Capitalists,workers, and the burden of debt

Abstract

This paper analyzes the burden of debt in a growth model that combines overlapping generations of workers who save for life-cycle reasons and dynastic agents who save for bequest reasons (‘capitalists’). Ricardian Equivalence prevails, but capitalists regard the debt serviced out of taxes on workers as net wealth. In the long run, the Cambridge Theorem holds: the relationship between the rate of profit and rate of growth is determined by the capitalist saving function, independently of worker or government saving. Two alternative closures are considered. Under exogenous growth constrained by a fully employed labor force, debt and deficits result in temporary effects on the distribution of income but permanent effects on the distribution of wealth. Under endogenous growth constrained by a fully utilized capital stock, debt and deficits result in temporary effects on the growth rates of the components of wealth and permanent effects on the level and distribution of capital.     

Conflict,growth, distribution,and employment: a long-run Kaleckian model

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of capital accumulation are adjusted in the long run. The long-run equilibrium is a continuum of equilibria and is characterized by hysteresis in that the long-run position of the economy depends on where it starts. An increase in the bargaining power of workers lowers the rate of unemployment in both the medium-run and the long-run equilibrium.     

Social security,saving, and macroeconomics

Arguing within the framework of a life-cycle hypothesis of consumption of the individual household, Martin Feldstein has claimed that a pay-as-you-go, unfunded social-security system implies a private-sector perception of wealth which both depresses private saving and raises aggregate consumption. But the effects in a macro-economic context are not the same. With less than full employment, perceived increments to private wealth in social security or any other government obligations should increase current and planned future consumption and saving, raising employment and output. With full employment, as long as monetary policy is appropriately accommodating, such increments to wealth should raise prices but leave all real variables, including capital accumulation, unaffected. Increases in social-security wealth would merely substitute for real private wealth in the form of explicit government bonds. Econometric estimates from corrected U.S. data on social security, public debt, income, and employment are consistent with these hypotheses.     

Social security expenditure and GDP in OECD countries: A cointegrated panel analysis

Abstract

Using panel data unit root tests and panel cointegration tests, as well as estimation techniques appropriate for heterogeneous panels such as the full modified OLS, this paper re-examines the long-run co-movement and the causal relationship between GDP and social security expenditure in a bivariate model, employing data on 25 OECD countries from 1980 to 2001. Our cointegration test results show strong evidence in favour of the existence of a long-run equilibrium cointegrating relationship between GDP and social security expenditure after allowing for a heterogeneous country effect. Regarding the panel-based error correction model, we find that GDP and social security expenditure lack short-run causality, but reveal the existence of long-run bidirectional causality. This shows that, in the long run, economic growth must be based on a social welfare policy that should be carried out, and economic growth can facilitate contiguous development in a social welfare policy. Lastly, we also provide evidence to support that social security expenditure can affect growth through the savings and human capital accumulation in OECD countries.     

PUBLIC EDUCATION EXPENDITURES, HUMAN CAPITAL INVESTMENT AND INTERGENERATIONAL MOBILITY: A TWO-STAGE EDUCATION MODEL

We show in this paper that, depending on the initial distribution of material wealth and that of individuals' abilities, economies converge in the long run towards different proportions of the skilled workforce and different levels of average wealth. We also show that the growth process raises net economic mobility, the long-run proportion of the skilled population and the long-run levels of wealth held by both rich and poor dynasties. Unless the income tax rate is too high, the increase in total public funds is associated, in the long run, with higher net mobility, a larger fraction of the skilled workers and higher levels of wealth of all the dynasties. In addition, the reallocation of public expenditures from basic to advanced education can result in lower mobility, a lower long-run size of the skilled workforce, and a lower long-run level of wealth held by rich dynasties, if the transfer of resources comes at the expense of excessively lowering the quality of education at the basic schooling level.     

An aging society: opportunity or challenge?

"This paper steps back from the current political debate [in the United States] over the social security trust fund and examines the more general question of how serious a macroeconomic problem aging is and how policy should respond to it. We focus primarily on issues relating to saving and capital accumulation. We do not consider the broader question of whether the current U.S. national saving rate is too high or too low, but focus on the effect of demographic changes on the optimal level of national saving. In addition, we consider the effects of demographic change on productivity growth and the optimal timing of tax collections. Our general conclusion is that demographic changes will improve American standards of living in the near future, but lower them slightly over the very long term. Other things being equal, the optimal policy response to recent and anticipated demographic changes is almost certainly a reduction rather than an increase in the national saving rate."     

