Building Future Generations : The Macroeconomic Consequences of Family Policies

Most developed countries have family policies, but little is known about their macroeconomic consequences. This paper develops a heterogeneous agent overlapping generations framework that integrates trade-offs between the number of children (quantity) and investment per child (quality), a rich demographic structure, and childcare choices. Calibrating the model to U.S. data and validating it with quasi-experimental evidence, I find that raising aggregate fertility to the replacement level requires a $30,000 cash reward to childbirth, similar to the expansion of the Child Tax Credit in the past decade (in net present value). Contrary to conventional wisdom, such a policy reduces average human capital and intergenerational mobility. The key to this result is that the marginal cost of child quality rises with fertility, and fertility effects of the policy are larger among parents with lower income. Nevertheless, average well-being rises by 1.6% in the long run as the old-age dependency ratio drops, requiring lower taxes to sustain retirement benefits. This gain in long-run welfare comes with higher public spending in transition, which may hurt existing households depending on how the policy is funded. Compared with cash rewards, in-kind benefits are less cost-effective in raising fertility but have other advantages: subsidized childcare encourages parents to work, while expansions of public education improve children's human capital and intergenerational mobility