Ageing and deflation in Japan

Inflation rates across industrialized economies have been remarkably low in the past decades, and at the same time these economies have been subject to considerable demographic ageing. Nowhere has this been more true than in Japan. What are the government's or the central bank's incentives to set policy that triggers lower inflation if the population gets older? I do not see where monetary policy would matter, but the fiscal theory of inflation may tell us something.

Hideki Konishi and Kozo Ueda study the latter in an overlapping generation model where the fiscal authority has a shorter lifespan than residents, but takes into account the impact of its actions on future governments. The fiscal theory of the price level tells us that inflation goes up when more debt is accumulated, and that is certainly the case when the population gets older and requires more retirement benefits. But the authors point out that this does not necessarily hold once you take into account the endogenous responses of income tax rates and public expenses. Then, because of the policy response it matters why the ageing is happening: lower mortality or lower fertility. Deflation is more likely in the former case. Now we just need someone to bring this to the data...

Why monogamy?

Isn't it interesting that most human societies, even when not in contact with each other, evolved to a model with long-term monogamous families? What made it crucial for evolution to avoid polygyny, communal families or repeated monogamy? Certain biological traits must have been necessary (and sufficient?) for this to happen.

Marco Francesconi, Christian Ghiglino and Motty Perry show that once you put this into the framework of a game theory model with overlapping generations, it all makes sense. You just need three features: children of different ages overlapping (i.e., women cannot bear "too many" children simultaneously), paternal investment (father need to help for children to succeed), fatherhood uncertainty (fathers may not be certain which children are theirs). This means that mothers need to secure the help of fathers by assuring that they are helping the right children thanks to monogamy. The first feature is necessary, but it is not clear to me why. I think it is because it gives more assurance to the father about paternity. Monogamy is then not only the most efficient family form in the sense that it maximizes the number of offspring, this is even amplified because it is the only form that creates altruistic ties between children.

Women's emancipation: more education and more divorces

Divorce rates are at an all-time high, and many blame a lack of morals. That is not a good explanation. There is always an economic argument in the background of societal change, and it is no different here. There is more divorce because the incentives are right for that. And if the incidence of divorce has changed, it must be because it now makes more sense for people to divorce, not because sentiments have changed.

Fatih Guvenen and Michelle Rendall argue that the cost of divorce used to be very high for the women. They have a natural bond to their children and want the best for them. But the lack of education and thus earning potential made it difficult for women to raise them on their own. With the increase of education among women, who have now overtaken men in this regard, plus the narrowing of the gender wage gap, the outlook is now much better for a single woman, mother or not. Thus she is more likely to seek divorce under the same circumstances as before. It also implies that women are less likely to seek marriage as they can better fend for themselves. Recall that the female labor supply has dramatically increased over the last half-century. The institution of unilateral divorce laws in the 1970s in the US also contributed to this evolution. Using a carefully calibrated model, the authors can actually quantify this with counterfactual experiments. 25% of the increase in education and half the increase of the female labor supply can be traced back to this divorce law reform. And this increase in education has a very substantial impact on well-being, corresponding to $11,000 a year. The model is rich enough to also quantify how good this education improvement is for attracting a better spouse, which is worth about $4,000 a year.

Japan's lost demographic decades

Since the asset bubble burst in Japan in 1990, the economy has stagnated despite significant policy efforts. Interest rates have been very low all along and fiscal policy has certainly not been austere. What was once labeled a lost decade has now become a pair of lost decades. Can only the burst bubble and the issues with the Japanese financial system be blamed?

Reiko Aoki thinks the demographic change in Japan has a large role in this extended stagnation. As is well know, Japan is aging considerably, and this has of course a dramatic impact of the savings picture. Financial institutions that were built to accommodate rapid growth and a young population looking to safeguard massive amounts of savings struggle to deal a much older population that is in the phase of eating its savings. Worse, as institutions need to adapt to the new situation, reform is hindered by the large voting block of the elderly whose interest lies in the short-term provision of their pensions.

