Is this why budget deficits might prove sustainable?

By Adrien Auclert, Hannes Malmberg, Frederic Martenet, and Matthew Rognlie:

We use a shift-share approach to quantify the general equilibrium effects of population aging on wealth accumulation, real interest rates, and capital flows. Combining population projections with household survey data from the US and 24 other countries,we project the evolution of wealth-to-GDP ratios by changing the age distribution,holding life-cycle asset and income profiles constant. We find that this compositional effect of aging is large and heterogeneous across countries, ranging from 85 percent-age points in Japan to 310 percentage points in India over the rest of the twenty-first century. In a general equilibrium overlapping generations model, our shift-share provides a very good approximation to the evolution of the wealth-to-GDP ratio due to demographic change when interest rates remain constant. In an integrated world economy, aging generates large global imbalances in the twenty-first century, pushing net foreign asset positions to levels several times larger than those observed until today.

Via Steven Bogden.  This is very likely an important piece.


Wow, yes I agree. Although I believe there are probably other factors that are also causing real interest rates to fall

That's the likely model for the entire aging first world

How well toes the set of modes for generating output compare to the set of things consuming output.

Let the compositional effect be normalized to one. meaning the best you can do is have one loose cannon. The one asks what happens when N increases but the partitions remain. You get expanding Brownian motion and the probability of more loose cannons increase greater than N increases. You are counting emissions.

Sort of a current topic in mathematics.

If you count time you are creating an M+1 dimensional space with the number N set large enough to measure your the observed curvature between deviations in output and deviations in consumption. But you are still finite, so time does not start at zero, it starts at one, and all your colors have one as their minimum deviation count. And the N selected is greater than the N in the observations, all fine and dandy, correct. Setting time to zero is the euclidean model, so you are struck with relativity. Instgead time is an integer set, and after the system is closed, then do a decompression and get time and all your axis, as a geodesic. Time becomes a yard stick with marks where time marks its minimum deviations. All axis work like this. And the question is answered because N grows to large for the accuracy of time units. you get emissions, loose cannons.

I personally believe that U.S. Americans are unable to do so because, uh, some, uh, people out there in our nation don't have maps and, uh, I believe that our education like such as in South Africa and, uh, the Iraq, everywhere like such as, and, I believe that they should, our education over here in the U.S. should help the U.S., uh, or, uh, should help South Africa and should help the Iraq and the Asian countries, so we will be able to build up our future. For our children.


I don't knowwww?
if you've con-SID-ered??
all the fah-ACTS??
in this cay-ACE??

In English please, Baxter. You know I don’t speak Spanish.

Just kidding. But really, can someone dumb this down a little bit?

Short path:
The Fed taxes young kids by raising the price of consumer banking. A hidden tax needed to keep the pensions stable.

Do the banks get to keep any of it?

They use this method called shift-share to create a model of aging demographics and its effect on a few economic metrics like savings and income.

Another way of saying it is that people are getting older and older people tend to save more.

It is why we exercise the Right to Coin once a generation.

I studied economics for years before Rudi Dornbusch spilled the beans and told us that a great many economic puzzles just boil down to demographics. E.g., in the 80s everyone was awed by Japan's huge saving rate, but Rudi showed that Japanese individuals don't save more than people in other countries but their age profile is much different.

At 84 pages it better be important! I just printed it and am going to read it.

Asher, can you please post the link for the Rudi Dornbusch work? He was excellent - I knew him slightly, wish he lived longer.

It was in class. Rudi excelled at giving us the folk wisdom of economists. My favorite was his method for figuring out which markets were in excess demand and which in excess supply. You just see if the suppliers send a case of whiskey to the customers at Christmas or vice versa.

Does this still work in 2020??

Older people consume less, save more. Hence, a higher deficit to GDP ratio is not inflationary. I'm not sure this is a good thing in a world already experiencing a savings glut (I know, there's no such thing as a savings glut). In any case, one need only look at the U.S. budget over the past 40 years to see how government spending has shifted a whole lot, from investment to consumption. There's a price to be paid, including lower productivity, stagnant wages, and disappointing economic growth. One might suspect that this paper will be used by you know who to defend more tax cuts for the wealthy, while ignoring what's happened to productivity, wages, and growth. [An aside, why don't economic journals hire editors who, you know, can write. I suspect that the gibberish is intentional, for obfuscation.]

