Biden-omics: signposts on the road to reviving the American Dream

The most notable thing that Democratic presidential hopeful Joe Biden did last week, obviously, was announce Kamala Harris as his running mate. But the two also met with a group of economic advisers, which proves revealing in regards to who might take up senior economic roles in a Biden administration.

The key senior figures were former Federal Reserve chair Janet Yellen and long-time Biden confidant Jared Bernstein, now a senior fellow at the Center on Budget and Policy Priorities. There was also Washington Center for Equitable Growth head Heather Boushey, and economics professors Lisa Cook and Raj Chetty.

Bernstein is a leading contender to be director of the National Economic Council which coordinates economic policy in the White House. Yellen, who served with distinction as Fed chair, could presumably have her pick of jobs if she wished.

But it was the presence of Chetty which may have been the clearest signal about economic policy priorities in a Biden-Harris White House.

How one economist used millions of tax returns to study social mobility

Chetty is one of the leading applied microeconomists of his generation. He received the 2013 John Bates Clark medal from the American Economic Association for the best economist under 40, and won a MacArthur Foundation “genius” grant.

With apologies to Gilbert and Sullivan, he’s economics’ equivalent of “the very model of a modern major general”. Look out for him as chair of the Council of Economic Advisers if Biden and Harris win in November.

Chetty’s work spans a number of important areas, including education and tax policy. But it’s his pathbreaking work on intergenerational mobility and inequality that has been the most impactful, and which perhaps speaks most directly to policy priorities in a Biden administration.

Chetty and his coauthors have posed and answered a number of big, important questions about social mobility in America and how it has changed over time.

For instance, to what extent is the possibility of upward economic mobility shaped by the neighbourhoods in which young Americans are raised? Or, how does the tertiary education system in the US affect intergenerational income mobility? Put differently, is attending a top university a pathway to upward mobility, or is it the case that children of wealthier families are more likely to attend better universities, and this makes intergenerational income mobility worse?

Now you might ask how on earth a social scientist could go about answering such questions. The easy part is that the Internal Revenue Service has exactly the data required — the individual tax returns of every US citizen and permanent resident going back decades.

And that data links children with their parents. The hard part is getting the IRS to give one access to the data (obviously in anonymised/de-identified form).

Not only did Chetty manage to get the data, he provided compelling answers to the big questions posed above through ingenious research designs.

For instance, how much do neighbourhoods in which American kids are raised affect social mobility? It turns out the answer is “a lot”. But just looking at where kids grow up and what their life outcomes are might reflect differences to do with wealth or race, not their neighbourhoods per se.

As a researcher, one would like to run an experiment that randomly assigns kids to neighbourhoods — just like a pharmaceutical trial randomly gives some people medication and others a placebo. That obviously isn’t possible, but Chetty and his coauthors used what’s known as a “quasi-experimental approximation” to the ideal experiment — essentially relying on differences in the timing of when families move across neighbourhoods.

They found that the incomes of children who move neighbourhoods converge to the incomes of living (permanently) in the destination “at a rate of 4% per year of childhood exposure”. This has huge implications for how investing in better and safer communities can affect life outcomes.

What about higher education and mobility? Chetty and (different) coauthors found that parental income segregation across US universities is roughly as big as across neighbourhoods, and that “children of low- and high-income parents who attend the same college have relatively similar earnings outcomes, but children from high-income families are much more likely to attend colleges with high earnings outcomes”.

This has big implications for policies like “income blind” admissions, affirmative action of various kinds, and even whether admissions tests and tutoring programs should be subsidised for low-income students, or not used in admissions at all.

President Biden and the American Dream?

In some very real sense, the animating promise of America is that any kid can “make it”. Or, as Senator Edward Kennedy put it in eulogising his fallen brother Bobby: “It is the shaping impulse of America that neither fate nor nature nor the irresistible tides of history, but the work of our own hands, matched to reason and principle, that will determine our destiny.”

In 2020 it is pretty clear that America is not living up to that promise — and Biden has made it equally clear in his public statements and through his personal history that he intends to change it.

Doing that will require clever and carefully-crafted policies that are less ideological and more data-driven.

Selecting Raj Chetty as one of his top economic advisers would be a big step to making that happen.

Richard Holden (@profholden) is professor of economics at UNSW Business School.