Welfare and macroeconomic effects of family policies: insights from an OLG model

The US differs from other OECD countries in terms of family policy size and composition. This study examines the welfare and macroeconomic effects of family policy reforms. I explore three policy instruments: child-related tax credits, childcare subsidies, and child allowances. The children are merit good due to pay-as-you-go social security structure. I show that expanding family policy, like the American Rescue Plan, improves welfare. I also define the optimal family policy for the United States. It accounts for about 3% of GDP, three times larger than the existing policy, and primarily focused on childcare subsidies. Family policy structure is critical for welfare evaluation because similar expenditure levels can result in contrasting welfare outcomes depending on policy composition. This study emphasizes the importance of carefully designed family policies, as well as the need for ongoing research and policy innovation to maximize societal benefits and promote equitable economic growth.