What key economic policy developments happened in 2022 and what lies ahead in 2023?

Economic policy leaders and researchers were kept busy in 2022 by high inflation, a volatile labor market, crypto crashes, and major legislation like the Inflation Reduction Act. We asked five Economic Studies scholars about important developments this year in their fields of study and developments that they expect in 2023.

What were the most important developments in health care from the last year?

The past year has seen dramatic developments in both mental health care and drug pricing. Concerns over mental health in the United States has- taken center stage. For example, the prevalence of mental illnesses increased over the last decade for the first time since the 1950s. That was largely driven by illness in children that more than doubled from 2010 to 2019. President Biden drew attention to the problem and sketched a vision of how to address it.

The U.S. Congress enacted the Inflation Reduction Act that established the ability of the federal government to negotiate prices for prescription drugs and established catastrophic protection against the costs of prescription drugs. These are historic changes in U.S. policy that will save American consumers and taxpayers tens of billion dollars.

Our work on mental health policy during 2022 has focused on three specific issues: the mental health of children, the system for dealing with mental health crises, and the challenges of integrating behavioral health into general medical care. Some key points made in that work are as follows.

Our work on prescription drugs has focused on two key issues. The first is on claims made regarding the impact of policies that negotiate drug prices on innovation and the supply of “new cures.” Our analyses highlighted several points. We showed that concerns over the impact of the Inflation Reduction Act’s impact on new cures was exaggerated and that the Congressional Budget Office’s estimate of a very modest impact was consistent with existing evidence. In addition, we examined various complementary policy measures that could be taken to promote innovations that would boost the health of Americans including greater investments in the NIH and other science agencies and government seeding of venture investments. The second area focused on regulatory impediments to competition. We offered a series of possible modifications to FDA regulations that would promote greater price competition in prescription drug markets that would generate savings to consumers and taxpayers and invigorate the emerging market for biosimilar products.

The attention and initial steps towards addressing the complex array of issues related to the American struggle with mental illnesses have provided a general direction for policy. In the coming year the details of the strategies for implementing policies at all levels of government and civil society will need to take shape. Our work will focus on both the development of federal policy and addressing barriers at the state and local levels that will be necessary to realize the vision that developed over the past several years.

There are a variety of critical implementation issues related to the prescription drug provisions of the Inflation Reduction Act that must be developed in 2023. Several of those will turn on the answers to analytical questions regarding how markets will respond to policy guidance that will guide the development of a price negotiation process. We intend to focus on some of those analytical issues. In addition, the President has called for ideas for addressing drug prices and competition beyond the provisions of the Inflation Reduction Act. We will be conducting several research projected specifically on those issues.

What was the most important development in monetary policy from the last year?

This past year was one of the most unusual in recent Federal Reserve history. As inflation proved unexpectedly virulent, the Fed took interest rates from zero to over 4%, a faster pace of rate increases than any time since Paul Volcker. This triggered a sharp decline in both stock and bond prices that eroded the value of Americans’ retirement accounts, a spike in mortgage rates that hit new-home buyers hard, and brought long-sought relief for those with savings in the bank or in market funds.

For the Fed to make policy that will bring inflation under control, they first have to know how high it is, and measuring inflation is no easy task. We’ve published several explainers to help reporters, average Americans, and even policymakers understand how the federal government—primarily the Bureau of Labor Statistics (BLS) – does it. Measuring the price of housing—both rental and owner-occupied – turns out to be particularly messy, and housing plays a big role in the official inflation measures, as we explain here.

In the second half of 2022, we hosted an illuminating series of discussions alongside the monthly releases of the BLS Consumer Price Index report. Guests including Wendy Edelberg (The Hamilton Project), Justin Wolfers (Brookings nonresident fellow), Jason Furman (Harvard), Neil Irwin (Axios), and Betsey Stevenson (University of Michigan) joined me to share their perspectives on the drivers of inflation, the Fed’s response, and the road ahead. You can read takeaways from the latest discussion here.

We hosted Fed Chair Jerome Powell in December, and he made it as clear as anyone has that we will continue to face challenges from inflation well into the future. We will be watching closely to see how quickly inflation comes down and how far the Fed raises rates in 2023 – and whether, as I expect, the U.S. economy will slide into recession during 2023. We’ll also be thinking about the questions the Fed needs to address when it reviews the monetary policy framework it adopted in August 2020 in light of the recent bout of inflation.

What was the most important development in labor market policy from the last year?

A combination of factors—long-COVID, excess retirements, high demand for labor, among others—has contributed to a volatile labor market in 2022. Some observers have focused on the low unemployment rate compared to the job opening rate and concluded that the unemployment rate will likely have to rise to startling high levels just to stabilize the labor market and get rid of the upward pressure on inflation. Instead, the fill rate (the ratio of job openings to hires) shows that firms looking to hire large numbers of workers are indeed expanding employment at a rapid pace. It’s a complex and unique situation.

In this piece, I argued with some of my colleagues at The Hamilton Project that in order for the economy to return to more stable footing, the labor market needs to soften, but not at much as some think. What squares the circle between the unemployment rate and the fill rate is that right now, the unemployment rate is doing a relatively poor job of capturing the pool of potential workers—many are coming straight into jobs from outside the labor force.

