Research Interests

Primary: Macroeconomics, Computational Economics
Secondary: Public Finance

Published Papers

Click on the title to download the working paper version.

The Restrained Recovery of State and Local Government Payrolls from the Pandemic Recession
with David Cashin, Byron Lutz, , David Ratner, and Sarah Rodman

On the eve of the outbreak of the COVID-19 pandemic, state and local government employment in the U.S. stood at 20 million. In the first three months of the pandemic, these payrolls plunged 1.5 million as social distancing reduced the need for many government services, such as in-person schooling, and these governments feared sharp revenue declines. By Spring 2021, however, State and Local governments found themselves in their strongest budget position in 50 years, as the federal government provided historic levels of aid and State and Local tax revenues proved resilient. And yet, despite the strong budget positions and the waning of social distancing, the level of these payrolls had not returned to its pre-pandemic peak let alone its pre-COVID trend by the summer of 2023. In this note, we argue that the recovery has been quite restrained. We then highlight two factors—anemic wage growth relative to the private sector and an elevated rate of early retirements—that have likely hampered the sector's recovery. We conclude with some thoughts on the outlook for the sector's employment growth going forward.

A New Index to Measure U.S. Financial Conditions
with Andrea Ajello, Michele Cavallo, Giovanni Favara, John Schindler, and Nitish R. Sinha

Our FEDS note introduces the Financial Conditions Impulse on Growth (FCI-G) index, a new research product that measures how the recent history of changes in interest rates, asset prices and the dollar will affect future U.S. growth. The FCI-G suggests that financial conditions are significantly tighter than they were at the end of 2021 and act as headwind to expected growth. Higher interest rates make up for the largest share of the headwind, while stock and house prices appreciation recorded over the pandemic still provide some tailwind to the growth outlook.

Climate Policy Transition Risk and the Macroeconomy
with Stephie Fried and Kevin Novan (European Economic Review, August 2022, 147) FRBSF Economic Letter

Uncertainty surrounding if the U.S. will implement a federal climate policy introduces risk into the decision to invest in long-lived capital assets, particularly those designed to use, or to replace fossil fuel. We develop a dynamic, general equilibrium model to quantify the macroeconomic impacts of this climate policy transition risk. The model incorporates beliefs over the likelihood that the government adopts a climate policy causing the economy to dynamically transition to a lower carbon steady state. We find that climate policy transition risk decreases carbon emissions today by causing investment to become relatively cleaner and output to fall. This result counters the Green Paradox, which argues that climate policy risk raises emissions today by increasing incentives to extract fossil fuel, expanding its supply. Even allowing for the supply-side response, we find the demand-side response dominates, and the net effect of climate policy transition risk is still to reduce emissions today.

An Evaluation of the Paycheck Protection Program Using Administrative Payroll Microdata
with David Autor, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, David Ratner, Daniel Villar, and Ahu Yildirma (conditionally accepted at Journal of Public Economics, July 2022, 211)

The Paycheck Protection Program (PPP), a principal element of the fiscal stimulus enacted by Congress in response to the COVID-19 economic shock, is intended to assist small businesses to maintain employment and wages during the crisis. An obstacle to assessing whether the PPP achieved this goal is the absence of granular, high-frequency employment data that can precisely capture any causal effect of the PPP on employment. We use administrative data from ADP-one of the world’s largest payroll processing firms-to contrast the evolution of payroll employment at PPP-eligible and PPP-ineligible firms, where eligibility is determined by industry-specific firm-size cutoffs. We estimate that the PPP boosted employment at eligible firms by 2 to 4.5 percent, with a preferred central tendency estimate of approximately 3.25 percent. Our estimates imply that the PPP increased aggregate U.S. employment by 1.4 million to 3.2 million jobs through the first week of June 2020, with a preferred central tendency estimate of about 2.3 million workers. In an alternative analysis, we identify the effect of the PPP from a set of firms for which we can observe loan take-up and obtain results at the upper end of the range of estimates. Although the evidence is supportive of a causal effect of the PPP on aggregate employment, we are careful to highlight puzzles where they occur and view our work as preliminary in nature. Future work will leverage loan-level PPP data to calibrate the relationship between eligibility, take-up, and employment.

