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Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium

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  • Martín Gonzales-Eiras

    ()
    (Universidad de San Andrés)

  • Dirk Niepelt

    ()

Abstract

We analyze the effect of changes in fertility and longevity on taxes, the composition of government spending, and productivity. To that purpose, we introduce politics in an OLG economy with endogenous growth due to human and physical capital accumulation. Population ageing shifts political power from students and workers to retirees, leading to a reallocation of resources from education spending to retirement benefits and a slowdown of productivity growth. Calibrated to U.S. data, the closed-form solutions of the model predict retirement benefits as a share of GDP to strongly increase over the next decades and the education share to fall. This effect depresses the annual productivity growth rate by 10 basis points. In spite of higher labor-income taxes, per-capita labor supply is predicted to rise, as a consequence of increased life expectancy. The equilibrium allocation is consumption and production efficient, but the political process allocates a much smaller share of resources to eduction than a Ramsey planner with balanced welfare weights.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 07.05.

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Length: 33 pages
Date of creation: Nov 2007
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Handle: RePEc:szg:worpap:0705

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  1. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 755-76, October.
  2. John Y. Campbell & Luis Viceira, 2005. "The Term Structure of the Risk-Return Tradeoff," NBER Working Papers 11119, National Bureau of Economic Research, Inc.
  3. James M. Poterba, 1997. "Demographic structure and the political economy of public education," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(1), pages 48-66.
  4. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 243-272, January.
  5. William F. Blankenau & Nicole B. Simpson & Marc Tomljanovich, 2007. "Public Education Expenditures, Taxation, and Growth: Linking Data to Theory," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 393-397, May.
  6. Grossman,G.M. & Helpman,E., 1996. "Intergenerational Redistribution with Short-Lived Governements," Papers, Tel Aviv 2-96, Tel Aviv.
  7. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 565, C.E.P.R. Discussion Papers.
  8. Martín Gonzalez-Eiras & Dirk Niepelt, 2012. "Economic and Politico-Economic Equivalence of Fiscal Policies," CESifo Working Paper Series 3718, CESifo Group Munich.
  9. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series, Federal Reserve Bank of Chicago WP-05-07, Federal Reserve Bank of Chicago.
  10. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers, Stockholm - International Economic Studies 537, Stockholm - International Economic Studies.
  11. Gonzalez-Eiras, Martin & Niepelt, Dirk, 2007. "The Future of Social Security," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6245, C.E.P.R. Discussion Papers.
  12. Martin Gonzalez-Eiras & Dirk Niepelt, 2004. "Sustaining Social Security," 2004 Meeting Papers, Society for Economic Dynamics 199, Society for Economic Dynamics.
  13. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  14. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  15. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
  16. Assar Lindbeck & Jörgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, Springer, vol. 52(3), pages 273-297, January.
  17. repec:fth:prinin:334 is not listed on IDEAS
  18. Mulligan Casey B & Sala-i-Martin Xavier, 2004. "Internationally Common Features of Public Old-Age Pensions, and Their Implications for Models of the Public Sector," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 4(1), pages 1-37, May.
  19. Antonio Rangel, 2003. "Forward and Backward Intergenerational Goods: Why Is Social Security Good for the Environment?," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 813-834, June.
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Cited by:
  1. Kuehnel, Johanna, 2011. "Population Aging, the Composition of Government Spending,and Endogenous Economic Growth in Politico-Economic Equilibrium," Working Papers, University of Heidelberg, Department of Economics 0510, University of Heidelberg, Department of Economics.
  2. Çagaçan Deger, 2008. "Pension Reform in an OLG Model with Multiple Social Security Systems," ERC Working Papers, ERC - Economic Research Center, Middle East Technical University 0805, ERC - Economic Research Center, Middle East Technical University, revised Oct 2008.
  3. Martín Gonzalez-Eiras & Dirk Niepelt, 2011. "Ageing, Government Budgets, Retirement, and Growth," CESifo Working Paper Series 3352, CESifo Group Munich.

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