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collected during field work in the early 1990s and material drawn from secondary sources. The choice of story telling is reasonable given the attempt to describe complex institutional phenomena. Yet, since the author neglects agency and motivation she has not attempted during the field interviews to find out from Tanzanian managers and bureaucrats themselves why they acted as they did. This makes the story less interesting than it could have been and leads to a conjectural style in many instances, which in this reader’s opinion weakens the story telling considerably. Not being a native English speaker, the author may be forgiven for a sometimes repetitional and inconsistently fluid writing style. The book is Gun Eriksson Skoog’s dissertation published several years after the field work was accomplished. In a sense, one leaves the book wishing the author had returned once more to look at how the soft budget constraint can survive in a world of tougher donors, lost ideological legitimacy for socialism, and following ten years of economic reform in the soft budget constraint’s heartland of Eastern Europe. And one would hope that this time round, the author would have told the story by paying explicit attention to the objectives of the main actors and the resulting political economy of reform. For scholars of Tanzanian economic history the present volume is already a welcome addition; for scholars working on the soft budget constraint and how it is affected by economic reform, the present attempt remains somewhat disappointing.
References Qiang, Y. (1994): ‘‘A Theory of Shortage in Socialist Economies Based on the Soft Budget Constraint’’. American Economic Review 84: 145–156. Qiang, Y., and Gerard, R. (1994): Regional Decentralisation and the Soft Budget Constraint: The Case of China, CEPR Discussion Paper No. 1013. Dewatripont, M., and Maskin, E. (1995): ‘‘Credit and Eciency in Centralised and Decentralised Economies’’. Review of Economic Studies 62: 541–555.
M. Raiser, London, UK
Auerbach, A. J., and Lee, R. D. (Eds.): Demographic Change and Fiscal Policy. XVII, 446 pp. Cambridge University Press, Cambridge, UK, 2001. Hardcover £50.00. Industrialized countries will face radical demographic changes in the upcoming decades. For the first time in history, rising life expectancy is accompanied by significant declines in fertility rates. The number of old
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people is thus sharply increasing in absolute terms and in relation to the size of the young generations. This aging of Western societies certainly affects the economy as a whole. It particularly shapes fiscal policy in Europe and the United States and is characterized by devoting large amounts of funds to age-dependent expenditures. Some of the emerging issues are covered in Demographic Change and Fiscal Policy. In this book, the editors Alan Auerbach and Ronald Lee have assembled a collection of theoretical and empirical papers, authored by wellknown experts in the fields of demography and fiscal policy. The book arose from a conference at the University of California, Berkeley, and also includes the comments of the discussants. As the title suggests, government spending is broadly covered. Besides pensions schemes, the contributions deal with medical care, public assistance and other age-dependent expenditures. The empirical papers are diverse in both methodological approach and focus of the analysis. The first group of papers provides long-run forecasts on how the demographic development affects public budgets. For instance, Bernd Raffelhu¨ schen (chap. 6) and Steven Caldwell et al. (chap. 8) calculate generational accounts to assess redistributional impacts of the social security systems and fiscal imbalances in Europe and the United States, respectively. The situation in the United States is further explored by David Cutler and Louise Sheiner (chap. 7), who examine trends in medicare spending. In chaps. 6, 7 and 8, the paths of the forecasts’ inputs like population features are assumed to be deterministic. In contrast, Ronald Lee and Shripad Tuljapurkar (chap. 2) advocate a method that regards these trajectories as stochastic. They apply this alternative approach to project government budgets in the United States. While the papers mentioned above give long-run forecasts, two further empirical contributions restrict their analyses to developments in recent decades. Jonathan Gruber and David Wise (chap. 5) examine international variations in pension schemes and early retirement, and Robert Moffitt (chap. 9) explains changes in U.S. public assistance payments in the past. The overall picture arising from the data confirms conventional wisdom. This is not surprising since some papers are heavily based on previous contributions. For instance, Gruber and Wise as well as Raffelhu¨ schen summarize the international comparisons originally presented in Gruber and Wise (1999) and European Commission (1999), respectively. Nevertheless, the writings provide interesting details and some less well-known ‘‘facts’’. Taking a close look at explicit public debts as well as pension and health care schemes in twelve Member States of the EU, Raffelhu¨ schen shows that all these countries, except for Ireland, shift substantial burdens to future generations. The impact of the demographic changes on the social security
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schemes mainly causes this redistribution while explicit national budget deficits play a minor role in most countries. The United States faces similar problems as Europe. Medical care spending is sharply increasing even though health improvements of the elderly might ease off costs explosions as indicated by Cutler and Sheiner. Like its European counterparts, the American Old Age Survivors Insurance (OASI) levies a high implicit tax on income according to Caldwell et al. On both sides of the Atlantic, restoring a balanced budget in the long-term requires tax increases or benefit cuts. In each case, new generations bear even higher burdens than their predecessors. Reviewing the projections explored in various chapters immediately provokes the question of how reliable these figures are. As far as long-term demographic forecasts are concerned, Lee and Tuljapurkar give a very good account of the current state of the art in chap. 2. Having outlined the main approaches and the associated problems, they present the basic ideas of stochastic population forecasts based on time series models. This method allows them to determine the distribution of future population profiles and confidence bounds. Applying this approach to analyze the U.S. social security system offers indeed a new perspective. In contrast to predictions based on ‘‘deterministic’’ models, Lee and Tuljapurkar show that suggested measures to ensure a long-run fiscal balance still leave a substantial risk of insolvency. This grim picture also qualifies a result of Caldwell et al. According to them, official reports are too pessimistic since future benefit payments are overstated. Given the uncertainty involved in long-term forecasts, an adequate governmental response to the supposed crisis of social security systems is not obvious. Alan Auerbach and Kevin Hassett discuss in chap. 3 how long-run fiscal policy should take account of this uncertainty. They use a standard overlapping generation model with a risk-averse benevolent dictator maximizing social welfare over an infinite horizon. In this framework, uncertainty about the future generally urges precautionary savings providing for potentially unfavorable outcomes. Additionally, Auerbach and Hassett sketch the optimal policy if the government cannot adjust its policy at each date (for instance, because of transaction costs). Then, precautionary savings are still recommended in principle, but ‘‘occasional periods of apparent irresponsibility’’ (S. 91), i.e., the postponing of painful reforms might be justified. The motivation for the stickiness of social policy is rather vague. This issue is related to the institutional setting and the underlying political process, but Auerbach and Hassett account for it in a very stylized framework with a traditional welfare-optimizing government. Their approach raises some doubts about whether the analysis tackles the heart of the problem.
