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 Sam Boocker, Georgia Nabors, Louise Sheiner, and Lorae Stojanovic.
Kris James Mitchener of Santa Clara University and Angela Vossmeyer of Claremont McKenna find that in the aftermath of the Great Depression, there was more systemic risk (risk spread across the entire financial system) and balance sheet risk (the risk that an individual bank will default) in the financial system than before. Using data on the entire U.S. financial system from 1929 to 1934, the authors find that systemic risk increased by 33%; for each bank acquired by a surviving financial institution, risk at acquiring banks increased by 25%. The authors conclude that changes in the banking system during financial crises redistribute risk from unhealthy firms to healthy firms through mergers rather than removing risk from the financial system through closures of poorly managed banks. They argue that careful consideration of the financial stability risks of mergers is particularly important during periods of banking turmoil.
Minimum wage increases raise the opportunity cost of schooling and can potentially reduce enrollment in post-secondary institutions. Diane Whitmore Schanzenbach and Julia Turner of Northwestern and Sarah Turner of the University of Virginia find that in the year after a substantial increase in the state-level minimum wage, overall enrollment in two-year colleges declined by 4%. This effect was larger for part-time community college students in two-year programs, who saw a 6% reduction in enrollment. Enrollment at four-year institutions was largely unchanged following a minimum wage hike, aside from a small, short-term increase among part-time students. Degree and certificate completions were mostly unaffected, the authors find, suggesting that minimum wage increases reduce enrollment for students who are only marginally committed to post-secondary education and are thus unlikely to forgo a degree.
Arpit Gupta of NYU and Candy Martinez and Stijn Van Nieuwerburgh of Columbia University determine that about 11% of U.S. office buildings are suitable for conversion to apartments based on physical attributes such as plumbing and architecture. These investments could be profitable if developers purchase the buildings at their current fair market prices, which the authors calculate are 61% lower than their pre-pandemic level. Ensuring that the new housing supply is also affordable for lower-income tenants, however, requires additional investment incentives. Using a financial model of property development, they find that property tax abatements, debt subsidies, and grants could all encourage developers to convert offices to affordable apartments. The authors highlight specific provisions under the Inflation Reduction Act (IRA) that could provide additional funding: A project converting offices to energy-efficient and affordable apartments would be compatible with both the IRA’s mission to reduce greenhouse gas emissions and with its emphasis on climate justice. Without help from the IRA, however, “apartment conversions risk being either green or affordable, but not both.”
“[R]ight now the unemployment rate is at 3.6%, it’s below many people’s view of a long-run normal unemployment rate, but not by a lot. [The unemployment rate fell slightly in data released after this interview, to 3.5%.] A few tenths or so. From that perspective, I would expect the unemployment rate would move back to a more normal level. Will it rise above that, in order to really get inflation back to 2%? I don’t know the answer to that,” says John Williams, President and CEO of the Federal Reserve Bank of New York.
“[I]n… my own forecast, I expect that the unemployment rate will rise above 4% next year, but I can’t say with any conviction how much will that need to happen. It will depend on how all the pieces come together, how much inflation continues to come down because of the reversal of some of the factors that drove it up — like the pandemic-related factors, Russia’s war in Ukraine, all of the other things… So my view is: We have a path forward, where the economy continues to grow below trend and unemployment edges up somewhat, and inflation comes back down — exactly what that means for the employment rate, I can’t say with any certainty. My own view is that the unemployment rate, in order to achieve all of that, may rise to something like 4% to 4.5%, but we’ll have to see. Which is still, by historical standards, a very, very low unemployment rate.”
The Brookings Institution, 1775 Massachusetts Ave NW, Washington,DC, 20036
