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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.

Suggested Citation

  • Kai(Jackie) Zhao, 2009. "War Debt and the Baby Boom," 2009 Meeting Papers 856, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:856
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    References listed on IDEAS

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    1. 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.
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    7. 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.
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    14. 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.
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    Cited by:

    1. Fanti, Luciano & Spataro, Luca, 2013. "On the relationship between fertility and public national debt," Economic Modelling, Elsevier, vol. 33(C), pages 843-849.
    2. 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.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E0 - Macroeconomics and Monetary Economics - - General
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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