Generational Accounting in Open Economies

1
Generational Accounting in Open Economies

• Eric Fisher, UCSB
• Kenneth Kasa, SFU

2
Introduction

• Budget Deficit and External Deficit are Cash-flow
  Measures
• Generational Accounts are based upon Accrual
  Accounting Methods
• Theory and Measurement Go Hand in Hand

3
What is a Cash Flow Measure?

• Say the government of California owes some
  contractor 1,000,000
• They want the books for 2005 to look good.
• So they delay the payment for one month
• They make the payment in January 2006
• To make the contractor whole, they actually pay
  1,000,000(1i)(1/12)
• Nothing changes, but the books are cooked

4
Does this sort of thing really matter?

• Unfunded liabilities matter quite a bit
• It is especially important for a government to
  state clearly its future liabilities
• Consider a country that has no national debt and
  no current government deficit
• It could be in bad financial shape if demographic
  changes are going to have a big impact

5
Contributions of our Paper

• Calibrate Weils (1989) Model to Data from U.S.
  and Japan for 1981-95
• General Equilibrium Effects
• Cross-country Effects
• Go Beyond Auerbach, Gokhale, and Kotlikoffs
  Equal Treatment of Unborn Generations

6
Population Growth and the Deficit

• The federal government gives 1,000,000 to people
  alive today
• The interest rate is 5, and the population
  growth rate is 1
• The interest burden on this debt is 50,000
• Since there are new people in the future, the
  current generation only needs to pay 40,000.
  Hence, the tax burden is diluted.

7
Summary of the Findings

• Crowding-out is Small (2 basis points)
• Most Effects are Intergenerational Rather than
  International
• Calibrated Present Value of a Cohorts Human
  Capital is 336,700
• Reagan Deficits Helped Americans alive in 1981
• Future Americans and Japanese are hurt by these
  policies.

8
The Model
9
What do these symbols mean?
10
Understanding these Equations

• The first one says that consumption will rise if
  real interest rates are high, and if the rate of
  capital thinning is small
• The second one says the national debt rise is
  interest rates are high or taxes are small
• The third one says investment equals savings in
  the national economy

11
Solution Technique

• Forecast Debt Paths for the U.S. and Japan
• Integrated World Equilibrium
• Calibrate the model to 1981 U. S. Data
• Judds (1985) Laplace Transforms Give the
  Transitional Dynamics

12
Figure 1 Government Debt as a Percent of GDP
13
Understanding this Graph

• The US was running deficits in the Reagan years.
  These deficits increased the stock of debt and
  crowded out real investment
• Japan was running surpluses
• What was the overall effect on the world economy?
• The world here is a model economy that consist of
  2/3 USA and 1/3 Japan

14
Figure 2 Current Accounts as a Percent of GDP
15
Figure 5 The World Real Interest Rate
16
Understanding this graph

• There was not much crowding out
• The slight increase in interest rates will lower
  the present value of all human wealth, in Japan
  and the USA

17
Figure 6 Generational Accounts
18
Understanding this Graph

• Before the change in government policy in the USA
  and in Japan, the present value of human wealth
  was 337k
• The US gave a few generations some buying power.
  The all future generations will lose about 5k in
  wealth
• Japan accommodated the US deficit to some extent.
  Future generations in Japan are hurt to a slight
  extent. They end up owing some wealth in the US.
  The typical Japanese will own around 3k of US
  assets in the long run

19
Figure 8 Generational Pattern of Net Foreign
Assets
20
Conclusion

• Auerbach, Gokhale, and Kotlikoff are not Wrong to
  Take Real Interest Rates as Given
• Weils Model is Flexible and Realistic
• Judds Technique is Apt for Generational
  Accounting
• Fishers Criticisms of the Conventional Current
  Account Matter to Some Extent