The Economics of Shrinking Populations
by Travis Pantin
Thu, 20 Dec 2007 at 12:02 PM
Most of Middle and Eastern Europe is projected to suffer from rapidly shrinking population over the next decade, according to data released by the United Nations. On the VoxEU blog, three German economists explain how they think these changes will likely impact the European economy.
Public goods – like roads, sewers, and streetlights – become cheaper to maintain as the system grows, they write. "The production of many public services entails substantial fixed costs. A minimum staff size is often necessary to cover provision of all public services required by constitutional rules. For example, providing streets or wastewater networks involves significant set-up costs, which are to a considerable extent independent of the number of users."
So when a country's population shrinks, it becomes proportionally more expensive to maintain such systems. This decline in public amenities can "accelerate the population drop."
A shrinking population can therefore launch entire regions "into a downward spiral" as increasing cost pressures "lead either to a deterioration of services or to increasing fees and local taxes. This impairs the region's position in the competition for mobile workers and companies. A process of negative cumulative causation is the outcome, thereby further aggravating regional disparities."
PROGRESSIVE TAXES
Over the past week, several economics bloggers have been debating the perennial question: Do the rich pay too little, too much, or just the right amount of their income in taxes?
An associate professor of economics at George Mason University, Alex Tabarrok, writes (snurl. com/1vkfd), "Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive. Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes. … Effective tax rates are considerably higher on the rich than the poor."
He continues, "The effective tax rate is higher on the rich and the rich have more money — put these two things together and we can calculate who pays for the federal government. … The top 10% of households by income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes." But an anonymous blogger at Bluematter argues that Mr. Tabarrok is barking up the wrong tree. "The progressivity of income tax is not the issue at all. What really matters for people's welfare and purchasing power is wealth," he writes.
"Looking at the tax system as a whole, the rich pay a scandalously small proportion of their wealth in taxes, the poor a scandalously large one," he writes. "And still we have this ridiculous situation whereby people try to figure out how redistributive our society is by looking at the flow of purchasing power and ignoring the bloody stock."
The Bluematter blogger finds it necessary to add, "this is all positive analysis, and descriptive — rather than policy prescriptive. I'm not saying the rich should be paying more and I'm not saying that they shouldn't. I'm not saying we should be looking to tax wealth rather than income either."
MCCAIN'S ECONOMIC POLICY
On Market Movers, Felix Salmon responds to Senator McCain's recent comment that he "never really understood" economics. "Can a president delegate the economic stuff? … Is that realistic?" Mr. Salmon asks.
"I think that maybe it is," Mr. Salmon writes. "There are certain areas where a president really has to make the big decisions himself, and those areas center on foreign policy. But I don't think that fiscal policy needs a hands-on president: Bill Clinton, for one, was never better at fiscal policy than when he sat back and let Bob Rubin make the decisions and do most of the talking."
However, he adds that a president probably should understand the most important issues in some depth. "It would be incredibly hard to simply sign on the dotted line because your vice-president and treasury secretary told you to do so," he writes.
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