Tue, May 21, 2024 page9

• Could South Korea’s US$73,500 baby bonus solve its fertility crisis?

  The proposal to pay families for having a child is worth considering, but is unlikely to have much of an impact

  • By Tyler Cowen / Bloomberg Opinion
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  As the global fertility crisis continues to accelerate, so does the anxiety over what to do about it. A smaller world population might be fine in the short run, but it would not be good for it to asymptotically approach zero, and many citizens presumably do not want their countries to lose their geopolitical influence due to population decline. In many cases, there is also national debt to be paid off, which requires more young people to pay taxes and finance the pensions of the old.

  Some countries are taking action. South Korea, which has the world’s lowest total fertility rate — just above 0.7, far below the replacement level of 2.1 — is pondering a radical solution: baby bonuses of 100 million won (US$73,500) each. For perspective, that is about twice South Korea’s annual per capita income. At current birthrates, the plan would cost more than US$16 billion a year; if it is successful, it would cost even more.

  In principle, these kinds of policies are self-financing.

  

  Illustration: Yusha

  Most babies born today or over the next few years would grow up to be taxpayers. In the long run, the birth subsidies in net terms need not cost anything at all. If, for instance, you pay two years’ average income to a family to have another child, you might plausibly expect to later receive about 45 years of tax receipts.

  Would such policies actually result in population growth? After all, the government might end up making a lot of payments to families which would have had children anyway. Imagine that, after putting the policy into practice, only one-10th of the kids born were induced by the subsidy. In that case, in expected value terms, the two years’ investment of per capita income yields only one-10th of the calculation presented above — that is, 4.5 years of additional tax receipts. Given that those receipts are discounted for a rather distant future, and perhaps constitute only about one-third of income, in fiscal terms this is not a profitable deal.

  You might think it is worth spending money to increase the number of South Korean babies. After all, people in prosperous countries are on average happy, and that is worthwhile in itself, aside from their contribution to the public till. Still, if addressing public budget imbalances is one of the motivations for this policy, it could make fiscal problems worse.

  Unfortunately, it is impossible to say how much impact the subsidies would have, as there is no precedent. The closest would be Hungary’s subsidies for childbearing, including income tax exemptions amounting to about 5 percent of GDP. These policies were instituted only a few years ago, but there is some evidence of rising fertility rates in Hungary, albeit at 1.6, still well below the replacement rate.

  When birth subsidies get smaller, most of the evidence is not encouraging. The Nordic countries provide various kinds of free childcare and benefits for parents, such as paid work leave. Those policies are generous by global standards, yet the resulting birthrates are not impressive.

  Similarly, data from the US shows that the so-called “shifting priorities” of younger generations — about life choices and societal norms — influence decisions about family size far more than any changes in childrearing costs or subsidies.

  France also has a subsidy plan in mind, but it probably is not big enough to work. Singapore has tried subsidies as well as nudges, such as government-sponsored dating cruises, to no avail.

  It should not be a huge surprise that the smaller subsidies do not work.

  Having children changes everything you do and how you do it. If you are not interested in that life-altering transformation, a birth subsidy is not going to make a difference. Subsidies might convince a couple with two children to have a third, because now the additional child is easier to afford. The problem of course is that so many families are not having two children to begin with.

  Peer expectations are another factor here. If most families have three children, more people might seek to meet that standard and the subsidy could help them do so. One way the subsidies could work is by creating a critical mass of large families and changing social norms for everyone.

  In any case, the South Korean and Hungarian birth subsidy experiments deserve both praise and scrutiny. Even if they just slow, but do not arrest the trend toward much older and smaller societies, they are still worth pursuing.

  We all would learn from the results. There is not enough social experimentation in the world, and humanity has to try something to avoid disappearing.

  Tyler Cowen is a Bloomberg Opinion columnist, a professor of economics at George Mason University and host of the Marginal Revolution blog.
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