QSPS Conference Ayşe Imrohoro¼glu May, 2013 Utah State University
QSPS Conference Long-run
Japanese Saving Rate 0.30 0.25 Japan 0.20 Saving Rate 0.15 0.10 U.S. 0.05 0.00 1956 1961 1966 1971 1976 1981 1986 1991 1996 Net national saving rates
Japanese Saving Rate Perhaps we need: Demographics Borrowing constraints Social Security Taxes Low initial capital stock OLG? In nite Horizon?
Japanese Saving Rate 0.30 0.25 Benchmark Model 0.20 Saving Rate 0.15 0.10 0.05 Data 0.00 1960 1965 1970 1975 1980 1985 1990 1995 2000 OLG
Japanese Saving Rate 0.30 0.25 Saving 0.20 0.15 Saving Rate 0.10 0.05 Benchmark Model 0.00 1956 1961 1966 1971 1976 1981 1986 1991 1996 0.05 0.10 0.15 In nite Horizon
Japanese Saving Rate 0.30 0.25 Data 0.20 0.15 Constant Growth Saving Rate 0.10 0.05 Depreciation Tax 0.00 1956 1961 1966 1971 1976 1981 1986 1991 1996 0.05 0.10 0.15 The e ects of depreciation and tax rate
Japanese Saving Rate Turned out that a simple neoclassical growth model with annual TFP, taxes and depreciation rate would account for the data. 0.30 0.25 Data 0.20 TFP only Saving Rate 0.15 0.10 0.05 All time series except TFP 0.00 1956 1961 1966 1971 1976 1981 1986 1991 1996 0.05 Main determinants of the saving rate
U.S. Saving Rate How about the U.S?
U.S. Saving Rate 0.20 0.18 0.16 Data 0.14 Saving Rate 0.12 0.10 0.08 0.06 0.04 0.02 TFP Time Series Only 0.00 1960 1965 1970 1975 1980 1985 1990 1995 2000 Role of TFP - U.S.
U.S. Saving Rate GNP per person 1.3 1.2 1.1 1 0.9 GNP per person model data hours 0.5 0.45 0.4 0.35 hours per capita model data 0.8 1960 1970 1980 1990 2000 year 1960 1970 1980 1990 2000 year 1.2 1.1 capital model data 1.1 1.05 labor productivity model data capital 1 0.9 0.8 productivity 1 0.95 0.7 0.9 1960 1970 1980 1990 2000 year 0.85 1960 1970 1980 1990 2000 year
U.S. Saving Rate For the U.S. need the labor wedge.
U.S. Debt How about the future
Debt as Percentage of U.S. GDP U.S. Debt Signi cant increase in projected debt to GDP by the CBO 200 180 extended baseline alternative 160 140 120 100 80 60 40 20 1970 1980 1990 2000 2010 2020 2030 2040 Debt to GDP
Revenues as Percentage of U.S. GDP U.S. Debt Main reason for the di erences in projections: Revenue assumptions 24 23 extended baseline alternative 22 21 20 19 18 17 16 15 14 1970 1980 1990 2000 2010 2020 2030 Tax Revenues/GDP
U.S. Debt In the CBO projections D/Y stabilize if marginal tax rates on labor income increase from 25% in 2011 to 35% in 2035, Labor supply e ects are not incorporated into these projections
U.S. Debt How would things behave in a neoclassical growth model? Take into account behavioral responses to policy
Framework Households There is a representative household with N t working-age members, facing the following problem: subject to max t=0 β t N t [log c t + α log(1 h t )] C t + K t+1 [1 + (1 τ k,t )(r t δ t )]K t + (1 τ h,t )w t H t +TR t + N t π p t ]
Framework Firms Firm s problem is to maximize pro ts. The production function is given by: Y t = A t Kt θ 1 H θ t, Aggregate capital stock K t follows K t+1 = (1 δ t )K t + X t,
Framework Government Government Budget Constraint G t + TR t = τ h,t w t H t + τ k,t (r t δ t )K t N t π p t.
