Public Economics. Lec 12: Intergenerational redistribution and debt. Alessandro Martinello. alfa 4035B

Transcription

1 Public Economics Lec 12: Intergenerational redistribution and debt Alessandro Martinello alfa 4035B

2 AM s reminders Deadline for papers on Sunday 6, 24:00 Mail object: NEKG51 groupx PDF name: groupx.pdf 1 / 19

3 Reading list RG ch. 20 Recommended readings Gruber & Wise (1999) Kruse & Stålberg (2013) Kruse (2010) 2 / 19

4 Social security (OAP): redistribution Redistribution within a generation Protection of survivors Favors low-earning member of couple Transfer tends to be towards women + transfers to children Guaranteed income Financing proportional to income Who pays the payroll tax? Benefits decreasing with income PAYG = across generations 3 / 19

5 Type of benefit t = N b N w }{{} Dependency ratio B w }{{} Replacement rate Instrumental for intergenerational redistribution Defined benefit All (economic & demographic) adaptation falls on workers Fix B, then taxes have to change Defined contribution All adaptation falls on the retired Fix t, then benefits have to change Financing through in debt Later 4 / 19

6 Rationales behind redistribution - horizontal Rich to poor Equity Survivor: Highest benefits to families with incomes Incentive to childbearing (couples + staying home) Population growth = sustainability Subsidies to home production Disincentive to work = less taxable income 5 / 19

7 Rationales behind redistribution - vertical Sustainability & PAYG adjustments Social Security Wealth (Fig 11.2, p.232) From rich to poor? Wage growth If GPD grows enough, younger generations richer and richer Tremendous GDP growth after 2WW Intergenerational equality 6 / 19

8 Are younger generations richer? 7 / 19

9 Are younger generations richer? Income (normalized to 2000) Year / 19

10 Public debt Deficit = revenues - expenditures On-budget Off-budget Debt Sum of past deficits US: $17.8 trillions In practice, through sale of state-guaranteed bonds 8 / 19

11 Interpreting the numbers (I) D t Debt as a ratio of GDP: GDP t D t+1 = (1 + r) D t + d GDP t+1 = (1 + g) GDP t GDP growth: lower relative size of debt over time GDP per capita? Inflation: lower the rate of return on debt 2011, US: $9T Debt + 3.2% inflation = -$288B on debt value If inflation expected, r adjusts 9 / 19

12 Inflation and interest rates on debt, USA Value TIME Inflation Long-term i.r. Short-term i.r. 10 / 19

13 Inflation and interest rates on debt, Sweden Value TIME Inflation Long-term i.r. Short-term i.r. 10 / 19

14 Inflation and interest rates on debt, Italy Value TIME Inflation Long-term i.r. Short-term i.r. 10 / 19

15 Interpreting the numbers (II) Capital VS current accounting Productive investments over time & implicit obligations E.g. pensions, nuclear plants, toll bridges... Tangible assets? Does a sale of publicly owned assets really improves public finances? (privatization) State VS local governments debt Debt held by central banks / national agencies If CB independent, then counted as debt held by public 11 / 19

16 Who holds the debt? External debt Who holds bonds is not within the nation Loss if project not productive (redistributive) Internal debt Owned by own citizens The right hand owes to the left Nation as a whole is not worse off: who holds bonds gains from others (who are taxed) Popular until 50s. Still someone mentions it here and there 12 / 19

17 Who holds the debt? External debt Who holds bonds is not within the nation Loss if project not productive (redistributive) Internal debt Owned by own citizens The right hand owes to the left Nation as a whole is not worse off: who holds bonds gains from others (who are taxed) Popular until 50s. Still someone mentions it here and there Overlapping generations model 12 / 19

18 Overlapping generations model Several generations coexisting at the same time Unborn Young Old Lifetime income Government borrowing Government transfers Young Old Dead Lifetime income Government raises taxes Government pays debts Total Generational accounting 13 / 19

19 Other/complementary views Neoclassical model: resources removed from private sector Crowding-out of investments: money invested in bonds would be more productive in stocks Channel: in interest rates Large deficits = reduction in capital stocks Macro consequences Ricardian model: (Barro, 1974) If older generation cares about young generation, they realize there is a the transfer & increases bequests as response Public finance irrelevant 14 / 19

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21 Financing the state: to tax or to borrow? Benefits-received principle (he whom enjoys, pays) If investment benefits future generations, debt ok Intergenerational equity If future generations richer, debt ok Efficiency: depends on excess burden Burden increasing more than proportionally with tax = 2 small taxes better than a large one However, debt creates excess burden as well Crowding-out of investments Functional finance Stabilization/expansion policies (Barro/timing?) Risk of fiscal crisis (ARG, GR, ITA before e) Liquidity constraints 16 / 19

22 Moral and political grounds We shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves T. Jefferson, / 19

23 Moral and political grounds We shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves T. Jefferson, 1813 A child won t bear a parent s guilt, and a parent won t bear a child s guilt. God, at some point Second best argument - deficit act as costraints (Friedman) Change in GDP accounting, 2014 If micro, would be evidence of liquidity costraints 17 / 19

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25 For next time RG, ch.20, ex 2 RG, ch.20, ex 8 19 / 19