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 Elijah Asdourian, Sam Boocker, Alex Conner, and David Wessel.
Using 20 years of California unemployment insurance (UI) administrative data, Alex Bell and co-authors at UCLA find that the duration elasticity of UI benefits – how much longer people stay on UI when benefits increase – rises during recessions. However, this result is a mechanical consequence of longer maximum benefit durations during downturns. Behavioral responses to changes in benefits in general don’t change across the business cycle. But the authors find that the initial wave of UI claimants during the pandemic were significantly less likely to respond to benefit increases by staying on UI longer than claimants over the prior 20 years. The authors conclude that “our finding that claimants’ behavior responded little if at all to large changes in added benefits during the pandemic also points to the power of UI expansions not only to insure workers against job loss, but also to effectively distribute large amounts of fiscal stimulus during downturns with minimal distortions.”
Firm markups over prices in the U.S. increased by 11% from 1980 to 2015. Using firm-level data on prices and costs from 1980 to 2015, Ricardo Marto of the St. Louis Federal Reserve challenges assertions that high markups reflect monopoly power, barriers to entry, or superstar firms. Instead, he finds that the shift from manufacturing to services is the major driver of higher markups. The author argues that as consumers became wealthier, their demand for services rose, allowing firms to increase markups. These wealthier consumers demand more services, leading the services sector to grow as a proportion of the economy and overall markups to increase.
Infrastructure spending in the U.S. is allocated by formulas reflecting estimates of local needs as well as by earmarks, local spending projects specified by Congress. Earmarks, also known as “pork barrel” spending, are often viewed as being based on politics rather than need. Using data on formula-based subsidized loans from the 1996 Safe Drinking Water Act and congressional earmarks from 2009, 2010, and 2022, David Keiser of the University of Massachusetts Amherst and co-authors find that water earmarks “target Black, Hispanic, and low-income communities”, partly because they target water systems serving large populations. These results are robust to the political party affiliation of the proponent of the earmarks and the state population size. Compared to Safe Drinking Water Act loans, earmarks disproportionately benefit Hispanic communities, but not Black or low-income ones. The authors conclude that earmarks do not necessarily benefit wealthy communities at the expense of low-income ones.
"There can be no let-up on the fight against inflation. The key priority remains to steadily guide inflation back to target levels. As discussed, there are various forces that could keep adding pressure on inflation – loose fiscal policy, the catch-up in real wages, waning disinflationary factors, and possibly a premature easing of financial conditions. To be abundantly clear, I see no appetite that central banks would accommodate these pressures. Central banks will do their job and remain vigilant. In fact, if inflation does not continue on its steady decline to target, central banks may decide to keep interest rates as high as needed or even do more," says Agustín Carstens, General Manager for the Bank of International Settlements.
"In this context, it is worth underscoring the challenges that renewed supply shocks would pose – a relevant risk against the backdrop of geopolitical tensions, challenges posed by the green transition, and adverse demographic forces. In normal times, when inflation hovers around target, central banks would generally be able to see through the temporary increase in inflation triggered by adverse supply shocks. But these are not normal times. After a prolonged period of elevated inflation, letting inflation surge again – even if on the back of a temporary shock – would be a very risky strategy."
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