Government expenditure 2010 › ... › slides.pdf · H.-W. Sinn -30 -15 0 15 30 45 60 75 90 105...

H.-W. Sinn

Monetary social benefits

36.21% (429.33)

Other monetary social benefits

1.59% (18.9)

Long-term care insurance

0.47% (5.56)

Benefits to the rest of the world

0.51% (6.1)

Accident Insurance 0.55% (6.47)

In brackets:

Absolute values in

billions (Euro)

Source: Statistisches Bundesamt, October 2011.

Government expenditure 2010

Public pensions 4.25% (50.41)

Child benefits 1.63% (19.33)

Unemployment aid 1.97% (23.34)

Unemployment insurance

2.30% (27.26)

Social and war victim aid

1.99% (23.59) Health insurance 0.73% (8.62)

Pension insurance

20.22% (239.75)

Social benefits in kind

17.12% (202.95)

Compensation of

employees

16.41% (194.54)

Intermediate

Consumption

10.12% (119.97)

Interest Payments

0.92% (10.96)

Other current transfers

1.27% (15.04)

Gross investment

3.44% (40.77)

Wealth transfers

0.80% (9.51)

Subsidies 2.29% (27.17) Other goverment

expenditure

11.43% (135.51)

H.-W. Sinn

0

500

1000

1500

2000

2500

3000

3500

65 70 75 80 85 90 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Social aid

Unemployment insurance

Health insurance Pension insurance

GDP Accident insurance

Source: Statistisches Taschenbuch 2010 (BMGS). Since 1991 old and new federal states.

Real social expenditure development in Germany Index 1965 = 100

Yearly data

H.-W. Sinn Source: Statistisches Taschenbuch 2009 (BMGS). Since 1991 old and new federal state s.

100

300

500

700

900

65 70 75 80 85 90 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Social aid

Health insurance

Pension insurance

GDP

Accident Insurance

Source: Statistisches Taschenbuch 2010 (BMGS). Since 1991 old and new federal states.

Real social expenditure development in Germany Index 1965 = 100

Yearly data

H.-W. Sinn

Private versus public insurance 2007

Share of government expenditure in GDP

Share

of private

insura

nce p

rem

ium

s in G

DP

Source: OECD, Economic Outlook No. 86.

0,25 0,30 0,35 0,40 0,45 0,50 0,55

0,00

0,14

0,02

0,04

0,06

0,08

0,10

0,12

y = 0,0882 – 0,07x

Great Britain

Switzerland

Poland

Spain

Slovakia

Sweden Japan

France

Finland

Korea

Belgium

Portugal Canada

Australia

Italy

Ireland

New Zealand

Austria

Island

Norway

Czech Republic

Denmark

Germany

Hungary

Greece

Netherlands

USA

H.-W. Sinn

27 28 29 29 29 30 30 31 32 33 34 34 34

35 35 36 37 38 38 39 40 42 43 43 44 44 44

46 47

49

0

10

20

30

40

50

60 % of GDP

Tax ratio and social security contribution ratio – international comparison 2009

Social security contribution ratio

Tax ratio

H.-W. Sinn

13 14

15 15 16 16

18 19 19 19 20

21 22 22 22 23 23 24 24

26 26 26 26 28 28 28 28 28

29 30 31

0

5

10

15

20

25

30

35 others Habitation Social exclusion Unemployment Family/children Surviving dependents Seniority Invalidity Sickness

% of GDP

Social security expenditure as share of GDP (2008)

H.-W. Sinn

Efficiency of the PAYGO system I

Each Robinson pays half of his

apple belongings to the old

generation in young age and gets

half of the apple belongings from

the young generation in old age.

Population growth rate = 0

Rate of interest = 0

Pareto improvement as the

introducing generation is better off

and subsequent generations are

not worse off.

0.5

0.5

H.-W. Sinn

Efficiency of the PAYGO system II

Population growth rate > 0


Pareto improvement as all

generations are better off.

0.5

0.5 0.5

0.5 0.5

0.5

H.-W. Sinn

Efficiency of the PAYGO system III

Population growth rate < 0


Pareto deterioration as all

generations are worse off.

0.25 0.25

0.25 0.25

0.25 0.25

H.-W. Sinn Source: CESifo.

