The personal side of economics

Raj Chetty is Harvard’s newest and youngest tenured professor of economics. But that doesn’t mean he only pursues weighty academic interests.

As a Harvard undergraduate at Pforzheimer House, he played a lot of Mario Kart, a video racing game, and held his own at intramural basketball.

“I was a reasonably good shooter,” but not a physical player, said Chetty ’00, Ph.D. ’03, of his court time a decade ago. “People would always make fun of me for trying to ‘protect the brain.’ ”

It’s easy to see why. Chetty finished his bachelor’s degree, wrote a prize-winning thesis, and completed the course work for a doctorate in economics — all in three years. “If you’re passionate about what you’re doing,” Chetty explained modestly, “it’s very easy to spend time on it.”

Chetty, born in New Delhi and raised after age 9 in the United States, has had one cup of coffee in his life, but you don’t need caffeine if genetics has already sped up your performance. Chetty’s father is a Ph.D. economist at Boston University, his physician mother conducts research on lung injuries, and his two sisters (in Chicago and Atlanta) are biomedical researchers.

He considered entering biomedicine too, but then balked at the prospect of so much repetitive hand work in a laboratory — but not before publishing a medical paper while a senior in high school.

Chetty finished his Harvard doctorate, then started his career as an assistant professor at the University of California, Berkeley. Last spring he returned to Cambridge as one of the most cited young economists and an acknowledged leader in the field of public economics.

There were other professorship offers for Chetty, who last year received the American Young Economist Award: from Berkeley, as well as from Stanford, the University of Chicago, and Yale. What drew him back to Harvard, in part, was being able to solve what Chetty called the “co-location problem” when his wife Sundari landed a postdoctoral fellowship at the Harvard Stem Cell Institute.

It was important too that Harvard is just down the street from the prestigious National Bureau of Economic Research, “which draws people continuously” to conferences, he said.

Add LEAP to the lure of Harvard. That’s the Economics Department’s Laboratory for Economic Applications and Policy, which began during the summer. It provides an interactive space for collaborative research.

Chetty, who just turned 30, is looking for ways to make the serenity of mathematical economic theory more descriptive of the tangle of economics in the real world. “People are not human calculators,” he said, and so sometimes make decisions that defy traditional models of economic theory.

Chetty wants to refine the economic models behind public policy. There are ways to do it, he said, that save money and align government programs more closely with everyday life.

In that vein, he and a colleague are studying earned income tax credits, a federal program that spends $50 billion a year to subsidize low-income wage earners. For every $10 of income, $4 more come back as an earned income tax credit.

Yet a lot of people don’t understand the basic premise, and by tax time miss out on significant boosts in income. So the researchers devised an experiment involving 43,000 low-income earners in the Chicago area that would test the effect of a simple real-world factor: information.

The more people understood about the basic incentive structure, said Chetty, the more they worked. Preliminary data showed that spending $5 per person to get that information across has the same effect as expanding the program by 33 percent. That means spending millions instead of billions.

Chetty’s 2003 Ph.D. dissertation at Harvard, called “Consumption, Commitments, and Risk Preferences,” took a similar turn toward a personal scale by studying the optimal level of unemployment benefits.

When someone is laid off, should the government provide high benefits? Traditional theory says no, since big benefits seemingly reduce the incentive to find a job. “Standard models predict that we should have no safety net,” said Chetty.

But in reality, higher benefits are more in line with actual needs, because most Americans have so much income tied up in fixed commitments, such as payments for houses, cars, and furniture. “There are a lot of things you can’t adjust in the short term,” he said.

So the traditional economic models that are used to determine unemployment benefits miss a simple fact: People have bills to pay. “You miss certain features of reality,” said Chetty, “when you’re trying to write down simple models of the world.”