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In the Papers: The Effects of Increasing Social Security Benefits

Every Monday, the National Bureau of Economic Research, a nonprofit organization made up of some of North America’s most respected economists, releases its latest batch of working papers. The papers aren’t peer-reviewed, so their conclusions are preliminary (and occasionally flat-out wrong). But they offer an early peek into some of the research that will shape economic thinking in the years ahead. Here are a few of this week’s most interesting papers:

Title: “Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991”

Authors: Christina D. Romer, David H. Romer

What they found: Permanently raising Social Security payments provides a big short-term boost to consumer spending, but the effects fade quickly and there is little evidence of an impact on other measures of economic activity. Permanent increases also have a much bigger impact than temporary ones.

Why it matters: Transfer payments (Social Security, Medicare and Medicaid, etc.) account for more than 40 percent of federal spending, but their macroeconomic impact has gotten relatively little study. The authors find that permanently increasing Social Security payments have big short-term impacts on consumer spending but small long-term impacts, whereas changes in tax policy are the opposite. This appears to be due at least in part to the way the Federal Reserve reacts to policy changes: The Fed tends to tighten monetary policy in response to increased benefits, but not in response to tax cuts.

Key quote: “While the tax changes are slower to affect consumption, their effects are much more persistent, more statistically significant, and far larger over an extended period than those for benefit increases. As a result, tax changes affect broader economic indicators, while benefit increases do not.”


Title:  “Discrimination and the Effects of Drug Testing on Black Employment”

Author: Abigail K. Wozniak

What she found: Laws allowing employers to test workers and job applicants for drug use may reduce discrimination against African-American workers.

Data she used: National Survey on Drug Use and Health; Current Population Survey

Why it matters: Drug-testing programs have become more common in the corporate world in recent decades. Critics have often argued such policies disproportionately hurt minority workers, but Wozniak reaches the opposite conclusion. She finds evidence that employers discriminate against black workers when they can’t test them for drugs, and that such discrimination becomes less significant when they can.

Key quote: “I conclude that the advent of widespread drug testing benefited black workers. I further conclude that the results are consistent with discrimination against blacks by firms in the testing sector prior to the advent of drug testing.”


Title: “Communicating Uncertainty in Official Economic Statistics”

Author: Charles F. Manski

What he found: Government agencies routinely fail to report the sources and magnitude of error in official economic data.

Why it matters: Policymakers, companies and individuals use economic data to guide their decisions, but many may not realize how much uncertainty is inherent in those estimates. Government agencies, Manski argues, can and should do more to highlight and quantify that uncertainty, something the Bank of England does.

Key quote: “Reporting official statistics as point estimates manifests a common tendency of policy analysts to project incredible certitude, encouraging policy makers and the public to believe that errors are small and inconsequential. In the absence of agency guidance, persons who understand that official statistics are subject to error must fend for themselves and conjecture the error magnitudes. Thus, users of official statistics may misinterpret the information that the statistics provide.”

Ben Casselman was a senior editor and the chief economics writer for FiveThirtyEight.