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Hutchins Roundup: Quantitative easing, labor productivity, and more

By Elijah Asdourian, James Lee, Lorae Stojanovic, David Wessel

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.

Pandemic quantitative easing was counterproductive

Quantitative easing (QE) that the Federal Reserve conducted between March 2020 and March 2022—initially to mitigate strains in the bond market at the onset of the COVID-19 pandemic but later to shore up the economy—did not significantly reduce term premiums (the compensation that investors require for bearing the risk of holding a long-term as opposed to a short-term bond). This implies that QE did not contribute to the subsequent economic recovery, according to Andrew Levin and Brian Lu of Dartmouth and William Nelson of the Bank Policy Institute. Since the bond buying was financing the Fed’s short-term liabilities, this round of QE may have been counterproductive by increasing the federal government’s interest rate risk and reducing the Fed’s Treasury remittances by about $760 billion over the next 10 years, the authors say.

Differential productivity drives wage inequality between high-skilled and low-skilled workers

Why are wages growing faster at the top than at the median? Using data on 40 U.S. industries and 34 OECD countries, the late Edward Lazear of Stanford and co-authors found that this growing inequality reflects faster productivity at the top of the wage distribution than at the middle or the bottom. U.S. industries that mainly employ college-educated workers had the highest productivity growth over the last 30 years, and hence had higher wage growth. Countries with high productivity growth also attained higher wage growth than countries with low productivity growth. The authors argued that technological advancement may be driving the change, as high-skilled workers make use of new technologies and become more productive, while low-skilled workers are often replaced by new technologies. They also suggested that future improvements to artificial intelligence could affect high-skilled workers, which could change the distributional impact of technological change.

Absence of low-skilled labor leads firms to automate

From 1995 to 2019, low-skilled, non-Western immigrants were drawn to Denmark due to the collapse of Yugoslavia, political unrest in some African countries, and the expansion of the E.U. These immigrants tended to relocate to municipalities with large existing communities from their home countries. To study the effects of an increased supply of low-skilled workers on adoption of robots by firms, Katja Mann and Dario Pozzoli of Copenhagen Business School match firm-level data on robot imports to municipal-level data on the share of the working population comprised of non-Western immigrants. Firms located in municipalities with large non-Western immigrant populations were less likely to automate, the authors found. A one percentage point increase in the worker share of non-Western immigrants triggered a 7% decline in robot adoption by firms.

Chart of the week: The Federal Reserve’s portfolio begins to shrink

Line graph of weekly securities held by the U.S. Federal Reserve from January 3, 2007 to December 7, 2022. One line shows U.S. Treasury securities, which were near $1 trillion at the start of the period, $2.5 trillion in the mid to late 2010s, and increased to just under $6 trillion during the pandemic. The other line shows mortgage-backed securities which were at 0 at the start of the period, increased to between $1 and $2 trillion in the 2010s, and further increased to $2.6 trillion during the pandemic. In 2022, holdings in Treasury securities have decreased by roughly $250 billion and holdings in mortgage-backed securities have decreased by roughly $100 billion.

Data courtesy of the Federal Reserve Board via FRED

Quote of the week:

“A perennial question is whether economics is really a science. It is true, for example, that we economists can’t do large-scale experiments—although neither can evolutionary biologists or seismologists,” says Ben Bernanke, Distinguished Senior Fellow in Economic Studies at Brookings, at the 2022 Nobel banquet.

“However, one thing we surely have in common with physics, chemistry, and the rest is that ignorance or misapplication of basic principles can result in enormous damage. In economics, that damage takes the form of financial crises and economic depressions. While financial and economic crises can have terrible human costs, at least they can give us insight into how economic and financial systems work, why they break down, and how we might avoid such outcomes in the future… We [this year’s economic laureates] agree that financial systems are prone to instability which can be very costly for an economy and a society as a whole. There is consequently a strong case for government oversight of the financial system as well as for safeguards like sufficiently high bank capital that reduce the risk of crises.”

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

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