There are times where you come across an interesting title and a somewhat appealing abstract, and then you read the paper and you cannot believe the rubbish that is being presented. It is all elegant math, neat proofs, sometimes there is even good intuition, but the relevancy or the modeling assumptions are completely out of this world. The latest opus by Luciano Fanti and Luca Gori is one them.
So the purpose of this paper is to study how public expenditures for health impact savings and the current account through changes in longevity. That seems like a reasonable question, especially the longevity angle, as many studies before, some cited on this blog, have looked at the direct interaction between health expenses and savings, or at the indirect effect through changes in interest rates. From here it goes downhill, though.
First, prices are fixed. While may make sense for the interest rate, a small open economy is assumed after all, it makes no sense for the wage, as the whole point is to look what happens when population and aggregate savings change and thus should have an impact on the marginal product of labor. Second, aggregate capital is not defined, and thus the current account is not defined. Third, the paper claims that longevity is endogenous, but in fact it is just a function of health expenditures, which are exogenous. Fourth, when lifetime is endogenous, one cannot describe utility solely with consumption and assign zero utility when dead. As a consequence, any welfare measure is invalid.
Ironically, the cover page of the working paper series says "adhibe rationem difficultatibus", a quote from Seneca translating to, roughly, "let reason conquer your obstacles."