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Falling natural rates and missing business investment

Using a panel of 31 high-income countries and a structural model of investment, a team of researchers from the Bank of England estimate that the global, long-run natural rate of interest fell 1.9 percentage points from 1985 to 2015. Slower productivity growth and increased life expectancy each accounted for about half the decline, and they expect these factors to keep the natural rate low going forward. The authors note that firms have not taken advantage of low interest rates to reinvest, what they call a “missing-investment puzzle,” despite steady returns to capital. For the U.K., they show that accounting for intangible capital like data, software, and brand accounts for much of the missing investment. But firms with the most intangible capital tended to experience the worst productivity growth, deepening the productivity puzzle. The authors say more research is needed to understand intangible investment and productivity dynamics.

Limits on low-skilled work visas hurt revenues without benefitting US workers

H-2B visas, which allow U.S. firms to hire foreign low-skill workers, have been capped since 1990 in order to protect low-skill U.S. workers from competition. Michael Clemens of the Center for Global Development and Ethan Lewis of Dartmouth find that H-2B visa restrictions hurt the revenues of U.S. firms without helping the employment prospects of low-skill Americans. Firms that win the H-2B visa lottery and can hire foreign workers see 18.5% revenue growth. Firms that win the lottery also slightly raise the number of U.S. workers they employ—in other words, foreign workers on H-2B visas are not displacing domestic workers. Instead, the authors argue that low-skill foreign workers do jobs that U.S. workers won’t fill and which are hard to automate away, especially in physically demanding industries like landscaping and construction. Caps on H-2B visas thus do little to help U.S. workers, while preventing many firms from hiring needed labor from abroad.

Administrative burdens lowered public health insurance child enrollment

Iris Arbogast of the Federal Reserve Bank of St. Louis, Anna Chorniy of Northwestern University, and Janet Currie of Princeton find that administrative burdens—procedures that verify enrollment or re-enrollment eligibility—reduce child public health insurance coverage. For example, in 2017, Mississippi enacted legislation allowing only 10 days for Medicaid recipients to report income revisions exceeding $100.  Using a list of 15 states with similar changes between 2016 and 2019, they find that increases in administrative burdens led to a 5.4% decline in children’s enrollment in Medicaid and the Children’s Health Insurance Program six months after changes were made. Children without a college-educated parent and Hispanic children experienced a decline in coverage three times larger than that of other children, and children with a non-citizen parent experienced a decline that was four times larger. The authors point to immigration fears as one potential explanation for the outsize burden on immigrant and Hispanic children.

Chart of the week: Change in rental demand reached its lowest point since 2009

Bar graph showing change from a year earlier in number of occupied rental units reported quarterly over the last three decades. In 2022 Q1, change in demand was at its highest level since 2001, at a 700,000 more occupied rental units than the previous year. Change in demand in 2022 Q3 has slowed to less than 100,000 additional occupied units compared to one year prior.Chart Courtesy of the Wall Street Journal

Quote of the week:

“One often hears that people are worse off ‘because of inflation.’ This is not quite right. Implicitly, it presumes that monetary policy could have prevented prices from rising so fast without doing anything to nominal incomes. Unfortunately, that’s not the case. Even assuming policy had been tightened sufficiently aggressively, and sufficiently early, to have knocked eight percentage points off the current rate of inflation, it would also have depressed nominal income growth by at least as much and almost certainly quite a bit more. Unemployment would be materially higher and nominal wage growth materially lower,” says Ben Broadbent, Deputy Governor of Monetary Policy at the Bank of England.

“Ultimately, this reflects what is known as the ‘neutrality’ of monetary policy: in the long run it has no impact on real economic variables (things like real output or relative prices). It can’t boost structural productivity, for example. Nor can it offset the consequences for real incomes of (say) disruptions to supply chains in Asia or Russia’s curtailment of the supply of gas to Europe.”

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