Fiscal policy and human capital in the race against the machine
(joint with Stefan Niemann and Daniele Angelini)
We analyze the role of fiscal policy and education spending on economic growth and inequality in a dynamic growth model with automation and endogenous human capital. While automation is complementary to high-skilled workers, it substitutes for low-skilled workers leading to an increase in wage inequality. Government affects the economy through taxation, education spending, and redistribution. While redistribution reduces inequality at the cost of lower economic growth, education spending boosts production exacerbating inequality due to the stronger effect of education spending on the human capital of high-skilled workers. The introduction of endogenous human capital, therefore, implies that an increase in taxation, by increasing both transfers and education spending, has an ambiguous effect on inequality. Estimating the optimal tax schedule, we observe that while the labor tax first increases and then reduces over time, the opposite holds for the robot tax. Technological progress in automated technology, indeed, by increasing inequality leads to an optimal adjustment in the fiscal policy mix in favor of the relatively more redistributive robot tax. This result is also robust to the inclusion of private college education spending.
Fiscal consolidation and inequality
Work in progress.