Monday morning insights from NBER

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I look forward to my Monday morning e-mail because that’s when I see what’s up in the National Bureau of Economic Research (NBER) Working Papers.  These articles are in the last stages before being published in refereed journals or conference volumes and thus have usually gone through a long process of seminars and formal peer review.  They are thus scientifically reliable and, even better, contain fascinating insights.

Two papers caught my eye this morning and provide some food for thought on what is, in central Minnesota, a gray, wet day.

“Tax Policy Toward Low-Income Families,” by  Hilary Hoynes and Jesse Rothstein.

Two important efforts to help low-income families through the tax code (as opposed to direct payments) are the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).  Hoynes and Rothstein find that the EITC meets the goal of promoting work among low-income families while providing additional income via refundable tax credits. They further argue that expanding the EITC to childless individuals and couples would help them substantially would be relatively expensive.

The more interesting result, to me, is what they find with regard to the CTC.  Here most of the benefits accrue to high-income households, exactly the opposite of what a policy aimed at helping out low-income people should do. This happens because the CTC, like the EITC, is refundable but, unlike the EITC, has a very high income level above which the credit disappears.  Thus a relatively simple fix to this problem would be to greatly lower the income threshold below which a household receives the CTC.

I say simple in the sense that it’s not a complex change, but the politics are not at all simple. The CTC, like the mortgage interest deduction, benefits high income households disproportionately and thus would be politically difficult to reduce or repeal.  I still think this would be good public policy but it’s hard to think of a majority of representatives and senators who would vote for this.

“National Policy for Regional Development: Evidence from Appalachian Highways,” by Taylor Jaworski and Carl T. Kitchens

“How effective are policies aimed at integrating isolated regions? We answer this question using the construction of a highway system in one of the poorest regions in the United States. With construction starting in 1965, the Appalachian Development Highway System (ADHS) ultimately consisted of over 2,500 high-grade road miles.”

Jaworski and Ktichens find that highways integrated the area into the wider regional economy, but that this had two offsetting effects.  First, local companies had greater access to markets which boosted their income and employment and thus benefited the area.  Second, local populations could now work outside the area more easily or even migrate to higher-income regions.  The net effect:

Today, the region’s performance relative to the national average is similar to its position in the 1960s. Thus, despite substantial investment in transportation and some gains in income per capita the region continues to lag behind the rest of the country.

This calls into question efforts to improve roads and other infrastructure as a way of raising incomes in distressed areas.  For example, how will improved highway access and broadband affect northeastern Minnesota?  Will it raise incomes and allow for a more diversified business base?  Or, will these effects be washed out by residents taking jobs involving longer commute or even leaving the area.  We just can’t tell in advance.

This is yet another set of examples of where “on the one hand… on the other hand…” is the state of our knowledge.