The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did it Go There?
with David Autor, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, David Ratner, Daniel Villar, and Ahu Yildirma (Journal of Economic Perspectives, Spring 2022, 36 , 55-80)

The Paycheck Protection Program (PPP) provided small businesses with roughly $800 billion dollars in uncollateralized, low-interest loans during the pandemic, almost all of which will be forgiven. With 93 percent of small businesses ultimately receiving one or more loans, the PPP nearly saturated its market in just two months. We estimate that the program cumulatively preserved between 2 and 3 million job-years of employment over 14 months at a cost of $170K to $257K per job-year retained. These estimates imply that only 23 to 34 percent of PPP dollars went directly to workers who would otherwise have lost jobs; the balance flowed to business owners and shareholders, including creditors and suppliers of PPP-receiving firms. Program incidence was highly regressive, with about three-quarters of PPP funds accruing to the top quintile of households. This compares unfavorably to the other two major pandemic aid programs, enhanced UI benefits and Economic Impact Payments (i.e. stimulus checks). PPP’s breakneck scale-up, its high cost per job saved, and its regressive incidence have a common origin: PPP was essentially untargeted because the United States lacked the administrative infrastructure to do otherwise. The more targeted pandemic business aid programs deployed by other high-income countries exemplify what is feasible with better administrative systems. Building similar capacity in the U.S. would enable greatly improved targeting of either employment subsidies or business liquidity when the next pandemic or other large-scale economic emergency occurs, as it surely will.

Optimal Public Debt with Life Cycle Motives
with Erick Sager (AEJ - Macroeconomics, Forthcoming)
Press: Business Week

This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor and savings, both in the cross section of U.S. households and by age. We find that public savings, not public debt, equal to 168% of output is optimal, primarily due to the influence of the life cycle on household decision-making. By inducing a lower interest rate, public savings slows the empirically observed rate of consumption and leisure growth over an average household's lifetime, and the resulting flatter allocation of lifetime consumption and leisure improves welfare. We show that when including the life cycle these welfare benefits are large; so large that, on net, they outweigh the transitional costs from a tax-financed public debt elimination.

Taxing Capital? The Importance of How Human Capital is Accumulated
with Adam Blandin (European Economic Review, October 2019, 119, 482-508)

This paper shows that in a life-cycle framework the optimal tax on capital depends crucially on how human capital is accumulated. We focus on three cases common to the macroeconomic literature: (i) Learning-By-Doing (LBD), (ii) Learning-Or-Doing (LOD), and (iii) exogenous accumulation. First, we show analytically in a simple two-period model that endogenizing human capital introduces novel motives for the government to tax capital when it cannot directly condition taxes on age, and moreover that these motives differ depending on whether LBD or LOD is assumed. We then quantify differences in optimal capital taxes using a rich life-cycle framework that features heterogeneity in learning ability and initial human capital. With proportional taxes the optimal capital tax is 12pp higher with LBD than with exogenous accumulation, but 16pp lower with LOD than with exogenous accumulation. We show that heterogeneity in learning ability strengthens the novel channels introduced by human capital, resulting in a larger gap in capital taxes between LBD and LOD relative to a case with homogeneous workers. Finally, we show that although allowing the government to make labor taxes progressive reduces the gap in optimal capital taxes, a sizeable gap still persists.

