Raj Chetty was just named the best American economist under 40. Here’s why.

Chetty at work. (Tsar Fedorsky/AP)

Raj Chetty has been named the 2013 winner of the John Bates Clark Medal, which the American Economic Association awards annually to an "American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge." Chetty is only 33, making him an unusually young winner, even for an award with an upper age limit, and it comes hot on the heels of his MacArthur "Genius" Grant, announced last fall.

For context, 12 winners of the Clark medal, out of 35 total, have gone on to win Nobel Prizes, including Paul Samuelson, Milton Friedman, Joseph Stiglitz, James Heckman and Paul Krugman. Other victors include familiar names such as Martin Feldstein, tax and inequality expert Emmanuel Saez, development economist Esther Duflo, Freakonomist Steven Levitt, Larry Summers, and last year's winner, Amy Finkelstein.

So what did Chetty do to join this distinguished club? A remarkable amount, actually. Chetty, a specialist in public finance economics, has authored some of the most influential papers on public policy matters in recent years. Here are just a few of them, and what they tell us.

1. Straightforward savings incentives don't work.

Tax incentives won't necessarily help retirees afford stuffed seals. (Kim Kyung-hoon/Reuters)

Arguably Chetty's most celebrated paper, co-authored with Harvard colleague John Friedman and Danish economists Soren Leth-Petersen, Torben Heien Nielsen and Tore Olsen, is "Active vs. Passive Decisions and Crowd-out in Retirement Savings Accounts: Evidence from Denmark." The paper aims to figure out whether tax incentives to save for retirement merely give money to people who were going to save anyway, or if they actually encourage new savings.

The authors conclude that the former is by far the likelier response. A $1 increase in tax subsidies, which participants must actively decide to use, only leads to a 1¢ increase in savings. However, automatic contribution policies increase savings considerably. "Approximately 85% of individuals are passive individuals who save more when induced to do so by an automatic contribution but do not respond at all to price subsidies," Chetty et al conclude. The finding wasn't a huge surprise to those familiar with behavioral economics research in this area, but Chetty helped show that beneficiary inertia is a powerful factor which public policies must take into account.

2. Kindergarten matters.

(Jahi Chikwendiu/The Washington Post)

Along with Friedman, Saez, Northwestern's Diane Whitmore Schanzenbach and Harvard grad students Nathaniel Hilger and Danny Yagan, Chetty analyzed the results of Project STAR, a randomized study of kindergarten conducted in Tennessee in the 1970s. The ensuing paper, "How does your kindergarten classroom affect your earnings? Evidence from Project STAR," concluded that the nature of your kindergarten education mattered tremendously later in life. They found that performance on tests in kindergarten is "highly correlated with outcomes such as earnings at age 27, college attendance, home ownership and retirement savings." Not only that, but being in a higher-quality classroom and having a more experienced teacher improve your earnings later in life as well.

"Suppose you're randomly assigned to a teacher that's at the 99th percentile instead of the 50th percentile," Chetty explained to me in an interview in 2010. "As a child you earn, on average, $1,000 more per year." Teacher quality, in other words, matters a lot, and matters at a very young age.

3. Value-added tests really do mean something.

Learn to love these bad boys.

Almost as influential as the STAR paper is a paper Chetty co-authored with Friedman and Columbia's Jonah Rockoff. It attempted to determine whether students of teachers who performed better on value-added metrics ended up having better life outcomes. They do. "We estimate that replacing a teacher whose true VA is in the bottom 5 percent with an average teacher would increase the present value of students' lifetime income by $267,000 per classroom taught," the authors conclude. That study caused a bit of a ruckus upon publication, but ultimately it just confirmed what the STAR study showed first: Teacher quality really, really matters.

4. Awareness of tax benefits is key.

Along with Friedman and Saez, Chetty figured out a clever way to identify areas of the U.S. where information about the Earned Income Tax Credit (EITC) is particularly high. He figured that high-information areas would have more people reporting the income associated with the maximum payout. Using that information, he and his co-authors then tried to isolate the effect of information on actual payouts. He found that residents of high-information areas had $122 higher EITC payments on average, relative to residents of low-information areas. That's a 5 percent bump, no small thing.

5. The dividend tax cut greatly increased dividend payouts

The dividend tax cut led to shareholders throwing out fliff like they’re sultans. (Brad Neely / Creased Comics)

Chetty and Saez found that the 2003 dividend tax cut pushed and signed into law by the Bush administration increased dividend payouts by companies by about 20 percent. What's more, that increase didn't come due to reduced stock repurchases, which are another way that companies can pay back their shareholders. There was just a straightforward increase in compensation of shareholders by corporations. They're clear that this doesn't necessarily mean the cut was a good idea, just that it had a real effect on corporate behavior.



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Sarah Kliff · April 12, 2013