Thursday, December 28, 2006

Postponing and Accelerating Births

by Edward Hugh

Two vaguely related pieces of news attracted my attention today: German women it seems are busy postponing childbirth, whilst US ones are busy accelerating them, which, of course tells me that everything in the world is as I thought it was. The postponement and acceleration in question here, however, is entirely conjunctural. First the Germans:

"Enticed by a generous German government aid program for newborn children that takes effect on January 1, expectant mothers are doing what they can to prolong their pregnancies until Monday."

Behind the rush to delay there lies, as the article suggests, a new law which comes into effect on 1 January 2007, and which offers mothers of new born children significant benefits:

Worried about Germany's shrinking population and a birth rate that fell to a post-war low in 2005, the government introduced a law in September to encourage working couples to have children. They made January 1, 2007 the cut-off date.

Parents who take time off from work to care for newborns can receive two-thirds of their net monthly salary, or up to a maximum of 1,800 euros, for 12 months. If the other parent takes a further two months off, the benefit is extended to 14 months.

Now this move is obviously very welcome - although as a macro economist I would far rather that this was being paid for by a reduction in spending somewhere else and not by part of a 3% VAT tax hike, since the consequences of this on an already weak German consumption really are yet to be seen, and ageing populations involve difficult choices since resources are constrained, and growing debt is a problem which cannot simply be shrugged off, and at the end of the day governments have to take a stand in favour of the coming generations, even though this will never be easy.

Also of course it needs to be said that much as the present measure is to be welcomed, it is well short of what is actually needed. This post on Sweden gave some indication of the battery of measures that you need to actually have an impact on fertility, and of the degree of impact these can have on fertility (which is to say that such measures can nudge up fertility, but not dramatically, and they are very expensive when you add together the whole weight of the package up to the time of the labour market entry of the new child). Fertility in Germany is currently in the 1.3 range, so with a really effective pro-natalist package you might get up to 1.5/1.6 tfr, and remember none of this will impact the labour market for at least 20 years,and between now and then this is all on-cost for the society to assume, which is why such measures need to be paid for by savings elsewhere and not by increases in taxes.

Well, so much for Germany, but what about the US, well according to the New York Times:

In the last 15 years, there has been a huge increase in the number of births that are induced with drugs or come by Caesarean section. In either case, parents or doctors can often schedule a baby’s arrival on a day of their choosing.

Over this same period — since the early 1990s — the federal government has been steadily increasing the tax breaks for having a child. For parents to claim the full amount of any of these breaks in a given year, a child must simply be born by 11:59 p.m. on Dec. 31. If the baby arrives a few minutes later, the parents are often more than a thousand dollars poorer.

Unless you’re a cynic, or an economist, I realize you might have trouble believing that the intricacies of the nation’s tax code would impinge on something as sacred as the birth of a child. But it appears that you would be wrong.

In the last decade, September has lost its unchallenged status as the time for what we will call National Birth Day, the day with more births than any other. Instead, the big day fell between Christmas and New Year’s Day in four of the last seven years — 1997 through 2003 — for which the government has released birth statistics.

Now as Greg Mankiw (to whom I am indebted for this link) points out economists tend to call this process intertemporal substitution, and such processes can have large as well as small consequences, especially if they take place over years and involve a systematic upward displacement of maternal first birth ages. At the end of the day I might note that Greg Mankiw seems to be fascinated by the micro level components of fertility decisions (and even at times suggests that they well have no significant macro consequences), while I am convinced that such decisions play an important role in evolving macro phenomena and am mainly motivated by an attempt to understand what these are. In any event, here we are talking, not about storks, but about butterflies, and what happens when they flap their wings.


Anonymous said...

Note that if you're going to subsidize childbearing and rearing, it makes a lot of sense to do it through tax incentives, rather than by actually giving people money.

It more or less forces economies elsewhere, for starters -- 'starving the beast', as the saying goes.

Admin said...

