- So, good afternoon.
I'm Kim Ruhl, and it's my
privilege
to welcome you to the third
annual
David K. Backus Memorial Lecture
at NYU Stern School of Business
and to introduce our
distinguished speaker,
Professor Timothy Kehoe.
I'm extremely fortunate to have
had
two great economists as mentors.
As a young professor at Stern,
Dave Backus helped me figure out
what it meant to be a
professional economist
and how to navigate the
obstacles
that life and our employers
put in front of us.
And it wasn't just me.
Dave helped hundreds of students
and young economists find their
way.
His influence is felt the world
over.
In graduate school, Tim Kehoe
shared his time and wisdom
with a very young version of me
and put me on the path to
who I would later become.
Tim is also a prolific advisor
and mentor,
and it's no accident that Tim
and Dave
were such close friends.
Tim is here today to
share his thoughts with us
in honor of our friend Dave.
Tim holds a PhD from Yale
University
where he met and studied with
Dave,
roommates, I believe.
After positions at MIT and
Cambridge,
Tim joined the University of
Minnesota
where he's currently the
Distinguished McKnight
University Professor.
Tim's a fellow of The
Econometric Society
and the Society for the
Advancement of Economic Theory.
Tim and his coauthors have
written foundational papers
in general equilibrium theory,
the theory that forms the
foundation
for all of modern macroeconomic
models.
And his seminal work on the
theory of sovereign debt
has shaped our understanding
of self-fulfilling debt
crises and default.
Tim is one of the giants
upon whose shoulders so
many of us have stood.
Now, this might make it sound
like Tim
is some sort of ivory tower
academic.
That's not true.
Much of what Tim has done has
focused on
the tough choices policymakers
have to make every day.
Tim's advised governments
and central banks all over the
world,
including in the early 1990s
Tim served as a special economic
advisor
to the Mexican government
during the NAFTA negotiations.
Not the renegotiations though, I
guess.
(audience chuckling)
Good, good.
Tim is currently working on a
project
joint with researchers at Stony
Brook and Harvard University
that studies the impacts
of an aging population
on Medicare and Medicaid.
How will taxes have to change to
finance
the growing share of elderly
people in the United States?
What will those tax rates
do for labor supply?
What impact will they have
on saving and investment?
How will the effect differ in
high income
versus low income households?
How will it affect people
with college degrees
versus people without college
degrees?
The enormity of these questions
requires modeling the entire
economy,
not just the healthcare
sector in the government.
Tim brings a macroeconomic
approach
and his expertise to
bear on these questions.
The government's role
in healthcare provision
is at the forefront of
our political debate.
No jokes for that now, maybe
later.
And we're fortunate to have
someone
with Tim's expertise with us
today.
Please join me in welcoming
Professor Timothy Kehoe.
(audience applauding)
- Thank you, Kim.
This could be emotional for me,
for a bit.
Once I get into economics I calm
down,
or I get excited but in a
different way.
I'm really happy to be here
today.
Looking out, I see so many
friends of Dave and family.
I just wanna mention a few
of them right up front.
Of course, Marilyn, Dave's wife,
and his children, Paul and
Melanie,
and his brother and
sister-in-law,
Katherine and Warren.
I could mention...
Well, wait a minute.
This is a mixture.
About half of you
are family and friends of Dave.
And the other half are young
people.
Dave would be excited about
that.
As Kim mentioned, he's quite a
mentor
and promoter of young people.
Now I'm overwhelmed.
And I'm overwhelmed because of
the honor
of giving the third David
K. Backus Memorial Lecture.
But I'm much more overwhelmed by
thinking about Dave,
who is one of my closest friends
in life,
and is my classmate and
housemate,
oof, in a dump of a house
(audience chuckling)
in 30 Winchester Avenue.
One of the worst
neighborhoods in New Haven.
There are a lot of grad students
who lived on Mansfield Avenue
which was a block closer to Yale
than us,
and they'd always
complain about the muggers
and thieves.
And we said, well, we
don't worry about them
because we live in the
neighborhood with them.
They go from our neighborhood
over there.
I'm looking out there, and
I'm thinking, some of you...
now, Dave's sister Lois
can't be here with us today
because she just moved to
Seattle.
She spent a year living with us
when she finished at Holyoke
and before she went off to
Afghanistan in the Peace Corps.
She was a real veteran.
Dave's youngest sister Ruth
came and spent a week with us
when she was in high school.
Sometimes I've heard
her tells stories of me,
when she was 17, teaching
her how to drink.
I hope that we're not...
If we remember that stuff too
much
I could go to jail even now.
(audience laughing)
And my brother Patrick
during the summer when
he was still an undergrad
came and lived with us.
He already knew how to drink
beer.
(audience laughing)
We played a lot of softball.
And Dave and I tried
to teach him economics.
Eh, eh.
Okay.
Okay.
Laura is a very good friend of
mine.