Internal rate of return of the PAYGO system in Germany

0%

1%

2%

3%

4%

5%

1957 1962 1967 1972 1977 1982 1987 1992 1997

Start of working life

Capital market interest rate (real)

Rate of wage growth (real)

Internal rate of return of the

statutory pension insurance (real)


Contribution shares of savings and taxes in the German pension system

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Start of employment

Tax

sh

are

of

the

pen

sio

n c

on

trib

uti

on

s

Savings share

Tax share

H.-W. Sinn

Statistisches Bundesamt Interministerielle Arbeitsgruppe

Year Total

Population [Mio.]

Share of people of age

(≥ 60) [%]


(≥65) [%]

Total Population

[Mio.]


(≥ 60) [%]


(≥ 65) [%]

1996 82.8 37.0 24.6 82.8 37.0 24.6

2000 83.7 41.5 26.0 82.2 40.8 25.7

2005 83.8 43.5 30.3 81.8 44.5 29.6

2010 83.4 44.1 31.0 81.0 44.8 32.2

2015 82.5 46.8 31.7 79.9 47.9 32.5

2020 81.2 51.6 33.6 78.4 53.1 35.1

2025 79.5 60.1 37.4 76.6 62.6 39.3

2030 77.4 67.9 43.8 74.3 73.2 46.8

2035 75.1 68.5 49.2 71.7 76.6 54.6

2040 72.4 67.8 48.8 68.8 76.4 56.2

2045 67.9 47.6 77.6 55.0

2050 69.7 47.1 80.2 55.1

Population forecast for Germany

H.-W. Sinn Source: Statistische Jahrbücher. Old and new federal states from 1991 onwards.

0%

10%

20%

30%

40%

50%

60%

70%

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Labour force participation rate, men

Labour force participation rate, women

Labour force participation rate, total

Labour force participation rate in Germany

H.-W. Sinn Source: Rentengutachten des Wissenschaftlichen Beirats des Bundesministeriums der Finanzen.

Development of the contribution rate in the public pension system

0%

5%

10%

15%

20%

25%

30%

35%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Contr

ibution

rate

Population forecast

Statistisches Bundesamt

28.2%

31.1% Population forecast

Interministerielle Arbeitsgruppe

H.-W. Sinn

The „pension career“ of a representative pensioner

age=53

Old age pension

Contributions

age=20

Old age pension

age=65

age=65

age=75

age=75

age=88.3

age=88.3


Total expenditures for PAYGO and obligatory contributions under alternative policy options

17%

19%

21%

23%

25%

27%

29%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Contr

ibution r

ate

IV Funded system & borrowing

II „Tunneling“ V Fixed savings rate

IIII Funded system

I PAYGO System

28.2 %

VI Variable savings rate


Variants of funded pension systems

15%

16%

17%

18%

19%

20%

21%

22%

23% 24%

25%

26%

27%

28%

29%

30%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Contr

ibution

rate


III Funded system

I PAYGO system

III‘ Residual contribution

for PAYGO system

28.2 %


Switch to funded pension system financed by public debt: development of the

debt-GDP ratio

0%

10%

20%

30%

40%

50%

60%

70%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Debt

ratio

Debt level in % of GDP


Variable savings rate, residual contribution and total contribution

0%

5%

10%

15%

20%

25%

30%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Co

ntr

ibu

tion r

ate

Residual contribution for PAYGO system

Total contribution for a variable savings rate

Variable savings rate

1.0%

4.2%

4.7%

Year


Macroeconomic savings rates under alternative reform scenarios

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Sa

vin

gs r

ate

reg

ard

ing

ne

t n

atio

na

l p

rod

uct

Private savings (1989)

III Funded system

VI Variable savings rate

V Fixed savings rate


Private savings (1960)

Year

H.-W. Sinn

The

demographic crisis

H.-W. Sinn

Europeans are older …

H.-W. Sinn

Who is the Oldest? 2010

Median age 2. Germany 44.3

4. Finland 42.0

5. China, Hong Kong SAR 41.8

6. Austria 41.8

8. Bulgaria 41.6

9. Croatia 41.5

1. 44.7 Japan

3. Italy 43.2

7. Slovenia 41.7

10. Switzerland 41.4

12. EU15 41.0

34. Poland 38.0

35. United States 36.9

21. Spain 40.1

22. France 39.9

23. United Kingdom 39.8

19. Netherlands 40.7

H.-W. Sinn

… and they are ageing

faster.

