Alternatives for Raising Living Standards
Given the fundamental goal of raising living standards in the longer term, much attention is paid to policies that can be expected to increase national saving. With respect to private saving, the mechanism is tax reform - a lower tax on interest income. The basic problem with this approach is that, for a given size of government, some other tax or transfer must be adjusted to finance the interest-tax cut. This fact may make it difficult to ensure that those with only labour income will share in the spoils. An alternative is to concentrate on public saving. Ultimately, deficit reduction makes possible lower taxes and/or higher transfer payments across the board. This reasoning suggests that debt reduction may be the more equitable government initiative. But there are other options such as investing in human capital and altering the population growth rate through immigration policy. The latter option is pursued in this paper. According to the standard neoclassical growth model, a lower population growth rate raises steady-state living standards, but things are more complicated in an optimization-based overlapping-generations context. This paper extends Blanchard's constant-planning-horizon model of disjoint agents to allow for retirement, a subset of the population that remains liquidity constrained, and various taxes and transfers - in a small open-economy setting. Tax reform, debt reduction and population growth policies are compared in an internally consistent manner. For each policy, both the immediate and steady-state effects are derived, and the present value of the entire time path for consumption between these two end-points is also analyzed (for all three policy initiatives). A calibrated version of the model is used to identify policy combinations that can deliver long-term gain without short-term pain, and without problems for the hand- to- mouth subset of the population.
|Date of creation:||May 1999|
|Date of revision:|
|Contact details of provider:|| Postal: 1280 Main Street West, Hamilton, Ontario, L8S 4M4|
Phone: (905) 525-9140 ext. 22765
Fax: (905) 521-8232
Web page: http://www.mcmaster.ca/economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-47, April.
- Tiff Macklem & David Rose & Robert Tetlow, .
"GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis,"
Staff Working Papers
95-4, Bank of Canada.
- Tiff Macklem & David Rose & Robert Tetlow, 1995. "GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis," Macroeconomics 9506003, EconWPA.
- Macklem, R Tiff, 1993. "Terms-of-Trade Disturbances and Fiscal Policy in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 103(419), pages 916-36, July.
- Søren Nielsen, 1994. "Social security and foreign indebtedness in a small open economy," Open Economies Review, Springer, vol. 5(1), pages 47-63, March.
- Diamond, Peter A., 1980. "An alternative to steady-state comparisons," Economics Letters, Elsevier, vol. 5(1), pages 7-9.
When requesting a correction, please mention this item's handle: RePEc:mcm:qseprr:344. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.