Trillions
Public Finance in the Age of AI: A Primer
Anton Korinek & Lee Lockwood
NBER Working Paper, February 2026
Abstract:
Transformative artificial intelligence (TAI) -- machines capable of performing virtually all economically valuable work -- may gradually erode the two main tax bases that underpin modern tax systems: labor income and human consumption. We examine optimal taxation across two stages of artificial intelligence (AI)-driven transformation. First, if AI displaces human labor, we find that consumption taxation may serve as a primary revenue instrument, with differential commodity taxation gaining renewed relevance as labor distortions lose their constraining role. In the second stage, as autonomous artificial general intelligence (AGI) systems both produce most economic value and absorb a growing share of resources, taxing human consumption may become an inadequate means of raising revenue. We show that the taxation of autonomous AGI systems can be framed as an optimal harvesting problem and find that the resulting tax rate on AGI depends on the rate at which humans discount the future. Our analysis provides a theoretically grounded approach to balancing efficiency and equity in the Age of AI. We also apply our insights to evaluate specific proposals such as taxes on robots, compute, and tokens, as well as sovereign wealth funds and windfall clauses.
Beyond Relief: The Lasting Legacy of New Deal Spending on the Geography of Government
Brian Hamel & Michael Shepherd
Journal of Politics, forthcoming
Abstract:
We offer a novel explanation for why some local economies are more dependent on government than others: New Deal era public works programs. We argue that these programs -- designed as temporary economic relief -- reshaped some local economies around public institutions (e.g., hospitals, universities, and federal buildings) and employment. Once established, these public facilities and payrolls created material and political barriers to retrenchment, effectively locking in the state's local presence over the long term. Consistent with this argument, a difference-in-differences event study analysis of county-level data shows that New Deal spending produced lasting increases in public sector employment through 2020. Additional analyses reveal that these investments both reinforced existing centers of government activity (e.g., state capital counties) and extended the state's reach into the previously less developed rural periphery.
Are Macro Shocks Second Order?
Michail Anthropelos, Jasmina Hasanhodzic & Laurence Kotlikoff
NBER Working Paper, February 2026
Abstract:
This paper addresses two fundamental macroeconomics questions. First, are macro shocks large enough to alter the course of the economy? Second, are they large enough to materially impact economic welfare? Lucas and many others have addressed these issues, but do so primarily in the context of representative agent models. We study these questions using a large-scale, general equilibrium, stochastic, overlapping generations model. We consider 80 generations overlapping in an economy buffeted by realistically calibrated total factor productivity and capital depreciation shocks. The model is solved using Marcet's projection method taking explicit account of the full state space, which comprises 81 variables. Our findings, some recapitulated from prior studies by Hasanhodzic and Kotlikoff, suggest macro shocks are second order both with respect to their impact on aggregate variables and individual welfare. Specifically, the probability that the stochastic economy's long-run aggregates materially deviate from their deterministic counterparts is less than one percent. Furthermore, the realized (simulated) lifetime utility of generations born in the long run rarely differs from deterministic long-run utility levels by more than 1 percent, measured as consumption-compensating differentials. These findings are supported by the model's small equity premium. Moreover, they are essentially indifferent to the presence of a bond market. Both results suggest agents are minimally concerned with precautionary savings against these shocks. Our RBC-in-OLG findings suggest that what really moves the macroeconomy and demands attention is policy, not shocks.
A Danish Fix for U.S. Mortgage Lock-in?
David Berger et al.
Duke University Working Paper, March 2026
Abstract:
We study Danish fixed-rate mortgage contracts, which are identical to those in the United States except that borrowers may repurchase their mortgages at market value. Using Danish administrative data, we show that households actively buy back debt when mortgage prices fall below par and that household mobility is largely insensitive when existing mortgage rates are below prevailing market rates -- unlike in the United States, where moving rates fall sharply as rates rise. We develop an equilibrium model that explains these patterns and show that introducing a repurchase-at-market option into U.S. mortgages substantially reduces interest-rate-induced lock-in with limited effects on equilibrium mortgage rates.
US Federal Budgets and Federal Employee Job Satisfaction
Nathan Favero, Carla Flink & Tingli Qu
Public Budgeting & Finance, forthcoming
Abstract:
Researchers have long studied how organizational budgets relate to performance, but how do employees themselves experience the effects of budgetary decisions? Given widespread attention to political dysfunction in US federal budgeting, conventional wisdom holds that employees are negatively affected by budgetary uncertainty (volatility, delays, and stop-gap measures). We test how budget size and uncertainty are associated with US federal employee attitudes using survey and archival data from 2005 to 2020. Results provide some evidence that employee job satisfaction improves with enhanced funds, but there is little to no support for the notion that budgetary uncertainty influences federal employees' job satisfaction.
