Chapter 20 - Income, Inequality, and Poverty

  • A person’s wage depends on the supply and demand for the person’s labor.
  • The factors that influence wages also help distribute the total income throughout the equality.
  • The “invisible hand” distributes resources, but not necessarily fairly. So, the government should help redistribute income to achieve equality.

20-1 Measuring Inequality

  • There are four main questions to address.
    • How much inequality is there in our society?
    • How many people live in poverty?
    • What problems arise in measuring the amount of inequality?
    • How often do people move between income classes?

US Income Inequality

  • Quintiles: when a statistical group is divided into five equal groups
  • Increases in international trade with countries that offer low wages and changes in technology reduce the unskilled labor demand.
  • This change in wages has increased inequality in family incomes.
  • 2017 Income Distribution (Annual Family Income)
    • Bottom Quintile: $33,551 and below
    • Second Quintile: $33,552–$60,032
    • Middle Quintile: $60,033–$92,358
    • Fourth Quintile: $92,359–$145,380
    • Top Quintile: $145,381 and above
    • Top 5 Percent: $261,508 and above

Inequality Around the World

  • Some statistics for countries aren’t available.
  • Data collection methods also differ (individual incomes, family incomes, expenditure, etc…)
  • Quintile ratio: the income of the richest quintile divided by the income of the poorest quintile
  • Pakistan and Sweden are the two most “equal” countries.
  • South Africa is the most unequal country.

The Poverty Rate

  • Poverty rate: the percentage of the population whose family income falls below the poverty line
  • Poverty line: 3x the cost of providing a fulfilling diet, set by the federal government. It depends on family size and is adjusted every year.
  • Poverty is correlated with race, age, and family composition.
    • Blacks and Hispanics are more likely to be in poverty.
    • Children are more likely to be in poverty.
    • Single mothers that lead a family are more likely to be in poverty.

Problems in Measuring Inequality

  • Family annual incomes do not measure the standard of living.
  • In-kind transfers: goods and services (not cash) given to the poor. Standard inequality measurements do not account for these.
  • Data does not count tax credits specifically made to help poor people.
  • Life cycle: The regular pattern of income variation, where income rises, peaks at age 50 and falls at a retiring age of 65
  • This causes inequality in annual income distribution but does not have to mean true standard of living inequality.
  • Permanent income: A family’s average income
  • The distribution of permanent income is more important than the distribution of annual income.
  • Permanent income and consumption are less affected by transitory changes. So, they are more equally distributed.
  • Inequality in material standards of living is lesser than inequality in annual income.

Economic Mobility

  • Economic mobility depends on luck and work.
  • Economic mobility: the movement of people between income classes.
  • Temporary poverty is more common than persistent poverty.
  • In a 10 year period, 25% of families fall below the poverty line in at least one year.
  • In a 10 year period, less than 3% of families are poor for eight or more years.
  • Policies try to differentiate these families to combat permanent poverty.
  • One way to determine this is by checking the generational economic success.
    • If a parent earns 20% above the average income for their generation, the child will most likely earn 8% above the average income for their generation.
  • About 80% of millionaires made money on their own. 20% inherited the fortune.
  • Countries with greater inequality than the US have lower mobility. Countries with lower inequality than the US have higher mobility.

20-2 The Political Philosophy of Redistributing Income

  • What should the government do about economic inequality?

Utilitarianism

  • Utilitarianism: the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society.
  • Utilitarians use individual decisions to question bigger issues dealing with morality and public policy.
  • Utility: the level of happiness or satisfaction a person receives from their decisions. It is a measure of well-being and is used as a baseline to solve problems.
  • The government should maximize utility for everyone in society.
  • Redistributing income is based on diminishing marginal utility. A poor person will benefit more from $1 than a rich person. The government should focus on distributing income equally.
  • Utilitarians do not expect complete equality because of incentives, and how people respond to them.

Liberalism

  • Liberalism: the political philosophy according to which the government should choose policies deemed as just, as evaluated by an impartial observer behind a “veil of ignorance”
  • How can society agree fully on the definition of justice when everyone is influenced by their own experiences?
  • Maximin criterion: the claim that the government should aim to maximize the well-being of the worst-off person in society
  • Liberalism aims to maximize the minimum utility or raise the poverty line.
  • It includes transferring the rich to the poor.
  • Liberalism also does not expect complete equality. With complete equality existing, incentives disappear and people are no longer ready to work.
  • Social insurance: government policy aimed at protecting people against the risk of adverse events

Libertarianism

  • Society does not earn any income, only individual members do.
  • The government should not take money from individuals to give to others to achieve a different distribution of income
  • Libertarians evaluate the economic outcomes by observing the process where these outcomes arrive.
  • The equality of opportunities is more important than the equality of outcomes.
  • Everyone has the same chance to succeed, but it is not guaranteed that the outcomes are equals

20-3 Policies to Reduce Poverty

  • Poverty is one of the most difficult problems that politics has to face.
  • Poverty includes homelessness, drug dependence, health problems, teenage pregnancy, illiteracy, unemployment, low educational attainment, and more relations to crime.

Minimum-Wage Laws

  • Minimum wage helps the working poor without costing the government, but others view it to hurt those who it intends to help.
  • The cost of labor increases and the demand for labor decreases, causing higher unemployment.
  • However, it depends on the elasticity of labor demand. Some perceive the demand for unskilled labor as inelastic, while others think it is more elastic.

Welfare

  • Welfare: government programs that supplement the incomes of the needy
  • Temporary Assistance for Needy Families (TANF) assists families with children but no adult able to support the family.
  • Supplemental Security Income (SSI) helps those who are sick and disabled.
  • Some perceive these programs create incentives for people to become “needy”.
    • EX: Families breaking up to qualify for absent father welfare programs

Negative Income Tax

  • Negative income tax: a tax system that collects revenue from high-income households and gives subsidies to low-income households
  • The only requirement is a low income.
  • Earned Income Tax Credit (EITC) allows working families to receive income tax refunds greater than the taxes paid during the year.

In-Kind Transfers

  • Providing poor people directly is also an option.
  • This includes food, clothing, shelter, and toys at Christmas.
  • Supplemental Nutrition Assistance Program (SNAP) gives plastic cards that buy food at stars.
  • This ensures the poor get what they need most.

Antipoverty Programs and Work Incentives

  • Some policies accidentally discourage the poor from working and therefore escaping poverty.
  • Welfare, Medicaid, SNAP, and EITC are all programs aimed to help the poor but are tied to a lower family income.
  • Some think reducing benefits to poor families as their incomes rise, gradually, is an easy solution to this.
  • However, it increases the cost of these programs.

20-4 Conclusion

  • Measuring inequality is difficult.
  • A lot of nations have a huge difference in inequality.
  • Governments can sometimes improve market outcomes but have intended consequences.
  • Policies can accidentally reduce the incentive to succeed. There is a trade-off between equality and efficiency.