“Incentives matter” is the most central lesson of economics. And they matter no matter what kind of social activity you examine or which level of the economy you study.
Economists used to believe that not many people moved across state lines because of tax rates, for example, but a study published earlier this year suggests that there was indeed a tax-driven exodus from California about a decade ago. Or consider lithium, a critical component for some kinds of batteries. Fears of a shortage, and subsequent high prices, drove further exploration, and one of the biggest lithium deposits was recently discovered in Pennsylvania. Again, incentives matter.
Yet the skeptics do not give up. Surely, they say, economic reasoning doesn’t apply to the more intimate realms of human experience — relations between parents and children, for example, or between parents themselves.
I am here to tell you that the evidence continues to accumulate in favor of incentives mattering just about everywhere. Even in the bedroom, and even when it comes to our most precious bundles of joy.
The latest entry in this debate concerns babies. When a baby is born, the pure romantics among us expect that intense love takes over, or perhaps biological programming. In any case, economic incentives recede or disappear altogether.
The data show otherwise: There is in fact a pronounced “baby bump” in December. The numbers show that induced deliveries and scheduled Caesarian section deliveries are higher than average toward the very end of the year.
Why? In the US, there are significant tax advantages to having a child. If you are a single parent with an adjusted gross income below $112,500, an extra child brings you a $3,600 child tax credit per year.
So — speaking strictly about the tax implications, of course — a New Year’s Eve baby is better than New Year’s baby: You can claim that little bundle of joy as a dependent for the entire year, even though they were only there for a day of it. Yet further benefits could come from state-level earned income tax credit and child tax credit programs.
You might argue that the parents, not the kids, gain the most from these tax benefits. You might also ask if there are some costs to these newly born children. In fact, the study shows that these children have lower birthweights. Further research shows that the accelerated births had noticeable impacts on the children, again finding lower birthweights.
The good news, however, is that those same kids have accelerated weight gains over the course of subsequent examinations. The further good news is that those children reach early development milestones at a faster pace than average. That may reflect the extra income the parents have, since higher income and other positive parental features do predict better developmental outcomes for the kids.
On net, it seems that when parents engage in tax arbitrage with their child-delivery decisions, the family turns out OK. It is a complication in the analysis that the tax-sophisticated parents may well have higher socioeconomic status to begin with, and that helps to explain why their early-arriving children do fine.
Still, the available evidence simply does not show persistent problems for the children born on dates such as Dec. 31, even if the reason is tax arbitrage. Or perhaps everyone does fine because the reason for an early arrival is tax arbitrage. As a new tyke born into this world, and all other things being equal, you probably should prefer to have parents who think a lot about the tax system and its consequences.
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Another question raised by these accelerated births is whether the parents are just grabbing after money or are making a more deliberate choice. That we do not know, but here is at least an instance in which the invisible hand, as applied to birthing decisions, seems in accord with general harmony, including for the children.
Of course there is a lesson for couples in all this. In the clinical language of my chosen profession, I would merely observe that, if you are with a partner and have amorous inclinations, and wish to expand the size of your family, you may not want to wait much beyond April to deploy your affections. Or I could just say: Incentives matter. Get it on.
Tyler Cowen is a Bloomberg Opinion columnist and a professor of economics at George Mason University. ©2024 Bloomberg. Distributed by Tribune Content Agency.