"Note that if you're going to subsidize childbearing and rearing, it makes a lot of sense to do it through tax incentives, rather than by actually giving people money."

I'm not really sure about this Sterling, but obviously it all depends how the tax system is framed. Negative taxes, however, which are one alternative solution to the poverty trap part of the problem effectively amount to giving people money at the end of the day. This is important if you want to get child benefits through to the people on or near the minimum wage who are effectively not paying income tax in the first place. Of course - using electronic systems - you could in principle offer people exemptions from all sorts of consumption taxes, but I suppose the possibilities for abuse are just too great for anything as imaginative as this.

Of course, if we are talking about people around the minimum wage, then we could be sort of back to the modern equivalent of Keynes's idea of paying people to dig holes and then fill them in again, or in this case have three years fully paid leave from work in return for having a child (arranged, if you want Sterling, via the intermediary of the tax system), all that is needed is a little sophistication and a little creative accounting).

I say three (which is arbitrary as a number at this point) to drive in the idea that we are interested in quality as well as quantity, since human beings (in the developed world at least) are about to become a scarce resource, and what we don't want to be doing is encouraging people to have 'latch-key' children who are subsequently only going to become an issue for social services.

But since at the bottom end there is no special disadvantage in taking time out to be a virtually full-time mum (career opportunity loses are virtually minimal) and since this is rather desirable in-and-of itself (female health numbers seem to be begining to show this too), then money could be effectively used here.

Also, not everything in all this is to do with cash. The whole educational and general young children support (and medical) system is equally important. Parents here in Spain (eg) still have to pay dental treatment for children. I see absolutely no reason for this.

The begining and end of the issue is that children need to be seen - in economic terms - as an externality (rather like defence spending, only more so, since if you don't have children you have nothing left to defend) - and a clear example of market failure which needs to be addressed in the same way as other market failures, since the costs fall on one group of people (the parents) and the benefits all too often go to others).

The thing is at the end of the day I am sure it isn't so hard to devise good policy once the need to do it is recognized. Up to now I have been focused on the big picture items, since I think this is a complex problem, and if we try to tackle it too vigorously without understanding the complexity in full, then we are in danger of addressing one item in a way which only makes another problem worse.

This is clear in the case of pro-natalism since the only way in a developed society you are going to get the kind of volume of resources necessary to have a real go at this is by reducing health and pensions spending on the older age groups, and there is only any justification for doing this if you really know what you are doing, which we don't yet.

The only way will be to reduce existing spending commitments beyond what is already being envisaged and divert these resources to encouraging more young people to have children (and supporting them while they bring them up, which amounts tot he same thing), plus in the meantime bringing in immigrants to fill the gap while the children born now reach 20/25 and start working. (Over 15 as working age is frankly now ridiculous, and will be even more so in 20 years).

Anyone reading this blog for the last year will realise I am modifying my view a bit here, but then this is what this debate is all about, fluid positions and modifying attitudes in the face of unfolding situations and exchange of ideas.

And if you find the idea of taking resources from the old to give to the young (while always maintaining your commitment to the old as best you can, of course) then try talking to the people who 20 years ago were saying (and incredibly still are saying today) that this whole issue was a non problem. Unfortunately in many developed societies the day you could devote resources costlessly to pro-natalism are long gone, unless, of course, by pro-natalism you mean the kind of tokenism that appeals to people like Putin and Berlusconi.

Anonymous said...

"This is important if you want to get child benefits through to the people on or near the minimum wage who are effectively not paying income tax in the first place."

-- well, frankly, why bother? They're already the income group with highest fertility in most places, and they're the ones most likely to impose further costs.

What you really want to do is increase TFR's at the middle to upper ends of the income pyramid, among the employed, highly-educated and relatively well-to-do.

These are the people best able to support and socialize their children through to adulthood anyway.

That's precisely why I'd advocate massive income tax credits for the second and particularly for the third child. The impact would be higher the higher you went on the ladder. And it would shift the overall tax burden to consumption, which is all to the good.