A Historical Welfare Analysis of Social Security: Who Did the Program Benefit?
with Kamila Sommer (Quantitative Economics, 2019, 10, 1357-1399)

This paper builds a computational life cycle model and simulates the Great Depression in order to assess the historical welfare implications of implementing Social Security during this business cycle episode. A well established result in the literature is that when comparing steady states with and without Social Security in a standard life cycle model, steady state welfare tends to be lower with Social Security. Consistent with these previous results, this paper determines that on average in the steady state the original Social Security program lowers welfare by the equivalent of 2.5% of expected lifetime consumption. Moreover, the likelihood that this Social Security program causes a decrease in an agent's welfare in the steady state is 92%. However, this paper finds that the welfare effects of implementing Social Security for agents in the economy at the time the program is adopted is very different than these steady state welfare effects. In particular these living agents experience an increase in their lifetime welfare due to the implementation of Social Security that is equivalent to 5.9% of their expected future lifetime consumption. Moreover, the paper finds that the likelihood that these living agents experience an increase in their lifetime welfare due to the adoption of the program is 83%. The divergence in the steady state and transitional welfare effects is primarily driven by a slower adoption of payroll taxes and a quicker adoption of benefit payments. This divergence could be one explanation for why a program that decreases steady state welfare was originally implemented.

How Well Did Social Security Mitigate the Effects of the Great Recession?
with Kamila Sommer (International Economic Review, 2019, 60, 1433-1436)

The Great Recession was associated with historically large losses in households' wealth and labor earnings. Using a computational life cycle model, this paper assesses how Social Security affects the welfare of different types of individuals during the most recent recession. Overall, we find that Social Security reduces the average welfare losses for agents alive at the time of the Great Recession by the equivalent of 1.4% of expected future lifetime consumption. Zooming in on the effect of the program for particular groups, we show that although the program mitigates some of the welfare losses for most agents, it is particularly effective at mitigating the losses for agents who are poorer and or older at the time of the shock. Although Social Security reduces the welfare losses from the Great Recession, consistent with previous studies, we find that it substantially lowers average welfare in the steady state. Therefore, we quantify the tradeoff between reducing average welfare in the steady state and mitigating welfare losses during business cycle episodes in a smaller, means-tested program, in the spirit of Supplemental Security Income. We find that this smaller more progressive program can provide a significant fraction of the mitigating effect, while causing much less reduction in average steady state welfare.

Fiscal Policy and Aggregate Demand in the US Before, During and Following the Great Recession
with David Cashin, Jamie Lenney, Byron Lutz (International Tax and Public Finance, 2018, 25.6, 1519-1558)

We examine the effect of federal and subnational fiscal policy on aggregate demand in the U.S. by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers—changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. We use FE to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

The Distributional Effects of a Carbon Tax on Current and Future Generations
with Stephie Fried and Kevin Novan (Review of Economic Dynamics, 2018, 30, 30-46)

This paper uses a life cycle model to compare how different approaches for recycling carbon tax revenue affect the welfare of agents born in the future steady state versus agents alive when the policy is adopted. Our results demonstrate that the welfare consequences of a given policy vary substantially across these two groups. For agents born into the future steady state, the expected non-environmental welfare costs are minimized when carbon tax revenue is used to reduce an existing distortionary tax. In contrast, among the agents alive when the policy is adopted, recycling revenue through uniform, lump-sum rebates results in the largest welfare increase across the policies we examine. Moreover, we find that the regressivity or progressivity of a policy also differs within the living population versus the future steady state population. Overall, our results illustrate that estimates of the non-environmental welfare costs of carbon tax policies that are based on the long-run outcomes miss-represent the near-term consequences. Given the potential importance of these near-term effects on the political feasibility of a policy, our findings indicate that, when designing a carbon tax, policy makers must pay careful attention to not only the long-run outcomes, but also to the transitional welfare effects of the policy.

