Macro Roundup

In this note, we examine how fiscal support impacted the balance between supply and demand across countries during the COVID-19 crisis. Our findings suggest that fiscal stimulus boosted the consumption of goods without any noticeable impact on production, increasing excess demand pressures in good markets. As a result, fiscal support contributed to price tensions. Indeed, focusing on inflation through February 2022 which does not capture many disruptions associated with the war in Ukraine, we show that countries with large fiscal stimulus, or with high exposure to foreign stimulus through international trade, experienced stronger inflation outbursts. Our back-of-the-envelope illustrative calculations suggest that U.S. fiscal stimulus during the pandemic contributed to an increase in inflation of about 2.5 percentage points (ppt) in the U.S and 0.5ppt in the United Kingdom. Unlike previous recessions, consumption of goods and services behaved very differently (see figure 2). In advanced economies, where the data allow real consumption expenditures across goods and services to be discernible more easily, consumption of services fell dramatically and then started recovering slowly as containment policies eased and vaccines were made widely available. In contrast, goods consumption fell by less during the beginning of the pandemic and experienced a strong recovery thereafter. Industrial production, however, was slow to adjust, creating a discrepancy between supply and demand in the goods' markets that likely played a role in the depletion of inventories and ultimately in recent price tensions Using our point estimates and country-specific values of fiscal support, figure 4 quantifies the role of fiscal support in shaping the response of goods consumption to fluctuations in mobility. The United States is the most impacted country, with consumption decreasing significantly less when mobility drops and rebounding significantly more when mobility increases. Keeping in mind the caveats described above, figure 5.1 presents the impact of domestic and foreign exposure on excess inflation for several regions, based on our regression estimates. The impact of domestic fiscal stimulus on inflation is highest in the United States. Canada, a country with strong trade links with the U.S., features a high level of excess inflation related to exposure to foreign fiscal stimulus. In large economies, not surprisingly, domestic stimulus is a more important driver of excess inflation than foreign stimulus. For example, domestic stimulus is associated with a 2.5 (ppt) in excess inflation in the United States, 1.8ppt in the Euro Area. Conversely, smaller economies are relatively more sensitive to foreign stimulus. In figure 5.2, we derive a measure of "international spillover" of U.S. fiscal stimulus. In particular, we isolate the share of U.S. stimulus in foreign exposure for several countries and compute the associated excess inflation in those countries. Our estimation implies that US fiscal stimulus was associated with an excess inflation of about 0.5 percentage points in the United Kingdom.

François de Soyres, Ana Maria Santacreu and Henry Young, "Fiscal policy and excess inflation during Covid-19: a cross-country view,"Federal Reserve Board, July 15, 2022, https://www.federalreserve.gov/econres/notes/feds-notes/fiscal-policy-and-excess-inflation-during-covid-19-a-cross-country-view-20220715.htm

Fiscal policy and excess inflation during Covid-19: a cross-country view

The recent surge in inflation in many countries around the world and the fiscal stimulus provided in the face of the COVID-19 pandemic has renewed interest in analyzing the potential role of large fiscal spending as a driver of price increases.

In this note, we examine how fiscal support impacted the balance between supply and demand across countries during the COVID-19 crisis. Our findings suggest that fiscal stimulus boosted the consumption of goods without any noticeable impact on production, increasing excess demand pressures in good markets. As a result, fiscal support contributed to price tensions. Indeed, focusing on inflation through February 2022 which does not capture many disruptions associated with the war in Ukraine, we show that countries with large fiscal stimulus, or with high exposure to foreign stimulus through international trade, experienced stronger inflation outbursts. Our back-of-the-envelope illustrative calculations suggest that U.S. fiscal stimulus during the pandemic contributed to an increase in inflation of about 2.5 percentage points (ppt) in the U.S and 0.5ppt in the United Kingdom.

1. The Covid Crisis and fiscal policy responses around the world

The COVID-19 pandemic greatly disrupted economic activity all over the world. Due to a mix of government-imposed restrictions and voluntary personal decisions, mobility levels, as measured by Google's geo-location tracking data from smartphones, collapsed in March 2020. Since then, mobility has improved, although with some volatility that tracked closely the successive waves of the pandemic (see figure 1).

While the pandemic and associated public health restrictions were the main drivers of economic fluctuations over the past two years, fiscal stimulus policies might have shaped the response of consumption and production to changes in mobility. Here, we investigate the association between the size of total fiscal stimulus and the path of consumption and Industrial Production during the COVID-19 pandemic, by evaluating: (i) the elasticity of demand and supply to lockdowns, and (ii) the impact of fiscal stimulus on this elasticity.