She never lived with us.
- No.
- No.
- [Laura] I did know how to
drink though.
- No, okay.
But you were kind enough to
invite me
to your wedding in Pittsburgh
when Dave and I were grad
students.
Okay.
So all of you who knew us at
the time are gonna remember
Dave and Tim's rule.
Nothing in life that's good
can't be better with a couple
beers.
Maybe before, after, during.
That includes funerals.
That includes economics
lectures.
Maybe you have to wait til
after,
but it can make it a bit better.
Okay.
Preparing for this, guys,
I gotta get to my lecture.
But preparing for this,
I went through,
and really, it's the
first time in three years,
some of the emails that Dave and
I shared
in May and June of 2016.
I had all this woven into a
talk.
My wife Genie told me,
it's gonna be too long,
you'll be crying too much,
and that's not what this event
is.
We've already done that.
We've done our crying events.
This is to remember Dave with
joy.
Okay.
So let me just read a little
piece.
A couple weeks after Dave died
I was in Toulouse
at the Meeting of the Society
for Economic Dynamics.
And Dave was a very important
member of that society.
And I got up and I read
a little memorial thing.
I just wanna do that for you
now.
This is just part of it.
I posted news of Dave's
death on my Facebook page
during the night of Monday, 13
June, 2016,
the day after he'd died on the
Sunday.
More than 200 people commented.
The most common comment was that
Dave was one of the kindest,
most generous people,
maybe the nicest person in
economics.
At a memorial ceremony for Dave
at NYU,
immediately afterwards
I was especially touched
by the words of Stan Zin.
Stan talked about what a big
hole
Dave's death had left in his
life.
But he concluded that the best
we can do to remember Dave
is to strive to be like him
in his kindness, generosity
and helping others,
students, colleagues, coauthors,
to be the best they could.
We can be honest and
straightforward in our
criticism,
as Dave was, but we need to
strive to be kind and generous
as he was.
I've tried to do that.
I've failed.
(audience laughing)
But imagine what an
ornery, old dude I'd be
if I hadn't at least tried.
(audience chuckling)
Okay, so I talked to Kim
about what I should present.
We published a paper in the JPE
last year
with our friend Joe Steinberg
that was really inspired by
conversations
that Kim and I had had with
Dave.
And Kim said, no, that's old
stuff.
That's not what Kim would want.
He'd want something new
and that you're excited about.
So that's what I'm gonna try to
do.
Kim already gave a great intro,
so let me jump into it.
Okay.
U.S. old age dependency ratio.
That is the number of old people
compared to working age people
is gonna increase.
The main causes are drops in
fertility, less young people,
and increases in longevity.
That's gonna lead to
higher government spending.
How are we gonna finance it?
Well, we could cut benefits.
We're not gonna explore that
much here.
Or we could keep the programs,
particularly Medicaid,
Medicare and Medicaid, in place.
We have Social Security here.
It turns out that's not as big a
problem
in the United States
as it is in a bunch of European
countries.
And we're gonna get results
like other researchers have
found.
We're gonna need big increases
in taxes.
But what I'm gonna talk
about here today is meant to
make you a little bit more
optimistic about the future.
Because there's another big
tendency
that's going on in the U.S.
economy.
The number of people
with college education
is a fraction of the adult
population.
It's increasing all the time.
It turns out
that's gonna make people older.
College educated people,
and this is robust,
controlling for lots of other
influences,
but they know how to read and
think a little bit better.
That's at least what we
hope as college educators.
They live longer, and
they're healthier longer.
So we're gonna build that into
the model.
And what are we gonna find?
I'm gonna get to that in a
second.
First, I notice
I've gotta tell you a bit about
the model.
Don't worry.
I have, for you
professional economists out
there,
you're saying to yourself,
what the heck is Tim doing?
He's a technical economist
and he's giving us a lot of
words.
Yeah, I'm gonna give you a
lot of words and stories.
I've got the Bellman equation
still.
And we're gonna get to those in
a minute.
Okay.
But what we're gonna do
is we're gonna build a
model of the economy.
You're just gonna think to
yourself
when you hear about the
detail that goes into that,
wow, that takes one heck
of a computer program to work
with.
Yeah, and it does.
It sure does.
In fact, the people at the
Minnesota
supercomputer laboratory
were getting a bit sick of us
because we took up all their
space.
This is joint work with
Juan Carlos Conesa.
He's the guy from Stony Brook
who we were talking about.
Two young guys.
Vegard Nygaard, who just
became an assistant professor
at University of Houston,
and Gajen Raveendranathan
who's up in McMaster
University outside Toronto.
Well, turns out that Gajen
has access to this giant
Canadian supercomputer system,
and so we're making even more
progress.
And I'll get to that in a
minute.
Okay.
We're gonna put all this into a
model.
