Abstract
The paper considers a two-sector economy with a constant population: The public sector,
with stable productivity, and a private sector, with productivity growth. Baumol's law says
that such an economy has no steady state. It is demonstrated what this means. Two attempts
to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this
causes the share of the real public sector to vanish. The other policy fixes the share of real
public production - this causes the tax pressure to keep rising.
with stable productivity, and a private sector, with productivity growth. Baumol's law says
that such an economy has no steady state. It is demonstrated what this means. Two attempts
to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this
causes the share of the real public sector to vanish. The other policy fixes the share of real
public production - this causes the tax pressure to keep rising.
| Original language | English |
|---|---|
| Place of publication | Aarhus |
| Publisher | Institut for Økonomi, Århus Universitet |
| Number of pages | 16 |
| Publication status | Published - 2009 |
Keywords
- Welfare state, steady state growth