Empirical Setup.

Our empirical strategy consists of projecting quarterly real consumption and production growth on the growth rate in mobility in the same quarter. We also interact these variables with country-specific 2020 fiscal stimulus. Our objective is to analyze how fiscal support affected the country-level consumption and production in response to mobility fluctuations.4

On the one hand, in periods of mobility decline, we expect fiscal support to help household's "soften the blow" of the activity reduction, and hence expect a smaller decline in consumption in countries with large stimulus. Hence, in these periods, fiscal support is expected to counterbalance the effect of mobility, which means that the interaction term takes an opposite sign compared to the standalone mobility one. On the other hand, in periods of economic reopening and mobility rebound, we expect fiscal support to amplify the consumption increase, which implies that the interaction term takes the same sign as mobility.

Baseline Results.

We find that governments that provided generous fiscal support mitigated the drop in goods consumption in periods of lockdowns, while boosting consumption in periods of increased mobility. The effect of fiscal stimulus on services consumption, however, is insignificant. Finally, our results reveal that generous fiscal spending did not significantly contribute to supply expansion: countries with larger fiscal support did not have a significantly different association between mobility and Industrial Production. In other words, supply did not adjust quickly enough to meet the sharp increase in demand for goods.

Using our point estimates and country-specific values of fiscal support, figure 4 quantifies the role of fiscal support in shaping the response of goods consumption to fluctuations in mobility. The United States is the most impacted country, with consumption decreasing significantly less when mobility drops and rebounding significantly more when mobility increases.

The previous section highlighted that fiscal support boosted goods consumption demand without any noticeable impact on the supply of goods. Hence, the large increase in demand triggered by the fiscal stimulus policy, together with the slow pace of adjustment in production, likely contributed to the current imbalance in the goods market, resulting in the depletion of inventories, pronounced bottlenecks, and ultimately inflation.

The steep surge in goods consumption in countries with large fiscal support may have also created extra demand in other countries through an increase in demand for imports. This demand surge was met by limited supply capacity. Indeed, while both production, transportation and shipping capacity have adapted to increasing global value chain participation over the past few decades, the necessary infrastructure appeared to be quite inelastic in the short run. To further investigate this intuition, we turn to a cross-country regression analysis. For each country, we compute "excess inflation" by taking the 2021Q4 12-months inflation rate and subtract the average rate of inflation each country experienced during the 2015-2019 period. We then construct several measures of exposure to domestic and foreign fiscal stimulus and project excess inflation on such measures.

First, Exposure to Domestic Fiscal Stimulus captures each country's fiscal support, as presented in figure 3. Second, Exposure to Foreign Fiscal Stimulus measures a country's exposure to foreign stimulus and contains two parts: (i) a "vertical" component which is defined as a trade-weighted average of other countries' stimulus measures, and (ii) an "horizontal" component capturing the exposure of each country's import-partners to third countries' fiscal stimulus. Intuitively, the United States can be exposed to fiscal stimulus from Canada, both through a high import share (i.e, imported inflation) and through a high export share (i.e., higher demand from Canada). This captures vertical foreign exposure. Moreover, the price of Canada's exports to the United States may be pushed up by Canada's exposure to Mexico's fiscal stimulus. This captures horizontal foreign exposure.

We find that excess inflation is significantly correlated with each country's domestic stimulus, as well as with exposure to foreign stimulus. When taken separately or when used in conjunction with domestic fiscal stimulus, both vertical and horizontal exposure to foreign stimulus appear to be significantly correlated with domestic excess inflation. Moreover, our results show that excess inflation is also strongly related to our aggregated measure of Foreign Exposure.

Before describing our results further, we need to acknowledge several limitations in our analysis. Our estimation relies on the association between excess inflation and exposure to domestic and foreign fiscal stimulus, but it might be the case that countries that engaged in larger fiscal support are also those that have been the worst hit by the pandemic and thus had a greater recovery. In such a case, and if the severity of the pandemic is itself positively correlated with excess inflation in the recovery period over and beyond the effect of fiscal support, then we would suffer from an omitted variable issue bias. Moreover, the bias would be positive because our fiscal stimulus variable would capture both the direct effect of the pandemic and the effect of the fiscal spending. Future work on this topic would gain from addressing such concern. For the moment, the results should be viewed as illustrative, highlighting perhaps the higher end of potential price pressures from fiscal stimulus during the pandemic.

Back-of-the-Envelope Calculation: Quantifying the Impact of Fiscal Stimulus on Inflation.