We're gonna look at balanced
growth paths,
which are relatively easy to
compute and get ideas from,
and then we're gonna
look at transition paths
that just tells us
what's gonna happen over the
next century.
A couple caveats here.
We are assuming,
we're assuming that healthcare
costs
are not gonna increase faster
than the economy itself grows.
That is not quite in line with
the data.
But you know, if healthcare
costs keep increasing
at the same rate that they've
increased
over the last 20 years,
we're screwed.
That's a technical term
but, you know what I mean?
Let's assume we can keep
our healthcare costs
in line with economic growth,
that they are gonna be growing,
but not by more than like
2% per year per capita.
And I'm gonna show you aging,
that other people have
looked at, is pretty scary,
but not when we take into
account
that people are gonna be more
educated.
And I'm gonna show you why
general equilibrium is
important.
There's a little fuss in
economic of healthcare
because it's dominated by
applied microeconomists
who don't like macroeconomists,
and they certainly don't
believe in general equilibrium.
They're wrong, we're right,
okay,
but that's just a side thing.
And then I'm gonna show you
how we have to do transition
paths.
Then we need serious
computation of the sort that
Juan Carlos was a student of
mine at Minnesota as well,
and he and Dirk Krueger did
real pioneering work on this.
But that was 20 years ago.
So that's why we need
young guys like Gajen
come and take over.
Okay, so here's the result.
This is in line with what
other people have come up with.
If we keep other institutions
constant
and take into account college
attainment
but keep that as a fraction
of population constant
we're gonna start needing to
change
the average tax on labor income
from about 32%, as it is now,
for the average American,
counting up all the labor taxes,
including Social Security,
payroll taxes paid by employers,
and income taxes.
That's gonna have to
increase to more than 44%.
And as Kim alluded to, oof,
that's tough
because we're gonna
have fewer young people.
They're gonna have to work,
and we're gonna tax the heck out
of them.
And they won't wanna work so
much.
The situation could be dire.
But if we take into account
higher college education
that increase goes down
from 12.4 to about 2.3%.
It's not so bad.
More and more college, that's
good for us college teachers,
can help save the U.S. economy.
And I'm gonna talk about
what's gonna happen to asset
prices.
I'll talk briefly about the
topic
of whether U.S. interest rates
are determined in Beijing.
No, they're not.
What Chinese monetary policy
determines
is the U.S. dollar-yuan exchange
rate.
And this is something
that Kim and I showed
in this paper with Joe Steinberg
inspired by some of this stuff
Dave got us thinking about.
No, U.S. interest rates
are determined here.
And they're gonna be falling
as the population ages.
Okay, there's a literature on
this.
I put this up here.
If there's any of you guys
out there who contributed,
congratulations.
Let me just move on.
(audience laughing)
Okay.
So, consumers are born.
But in every period in the
model,
which is gonna be every two
years,
they're hit by shocks.
They're hit by shocks
through their labor income,
and they're hit by shocks to
health,
especially as they get older,
as some of us are.
Then they choose how much labor
to supply,
how much to consume, how much to
save,
and what to do in terms of
healthcare.
The government is gonna
provide Medicare, Medicaid,
Social Security, and something
we call emergency relief.
Now, this model is gonna
be carefully calibrated
to all kinds of micro data
on consumer expenditures.
And across states these things
can differ.
And we're working on that.
With the Affordable Healthcare
Act,
some states bought into
increased Medicare and Medicaid
provision, and some didn't.
And that should have an impact.
And we're working on that.
We're not gonna do that here
because we're gonna stop
this thing right around 2010,
the changes that we're putting
in the healthcare system,
so we're not looking at
Affordable...
The Obamacare, as they call it.
Remember, people didn't used to
like that.
And now we've decided we love
it.
Okay.
That's the only political
joke I'm gonna make.
Oof, I was just down in Dallas.
There you gotta be careful.
There's a lot more Republicans
out there.
And it's gonna collect all kinds
of taxes.
Something interesting that we
found,
and Juan Carlos you helped us
find it,
but it also indicated that you,
and Dirk,
and some of your collaborators,
made mistakes not including all
this stuff
back in your pension days.
Turns out, to get a lot of these
effects,
you need the full tax system in
there.
If you just think of
what labor tax you need
to increase healthcare provision
when you have almost zero
labor taxes, it's small,
well, it can be 10%,
but the distortionary impact
of that is not very high.
When you're at 30% and you
increase to 40,
the impact of that in reducing
labor supply is pretty brutal
because you're getting closer to
something kind of embarrassingly
we economists call the
top of the Laffer curve.
If you don't understand what
I'm talking about, don't...
I mean, try to figure it out
and don't worry about the
Laffer, Laffer.
Okay, let's just move on.
Insurance, we're gonna have
employer provided insurance,
private healthcare insurance,
and we're gonna have firms
in a very simple way.
Every consumer is gonna
have a state variable.
Every two years, they
know what their age is.
That just moves forward
by one every period.