In other words, selling bonds that will never be paid off is much better that taxing people at the same dollar value.

Taxes are only levied on excess income that goes into savings.

Ie, someone earning $25,000 per year would not pay the pre-70s 70% tax rates, but those who no longer pay 70% tax rates but instead 20-25% buy tens of thousands in government bonds with the income no longer paid in taxes. This income is so far iin excess of the money that they are willing to pay workers to produce durable goods, that they need to fund increased consumption by buying government debt that since the 80s overwhelming funds consumption,, not investmment.

I grew up while conservatives sold the public on the idea that borrowing to build roads, water and sewer, schools, bombs and the means to deliver them, and the taxing to repay the bonds was wasteful spending.

With reaganomics, borrowing to wage wars, put people in jail, put money in consumer pockets to increase consumption of food and clothing, other consumption, and then never repaying the debt is virtuous because it creates jobs today and debt forever.

It's like paying taxes and saying you are keeping the money paid in taxes in your own pocket.

(For parts of government can't borrow, not building "wasteful spending" limits the quantity of real estate inflating the taxed price to 2, 5, 10, 25 times the labor costs to make the real estate have a price. Property taxes are levied on the inflating price allowing higher consumption without tax rate hikes. But this happens only in leftist progrowth places, eg, LA, SF, NYC, not in podunk Kansas or Iowa or Kentucky or West Virginia so those cities and towns dry up and blow away with no creative destruction possible.)

Budget deficits are not inflationary if the Fed is targeting NGDP or the Price level.

Older people are more set in their ways. They are more likely to live quietly and frugally with big bank accounts.

Sounds like an opportunity to raise inheritance taxes and eliminate stepped up basis so you can take the burden off the younger generation. Never saw it coming.

I agree. I think capitalism should be played hard like a game. But we have to collect (most) winnings at the end, or you lose the meritocracy inherent in the model.

If you just hand billions down to failsons you do not have a market rewarding hard work or invention. At that point you have a aristocracy.

(Cough - Jared - Cough)

Or as I like to tell Marxists: The problem isn't wealth. It's dynastic wealth.

Tell the Marxists to get a better religion.

Inheritance and estate taxes are part of most western industrialized nations' public finance.

You have that looter mentality, Bill. Glad you're off the streets the past few days.

If I've accumulated appreciated gains in my lifetime and never paid taxes because there was no taxable event, and now I die, the money gets passed on without taxes. Who is the looter? Treat death as an an ordinary exchange transaction event, just as you would had the person sold the appreciated assets before death, given the money to the kids, and have been taxed on the capital gain.

The new IRA law covers that for most of us since that might be where most of the wealth is. There might be a slight blip in NY and other states whose governors made stupid decisions. I’m sure some eagle-eyed interested person might be able to tease out some movement that can be traced to that fiasco over the next few years.

But having the tax man come in and assess the contents left If the dead wasn’t already in a death camp including artwork, jewelry, etc. is King John territory. My mom died last year so I’m going thru the final distribution.

You’re not talking about Sam Walton and the rest. You’re talking about me and others like me.

Parents of boomers were born before or during the Depression. They were young during WWII and might have grown up with tales of WWI. Perhaps their experiences shaped how they handled their money and passed that knowledge along to their children.

Old people should have more money than the young. They worked longer. Talking to some of my nieces and nephews, I don’t think they get that. Perhaps what’s needed is less teaching 5 -8 year olds that they’re really the other sex and more life skill and economic classes.

I’m assuming you want to remove the 1-time home sale exemption for those 55 and up?

...or rather your parents aren't taxed on their estates at death. The current exemption is well over $11 million for a couple. If your IRA is your main asset, you aren't paying estate tax.

Jeez, Bill, where exactly did that younger generation come from?

Jeez, Yancey, I thought you want to reward hard work and not aristocracy. Sam Walton's kids may have less, but so what. What did they do to earn it. Be a good swimmer in the mother's birth canal. When your dead, your dead.

