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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
Date of revision:
Handle: RePEc:szg:worpap:0705

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  1. Gonzales-Eiras, Martín & Niepelt, Dirk, 2004. "Sustaining Social Security," Seminar Papers 731, Stockholm University, Institute for International Economic Studies.
  2. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  3. Grossman,G.M. & Helpman,E., 1996. "Intergenerational Redistribution with Short-Lived Governements," Papers 2-96, Tel Aviv.
  4. Gonzalez-Eiras, Martin & Niepelt, Dirk, 2007. "The Future of Social Security," CEPR Discussion Papers 6245, C.E.P.R. Discussion Papers.
  5. Boldrin, Michele & Montes, Ana, 2002. "The Intergenerational State: Education and Pensions," CEPR Discussion Papers 3275, C.E.P.R. Discussion Papers.
  6. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
  7. Dirk Niepelt & Martin Gonzalez-Eiras, 2011. "Economic and Politico-Economic Equivalence of Fiscal Policies," 2011 Meeting Papers 58, Society for Economic Dynamics.
  8. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago.
  10. James M. Poterba, 1996. "Demographic Structure and the Political Economy of Public Education," NBER Working Papers 5677, National Bureau of Economic Research, Inc.
  11. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  12. 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, vol. 97(2), pages 393-397, May.
  13. 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, vol. 4(1), pages 1-37, May.
  14. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  15. Antonio Rangel, 2003. "Forward and Backward Intergenerational Goods: Why Is Social Security Good for the Environment?," American Economic Review, American Economic Association, vol. 93(3), pages 813-834, June.
  16. Campbell, John Y & Viceira, Luis M, 2005. "The Term Structure of the Risk-Return Tradeoff," CEPR Discussion Papers 4914, C.E.P.R. Discussion Papers.
  17. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
  18. repec:fth:prinin:334 is not listed on IDEAS
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Citations

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Cited by:
  1. Dirk Niepelt & Martin Gonzalez-Eiras, 2010. "Ageing, Government Budgets, Retirement, and Growth," 2010 Meeting Papers 69, Society for Economic Dynamics.
  2. Çagaçan Deger, 2008. "Pension Reform in an OLG Model with Multiple Social Security Systems," ERC Working Papers 0805, ERC - Economic Research Center, Middle East Technical University, revised Oct 2008.
  3. Kuehnel, Johanna, 2011. "Population Aging, the Composition of Government Spending,and Endogenous Economic Growth in Politico-Economic Equilibrium," Working Papers 0510, University of Heidelberg, Department of Economics.

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