Their education, which is locked
in.
In the current version of the
model
somebody else must have chosen
who got the education, like
parents.
And you lose the first
period starting in...
When you're 20 is when
you're gonna start out.
Before that, you live with your
parents.
And really it's more like
non-college educated people
start between 18 and 20,
and college educated people
start between 22 and 24.
But this current version we
don't look at that choice.
We're just gonna take trends
into account.
Depending on whether you're
college educated or not
you have a profile of labor
earnings,
what's called the hump shape.
It's especially hump shaped
for less educated people.
You get more and more productive
over time
and then as you get old
you get less productive.
But we're gonna have separate
ones
for college educated people and
non-college educated people.
But they're gonna get lots of
shocks,
including unemployment.
As people get old
they're gonna get Social
Security and Medicare benefits.
We haven't yet, our model is
perfect
for thinking about what happens
when you move those back
as people get older.
And we're gonna have to
do that as a society,
but that's not what we're
focused on here.
Health and age are
gonna determine Medicaid
and medical expenditures,
and survival probabilities
depend on age, education, and
health.
See, one of the health statuses
we have is
dead.
And usually, before you're dead
you go through bad shape.
Although that doesn't always
happen.
You guys want a picture, and
I'll show you this in a while.
One of the big things
we did with micro data
was estimate this giant Markov
matrix
that says what's the
probability of tomorrow,
being two years older, of
course,
but high earnings, good
health state, and so forth,
given where we are today.
Medicare is gonna cover
half of the medical expenses
of consumers 65 and older.
Last year I got a Medicare card.
I'm not sure still what
I gotta do with it,
but Genie told me I better sign
up.
Medicare and Medicaid is gonna
cover
a lot of medical expenses,
but you gotta be poor.
There's conditions you gotta
meet.
We found in our other paper,
in another paper we had worked
on,
that the idea of eliminating
Medicare
did not save that much money.
It only saved 46 cents on the
dollar
that was saved just by reducing
Medicare
because it'd force a lot
of lower middle class
and working class people in the
United States into Medicaid.
That kind of margin is kind of
obvious,
but people hadn't pointed it out
enough.
I already mentioned
we're mixing together data,
at least at this point,
from all kinds of different
states.
So we take averages to get this
thing
where we just reduce form.
We call it emergency relief.
That includes food stamps,
emergency medical programs,
all kinds of other stuff.
That's just kind of on average.
Government's gonna consume,
and it's gonna have debt.
Juan Carlos and I
as late as last summer thought,
oh, introducing government
debt in this model
is not gonna have a big impact.
It actually does
because if interest rates are
going down
the pressure on the government
budget
of increased debt is greatly
reduced.
And that's something that was
kind of an education to us.
And then the government's gonna
have a broad range of taxes.
Right now we just have a
flat tax on labor income.
We've done it with progressive
taxes,
like the U.S. tax system in some
ways is,
in some ways isn't.
You gotta get the details right.
Social Security taxes are
regressive.
But doesn't impact the results
that much.
Let me get into a few details
here.
I've already mentioned this.
We've looked at, ah, our
economy is gonna grow per capita
by 2% per year.
That's the trend in the United
States since about 1875.
We've had a little bit of
slowdown
since the global recession
of 2008, 2012.
Let's hope that we're gonna pick
up again.
I see my friend Vin Kidlin back
there.
I know he's more worried about
this,
or pessimistic about this than I
am.
But maybe we can talk about that
over beers later, right?
That's what Dave said.
Everything's better with a
beer, including economics.
So you gotta be poor, and
you can't have assets.
Unfortunately, a lot of the
people,
and in our model
they're gonna be responsible
for a bunch of our results,
they're gonna be the
non-college educated people,
something happens to
them when they're older.
The kind of insurance
they have out there is,
a lot of it is Medicaid.
- [Patrick] But you're
gonna have people making
endogenous decisions
to stay under the cap?
- Yep.
No, we're gonna have...
Good.
A big part of our result
is driven by the following
observation.
So you did learn something
from me and Dave.
(audience chuckling)
When we look at the data
we see that Medicaid
collections,
Medicare benefits to
college educated people
are fairly low compared to
non-college educated people.
A lot of it, of course, is
income level,
but that's correlated with
the college education.
But there even seems
to be an extra effect.
College educated people don't
like to have
to go on Medicaid.
It's not a pleasant thing to
have to do,
even the kind of
hearings that you have to
go through, and so forth.
What happens is the
college educated people
save extra so that they're
not gonna have to...
Everybody's happy with Medicare.
But college educated people save
extra
so they don't have to go on
Medicaid.
And that would save the
government a lot.
Now, this needs more work
but you know, I'm not
embarrassed about this,
and Dave wouldn't be either.
Because especially if
I'm talking to a room
filled with grad students
I'd say, hey, here's a
weak point of our model,
this would be something to work
on.
