Date of Award
2010
Degree Type
Thesis
Degree Name
Doctor of Philosophy
Program
Economics
Supervisor
Dr. Elizabeth Caucutt
Second Advisor
Dr. James MacGee
Third Advisor
Dr. Karen Kopecky
Abstract
My doctoral thesis consists of three chapters in the field of quantitative macroeconomics. In the first chapter, I develop a quantitative macroeconomic model of health spending and use it as a framework to evaluate potential explanations for the dramatic rise in US health spending as a share of GDP over the last half century, i.e. from 4% of GDP in 1950 to 13% of GDP in 2000. I find that the main existing explanations, expanded health insurance coverage and income growth, only account for 48% of the rise in US health spending from 1950 to 2000. I propose and evaluate a new explanation for the rise in health spending: the expansion of US Social Security. Social Security transfers resources from the young to the elderly (age 65+) whose marginal propensity to spend on health care is much higher than the young, thus raising the aggregate health spending of the whole economy. Furthermore, by raising people’s expected future utility, Social Security increases the marginal benefit from investing in health and thus induces more health spending. I find that the expansion of US Social Security can account for a significant portion of the rise in health spending (21%). This finding suggests that another recently popular hypothesis for the unexplained residual, health technological progress, may be less important than what existing studies suggest (e.g. Newhouse (1992) and CBO (2008)). It also suggests
that Social Security policies have a significant spill-over effect on public health care policies via the impact of Social Security on health spending, that future studies on Social Security policies should take into account. In the second chapter, I propose a novel explanation for the postwar baby boom in the United States. I argue that the dramatic reduction in government debt financed by income tax after the Second World War was an important factor causing the postwar baby boom in the US. My theory emphasizes two mechanisms. First, a reduction in government debt in the current period implies a lower tax burden on children in the future and raises the children’s utility. In a Barro-Becker environment (in which the children’s utility is included in the parent’s utility function), an increase in children’s utility gives the parent extra incentive to increase fertility. Second, the implied higher labor income tax rate lowers after-tax wages and therefore the opportunity cost of child-rearing, which also induces the parent to increase fertility. The quantitative exercise shows that the government debt channel can explain 48% of the baby boom. In the third chapter, I study the differential effect of Social Security on fertility (by income) and its implication for the earnings distribution. I argue that social security reduces fertility by substituting children out of parents’ old-age portfolio. Furthermore, given its redistributional property, Social Security reduces fertility of the poor proportionally more than it reduces fertility of the rich, and therefore shrinks the fertility gap between the poor and the rich. Since earnings are intergenerationally correlated, the narrower fertility gap between the poor and the rich would generate a stationary equilibrium with a smaller portion of poor people and a higher average earnings level.
Recommended Citation
Zhao, Kai, "ESSAYS ON THE MACROECONOMICS OF HEALTH SPENDING, FERTILITY, AND PUBLIC POLICY" (2010). Digitized Theses. 3882.
https://ir.lib.uwo.ca/digitizedtheses/3882