Talking Dollars
The Optimal Monetary Policy Response to Tariffs
Javier Bianchi & Louphou Coulibaly
NBER Working Paper, March 2025
Abstract:
What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions.
The State Capacity Crisis
Nicholas Bagley & David Schleicher
University of Michigan Working Paper, January 2025
Abstract:
Crumbling infrastructure, inadequate housing supply, failing schools, growing public disorder-few government services seem to work as they should. For a decade, a nascent scholarly movement has been warning that America faces a crisis of state capacity. But while the major figures in this "state capacity movement" have identified the right problem, they concentrate almost exclusively on the federal government. That yields a misdiagnosis of why the American government lacks capacity and to solutions that are unlikely to accomplish much. In the United States, it is state and local governments that do most of what "the state" does, and they suffer from different pathologies from the federal government. First, voters know next to nothing about their state and local representatives, and instead base their votes on national political affiliation. That dulls public accountability for good government performance. Second, state administrative law is as strict, and often stricter, than federal administrative law, especially when it comes to rules around public participation. That privileges interest groups that have the organizational wherewithal to exploit the procedural opportunities that administrative law affords. Third, states have limited fiscal capacity relative to the federal government. When a recession depletes tax revenue, states have few choices except to increase taxes or reduce spending, right when public services are needed most. These three factors are the primary drivers of a dearth of American state capacity, and they are all getting worse. Yet they are basically invisible in the state capacity literature. To improve the quality of American governance, we must examine the right governments and ask the right questions.
Do Temporary Cash Transfers Stimulate the Macroeconomy? Evidence from Four Case Studies
Valerie Ramey
NBER Working Paper, February 2025
Abstract:
This paper re-evaluates the effectiveness of temporary transfers in stimulating the macroeconomy using evidence from four case studies. The rebirth of Keynesian stabilization policy has lingering costs in terms of higher debt paths, so it is important to assess the benefits of these policies. In each case study, I analyze whether the behavior of the aggregate data is consistent with the transfers providing an effective stimulus. Two of the case studies are reviews of evidence from my recent work on the 2001 and 2008 U.S. tax rebates. The other two case studies are new analyses of temporary transfers in Singapore and Australia. In all four instances, the evidence suggests that temporary cash transfers to households likely provided little or no stimulus to the macroeconomy.
Property taxation as compensation for local externalities: Evidence from large plants
Rebecca Fraenkel & Sam Krumholz
Journal of Public Economics, March 2025
Abstract:
Large scale industrial plants often create broad economic benefits, but impose harms on nearby residents. When local jurisdictions have control over land use, such plants may not be built absent sufficient compensation. In this paper, we study the extent to which large plants' property tax payments compensate for local harms and whether local governments internalize these fiscal benefits when making decisions about local industrial development. We first demonstrate that the tax base impact of plant openings are economically large, lead to increases in local expenditures and reductions in local property tax rates, and are valued by local residents. We next show suggestive evidence that limiting local jurisdictions' access to property taxation reduces the likelihood that they will contain large industrial plants. Together, these results suggest that increases in the local tax base are an important benefit of large externality-producing projects that are valued by residents and that local governments may internalize the fiscal impact of these plants when making development decisions.
The Effect of US COVID-19 Excess Mortality on Social Security Outlays
Hanke Heun-Johnson et al.
NBER Working Paper, February 2025
Abstract:
The COVID-19 pandemic has resulted in significant excess mortality among the US population, impacting the future outlays of the US Social Security Administration (SSA) Old Age, Survivors, and Disability Insurance (OASDI) program. This study aimed to estimate the net effects of pandemic-induced excess deaths on OASDI liabilities, utilizing dynamic microsimulation models, and examined how these effects vary across different socioeconomic and racial-ethnic groups. Data on excess deaths were obtained from the CDC and processed to account for seasonal variations and demographic disparities. The simulation incorporated demographic and health status variables to project OASDI retirement and disability benefits, and survivors' benefits for spouses and children, for respondents with highest COVID mortality risk. The pandemic resulted in approximately 1.7 million excess deaths among individuals aged 25 and older between 2020 and 2023. These premature deaths reduced future retirement payments, which increased the Social Security fund by $294 billion. However, this gain was offset by reductions in future payroll tax flows ($58 billion) and increased payments to surviving spouses and children ($32 billion), resulting in a net impact of $205 billion. Non-Hispanic Black and Hispanic decedents left behind more underage children per capita, yet payments to their surviving family members were lower compared to non-Hispanic White decedents, across all educational levels. Excess mortality during the COVID-19 pandemic has complex implications for the OASDI program. While there is an estimated net positive financial impact due to reduced future retirement benefits, this effect is mitigated by decreased payroll tax contributions and increased survivors' benefits. The differential impact by race and ethnicity highlights existing inequalities and underscores the importance of considering demographic disparities in future projections of Social Security liabilities. These findings provide critical insights for informing SSA trust fund projections and policy decisions.
Project Networks and Reallocation Externalities
Vibhuti Dhingra, Harish Krishnan & Juan Camilo Serpa
Management Science, forthcoming
Abstract:
A project involves several participants -- including clients, contractors, and subcontractors -- that work concurrently on multiple projects and allocate resources among them. This interdependency creates a network of otherwise-unrelated projects. We map the network of U.S. government projects involving over 150,000 participants. We show that a seemingly localized disruption, affecting only one project site, eventually causes delays across unrelated projects. This is because participants opportunistically reallocate resources into disrupted projects, at the expense of other projects, triggering a domino effect of further reallocations in the network. Thus, the costs of on-site disruptions end up being shared by multiple participants in the network, rather than being fully absorbed by the affected project. Performance-based incentives, which reward contractors for timeliness, exacerbate these externalities by encouraging self-interested resource reallocation.
Left-digit bias in property taxes
Dena Lomonosov
Real Estate Economics, forthcoming
Abstract:
This article investigates whether homebuyers display a form of cognitive bias called left digit bias when it comes to future property taxes. Using a regression discontinuity method, and under both hedonic and repeat-sales estimations, homes with property tax obligations that are just under a $1000 threshold are shown to sell for 0.5% more than other equivalent homes. This type of cognitive error results in an average overpayment of $1650. Results are larger for single-family homes. Neither market conditions nor property tax growth rates change the left-digit bias estimates. There is also evidence of additional left-digit bias with respect to the assessed value.
Limits of Disclosure Regulation in the Municipal Bond Market
Ivan Ivanov, Tom Zimmermann & Nathan Heinrich
Management Science, forthcoming
Abstract:
We examine the effectiveness of recent federal disclosure regulation aiming to improve transparency in the $4 trillion municipal bond market. Governments fail to disclose material private placements 50%-60% of the time and, conditional on disclosure, filings often omit contract details essential for bond pricing. Noncompliant issuers are significantly riskier than compliers, with disclosure decreasing in the potential of privately placed debt to adversely affect bondholders. We show that disclosure reveals positive news and is especially informative to investors in low-rated bonds or during market crises. Overall, privately placed debt continues to pose significant risks to municipal bond investors.