We don't really have
the employee, employer provided
medical insurance figured out
that well.
There's all kinds of tax
benefits
that we're not taking into
account.
There's all kind of benefits in
how
what we call the pools are
formed.
And we don't really do that.
We just have some people
are stamped at birth,
remembering, to us, birth is 20
years old,
with getting employer
paid medical insurance.
And disproportionately those are
people
with a college education too.
And then they're gonna have
that their whole lives.
It turns out, and this
shouldn't surprise you
if you remember all the
big healthcare debates
two years ago,
the young people who have
employer provided healthcare
would rather not have it.
They'd rather have the higher
wage
because they don't think
they're gonna get sick,
and it just seems like
a better deal to them.
But the employers like
to have them in the pool
because it makes the overall
cost low.
Those are fascinating issues
that we haven't fully dealt with
here.
Well, we haven't dealt with them
at all.
We just kind of (imitating
stamping sound)
That's what we economists do.
You come across some part of
your model
that's really difficult to do
and not at what you think is
the center of what you're doing
and you just make an assumption.
Dave was great at that.
I don't think I'm that bad
either.
And then we're gonna have
private health insurance,
and we're gonna assume that
that's actuarially fair.
And we know it's actually
not in the United States.
But once again, we're
just moving beyond that.
Young consumers who don't
have the employer insurance
choose or not to buy
private health insurance.
A lot of them don't do it,
and that's something we see in
the data.
In fact, you even see that
with highly educated people
nowadays
because you'll find, especially
in the high tech sector,
people wanna join startups.
And they'll even tell their
parents, they say, well look,
I'm not getting a high salary,
but I am benefiting getting
in on the bottom floor here.
I'm getting stock options.
Health insurance, hey, I'm
healthy.
And, you know, can I stay on
yours?
Can we look into that?
Some of you people are at the
age
you know what I'm talking about.
Okay.
Older consumers all benefit from
Medicare,
and they can also get private
health insurance on the side.
Consumers who are just
overwhelmed
by medical expenses
just go on first Medicaid
and then what we call emergency
relief.
We're gonna have everybody--
Okay.
Model is very simple here.
We're gonna have everybody
who is in a certain bad health
status
get provided the same care
when we know there's
differences in care level.
What's kind of shocking
in public healthcare,
public health economists find
this,
sometimes the expensive
healthcare
doesn't improve your
survival probabilities.
That's complex to work with.
Vegard, you're working
with our partners at...
Thank god Kim already mentioned
all these things I woulda
forgot.
A lot of this is a big project
with the Harvard School of
Public Health
led by my good friend David
Canning.
Okay.
Oh yeah, all right.
So, all of this has been a lot
of words.
Thank god now we economists
can see just what's going on
here.
I already told you guys
this is for a young consumer.
The state of the consumer is
age, education, health status,
static stochastic labor
productivity,
that's just the up and down
thing,
the amount of assets that
they've chosen,
and the health plan they
came into the period with.
They'll go out of the period
maybe with the same health plan,
or maybe they'll switch, and
that's one of their choices.
That's what they're choosing.
They're gonna choose
consumption,
asset holdings, labor,
and healthcare plan to go out
with.
They maximize the utility
over consumption and leisure.
And then they look forward to
the future.
They have all these Markov
processes.
Those are the big Q's.
They're gonna tell them
where they're gonna be
in the next period.
And a bunch of that's
stochastic.
They have a budget constraint,
with all kinds of taxes,
and things that complicate it
depending on whether they're
sick,
whether they have to do
copays, and so forth.
And they pay taxes.
Consumption taxes, labor taxes,
and capital income taxes.
I had to put that in here.
You economists wouldn't have
understood it otherwise.
- [Patrick] So, you're
taking the healthcare status
as doing its own thing
and you're just worried about
the insurance component,
not feedback between money
put in and your health...
- No, that's right.
That's because David Canning
told us that to first order
the public health guys can't
even decide
if it has a big impact.
Now, Vegard, and Canning,
and some of his people
are doing a paper on this.
The NIH, that put in a lot of
money
to help us pull this thing
together,
is really looking for more
evidence
that actually healthcare
does improve health outcomes.
(audience chuckling)
We're wringing the data as hard
as we can.
- [Patrick] So that's a
requirement
for renewal of the money?
(audience laughing)
- Yes, yes.
Hey, you've learned a lot of
stuff
since that summer in New Haven.
Now that the economists
understand where I am
I can get back to just words.
So, one thing is longevity.
And the UN has a lot of these
projections
for different countries.
They're interesting.
They have high projections,
low projections,
medium projections.
We're doing the medium
projection.
They're interesting to look at.
They're gonna tell you the
country
with the biggest population
in the world in 2060
is gonna be Nigeria, not China.
China's gonna shrink,
Nigeria's gonna keep growing.
Anyway.
We looked at the U.S.,
and we worked things out.