Quite obviously, the current imbalance in the demographic pyramid is the problem. Aoki thinks that fertility must be encouraged. This has worked little in other economies, but may be much easier to implement politically than the best solution, get people to retire later. Immigration is another solution, but as other countries are looking to embrace similar solutions, we may run out of willing young migrants. And Japan is not the obvious choice for a migrant, given the high entry cost in terms of integration.

Longevity increased much before the Industrial Revolution

There is no doubt that average human lifetimes have considerably lengthened since Antiquity (except, maybe, Biblical times...). Improvements in living standards through better nutrition, salubrity and medicine likely were the major factors in this dramatic evolution. When this improvements started kicking in is a subject of debate, which is not helped by the fact that good data about lifetimes is difficult to come by. Written genealogical records go only so far back, and their quality and comprehensiveness declines considerably with age. And working from cemeteries is also quite unreliable, especially for longer horizons.

David de la Croix and Omar Licandro provide a very significant step towards a better understand of longevity in human history by compiling a database of 300,000 famous people spanning 25 centuries. The data includes information about location, religion, occupation, and nationality, which should take care of the major selection biases. They find that longevity was mostly flat throughout human history until it started increasing with the cohort born in the 1640s. This is before Malthus, whose assumption of stagnation is thus wrong. And this is much before the Industrial Revolution and has happened across the world and across occupations, thus the two events seem unrelated.

Better educated twins live longer

What is the secret to a long life? A healthy life style, good nutrition, few worries, few risks, little stress. That is all obvious. When you look at data, life-span has a very high correlation with income, education, and other measures of standard of living. Of course, none of this implies causation, if fact one may think that an expected longer lifespan leads people to get more education. Enter the twin studies.

Petter Lundborg, Carl Hampus Lyttkens and Paul Nystedt use twins, who have the same genes and where subject to the same starting conditions, to disentangle what leads to longer lives. Education comes here as a clear winner. Even differences between twins like birth weight cannot make this disappear. Having more than 12 years of education gives you a bonus of 2-3 years, whether male or female.

China's biggest threat: its men

Many people in the Western world are afraid of China as a new economic superpower. To a large extend, this is because of a mistaken belief that the world economy is a zero-sum game, and any progress in China is to the detriment of currently rich economies. Of course, rich economies mostly benefit from China's growth, as it makes some goods cheaper and opens new markets. And the richer countries are, the less they will want to get into destructive wars, if this is what you are worried about.

If there is a threat, it is rather from within China. First, there is a huge number of undocumented internal migrants who do not have access to social services. Second, as Jane Golley and Rod Tyers describe, there is a time-bomb resulting from an imbalance in the sex ratio. The surplus of men leads families to save too much in order to compete for scarce women to marry their sons to. The imbalance is so strong that regular immigration or human trafficking are not sufficient. But the most striking menace comes from the discouraged single and low-skilled men, who could amount to a quarter of all men of reproductive age by 2030, who are prime candidates for a criminal life. And reverting such trends is going to be very difficult.

Does the retirement age have an impact on when you die?

Being active in old age is thought to improve life quality, health and ultimately longevity. My grand-father painted and played brain games until late in his life, and made it to 92 really enjoying his last years. But beyond such leisurely activities, working also keeps you active. Does retiring later also prolong one's life? Answering that question is not straightforward because of the reverse causality. One may be able to work longer because one is of better health and thus will live longer. And of course, those who die early may also have retired early due to health reasons.

Erik Hernaes, Simen Markussen, John Piggott and Ola Vestad look at Norwegian administrative data and find no relationship between retirement age and mortality. To avoid the endogeneity issues, they exploit the fact that the retirement age was gradually decreased for some employers. The study also takes into account that employees may have switched jobs because of these changes. They check on the impact of the actual retirement age on mortality instrumenting with the entitled retirement age, and no matter the controls there is no relationship. So it looks like being active only has an impact on the enjoyment of life in the latter years.

