Raj Chetty

The Fading American Dream: Trends in Absolute Income Mobility Since 1940

Aspiring to do better than ones parents The American dream promises that hard work and opportunity will lead to a better life. Although the specifics of what constitutes a better life vary from generation to generation, one constant is that children expect to do better—or at least to have a good chance at doing better—than their parents. Chetty et al. show that this dream did come true for children born in the middle of the 20th century, but only for half of children born in 1984 (see the Policy Forum by Katz and Krueger). A more even distribution of economic growth, rather than more growth, would allow more children to fulfill their dreams. Science, this issue p. 398; see also p. 382 Only half of Americans see their dreams come true. We estimated rates of “absolute income mobility”—the fraction of children who earn more than their parents—by combining data from U.S. Census and Current Population Survey cross sections with panel data from de-identified tax records. We found that rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s. Increasing Gross Domestic Product (GDP) growth rates alone cannot restore absolute mobility to the rates experienced by children born in the 1940s. However, distributing current GDP growth more equally across income groups as in the 1940 birth cohort would reverse more than 70% of the decline in mobility. These results imply that reviving the “American dream” of high rates of absolute mobility would require economic growth that is shared more broadly across the income distribution.

Moral Hazard versus Liquidity and Optimal Unemployment Insurance

This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a “liquidity effect” rather than distortions on marginal incentives to search (“moral hazard”) by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity‐constrained households. Second, lump‐sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced‐form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The “exact identification” approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives.

The Association Between Income and Life Expectancy in the United States, 2001-2014

IMPORTANCE The relationship between income and life expectancy is well established but remains poorly understood. OBJECTIVES To measure the level, time trend, and geographic variability in the association between income and life expectancy and to identify factors related to small area variation. DESIGN AND SETTING Income data for the US population were obtained from 1.4 billion deidentified tax records between 1999 and 2014. Mortality data were obtained from Social Security Administration death records. These data were used to estimate race- and ethnicity-adjusted life expectancy at 40 years of age by household income percentile, sex, and geographic area, and to evaluate factors associated with differences in life expectancy. EXPOSURE Pretax household earnings as a measure of income. MAIN OUTCOMES AND MEASURES Relationship between income and life expectancy; trends in life expectancy by income group; geographic variation in life expectancy levels and trends by income group; and factors associated with differences in life expectancy across areas. RESULTS The sample consisted of 1,408,287,218 person-year observations for individuals aged 40 to 76 years (mean age, 53.0 years; median household earnings among working individuals,

Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply

61,175 per year). There were 4,114,380 deaths among men (mortality rate, 596.3 per 100,000) and 2,694,808 deaths among women (mortality rate, 375.1 per 100,000). The analysis yielded 4 results. First, higher income was associated with greater longevity throughout the income distribution. The gap in life expectancy between the richest 1% and poorest 1% of individuals was 14.6 years (95% CI, 14.4 to 14.8 years) for men and 10.1 years (95% CI, 9.9 to 10.3 years) for women. Second, inequality in life expectancy increased over time. Between 2001 and 2014, life expectancy increased by 2.34 years for men and 2.91 years for women in the top 5% of the income distribution, but by only 0.32 years for men and 0.04 years for women in the bottom 5% (P < .001 for the differences for both sexes). Third, life expectancy for low-income individuals varied substantially across local areas. In the bottom income quartile, life expectancy differed by approximately 4.5 years between areas with the highest and lowest longevity. Changes in life expectancy between 2001 and 2014 ranged from gains of more than 4 years to losses of more than 2 years across areas. Fourth, geographic differences in life expectancy for individuals in the lowest income quartile were significantly correlated with health behaviors such as smoking (r = -0.69, P < .001), but were not significantly correlated with access to medical care, physical environmental factors, income inequality, or labor market conditions. Life expectancy for low-income individuals was positively correlated with the local area fraction of immigrants (r = 0.72, P < .001), fraction of college graduates (r = 0.42, P < .001), and government expenditures (r = 0.57, P < .001). CONCLUSIONS AND RELEVANCE In the United States between 2001 and 2014, higher income was associated with greater longevity, and differences in life expectancy across income groups increased over time. However, the association between life expectancy and income varied substantially across areas; differences in longevity across income groups decreased in some areas and increased in others. The differences in life expectancy were correlated with health behaviors and local area characteristics.

