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This edition was written by Chesapeake Dowdy, Chase Parry, Zixun Tan, and David Wessel
Diego R. Känzig and Luca Zanotti of Northwestern University and James H. Stock of Harvard find that the shale boom—the surge in U.S. oil production driven by advances in hydraulic fracturing and horizontal drilling—has transformed the effects of oil supply shocks on the U.S. economy. By turning the U.S. from a major petroleum importer into a net exporter, the boom has made higher oil prices more likely to boost U.S. economic activity rather than depress it. Using oil-futures price movements around OPEC announcements to identify oil supply news shocks, they estimate that a shock that raised real oil prices by 10% on impact lowered industrial production by roughly 0.6% after one year before 2010. After 2010, the effect reversed: the same shock raised industrial production over most horizons, with a peak increase of almost 1% in the first few months. The authors argue that higher oil prices now generate larger income gains within the U.S., boosting profits, wages and consumer spending. On the other hand, oil price shocks still raise consumer prices by about as much as they did when the U.S. was a net importer.
Between 2021 and 2024, Norway raised top tax rates on wealth and dividends and closed loopholes that had let emigrants avoid taxes on unrealized capital gains, prompting widely reported departures of billionaires to Switzerland. Using Norwegian tax records and the national shareholder register, Marius Ring of the University of Texas at Austin finds that the reforms, which nearly doubled the top marginal tax rate on business wealth from 0.47% to 0.88%, led at most about 100 people to leave. Most were in the top 0.1% of the wealth distribution, and most left in 2022 and 2023; departures returned to pre-reform levels by late 2023 after migration-related tax loopholes began to close. Ring finds no evidence that more startup founders or inventors left Norway, or that fewer arrived, relative to other Nordic countries. He also finds that, without any departures, wealth tax revenue would have risen 75% from 2021 to 2024; with them, it rose 71.5%. Comparing firms owned by Norwegians subject to the tax with similar firms owned by foreigners and other exempt owners, Ring finds no rise in dividend payouts or bankruptcies and no reduction in investment. The result also holds when comparing Norwegian-owned and foreign-owned firms based in other European countries. Ring concludes that the short-run costs of wealth taxation, in migration and firm investment, are "more limited than the public debate implies."
Adam Guren of Boston University reviews two decades of research on why U.S. house prices rose so sharply from the late 1990s through 2006 and then collapsed, concluding that the cycle resulted from a ‘perfect storm’ of factors that emerged in stages and reinforced one another. Fundamentals, including income and demographics, began improving in the late 1990s, raising rents andsupporting higher house prices. Guren concludes that they explain 10% to 30% of the boom. At the same time, banking deregulation and automated underwriting expanded the supply of credit. Interest rate cuts from 2001 to 2004 lowered mortgage rates, accounting for another 10% to 25%. Credit expanded further after 2003 as automated underwriting spread into subprime lending and private-label securitization grew. As prices kept rising, homebuyers became overly optimistic about future price growth, further boosting housing demand; this demand accounts for another 30% to 50% of the boom. Differences in expectations about house prices also fueled speculation accounted for 5% to 10% of the boom nationally but considerably more in some regions. The unwinding of these factors led to the bust, which was amplified by mortgage defaults and foreclosures. Foreclosures added distressed homes to the market, pushing prices down, while defaults damaged lenders’ balance sheets and reduced credit supply, reinforcing the decline in house prices.
"Let me speak to monetary policy first. In many countries inflation exceeding target has been a headache for quite some time—in the U.S. case for over 5½ years. We draw comfort from long-term inflation expectations staying anchored, but let us not forget the simple fact that inflation is only anchored until it is not—as I learned the hard way from Bulgaria’s hyperinflation," says Kristalina Georgieva, managing director of the IMF.
"The AI building boom is inflationary. The energy and food shocks are inflationary. Tariffs, defense spending, and high public debt can be inflationary. And memories of the recent high inflation are still fresh.
"Now may be a good time for a prudently hawkish bias in many countries’ monetary policy—and it is highly appropriate that the U.S. Federal Reserve, the ECB, and the Bank of Japan have all raised rates and spoken firmly, with future policy rate paths repricing accordingly."
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