Anonymous said...

One basic problem we've been having is that modern medicine puts disproportionate resources into keeping very old and/or very sick people alive another 6 to 12 months.

If you look at the proportion of health spending going to people during the last year of their lives, it's absurd -- and growing.

The real reductions in mortality came quite some time ago, with basic sanitation and other preventative measures, and antibiotics. That change was complete by the 1960's in the West.

Since then, we've been spending immense resources to saddle society with Strudlebugs.

People have to accept the fact that you get old and then you die.

Admin said...


"One basic problem we've been having is that modern medicine puts disproportionate resources into keeping very old and/or very sick people alive another 6 to 12 months."

Sometimes I think, Sterling, that you have a very harsh way of putting things, or would that be a very direct way, the curious thing is sometimes it irks me, and I'm sure that sometimes the way I say what I'm saying irks you, and then at the end of the day we find out we are saying very similar things.

I entirely agree with you here, although I think you may find that it is more like 5 years before the final curtain-down when the the big curve starts to climb. They have been developing frailty indexes to address this type of issue.

But again what exactly do you want to do about this? If people pay into private medical schemes, then these schemes can't exactly advertise saying "but please note, we are going to decide when to pull the plug, because we will take decisions in the interests of the young who will pay too much otherwise". This I think wouldn't work.

In fact this seems to be one of the disadvantages of the privatization of medical funding (as opposed to provision), since the service has then to be run as a business, and you have to offer to some extent what the customers want.

In the end this argument is very similar to the Chinese savings one, you and I can decide we will forgo the last year of life (I certainly would, I don't want all those wires and cables sticking out of me all over the place), but we can't take this decision for others, and we have to accept that the majority of our fellow citizens don't even want to be told when they are into the last year, at least again, going from Spanish experience, people seem to want to be told almost any old wives tale about what the problem is that they actually have.

Again there is the difficulty of actually knowing when your last year is (imperfect information again JoeImp), so the policy proposal seems a little impractical to me.

OTOH, there is the phenotypes issue. I mean I am still not sure you have picked up the significance of the fact that you may well have two different expressed phenotypes floating around in the USA (and of course coming soon elsewhere, to a hospital somewhere near to you, gentle reader) a long lived and a shorter lived one.

The generation born in the 1930s seems to be a fairly long living one, but the generation born in the US in the 1960s (the metabolic syndrome generation) may be much shorter lived. I keep using the term phenotype, since these changes in longevity are much too rapid to be related to mutations in the genotype, so we have to be talking about changes in the repertoire of expressed genes (probably driven by diet, and especially female diet around the time of giving birth), or epigenetics (Waddington) here, thus I use the term phenotype.

So you may have 2 generations looking for payoffs from the medical system at one and the same time at some point, and the economics of this will be very complicated indeed.

Admin said...

"-- well, frankly, why bother? They're already the income group with highest fertility in most places, and they're the ones most likely to impose further costs."

I suspect you may be generalising from the US and above replacement fertility societies. I don't think this is at all true in Eastern and southern Europe for example.

Really in Spain, apart from the gypsies, and recently arrived immigrants, very very few people have children before 30. Now those who have children after 30 and gone on to have two or even three tend to be in the rather higher income groups. Those in the middle *and* those at the bottom (remember under 30 in a country like Spain there is very little in the way of real unemployment, there are plenty of jobs, but there are few well paid jobs till after 30. This is one of the reasons people wait. So a lot of the future parents are on temporary contracts and salaries which are not that much above the minimum wage.

I think its important to understand that the sort of people we saw in the news coverage of the new orleans flooding just don't exist here, so we don't have these kind of issues.

Now in the piece of research from Sweden I cited in a post, they drew attention to the way in which salary related subsidies was encouraging postponement, since people waited till they were on higher salaries in order to make it more beneficial to have the baby (Mankiw's incentives again). This it would be nice to try and avoid.

