Class of October 9, 2015
1. Fertility and Education: George conveys the data very well. Additionally we noted that the fertility rate fell by ⅓ (3.0 to 2.0) exactly during the period when below-40 LF participation rates for women rose. Of course if you choose not to have children then work is … natural. But maybe the causation is rather that you choose work and therefore have fewer children. Correlation is not Causation!
To my surprise, the fertility rate of immigrants is quite close to the average – and that is without controlling for possibly lower average levels of education. If in fact the average for immigrants is lower (they certainly don’t have a US high school diploma!) then behavior could be identical. That doesn’t mean there’s no tie. My hunch is that immigrants are young on average, so there’s a composition effect: immigration may not raise the age-specific fertility rate, but it could raise the number of women in their childbearing years. Of course immigration in and of itself adds to population, and most are of an age where labor force participation is likely. (Again I have no data – I do know people who “sent for” their parents, that is, sponsored their immigration, so I could be wrong. Even then, older immigrants can still add economic value, because as grandparents they take care of the children so that both parents can work full-time. There is also a component of non-market “household” production, which is not counted in GDP: implicitly such children are paying their parents to serve provide daycare.)
2. Tax cuts: the analysis of Jerry makes sense: tax revenues lost up front, but eventually hitting parity … in 20 years. George (?) added another twist, which strikes me as exactly the right question: for parity within the time horizon of a 2-term president – 8 years – we would have to see growth jump from 2.5% to 4.0%.
I put his numbers into my spreadsheet: he assumes the full impact is felt from the year that taxes are cut. If it takes 4 years for the effect to phase in, as companies boost investment and people reevaluate consumption decisions, then (duh) the breakeven point is pushed back. When I used 0.5, 1.0, 1.5 for years 1-3, the impact is a one-year delay.
But when would tax cuts be most important? We did not go through in detail, but obviously it helps if individual taxes are cut for groups that save the least, such as those on minimum wages. In contrast, tax cuts for billionaires won’t much matter: if a billionaire ends up with an extra million, will he or she leap for joy and go out and spend most of it? – not likely. If we have an economy running at capacity, well, it’s running at capacity and we get no boost. Then there’s the Fed: will their behavior work against a tax cut having an impact?
Then there are businesses. How sensitive are they to the cost of capital? That leads to directly to our reading: Rosewall, Tom, and Kevin Lane. 2015. “Firms’ Investment Decisions and Interest Rates.” RBA [Reserve Bank of Australia] Bulletin, 01–08.
3. Rosewall and Lane ask firms what affects investment decisions. The answer is that firms maintain very conservative rates-of-return hurdles or short payback periods (net present value is affected by the timing of returns; payback calculations are cruder, implicitly assuming zero discounting). In addition, they adjust these infrequently. So neither (small) changes in tax rates nor small changes in interest rates will affect investment decisions. That’s back news: neither tax policy nor monetary policy have a direct impact on investment.
We did not have time to discuss indirect effects. What might those be? Furthermore, investment is volatile. Why? Does answering that point to other policy tools that might stimulate (or restrain) investment?