Issue Briefs: Volume 7
As economists discuss the possibility of another recession, it is useful to keep in mind that certain alternative private funds that invest in debt or credit have the potential to play an important role in promoting financial stability by supplying the economy with a countercyclical source of credit. Despite the benefits to economic resilience, however, the development of a robust market for nonbank credit has generated concern among some financial stability watchdogs, reflecting long-standing distrust about the shadow banking sector. This brief outlines the rationale for why regulators and legislators should be thinking of ways to allow more—not less—investment to flow into the private credit/debt market, to mitigate future economic downturns. In particular, the brief argues that certain private credit/debt fund investments should be made accessible to retail investors, and recommends possible avenues the SEC could pursue—i.e., amending the definition of an accredited investor and expanding exemptions under Regulation D—to enable that to happen. In addition to fostering a countercyclical source of credit, such a deployment of the SEC’s rulemaking power also stands to have the ancillary benefit of promoting broader financial inclusion.
As economists debate the possibility of another recession, it is critical for policymakers to have a full understanding of the dynamics that were at play in the last one. In this brief, the authors offer a new perspective on the behavior of banks during the financial crisis of 2007-08 and the limited success of unconventional monetary policies in stimulating bank credit to the private sector during the subsequent economic recovery.
Policymakers concerned about stimulating small business and entrepreneurial growth need to better understand the dynamics of crowdfunding as a vehicle for that growth. The conventional wisdom is that raising cash through crowdfunding always benefits entrepreneurs. But that is not the complete picture. In reality, there are ways in which entrepreneurs, as well as VCs looking for new investments, may actually be left worse off after a successful crowdfunding campaign. This issue brief examines the potential pitfalls of a successful campaign. These include a moral hazard problem that comes into play when entrepreneurs explore both crowdfunding and venture capital investment, which can lead to a breakdown in negotiations between entrepreneurs and VCs, leaving the VC without a potentially lucrative project and the entrepreneur without the VC’s essential financial support, expertise, and guidance. While the brief focuses on reward-based crowdfunding platforms, the pitfalls described herein likely apply as well to peer-to-peer lending, real estate, and equity-crowdfunding platforms too.
Recent demographic changes—the sharp increase in single-person households, especially among single individuals over the age of 65, as well as racial disparities in homeownership and the increasing cost burden of home rentals—are underscoring the need for a new vision with respect to U.S. housing policy. This Issue Brief lays out several policy prescriptions for improving housing affordability and fairness, both for renters and owners: modifying the federal Housing Choice Voucher program as well as local and state land-use regulations; investing in the maintenance of existing affordable housing stock; making good on HUD’s Affirmatively Furthering Fair Housing requirements so as to reduce fair housing barriers; and promoting financing programs for retrofitting existing low-income housing, to increase energy efficiency and reduce overall costs. While each of these recommendations would be beneficial in and of themselves, what the U.S. ultimately needs is a broader and more complete national strategy for housing policy.
While policymakers have talked a lot recently about finding a comprehensive fix for escalating health care costs, such as Medicare-for-all, many economists have been exploring the possibility that the answer for excessive health care spending may rest instead in series of smaller adjustments. One such small fix is preferred pharmacy networks. This is a relatively new tool whereby health insurers aim to steer consumers to lower cost “preferred” pharmacies, where insurers are able to negotiate lower drug prices. The research concludes that preferred pharmacy contracting results in a roughly 1 percent decrease in Medicare Part D drug costs among plans utilizing this tool—a fact that should be encouraging to policymakers concerned about reigning in costs, especially in light of other research demonstrating that health care consumers do not shop around for lower priced care. If this practice of “steering” consumers toward lower cost drugs were applied to the entire pharmaceutical industry, the savings could be much greater.
The landmark Supreme Court ruling in Illinois Brick Co. v. Illinois (IB), which bars “indirect purchasers” from bringing antitrust suits against upstream product manufacturers, has greatly reduced the legal costs associated with antitrust enforcement. The ruling also might have another, lesser-known result: it has the potential to enable firms upstream in the supply chain to engage in collusion through the use of a particular contract structure—the wholesale price plus fixed fee structure (WPFF). The key component of the WPFF structure is a slotting fee, by which manufacturers agree to pay a fixed fee to retailers, compensating them for stocking fewer, higher cost items than they would under perfect competition. The fee acts as a disincentive for retailers to level antitrust suits against manufacturers. And consumers, whose welfare is reduced by the collusion, are forbidden from bringing antitrust action by the IB ruling. The research suggests that the incentive to collude is greater when demand uncertainty for a product is higher, the number of retailers in the market is higher, and the number of manufacturers is lower. Public enforcers of antitrust law can use this knowledge to focus their monitoring efforts on firms embedded in the type of supply chain structures described here while using WPFF contracts.
Throughout its history, the U.S. Federal Reserve has engaged in international diplomacy, outside the bounds of (and sometimes in conflict with) the priorities of the White House and U.S. State Department. In directing monetary policy, the Fed’s primary concern is to benefit the U.S. economy. In the process, the Fed at times acts in concert with foreign central banks, as was the case in setting new bank regulations after the 2008 financial crisis. At other times, the Fed acts in ways that other countries view as detrimental to their economic interests. Either way, the Fed operates with little public accountability, and can wind up complicating the work of U.S. diplomats. This brief addresses the questions of whether and how greater oversight of the Fed’s international activities should be pursued. The brief recommends not an overhaul of the Fed’s structure or the elimination of its role in international affairs, but instead calls for greater disclosure of its international activities. The authors suggest that the Fed should provide testimony to Congress twice per year on its foreign policies, just as it does for monetary and regulatory policy. This kind of disclosure permits broader discussion of the Fed’s activities without eliminating the benefits of its institutional independence for monetary policy.