Revitalize or Relocate: Optimal Place-based Transfers for Local Recessions January 2025

Many regions in the US experience depressed labor demand and high unemployment, even when the rest of the United States does not. How should the US government respond? In this paper, I characterize optimal place-based transfers in a dynamic economic geography model with nominal wage rigidity and compare them to observed government transfers. I show that transfers not only have a stimulus effect—by boosting local demand—but also a migration effect—by encouraging local residents to stay. Analytically, I provide optimal transfer formulas that capture this trade-off and show, perhaps surprisingly, that the optimal transfer to a distressed region may be a tax due to the migration effect. All else equal, transfers should be larger in the short-run and when distressed places are geographically concentrated. Quantitatively, I find that observed transfers are both too small in the short-run and too large in the medium-run, achieving just over half of the gains from the fully optimal response to idiosyncratic local shocks. I conclude by exploring how the US government could have responded to the China trade shock in the 2000s.

Strategic (Dis)Integration (with John Sturm Becko) January 2025

Suppose a country anticipates that it may use trade as a point of leverage in future geopolitical conflicts. How should it develop domestic industries and international trading relationships today in order to strengthen its hand tomorrow? Domestically, we show that the country should abstain from peacetime industrial policies if it can credibly threaten trade taxes as geopolitical punishments during conflict, but not otherwise. Internationally, peacetime trade policy should promote the accumulation of foreign capital that makes foreign prices—not foreign welfare—more sensitive to trade during conflict. We apply these insights to provide the first quantitative exploration of the US's optimal policies for building geopolitical power vis-à-vis China. The optimal policy promotes US-China trade on both the import and export margins.

Optimal Carbon Taxation with Concerns for Redistribution (with Arnaud Costinot, Joseph Shapiro, and Iván Werning)

We provide a general formula for optimal carbon taxes in a second-best world where governments may have concerns for redistribution, but only have access to nonlinear income taxes. Our formula requires adding to standard estimates of the social cost of carbon an extra term that takes into account its potentially adverse consequences for inequality. Our adjustment only depends on a few sufficient statistics: marginal income tax rates, elasticities of labor supply, and elasticities of relative wages with respect to changes in carbon emissions across quantiles of the income distribution. Combining a model of the US economy with detailed administrative data, we provide estimates of these statistics and explore their implications for carbon taxation.