Other People's Money: Political Embeddedness on Pension Boards, Alternative Assets and Investment Fees
Jeffrey Diebold & Cody Taylor
Public Budgeting & Finance, forthcoming
Abstract:
State-administered pension plans report paying roughly $20 billion each year in fees to external asset managers, much of it for high-cost, high-risk "alternative" assets such as private equity and hedge funds. These outcomes involve trillions in pension investments that affect the retirement security of millions of public sector workers and the budgets of every U.S. state. Yet, a consistent finding in the finance literature is that these managers tend to underperform broad market indices after accounting for fees. Politically appointed members of pension boards may nonetheless rationally favor these strategies, given the short-term political incentives of those who appoint them. Drawing on the "political embeddedness" framework, this study assesses whether and how the share of politically appointed members on pension boards influences asset allocation and fees. Using panel data for 66 state-administered plans from 2019-2022, combined with fee data from annual reports, we estimate plan-level fixed effects models to examine investments in alternative assets and fees paid by pension systems. We find that, among boards with statutory authority over asset allocation, adding one political appointee (?10 percentage points) is associated with a 1.2 percentage point increase in alternative asset allocations and a 5-7 percent increase in total fees, even after adjusting for asset composition. These results align with the short-term incentives of political appointees and underscore how board governance shapes investment outcomes. The prevalence of missing fee data -- especially for alternative assets -- further highlights the need for greater transparency in fee reporting.
Vacancies on the FOMC
Cody Couture
Southern Economic Journal, forthcoming
Abstract:
I provide evidence that decreased efficiency in the appointment process to the Board of Governors of the Federal Reserve has resulted in an increase in the number of average vacancies. I then estimate whether this increase in vacancies is costly for the economy. I find little evidence to suggest that this is the case: monetary policy, uncertainty about the future path of interest rates, and the Board of Governor's ability to supervise and communicate have been largely unaffected by the number of absences.
Inflow neglect: Forecasting failures after stocks run out
Megan Weber et al.
Journal of Experimental Psychology: General, April 2026, Pages 1006-1023
Abstract:
People frequently encounter dynamic systems that involve inflows, outflows, and accumulated stocks -- whether within their own households (e.g., financial accounts, stocks of food or supplies) or in larger institutional settings (e.g., manufacturing inventory, government benefit accounts). In this research, we introduce a novel stock-flow reasoning error, inflow neglect, and argue that this error can lead to important misperceptions regarding future outflows. To study this reasoning, we first focus on the United States' Social Security trust funds, whose impending depletion generates significant attention due to implications for American retirees. In Experiments 1-3, we show participants information about the trust funds over time that focus on the stock (i.e., balance) or flows (i.e., tax revenue and benefits payments), finding that those who see flows presentations are significantly less likely to expect benefits to cease completely after depletion (i.e., hold zero-outflow beliefs). In Experiments 4a and 4b, we show that prompting participants to reflect on the continuity of inflows (i.e., by reminding them that they expect payroll taxes to continue) significantly reduces inflow neglect and zero-outflow beliefs. Experiment 5 replicates these results in a separate domain, illustrating the generalizability of inflow neglect and underscoring the efficacy of presentations and targeted questions that emphasize the flows. This research contributes both theoretically and practically, advancing the literature on stock-flow reasoning and highlighting how communications about particular components of dynamic systems may contribute to -- or be used to remedy -- misconceptions that outflows will cease after depletion.
What Drives Money Competition: Comparative Advantage in Payments versus Reserves
Itay Goldstein, Ming Yang & Yao Zeng
NBER Working Paper, February 2026
Abstract:
We study competition between monies that provide separate payment and non-payment (e.g., store-of-value) functions. Our central insight is that payment adoption is governed not by absolute payment superiority, but by comparative advantage between payment and non-payment roles. A money that is "too good" as a store of value may circulate less as a payment instrument, even if it is technologically superior, because agents prefer to hoard it rather than spend it. The model delivers equilibria in which monies either specialize into distinct roles or coexist as payment instruments with one emerging as dominant. These mechanisms provide a unified microfoundation for classic monetary phenomena such as Gresham's law and the big problem of small change, and offer a new perspective on modern debates over stablecoins and central bank digital currencies (CBDCs). Contrary to the common view that interest-bearing digital currencies necessarily threaten bank deposits, we show that higher yields can weaken payment adoption by raising the opportunity cost of spending. As a result, traditional bank deposits may coexist with, and even retain dominance over, technologically superior digital alternatives.
The Impact of State and Local Tax Deductions on Household Relocation Decisions: Evidence From the TCJA Law
Moussa Diop & Richard Green
University of Southern California Working Paper, February 2026
Abstract:
The Tax Cuts and Jobs Act of 2017 (TCJA) had a major impact on the tax liability of high-income individuals in states with high state and local taxes. The impact arose from a newly instituted $10,000 cap on state and local tax deductions (SALT), meaning that itemizers with more than $10,000 of state and local taxes saw their effective tax liabilities rise by as much as 58 percent. If states were previously in a Tiebout equilibrium regarding local taxation and spatial allocation, this change in Federal tax policy would upset that equilibrium, inducing migration. Using a difference-in-differences framework and Internal Revenue Service data, we find that TCJA induced movement from high SALT states to low SALT states.