Proof Positive That Our Sources are Geniuses - Pacific Standard

Proof Positive That Our Sources are Geniuses

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A quick shout-out to Raj Chetty, one of 23 recipients of this year’s John D. and Catherine T. MacArthur Foundation “genius grants.”

Chetty, at age 33, is a Harvard economist who studies at the intersection of policy and the real world (a neighborhood a lot of economists can’t seem to find too well). His scholarship has already earned him plenty of notice, such as from The Economist, which labeled Chetty one of its “international bright young things” four years ago (the same year Harvard granted him tenure!) in a look at emerging superstars in the field.

As the magazine explained in detailing his approach:

For example, he wanted to know whether policymakers should raise unemployment benefits. To answer this question, a structural model would need to specify how much a dollar is worth to a person on the dole, as compared with someone in work. It would also need to quantify the burden a job hunt imposes. This isn't easy to find out. But Mr Chetty argues it is unnecessary.

He gleans all the information he needs by looking at the time it takes unemployed people to find a new job. Unsurprisingly, they take longer when their benefits are more generous. This is usually attributed to “moral hazard”—people take less care to escape a danger, such as joblessness, if they are insured against it. But Mr Chetty shows that skewed incentives account for only 40% of the delay.

The rest is due to what he calls a “liquidity effect”. The unemployed typically have few liquid assets to fall back on and little chance of a loan from the bank. This forces them to rush their job search. If they had savings to dip into or credit to tap, they might search with greater deliberation. This kind of dallying is, in a sense, optimal. The unemployed decide that an unhurried job search is worth the extra cost of depleted savings or heavier loan repayments.

Higher benefits ease this liquidity problem. Raising benefits by $1 a week would do as much social good as raising American GDP by $290m, Mr Chetty calculates, although government loans to the unemployed might do better still.

Esquire, in turn, named him among “The Brightest: 16 Geniuses Who Give Us Hope” and the American Enterprise Institute’s The American magazine gave him their Young Economists Award in 2008. It’s not just the ink-stained who honor Chetty: Germany’s labor-market-oriented IZA foundation gave him their Young Labor Economist Award in 2010, while the St. Louis Fed’s IDEAS site list him as No. 1 on their tally of top young economists.

Here at PSMag.com, we recall Chetty as the nice man who helped explain a National Bureau of Economic Research paper on how a good kindergarten teacher can be worth their weight in, well maybe not gold, but future good prospects for their students. (Don’t ask exactly how you could weigh that.)

As Chetty told us two years ago:

“We found that everything comes back. Our paper shows that investments in early childhood education have potentially very large payoffs. In the U.S., kids from disadvantaged families attend lower quality schools because of property tax financing. That system basically perpetuates income inequality. Disadvantaged kids end up not doing so well. We should think about improving schools at the lower end of the school distribution.”

So we say thanks, and hope the MacArthur money will pay a similar dividend in Chetty’s efforts as a kindergarten teacher must have made for him earlier.

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