The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence

How can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention? I derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand, the size of the price change, and the degree of frictions. The degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum. The bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities. I apply these bounds to the literature on labor supply. The utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1% of earnings. As a result, small frictions can explain the differences between micro and macro elasticities, extensive and intensive margin elasticities, and other disparate findings. Pooling estimates from existing studies, I estimate a Hicksian labor supply elasticity of 0.33 on the intensive margin and 0.25 on the extensive margin after accounting for frictions.

Social Insurance: Connecting Theory to Data

The 2003 dividend tax reform has generated renewed interest in understanding the economic effects of dividend taxation. The reform introduced favorable tax treatment of individual dividend income, whereby dividends are taxed at a rate of 15 percent instead of facing the regular progressive individual income tax schedule with a top rate of 35 percent. Several recent studies have used the 2003 tax cut as a “natural experiment” to learn about the effects of dividend taxation on corporate behavior. These studies have obtained divergent, empirical results, despite using the same underlying data. The goal of this paper is to reexamine the evidence using newly available data and reconcile some of the contradictory results in this recent literature. We focus on three questions: (a) Did the tax cut cause the surge in dividends or were other factors responsible?; (b) Did the tax cut induce substitution of repurchases for dividends, or did total payouts rise?; and (c) Did the tax cut induce more efficient distribution of investment funds across firms?

Identification and Inference With Many Invalid Instruments

We survey the literature on social insurance, focusing on recent work that has connected theory to evidence to make quantitative statements about welfare and optimal policy. Our review contains two parts. We first discuss motives for government intervention in private insurance markets, focusing primarily on selection. We review the original theoretical arguments for government intervention in the presence of adverse selection, and describe how recent work has refined and challenged the conclusions drawn from early theoretical models. We then describe empirical work that tests for selection in insurance markets, documents the welfare costs of this selection, and analyzes the welfare consequences of potential public policy interventions. In the second part of the paper, we review work on optimal social insurance policies. We discuss formulas for the optimal level of insurance benefits in terms of empirically estimable parameters. We then consider the consequences of relaxing the key assumptions underlying these formulas, e.g., by allowing for fiscal externalities or behavioral biases. We also summarize recent work on other dimensions of optimal policy, including mandated savings accounts and the optimal path of benefits. Finally, we discuss the key challenges that remain in understanding the optimal design of social insurance policies.

Consumption Commitments and Asset Prices

We study estimation and inference in settings where the interest is in the effect of a potentially endogenous regressor on some outcome. To address the endogeneity, we exploit the presence of additional variables. Like conventional instrumental variables, these variables are correlated with the endogenous regressor. However, unlike conventional instrumental variables, they also have direct effects on the outcome, and thus are “invalid” instruments. Our novel identifying assumption is that the direct effects of these invalid instruments are uncorrelated with the effects of the instruments on the endogenous regressor. We show that in this case the limited-information-maximum-likelihood (liml) estimator is no longer consistent, but that a modification of the bias-corrected two-stage-least-square (tsls) estimator is consistent. We also show that conventional tests for over-identifying restrictions, adapted to the many instruments setting, can be used to test for the presence of these direct effects. We recommend that empirical researchers carry out such tests and compare estimates based on liml and the modified version of bias-corrected tsls. We illustrate in the context of two applications that such practice can be illuminating, and that our novel identifying assumption has substantive empirical content.

The Effects of Taxes on Market Responses to Dividend Announcements and Payments: What Can We Learn from the 2003 Dividend Tax Cut?

This paper studies portfolio choice and asset prices in a model with two consumption goods, one of which involves a commitment in that its consumption can only be adjusted at a cost. Commitments effectively make investors more risk averse: they invest less in risky assets and smooth total consumption more. Aggregating over a population of such consumers implies dynamics that match those of a representative consumer economy with habit formation. Calibrations show that the model can resolve the equity premium puzzle. We test the key prediction that an exogenous increase in economic commitments (e.g., housing) causes a more conservative portfolio allocation using a novel instrumental variables strategy related to age at marriage. We find that a

Consumption Commitments and Habit Formation

1 increase in housing causes a 50-70 cent reallocation from stocks to bonds for the average investor. Exploiting differences in the variance of home prices across cities, we show that this effect is due to commitments and not greater exposure to housing price risk.