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The very specific objective function applied in Auerbach and Hassett is certainly open to dispute. However, it makes an important point – it focuses on consumption flows. In contrast, the empirical contributions consider changing public expenditures and compare net contributions to the social systems across different cohorts. Their emphasis might be misleading. Shifting burdens to future citizens is not in itself ‘‘unjust’’ and might be accompanied by continuously increasing living standards. There are wellknown mechanisms which partly compensate the new generations (for instance, lower birth rates can push up gross wages). Furthermore, immigration is neglected in the present collection of papers. Since some parts of the world still suffer more from too high than from too low birth rates, labor mobility can help to soften the generational imbalances. Nevertheless, the data is worrisome, but the political implications are far from being clear. Thus, the authors might have good reasons for providing at most a vague political recommendation. From a public choice perspective, it might be doubted whether governments care for traditional welfare analysis in a world where different groups politically compete for scarce resources. But maybe this pessimistic view is not quite correct, and countries implement solutions that come close to the social optimum. In a very interesting paper, Thomas MaCurdy and Thomas Nechyba provide some evidence that government spending is not as inefficient as often believed. They analyze how the demographic composition affects the revenues and expenditures of a community, how it alters interjurisdictional spillovers, and how transfers from the central government compensate for local fiscal burdens. Data from California counties indicate indeed that central government funding does ‘‘correctly’’ respond to varying demographic features across counties, thereby at least partly internalizing the spillovers. This paper certainly enriches the picture of fiscal federalism and suggests routes for further research in an age of drastic demographic changes. Despite the diversity, all chapters share a common feature – the impact of the economic system on demographic characteristics is ignored. This might puzzle some readers when reading a book on demographic change and public finance. Only Moffitt discusses in more detail how pecuniary incentives could affect demographic factors. According to Lee and Tuljapurkar, ‘‘they [Economic theories of fertility] do not yet provide a useful basis for forecasting fertility.’’ (p. 10). However, a look at long-term development and growth on the one hand and fertility rates and longevity on the other hand suggests strong interactions. Demographic structures seem to respond sensitively to major economic changes (for instance, industrialization).
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Neglecting this feedback from the economic system makes it particularly difficult to anticipate structural breaks and turning points, which could be important for long-term projections. If demographic features depend on economic incentives, the set of political means is enlarged. Public family assistance and similar measures might then soften financial imbalances. But, even if policy can boost birth rates, governments should be reluctant to overstress this solution. A return to exponential population growth enhances congestion and environmental problems and thus is a risky strategy in the long-run. It is striking that despite low fertility rates, the population in a number of European countries is still expected to grow. The present collection of papers clearly outlines the increasing evidence of fiscal imbalances. It does not explain why the governments sluggishly respond to these challenges since no attention is paid to the underlying political process. This inactivity could reflect the growing power of the old generations, which prevents any reforms at their expense. The data of Caldwell et al. might indicate an additional argument. They show that, at least in the United States, the pension schemes’ internal rates of return drastically vary within each cohort. A coalition of ‘‘inter- and intragenerational redistribution winners’’ could even more politically stabilize the level of the current old-age benefits. To sum up, Demographic Change and Public Finance contains a variety of distinct empirical and theoretical contributions. It broadly covers the impact of demography on public finance and suggests some stimulating roads for further research. However, scholars with a deep interest in more specific issues, a more systematic treatment, or consistent cross country comparison and its methodology may find other books more helpful (for instance, Auerbach et al., 1999). On the other hand, readers might appreciate that they can get an idea of current empirical and theoretical research (in different directions) as well as summaries of large-scale research projects.
References Auerbach, A., Kotliko, L., and Leibfritz, W. (1999): Generational Accounting around the World. Chicago: University of Chicago Press. European Commission (1999): ‘‘Generational Accounting in Europe.’’ European Economy: Reports and Studies 6. Gruber, J., and Wise, D. (1999): Social Security and Retirement around the World. Chicago: University of Chicago Press.
A. Haupt, Frankfurt/Oder, Germany and Boulder, Co, USA
