The Case For Cash Transfers Gets A Boost

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Raj Chetty and friends released a new paper as part of their Equality of Opportunity Project, this time focused on the “innovation gap,” by which they mean the gap between the amount of patenting activity rich children do as adults and the amount of patenting activity poor children do as adults. There are a couple of interesting takeaways worth noting here, both of which bolster the case for cash transfers.

The “innovation gap” is mostly about income differences

Chetty finds that innate ability at birth has little to do with why rich children wind up engaging in more patenting activity as adults than poor children do. To demonstrate this, he compares the patenting activity of various income groups to the math scores those groups posted between 3rd and 8th grade.

Chetty finds that 3rd grade test scores explain 31% of the class-based difference in patenting activity and that 8th grade grade scores explain 48% of the gap. Extrapolating from that data, Chetty concludes that innate differences at birth probably explain just 5.7% of the class-based “innovation gap,” but that this relatively high equality of ability at birth is quickly degraded over childhood such that, by the end of high school, test grades explain 60.1% of the divide in patenting activity.

Put simply, Chetty concludes:

These results suggest that low-income children start out on even footing with their higher-income peers in terms of ability, but fall steadily behind as they progress through school.

Why do poor children fall steadily behind in school such that minuscule differences in innate ability become massive gulfs in ability by the end of high school? That question is outside the scope of Chetty’s paper, but the toxic effects of low income on stress, nutrition, and other important engines of development are well documented. Reducing the number of children burdened by living on a low income through cash transfers is thus an obvious response to this problem.

Zero-sum exposure to adult inventors matters

Chetty also finds, consistent with other studies about intergenerational transmissions of occupation (I, II), that children with an inventor parent (meaning a parent who has a patent) are much more likely to be an inventor as an adult than children without an inventor parent.

Chetty concludes:

In sum, exposure to innovation in one’s family substantially increases the likelihood that a child pursues innovation. Although this result is useful in establishing that exposure matters, replicating the level of exposure one obtains through one’s parents is likely to be challenging from a policy perspective.

Chetty also shows that having a parent who has an inventor colleague and living in neighborhoods with inventors increases the likelihood of inventing as an adult, albeit by a much lower amount than having a parent inventor.

He concludes:

This effect is about one-third as large as the impact of direct parental exposure, showing that exposure to innovation through one’s peers and neighbors — which is potentially much more scalable through appropriately designed internship or mentorship programs — can have meaningful impacts on children’s propensities to innovate.

Although Chetty does not pontificate on this issue in his paper, it is obvious that “exposure to inventors” is a necessarily limited quantity. There are only so many inventors in the country and they only have so many hours in a day to mingle with children. It may be possible to redistribute those hours to different kinds of children, e.g. through the internship and mentorship programs Chetty has in mind, but this is a zero-sum reallocation of their exposure hours from one group of children to another.

Given that being a successful inventor is significantly related to how much of the scarce exposure to inventors you manage to capture for yourself as a child, it makes little sense to say that inventors should be permitted to pull down massively higher incomes than non-inventors. Conversely, it makes a lot of sense to smooth out the inequality that follows from this zero-sum game through cash transfers.