Hutchins Roundup: Carbon pricing, school finance litigation, and more 

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. 

Cap and trade more costly than carbon taxes, but both reduce emissions  

Using data from the last 20 years, Diego Känzig of Northwestern University and Maximilian Konradt of the Geneva Graduate Institute compare the efficiency of national carbon taxes across European countries to that of the European Union Emission Trading System, a program that caps carbon emissions and then lets businesses trade the rights to those emissions. The authors find that while both policies are effective at reducing total emissions, cap and trade comes at a larger economic cost. Under cap and trade, economic activity falls, unemployment rises, and prices rise. Under carbon taxes, governments have tax revenue to redistribute to citizens, thus mitigating the effects of rising prices, and manufacturers are less likely to pass the full cost of emissions onto consumers. Lastly, the authors find that the effects of cap and trade are heterogeneous across countries, with higher energy prices, larger declines in economic output, and larger decreases in emissions in countries with heavily concentrated electricity markets. 

School finance lawsuits have little impact on states’ spending per pupil in the long run   

School finance lawsuits challenge funding disparities across state districts, with plaintiffs arguing that the disparities lead to unequal educational opportunities that violate state constitutions, and defendants (usually state government officials) seeking to uphold existing finance systems. Using data on 205 distinct school finance litigation cases across 48 states between 1968 and 2021, Eric A. Hanushek and Matthew Joyce-Wirtz of Stanford find that plaintiffs win the cases about slightly less than half the time. Plaintiffs in states where per pupil spending is lower than the national average are more likely to initiate lawsuits but somewhat less likely to win. While rulings in favor of plaintiffs raise per pupil spending of a state within five years of the decision, the authors find that litigation cannot explain the growth in how much states spend per pupil over the 1970-2019 period. “[F]or all of the energy and activity of the courts, the overall impact on spending for schools of 50 years of litigation is surprisingly modest,” the authors conclude.   

Quality of housing among safety net recipients has increased since 1985  

While housing expenditures have risen sharply for the neediest Americans, the quality and size of the homes they inhabit have also improved, according to Erik Hembre and Samuel Wylde of the University of Illinois-Chicago and J. Michael Collins of the University of Wisconsin-Madison. Between 1985 and 2021, monthly housing expenditures among safety net program recipients rose 93%, adjusted for inflation. This spending resulted in bigger and better homes: transfer program recipients in 2021 lived in homes as nice as the average American home in 1985, according to a quality index developed by the authors. Further, the size of their homes increased by 9%. Using a house pricing model that accounts for quality and size, the authors conclude that these social safety net recipients increased their real housing consumption by 45%.    

Chart of the week: Foreign-born workers make up increasingly large share of the US workforce 

Quote of the week: 

“We still have some major data releases coming up in the next three weeks and I’ll also be learning more about evolving credit conditions, both factors which will inform me on the best course of action. Between now and then, we need to maintain flexibility on the best decision to take in June … One might lean toward hiking by focusing on the economic data and interpreting it to suggest that inflation and economic activity are not consistent with significant and ongoing progress toward the FOMC’s 2% inflation goal. Based solely on the data we have in hand as of today, we are not making much progress on inflation. If one doesn’t believe the incoming data will be much better, one could advocate for another 25-basis-point hike as the appropriate action in June,” says Christopher Waller, Member, Federal Reserve Board. 

“Alternatively, one might view the current and incoming data as supporting a hike in June but believe that caution is warranted because there is a high level of uncertainty about how credit conditions are evolving. Another hike combined with an abrupt and unexpected tightening of credit conditions may push the economy down in a rapid and undesirable manner. This possibility is the downside risk of an additional rate hike in the current environment. If one is sufficiently worried about this downside risk, then prudent risk management would suggest skipping a hike at the June meeting but leaning toward hiking in July based on the incoming inflation data. There is a little over a month between the June and July FOMC meetings, and during that time we will learn more about how credit conditions are evolving. Over four months will have passed between the Silicon Valley Bank failure and the July meeting. By then we will have a much clearer idea about credit conditions. If banking conditions do not appear to have tightened excessively, then hiking in July could well be the appropriate policy.” 

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