Keeping in mind the caveats described above, figure 5.1 presents the impact of domestic and foreign exposure on excess inflation for several regions, based on our regression estimates. The impact of domestic fiscal stimulus on inflation is highest in the United States. Canada, a country with strong trade links with the U.S., features a high level of excess inflation related to exposure to foreign fiscal stimulus. In large economies, not surprisingly, domestic stimulus is a more important driver of excess inflation than foreign stimulus. For example, domestic stimulus is associated with a 2.5 (ppt) in excess inflation in the United States, 1.8ppt in the Euro Area.

4. Conclusion.

The COVID-19 pandemic hampered firms' ability to produce and consumers' ability to consume. In response to economic disturbances, many governments resorted to large fiscal stimulus. This policy was successful at boosting consumption which, together with relatively inelastic supply, may have led to supply chain bottlenecks and price tensions.

However, one should also recognize the positive role played by generous government support throughout this unprecedented crisis. The large spending supported a strong economic rebound, with both GDP and employment recovering at a remarkable pace, likely preventing worse outcomes despite the price pressures that may have resulted from the spending.

References.

Amiti, Mary; Heise, Sebastian and Wang, Aidan. "High Import Prices along the Global Supply Chain Feed Through to U.S. Domestic Prices." Federal Reserve Bank of New York Liberty Street Economics, November 8, 2021.

Leibovici, Fernando and Dunn, Jason. "Supply Chain Bottlenecks and Inflation: The Role of Semiconductors." Federal Reserve Bank of St. Louis Economic Synopses, 2021, No. 28.

Ana Maria Santacreu and Jesse LaBelle, "Supply Chain Disruptions During the COVID-19 Recession," Economic Synopses, No. 2, 2022.

Santacreu, Ana Maria; Leibovici, Fernando and Jesse, LaBelle. "Global Value Chains and U.S. Economic Activity During COVID-19." Federal Reserve Bank of St. Louis Review, Third Quarter 2021, 103(3),pp. 271-88.

Santacreu, Ana Maria and LaBelle, Jesse. "Rethinking Global Value Chains During COVID-19: Part 1." Federal Reserve Bank of St. Louis Economic Synopses, 2021a, No. 16.

Santacreu, Ana Maria and Jesse LaBelle. "Rethinking Global Value Chains During COVID-19: Part 2." Federal Reserve Bank of St. Louis Economic Synopses, 2021b, No. 17.

Santacreu, Ana Maria and Jesse LaBelle, "Global Supply Chain Disruptions and Inflation During the COVID-19 Pandemic," Federal Reserve Bank of St. Louis Review, Forthcoming 2022.

Sargent, Thomas J. and Wallace, Neil. "Some Unpleasant Monetarist Arithmetic." Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981,pp. 1-15.

Sims, Christopher A. "Stepping on a Rake: The Role of Fiscal Policy in the Inflation of the 1970s, https://doi.org/10.1016/j.euroecorev.2010.11.010." European Economic Review, 2011, 55(1): 48-56.

Kehoe, Timothy and Nicolini, Juan Pablo (editors). "Monetary and Fiscal History of Latin America, 1960-2017", 2021, University of Minnesota Press

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1. François de Soyres (Francois.m.deSoyres@frb.gov) and Henry Young (Henry.l.Young@frb.gov) are with the Board of Governors of the Federal Reserve System. Ana Maria Santacreu (Ana.M.Santacreu@stls.frb.org) is with the Federal Reserve Bank of St Louis. The views expressed in this note are our own, and do not represent the views of the Federal Reserve Bank of Saint Louis, the Board of Governors of the Federal Reserve, nor any other person associated with the Federal Reserve System. Return to text

2. See Santacreu and LaBelle (2022) Return to text

3. Several aspects of this line of reasoning, including the role of semiconductors and the importance of supply-chain bottlenecks, have been documented in recent contributions such as Amiti et al. (2021), Leibovici and Dunn (2021), Santacreu et al. (2021), Santacreu and LaBelle (2021a, 2021b, 2022) Return to text

4. In our baseline specifications, we use country fixed effects to account for unobservable factors such as heterogeneous trend growth across countries. Our results are qualitatively similar with different fixed effects. Return to text

