Grant Category

Macroeconomic Policy

What are the implications of inequality on the long-term stability of our economy and its growth potential?

What are the implications of inequality on the long-term stability of our economy and its growth potential?

A larger share of U.S. national income has been flowing to the individuals at the top of the income and wealth ladder. These individuals are less likely to spend and more likely to save their money than those with lower income. There is evidence that growing income inequality may be contributing to the so-called secular stagnation of macroeconomic growth.

Growing income inequality likely bears on macroeconomic performance through other channels as well. The lower real interest rates that have resulted from higher global saving will limit the ability of conventional monetary policy to stabilize the economy in the next economic downturn. Growing inequality has also contributed to a growing sense that the economy isn’t working for most families, fueling both distrust in institutions and greater political polarization.

We need to better understand the implications of inequality on the long-term stability of our economy and its growth potential. The large and sustained rise in inequality across income and wealth groups, as well as the disparate performance of different geographies and demographic groups, make understanding how these trends could exacerbate economic instability and reduce economic growth a pressing national concern.

  • The effects of monetary policy
  • The effects of fiscal policy
  • The effects of the tax and transfer system
  • Political economy

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Racial and ethnic inequality in consumption smoothing

Grant Year: 2020

Grant Amount: $75,000

Grant Type: academic

Forty-two percent of Americans report that they do not have savings that could be used to cover unexpected expenses, a staggeringly high number. And there are stark racial differences, with 38 percent of White households and 55 percent of Black households saying they don’t have money to cover an emergency expense—one manifestation of the Black-White wealth divide. Yet there is surprisingly little research on how typical month-to-month fluctuations in income affect consumption and even less evidence on how this consumption smoothing varies with wealth. Given how central consumption dynamics are for macroeconomics, it’s important to understand the sensitivity of consumption to income and how that might vary by race and wealth. This project uses exciting new data to explore how income shocks may be passed through to consumption. By linking deidentified administrative bank data with self-reported race information from voter registration records, the authors will be able to identify the response of consumption by race with a large enough dataset (the analysis sample consists of 1.8 million matched bank-voter records) to identify racial differences credibly. Understanding how well households can smooth consumption, and how and why some groups—such as Black and Hispanic households who have lower-than-average wealth—may face greater challenges in doing so, is central for developing policy to address economic inequality and ensure vulnerable households achieve economic security.

Measuring the rise of wealth inequality, capital gains, and income inequality

Grant Year: 2020

Grant Amount: $35,400

Grant Type: academic

Capital gains are one of the largest components of income at the top of the wealth distribution and play a key role in measuring wealth inequality. Yet capital gains are rarely included in estimates of the wealth distribution in economics, mainly because measurement requires detailed information on the distribution of wealth at the individual security level. This project will construct a new dataset to directly measure the holdings of public equities and fixed-income assets for all individuals in the United States using internal IRS data from the 1099-DIV and 1099-INT forms, which have not previously been used by researchers. This improved data will allow for more accurate estimates of wealth inequality, including new estimates of top-end wealth inequality. It will also shed light on savings rates across the income distribution and bring to bear new evidence of whether the rich save more.

The innovation dividend of fiscal policy: the impact of defense spending on local innovation in U.S

Grant Year: 2020

Grant Amount: $15,000

Grant Type: doctoral

This study focuses on place-based policies and how geographic concentration of innovation affects regional economic growth in the United States. The researchers will explore how local fiscal stimulus in the form of defense spending impacts both innovation and economic growth. Using contract-level data on defense spending and county-level measures of innovation, the researchers will attempt to identify through which channels defense spending affects aggregate innovation. They use Gross Domestic Product, personal income, and total employment to evaluate how defense spending affects economic growth.

Place-based climate policy in the United States

Grant Year: 2020

Grant Amount: $15,000

Grant Type: doctoral

This project explores whether, as an empirical matter, people have constrained choice sets in energy consumption due to where they live, and if that, in turn, may mean that traditional models of the efficiency of carbon taxation are incorrect. The researcher will decompose the spatial heterogeneity in carbon emissions into a component driven by individual preferences and a component driven by place. Using U.S. Census data, the American Community Survey, and the Longitudinal Employer-Household Dynamics, among other data sources, the author explores how factors such as climate, income inequality, segregation, and public disinvestment impact place-based heterogeneity. Since so much emission heterogeneity is tied to income, there are clear implications for how this could impact and be impacted by inequality. Findings have the potential to inform our understanding of how carbon taxes may need to be accompanied by rezoning or other policies.

Monetary policy and firm heterogeneity in the United States

Grant Year: 2020

Grant Amount: $15,000

Grant Type: doctoral

With the Federal Reserve’s focus on promoting maximum employment, it is important for researchers to understand how U.S. monetary policy affects firms’ employment differently. This research project will analyze how the age and size of a firm impacts the firm’s responsiveness to monetary policy. Using the Business Dynamics Statistics and Quarterly Workforce Indicators datasets from the U.S. Census Bureau, the researcher will attempt to provide new evidence on the distributional effect of monetary policy on the employment of heterogenous firms in the United States from 1977 to 2007.

Mark-ups, labor market inequality, and the distributional implications of monetary policy

Grant Year: 2020

Grant Amount: $60,000

Grant Type: academic

This project is part of a broader agenda to develop quantitative macroeconomic models that can be used to study the distributional implications of macroeconomic shocks and policies. Existing macroeconomic models are limited in their ability to create realistic dynamics in the distribution of labor income in response to macroeconomic shocks. Since labor income is one of the most important dimensions of economic inequality and the most important determinant of economic welfare for the majority of U.S. households, this is a significant limitation. This paper will begin by developing a theory to demonstrate the new heterogeneity that is going to be a key force in the model. It will be followed by an empirical section to show the fact that the model is seeking to address and to highlight the important empirical facts that other models are missing, such as that not all labor income is similarly cyclical and that expansionary and productive occupations have systematically different experiences. The final section addresses the general equilibrium consequences of this heterogeneity, a step that is critically important for doing policy counterfactuals.

Experts

Grantee

Joan Williams

University of California, Hastings College of Law

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Grantee

Andria Smythe

Howard University

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Grantee

Benjamin Scuderi

University of California, Berkeley

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Grantee

Jane Waldfogel

Columbia University

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Steering Committee

Jason Furman

Harvard Kennedy School

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