The Effect of Endogenous Human Capital Accumulation on Optimal Taxation
(Review of Economic Dynamics, 2016, 21, 46-71)

This paper considers the impact of learning-by-doing on optimal tax policy in a general equilibrium heterogenous agent life-cycle model. Analytically, it identifies two main channels by which learning-by-doing alters the optimal tax policy. First, learning-by-doing creates a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then a capital tax or progressive/regressive labor income tax can be used in order to mimic age-dependent taxes. Second, a progressive/regressive labor income tax is potentially more distortionary in a model with learning-by-doing since the distortion is propagated through the additional intertemporal link between current labor and future human capital. Quantitatively, I find that both of these channels are important for the optimal tax policy. Adding learning-by-doing leads to a notably flatter optimal labor income tax due to the second channel. Moreover, including learning-by-doing causes an increase in the optimal capital tax due to the first channel. I find that when solving for the optimal tax policy in the learning-by-doing model, the welfare consequences of not accounting for endogenous human capital accumulation are equivalent to around one percent of expected lifetime consumption, a majority of which are due to adopting too progressive of a tax policy.

Reconciling Micro and Macro Estimates of the Frisch Labor Supply Elasticity
(Economic Inquiry, 2016, 54 (1), 100-120)

This paper explores the large gap between the microeconometric estimates of the Frisch labor supply elasticity (0-.5) and the values used by macroeconomists to calibrate general equilibrium models (2-4). These two ranges identify two fundamentally different notions, the micro and macro Frisch elasticity, respectively. Due to the different definitions, there are two restrictions in the micro Frisch elasticity that are relaxed in the macro Frisch elasticity. First, the micro Frisch elasticity focuses only on prime-aged married males who are the head of their household, while the macro Frisch elasticity represents the whole population. Second, the micro Frisch elasticity only incorporates intensive margin fluctuations in hours, while the macro Frisch elasticity includes both intensive and extensive margin fluctuations. This paper finds that relaxing these two restrictions causes estimates of the Frisch elasticity to increase from 0.2 to between 2.9 and 3.1, indicating that these two restrictions can explain the gap between the microeconometric estimates and the calibration values. However, this paper demonstrates that these estimates of the macro Frisch elasticity are sensitive to the estimation procedure and also the exclusion of older individuals, implying that calibration values used for macroeconomic models should be selected carefully.

Determining the Motives for a Positive Optimal Tax on Capital
(Journal of Economic Dynamics and Control, 2013, 37 (1), 265-295)

Previous literature demonstrates that in a computational life cycle model the optimal tax on capital is positive and large. Given the computational complexities of these overlapping generations models it is helpful to determine the relative importance of the economic factors driving this result. I highlight the effect of changing two common assumptions in a benchmark model that generates a large optimal tax on capital similar to the model in Conesa et al. (2009). First, the utility function is altered such that it implies an agent's Frisch labor supply elasticity is constant, as opposed to increasing, over his lifetime. Second, the government is allowed to tax accidental bequests at a separate rate from ordinary capital income. The main finding of this paper is that these two changes cause the optimal tax on capital to drop by almost half. Furthermore, I find that the welfare costs of adopting the high optimal tax on capital from the benchmark model in the model with the altered assumptions, which calls for a lower tax on capital, are equivalent to 0.35 percent of total lifetime consumption. Quantifying the effect of these assumptions in the benchmark model is important because the first has limited empirical evidence and the second, although included for tractability, confounds a motive for taxing capital with a motive for taxing accidental bequests.

Under Review

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Recycling Carbon Tax Revenue to Mazimize Welfare
with Stephie Fried and Kevin Novan (Revision Requested Journal of the Association of Environmental and Resource Economists)

This paper explores how to recycle carbon tax revenue back to households to maximize welfare. Using a general equilibrium lifecycle model calibrated to reflect the heterogeneity in the U.S. economy, we find that the welfare maximizing rebate uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while using the remaining one third to increase the progressivity of the labor-income tax. This recycling approach attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists - which called exclusively for reductions in distortionary taxes. Importantly, we find that recycling a majority of the revenue by lowering the capital tax is unique to raising revenue through a carbon tax.