H.-W. Sinn

20

25

30

35

40

45

50

55

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Median age (years)

New EU members

Median Age of the EU Population 1950-2050

Sources: United Nations (2003), Population Division, World Population Prospects: The 2002 Revision; Ifo Institute calculations.

EU15

USA

8

H.-W. Sinn

Are we living longer?

H.-W. Sinn

EU 15: 80.4

Life expectancy 2009

EU 12: 75.8

USA: 79

78.3

Sources: World Health Organization 2011.

EU 12 including Bulgaria and Rumania.

H.-W. Sinn

If we were living longer,

the EU population would

increase.

H.-W. Sinn

-30

-15

0

15

30

45

60

75

90

105

120

135

2000 2010 2020 2030 2040 2050

Changes in thousands (relating to the year 2000)

United States (Total population)

EU25 (65+)

EU25 (Total population)

United States (65+)

Starting year 2000: Total population EU25: 452.1 million; of these, 71.3 million are 65 years and older; net immigration EU25 about 654.000,

annually cumulated national projections. Total population United States: 285.0 million; of these, 35.0 million are 65 years and older;

net immigration about 1.115.000 annually.

Source: United Nations, Population Division, World Population Prospects: The 2002 Revision, 2004: Ifo Institute calculations.

Population Changes

+123.7

+51.0

+46.7

-20.8

H.-W. Sinn

The true reason is

low fertility.

H.-W. Sinn 1.19

1.32 1.34 1.35 1.37 1.38 1.39 1.41 1.41

1.46 1.48 1.50 1.51

1.53 1.60 1.60 1.61

1.78 1.82 1.85

1.89 1.91 1.94 1.96 1.97 2.00

2.10 2.10

2.10 2.11 2.14

2.20

18.3 18.2

16.9 15.2 15.1 14.3

13.8 12.9 12.9 12.7

11.9 11.8 11.7 11.5 11.5 11.4 11.3 11.2 11.2 10.9

10.9 10.6 10.5 10.3 10.1

9.9 9.8 9.6 9.4 9.3

8.7 8.3

Comparison of Fertility Rates (left-hand) and Birth Rates per 1000 Inhabitants (right-hand) in the OECD Countries in 2008

South Korea Slovakia

Japan Hungary Portugal

Germany Poland Austria

Italy Spain

Switzerland Czech Republic

Greece Slovenia

EU27 Canada

Luxembourg Netherlands

Belgium Finland

Denmark Sweden

United Kingdom Norway

Australia France Ireland

USA Mexico Turkey Iceland

New Zealand

Mexico Turkey Ireland Iceland New Zealand USA Australia United Kingdom France Norway Sweden Denmark Belgium Czech Republic Luxembourg Spain Canada Netherlands Finland Poland EU27 Slovakia Slovenia Greece Switzerland Hungary Portugal Italy South Korea Austria Japan Germany

H.-W. Sinn

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6 Births per woman

Source: Worldbank, World Development Indicators.

1.8

1.6 1.4 1.4 1.4 1.4

60 65 70 75 80 85 90 95 00 05 10

Germany

2.0 France

Italy

Spain

Poland

EU27

Netherlands

Development of Fertility Rates International comparison 1960–2009 (selected coutries)

Fertility rate defined as the sum of age-specific birth rate per woman from the age of15 to 49.

H.-W. Sinn

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6

Source: Worldbank, World Development Indicators.

Germany

Italy

Spain

Poland

7 11 4

60 65 70 75 80 85 90 95 00 05 10

Development of Fertility Rates International comparison 1960–2009 (selected coutries)

Births per woman

Fertility rate defined as the sum of age-specific birth rate per woman from the age of15 to 49.

H.-W. Sinn

95 and older

United States Age distribution, 2010

3500 2500 1500 500 500 1500 2500 3500 3500 2500 1500 500 500 1500 2500 3500

Thousand people per age group Thousand people per age group

Sources: EU15: Eurostat, National Statistics: Ifo Institute calculations, USA: U.S. Census Bureau.