Immigration and remittances in a two-country model of growth with labor market frictions

We present a North-South model with labor market frictions and labor migration to study the dynamic implications of workers mobility on employment, capital accumulation and welfare. In the baseline model, the Northern country is able to control immigration flows by setting a cap on the number of foreign workers. We find that, despite an increase in migration displaces native employment in the short-run, a permanent raise of the migration cap stimulates capital accumulation, improves labor market conditions and increases social welfare in the long run. In an extension of the model, we also test the long-run effects of a pro-employment protectionist policy consisting in imposing a distortionary tax on immigrant employment. We find that the protectionist policy in North, while increasing national welfare, damages the macroeconomic performance of the domestic economy and is not effective in improving native employment.     

To Save or to Consume: Linking Growth Theory with the Keynesian Model

In the neoclassical growth theory, higher saving rate gives rise to higher output per capita. However, in the Keynesian model, higher saving rate causes lower consumption, which may lead to a recession. Students may ask, "Should we save or should we consume?" In most of the macroeconomics textbooks, economic growth and Keynesian economics are in separate, sometimes unsequential, chapters. The connection between the short run and the long run is not apparent. The author builds a bridge between the neoclassical growth theory and the Keynesian model. He links the Solow diagram and the IS-LM curves and depicts the short-run to long-run transition of the economy after changes in saving and other macroeconomic policies.     

Crossing Hubbert’s peak: Portfolio effects in a growth model with exhaustible resources

This paper elaborates a two-class growth model with an exhaustible resource (“oil”) and an alternative technique (“solar”). Bequest savers accumulate wealth, consisting of capital and oil, saving a constant fraction of their end-of-period wealth. The price of oil obeys Hotelling’s rule. Rising oil prices and the depletion of oil supplies create portfolio effects on the accumulation of capital. When growth is constrained by an exogenously increasing labor force, these wealth effects express themselves in changes in the distribution of income, which first shifts toward profits and then shifts back toward wages as the oil stocks approach depletion. When growth is constrained by capital (the labor force is endogenous), the portfolio effects express themselves in changes in the rate of capital accumulation, which first declines and then rises sharply as the oil stocks approach depletion.     

Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth

This study combines a neo-Kaleckian growth and distribution model with a sort of Sraffian supermultiplier mechanism in which autonomous demand is driven by foreign exports. Short-, medium- and long-run equilibria are considered. In the long-run case, the expectations of sales growth governing investment change adaptively, and this, combined with the autonomous growth rate of exports, produces convergence of the actual rate of capacity utilization to its normal rate. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short or medium run but also in the long run, in the sense that both (1) a decrease in the propensity to save, and (2) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations, even within the supermultiplier context.     

Social status,human capital formation and the long-run effects of money

This study examines the effects of monetary policy in a two-sector cash-in-advance economy of human capital accumulation. Agents concern about their social status represented by the relative physical capital and relative human capital. We find that if the desire for social status depends only on relative physical capital, money is superneutral in the growth-rate sense. However, if the desire for social status depends on relative human capital, the money growth rate will have a positive effect on the long-run economic growth rate. Furthermore, an increase in the desire to pursue human capital will raise the long-run growth rate, but an increase in the desire to pursue physical capital will lower it.     

The causal relationship between equipment investment and infrastructures on economic growth in China

There is agreement in the literature on economic growth concerning the transitory effects of capital accumulation on the process of economic development. However, controversy arises if this effect is permanent. In this sense, the key point is the embodied technological progress and whether supply factors predominate among the determinants of capital accumulation. Only in this case should expect long-run effects of capital accumulation on economic growth. Inspired by this idea, I focus the study on two elements accounting for economic development—equipment investment and productive infrastructure and I also analyze the type of the empirical relationship that exists between them. The results indicate that equipment investment and infrastructures have played a significant role in accounting for long-run growth in China. However, I do not find empirical evidence supporting any relationship between the two types of investment. In addition, I find that foreign trade has stimulated output and equipment investment in the long run. Finally, it is found that innovation activities encourage equipment investment in the long run.     

Is Altruism Important for Understanding the Long-Run Effects of Social Security?

This paper quantifies the effects of social security on capital accumulation and wealth distribution in a life-cycle framework with altruistic individuals. The main findings of this paper are that the current U.S. social security system has a significant impact on capital accumulation and wealth distribution. I find that social security crowds out 8% of the capital stock of an economy without social security. This effect is driven by the distortions of labor supply due to the taxation of labor income rather than by the intergenerational redistribution of income imposed by the social security system. In contrast to previous analysis, I found that social security does not affect the savings rate of the economy. Another interesting finding is that even though the current U.S. social security system is progressive in its benefits, it may lead to a more dispersed distribution of wealth. Journal of Economic Literature Classification Numbers: D31, D58, E2, E6, H55, J22, J26.     

