Other aspects related to pension economics and finance
Title: The debt tax shield, economic growth, and inequality
Participants: Marcel Fisher and Bjarne Astrup Jensen (FI, CBS)
Description: We study the implications of the corporate debt tax shield in a growth economy that taxes household income and firm profits and redistributes tax revenues via pension payments in an attempt to harmonize lifetime consumption opportunities of households that differ in their endowments. Our model predicts that the debt tax shield (1) increases the risk-free rate, (2) leads to a higher growth rate of the economy, and (3) increases the degree of disparity in households' lifetime consumption opportunities. We further quantify how the debt tax shield affects the tradeoff between the goals of achieving a high growth rate of the economy and a low degree of inequality.
Title: The Implications of the Decline of European Manufacturing for Productivity Growth and World Interest Rates
Participants: Michael Burda (Humboldt University), and Battista Severgnini (ECON, CBS)
Description: This project seeks to uncover the puzzle of the decline of manufacturing industry in Europe that started in the early 1990s, to understand its origins, and explore its significance for the world economy. It may help use to understand the persistent decline in real interest rates which has occurred across the world and especially in Europe over the same period.
First, we would like to understand the slowdown in manufacturing multifactor productivity in Europe which started in the early 1990s and continues to date. This is a new phenomenon that was certainly not recognized at the beginning of the millennium (see for example Blanchard and Solow’s well-known McKinsey (2002) study on European productivity). We would document this with high quality macro and possibly micro data, taking into account sectoral changes that have occurred in Europe over the past decades.
A second puzzle is that Europe’s decline in manufacturing is not uniform. In contrast to the findings of Rodrik (2013) for the world economy, labour and total factor productivity in manufacturing industry is diverging within Europe. It is also lagging behind that of the US in a process that seemed to begin in the early 1990s. In particular, southern Europe has fallen behind, while most of northern Europe has not. While this divergence in productivity has particular importance for the survival of the European Monetary Union, it began in the 1990s and is not, contrary to common opinion, with the introduction of the Euro. The puzzling rise and fall of productivity in Europe relative to the United States is best explained in a conditional regression analysis (Griffith et al. 2014) which admits a role for information technology investment and adoption, competition and openness, product and labor market regulation, and corruption.
This project has relevance for the current macroeconomic puzzle of low real interest rates. The EU represents more than 500 million consumers and more than 20% of the world’s GDP. A slowdown in business fixed capital formation in this part of the world and a reduced presence at the frontier of innovations in manufacturing would have global implications, not just for flows of global foreign direct investment, but also for the overall demand for capital goods. In the final part of the project we would investigate the implications of Europe’s slump for the world’s demand for investment, GDP growth in general, and the level of interest rates in the world.
Griffith, R., S. Redding, and J. Van Reenen 2004, “Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries," The Review of Economics and Statistics, 86(4), 883-895.
McKinsey Global Institute 2002, “Reaching High Productivity Growth in France and Germany.” October.
Rodrik, D. 2013."Unconditional Convergence in Manufacturing," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 165-204.
Title: Studying Danish Inequality on a Comprehensive, Economic Basis
Participants: Svend E. Hougaard Jensen (ECON, CBS), Laurence J. Kotlikoff (Boston University) and Bernd Raffelhüschen (University of Freiburg)
Description: Pensions, both those provided by employers and those provided by the state, represent important forms of household wealth. Yet they are seldom incorporated in studies of inequality. Indeed, much of the concern about inequality stems from the concentration of net wealth. For example, in the US, the richest 1 percent of households, ranked by their economic resources, account for almost 20 percent of the cohort's net wealth. This is obviously highly unequal. But would including pension and other forms of wealth, including human wealth change the picture? And doesn't one also need to account for negative wealth, specifically the present value of projected future taxes. The answer, of course, is yes. When one adds all the positive and negative wealth components together one arrives at lifetime spending power, which should be the real focus of inequality discussions. In the U.S., inequality in spending power is far smaller than is inequality in wealth. For example, the richest 1 percent of 40 year old households account for only 9 percent of spending power, i.e., top-1 percent inequality measured correctly is, for this cohort, less than half of what one would think from considering only net wealth. In this study, we would like to undertake a similar analysis for Denmark and would, of course, need to re-programme the model for Denmark.