Survival probabilities,
in order to get these much older
people
that they're projecting,
there's not much room...
Is this good news for
us or bad news for us?
There's not much room to have
40-year-olds
survive to be 42-year-olds.
Most of them are gonna do it
anyway.
It has to be up there like...
You know what I mean?
People like my dad, who lived to
be 86...
You see what I mean?
We're gonna have to live a lot
longer.
- [Patrick] Live a lot longer to
what?
Be consistent with population
projections?
- Yeah.
And there's micro stuff on this.
It's what they call
compression...
It's a horrible sounding
term, but it's out there.
It's just whether it's stalled
or not is the big debate
among the health economists
and the medical practitioners,
something called compression of
morbidity.
And it's more like telling you
things like
80 is the new 70.
And they say stuff like that to
you.
And it means that if you're
gonna be 80 in the near future
you're gonna be as healthy as
the average 70-year-old person
was a few years ago.
That's kind of good.
I'm hoping that.
And we look at projections,
and this could be optimistic,
but between 1980 and 2005,
about 23% of American adults
finished a university education,
by looking at different
projections.
I tell you, when this
paper went to a journal
some of the referees said,
oh, those projections
they're doing are ridiculous.
But then the editor, this guy
Mike Keen,
he wrote back and said, ignore
that.
Your projections match
up exactly with mine.
So, oh, okay, fine.
(audience laughing)
Fine, fine.
I'm just mentioning this is
a little bit problematical
thing,
but let's just see how far we
get with it.
We're gonna say that by the year
2010
2/3 of Americans are gonna
have college educations.
Makes you more productive
and it improves your health
outcomes.
Come on, we know that.
College educated people, for
better or worse, smoke less,
all kinds of, less obesity.
And we don't understand all
those things.
But it's in the data.
And you'd say, oh no, it's
just because they're richer.
No, control for that.
Run these regressions and all
that stuff that these guys do.
Don't look at me so funny, Tom.
Do the best you can
and it really seems to be
this education component
to better health outcomes.
So we're gonna stick that in.
Okay, I've already told
you all this stuff.
First I'm gonna do balanced
growth paths.
These are funny graphs.
We just thought we needed
graphs.
I want you to look at zero and
10.
But we even were saying to
the referees for the paper,
look, if you think that the
increase in college education
is only half as much as we said,
that's gonna be the .5 here.
Old age dependency,
that comes from longevity.
Of course, some of it
comes from fertility.
There's less young people.
And some of it comes
because college educated
people live longer.
But that's not the action.
That's longevity.
Oof, picture's gonna change.
How much capital do we have out
there?
How much saving do we have out
there?
And that's gonna drive
things like wage rates,
and interest rates, and so
forth.
- [Patrick] Clarifying question.
Someone says fraction of the
projection.
What are you changing?
Are there three projections
behind it?
- No, a whole grid of
projections.
We're gonna take all those
things saying
how much longer are you gonna
live.
- Just longevity only.
- Longevity.
And then we're gonna take a grid
on it
saying if the average life
expectancy
of a college educated person
is gonna go from 82 years to 95
years,
let me just do that in steps
in case you don't believe it.
But I, Patrick, I want
you to focus on zero,
what would have had
happened with no changes,
and one, our projection.
- [Tom] What are you
assuming about labor supply
with respect to age?
- Old people...
And we've built this in.
Tom, I don't have this picture
here.
Old people stop working a lot.
We don't make them stop working.
But in the data, they work a lot
less,
so we put a fudge factor in
there
that said 70-year-olds don't
like to work
as much as 60-year-olds.
I love doing what I call work,
so I don't quite understand
that.
But Genie might say that's
because that's what I call work.
Not everybody else does.
They call what I do having fun.
That's the good thing
about being a professor.
- [Participant] Tim, what are
you assuming
about the cost of a college
education?
- We don't.
This is what I was trying to
mention.
The version we're sending
back to the journal
is gonna have that in it.
So when I talk about welfare
numbers
this thing of having...
I've already mentioned
we do have worked in now
that a big cost of college
education
is you don't start earning
income
until you're about four years
older.
Okay, that's a big cost.
But then,
oof, people who are NYU
students,
well, undergrads, but you guys
are probably grad students,
don't have to worry,
but oof, it costs a fortune.
Yeah, we don't have that in this
version.
I think we're gonna put
something.
Right, Juan Carlos,
aren't we putting in...
They wanted us to stick it in.
Here I don't have those results
yet.
No, that's a really good point.
Because it's so good to have
more college educated people,
but it's costly.
So of course our results are
gonna be
because we're gonna talk
about how good it is
and not how costly it is.
Maybe you were the referee.
- [Patrick] Are you worried
your results on college
are a little bit overly
optimistic?
It looks like you have
no underlying types.
You don't have inherently
super talented, college ready,
not-so talented, some super
untalent.
