Bird, Edward J. "Repairing the Safety Net: Is the EITC the Right Patch?".
Journal of Policy Analysis and Management,  Winter 1996

For discussion in class Friday, January 26th

This article is available only through the reserve desk; three copies are on reserve there.

This paper is rather long and the computations become rather detailed. Our discussion will focus on the first half of the analysis and the conclusions. I will not draw any questions from pages 18 to 21, and reading them is optional. You also do not need to read the appendices.

1. What does the author mean when he says "Income support for the poor is the voter's premium on her poverty insurance policy"? What is the risk that the voter is being insured against? In what sense is the voter "paying" for this policy? Why is this politically important?
2. What is the primary difference between the EITC and other welfare programs? (Several answers are possible.)
3. Figure 1 shows an "EITC budget line." What would the indifference curves that go with this budget line look like? (Hint; which of these "goods" do consumers want, and which do they not want? Which points are best?) Explain how the EITC can increase or decrease labor supply.
4. The author notes that "The income one observes in the data is very much under the respondant's control." What problem(s) does that cause for the analysis?
5. What is "full income", and how does the author think that using full income solves the problem(s) in question 4?
6. Do consumers like to have a higher variance in their full income, or a lower variance in their full income? Explain why, using Figure 2.
7. What is the PSID? You can learn about it on the Web by going to http://www.icpsr.umich.edu, clicking on "archive", and searching for the Panel Survey of Income Dynamics. (This question was also on reading assignment 2: if you didn't do it then, you have a second chance.)
8. Which number in Table 1 is the most important, and what does the author claim that it tells us?
9. Why are the numbers in the R columns so much larger in Table 2 than in Table 1? (Hint: look at the bottom of page 12.)
10. Which group benefits the most from the EITC: high school dropouts, high school graduates, or college graduates? (See table 4.) Is this the result you would have expected, or not? Briefly explain why the author thinks he gets this result.
11. What does the author mean when he says "The EITC appears better able to provide the right mix of burdens and benefits [than means-tested programs]"? Why do middle-class people get more benefit from EITC than means-tested programs?