The Theorist: MIT's Ivan Werning, 33, Uses Theoretical Models to Find the Best Economic Policies on Such Thorny Matters as Estate Taxes and Unemployment Insurance

Article excerpt


EMPIRICAL ECONOMICS IS fine for exploring things that have already happened. For example, you can look at the history of energy prices and determine how much of an increase forces consumers to reduce the heating of their homes. But Ivan Werning is drawn to a different side of economics--the theoretical. Because he's fascinated by public policy, he considers things that haven't yet occurred.

"It's good to understand things that are already happening," he says, "but it's only going to inform you about the policies that exist. I think the idea is to test different policies to determine what would be the best policy." Werning, the son of a mathematician, was born and educated in Argentina, where he witnessed the devastating impact of economic disaster firsthand. He earned his Ph.D. in economics from the University of Chicago in 2002.

So far, Werning, now a 33-year-old tenured economics professor at the Massachusetts Institute of Technology, has focused on estate taxes and unemployment insurance. With both, he's shown why current policies are not necessarily best.

In his paper entitled "Inequality and Social Discounting," written with Harvard University economist Emmanuel Farhi and published this past June in The Journal of Political Economy, Werning explores inequality and whether estate taxes should help mitigate it. If you're born to rich parents, you're more likely to be rich as an adult than if you are born to poor parents. Wealth gets passed on.

Previous studies have shown that the most efficient economic system causes inequality to grow. Policies that reduce inequality are believed to have a trade-off: If you punish people too much for doing well--by reducing their incentives to pass on wealth to their children--these people will reduce their effort, to the detriment of the economy as a whole. But allowing inequality to increase concentrates the world's wealth into fewer and fewer hands.

Werning found that the models at the core of these judgments were incomplete. Allowing inequality to grow, unfettered, is economically optimal only if one looks at just the first generation. But if you take into account the children of first-generation parents, and their children's children, then the most preferable system is not one that allows inequality to grow, but one that attempts to stabilize the distribution of wealth.

His paper shows that the transmission of wealth should be regulated to prevent an accumulation of luck--that children should essentially be insured against the family into which they are born.

In a follow-up paper, entitled "Progressive Estate Taxation," also written with Farhi, Werning discovered that the best approach would be to encourage parents to leave bequests to their children, and that government should, through subsidies, help the poor pass on money to their heirs. …