Population aging, inequality and public policy
(Job market paper)
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 foster automation-driven growth, followed by its gradual increase to address widening inequality. Education subsidies can be welfare-improving if they are financed through the labor tax without compromising higher education spending. Finally, we explore robustness under private contributions to higher education.
JEL classification: E23, E25, H23, H52, O31, O33, O40
Keywords: Automation, Education, Human capital, Innovation-driven growth, Inequality, Policy responses
Voting, automation and robot taxes
(with Daniele Angelini and Stefan Niemann)
Fiscal consolidation programs and population aging