Health versus Wealth: On the Distributional Effects of Controlling a Pandemic

April 27, 2020

By Andrew Glover, Jonathan Heathcote, Dirk Krueger and José-Víctor Ríos-Rull

To slow the spread of COVID-19, many countries are shutting down non-essential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a utilitarian government that can redistribute across individuals, but where such redistribution is costly. We show that optimal redistribution and mitigation policies interact, and reflect a compromise between the strongly diverging preferred policy paths of different subgroups of the population. We find that the shutdown in place on April 12 is too extensive, but that a partial shutdown should remain in place through July.

Among the hundreds of papers already written on COvid-19, a few stand out, and this is one of the select few. Proper confinement design is an important question, especially as it has very strong distributional consequences. Here, the best tools of trade are applied to understand the consequences of the current confinement policies. Of course, the paper was produced in record time and you could argue about some choices, but this draft shows clearly that a more nuanced approach is warranted. History will tells us whether this is right.

The Murder-Suicide of the Rentier: Population Aging and the Risk Premium

April 20, 2020

By Joseph Kopecky and Alan Taylor

Population aging has been linked to global declines in interest rates. A similar trend shows that equity risk premia are on the rise. An existing literature can explain part of the decline in the trend in safe rates using demographics, but has no mechanism to speak to trends in relative asset prices. We calibrate a heterogeneous agent life-cycle model with equity markets, showing that this demographic channel can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing premium attached to risky assets. This is because the life cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue push the risk free rate further into negative territory, while the equity risk premium remains elevated.

To continue on the theme mentioned here two weeks ago, population aging is crucial for some many economic outcomes. This paper adds to it. However, I am starting to wonder whether the current pandemic is going to make those changes less drastic as it will lead to less pronounced aging of the population.

Should Germany Have Built a New Wall? Macroeconomic Lessons from the 2015-18 Refugee Wave

April 13, 2020

BY Christopher Busch, Dirk Krueger, Alexander Ludwig, Irina Popova and Zainab Iftikhar

In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population.

This paper addresses a question that is delicate yet needs to be answered: What are the consequences of an influx of refugees. And once more, it shows that the outcome is generally positive on the economic side. And as long losers are compensated and socio-ethnographic concerns are addressed, a wave of refugees should be fine.

Demographics and the decline in firm entry: Lessons from a life-cycle model

April 8, 2020

By Oke Röhe and Nikolai Stähler

Since the mid-1970s, firm entry rates in the United States have declined significantly. This also holds for other OECD countries over the past years. At the same time, these economies experienced a gradual process of population aging. Applying a tractable life-cycle model with endogenous firm dynamics, we show that falling US firm entry rates can be explained by demographic transition. Specifically, our model simulations suggest that aging can account for up to one third of the observed decrease in US firm entry rates. In addition to the negative effects of a slowdown in working-age population growth on firm entry, our analysis points out that an increase in longevity may also be an important factor contributing to the decline in business dynamism, weighing on both firm entry and exit rates.

Yet another paper highlighting that population aging is critical in understanding some deep changes in the economy. At this point, one has to ask what is not influenced by population aging. Or, one needs to justify why a model does not include population aging if it tries to explain some trend.