Public capital, public pension, and growth

Abstract

This paper constructs an endogenous growth model with overlapping generations, whose engine of economic growth is productive public capital. The government faces a trade-off in public policy between public investment and social security provision because of its budget constraint. Larger public investment accelerates economic growth. On the other hand, larger public investment reduces the social security provision. This may reduce the consumption stream of agents. We first show that when the government aims at growth maximization, it chooses no social security provision. However, we also show that the growth-maximizing policy does not maximize welfare levels of each generation on the balanced growth path. Early generations may demand social security provision because the benefits from economic growth caused by an acceleration of public investment are relatively small. In contrast, future generations may require no social security provision but a large amount of public capital. Additionally, by setting the tax rate below the level that maximizes the growth rate, the government can make the welfare levels of all generations from the initial state on the balanced growth path better off. Moreover, in an economy facing an aging population, an increase in the social security provision to the old rather than an increase in public investment can be preferable from the viewpoint of social welfare.

Labor or Capital Income Tax for Growth in an Aging Society

“…According to Cabinet Office (2020) 3 , Mai Chi Dao et.al. (2017) and Maebayashi(2013) Mai Chi Dao et.al. (2017) indicated the ratio of the share of capital and labor was 4:6 in 1970, but it is currently at 6:4.…”

“…In the body of this article, the endogenous growth model (Romer(1986)) is used to simulate introduction of public capitals proposed by Barro (1990), Barro and Sala-i-Martin (1992), Futagami et al (1993), Turnovsky (1997) and Yakita (2008). While public pension is introduced with taxation on both labor income and capital income as financial sources in Maebayashi (2013), I hereby establish separate model with taxation of capital income and labor income in order to analyze how they impact growth rate and social welfare.…”

“…This study is based on Maebayashi (2013). He indicated the relative scale of capital (private-public) will stably converge on the steady-state.…”

Public Investment Financed by Seigniorage and Money Supply Control

“…Previous studies that are closely related to this study include Crettez et al (2002), Yakita (2008), Maebayashi (2013), and Yanagihara and Lu (2013). All of these studies are characterized by a basic framework that is based on discrete-time overlapping generations (OLG) models a la Diamond (1965).…”

“…Yakita (2008) considered a situation in which government revenues from income taxes are allocated to new investments in industrial infrastructure and maintenance of infrastructure, and examined the selection of income tax rates to maximize the gross domestic product (GDP) growth rate and the allocation problem in relation to government spending. Maebayashi (2013) addressed the issue of social security benefits and infrastructure investment based on the model of Yakita (2008). Note that Maebayashi (2013) ignored infrastructure maintenance to simplify the analysis.…”