Asset-based Asset-based ReallocationsReallocations

Andrew MasonAndrew Mason

44thth NTA Workshop NTA Workshop

UC BerkeleyUC Berkeley

Outline of PresentationOutline of Presentation

I.I. General ConceptsGeneral Concepts

II.II. Comparative ResultsComparative Results

III.III. Conceptual and Computational Conceptual and Computational IssuesIssues

General Concepts: NTA General Concepts: NTA Classification of Asset-based Classification of Asset-based ReallocationsReallocations

Capital and Capital and PropertyProperty CreditCredit

PublicPublicInfrastructureInfrastructure

Schools Schools

Public hospitalsPublic hospitalsNational debtNational debt

PrivatePrivate

Machinery, Machinery, equipment, equipment,

vehicles, vehicles, structures, landstructures, land

Consumer Consumer creditcredit

General Concepts: Asset-General Concepts: Asset-based inflows and outflows.based inflows and outflows.► Asset-based reallocations consist of the outflows Asset-based reallocations consist of the outflows

and inflows generated by owning, creating, and inflows generated by owning, creating, acquiring, or disposing of a financial or physical acquiring, or disposing of a financial or physical asset. asset.

► Outflows are generated by:Outflows are generated by: Saving and thereby accumulating assets (or reducing Saving and thereby accumulating assets (or reducing

debt);debt); Paying interest on previously acquired debt.Paying interest on previously acquired debt.

► Inflows are generated by: Inflows are generated by: Dis-saving, i.e., disposing of an asset (or increasing debt);Dis-saving, i.e., disposing of an asset (or increasing debt); Earning asset income, e.g, profits, interest income, Earning asset income, e.g, profits, interest income,

dividends, and rent.dividends, and rent.

General Concepts: Asset-based General Concepts: Asset-based flows and bequests.flows and bequests.►Dis-saving occurs when age groups Dis-saving occurs when age groups

liquidates their assets to finance liquidates their assets to finance consumption.consumption.

►Dis-saving is also generated by Dis-saving is also generated by bequestsbequests Transfer outflow and dis-saving by the Transfer outflow and dis-saving by the

decedent’s age groupdecedent’s age group Transfer inflow and saving by the age Transfer inflow and saving by the age

groups of the beneficiariesgroups of the beneficiaries

General Concepts: Private and General Concepts: Private and Public BequestsPublic Bequests►Both public and private assets are Both public and private assets are

bequeathed.bequeathed.►The age profile of the outflow depends The age profile of the outflow depends

on the age profile of asset ownership:on the age profile of asset ownership: Private - assets are assigned to the Private - assets are assigned to the

household head. household head. PublicPublic

►BeneficiariesBeneficiaries►TaxpayersTaxpayers►Per CapitaPer Capita

Asset Income: Asset Income: Private Capital and LandPrivate Capital and Land

TotalTotal DomestiDomestic by c by ageage

ROWROW

Capital incomeCapital income

Rent, netRent, net 00

Rent inflowsRent inflows XX

Rent outflowsRent outflows -X-X

Asset Income: Private CreditAsset Income: Private Credit

TotalTotal DomestiDomestic by c by ageage

ROWROW

Interest, netInterest, net 00

Interest incomeInterest income XX

Interest expenseInterest expense -X-X

Asset Income: Public Capital Asset Income: Public Capital and Landand Land►Public capital: no capital income.Public capital: no capital income.►Public land (and other non-Public land (and other non-

reproducible assets): has not been reproducible assets): has not been addressed. addressed.

Asset Income: Public CreditAsset Income: Public Credit

TotalTotal DomestiDomestic by c by ageage

ROWROW

Interest, netInterest, net 00

Interest Interest income/Investorsincome/Investors XX

Interest expense Interest expense /Taxpayers/Taxpayers -X-XNote that if the government is a net creditor then investors will experience an outflow in the form of interest expense and taxpayers an inflow in the form of interest income.

An Important Simplifying An Important Simplifying AssumptionAssumption► Asset portfolio (distribution of capital, land, Asset portfolio (distribution of capital, land,

private credit, and public credit) is private credit, and public credit) is independent of age. independent of age.

► Implies that the relative age profiles for capital Implies that the relative age profiles for capital income, rental income, private interest income, rental income, private interest income, and public credit income are identical. income, and public credit income are identical.

► Implies that choice of debt versus equity Implies that choice of debt versus equity financing has no age reallocation effect. Thus, financing has no age reallocation effect. Thus, limit private credit to consumer credit, college limit private credit to consumer credit, college loans, etc. loans, etc.

Net Asset Income, Per Capita, Normalized on Labor Income

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

0 7 14 21 28 35 42 49 56 63 70 77 84

Age

Ass

et I

nco

me/

Yl(

30-4

9)

Costa Rica

Taiwan

US

Thailand

Korea

Japan

Indonesia

Public SavingPublic Saving

► Age profile depends on who owns the public Age profile depends on who owns the public capital capital ““Who benefits” ruleWho benefits” rule

►Students own the schoolsStudents own the schools►Students invest in schools (with money transferred from Students invest in schools (with money transferred from

taxpayers)taxpayers)►Upon graduation students bequeath schools to new and Upon graduation students bequeath schools to new and

perhaps continuing studentsperhaps continuing students ““Who pays” ruleWho pays” rule

►Taxpayers own the schoolsTaxpayers own the schools►As relative tax burden declines, public assets (and debt) As relative tax burden declines, public assets (and debt)

are transferred to a new generation of taxpayers. are transferred to a new generation of taxpayers.

Line between Public and Private Line between Public and Private SavingSaving► In NIPA private saving includes the In NIPA private saving includes the

accumulation of public credit by private accumulation of public credit by private entities. entities.

► In NTA, the public credit system In NTA, the public credit system includes changes in public debt owned includes changes in public debt owned by taxpayers matched with changes in by taxpayers matched with changes in public credit owned by investors.public credit owned by investors.

► Implications for the aggregate controls.Implications for the aggregate controls.

Pre-Bequest Saving, Per Capita, Normalized on Labor Income

-1

-0.5

0

0.5

1

1.5

20 7 14 21 28 35 42 49 56 63 70 77 84

Age

Sav

ing

/Yl(

30-4

9)

Costa Rica

Taiwan

US

Thailand

S Korea

Japan

Indonesia

Japan(0)=3.8

Note: Some series include bequests of public assets and

debt: Japan, Indonesia, others?

Pre-Bequest Asset-based Reallocations, Per Capita, Normalized on Labor Income

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Age

Ass

et-b

ased

Rea

llo

cati

on

s/Y

l(30

-49

)

Costa Rica

Taiwan

US

Thailand

Korea

Japan

Indonesia

Japan(0)=-3.8

III. Conceptual and III. Conceptual and Computational IssuesComputational Issues►Who owns public assets?Who owns public assets?

BeneficiariesBeneficiaries PopulationPopulation TaxpayersTaxpayers

►Definition of the household headDefinition of the household head► Calculation of savingCalculation of saving

S=Y-CS=Y-C S=Deposits to saving accounts + purchase of S=Deposits to saving accounts + purchase of

assets + change in cash holdings – net increase assets + change in cash holdings – net increase in debt, etc. in debt, etc.

Saving versus Pre-Bequest Saving, US, 2000Per Capita Values

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0 10 20 30 40 50 60 70 80 90

Age

S/Y

l(30

-49)

Saving

Pre-bequest Saving

Definition of Head and Pre-bequest Saving, Costa Rica, 2004, Per Capita Values

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0 10 20 30 40 50 60 70 80 90

Age

S/Y

l(30

-49)

Earner

Designated