About taxing children for climate change

While some impact from global climate change can already be felt, it is believed the significant impact will be for future generations. As the current generation would only face a cost to alleviate what leads to this climate change, one can make the argument that the future generations should pay us. But they are not there yet to do so. However, their parents are and these care about their offspring. So parents should be taxed to take care of reducing pollution and redistributing funds to those hurt by reducing pollution from current levels. That is a rather twisted argument to argue for future generations to pay (homework: where is the error?).

A better argument can be made for parents to pay. It is by Henning Bohn and Charles Stuart, who observe that each additional person exerts a negative externality onto the others by generating more population, taking more spaces, etc. That externality is not internalized, thus it needs to be taxed. Thus, whatever the reasons are that we subsidize having children needs to be amended by this tax. And by the calculations of Bohn and Stuart, the child subsidy could very well turn into a child tax. Indeed, the child pollution tax is 21% of life-time parent income per child, which is needed to divide the population by four in the long-run. However, that tax can be reduced to 5% if there is a cap of pollution permits set at current levels.

Of course, one can have endless arguments about the calibration used in the study. In this particular case, it is assumed that it costs 3% of output to reduce pollution by 25%. Also important is the output and time cost of children, as well as preference parameters. You may think of other parametrizations, but it remains that the child pollution tax makes sense. Only its amount it up to debate.

Divorce risk is good for the savings rate

Savings rates have declined over the last decades in developed economies. Many explanations have been offered for this, including the availability of better insurance that allows to smooth out better potential risks. One other that was suggested was that the higher divorce rates and the larger number of out-of-wedlock children would lead to lower savings because economies of scale in consumption do not kick in. An old paper by Luis Cubeddu and José-Víctor Ríos-Rull dispelled this idea, showing in a model economy that the higher risk of divorce actually increases the savings rate, as people foresee the risk and accumulate precautionary savings.

You may dismiss this theoretical result on the grounds that there is no way that freshly married people foresee increased divorce risk and react by saving more. And that may be why this paper was never published. But they there is now evidence from Italy that there is some truth to this result.
Filippo Pericoli and Luigi Ventura, who do not quote the above study, find that this precautionary saving is actually quite substantial at 11% of overall savings. So there, Italians are more rational than we thought.

About fertility declines in wars

A typical war has a large impact on demographics. People die, mostly men. Fewer people are born, because men a missing, both because they are on the battlefield or, as mentioned, dead. At the end of the war, fertility shoots up to catch up for "missed opportunities", and we get baby booms. Well that is the conventional wisdom, and it is not necessarily right. For example, there is some evidence, discussed here before, that the baby boom after World War II was not about the men returning home and catching up on baby making. And one could also challenge the idea that fertility drops during the war because of the absence of men.

Guillaume Vandenbroucke does this for World War I in France. he draws a model of fertility choice where couples factor in that the potential father may die in war. Of course, this reduces fertility, but the question is how much. To get an answer, the model is carefully calibrated to pre-war fertility, mortality and income figures. Then 97% of the drop in fertility is explained by expectations. Of course, this assumes that the French correctly predicted the probability of death. Given that this war lasted much longer than expected and introduced killing technologies of never-seen-before efficacy, I doubt this is a correct assessment of the expectations at the time.

How much does race contribute to poverty in South Africa?

It is no one's surprise that blacks in South Africa are poor, less educated and less healthy than whites, given the still rather recent struggles through apartheid. But the country has also gone through a remarkable reversal of fortunes, with blacks now running the country and leading some formidable efforts to raise the blacks from chronic poverty. In some ways, these efforts are much more substantial than those that have been made in the US, where blacks are still a minority and yet have remained in poverty with little progress for decades. It is therefore of interest to understand how things have improved in South Africa, and whether the damage from apartheid has been overcome.

Carlos Gradín focuses on poverty and deprivation, both of which still show considerable gaps between blacks and whites, and comes to the conclusion that they are mostly explained by education and "family background" (parents' occupation and education). This all points to the fact that education is the big policy option, but it will take considerable time to reduce the gap.

