The expanded Child Tax Credit in 2021 resulted in dramatic reductions in the U.S. child poverty rate. New research by Jacob Bastian of Rutgers University and Melody Harvey of the University of Wisconsin-Madison finds that the decision by Congress to not extend the expansion also resulted in driving up lingering economic pessimism, particularly among children with families. Spotlight spoke with Bastian recently about the new study. The transcript of that conversation has been lightly edited for length and clarity.
While our audience is pretty familiar with the ups and downs of the CTC, why don’t we start with a brief overview of what has happened with the credit since the pandemic, and then we can jump into your study.
That's perfect. So, it's interesting, whenever I talk about the Child Tax Credit, I always have to say that this isn't one thing. This is something that's looked very different over time. This is a small, non-refundable credit that started in the 1990s and expanded during the Obama era to become a little bit more refundable. Before the pandemic, it became a little bit more refundable, though still with not a lot of benefits available to the lowest income families. And then, the American Rescue Plan in 2021 during the Biden presidency really changed the CTC for the first time ever to a really massive program, probably one of the biggest changes to the U.S. safety net in decades.
And just to recap what this looked like, it was $3,000 per child, $3,600 for young kids. For the first time, benefits went out monthly. And then the biggest change was this was a fully refundable tax credit, meaning the lowest income families were eligible for the full credit, even those not able to work. Then, in early 2022, the expanded CTC ended and it kind of reverted back to its smaller state—meaning that for low-income families, they may have been losing $3,000 per child per year. This represented a massive loss of income for the lowest income families in the U.S.
And I know you're focused mostly on the psychological impact and how this has fed into economic pessimism, but there were also demonstrable, tremendous improvements that came as a result of this expanded CTC.
Yes. And even though the research we're going to talk about is more focused on the expiration of this policy, I think it's really important to focus on the good things that the policy did when it was in place. It drove down child poverty down to a record 5.2%, It brought down hunger and food insecurity and the ability of families to pay the bills was remarkably improved.
Now, unfortunately, it was only in place for less than a year. From July to December 2021, there were monthly payments that went out. And then the second half of the policy came in the form of a large tax refund in early 2022. But for those six to nine months when the policy was in place, a lot of really good things happened and from my point of view, it’s a shame that it didn't continue.
And so, your thesis is that the absence of those benefits, the failure to extend them, has really fueled economic pessimism, particularly among families with children?
That's exactly right. In this research with Melody Harvey at the University of Wisconsin, we have spent the last couple years looking into this project. And what we found was that when this policy ended, unfortunately families were no longer able to pay the bills, and the financial stress started to creep up again. In this paper, we're focused on psychological wellbeing. You may recall a few years ago, everybody was talking about the vibes and the vibe session and how do people feel? We were coming out of the pandemic and unemployment and inflation was coming down. And so, why did people still feel so insecure about their situation? In this paper, we're able to show that basically it's because of the loss of this credit.
And so, what we do is we look at how people felt. Now, inflation, all these other things, they hit everybody. But if you look at the sentiment, you see that people with kids started feeling worse than people without kids. And the timing just really lines up where it's right there in early 2022 when this expanded credit ended, that the sentiment of families starts to decline compared to people without kids. And we basically find that the effect is bigger among people with kids. It's bigger among people with multiple kids. It's bigger among lower-income households. All of these things just line up with the story that it was the expiration of this expanded Child Tax Credit that really led people to start feeling more pessimistic.
And are there other factors that could explain that? And how have you ruled some of those out?
It's a good question. By 2022, a lot of COVID-related things were in the rearview mirror at that point. School closings and other things that made life relatively harder for parents compared to non-parents had started to resolve by early to mid-2022. The other big possible alternate explanation would be rising prices and inflation. And so, one thing that we do in the paper is we say, you know, what if inflation affected families differently by the number of kids? So, we account for those factors. When we're running our regressions of how the loss of the Child Tax Credit affected families, we're careful to control for different measures of inflation, like the cost of borrowing a car. And we interact those measures with having kids just to make sure that that's not driving our results. And we can pretty confidently rule out that that's happening.