Looks like you have
everyone being the same
and you've just mechanically
taken
how well the college doing,
pretending if you went
and educated everybody
somehow they'd all end up the
same.
Even though if you actually did
that
there might be a whole bunch of
people
who went to college that
won't get a lot out of it.
Does that make your thing a
little bit overly optimistic?
- Juan Carlos, are you
taking notes on all this?
- [Patrick] Right, like on the
margin,
you're dipping into a different
pool.
When you're going down to the
last 10% of people right now
in terms of how well
they did in high school,
it's not obvious--
- Come on, you've been a college
educator
for, whoa, 30-some years.
- 12.
(audience laughing)
- 12?
- 12.
- Oh, yeah, you're my
much younger brother.
No, don't you believe we
transform people's lives?
- [Patrick] In proportion to
their
underlying talent,
unfortunately.
- Tom.
- [Tom] In Korea right now,
about 85% of people graduate
from college,
so you've got some observations.
- [Patrick] I see.
I see.
- Oh, Juan Carlos thinks
he's gonna remember all this.
- [Tom] Beers on this young man.
- [Patrick] The Tempest's on
you.
- No, that's right, that's
right.
That's right.
No, because when I presented it,
that...
There's benefits of
more college education,
but there's costs.
We'd better get the costs in
there.
And the projections,
but Mike Keen, and he's the
editor in charge of our paper,
said our projections were fine
with him
because he has a paper that says
that.
However...
No, this is the tough thing.
So, Tom's saying that
college education's way up.
Believe it or not, I'm
actually on schedule here.
(audience chuckling)
- I don't.
(audience laughing)
- Lot more savings.
And what the old...
People who are gonna live longer
just on their own save more
because they know they're
gonna live to be older,
so they better save more.
But college educated
people save especially more
so that they don't have to go on
Medicaid.
We have a utility cost
of going on Medicaid
that's common in the literature.
It's really unpleasant
to apply for Medicaid.
That's a shame for the United
States,
but we have to put that in.
People don't wanna do it.
If you don't have high enough
income
you just say, ah, screw it.
If I'm really sick when I'm old,
I'm gonna have to go on
Medicaid.
But college educated people say,
I'm gonna save my way out of
that
and I'm gonna have Medicare
and a good private
health at the same time.
Wages are gonna go up
because a college attainment
makes people more productive
and because we have a bigger
capital stock
because people are saving more.
That's gonna make interest rates
go down.
That would have happened even
without the college attainment
because more people are
saving for retirement.
But, yeah.
Government spending,
public health spending goes up
with all of our sources of aging
except college attainment.
Social Security spending goes up
because college educated guys
get higher Social Security
benefits, and they live longer.
They get more Medicare.
But they take much less
Medicaid.
And that's where the action is
here.
And this is what...
I remember we had a meeting,
Juan Carlos and I, with Vegard
and Gajen.
And they were saying, oh,
we should put government debt in
there.
We said, why do that?
That's not gonna have any
impact.
Remember that?
They were right, and we were
wrong.
It turns out a big portion
of the federal budget
is dedicated to servicing the
debt.
If you have much lower interest
rates,
because you say, how can they
get lower than they are now,
but at least they'll stay low.
A lot of these changes,
this is what some
macroeconomic researchers
call the new normal,
the low interest rates,
and it's driven by aging, not by
China.
What does Larry Summers call it?
I don't wanna teach these guys
bad words.
Secular stagnation.
- [Patrick] You're staying well
away
from the Samuelson case.
- Oh yeah, yeah.
- [Patrick] But it's still
getting closer
so it's cheaper and cheaper.
- For people who are
interested in finance here,
we're having what we
call our interest rate
starts out being like 4%
and then it might be going down
to 2%.
That is because we have one
asset.
Government bonds and capital
pay the same rate of return.
We would need a model
where we could make sense of
the low return on government
bonds
compared to high return on
capital.
- [Patrick] I see.
- Kim told me this talk would
be good for finance guys
but now they're thinking,
oof, that's a pretty drastic
assumption.
But hey, if you're a young guy,
this is showing how important it
is
to figure that thing out
differently
so it returns on different
assets.
Here's the big thing,
and we've already talked about
that.
If you put in...
If you put in longevity
and fertility increases
you get big increases.
You add those things together
and you get over 44% marginal
labor tax at the end.
- [Patrick] Wait, where are you
getting
the fertility increases from?
- Oh, not enough young guys.
- [Patrick] No, I meant...
I'm confused.
I thought if you're gonna
just hit patterns in the data,
I thought, richer you get, fewer
kids.
Look at all of Europe and stuff.
- Here's what happens.
If...
Remember the story, and
it's to scare young people.
You say, see all those old guys
out there?
They're gonna wanna have their,
and the people keep
mentioning Social Security.
Social Security is not the big
deal here.
In some European countries,
of course, it is.
In the United States it's not.