0

10

20

30

40

50

60

70

90

80

0

10

20

30

40

50

60

70

90

80

95 and older

EU15

Men Women Men Women

H.-W. Sinn

Comparison of Actual and Constant Population, EU15 Age distribution, 2010

Men Women

95 and older

3500 2500 1500 500 500 1500 2500 3500 Thousand people per age group

0

10

20

30

40

50

60

70

90

80

Source: Eurostat.

H.-W. Sinn

Comparison of Actual and Constant Population, EU15 Age distribution, 2010

Constant

population

Actual

Men Women

95 and older

3500 2500 1500 500 500 1500 2500 3500 Thousand people per age group

0

10

20

30

40

50

60

70

90

80

Source: Eurostat.

H.-W. Sinn

The

consequences

H.-W. Sinn

0

10

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Old age dependency ratio in %

Old Age Dependency in Selected OECD Countries and the EU: A Centenarian Comparison

Legend: Old age dependency ratio defined as the ratio of the population aged 65 and over to those aged 15-64.

*Average: weighted with population sizes.

Source: United Nations, Population Division, World Population Prospects: The 2002 Revision, Ifo Institute calculations.

Japan

United States

EU15

H.-W. Sinn

0

10

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Old age dependency ratio in %

Old Age Dependency in Selected OECD Countries and the EU: A Centenarian Comparison

Legend: Old age dependency ratio defined as the ratio of the population aged 65 and over to those aged 15-64.

*Average: weighted with population sizes.

Source: United Nations, Population Division, World Population Prospects: The 2002 Revision, Ifo Institute calculations.

Japan

Italy France

United States

United Kingdom

Spain

Germany

Netherlands

H.-W. Sinn

Implications for PAYGO

systems:

cutting replacement rates

in half

or

Doubling contribution rate

H.-W. Sinn

Germany

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2000 2010 2020 2030 2040 2050

Replacement ratio

Contribution rate

Percentage of gross wages

France

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2000 2010 2020 2030 2040 2050

Replacement ratio

Contribution rate

Italy

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2000 2010 2020 2030 2040 2050

Replacement ratio

Contribution rate

Old Age Contribution and Replacement Rates

in Three European Countries

Sources: CESifo Pension Model,

Ifo Institute calculations.

H.-W. Sinn

Excessive burdens on

future generations:

Implicit taxes

H.-W. Sinn

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Age cohorts (by year of birth)

Implicit PAYGO Taxes as a Percentage of Lifetime Labour Income

Ifo Institute: Fenge and Werding (2004),

Japan

Implicit tax rate (% of life-time earnings)

United States

Italy

United Kingdom

France

Sweden

Germany

H.-W. Sinn

Slower cultural development

Lower dynamism

Fewer entrepreurial acitivities

Fewer scientific innovations

H.-W. Sinn

Road to gerontocracy

H.-W. Sinn

42

44

46

48

50

52

54

56

2000 2010 2020 2030

France Median age

Indifference age

When will the EU Political Systems

Topple?

Source:

Sinn /Übelmesser

EJPE 2002

Übelmesser 2004

42

44

46

48

50

52

54

56

2000 2010 2020 2030

Germany Median age

Indifference age

2000 2010 2020 2030 42

45

48

51

54

57

60

Italy

Median age

Indifference age

H.-W. Sinn

The

economic causes

H.-W. Sinn

GDR fertility policy

No economic causes ?

Saarland

Germany after Bismarck

H.-W. Sinn

50 60 70 80 90 00 10 0.5

1.0

1.5

2.0

2.5

3.0

Fertility Rates in Germany since 1950

Births per woman

Source: Statistisches Bundesamt, Fachserie 1, R. 1 1999, Fachserie 1, R. 1.1 2000-2002, 2004, 2009.

Total fertility rate defined as sum of age-specific fertlity rates per woman from age of 15 to 49.

West Germany

East Germany incl. East Berlin

East Germany fertility enhancing program

1972

H.-W. Sinn

0

5

10

15

20

25

1950 1960 1970 1980 1990 2000 2010

Live births per 1000 inhabitants

Birth Rates in the Saarland Following Accession to the Federal Republic of Germany

Source: Statistisches Bundesamt; Statistisches Jahrbuch für die Bundesrepublik Deutschland: diverse Jahrgänge,

Statistisches Jahrbuch 2002 für das Ausland, p.195f; Eurostat.

