Population aging, inequality and public policy
Abstract: This paper examines the implications of population aging for the political economy of allocating resources between pensions and education in a medium-scale overlapping generations model with heterogeneous households calibrated to the German economy. As a consequence of population aging, the increasing political power of the elderly shifts public policy toward higher pension spending at the expense of investment in education relative to an economy in which public policy is independent of the age structure. Aggregate output and total income inequality fall significantly while wealth inequality rises. Higher pensions discourage capital accumulation, while reduced public investment in education leads to a decline in the economy's human capital level. Rising tax liabilities to finance relatively higher pension spending distort individual labor supply, further depressing aggregate effective labor. Substantially higher redistributive pensions mitigate total income inequality but discourage capital accumulation, especially at the lower end of the wealth distribution, and increase wealth inequality. The magnitude of the effects decreases strongly with the size of future population growth rates. In a counterfactual experiment, a compulsory voting policy increases political participation, especially among younger individuals, and leads to less severe effects on aggregate output, higher total income inequality, and lower wealth inequality.
JEL classification: D31, D52, D91, E62, J11
Keywords: Population aging, Inequality, Probabilistic voting, Fiscal policy, OLG, Heterogenous agents, Incomplete markets
Fiscal policy and human capital in the race against the machine
(with Daniele Angelini and Stefan Niemann)
Abstract: We analyze the policy trade-offs facing fiscal policy in a dynamic growth model with automation, education choice, and human capital formation. Although beneficial for economic growth, automation contributes to wage inequality. When human capital formation is affected by government spending, fiscal policy can enhance welfare through a coordinated increase in labor and robot taxes. The composition of taxes financing spending on transfers and education is key in determining the effects on economic growth and inequality, as the robot tax is the more redistributive instrument. We calibrate our model to the US economy and determine the welfare-maximizing tax policy. Optimality requires an initial reduction in the robot tax to fos ter automation-driven growth, followed by its gradual increase to address widening inequality. Education subsidies can only be welfare-improving if they are financed through the labor tax. When private contributions to higher education are sufficiently high, the optimal robot tax is zero.
JEL classification: E23, E25, H23, H52, O31, O33, O40
Keywords: Automation, Education, Human capital, Innovation-driven growth, Inequality, Policy responses
Population aging and fiscal multipliers
Abstract: This paper examines the consequences of population aging for the magnitude of fiscal multipliers. Using structural vector autoregressions (SVARs) for a broad cross-section of countries, we find that fiscal multipliers following a positive government spending shock are, on average, positive, larger in economies with a younger age structure, and negatively correlated with the old-age dependency ratio - a key measure of population aging. To explain these empirical findings, we develop a medium-scale overlapping generations model with heterogeneous households, calibrated to several developed economies and incorporating country-specific demographic variables. The central mechanism is that older economies exhibit a weaker labor supply response from working-age households, which dampens the output effect of fiscal expansions. This is because households in aging societies tend to save more intensively over the life cycle and respond less strongly to increases in non-distortionary taxation. Quantitatively, we find that a one standard deviation increase in the old-age dependency ratio - equivalent to a 6.3 percentage point rise - reduces the fiscal multiplier by an average of 17.7 percent across countries. After controlling for cross-country differences unrelated to the demographic structure of the economies, the reduction remains economically meaningful, though smaller, at 3.6 percent. The model predicts that continued population aging will reduce fiscal multipliers by an average of 11.3 percent by 2070.
JEL classification: C32, D52, E62, H20, J11
Keywords: Fiscal multipliers, Government spending, Population aging, Incomplete markets, Taxation, OLG, Structural VAR
Voting, automation and robot taxes
(with Daniele Angelini and Stefan Niemann)
Should robots pay for our pensions?
(with Johan Gustafsson and Gauthier Lanot)