“…Just two percent of all US counties account for half the nation’s homicides, he writes, and depending on the location as many as 95 percent of the victims are black or Hispanic….Mangual notes thatin 2018, Germany, England and Wales collectively had 3,197 homicides spread out over 142.2 million people, a rate of 2.24 per 100,000. That same year, there were a combined 337 killings among just 472,604 people in 11 inner city areas of Chicago, Baltimore, Detroit and St. Louis — a rate of 71.3 per 100,000….Many of the countries we are unfavorably compared to respond equally punitively to homicide convicts, who constitute a significant slice of our prison population,” In fact, he writes, the US justice system is actually lenient toward the worst offenders. According to a 2017 study on violent crime in Chicago, “on average, someone arrested for a homicide or shooting had nearly 12 prior arrests. Almost 20 percent of Chicago shooters and killers had more than 20 priors.” He cites a 2018 federal report that says 30 percent of convicted murderers and 64 percent of convicted rapists/sexual assailants nationwide were out in less than 10 years. The average state prisoner serves just 44 percent of his sentence before he is released.”…"Just 14.1 percent of state prisoners were incarcerated primarily for a drug offense, and the vast majority of them were in primarily for trafficking, as opposed to possession — an offense category that constitutes less than 4 percent of the state prison population.” Even that 4 percent includes inmates who likely committed more serious crimes but pled guilty to lesser charges such as drug possession, he argues. He points to a 2018 study in which a team of doctors and a criminologist looked at injuries to suspects during arrests. “The study analyzed more than 1 million calls for service, which resulted in more than 114,000 criminal arrests by officers in three midsized police departments — one in North Carolina, one in Arizona, and one in Louisiana,” he writes. “Police officers used physical force in just 1 in every 128 of those arrests, meaning that more than 99 percent of those arrests were completed without the use of any force whatsoever. Moreover, based on expert medical examinations of the medical records of arrestees, the study went on to find that 98 percent of the suspects subjected to physical force ‘sustained no or mild injury.’”…”

Brad Hamilton, "Why a small number of criminals perpetrate the worst crimes in America,"New York Post, August 6, 2022, https://nypost.com/2022/08/06/why-a-small-number-of-criminals-perpetrate-the-worst-crimes-in-america/

Why a small number of criminals perpetrate the worst crimes in America

In the summer of 2019, Brittany Hill was 24, and walking with her toddler daughter through Chicago’s Austin neighborhood when a sedan slowly approached, and two men opened fire.

Caught in a gang shootout, Hill shielded her child as bullets flew, hiding them both behind the bumper of a parked car. Though two men rushed to her aid, it was too late. Hill died at the hospital, and her daughter was left motherless at just one year old.

The horrific episode — captured on a Chicago police surveillance camera and “one of the most tragic videos I had ever seen,” according to New York criminologist Rafael A. Mangual — quickly led to the arrests of two men: Michael Washington, 39, and Eric Adams, 23.

Both had long records, but Washington’s stood out: nine felony convictions, including second-degree murder in 2004, and a previous attempted murder charge reduced to battery in a plea deal.

“What on earth were these guys — especially Washington — doing out on the street?” Mangual wondered. That question led him to investigate crime and punishment in America with his new book, “Criminal (In) Justice: What the Push for Decarceration and Depolicing Gets Wrong and Who It Hurts Most” (Center Street), out now.

Using a wide range of stats, Mangual shows that most American violent crime is perpetrated by a small number of criminals — primarily young men with long rap sheets — and that gun violence affects an equally small minority of Americans, mainly in New York, Chicago and other large metro areas.

Just two percent of all US counties account for half the nation’s homicides, he writes, and depending on the location as many as 95 percent of the victims are black or Hispanic.

“If you were to randomly drop 10,000 people over the United States, the overwhelming majority of them will land someplace with a murder rate close to zero,” he writes. “An unlucky few, however, will drop into neighborhoods with homicide rates rivaling those of some of the most dangerous places in the world.”

Among recent shooting victims was 16-year-old Kahlik Grier, gunned down in January 2021 in the stairwell of his Bronx apartment building. One of the suspects, Desire Louree, had been released from jail just a month before the murder.

“Louree had open cases for gun possession and attempted murder — the former from 2019, and the latter stemming from a 2020 shooting in Brooklyn,” Mangual writes.

The root cause of our sky-high murder problem, he argues, is “the antisocial dispositions of violent criminals and a street culture that elevates violence as both a legitimate means of dispute resolution and a basis for respect.”

A key example is convicted killer Thaddeus “T.J.” Jimenez. After being awarded $25 million in 2012 over a wrongful conviction, he had a golden chance to give up the thug’s life in Chicago.

“Jimenez could have gone anywhere in the world to lead one of the many lives his newfound wealth would have sustained,” writes Mangual, “Instead, he went back to his West Side Chicago neighborhood and doubled down on the gangbanger lifestyle.”

In 2015, Jimenez shot a man twice as he was getting out of his car. “So far as I can tell, the victim was not robbed, and there was no indication that he owed Jimenez a cent — let alone an amount large enough to matter to someone recently graced with an eight-figure windfall.”