Germany

France

Saarland

H.-W. Sinn

5

10

15

20

25

30

35

40

45

1840 50 60 70 80 90 1900 10 20 30 40 50 60 70 80 90 2000

Sources: National Statistical Offices, World Bank Group, Database 2004.

Births per 1000 Inhabitants

France

Germany

H.-W. Sinn

Why have the birth rates

declined?

H.-W. Sinn

Sex

Three reasons for children

Desire for children

Investment motive

H.-W. Sinn

PAYGO pension

is

fertility insurance,

Sinn, JPubE 2004:

but with a strong

moral hazard effect.

Full coverage contracts are

never optimal with

moral hazard.

H.-W. Sinn

The social security hypothesis

• Ehrlich, I./ Chong J.G./ Kim J. (2001, 1998)

• 57 countries

• 1960-1992

• Cigno, A./ Rosati, F.C. (2000, 1997, 1996)

• United States, Japan, Germany,

United Kingdom, Italy

• 1960-1994

H.-W. Sinn

Advantage of one child for

pension insurance (present value) € 100,000

Additional pension of the mother

(present value) € 11,000

The fiscal externality

The case of Germany

H.-W. Sinn

Payment flow in Germany from childhood to pension

80,0000

60,0000

40,0000

20,0000

0

-20,0000

-40,0000

5 10 15

20 25 30 35 40 45 50 55 60

33,180

Net

Gross

Net

Gross

Employer Employee Labour

income

Pension

contribution

payments

Transfers

in favor of

children

age

Deutschmark

H.-W. Sinn

The

policy implications

H.-W. Sinn

Raising retirement age?

To stabilize dependency ratio:

76 years

Source: United Nations, model calculations „Replacement Migration“ (March 2000).

H.-W. Sinn

More immigration?

H.-W. Sinn

Even if immigrants did not age,

an immigration into EU 15 of

194 million

people would be necessary up to

2035

to keep keep the dependency ratio

constant.

H.-W. Sinn

Sources: United Nation, model calculations „Replacement Migration“ (March 2000).

701 million people

from 1995-2050.

UN Population Model

Constancy of the EU15 dependency ratio with

immigration of

H.-W. Sinn

Funding

as

a solution to

solve the imminent pension

crisis

H.-W. Sinn

Real capital or human capital

Smiths

H.-W. Sinn

The construction error of the

funded systems:

1. Threefold burden on

families with children

2. No fertility incentive

H.-W. Sinn

Insurance against childlessness

=

Socialization of the children’s contributions

H.-W. Sinn

Thus:

PAYGO pension differentiation

according to

the number of children

and

mandatory funded pension for

the childless

H.-W. Sinn

Smiths

The Parents

Emma Edward

Maggie David

H.-W. Sinn

• Existing PAYGO pension with fixed contribution rates

A reform proposal (for other countries)

• Pensions of civil servants indexed to state pension

• PAYGO child pension for parents (3 children guarantee today’s replacement ratio in total)

• Mandatory funded pension for the childless (to also guarantee today’s replacement ratio in total)

H.-W. Sinn

• Longer working period

• Activating social aid

• Ifo - tax

• Opening clauses for industry-wide

multi-employer agreements

• Supplementary pension:

