Will very large baby bonuses work?

That is the topic of my latest Bloomberg column.  Here is one bit:

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 each, or about $70,000. For perspective, that is about twice South Korea’s annual per-capita income. At current birth rates, the plan would cost more than $16 billion a year; if it is successful, it will cost even more.

And this:

In principle at least, these kinds of policies are self-financing. Most babies born today or over the next few years will 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.

But will such policies actually result in population growth? After all, the government may 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-tenth 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-tenth 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 a third of income, in fiscal terms this is not a profitable deal.

You still might think it is worth spending money to increase the number of Korean babies. After all, people in prosperous countries are on average happy, and that is worthwhile in itself, quite 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.

Worth a ponder…