Macroeconomic Implications of Heterogeneity in Labor Earnings and Returns to Savings
with Aditya Aladangady, Etienne Gagnon and Benjamin Johannsen (Revision Requested Journal of Economic Dynamics and Control)

We explore the long-run relationship between income risk, inequality, and the macroeconomy in an overlapping-generations model in which households face uncertain streams of labor income and returns on their savings. To manage those risks, households can apportion their savings to a bond, whose return is safe and identical across households, and a productive asset, whose return is uncertain and can differ persistently across households. We find that greater polarization in households' labor income and returns on their savings generally accentuates households' demand for risk-free assets and the compensation they require for bearing risk, leading to higher measured income and wealth inequality, a lower risk-free real interest rate, and higher risk premiums. These findings suggest that the factors behind the observed rise in inequality over the past few decades might have contributed to the observed fall in the risk-free real interest rate and widening gap between the risk-free real interest rate and the rate of return on capital. We also find that the magnitude of the decline in the risk-free real interest rate and offsetting rise in risk premiums depend importantly on the source of income polarization, with the effects being especially large when greater inequality is caused by increased dispersion in returns on risky assets. Thus, the macroeconomic implications not only depend on the amount of inequality, but also the source of this inequality.

Working Papers

An Extensive Look at Taxes: How does endogenous retirement affect optimal taxation?

This paper considers the effect on optimal tax policy of including endogenously determined retirement in a life cycle model. Because of two changes to the Frisch labor supply elasticity, endogenous retirement causes the optimal capital tax to increase by more than seventy percent. First, endogenous retirement increases the overall aggregate Frisch labor supply elasticity since agents can change their labor supply, not only on the intensive margin, but also, on the extensive margin. In response, the government lowers the labor tax and increases the capital tax to reduce tax policy distortions. Second, since the choice to retire is more relevant for older individuals, endogenous retirement disproportionately increases an agent's Frisch labor supply elasticity when he is older compared to when he is younger individuals. Ideally, the government would decrease the relative labor income tax on individuals when they are older. If age-dependent taxes are not available then the government mimics such a tax policy by further increasing the capital tax. I find that in my benchmark specification the welfare lost from not accounting for endogenous retirement when determining the optimal tax policy is equivalent to approximately 0.6 percent of total lifetime consumption.

Research in Progress

When Business is Personal: How the Paycheck Protection Program Affected Credit Market Outcomes for the Self-Employed
with Lisa Dettling, David Ratner, Kendra Robbins, and Tess Scharlemann

Decomposing the persistence of household and worker earnings risk
with Aditya Aladangady, and Kathy Bi

This paper decomposes the sources of income and wage risk into permanent, persistent, and idiosyncratic shocks for both individuals and households. Understanding how each of these types of shocks contributes to earnings variance along with how estimates change for wages versus total income and at the individual and household levels is important in order to capture the macroeconomic implications of risk. For example, the marginal propensity to consume from a persistent shock will tend to be much higher than an idiosyncratic shock. Moreover, since consumption is largely done at a household level, household income variation, as opposed to individual level variation, may provide more insight into the potential consumption response. Overall, we find that total variance is larger for the head of the household than the households total income primarily due to less variance in the persistent component. Similarly, we find that overall variance in wages is smaller at the household level than for individuals. However, the decrease is only partially due to less unconditional variances in the persistent component over the life cycle. Additionally, there is less variance in the household’s transitory component along with less variation in household wages when they enter the labor market. Thus, our findings suggest that using individual-level earnings risk may overstate the heterogeneity in spending in a standard lifecycle model if consumption decisions are made at a household-level. Moreover, if endogenously modeling both wages and labor supply, not capturing the correct correlation in both pieces within the household can lead to overstating the amount of income risk the household faces.