Child-pension for parents and Riester-

pension

THE NECESSARY REFORMS

• Savings salary instead of cash salary

H.-W. Sinn

100

80

70

60

50

40

30

20

10

0

90

Pension as %

The Old Pension System 2004

Old Paygo pension

H.-W. Sinn

100

80

70

60

50

40

30

20

10

0

90 The Old Pension System 2010

Pension as %

Old Paygo pension

H.-W. Sinn

100

80

70

60

50

40

30

20

10

0

90

Pension as %


Old Paygo pension

H.-W. Sinn

100

80

70

60

50

40

30

20

10

0

90

Social aid

Pension as %


Old Paygo pension

H.-W. Sinn

100

80

70

60

50

40

30

20

10

0

90

Smaller reforms

Social aid

Pension as %


Less unemployment, higher labour force participation

of women, pension age + 2 years

32

25

Old Paygo pension

H.-W. Sinn

Child pension

100

80

70

60

50

40

30

20

10

0

90

48

Smiths

Edward

David Maggie

Emma

Social aid

Pension as %



32

25

The New Pension System 2035

Old Paygo pension

H.-W. Sinn

Funded Pension Child pension

100

80

70

60

50

40

30

20

10

0

90

48

Social aid

Pension as %

The New Pension System 2035

Smiths

David Maggie

Edward Emma



32

25

Old Paygo pension

H.-W. Sinn

Causality principle

The advantages

Reduce fertility disincentives

Ability-to-pay principle

Capital formation

No double intervention

H.-W. Sinn

The French approach

Third child policy

Ecole maternelle

Quotient familial

H.-W. Sinn Source: OECD Familiy database 2011.

H.-W. Sinn

male female

German Empire, 1875

male female

Germany, 2008

Babyboom 1963/1964

2nd World War

Great Depression

42.7 million 82.2 million

800 600 400 200 0 200 400 600 800

Thousand persons per age group Thousand persons per age group

800 600 400 200 0 200 400 600 800

1st World War

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Birth low

Eastern Länder

H.-W. Sinn

Health insurance

H.-W. Sinn

Mandatory

Voluntary

Private

Source: Bundesministerium für Gesundheit, December 2011.

Distribution of insured persons (micro census 2007), statutory and private health insurance

14%

Total

61.1 million

(excl. co-insured relatives)

6%

79%

H.-W. Sinn Source: Statistisches Bundesamt, November 2011.

Public health insurance expenditure shares 2009

prevention/healthprotection

medical treatment

care/therapeutic services

habitation/food

commodities

transportation

administration

Total expenditures: 160.7 billion

2.53%

5.55%

3.41%

31.95% 32.19%

5.90% 18.47%

H.-W. Sinn

6

8

10

12

14

16

18

1995 1997 1999 2001 2003 2005 2007 2009

UK

Japan

Italy

USA

France

Source: World Bank 2011

Health expenditures as share of GDP

Germany

Canada

% of GDP

H.-W. Sinn

Price

A B Marginal costs

Demand

Ex post moral hazard

R1 R2 R

H.-W. Sinn

Y

R

1

0

2

3

4

Exess Burden due to moral hazard

Slope -1 No

coverage

despite

premium

Costs

1

X-θπ

1

Ex ante moral hazard in the indifference curve system

1-θ

I0

I1

I2

H.-W. Sinn

Excursus:

Moral hazard

in banking

H.-W. Sinn

Goldman Sachs 4.3%

Lehman Brothers 3.8%

Merrill Lynch 4.6%

US investment banks 2006

Morgan Stanley 3.2%

Equity-asset

ratio

Were they

simply

poor?

H.-W. Sinn

Lehman Brothers 3.8% 20.9%

Goldman Sachs 4.3 40.7%

Merrill Lynch 4.6 25.1%

US investment banks 2006

Morgan Stanley 3.2% 25.7%

Equity-asset

ratio

Rate of return

on equity

Goldman Sachs 4.3%

Merrill Lynch 4.6%

Morgan Stanley 3.2%

H.-W. Sinn

5%

5%

5%

The calculus of the bank

Equity

Debt

Investment

(Equity 5, debt 95)

H.-W. Sinn

6%

25%

- 100%

- 100%

24%

4%

5%

Equity

Debt

Investment (risky)

(Equity 5, debt 95)

- 100%

5%


H.-W. Sinn

6%

25%

0%

25%


Equity

Debt

Investment (risky)

(Equity 5, debt 95)

5%

- 100%

5%

5%

5%

H.-W. Sinn

The securitization cascade

Mortgage claims

MBS

Investor (Pension fund)

CDO3

Senior

tranche

Mezzanine

tranche

Equity

tranche

Senior

tranche

Mezzanine

tranche

Equity

tranche

CDO

CDO2

Senior

tranche

Mezzanine

tranche

Equity

tranche

In

cre

as

ing

ris

k

H.-W. Sinn

Insurance demand

H.-W. Sinn

a-EC

μ

σ

B

A θ = 1

C

θ = 0

Insurance demand for fair and unfair insurance

H.-W. Sinn

σ

σ

Bad risks

Good risks

Fair premium for bad risks

Enforced insurance

Enforced

insurance

Fair premium for good risks



Insurance with freely selectable

coverage ratio


coverage ratio

A'