These results are obtained by estimating a reduced-form equation for blacks and then letting them assume the characteristics of whites. Unfortunately, this procedure does not allow to determine whether there is still some discrimination against blacks, which would have been of particular interest in this context.

The fall of internal migration

It is costly to move, and those costs vary by culture and economic circumstances. International migration is of course hampered by immigrations laws and cultural barriers. But in most countries, internal migration is free and only restrained by costs and some degree of local attachment. In this respect, Americans are considered to be the most mobile, as they are very willing to drop everything to pursue better opportunities while the housing market is, usually, very fluid. In fact, the perception is that this mobility has even increased in the US and that it has been hampered only in the last few years, due to the current difficulties in selling homes.

Raven Molloy, Christopher Smith and Abigail Wozniak take a close look at the data and dispel some of those perceptions as myths. In fact, US internal migration has been in a steady decline for thirty years, a decline that in apparent whichever way you look at the data: by socioeconomic household characteristics and distance moved. And this has change little with the current crisis, probably because the additional incentive to move (as there is substantial evidence that some structural mismatch, including a geographic mismatch, has increased the unemployment rate recently) has been roughly compensated by the poor saleability of homes. Still, internal migration rates are still higher than almost everywhere else.

The polygyny-slave trade connection

Polygyny, a male marrying several females, is now rare except for Africa and especially Western Africa. Why would it be so prevalent in West Africa? To sustain polygyny, one needs an unbalanced sex-ratio, which is not the case there.

John Dalton and Tin Cheuk Leung claim that this is just a matter of very persistent institutions. Indeed, the sex-ratio used to be unbalanced for extensive periods in West Africa, and in a more pronounced and persistent way than anywhere else, due to the slave trade. Indeed, it took away many males from the region through the actual forced emigration, but also because of the many tribal wars associated with slave capture raids (which Dalton and Leung do not take into account).

The military draft, mortality and education

The data sometimes work in mysterious ways and provide puzzling correlations that lead to interesting research questions. One such correlation is that exemption from military service leads to lower mortality later in life.

Piero Cipollone and Alfonso Rosolia find this while looking at a natural experiment following the 1981 earthquake in Southern Italy. Boys from the affected region were exempted from military service, and they were followed, along with non-exempted neighbors, to track their life and education. By concentrating on boys both sides close to the border of the exempt region, they find that those exempt ended up being more educated. I can easily believe that, as they were not spending some of their prime learning years hiding in bushes and peeling potatoes, and they were expecting a longer work life. But the exempt also have lower mortality. This is not due to a lower incidence of military accidents, it is rather linked to the higher school completion rates. In fact, the authors conclude that raising high school completion by 10 percentage points would lower mortality by one or two percentage points in the decade thereafter. That is impressive at that age.

The child quality/quantity trade-off in the Industrial Revolution

Non-economists cringe when they hear us talking about investment in children and the quantity/quality trade-off in this regard. Yet, this is a very real aspect of child rearing pointed out by Gary Becker that is at the core of many models, and has been found wild in nature. This trade-off is though to be an integral part of the demographic transition, where fertility suddenly drops massively in the course of development.

Marc Klemp and Jacob Weisdorf look at data from Anglican parish registers from the 18th century that contain all sort of demographic data to look at the child quality/quantity trade-off during the Industrial Revolution. Theory tells us that if the returns to education and/or the cost of time (wages) get larger, parents switch from having many children with no education to few of them with better education. Klemp and Weisdorf's data indicates clearly that this trade-off is present: each additional sibling reduces by 8% the probability of a child eventually becoming literate. That is a strong effect, in particular considering the larger number of children at the time, and its rather large standard deviation during this time of transition.

Fertility differences and agricultural techniques

There are times when you read a paper and you really wonder how the authors came up with the idea to check out a particular correlation in the data, because it seems to be so far-fetched. But thus a correlation can be beautiful if it also has a nice theory that comes with it.