And what was the timeframe that you looked at?
Basically, we're looking from 2019 all the way through early 2024. And in the paper, there’s a figure which shows sentiment for families compared to households without kids. And if you look at 2019 through 2021, even though sentiment is going way up and down because there's the pandemic, the sentiment of families with kids was always a little bit higher than it was for those without kids. Which is to say, if you ask families how they're doing, how the economy's doing, on average, people with kids felt a little bit better than people without kids. That's true for several years until 2022, and then all of a sudden, it flips and people with kids start feeling worse about the economy, about their financial situation, about business conditions.
I've always thought one of the great, overlooked stories from that period was the federal government's ability to pull this off and to pretty seamlessly deliver monthly checks, particularly in a period where the widespread view is government can't do anything right. I'm wondering how much that monthly check rather than just a tax credit fed into this phenomenon that you're tracking.
I completely agree. I've thought a lot about this, and I've talked to a lot of people about this question because I studied the Earned Income Tax Credit and these tax credits where once a year you get a big check. Now, imagine you're a low-income family earning $25,000 a year, and once a year you get a check for $9,000. You're getting like a third of your income basically all at once. And as economists, we typically think about consumption smoothing as being optimal. There is some qualitative evidence out there that these big chunks help people pay down debt, buy a used car, things like that. But I think in terms of just the day-to-day, paying for food, paying the rent, making sure you can pay for childcare, that you can buy school supplies, I think that's where these monthly payments were a game changer. There's benefits to having a big infusion of money coming once a year, but I think that these monthly payments really helped families feel secure.
And are there any other top-line findings that you wanted to flag?
From this study in particular, I think two things. One is obvious, one is less obvious. The obvious one is when people's income goes down, they feel worse. That's probably not surprising. But actually, two other things were a little bit more surprising. One is when this Child Tax Credit benefit expired, the impact on sentiment fell, but it stayed low for longer than I would've expected. I would've expected that people would feel kind of lousy for a few months but then get back to normal. And what we find is that for nearly two years, families continue to feel pessimistic. So, it seems like they got used to this benefit that was around for only six to nine months.
The last thing I'll say that's surprising is when these benefits expired, people said they felt worse about their own economic situation. Again, that makes sense. That's probably pretty straightforward and intuitive. But also, people started saying they felt like the overall economy was doing worse and they were less confident in government policy. That's interesting and I don't think that really fits the typical economics model. And I think that has implications for how people feel and how people vote.
It’s also interesting that when this expanded CTC was first put into place, the assumption was it would be an entitlement that people would love so much that it would be impossible not to extend. But the polling never really showed that. Do you feel the right questions weren’t being asked?
There definitely was this idea that this was going to be such a popular program that people would demand that it be continued. But then in polls and surveys, people were pretty indifferent. I think what was going on, and I can confirm this anecdotally from people I’ve talked to, is that there was a lot of money flying around during that time. There was unemployment checks. There was economic impact payments. There was the Child Tax Credit. I don't think people are informed enough to know exactly what these different sources of income were and I think they just associated it all with pandemic aid. People thought the expanded CTC was another COVID program. And I think people were so sick of COVID and all these programs, they just wanted things to go back to normal. They didn’t attribute the benefits of the expanded Child Tax Credit to a separate policy that could become a new landscape of the U.S safety net.
And one of the messages from your research would be, hey, this policy really was popular, right?
I agree. I think it would be over-interpreting and misinterpreting what happened to think that we had this child tax program and people didn't care. I think that's not quite right. I think what my study shows is that when the program started, sentiment went up, but we really see strong evidence that when the program ended, sentiment went down. And to me, the interpretation from that is that people did care about this program. Even if they didn't know all the nitty gritty details, when it ended, it really made them more pessimistic.