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War Debt and the Baby Boom

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  • Kai(Jackie) Zhao

    (University of Western Ontario)

Abstract

I propose a novel explanation of the postwar baby boom in the U.S. I argue that the dramatic drop in the government debt-GDP ratio after WWII was an important cause of the baby boom. The debt-GDP ratio peaked at 108% in 1946, and it dropped dramatically in the following two decades. The ratio was only 28% in 1970. Simultaneously, the U.S. experienced a massive baby boom. I propose a causal link between these two phenomena. My theory emphasizes two mechanisms. First, a drop in the debt-GDP ratio affects fertility by changing the tax burden of different generations: it raises the current income tax rate and implies lower tax burden on children in the future. A higher current income tax rate raises fertility by lowering after-tax wage and therefore the opportunity cost of child-rearing (when the cost of child-rearing involves parental time). A lower tax burden on children in the future raises the children's lifetime utility, which also raises current fertility if parents have Barro-Becker type preferences (the children's utility is included in the parents' utility function). The second mechanism works via the capital-labor ratio. Government debt (internal debt) has crowding out effect on aggregate capital (see Diamond (1965)). Therefore, a drop in the debt-GDP ratio boosts the aggregate capital level and raises the capital-labor ratio, which in turn implies higher wage rates and lower interest rates in the future. Lower interest rates raise fertility by inducing parents to substitute their old-age savings for children. Higher wage rates raise children's utility, thus raising fertility. These two mechanisms worked together and contributed to the postwar baby boom in the U.S.. My theory is also consistent with an interesting cross-sectional property of the baby boom: the size of the baby boom was much larger among richer households. Given the progressivity of the income tax system, richer households share a proportionally larger part of the tax burden. Therefore, the first mechanism described above should have larger effects for richer households, generating a comparatively larger baby boom among them. The quantitative exercise shows that the model can explain 47% of the baby boom, and it also matches the cross-sectional properties of the baby boom well.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 856.

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Date of creation: 2009
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Handle: RePEc:red:sed009:856

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  1. Robert Haveman & Barbara Wolfe, 1995. "The Determinants of Children's Attainments: A Review of Methods and Findings," Journal of Economic Literature, American Economic Association, vol. 33(4), pages 1829-1878, December.
  2. Barro, Robert J & Becker, Gary S, 1989. "Fertility Choice in a Model of Economic Growth," Econometrica, Econometric Society, vol. 57(2), pages 481-501, March.
  3. Doepke, Matthias & Hazan, Moshe & Maoz, Yishay D, 2008. "The Baby Boom and World War II: A Macroeconomic Analysis," CEPR Discussion Papers 6628, C.E.P.R. Discussion Papers.
  4. Matthias Doepke, 2005. "Child mortality and fertility decline: Does the Barro-Becker model fit the facts?," Journal of Population Economics, Springer, vol. 18(2), pages 337-366, 06.
  5. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  6. DE LA CROIX, David & DOEPKE, Matthias, 2001. "Inequality and Growth : Why Differential Fertility Matters," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Kai Zhao, 2009. "Social Security, Differential Fertility, and the Dynamics of the Earnings Distribution," UWO Department of Economics Working Papers 20091, University of Western Ontario, Department of Economics.
  8. Zimmerman, David J, 1992. "Regression toward Mediocrity in Economic Stature," American Economic Review, American Economic Association, vol. 82(3), pages 409-29, June.
  9. Wildasin, David E, 1990. "Non-neutrality of Debt with Endogenous Fertility," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 414-28, April.
  10. Larry E. Jones & Alice Schoonbroodt, 2007. "Complements versus Substitutes and Trends in Fertility Choice in Dynastic Models," NBER Working Papers 13680, National Bureau of Economic Research, Inc.
  11. Stephenson, E. Frank, 1998. "Average marginal tax rates revisited," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 389-409, April.
  12. Lapan, Harvey E. & Enders, Walter, 1990. "Endogenous Fertility, Ricardian Equivalence and Debt Management Policy," Staff General Research Papers 10814, Iowa State University, Department of Economics.
  13. Larry E. Jones & Michele Tertilt, 2006. "An Economic History of Fertility in the U.S.: 1826-1960," NBER Working Papers 12796, National Bureau of Economic Research, Inc.
  14. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
  15. Friesen, Peter H & Miller, Danny, 1983. "Annual Inequality and Lifetime Inequality," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 139-55, February.
  16. Jeremy Greenwood & Ananth Seshadri & Guillaume Vandenbroucke, 2005. "The Baby Boom and Baby Bust," American Economic Review, American Economic Association, vol. 95(1), pages 183-207, March.
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Cited by:
  1. Zhao Kai, 2011. "Social Security, Differential Fertility, and the Dynamics of the Earnings Distribution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-31, August.
  2. Fanti, Luciano & Spataro, Luca, 2013. "On the relationship between fertility and public national debt," Economic Modelling, Elsevier, vol. 33(C), pages 843-849.

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