I underline I am not at this stage advocating any given policy, I am just saying that there are many factors to take into account here, and one of the main ones is the way lower income groups (where there is no special postponement rationale) may simply have copied the behaviour of the higher income groups (where there is). But since the higher income groups then also have more money later, they can have the second and third child and find the home helps etc they need, while the others find it difficult until it is too late.

Anonymous said...

The basic problem seems to be that there's a tension between earning patterns and need for spending. Young adults tend to face high cost of living: some are living alone and have to deal with the inefficiencies of singlehood; some are moving away from home for the first time and face large one-off setup costs, especially if they intend to enter the housing market; some are trying to bring up children. The elderly also have high healthcare costs. But neither of these two groups has a high income. Meanwhile, the highest-income group are the 50-somethings, who also have the lowest costs, because they are by and large still healthy, have had time to pay off mortgages, and any children will be independent or close to independence.

As a result, some combination of two things has to happen: a) spending gets hugely out of sync with earnings, b) people's behaviour is distorted in unfavourable ways: the relevant behaviour change here is postponement of fertility, but there are other serious ones as well, such as a rejection of higher education among people from poorer backgrounds.

To have less of b) and more of a) effectively means lending and borrowing on a huge scale. But there are several ways of doing so:

- individual borrowing, which amounts to borrowing from your future self. The trouble is that this creates huge and unavoidable risks for the individual due to the variance in anticipated future earnings, and it also throws them in at the deep end in terms of financial responsibility, with disastrous consequences if borrowing and spending are mismanaged.

- 'spontaneous' social redistribution, such as through parents lending/giving money to adult children, charity, and so on. The problem is that these are often based on traditional cultural practices, which tend to be slow-moving and may be badly out of step with modern realities. Looking at Italy and Japan, it's clear that even a strong culture of intergenerational support can completely fail to stave off lowest-low fertility, for example, and may even help exacerbate it.

- state redistribution: basically a tax paid by those prosperous 50-somethings, which is then given to the struggling youngsters. I think this has a lot more mileage in it than simply subsidising specific services (universities hospitals etc), and below is another idea.

Perhaps the most fair and 'neutral' scheme in the long term would be one that awarded payments/favourable loans/tax breaks based on age alone, because people all accumulate birthdays at the same rate, and while some are unlucky enough to have a short innings, they would generally be the ones to benefit most from such a scheme. (Of course, such a scheme would still be unfair on the initial generation of older people, so it would have to be phased in gradually.) How does this aid fertility, you ask? Well, minors would also be in the scheme of payments: as it is, the state assumes partial responsibility for the cost of living for a child (such as providing schooling, which we can regard as something children 'need'), and this would simply be an explicit way of doing so. Obviously I'm not talking about going up to children and giving them wads of pcket money. The reason I phrase it in terms of 'money to the children' rather than 'money to the parents' is that the money is thought of as a kind of parentally-managed trust fund on the children's behalf, not as a parental reward for having children. The government should retain some control over how the money is spent, and any leftover funds should be transferred to the child's full control upon achieving majority.

That idea isn't mine in origin, and I admit to having little understanding of the details. But I think the concept has a certain ring to it.

Anonymous said...

"I think its important to understand that the sort of people we saw in the news coverage of the new orleans flooding just don't exist here, so we don't have these kind of issues."

-- odd, I saw quite similar types burning cars all around Paris not so long ago... 8-). And you can certainly find them in Britain!

Anonymous said...

On the postponing birth question: since fertility drops off so rapidly after 30, postponing is often much the same thing as "never".

So getting people to front-load their childbearing may be important in bringing completed family size closer to _desired_ family size.

Usually it's quite a bit lower.

Anonymous said...

Note that in traditional Western society, income for ordinary laboring people peaked in the 20's and 30's -- precisely during the primary reproductive and household-formation years.

Then it tended to drop off after the mid-40's, as the physical capacity to do hard labor declined.