We show that the labor market dynamics since 2021 suggest that getting the job openings rate back to a more sustainable pace means we need the pace of hiring to return to roughly 2015 levels. Such a labor market in the year or so ahead would be softer than today’s, but not startling so.

What were the most important development in finance from the last year?

Bank overdraft fees exploded over the last twenty plus years, growing by some estimates to over $30 billion a year. Overdraft penalizes people who run out of money with fees (typically $35 each time) that directly flow into bank profit. This year, most of America’s largest banks and many smaller ones announced major changes to their overdraft programs that will reduce the high cost to be poor. By my estimate, changes from the largest banks alone will result in $5 billion a year back in the accounts of those living paycheck to paycheck.

Digital assets and crypto currency exploded and imploded with a series of high-profile losses and bankruptcies. Regulating crypto will likely be front and center before Congress and financial regulators who spent last year writing reports requested by President Biden’s executive orders earlier this year.

In 2022, many banks changed their overdraft policies absent any new regulation or legislation, as highlighted at this Brookings event focused on early adopters. New research, public name and shame, and potential competition from financial technology (FinTech) firms finally forced major changes across the industry. President Biden claimed some credit for this as part of his crack down on “junk fees” but regardless of why banks changed their way, the reality is a major win for working families who run out of money, which sadly is by some estimates half of all Americans.

On the crypto side, Brookings was glad to host, among others, the Commodity Futures Trading Commission Chairman, Acting Federal Deposit Insurance Corporation Chairman, and the New York State Banking Superintendent in a series of events discussing how they are regulating crypto. We recently created a resource for people interested in digital asset markets with key takeaways from a number of these events, along with summaries of recent research on crypto regulation.

While the voluntary progress on overdraft fee policies was welcome, we can and must take action. There are still banks (and likely some credit unions) operating on unsafe and unsound business models reliant exclusively on overdraft. I outlined a series of steps regulators should take: stopping any bank from relying on overdraft fees for a majority of their profit in consecutive years, fixing America’s real-time payments system, and a requirement for all financial institutions to offer a no-overdraft, low-cost, basic bank account. I hope Congress will consider these important measures in 2023.

One key question likely to be discussed in 2023 on crypto will be whether the Federal Reserve can or should issue its own central bank digital currency (CBDC). America already runs on commercial bank digital currency (credit/debit cards, digital banking, etc.) so it remains to be seen whether swapping the first C in CBDC from Commercial to Central will unlock benefits for the American economy or whether it is more in reaction with countries like China which are rolling out CBDC’s for their own reasons which are often very different than ours.

What was the most important development in climate policy in the last year?

The Inflation Reduction Act (IRA), signed into law in August of this year, is the most significant piece of climate legislation passed in this country’s history. The law provides a total of $386 billion for climate and energy issues, including $271 billion in clean energy tax credits and incentives, $40 billion to reduce air pollution and fund clean energy and infrastructure projects, $35 billion in conservation and rural development, and $27 billion for a greenhouse gas reduction fund that will award grants to national and local green energy and electrification projects.

This law provides significant incentives for large and small businesses as well as for consumers to adopt more low-carbon energy initiatives. It also specifically provides funding for disadvantaged communities to help grant them access to clean technologies and fight against the effects of climate change. Current modeling predicts that instead of reducing greenhouse gas emissions by 27% from 2005 levels by 2030, the US could potentially be able to reduce greenhouse gas emissions by an estimated 42% from 2005 levels by 2030 because of the climate provisions in the IRA.

One example is our recent article on permitting reform, which discusses that the U.S. needs to clear major regulatory delays and enable an unprecedentedly rapid build-out of solar, wind, and electric transmission infrastructure to fully realize the benefits of funding from the Inflation Reduction Act and meet the Biden administration’s climate goals. Permitting obstacles include local and state government delays, as well as a long list of federal permits and reviews that can take many years to complete.

Another example is our explainer video on climate risk. From homeowners in flood-prone areas facing rising home insurance rates to corporations facing pressure to disclose climate risks, nearly everyone is exposed to climate risks. Understanding and proactively mitigating these risks is critical to protecting people and places from climate change.

With a divided incoming Congress, I do not see much room for additional climate legislation to pass. A bipartisan compromise on permitting reform, with concessions to the left on environmental protection and to the right on fossil fuel infrastructure, seems unlikely but remains possible.

This will essentially mean that with much of the grant money set aside in the Inflation Reduction Act still to be allocated, regulatory agencies such as the Department of Energy, the Department of Transportation, and the Environmental Protection Agency will play an even more significant role in implementing climate regulation in 2023. This is why, in addition to continuing to perform research on permitting reform as well as tracking climate regulation implemented by agencies, looking at how IRA money is allocated will be key in the next year.

Other significant climate developments I anticipate in the near future include a final Securities and Exchange Commission rule requiring climate risk disclosures by public companies and additional details from the EPA on their cap-and-trade program for hydrofluorocarbons.

On the international front, the recently-announced provisional agreement on the European Union Carbon Border Adjustment Mechanism (CBAM) is a major development. It will target imports of carbon-intensive products, functionally applying a carbon tax to imports to bring them into compliance with the EU’s climate ambitions. The CBAM will begin phase-in in October 2023, and is likely to have significant impact globally.