The American magazine has been running a series of profiles of the newest crop of bright, young economists. Their latest profilee is Raj Chetty, associate professor of Econ at Berkeley (although now on loan to Stanford’s Hoover Institution).
Raj began his promising econ career by proposing and investigating – at a wee age – an intriguing thesis: in some situations, the demand curve for capital might be upward sloping –
Raj Chetty, now 28, was a sophomore at Harvard University when he came up with the theory that higher interest rates sometimes lead to higher investment. It was a counterintuitive idea. Usually, companies invest less when rates rise because the higher rates increase the cost of capital. But Chetty found that some companies, in fact, invest more because they want to get revenue-generating projects off the ground sooner, rather than later, in order to pay down that costly capital more quickly.
p>Put another way – when money is more expensive, and the time crunch is on, firms actually accelerate investments in certain, less risky, faster time-to-revenue projects. It’s sort of a “Sorry boys, the first bank payment is due next next week, so stop planning a coast to coast franchise, and start building the first, local Bombay Palace right now….” And building costs more (in the short run) than planning….
Or, as Chetty’s abstract more formally describes the scenario –
This paper studies the effect of interest rates on investment in an environment where firms make irreversible investments with uncertain pay-offs. In this setting, changes in the interest rate affect both the cost of capital and the cost of delaying investment to acquire information. These two forces combine to generate an aggregate investment demand curve that is a backward-bending function of the interest rate. At low rates, increasing the interest rate raises investment by increasing the cost of delay.
I’m a bit more of a capitalist than an economist so Raj’s result more than passes my smell test. Businesses – particularly startups – understand & internalize the value of “hustle” in a way economists – particularly macro – haven’t quite worked into all of their models. And under the right conditions, hustle burns more capital than not.
(FWIW, Austrian’s do tend to credit the “hustle”; however the motive isn’t just the “desire to spend now” but rather, the broader “lets discover if Bombay Palace can work now” with spending being an outcome instead of the goal; Raj’s paper focuses more the former but does have some sympathy with the latter).
“Yes Virginia, lowering dividend taxes forced corporations to be less profligate” — Raj Chetty (sorta, but not quite)
…focused on theoretical and empirical issues in the design of tax and social insurance programs. My broad objective has been to analyze new models of economic behavior that better match empirical evidence (e.g. models of risk preferences or corporate behavior), and study the implications of these models for government policy. My work can be grouped into two categories: (1) risk preferences and social insurance and (2) behavioral responses to taxation.
Towards that end, some of his interesting research papers include –
- Impact of the 2003 dividend tax cut – Although decried as a classic “tax cut for the rich”, empirical data collected by Raj on the 2003 dividend tax cut shows that it, on net, squeezed money out of firms, forced them to spend less $$$ on big boss perks, and return more $$$ to shareholder grandma’s as dividend payments.
- Experiments in Tax Salience — How aware is the consumer of retail sales taxes on a day to day basis? Through simple retail experiments, Raj demonstrates that the answer is – not very. The implication limits the efficacy of tax policy as a form of social engineering.
- Liquidity Effects vs. Unemployment Insurance — What’s the right amount of unemployment insurance (welfare, etc.) to achieve humanitarian ends without overly incenting folks to hang out on the dole? One structural answer, Raj proposes, can be found in looking at illiquid assets and liabilities held by individuals & how they affect incentives. This other paper has some interesting quantitative data on how much incremental severance packages and the like “slow down” the rate of new job discovery.
The paper I most laud, however, was written very early in his career, back in September, 2001 (sheesh, homey was just 22 back then!). The paper explores Milton Friedman’s classic critique of monetary policy that, due to the intrinsic non-linearity of the system even attempts at counter-cyclical policy can reduce, rather than improve stability. Why this one? Well, Chetty notes comments received from
Martin Feldstein, Benjamin Friedman, Milton Friedman, Greg Mankiw, and Arnold Zellner
1 Bates Medal Laureate + 1 Nobel Laureate + 2 former members of the Council of Economic Advsiors – not bad company to keep. And thus someone SM will certainly keep an eye on. And perhaps the more interesting question, given the non-trivial overlap between Raj’s demographic and ours, does he keep an eye on us?
[related - SM'ers might like The American's earlier profile Roland Fryer who tackles issues in race, culture, and economics - all hot buttons here]