Social status, human capital formation and super-neutrality in a two-sector monetary economy

In this paper, we study how social status affects the impact of monetary policy on the long-run growth rate in a two-sector monetary economy with human capital accumulation, and find that the super-neutrality of money, with regard to the growth rate of the economy depends on the formation of human capital. In an economy with Lucas-type human capital formation, money is super-neutral; however, for an economy in which both physical and human capital are used as inputs for human capital accumulation, the money growth rate will have a positive effect on the long-run economic growth rate. The existence, uniqueness and saddle-path stability of balanced-growth equilibrium are also examined.     

Income inequality and FDI: evidence with Turkish data

This article explores how foreign direct investment (FDI) and other determinants impact income inequality in Turkey in the short- and long-run. We apply the nonlinear auto-regressive distributed lag (ARDL) modelling approach, which is suitable for small samples. The data for the study cover the years from 1970 to 2008. The empirical results indicate the existence of a co-integration relationship among the variables with asymmetric adjustment of the income distribution in the short- and long-run. The negative impact of FDI on the Gini coefficient, decreasing income inequality, is statistically significant in the short- and long-run, though with a quantitatively small impact in both cases. In the short run, GDP growth increases inequality initially, an effect that is reversed in the next period, increases in domestic gross capital formation decreases inequality, and increases in the literacy rate have very minor adverse effects on income equality. However, in the long run these variables have no statistically significant effects on the Gini coefficient. A reduction in the population growth rate reduces inequality in the short run but has no effect in the long run, whereas an increase in the rate reduces inequality in the long run but has no effect in the short run.     

Long-run investment under uncertain demand

In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for a more general one and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider the profit function for the case of a monopolistic firm facing a linear demand function with additive shocks. Under this assumption, analytical solutions, for both short-run investment rule and long-run rate of capital accumulation, are not available. We then 1) propose an analytical approximation of the short-run investment rule and 2) show how such approximation can be used in order to derive the corresponding i) steady-state distribution of the optimal stock of capital and ii) the long-run average rate of capital accumulation. Finally, we compare the long-run rates of capital accumulation calculated under both profit function specifications. We find that, within a plausible range of parameter values, the two rates are significantly different. Hence, we conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.     

Scale Effects,Savings and Factor Shares in a Human Capital-based Growth Model with Physical Capital Accumulation

Using a balanced-growth model with physical and human capital accumulation, we analyze quantitatively the long-run effects of changes in the savings rate and in income distribution (i.e. the shares of physical and human capital in income) on investment in skill acquisition, income growth, and the ratio of human to physical capital. In the long run, the ratio of physical to human capital is constant, so that these two factor inputs can grow at the same rate. This rate is a function of the economy's exogenous technological and preference parameters and depends positively on the share of skills invested in human capital formation. We also find that population growth is neither necessary nor conducive to economic growth, that the level of real income depends linearly on the level of human capital and that it is independent of population size.     

Economic Growth with Institutional Saving and Investment

This article develops a two-sector growth model in which institutional investors play a significant role. A necessary and sufficient condition is established under which these investors own the entire capital stock in the long run. The dependence of the long-run growth rate on the behaviour of such investors and the effects of a productivity increase are analysed.     

Life expectancy, human capital, social security and growth

We analyze the effects of changes in the mortality rate upon life expectancy, education, retirement age, human capital and growth in the presence of social security. We build a vintage growth, overlapping generations model in which individuals choose the length of education and the age of retirement, and where unfunded social security pensions depend on workers' past contributions. Social security has a positive effect on education, but pension benefits favor reductions in retirement age. The net effect is that starting from a benchmark case, higher life expectancies give rise to lower per capita GDP growth in the presence of social security as the share of the active population is reduced. In addition, higher social security contribution rates reduce the growth rate of per capita GDP.     

Reexamining the interaction between innovation and capital accumulation

In endogenous growth models with innovation and capital accumulation Arnold [J. Macroeconomics 20 (1998) 189] and Blackburn et al. [J. Macroeconomics 22 (2000) 81] show that long-run growth of per capita income is independent of innovation activities; it is solely determined by preferences and the human capital accumulation technology. As a result, government policies do not affect long-run growth. This paper develops an endogenous growth model with innovation and (physical and human) capital accumulation to show that long-run growth depends on both innovation and capital accumulation technologies as well as on preferences and that government taxes and subsidies can have effects on the long-run growth rate.