Framework Government Real Government Debt: B g t+1 = (Bg t + GB t ) P t /P t+1 where GB t is net borrowing (revenues minus expenditures)
Framework Solution Start from given initial conditions Compute an equilibrium transition path towards a balanced growth path
Calibration Constant Parameters: Standard capital share θ = 0.4. subjective discount factor, β = 0.969 share of leisure in the utility function, α = 1.45
Calibration Calibration of the 1960-2011 period and beyond: 0.5 0.45 Capital Income Tax Benchmark H is t. Tax 0.4 0.35 Benchmark H is t. Tax Labor Income Tax 0.4 0.3 0.35 0.25 1960 1980 2000 2020 2040 0.2 1960 1980 2000 2020 2040 0.03 Population Grow th R ate 1.1 TFP factor 0.025 0.02 1.05 0.015 1 0.01 0.005 1960 1980 2000 2020 2040 year 0.95 1960 1980 2000 2020 2040 year Data and Assumptions for the Future
Calibration: Interest on government debt After 2010: In ation rate: 2%; Nominal interest rate: 3.3%
K/Y ratio X/Y Ratio GNP per person hours Results: Past 1.5 GNP per person 0.46 Hours per Capita 1.4 0.44 1.3 0.42 1.2 0.4 1.1 0.38 1 da ta model 0.9 1960 1970 1980 1990 2000 2010 0.36 0.34 1960 1970 1980 1990 2000 2010 4 Capital Output Ratio 0.2 In v e s tmen t Output R a tio 3.5 0.15 3 0.1 2.5 0.05 2 1960 1970 1980 1990 2000 2010 year 0 1960 1970 1980 1990 2000 2010 year Data and the Model
Results: Past 0.04 0.02 Budget Balance data model 0.7 0.65 0.6 Debt/GNP 0 0.55 0.02 0.5 0.45 0.04 0.4 0.06 0.35 0.3 0.08 0.25 0.1 1960 1970 1980 1990 2000 2010 year 0.2 1960 1970 1980 1990 2000 2010 year Data and the Model
Results: Future How about the future?
Results: Future Examine Debt/GNP with exogenous labor and higher taxes (CBO s extended benchmark) with endogenous labor and higher taxes
GNP per person D/Y ratio hours K/Y ratio Results: Exogenous versus Endogenous Inputs 0.46 Hours per Capita 3.6 Capital Output Ratio 0.44 3.4 0.42 3.2 0.4 0.38 3 0.36 2.8 0.34 1950 2000 2050 2100 year 2.6 1950 2000 2050 2100 year 1.5 1.4 GNP per person 2.5 2 Debt to Output Ratio exog endo 1.3 1.5 1.2 1 1.1 0.5 1 1950 2000 2050 2100 year 0 1950 2000 2050 2100 year Exogenous versus Endogenous Inputs
Results: Endogenous Labor - Higher Taxes Table 3: Economic Consequences of Higher Taxes Elasticity 1.0 Elasticity 0.5 High tax Hist. tax High tax Hist. tax D/Y in 2035 (%) 106 174 97 174 D/Y in 2080 (%) 215 420 184 421 Y/N growth (2011 2035) 0.92 1.27 1.04 1.30 Y/N growth (2011 2080) 1.19 1.33 1.23 1.34 Welfare 4.47% 3.23%
Detrended Output per Person Results Counterfactual: If labor could go back to good old days 1.45 1.4 Counterfactual Benchmark 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 1960 1970 1980 1990 2000 2010 2020 2030 2040 year GDP per person
Results Counterfactual: If labor could go back to good old days Debt to GNP in 2035: 123%
Results Counterfactual: In ation! 4% in ation: Debt to GDP 133% by 2035 6% in ation: Debt to GDP shrinks down to 104% by 2035
Table 5: Summary Table Debt-to-GNP Ratio in 2035 (%) CBO benchmark projections 74 High Tax Rates CBO exp.; exogenous inputs 63 CBO exp.; endogenous inputs 106 Historical Tax Rates (Endogenous Inputs) CBO expenditures 174 CBO exp.; high labor wedge and TFP gr. 123 CBO exp.; 4% in ation 132 Bowles-Simpson expenditures 120
Conclusion Modern day back of the envelope calculations High debt/gdp ratio likely to continue into 2035 s Welfare cost of higher taxes between 3%-5%
Expenditures as Percentage of U.S. GDP If not taxes what? 16 14 12 10 G SS G2 8 6 4 2 0 2000 2005 2010 2015 2020 2025 2030 2035 Expenditures/GDP
Expenditures as Percentage of U.S. GDP Health Care 16 14 12 10 8 6 4 2 Medicare G SS Medicare2 G2 0 2000 2005 2010 2015 2020 2025 2030 2035 Expenditures/GDP
Health Expenditures as Percentage of GDP Health Care 18 16 14 12 Canada Germany Japan Norway Spain Sweeden UK, US 10 8 6 4 2 1970 1975 1980 1985 1990 1995 2000 2005 Health Expenditures/GDP
Health Care Increase in Health Care Expenditures 1970-2009 Canada 65% Germany 93% Japan 89% Norway 118% Spain 171% Sweden 47% UK 118% US 145%
Health Care Will do research on health care!
QSPS Conference Thank you!