The correlation that Alberto Alesina, Paola Giuliano and Nathan Nunn study is between current fertility and adoption of plough agriculture in history. OK, I did not think about that one. But now that they find a nice positive correlation, how could one explain it? They argue that this has to do that women and children are not particularly useful when ploughing, as strength is required. The traditional task of weeding, that fell on women and children, is not necessary with ploughing. Thus, there is a preference for fewer children that is ingrained in the culture of these regions to this day.

Fertility and self-control

The Beckerian theory of fertility decisions in the family is based on the rationality and self-control of the involved parties, which is in stark contrast of the Malthusian theory of population growth, which relies on people breeding without control. As so often, the truth lies somewhere in between, as it is clear people guide their fertility outcomes but their is a substantial stochastic element to it.

Bertrand Wigniolle reinterprets Becker's theory by adding lack of self-control in the for of hyperbolic discounting, that is, discounted values fall rapidly in the near future and more slowly for the distant future. Wigniolle uses a three period model with parents valuing number and quality of children. In period 1, they choose the number of children and pay time costs for rearing them. In period 2, they choose their education, and support the associated costs. In period 3, they only enjoy their children. Hyperbolic discounting implies that every period they regret some of their past choices. The model yields very different results depending on parameter values. If parents have grounds to invest in the education of their children, then fertility is lower due to the lack of self-control. Call this a developed economy. If parents have no reason to invest in education (say because its return is low), then fertility gets higher with hyperbolic discounting. Call this a developing economy. And this is very sensitive to parameter values. A further reason to push for more schools and opportunities to use human capital in developing economies.

Rent seeking in divorce

Divorce is breaking a marriage, and courts rule on the compensation of the involved parties. In countries where no-fault divorce is allowed, how compensation is allocated is very much dependent on the outside option of each party, particularly when negotiations happen without the involvement of a judge, who is then just a threat point. For example, when there is only consensual divorce allowed, the partner not seeking divorce has all the bargaining power. But when no-fault unilateral divorce is allowed, the roles are completely reversed.

Sietse Bracke, Koen Schoors and Gerd Verschelden study how the introduction of unilateral divorce changes outcomes in Belgium, where consensual divorce was already permitted. In particular they look at self-sacrifice, for example how some household member may specialize in home production and thus jeopardize her labor market potential and bargaining position in case of divorce, especially when there is no-fault unilateral divorce. Indeed, one can view this specialization as an investment in future rents from marriage, and divorce annihilates those.

To analyze this, the authors collected survey data from divorces in four cities for a year. Using alimony as a signal of bargaining power, they find that alimonies are higher or more likely for long marriages, for no-fault divorces, and when there is significant self-sacrifice. That would all be consistent by theory, but unfortunately these results are somewhat tainted by the fact that the law gives judges very similar directives for handling divorces outcomes.

Breastfeeding and cognitive skills

Breastfeeding is now almost universally promoted as the healthiest way to feed a baby. And indeed, while breastfed babies are a little smaller and than bottle-fed ones and gain a little less weight, they are healthier, it is thought mainly because the mother milk transmits antibodies and relevant nutrients. But not every mother breast feeds, maybe because not every mother realizes all the benefits, or because some of the costs are high (time management for working mothers or aesthetic issues). Or there are some other benefits that are not well known.

Maria Iacovou and Almudena Sevilla-Sanz report that breastfeeding has significant positive impacts on cognitive skills (reading, writing and mathematics). While this correlation is well known, it may be spurious because mothers who breastfeed are more likely to be well educated (Irish example), and their children are also more likely to be well educated as well. The obvious way to overcome this statistical issue, a randomized trial, is not feasible on ethical grounds. What Iacovou and Sevilla-Sanz do is use propensity score matching, which essentially matches babies that have the same characteristics but breastfeeding and then compare their cognitive skills. What is particularly impressive in this study is that the retained characteristics are very broad beyond baby demographics and health, including parent characteristics such as education, job, income, and even pre-birth attitude towards breastfeeding or home and neighborhood. And even after controlling for all these variables, the impact of breastfeeding is still significant on babies from Bristol (England), and it may even grow with age.