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War Debt and the Baby Boom

  • Kai(Jackie) Zhao

    (University of Western Ontario)

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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
Date of revision:
Handle: RePEc:red:sed009:856
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. 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.
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  10. David E. Wildasin, 1989. "Non-Neutrallity of Debt with Endogenous Fertility," Discussion Paper Serie A 241, University of Bonn, Germany.
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  14. Larry E. Jones & Alice Schoonbroodt, 2010. "Complements Versus Substitutes And Trends In Fertility Choice In Dynastic Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 671-699, 08.
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