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This edition was written by Chesapeake Dowdy, Zixun Tan, and Louise Sheiner
John List of the University of Chicago and co-authors compare the effects of nudges—such as reminders, warning labels, and social-comparison messages—with those of taxes and subsidies in five consumer markets: cigarettes, alcohol, seasonal flu vaccination, household electricity, and residential water. They find that the average electricity-conservation nudge produces the same response as an 11% electricity tax, while the average flu-shot nudge produces the same response as a subsidy covering roughly the entire vaccine price. As nudges are often inexpensive to implement, they are more cost-effective than price interventions in all five domains. But the total welfare gains from nudges are limited by the behavioral changes they induce, whereas taxes and subsidies can be set to move behavior further toward the social optimum. In the authors’ baseline welfare analysis, the optimal tax or subsidy generates greater total welfare than a nudge in four of the five markets; cigarettes are the exception. In electricity, for example, the optimal tax generates $744 in annual welfare per household, about seven times the $104 generated by the optimal nudge. They conclude that nudges can be powerful complements to taxes and subsidies but rarely eliminate the need for price-based policies at scale.
Tariffs can increase prices directly by making imported goods more expensive and indirectly by raising domestic producers’ input costs and reducing competition from foreign firms. Mary Amiti and Sebastian Heise of the Federal Reserve Bank of New York and David Weinstein of Columbia examine how U.S. tariffs in 2025 passed through import and producer prices into consumer prices. They estimate that, by February 2026, the 2025 tariffs had raised prices for the consumer goods in their sample by about 2.2%, holding other economic conditions fixed. Roughly 1.5 percentage points of the increase came directly through higher prices for imported goods, 0.5 percentage point came through higher costs for imported inputs, and 0.15 percentage point because domestic producers faced less foreign competition. The authors note that the full effect of tariffs on consumer prices takes about a year to emerge because the indirect effects build gradually.
China’s recent technological advances have generated both alarm and skepticism: Some see “Sputnik moments” that threaten U.S. technological leadership, while others question whether China’s patent boom represents meaningful innovation. Using nearly 14 million domestic Chinese patent publications and comparable U.S. patents from 1985 to 2023, Josh Lerner of Harvard University and co-authors examine innovation across 14 critical technology areas. They find that Chinese critical-technology patenting and highly cited scientific research tend to rise together across fields and over time, suggesting that the patent boom reflects genuine innovative progress rather than simply incentives to file patents. Using four text-based measures of patent quality, they find no evidence that the rapid growth in Chinese critical-technology patenting since 2005 has been accompanied by declining quality relative to U.S. patents. Chinese patenting is also much less concentrated than U.S. patenting. In 2022, the 10 largest Chinese patent holders accounted for about 4% of Chinese critical-technology patents, compared with roughly 20% for the 10 largest U.S. patent holders. Looking across types of patent owners, private firms account for 58% of cumulative Chinese critical-technology patents and public universities for 27%, while state-owned enterprises and government entities together account for less than 4%. Fewer than one in 10 Chinese critical-technology patents involves an inventor with U.S. experience or training. The findings describe an innovation system that is less concentrated, more university-centered, and less dependent on U.S.-trained researchers than common accounts of Chinese technological progress suggest.
"Low and stable inflation also helps to foster maximum employment. After more than five years of above-target inflation, it is essential that we return inflation to the 2% target," says Anna Paulson, President of the Federal Reserve Bank of Philadelphia, in a statement after the July FOMC meeting.
"It is within this context that I supported last week’s FOMC decision to maintain the target range for the federal funds rate. The recent improvement in some inflation data is welcome. It is a step in the right direction, but it is only one step. I am focused on gathering more information to better understand what’s happening to underlying inflation and the impact of supply shocks from energy and tariffs. And I am keeping an open mind to ensure policy delivers price stability and maximum employment."
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"Even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2’s, not all the way to 2%, and the risks are to the upside. In addition to its inflation target, the FOMC has a mandate to achieve maximum employment; the job market is solid and perhaps strengthening a bit," says Lorie Logan, President of the Federal Reserve Bank of Dallas, in a statement on her dissenting vote.
"Labor, consumption and financial market conditions indicate that monetary policy is not restraining the economy. Without any policy restraint, inflation will likely continue to trend above target until there’s an unanticipated shock. The FOMC cannot count on unanticipated shocks to achieve its goals and can always adjust policy if unanticipated shocks occur. Modest action in the near term would reduce the likelihood of needing to take sharper action later."
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