Rethinking the cost of climate change: the welfare impacts of unequal damages
with Stephie Fried and Kevin Novan

Climate damage is most commonly modeled as a decrease in a region’s GDP that applies uniformly to all individuals in the region. However, in practice, climate damages more closely resemble idiosyncratic shocks which are unevenly distributed across the population. For example, individuals who work outdoors suffer large losses in labor productivity from extreme heat, while those who work in air conditioned office buildings are largely unaffected. This paper develops a new approach to modeling climate damages by incorporating idiosyncratic climate damage shocks, as opposed to an aggregate reduction of productivity, into an otherwise standard heterogeneous agent model. In this novel framework, climate change corresponds to an increase increase in the likelihood and severity of these shocks. Preliminary results demonstrate that accounting for the stochastic and idiosyncratic aspects of climate damage substantially increases the estimates of the welfare cost of climate change.

The Distributional Effects of Monetary Policy in a Life Cycle Model
with Aeimit Lakdawala and Tobias Cwik

A growing literature studies the contribution of monetary policy actions to inequality. We add to it by building a life cycle model that is used to understand the distributional effects of monetary policy. In the life cycle model, agents endogenously determine consumption, savings, and their portfolio in the face of idiosyncratic income shocks, uncertain mortality, aggregate productivity shocks, and monetary policy shocks, which gives rise to inequality both within and between the cohorts. The inclusion of a life cycle creates a setting where monetary policy can affect inequality through three potential channels. First, there is heterogeneity in sources of income related to where an agent stands in his life cycle. In particular, young agents tend to rely more heavily on labor income relative to the old. Changes in monetary policy have a differential impact on labor income relative to financial income thereby affecting inequality. Second, an agent's portfolio allocation changes with the life cycle. Young agents are more likely to invest in risky assets, while older agents tend to choose a portfolio which includes less risk. Monetary policy can have a disproportionate effect on the returns in each of these types of assets. Third, agents tend to transition from net borrowers to net savers as they age and a change in interest rates can have disproportionate effects on borrowers versus savers. This paper aims to quantitatively assess the importance of each of these channels in a computational overlapping generation model. In this framework we conduct two experiments. First, we consider the dynamic effects of a monetary policy shock on inequality. Second, we investigate the distributional consequences of an adverse aggregate TFP shock on inequality under different monetary policy rules.

The Aggregate Implications of Labor Supply Near Retirement
with Jose Mustre-del-Rio

A stylized view of labor supply late in life is that workers abruptly cut hours worked when transiting into retirement. This characterization ignores the possibility of partial retirement whereby individuals gradually decrease hours worked before reaching full retirement. We document the quantitative importance of these transitions late in life and then consider what classes of life cycle models can generate them. We find that otherwise standard models with age-dependent differences in the disutility of labor or differences in the disutility of working full versus part time can generate these transitions. Importantly, these models are consistent with a flat wage profile late in life, whereas standard models require wages to decrease in order to generate retirement. We then consider the implications of these more realistic formulations of retirement for the measurement of wage volatility.

Pareto Improving Tax Reforms in a Life Cycle Model
with Kent Smetters

Previous Research

Decomposing Inflation
(Federal Reserve Bank of Atlanta Economic Review, First Quarter, 2004)
Press: WSJ NYT

Recent declines in U.S. core inflation measures have prompted a renewed effort to understand inflation dynamics. Since late 2001, core consumer inflation rates have declined to levels not seen since the early 1960s. Core inflation as measured by the consumer price index (CPI) declined to 1.1 percent (year-over-year) by the end of 2003 while the core personal consumption expenditures price index (PCEPI) moved below 1 percent. This decline in measured inflation rates, coupled with uncertainty about future demand conditions, generated concern and debate among analysts and policymakers about near-term inflation prospects. In this article we provide a precise decomposition of the inflation rate by calculating the percentage point contributions of major consumer expenditure categories to core inflation measures over time. This technique provides a wealth of information concerning aggregate inflation behavior in a concise way, enabling us to describe the composition of inflation at any point in time. A particularly important benefit of this method is that it allows us to distinguish broad-based changes in inflation from changes due to relative price movements of a few components.