B' C'

D'

E'

A

B C

D

E F

G

μ

μ

Loss with

freely selectable

coverage ratio

Gain with freely

selectable

coverage ratio

The effects of adverse selection

H.-W. Sinn

σ

σ

Bad risks

Good risks


Enforced insurance

Enforced

insurance





coverage ratio


coverage ratio

A'

B' C'

D'

E'

A

B C

D

E

F

G

μ

μ

Loss of good risk H

Gain of

bad risk

(equi. to

FE)

Enforced insurance and Kaldor-Hicks criterion

Welfare gain

H.-W. Sinn

Social benefits and

unemployment

insurance

H.-W. Sinn

• Social peace, less crime

• Encourage risk-taking

• Career insurance (solidarity)

Reasons for the welfare state

• Democratic power

But also negative

behavioral effects

H.-W. Sinn

former communists

28% of mankind

+ India

= 45 %

Globalization &

fall of the Iron Curtain:

H.-W. Sinn

The forces of convergence

• Migration

• Specialization: horizontal and vertical

• Capital flows

• Knowledge transfer

H.-W. Sinn

The four options

2. Replacement wages / minimum wages

4. Wage subsidies

3. Scandinavian way

1. Education

H.-W. Sinn Source: Statistisches Bundesamt 2012.

Unemployment in Germany since 1925

0

5

10

15

20

25

1925 1930 1935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

%

German Empire Eastern Länder

West Germany

H.-W. Sinn Source: Statistisches Jahrbuch 2011.

Expenditures of the Federal Employment Agency in 2010

Total

45,214 million EUR

33%

50% 16%

Unemployment benefit Other expenditures

(incl. administration)

Employment promotion

H.-W. Sinn

€

€

€€

€

Private economy

The welfare state

H.-W. Sinn

Replacement wages as jobkillers

Employers: wages of lower productivity

Employees: wages higher than replacement wages

Result: No jobs for those whose productivity is lower that the replacement

wage

H.-W. Sinn

Increase 1970 – 2004

219%

Net wage

292%

Social assistance

H.-W. Sinn

0

4

8

12

16

20

24

28

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

West Germany and western Berlin

Source: Institut für Arbeitsmarkt- und Berufsforschung der Bundesanstalt für Arbeit (IAB-Forschungsbericht

Nr. 9/2007, Anhang 1a.

23.7

7.4

3.5

in %

October 10, 2007

2005

Qualification-specific unemployment rates1)

1) Unemployed in % of civilia labor force (excl. trainees) with same qualification, men and woman.

2) Completed occupational training: within firm training, occupational school, special master‘s and technical.

Without training

Completed occupational training2)

University degree

H.-W. Sinn

University degree

Higher secondary education (completed occupational training or high-school)

Less than higher secondary education (no completed occupational training or high-school graduation)

0

5

10

15

20

25 %

Source: OECD, Education at a Glance 2006: p.118 f, Table A8.4a.

* Japan: 2003.

12

.1

12

.0

11

.7

11

.0

7.8

6.7

6.6

6.5

6.4

6.4

5.7

3.6

2.6

7.8

8.4

10

.5

20

.5

7.8

4

.8

11

.2

7.5

8.2

6.9

9.5

5.6

9.7

3.8

5.3

5.4

3.7

5.8

3.2

5.6

3.9

3.8

3.5

5.5

6.1

4.7

3.9

7.3

3.3

6.9

2.9

3.9

4.8

3.7

2.2

4.3

2.1

4.4

2.8

2.4

2.9

Nov. 09, 2006

International comparison of qualification-specific unemployment rates

(25 to 64 year old persons, 2004)

H.-W. Sinn

€€

Social assistance as job

killer for low-skill workers

The accordion effect

H.-W. Sinn

0

10

20

30

40

50

60

70

80

90

Social assistance, Net wage 5 euros per hour

64%

Couple

71%

Couple +

1 child

78%

Couple +

2 children

84%

Couple +

3 children

Single

59%

Implied relative minimum wage in the East

H.-W. Sinn

• Shortening of benefit duration of unemployment compensation for older employees

• Elimination of unemployment assistance and reform of social aid system

Agenda 2010 (effective since 2005)

H.-W. Sinn

Since maximum of

unemployment in April

2005:

about 400 000 additional

loan labour jobs

H.-W. Sinn

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Million Persons

West Germany

1) West Germany incl. West Berlin

Unemployment development 1) 1970 – 2011

Oktober 2010

800 Tsd.

800 Th.

800 Th. -200 Th.

Source: Bundesagentur für Arbeit; Berlin: since 2001 estimations of the ifo Institute.

