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Saturday, December 12, 2015

'Debt and Demographic Debt Spirals'

Interesting theory from Paul Krugman:

Debt and Demographic Debt Spirals: I’m in Portugal... I have been doing some homework about the terrible times Portugal has recently suffered. ...
We used to think that high labor mobility was a good thing for currency unions, because it would allow the union’s economy to adjust to asymmetric shocks — booms in some places, busts in others — by moving workers rather than having to cut wages in the lagging regions. But what about the tax base? If bad times cause one country’s workers to leave in large numbers, who will service its debt and care for its retirees?
Indeed, it’s easy conceptually to see how a country could enter a demographic death spiral. Start with a high level of debt, explicit and implicit. If the work force falls through emigration, servicing this debt will require higher taxes on those who remain, which could lead to more emigration, and so on. ...
Portugal, with its long tradition of outmigration, may be more vulnerable than most, but I have no idea whether it’s really in that zone. ...
Now, it’s true that emigration in an economy with mass unemployment doesn’t immediately reduce the tax base, since the marginal worker wouldn’t have been employed anyway. But it sets things up for longer-run deterioration. ...

Dean Baker:

Krugman on Portugal and the Migration Death Spiral: Paul Krugman comments that Portugal can be a situation where its aging population, combined with a large outflow of younger people due to high unemployment, can lead to an ever worsening financial situation where fewer workers are left to support a larger debt and non-working population. (Note, the key factor here is the migration, not the aging.)
That pretty well describes the picture with Puerto Rico, with a large segment of its working age population moving to the mainland United States, leaving the island with relatively few working people to provide taxable income. The upside for Puerto Rico is that at least it has benefits like Social Security and Medicare covered by the national government, compared with Portugal, which must pay for its equivalents from its own tax revenue.

    Posted by on Saturday, December 12, 2015 at 11:52 AM in Economics | Permalink  Comments (31)


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