Public Economics

Members of the NBER's Public Economics Program met in Cambridge on October 25-26. Program Director Amy Finkelstein of MIT and Research Associate Henrik Kleven of Princeton University organized the meeting. These researchers' papers were presented and discussed:

Henrik Kleven

Taxation and Labor Force Participation: The EITC Reconsidered

Itzik Fadlon, University of California, San Diego and NBER; Shanthi P. Ramnath, U.S. Department of the Treasury; and Patricia Tong, RAND Corporation

Household Responses to Transfers and Liquidity: Evidence from Social Security's Survivors Benefits

Fadlon, Ramnath, and Tong use administrative tax data that include the entire U.S. population to identify the causal effects of Social Security's survivors insurance on American families' behavior and financial well-being. They analyze over a quarter of a million widowed households in which the husband died between 2002–2007, and exploit a sharp age discontinuity in eligibility for Social Security's survivors' benefits to study the responses of financially vulnerable households to government transfers. The researchers first study how households respond to benefit receipt in the immediate periods following a large financial shock to investigate the protective role of transfers. They find significant impacts of the program on newly-widowed families' net income and labor supply behavior, which points to life-insurance market inefficiencies and to a high valuation of survivors' benefits in protecting Americans against mortality shocks. Second, to investigate the particular role of liquidity and benefit timing, the researchers study how already-widowed women's labor supply responds to anticipated survivors benefit receipt. The study finds considerable responses to benefit availability that underscore credit market inefficiencies and the value of liquidity itself provided by government transfers. These responses and their heterogeneity highlight mechanisms that underlie the labor supply behavior of older vulnerable households, and they point to liquidity constraints, rather than myopia or benefit-schedule misperceptions, as a likely operative channel. The results also have implications for the design of survivors' benefits in the U.S., and, more generally, for retirement behavior and response mechanisms to transfers among older vulnerable populations.

Manasi Deshpande, University of Chicago and NBER; Tal Gross, Boston University and NBER; and Yalun Su, University of Chicago

Disability and Distress: The Effect of Disability Programs on Financial Outcomes

Deshpande, Gross, and Su provide the first evidence on the relationship between disability programs and markers of financial distress: eviction, foreclosure, bankruptcy, and home transactions. They document that rates of adverse financial events peak around the time of disability application and subsequently fall for both allowed and denied applicants. To estimate the causal effect of disability programs on these outcomes, the researchers use an age-based eligibility rule to implement a regression discontinuity design. Deshpande, Gross, and Su find that disability allowance at the initial level reduces the likelihood of foreclosure by 2.8 percentage points (54 percent) and home sale by 2.6 percentage points (20 percent) among homeowners over the next 3 years. The likelihood of bankruptcy falls by 0.76 percentage points (29 percent) over the next 3 years. The researchers present evidence that liquidity is the most likely channel for these effects, meaning that the results reflect a reduction in financial distress and an improvement in recipient welfare.

Susan Athey, Stanford University and NBER; Zakary Campbell, Brown University; Eric Chyn, University of Virginia; Justine S. Hastings, Brown University and NBER; and Preston S. White, Rhode Island Innovation Policy Lab

The Social Value of Targeting Interventions: Evidence from Reemployment Services

Thomas R. Tørsløv and Ludvig S. Wier, University of Copenhagen, and Gabriel Zucman, University of California, Berkeley and NBER

The Missing Profits of Nations (NBER Working Paper No. 24701)

By exploiting new macroeconomic data known as foreign affiliates statistics, Tørsløv, Wier, and Zucman show that foreign firms are an order of magnitude more profitable than local firms in tax havens, but less profitable than local firms in other countries. Leveraging this differential profitability, they estimate that close to 40% of multinational profits are shifted to tax havens globally each year. The non-haven European Union countries appear to be the main losers from this shifting. The researchers show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places. This policy failure can explain the persistence of profit shifting to tax havens despite the sizable costs involved for high-tax countries. The researchers provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting, showing that the rise of the global corporate capital share is significantly underestimated.

Jesse M. Shapiro, Brown University and NBER; Justine S. Hastings, Brown University and NBER; and Ryan E. Kessler, Brown University

The Effect of SNAP on the Composition of Purchased Foods: Evidence and Implications

Shapiro, Hastings, and Kessler use detailed data from a large retail panel to study the effect of participation in the Supplemental Nutrition Assistance Program (SNAP) on the composition and nutrient content of foods purchased for at-home consumption. They find that the effect of SNAP participation is small relative to the cross-sectional variation in most of the outcomes considered. Estimates from a model relating the composition of a household's food purchases to the household's current level of food spending imply that closing the gap in food spending between high- and low-SES households would not close the gap in summary measures of food healthfulness.

