MAY 4 2017

Christopher House, Christian Proebsting, Linda Tesar, VOX: Austerity in the aftermath of the Great Recession. Austerity policies implemented during the Great Recession have been blamed for the slow recovery in several European countries. Using data from 29 advanced economies, this column shows that austerity policies negatively affect economic performance by reducing GDP, inflation, consumption, and investment. It also warns that efforts to reduce debt through austerity in the depths of the economic recession were counterproductive.

Enrico Rubolino, Daniel Waldenström, IZA: Tax Progressivity and Top Incomes: Evidence from Tax Reforms. We study the link between tax progressivity and top income shares. Using variation from large-scale Western tax reforms in the 1980s and 1990s and the novel synthetic control method, we find large and lasting boosting impacts on top income shares from the progressivity reductions. Effects are largest in the very top groups while earners in the bottom half of the top decile were almost unaffected by the reforms. Cuts in top marginal tax rates account for most of this outcome whereas reduced overall progressivity contributed less. Searching for mechanisms, real income responses as measured by growth in aggregate GDP per capita, registered patents and tax revenues were unaffected by the reforms. By contrast, tax avoidance behavior related to the management of capital incomes in the very income top appears to lie behind the observed effects.

John N. Friedman, Ithai Lurie, Magne Mogstad, Raj Chetty, NBER: Long-Run Drivers of Disability Insurance Rates. Much recent research has focused on the proximate forces that drive an individual to claim disability benefits, such as economic conditions, local allowance rates, and age. This paper instead studies the long-term factors that shift an individual’s chances of DI receipt. We use administrative tax data to link young adults (ages 24-32) to their parents and generate three key findings. First, DI receipt is strongly linked to the income of the recipient’s parents, with rates for young adults from the poorest families roughly six times higher than those from the richest families. Second, children from low income families display sharply varying probabilities of receiving DI depending on the place where they grew up, while those from rich families show no similar differences. Evidence suggests that roughly 50% of these place-based differences are causal. Third, places where poor children grow up to have the highest rates of DI receipt tend to be “good” areas based on many standard characteristics, including lower inequality, lower segregation, higher school quality, and higher social capital.

Maya Rossin-Slater, Miriam Wüst, IZA: What is the Added Value of Preschool? Long-Term Impacts and Interactions with a Health Intervention. We study the impact of targeted high quality preschool over the life cycle and across generations, and examine its interaction with a health intervention during infancy. Using administrative data from Denmark together with variation in the timing of program implementation between 1933 and 1960, we find lasting benefits of access to preschool at age 3 on outcomes through age 65 – educational attainment increases, income rises (for men), and the probability of survival increases (for women). Further, the benefits persist to the next generation, who experience higher educational attainment by age 25. However, exposure to a nurse home visiting program in infancy reduces the added value of preschool. The positive effect of preschool is lowered by 85 percent for years of schooling (of the first generation) and by 86 percent for adult income among men.

Christina Starmans, Mark Sheskin, Paul Bloom, Nature: Why people prefer unequal societies. There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness.

Jon Kleinberg et al., NBER: Human Decisions and Machine Predictions. We examine how machine learning can be used to improve and understand human decision-making. Millions of times each year, judges must decide where defendants will await trial—at home or in jail. This is a promising machine learning application because it is a concrete prediction task for which there is a large volume of data available. Yet comparing the algorithm to the judge proves complicated. We deal with these problems using different econometric strategies, such as quasi-random assignment of cases to judges. Our results suggest potentially large welfare gains: a policy simulation shows crime can be reduced by up to 24.8% with no change in jailing rates, or jail populations can be reduced by 42.0% with no increase in crime rates. Moreover, we see reductions in all categories of crime, including violent ones.