We can finance Social Security.
Medicare and Medicaid are
something else.
See those old guys?
They're gonna want their
entitlement benefits.
Who's gonna pay for them?
Is there a Social Security
lockbox?
Is all the money put aside?
No, of course it's not.
Young guys are gonna have to pay
taxes.
And the fewer young guys
there are out there,
the more we're gonna have to tax
them,
the less they're gonna work,
and then the more
we're gonna have tax them on top
of that.
Okay.
Put all these things together...
(participant speaking
indistinctly)
- The graph from...
- Go back one slide.
- [Tim] Oh yeah.
- [Participant] So, just what
it means,
if I do blue plus red,
I get plus 14% taxes.
And if I do black I get minus
10.
- Exactly.
Exactly, and you take the...
- [Patrick] If you do what?
- [Participant] If I do
blue plus red I get plus 14.
- [Tim] Yes.
- [Participant] Black does minus
10,
so the net is plus four.
- [Tim] Exactly.
- [Participant] That's what I
mean.
- Exactly right.
Thank you.
No, Patrick, these are
each one separately.
- [Patrick] (speaking
indistinctly) why the fertility?
What are you graphing?
- If we had a model with only...
(overlapping indistinct
conversation)
- If it was only fertility...
- [Patrick] And did you do...
Higher decline, higher taxes,
that's what the red means.
- Right.
- Oh, okay, sorry.
- Yeah, it's each thing
separately.
These maybe aren't the best
things.
- Two minutes.
- Two minutes.
Blasting through.
(audience laughing)
- [Patrick] Right on time, right
on time.
- [Tim] All right, wait
a minute, wait a minute.
Welfare.
Welfare.
This takes out the 2% per
year that's already there.
Come on, people in 100 years,
hopefully you're gonna be
a lot better off than us
just cause of economic growth.
I was just talking about this
at a conference in Dallas,
and we were talking a lot about
Mexico.
You know, I really admire
the young woman from Sweden
who went and talked to the
United Nations about...
I'm nervous about climate change
too.
But she said, why is anyone
worried about growth?
Go find a young person from
Mexico,
from China, from India.
See if they're worried about
growth.
Climate change we gotta do
something about, but whatever.
No, no, no, no, we do, we do.
But we would be a lot...
I mean, my view is we're gonna
be
a lot better off in 100 years
just like we're a lot better off
than my great grandparents were.
So we're taking that into
account.
But we're even gonna be
better off than we thought.
And you know why?
You know why?
And we put this in there
the way the literature does.
Everybody, including the
non-college educated people,
are gonna live longer.
And you compute value of life,
you're getting extra kicks.
- I have a question.
- Yes.
- [Patrick] If they're living
longer,
and you can't find any effect
of spending money on health on
outcomes,
that's just like mechanically
built into the world?
- Yeah.
- The world goes longer, you
live longer
regardless if you spend more on
health?
- Patrick, Patrick, I think the
model has all of that in it.
We just don't have it
endogenous.
This compression of
morbidity increased lifespans
come from better health things.
It's just when they look
at what we Americans
spend extra money on
it doesn't seem to
necessarily improve stuff.
- [Patrick] But the
world progress on health,
it's going with time,
and it's not connected
to, at a given point time,
if you spend 10 times as much as
me
it's not like it pushes out the
frontier.
- No, that's exactly right.
That's exactly right.
So here I'm gonna end this by
just
answering Patrick's question
with something else I
wanted to talk about,
and pretend it's an answer.
(audience chuckling)
I spend a lot of time
in Mexico and Brazil.
And looking at the data, one
thing that we're finding there
is that when you look at health
outcomes,
measure of how healthy people
are,
what their life expectancies
are,
those countries are 20 years
behind the United States.
I mean, that is...
There is Brazil,
the life expectancy, health
outcomes, infant mortality,
is the kind of thing that we
had 20, maybe 25 years ago.
If you look at their GDP numbers
they're 70 years behind us.
There is something about
increased
knowledge of how important
sanitation is,
a clean water supply, basic
antibiotics,
that seems to be transferrable
even to very poor countries.
And so maybe our indices of how
well
Brazil and Mexico are doing,
we have to adjust it for those
health...
People are happy to
live an extra 20 years.
And that's in some of these
numbers.
And with that I'm gonna
thank you for listening.
And I'm hoping Dave would
have been happy to be here.
Thank you.
(audience applauding)
- [Moderator] Thank you very
much, Tim.
Thank you all for being here.
So now I'm gonna ask you, as
Dave would,
to compress morbidity with us
down in the Gardner Commons,
which you're gonna go out
this door, turn right briefly,
go right down the steps, and
turn left.
It's only about 20 feet away.
So please join us for
refreshments.
We'll see you downstairs.
You can't get lost.
- [Participant] (speaking
indistinctly) beer.
- Or wine, in this case.
(audience applauding)
