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 Sarah Ahmad, Georgia Nabors, Tristan Loa and Louise Sheiner.
Daryl Fairweather from Redfin and co-authors conducted a three-month field experiment in 2020 to examine the impact of flood risk information on home buyer behavior. The study randomly assigned 17.5 million Redfin users to receive property-specific flood data, including a flood risk score and 30-year predicted flooding likelihood. They find that users exposed to this information were more likely to search for low-risk properties compared to a control group that wasn’t given the information. For users initially searching in high flood risk areas, exposure to risk information led to a 12% reduction in the average flood risk of homes for which they searched after two months. In addition, these individuals made offers on properties with flood risk scores 57% lower than those in the control group. The authors estimate that providing flood risk information to all Redfin users could lead to an average $7,000 decrease in the price of homes with high flood risk that are not on the waterfront, suggesting a “reshuffling” of demand away from higher risk properties that were previously not perceived as risky.
Tax competition, where governments lower taxes to attract foreign investment, reduces tax revenues and distorts policies—a challenge a global minimum corporate tax seeks to address. James R. Hines Jr. of the University of Michigan argues that an efficient minimum tax rate balances the global benefits of reduced tax competition with the costs imposed on countries required to raise their tax rates.Specifically, the efficient minimum tax rate is approximately equal to the average tax rate of countries constrained by the minimum tax plus the average effect of tax competition on all countries. Based on corporate tax rates in 2020, Hines finds that minimum tax rates between 4% and 27% are inefficient—either because they are not worth their costs or because the benefits could be achieved at a lower cost. Minimum tax rates above or below this range could be efficient. Hines notes that minimum taxes set at popular rates, such as 15%, are particularly inefficient as they would only minimally offset the negative effects of tax competition.
The establishment of normal trade relations with China was a large, negative shock to labor demand in manufacturing sectors exposed to heightened import competition. Tucker Smith of the Dallas Federal Reserve finds that high school students in the Texas counties more exposed to labor shocks took fewer manufacturing-related vocational courses and more classes at nearby colleges. Greater exposure to China shocks increased the likelihood of enrolling in a public college by 4% and the likelihood of obtaining a bachelor’s degree by 8%. Students also adjusted their areas of study away from those impacted by import competition. Smith finds that the China shock produced an average annual earnings decline of $1,248 for young people already in the labor force over the following decade. Students young enough to alter their educational path were able to offset nearly all of this loss. He concludes that students can circumvent the negative impacts of import competition through their schooling decisions.
"After a voyage through rough waters, we’re in sight of the shore: the FOMC’s Congressionally mandated goals of maximum employment and stable prices. But we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard," says Lorie K. Logan, President of the Federal Reserve Bank of Dallas.
"The economy, of course, is subject to a wide range of risks. But I am paying particular attention to three that, in my view, pose the largest potential challenges for monetary policy in the months ahead.
One, unexpectedly strong demand or negative supply shocks could keep inflation above the FOMC’s 2% goal.
Two, tightening financial conditions could trigger a rapid deterioration in the labor market.
Or, three, financial conditions could ease too much if the neutral interest rate, the theoretical level that would neither slow nor accelerate the economy, proves to be higher than expected."
"Economic activity is strong, inflation is coming down and the economy is approaching a point that can sustainably deliver both maximum employment and stable prices. I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen. I am keeping an open mind, scrutinizing economic data and financial conditions, and listening carefully to business and community contacts as I assess what next steps may be appropriate for monetary policy."
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
.png?upscale=true&width=1120&upscale=true&name=q46sQ-12-month-percentage-change-in-consumer-price-index%20(1).png)
