current market shelter-gap will boost CPI shelter in 2024 and 2025 by 1.03 and 0.82 percentage points, respectively. Cotton also demonstrates that when positive market-shelter gaps exist, as has happened during the post-pandemic inflation period, tenants who move bear more of the costs from housing inflation than tenants who do not move.
"We are still not yet at the point where it is appropriate to lower the policy rate, and I continue to see a number of upside risks to inflation. First, much of the progress on inflation last year was due to supply-side improvements, including easing of supply chain constraints; increases in the number of available workers, due in part to immigration; and lower energy prices. It is unlikely that further improvements along this margin will continue to lower inflation going forward as supply chains have largely normalized; the labor force participation rate has leveled off in recent months below pre-pandemic levels; and an open U.S. immigration policy over the past few years, which added millions of new immigrants in the U.S., may become more restrictive," says Michelle Bowman, member of the Federal Reserve Board of Governors.
"Geopolitical developments could also pose upside risks to inflation, including the risk that spillovers from regional conflicts could disrupt global supply chains, putting additional upward pressure on food, energy, and commodity prices. There is also the risk that the loosening in financial conditions since late last year, reflecting considerable gains in equity valuations, and additional fiscal stimulus could add momentum to demand, stalling any further progress or even causing inflation to reaccelerate. Finally, there is a risk that increased immigration and continued labor market tightness could lead to persistently high core services inflation. Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents, as additional housing supply may take time to materialize. With labor markets remaining tight, wage growth has been elevated at around or above 4%, still higher than the pace consistent with our 2% inflation goal, given trend productivity growth."
The Hutchins Center on Fiscal and Monetary Policy invites you to attend the 13th annual Municipal Finance Conference on Wednesday, July 17 and Thursday, July 18. The event will be held both online and in-person.