Mangual also examines a commonly accepted belief — among liberals but also some conservatives — that America locks up too many people. Despite comprising just five percent of the world’s population, the argument goes, we have 25 percent of its inmates, and something must be done to reduce those numbers.

But it is wrong to base the “mass incarceration” theory on the large number of people we imprison compared with other developed nations, because America has vastly more violent inmates who kill or maim with guns, he writes.

Mangual notes that in 2018, Germany, England and Wales collectively had 3,197 homicides spread out over 142.2 million people, a rate of 2.24 per 100,000. That same year, there were a combined 337 killings among just 472,604 people in 11 inner city areas of Chicago, Baltimore, Detroit and St. Louis — a rate of 71.3 per 100,000.

“This gap in homicide victimization rates goes a long way toward explaining America’s comparatively higher incarceration rate, particularly given the fact that many of the countries we are unfavorably compared to respond equally punitively to homicide convicts, who constitute a significant slice of our prison population,” he writes.

Weapons offenses, he adds, “account for similar percentages of the UK’s and US’s adult prison populations, but with somewhere in the range of 400 million firearms in the US compared to just 4 million in the UK, the US simply has a greater number of gun offenders.”

He also pushes back on the theory that our prison population is overly bloated with minor drug-use offenders being unfairly held behind bars.

“Notwithstanding the widely held belief that incarceration is driven by the drug war, just 14.1 percent of state prisoners were incarcerated primarily for a drug offense, and the vast majority of them were in primarily for trafficking, as opposed to possession — an offense category that constitutes less than 4 percent of the state prison population.”

Even that 4 percent includes inmates who likely committed more serious crimes but pled guilty to lesser charges such as drug possession, he argues.

In fact, he writes, the US justice system is actually lenient toward the worst offenders.

According to a 2017 study on violent crime in Chicago, “on average, someone arrested for a homicide or shooting had nearly 12 prior arrests. Almost 20 percent of Chicago shooters and killers had more than 20 priors.” He cites a 2018 federal report that says 30 percent of convicted murderers and 64 percent of convicted rapists/sexual assailants nationwide were out in less than 10 years.

“Contrary to the widespread belief that we regularly lock offenders away and throw away the key … the average state prisoner serves just 44 percent of his sentence before he is released.”

And what about the epidemic of police violence?

It’s not happening, Mangual claims.

He’s not discounting the horror of cops who kill, and he points to the shocking clips of a Minnesota cop shooting Philando Castile in 2016 during a traffic stop and of a New York officer subduing Eric Garner in 2014 during an arrest for selling cigarettes.

“It would be hard for anyone to watch those videos and not be disturbed by the sounds of men gasping for what would turn out to be their final breaths — and in the case of Castile, to watch a man die in front of a four-year-old child, who will have to deal with the trauma of having witnessed something even battle-hardened soldiers struggle to live with.”

But these and other videos of cop abuse contributed “to the increasingly widespread sense that police uses of force were far more common than they actually were.” Actually, he writes, such violence is rare.

He points to a 2018 study in which a team of doctors and a criminologist looked at injuries to suspects during arrests.

“The study analyzed more than 1 million calls for service, which resulted in more than 114,000 criminal arrests by officers in three midsized police departments — one in North Carolina, one in Arizona, and one in Louisiana,” he writes.

“Police officers used physical force in just 1 in every 128 of those arrests, meaning that more than 99 percent of those arrests were completed without the use of any force whatsoever. Moreover, based on expert medical examinations of the medical records of arrestees, the study went on to find that 98 percent of the suspects subjected to physical force ‘sustained no or mild injury.’”

Mangual also argues that eliminating cash bail for suspects arrested for non-violent crimes has been a mistake in states like New York, which keeps letting more dangerous criminals back out on the street.

Instead, we should use a risk-evaluating formula — rather than weighing up the seriousness of a charge or trying to reduce the prison population — when figuring out who should get bail and who should be denied.

“A fairer and more accurate way for judges to assess a given defendant’s risk is through a validated algorithmic risk assessment tool (RAT), which calculates risk based on attaching weights to a variety of factors like criminal history and age,” he writes. In other words, those who are older, have a job and/or ties to the community, and have no violent criminal history should be given more leniency when deciding bail.

“A recent study by the Center for Court Innovation illustrated the predictive accuracy of such a tool — even across racial groups, which is a crucial criterion, given the opposition of some reformers who claim that racial bias is built into the algorithms.”

“People of good will can certainly disagree about the extent to which our criminal justice system flawed, and they can disagree about how to go about improving that system,” he writes.

But the idea that it “regularly brutalizes disfavored groups via overly draconian sentences and unjustifiably violent policing is nothing short of defamatory.”