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This edition was written by Chesapeake Dowdy, Jack Spira, Zixun Tan, and David Wessel
Using unanticipated changes in U.S. defense and nondefense R&D appropriations and data for 69 foreign economies from 1980 to 2019, Gustavo De Souza of the Federal Reserve Bank of Chicago and co-authors find that a large share of the benefits from U.S. public R&D accrues outside the United States, particularly in non-OECD economies. The benefits are larger and more persistent following increases in nondefense R&D than in defense R&D. The authors argue that economies further from the technological frontier may benefit more because new U.S. technologies allow them to leapfrog older technologies, while knowledge from nondefense research may diffuse more readily across countries. They estimate global social returns to U.S. nondefense R&D of roughly 250% to 460% or higher—about twice the domestic return—implying that the U.S. captures only 45% to 57% of the productivity benefits of its own nondefense investment. Where comparable data are available, increases in U.S. public R&D lead to more private-sector and higher-education R&D investment in other OECD countries. The authors warn that deglobalization could reduce these international benefits and suggest that coordinated R&D expansion among advanced economies could raise the return to each country’s research spending.
Housing in the U.S. is disproportionately owned by older Americans. Investigating the impact of property taxes on housing ownership over the life cycle, Joshua Coven of Baruch College and co-authors find that higher property taxes redistribute housing toward younger households through two channels: higher annual tax burdens encourage older owners to downsize, while the resulting lower prices reduce the down payments required of younger, wealth-constrained buyers. Using staggered property reassessments in North Carolina as a natural experiment, the authors find that a one-percentage-point increase in the property tax rate reduced house prices by 22.6%. They use this estimated effect on house prices, together with data on California households and housing markets, to calibrate a model of housing choices and financial constraints in California, where Proposition 13 has kept effective property tax rates unusually low. In the model, raising California’s average property tax rate from 0.8% to Texas’s 2% rate would slightly reduce homeownership overall but shift it toward younger households: the homeownership rate rises by 0.6% for households under 44 but falls by 9.2% for those over 65.
From 2008 to 2023, the gap between the aggregate value of publicly listed U.S. and European firms grew from $3 trillion to $34 trillion. Bo Becker of the Stockholm School of Economics and co-authors examine why. They find that the gap remains when comparing U.S. and European firms in the same industries, but is smaller when comparing larger firms, suggesting that this phenomenon is not driven by Europe having more firms in lower-growth sectors or by a handful of large U.S. “superstar” firms. The gap is especially large among younger and more R&D-intensive firms, whose value depends heavily on their ability to grow. European firms also remain much more tied to their home-country markets, limiting how easily they can expand across borders: a 1% increase in home-country GDP is associated with a 0.8% increase in firm sales, while U.S. firms’ sales are unrelated to GDP in their home state. European firms also receive less venture capital, have lower leverage, and rely more heavily on bank credit than U.S. firms, while smaller European firms face particularly high implied costs of capital. Together, the evidence suggests that promising European firms have more difficulty expanding into large markets and obtaining the financing needed to become very large than U.S. firms do.
"AI’s arrival is a good reason to revisit the assumption that productivity is exogenous. Consider activities that ultimately raise productivity: spending on research and development, adopting new tools, automating a task, launching a new firm or product, and so on. Those activities require investments that depend on the cost of financing them. That is precisely the lever a central bank pulls when it sets interest rates," saysAlberto Musalem, President of the Federal Reserve Bank of St. Louis, at the Centro de Debate de Políticas Públicas (Center for Public Policy Debate) in São Paulo, Brazil.
"Suppose low interest rates can coax faster productivity growth, and that faster growth eventually relieves inflation by lowering production costs. Then accepting a little more inflation now might pay for itself later. The potential payoff could be sizeable.
"The trouble is that this reasoning takes the central bank’s credibility for granted. The bargain only works because households, firms and investors keep expecting inflation to return to target. That expectation is what keeps borrowing costs, wage demands and prices anchored. A central bank seen to tolerate above-target inflation on the promise of a future productivity windfall can put that anchor at risk. Credibility, once lost, is expensive to rebuild. History suggests restoring it can take a long stretch of painfully high real interest rates, a high unemployment rate and lost output. Once those costs are weighed against the potential productivity gains, it is far from clear that a central bank should pursue monetary policy that is easier than warranted in order to foster productivity growth."
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