The Macroeconomic Impacts of Entitlements

TL;DR

This paper empirically investigates how increasing entitlement burdens affect key macroeconomic variables like output, price level, and interest rates, supporting concerns about long-term economic growth.

Contribution

It introduces an empirical analysis using a vector error-correction model to quantify the macroeconomic impacts of entitlements, which is a novel approach.

Findings

Entitlement shocks decrease real output.

Entitlements influence long-term interest rates.

Results remain robust across various checks.

Abstract

The worries expressed by Alan Greenspan that the long run economic growth of the United States will fade away due to increasing burden of entitlements motivated us to empirically investigate the impact of entitlements of key macroeconomic variables. To examine this contemporary issue, we estimate a vector error-correction model is used to analyze the impact of entitlements on the price level, real output, and the long-term interest rate. The results show that a shock to entitlements leads to decrease in output and lends support to the assertion made by Alan Greenspan. Several robustness checks are conducted and the results of the model qualitatively remains unchanged.