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Hutchins Roundup: Spending behavior, generic drug prices, and more

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Studies in this week’s Roundup find that households counterintuitively spend less when they expect inflation to be higher, generic drug prices have declined significantly in the last decade, and more.

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Higher expected inflation leads households to spend less

Olivier Coibion of the University of Texas at Austin and coauthors find that Dutch consumers in a randomized control trial tend to reduce spending when they expect prices of consumer goods to be higher in the future. This behavior contrasts the predictions of standard economic theory, in which higher inflation expectations should spur on spending today by reducing the incentive to save. Participants in a survey who were randomly provided with news that inflation would likely be higher in the coming months than they previously expected were more likely to reduce spending than were those not given the information. They show that a 1 percentage point increase in expected inflation leads households to spend about 60% less on durable goods than they had originally planned. The authors attribute the behavior to the fact that individuals in the study tended to associate higher inflation with worse economic conditions in the future—and therefore lower income—leading them to cut back spending today.

Generic drug prices have declined significantly since 2007

Using insurance claims for 40 million people and 350 payers from 2007 to 2017, Richard Frank and Andrew Hicks of Harvard, and Ernst Berndt of MIT, show that generic drug prices have declined overall since 2007 despite widespread media coverage of large price hikes for some off-patent drugs. The out-of-pocket price of generic drugs for consumers fell by roughly 50% from 2007 to 2016, while the total price of generic drugs – including payments made by insurers – fell by 80%. The prices consumers paid fell less than the total price because of the changing design of drug-insurance benefits. In 2007, 85% of enrollees were in plans with fixed copayments for generic drugs as opposed to plans that charge consumers a percentage of the price. By 2016, just 57% of enrollees had fixed copayments and many plans had higher deductibles, increasing the out-of-pocket costs for consumers relative to fixed copayment plans.

The good that comes with gentrification outweighs the bad in the United States

Quentin Brummet and Davin Reed of the Philadelphia Federal Reserve Bank use data from the American Community Survey to study the impacts of gentrification on residents in the 100 largest U.S. metropolitan areas. They find that gentrification increases total out-migration over a 10-year period among less-educated renters by 4 to 6 percentage points and by slightly less for other renters and homeowners. The authors point out that these effects are relatively modest since 70% to 80% of renters migrate to new neighborhoods over the same time span. Brummet and Reed find no evidence to suggest that gentrification has negative employment or income effects on residents who leave, but they note that there are unobservable costs such as moving costs and loss of proximity to friends and family. Meanwhile, original residents who stay in the neighborhood benefit from less exposure to neighborhood poverty and higher home values. The authors also find some evidence that gentrification increases the likelihood that children of less-educated homeowners who stay will attend and complete college. On balance, the authors say, the benefits of gentrification outweigh the costs.

Chart of the week: Inflation has been below the Federal Reserve’s 2% target for most of the last 5 years

The Fed's preferred inflation gauge, personal consumption expenditure inflation, has consistently come in below the central bank's 2% target

Quote of the week:

“If there were to be a significant worsening in the Eurozone economy, it’s unquestionable that fiscal policy – a significant fiscal policy, mostly in some countries but also at the euro area level – becomes of the essence […] monetary policy has done a lot to support the euro area and continues, as you can see today, to do a lot but if we continue with this deteriorating outlook, fiscal policy will become of the essence,” says Mario Draghi, president of the European Central Bank.

“[…] the possibility of a hard Brexit certainly is another factor to take into account and the slow rotation of the Chinese economy, all these factors and probably others are affecting the present outlook and weakening it. That’s the situation. Our last projections were in a sense suggesting that we might have had a rebound in the second part of the year. Now incoming signs show weakness of growth in the third quarter as well. So, this rebound becomes less likely now. All in all, the balance of risk was assessed to be on the downside, for the reasons that I’ve just mentioned, and also for the very fact that the simple – and this point I’ve made at other times – the simple prolonged lingering of this uncertainty is by itself a materialization of one of these risks.”

Authors

Sage Belz

Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution

M

Manny Prunty

Intern - Hutchins Center on Fiscal & Monetary Policy, Brookings Institution

Finn Schuele

Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution

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