Hutchins Roundup: Self-financing deficits, Child Tax Credit, and more

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.

In the long-term, deficits can pay for themselves  

When governments run deficits, tax increases or spending cuts are typically thought to be necessary to help finance the debt. George-Marios Angeletos and Christian Wolf of MIT and Chen Lian of the University of California, Berkeley, argue that debt can be paid off without these fiscal adjustments. In the authors’ model, deficits can spur growth in the economy, thus expanding the tax base and increasing tax revenue. Additionally, inflation decreases the government’s debt burden. Under these conditions, deficits can pay for themselves completely over a long enough time horizon. The authors draw on previous literature to show that the assumptions in their model are “grounded in realistic departures from permanent-income consumer behavior” and conclude that “a meaningful degree of self-financing is empirically plausible,” suggesting that even large policies such as COVID-era stimulus checks may end up paying for themselves.

Extended Child Tax Credit had little impact on labor supply

Brandon Enriquez at MIT, Damon Jones at the University of Chicago, and Ernie Tedeschi at the White House Council of Economic Advisers find that the temporary changes to the Child Tax Credit (CTC) under the American Rescue Plan Act of 2021 didn’t discourage recipients from working. The COVID-era law increased the maximum benefit per child and made the credit fully refundable for those who don’t earn enough to pay taxes. Using monthly data from the Current Population Survey and comparing individuals who qualified for smaller and larger CTC transfers before and after the credit was paid, the authors find that the size of the credit had no significant impact on workers’ labor force participation or hours worked. The effects are similar across gender, education level, and other demographic characteristics, they find.

Elasticities chronicle decline of UK market power in sovereign bonds 

Jason Choi, Duong Dang, and Rishabh Kirpalani of the University of Wisconsin-Madison and Diego Perez of New York University document the decline of U.K. hegemony in global sovereign debt markets. Since 1980, the price elasticity of demand for U.K. bonds – how much the yield responds to changes in the supply of assets – has increased sharply, reflecting the waning position of the U.K. as a pivotal sovereign lender. The authors estimate that the loss in the government’s market power reduced welfare in the U.K. by an equivalent of 0.04% of consumption. By comparison, the U.S. saw its elasticity fall notably over the period, reflecting its emergence as the dominant player in safe asset markets. 

Chart of the week: Quitting remains above its pre-pandemic level

Chart courtesy of Indeed Hiring Lab

Quote of the week:

QUESTION: “[Y]ou said in response to [a previous question], you’ll need data to accumulate to determine if this is a sufficiently restrictive stance. Does that data need to accumulate, or could it accumulate over a longer period than a six-week intervening cycle?”

“We’ve seen inflation come down [and] move back up two or three times since March of 2021,” said Federal Reserve Chair Jerome Powell. “So…a few months of data will persuade you that you’ve got this right…[W]e’ve raised 500 basis points. I think that policy is tight. I think real rates are probably—you can calculate them many different ways—but one way is to look at the nominal rate and then subtract a reasonable estimate of, let’s say one year inflation, which might be 3%. So you’ve got 2% real rates. That’s meaningfully above what most people—what many people anyway—would assess as…the neutral rate. So policy is tight. And you see that in interest-sensitive activities. And you also begin to see it more and more in other activities. And if you put the credit tightening on top of that and the QT [quantitative tightening] that’s ongoing…we may not be far off, or possibly even at that level.”

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