Stepped up basis is 100% a benefit to the beneficiary (often a young person), not the person that just died.

That's correct. I know that, which is why it is so appealing. But, Haven't you been told that it is a death tax. It's a death tax on the dead. They won't enjoy it. It is a windfall to the kids. Did they earn it for being good swimmer in the mother's birth canal to get the egg. Of course, what people do in the real world is buy an insurance policy on the life of the asset owner.

I'd rather see models of optimal deficits based on the costs and benefits of the taxes and expenditures that make them up.

I saw somewhere that a large percent of affluent retirees continue to accumulate assets in retirement so this maybe be quite right.

For my depression-era grandparents, they didn't even need to be affluent. They had a small house, and social security, and a goal to "die with $100,000 in the bank."

Actually that was one set of grandparents. The other set did a pretty good job of traveling abroad and blowing it all. Perhaps there is a dispositional aspect.

In my family, that was affluent. When you come from nothing and leave something, especially something your family wasn’t able to pass to you, it’s pride you could and did.

The perception of affluence Or expectation has changed over time.

When I was 10 banks used to give away TVs for opening an account. My parents gave it to me.

It wasn’t until I had kids and their “meh” response to something I gave them that my parents couldn’t do or give to me That I understood my parents’ response to my “meh.” I didn’t understand the big deal.

At that age, my parents only had radio.

Any paper focusing on official debt misses the forest for the trees. The U.S. fiscal gap is some 8 times official debt. The fiscal gap puts all the off-the-books liabilities on the book. Social Security's unfunded liability is $53 trillion on its own. Just look at table VI F1 in the latest Trustees Report. The fact that we, when things return to normal, in a highly open economy, means our fiscal insolvency will show up in terms of low levels of national income per capita, not low levels of GDP per capita. Aging is making the off the books liabilities gargantuan. So if they are left out of the analysis, the main manner in which aging matters is being ignored. Sorry for the tough love. Initial reaction. Will now read the paper.

Thank you. I was going to write your comment and reference you (if that is really you), but you beat me to it.

Hi, Larry. Your concern is about the definition of wealth, both at the individual and the country level. Should the beneficiary of a defined-benefit pension plan include its present value as part of his/her wealth? If yes, under what conditions, particular what should it be assumed about its expected funding?

Indeed, I think the beneficiary of other types of pension plans (like the one I have from a Chilean AFP) should include the present value of the life annuity.

Last Monday I read about a U.S. Supreme Court's decision

Yeah, those present values look a lot different at 2% than at 8%.

When we get to artificially induced negative interest rates, not only will the national debt be sustainable, but it will become a profit center for the US treasury.

People will then need to hold politicians accountable for NOT deficit spending because they're not adding to our debt profits.

If we have a savings glut, why do the central banks have to work so hard to repress interest rates directly and by buying assets?

Concern about liquidity traps. Concern that banks will have problems with clients who will default on their debt, making the bank less able to lend. Because we want to goose it for the election. Also: question you assumption that we are repressing rates and ask yourself: why are people willing to accept them if you think there are better opportunities elsewhere. There are probably better opportunities, but in a risk averse environment, people are risk averse and seek low risk assets. Think of it as a shortage of low risk assets relative to demand for low risk assets.

Thanks, but are we really in a risk averse environment? The stock market is up 40% in the last two months along with nearly every risk asset class you can think of. The primary purchaser of safe US Treasury debt these days is the Fed.

That's a good question: notice that you value stock based on the dividend relative to a riskless return. If interest rates are low, ask yourself, which way does the stock market go. I know you know the answer.

I was really answering Just above. Ask yourself though: Is the economy risky at the moment. You have enough information to answer that question yourself.

Cash is king. Now I’ll be able to pick up LV and rolexes for a song. The procurer just needed to be in the right place, oh look at that pallet of bricks just sitting there! And a few minutes for a great return.

I still cannot fathom the active market in TVs. There might Be an argument for going back to the tube since those innards make them heavier. It’s hard to run when trying to carry a 150 pd. TV.

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