Atlanta Fed

I said years ago on my Ideas Page that we need data and research on Benefit Cliffs:

Benefits Cliffs: Implicit marginal tax rates sometimes go over 100% when you consider lost subsidies as well as higher taxes. This could be trapping many people in poverty, but we don’t have a good idea of how many, because so many of the relevant subsidies operate at the state and local level. Descriptive work cataloging where all these “benefits cliffs” are and how many people they effect would be hugely valuable. You could also study how people react to benefits cliffs using the data we do have.

But it turns out* that the Atlanta Fed has now done the big project I’d hoped some big institution would take on and put together the data on benefits cliffs. They even share it with an easy-to-use tool that lets you see how this applies to your own family. Based on your family’s location, size, ages, assets, and expenses, you can see how the amount of public assistance you are eligible for varies with your income:

Then see how your labor income plus public assistance changes how well off you are in terms of real resources as your labor income rises:

For a family like mine with 3 kids and 2 married adults in Providence, Rhode Island, it shows a benefit cliff at $67,000 per year. The family suddenly loses access to SNAP benefits as their labor income goes over $67k, making them worse off than before their raise unless their labor income goes up to at least $83,000 per year.

I’ve long been concerned that cliffs like this in poorly designed welfare programs will trap people in (or near) poverty, where they avoid taking a job, or working more hours, or going for a promotion, or getting married, in order to protect their benefits. This makes economic sense for them over a 1-year horizon but could keep them from climbing to independence and the middle-class in the longer run. You can certainly find anecdotes to this effect, but it has been hard to measure how important the problem is overall given the complex interconnections between federal, state, and local programs and family circumstances.

I look forward to seeing the research that will be enabled by the full database that the Atlanta Fed has put together, and I’m updating my ideas page to reflect this.

*I found out about this database from Jeremy’s post yesterday. Mentioning it again today might seem redundant, but I didn’t want this amazing tool to get overlooked for being shared toward the bottom of a long post that is mainly about why another blogger is wrong. I do love Jeremy’s original post, it takes me back to the 2010-era glory days of the blogosphere that often featured long back-and-forth debates. Jeremy is obviously right on the numbers, but if there is value in Green’s post, it is highlighting the importance of what he calls the “Valley of Death” and what we call benefit cliffs. The valley may not be as wide as Green says it is and it may be old news to professional tax economists, but I still think it is a major problem, and one that could be fixed with smarter benefit designs if it became recognized as such.

Despite its many flaws*, I always like to check in on what the Taylor Rule suggests for the Fed. Its virtues are that it gives a definite precise answer, and that it has been agreed upon ahead of time by a variety of economists as giving a decent answer for what the Fed should do. Without something like the Taylor Rule, everyone tends to grasp for reasons that This Time Is Different. Academics seek novelty, so would rather come up with some new complex new theory of what to do instead of something undergrads have been taught for years. Finance types tend to push whatever would benefit them in the short term, which is typically rate cuts. Political types push whatever benefits their party; typically rate cuts if they are in power and hikes if not, though often those in power simply want to emphasize good economic news while those out of power emphasize the bad news.

The Taylor Rule can cut through all this by considering the same factors every time, regardless of whether it makes you look clever, helps your party, or helps your returns this quarter. So what is it saying now? It recommends a 6.05% Fed funds rate:

**Fed Funds Rate Suggested by the Bernanke Version of the Taylor Rule**
*Source: My calculation using FRED data, continually updated here*

I continue to use the Bernanke version of the Taylor Rule, which says that the Fed Funds rate should be equal to:

Core PCE + Output Gap + 0.5*(Core PCE – 2) +2

*What are the flaws of the Taylor Rule? It sees interest rates as the main instrument of monetary policy; it relies on the Output Gap, which can only really be guessed at; and it incorporates no measures of expectations. If I were coming up with my own rule I would probably replace the Output Gap with a labor market measure like unemployment, and add measures of money supply shifts and inflation expectations. Perhaps someday I will, but like everyone else I would naturally be tempted to overfit it to the concerns of the moment; I like that the Taylor Rule was developed at a time when Taylor had no idea what it might mean for, say, the 2024 election or the Q3 2024 returns of any particular hedge fund.

That said, people have now created enough different versions of the Taylor Rule that they can produce quite a range of answers, undermining one of its main virtues. The Atlanta Fed maintains a site that calculates 3 alternative versions of the rule, and makes it easy for you to create even more alternatives:

Two of their rules suggest that Fed Funds should currently be about 4%, implying a major cut at a time that the Bernanke version of the rule suggests a rate hike. On the other other hand, perhaps this variety is a virtue in that it accurately indicates that the current best path is not obvious; and the true signal comes in times like late 2021 when essentially every version of the rule is screaming that the Fed is way off target.