Giulia Giupponi and Camille Landais, London School of Economics

Subsidizing Labor Hoarding in Recessions: Employment & Welfare Effects of Short-Time Work

The Great Recession has seen a revival of interest in policies encouraging labor hoarding by firms. Short time work (STW) policies, which consist in offering subsidies for hours reductions to workers in firms experiencing temporary shocks, are the most emblematic of these policies, and have been used aggressively during the recession. Yet, very little is known about their employment and welfare consequences. Giupponi and Landais leverages unique administrative social security data from Italy and quasi-experimental variation in STW policy rules to offer compelling evidence of the effects of STW on firms' and workers' outcomes, and on reallocation in the labor market. The results show large and significant negative effects of STW treatment on hours, but large and positive effects on headcount employment. Results also show that employment effects disappear when the program stops, and that STW offers no long term insurance to workers. Finally, the researchers identify the presence of significant negative reallocation effects of STW on employment growth of untreated firms in the same local labor market. They develop a simple conceptual framework to rationalize this empirical evidence, from which they derive a general formula for the optimal STW subsidy that clarifies the welfare trade-offs of STW policies. Calibrating the model to the empirical evidence, the researchers conduct counterfactual policy analysis and show that STW stabilized employment during the Great Recession in Italy, and brought (small) positive welfare gains.

Raj Chetty and Nathaniel Hendren, Harvard University and NBER; John N. Friedman, Brown University and NBER; and Maggie R. Jones and Sonya Porter, U.S. Census Bureau

The Opportunity Atlas: Mapping the Childhood Roots of Social Mobility (NBER Working Paper No. 25147)

Chetty, Friedman, Hendren, Jones, and Porter construct a comprehensive, publicly available Census tract-level atlas of children's outcomes in adulthood using anonymized longitudinal data covering nearly the entire U.S. population. For each tract, they estimate children's earnings distributions, incarceration rates, and other outcomes in adulthood by parental income, race, and gender. These estimates allow the researchers to trace the roots of outcomes such as poverty and incarceration back to the neighborhoods in which children grew up. Children's outcomes vary sharply across nearby tracts: the standard deviation of mean household income given parents at the 25th percentile is $5,000 across tracts within counties. The researchers illustrate how these tract-level data can be used to support local economic policy and provide insight into how neighborhoods shape the development of human capital using two applications. First, they show that the data permit precise targeting of policies to improve economic opportunity by uncovering specific tracts where certain subgroups of children grow up to have poor outcomes. Neighborhoods matter at a very granular level: conditional on characteristics such as poverty rates in a child's own Census tract, characteristics in tracts that are one mile away are essentially uncorrelated with a child's outcomes. Historical estimates of children's mean outcomes by tract are informative predictors of outcomes even for children growing up today because neighborhood conditions are relatively stable over time. Second, the researchers show that the observational estimates are highly predictive of neighborhoods' causal effects, based on a comparison to data from the Moving to Opportunity experiment and a quasi-experimental research design analyzing movers' outcomes. This analysis allows the researchers to quantify the price that families must pay to buy better opportunities for their children, providing a central input into the design of affordable housing policies. The measures of children's long-term outcomes constructed are only weakly correlated with traditional proxies for local economic success such as rates of job growth, showing that the conditions that lead to greater upward mobility are not necessarily the same as those that lead to productive labor markets. More generally, the data provide a new lens for examining the potential net costs of government policies that accounts for the fiscal impact of adult outcomes based on their childhood exposure to each neighborhood in the U.S.

Qiping Xu, University of Notre Dame, and Eric Zwick, University of Chicago and NBER

Kinky Tax Policy and Abnormal Investment Behavior

Xu and Zwick document tax-minimizing investment, in which firms accelerate capital purchases near fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in fiscal Q4 exceeds the average of fiscal Q1 through Q3 by 37%. Q4 spikes occur in the U.S. and internationally. Research designs using variation in firm tax positions and the 1986 Tax Reform Act show that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. The researchers develop an investment model with tax asymmetries to rationalize these patterns. Models without purchase-year, tax-minimization motives are unlikely to fit the data.

Juan Carlos Suárez Serrato, Duke University and NBER

Unintended Consequences of Eliminating Tax Havens (NBER Working Paper No. 24850)

Suárez Serrato shows that eliminating firms' access to tax havens has unintended consequences for economic growth. He analyzes a policy change that limited profit shifting for U.S. multinationals, and shows that the reform raised the effective cost of investing in the U.S. Exposed firms respond by reducing global investment and shifting investment abroad -- which lowered their domestic investment by 38 percent -- and by reducing domestic employment by 1.0 million jobs. Suárez Serrato then shows that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. He discusses implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.

Peter Ganong, University of Chicago and NBER, and Pascal J. Noel, University of Chicago

Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession (NBER Working Paper No. 24964)

Ganong and Noel use variation in mortgage modifications to disentangle the impact of reducing long-term obligations with no change in short-term payments ("wealth"), and reducing short-term payments with approximately no change in long-term obligations ("liquidity"). Using regression discontinuity and difference-in-differences research designs with administrative data measuring default and consumption, they find that principal reductions that increase housing wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. The results suggest that liquidity drives borrower default and consumption decisions, and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers.

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