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, Tristan Loa, Andrew Rosin, and Louise Sheiner.
Using variation in geopolitical distance between countries, rather than between blocs, Florencia Airaudo and co-authors from the Federal Reserve Board examine whether global trade has become increasingly fragmented over time. In aggregate, they find that trade has become more sensitive to geopolitical distance only very recently, particularly following Russia’s invasion of Ukraine. This late timing, however, reflects the distinctive role of trade involving China. While China has reduced its imports from geopolitically distant advanced economies—consistent with greater self-reliance—its exports to those same countries have continued to grow. In particular, Chinese exports to economies such as the E.U., U.K., and Canada grew significantly over the past decade—rising by as much as 100% as a share of GDP in Canada. When trade involving China is excluded, evidence of fragmentation among other countries emerges much earlier, beginning in the mid-2000s. The authors further show that fragmentation is stronger for high-tech goods than for low-tech goods, likely reflecting the greater role of strategic and security considerations in shaping trade relationships for technologically advanced products.
In efficient markets, more productive firms should grow larger, but distortions—barriers such as corruption and poor infrastructure—can prevent firms from growing in line with their productivity. Using the World Bank Enterprise Surveys covering more than 100 countries, Diego Restuccia of the University of Toronto finds that the productivity gap between the most and least productive firms is larger in developing countries. Productivity at the top of the firm distribution is not dramatically lower than in advanced economies, but firms at the bottom are far less productive. High-efficiency firms in developing countries are much less able to translate their technological advantage into scale. Instead, these firms remain small and exhibit unusually high output per worker, indicating that productive firms are constrained from expanding to their efficient size. As a result, developing economies allocate labor far less efficiently than advanced economies; raising allocative efficiency to advanced-country levels would be sufficient to roughly double output, the author finds.
College-educated people in the U.S. have a lower mortality rate than non-college educated people, and the gap has widened in the past three decades, particularly for individuals ages 25 to 64. Christopher L. Foote of the Federal Reserve Bank of Boston and co-authors find that, between 1992 and 2019, college graduates experienced sharp declines in mortality rates, while mortality rates for people without a college degree barely budged. The authors identify smoking as a particularly strong predictor of these mortality trends, noting that mortality rates reflect not only current smoking behavior but also smoking in earlier decades. Smoking rates began declining earlier among college graduates than among the non-college population, so college graduates in the age groups of the largest midlife mortality gaps are less likely to have ever smoked compared to similarly aged individuals without a degree. In regressions of mortality changes on smoking histories, differences in smoking behavior explain a substantial share of the widening mortality gap between college- and non–college-educated adults. At the same time, using estimates from the medical literature on the long-run effects of smoking, the authors show that differences in smoking behavior alone cannot account for the full size of the gap. They conclude that smoking likely amplifies the impact of other factors that adversely affect mortality rates.
“As I see it, there are at least four primary drivers of declining labor demand. One, a number of firms report that they are normalizing staffing from high headcounts amassed in response to elevated demand for goods and services during much of the pandemic period. Two, many business leaders are optimistic that they can use technology to replace jobs that firms would normally need to hire for. Respondents to our surveys report plans to significantly increase investment in technologies like artificial intelligence in 2026. Third, firms have been hesitant to hire amid uncertainty triggered by manifold policy changes this year. Finally, numerous firms are wrestling with dwindling margins squeezed by higher costs and lower consumer demand. As a result, executives at these companies are laser-focused on headcounts,” says Raphael Bostic, President of the Federal Reserve Bank of Atlanta.
“I would categorize the first two of those reasons—normalizing staff sizes and labor-replacing technology—as structural in nature, and thus outside of the purview of monetary policy. Regarding the third driver, I realize there is mixed evidence and opinion on uncertainty shocks. But my strong sense is that volatility in fiscal, trade, and other policies is not something that any modest degree of monetary stimulus can overcome. In other words, I view uncertainty as a structural impediment in the current environment.
The signal to take from the last element—shrinking margins—is also not completely clear, since some of the margin squeeze may be due to cyclical factors. But my contacts have consistently reported that much of the margin pressure that firms are facing is specifically due to the high inflation of the past five years, which has raised input costs and reduced consumer demand from low- and middle-income households.”
We are seeking proposals for papers on the municipal bond market and state and local fiscal policy to be considered for the Municipal Finance Conference to be held in-person Tuesday, July 21, 2026 and Wednesday, July 22, 2026 in Washington, D.C.
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