10

H.-W. Sinn

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Unemployment rates %

Spain

Germany

France

United Kingdom USA

December 2011

2

6

10

14

18

22

forecast 2012

23.0%

10.6%

5.5%

8.4%

8.5%

H.-W. Sinn

wage

Employment

unemployment

Employment

potential

Wage

replacement

Labour demand

Cost of

unemploy-

ment

Cost of wage

subsidies Wage

subsidy

H.-W. Sinn

Expensive?

Instead of paying for the unemployed entirely,

it might be cheaper to subsidise the employed.

H.-W. Sinn

Cost of unemployment 2007

60 billion Euro

Cost of wage subsidies

8-9 Mrd. Euro

H.-W. Sinn

It is better to pay for

participation than for

absence.

H.-W. Sinn

0

1

2

3

4

5

6

7

<,50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Job losses

East:

0.3 m, = 6.4%

Job losses

West:

0.8 m. = 3.1%

7.50 €

East: 4.7 m. private jobs

December 12, 2007

West Germany: 26.1 m. private jobs

Employment losses because of minimum wage F

req

ue

ncy d

en

sity

Hourly gross wage (euros)

H.-W. Sinn

0

1

2

3

4

5

6

7

<,50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7.50 €

9.00 € 9.80 €

West Germany: 26.1 mill. jobs in

companies

Job losses

East:

0.47 mill. = 9.9%

Job losses

West:

1.42 mill. = 5.5%

December 12, 2007

East: 4.7 mill. jobs in

companies

Employment losses because of minimum wage F

req

ue

ncy d

en

sity

Hourly gross wage (euros)

H.-W. Sinn

Long-term unemployed

H.-W. Sinn

Labour demand

wage

employment

unemployment

Employment potential

Youth and long-term unemployed

Wage

replacement

Complete crowding out

Support of subgroups

wage subsidy

H.-W. Sinn

The Ifo model of activating social assistance

2. Lowering of unemployment compensation by one third

3. Former level of unemployment compensation for municipal contract labor

1. Additional earnings of up to €500 permitted

H.-W. Sinn

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Net income (€)

Gro

ss

in

co

me

(€)

Disastrous effects of the wage replacement system The North Face of the Eiger:

(Labor income per month, Unemployment Compensation II, child allowance,

child bonus, wage taxes; employee‘s contribution to social security system;

family with two children

Germany

2005

Stock clerk (Bavarian metal worker‘s union, lower group)

Nurse (BAT Kr V, west, group 1)

University secretary (BAT VIb, West, 40 years old)

Average wage earner (west Germany)

Foreman, automative crafts (Bavarian metalworker‘s top union wage)

Commercial employee (clothing industry, group 3, stage 3)

June, 2006

Germany

2003

H.-W. Sinn

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Net income (€)

Gro

ss

in

co

me

(€)

(Labor income per month, Unemployment Compensation II, child allowance,

child bonus, wage taxes; employee‘s contribution to social security system;

wage tax credit; family with two children

Activating social

assistance

Part-time, private sector,

Full-time contract work

Full-time, private sector

Germany

2005

June, 2006

Activating Social Assistance

H.-W. Sinn

Theory of the

welfare state

H.-W. Sinn

C

A' A B'

B

C'

Redistribution curve Self-insurance curve

μ

σ

The effects of the welfare state

H.-W. Sinn

C

A' A

B' B

C'

Redistribution curve

Self-insurance curve

μ

σ

The increase of the net risk due to the welfare state

H.-W. Sinn

C

A' A

B' B

C'

Redistribution curve Self-insurance curve

μ

σ

The effects of the welfare state

D‘ D . .

H.-W. Sinn

Welfare state

under systems

competition

H.-W. Sinn

r

r+t

MP

0

A B

C

D

F

E

K G

H

Redistribution and factor mobility

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