Presentation on theme: "Income Inequality and Poverty"— Presentation transcript:
1 Income Inequality and Poverty 20Income Inequality and Poverty
2 What good could come from the American government redistributing wealth? What problems might arise?
3 Key Questions for Chapter 20 How is poverty in society measured?How much income inequality is present in the US today?What groups are more likely to be poor? Why?What are the political philosophies that relate to poverty?What possible solutions to poverty are there?
4 The Measurement of Inequality Questions of measurement: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 among income classes?
5 The Measurement of Inequality U.S. income inequalityDistribution of incomeAlign families by incomeDivide all families into five equal groupsSame number of families in each groupDifferent incomesBottom fifth: 4% of all incomeTop fifth: 48.1% of all income
6 The distribution of income in the United States: 2005 1The distribution of income in the United States: 2005GroupAnnual Family IncomeBottom FifthSecond FifthMiddle FifthFourth FifthTop FifthTop 5 percentUnder $25,616$25,616–$45,021$45,021–$68,304$68,304–$103,100$103,100 and over$184,500 and over
7 Income inequality in the United States 2Income inequality in the United StatesYearBottom fifthSecond fifthMiddle fifthFourth fifthTop fifthTop 5%200520001990198019701960195019354.0%22.214.171.124.126.96.36.199.6%9.810.811.512.212.09.215.3%15.516.617.517.617.817.414.122.9%22.823.824.324.023.420.948.1%47.444.341.540.941.342.751.721.1%20.815.315.615.917.326.5This table shows the percentage of total before-tax income received by families in each fifth of the income distribution and by those families in the top 5 percent.
9 The Measurement of Inequality U.S. income inequalityTrends in income distribution: more equal distribution: more unequal distributionCauses:Increase in international trade with low-wage countriesChanges in technology
10 The Measurement of Inequality Inequality around the worldInequality measureRatio of the income received by the richest tenth of the population to the income of the poorest tenthDegree of inequality varies substantially around the world
11 Inequality around the world 1Inequality around the worldThis figure shows a measure of inequality: the income (or expenditure) that goes to the richest 10% of the population divided by the income (or expenditure) that goes to the poorest 10%. Among these nations, Japan and Germany have the most equal distribution of economic well-being, while South Africa and Brazil have the least equal.
12 The Measurement of Inequality The poverty ratePoverty ratePercentage of the population whose family income falls below an absolute level (poverty line)Poverty lineAn absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty
13 2The poverty rateThe poverty rate shows the percentage of the population with incomes below an absolute level called the poverty line.
14 The Measurement of Inequality Poverty rate1959: 22.4%1973: 11.1%Poverty - economic maladyAffects all groups within the populationNot with equal frequencyPoverty - correlated with raceBlacks and Hispanics are three times more likely to live in poverty than whites
15 3 Who is poor? Group Poverty rate All persons White, not Hispanic BlackHispanicAsianChildren (under age 18)Elderly (over age 64)Married-couple familiesFemale household, no spouse present12.6%8.324.921.811.117.610.15.931.1This table shows that the poverty rate varies greatly among different groups within the population.
16 The Measurement of Inequality Poverty - correlated with ageChildren - more likely to be members of poor familiesThe elderly - less likely to be poorPoverty - correlated with family compositionFamilies headed by a female adult and without a spouse presentFive times as likely to live in poverty as a family headed by a married couple
17 The Measurement of Inequality Problems in measuring inequalityData on income distribution & poverty rateIncomplete picture of inequalityDoesn’t account for in-kind transfersNormal life cycle patternCauses inequality in the distribution of annual incomeMay not represent true inequality in living standardsTransitory vs. permanent incomeTransitory changes - need not affect standard of livingA family’s ability to buy goods and services depends largely on its permanent income
18 The Measurement of Inequality Problems in measuring inequalityIn-kind transfersTransfers to the poor in the form of goods & services rather than cashLife cycleRegular pattern of income variation over a person’s lifePermanent incomeA person’s normal income
19 Alternative measures of inequality Different measures of inequality lead to dramatically different resultsAverage annual incomePoorest fifth of U.S. households = $9,974Richest fifth of U.S. households = $149,963About 15 times as much income as poorest fifthAccount for progressive taxesRichest fifthAbout 14 times as much after-tax income as poorest fifth
20 Alternative measures of inequality ConsumptionRichest fifth3.9 times as much as the consumption of the poorest fifthCorrect for differences in number of people in householdRichest fifth - average of 3.1 peoplePoorest fifth - average of 1.7 peopleConsumption per person in the richest fifthOnly 2.1 times as much as consumption per person in the poorest fifth
21 The Measurement of Inequality Economic mobility: Movement of people among income classesReflects transitory variation in incomeReflects more persistent changes in incomeMany of those below the poverty line are there only temporarilyPersistence of economic success from generation to generationAbove-average income carries over from parents to children
22 The Measurement of Inequality Economic mobilityFour of five millionaires made their money on their ownStarting and building a businessClimbing the corporate ladderOne in five millionaires inherited their fortunes
23 Political Philosophy of Redistributing Income UtilitarianismThe government should choose policies to maximize the total utility of everyone in societyUtility is the measure of happiness or satisfaction
24 Political Philosophy of Redistributing Income Utilitarian case for redistributing incomeBased on diminishing marginal utilityOne extra dollar of income has more utility to poor person than to rich personGovernment: redistribution of incomeFrom rich to poorIncrease total utilityBalance the gains from greater equality against the losses from distorted incentivesMaximize total utilityStops short of making society fully egalitarian
25 Political Philosophy of Redistributing Income LiberalismThe government should choose policies deemed justAs evaluated by an impartial observer behind a “veil of ignorance”Society’s institutions, laws, and policies should be just
26 Political Philosophy of Redistributing Income LiberalismMaximin criterionThe government should aim to maximize the well-being of the worst-off person in societyJustifies public policies aimed at equalizing the distribution of incomeTransfers income from the rich to the poorSociety raises the well-being of the least fortunateWouldn't lead to a completely egalitarian society
27 Political Philosophy of Redistributing Income LiberalismRedistribution of incomeA form of social insuranceSocial insuranceA Government policy aimed at protecting people against the risk of adverse events
28 Political Philosophy of Redistributing Income LibertarianismThe government should punish crimes and enforce voluntary agreementsThe government should not redistribute incomeDon’t evaluate economic outcomesEvaluate the process by which these outcomes arise
29 Policies to Reduce Poverty Government - should provide a “safety net”Poverty - associated with various economic and social illsPolicies: reduce number of people living in povertyMinimum-wage lawsWelfareNegative income taxIn-kind transfers
30 Policies to Reduce Poverty Minimum-wage lawsWorkers who remain employed benefit from higher wageHigher unemployment:Workers who might have been employed at a lower wage - worse offThe magnitude of these effects is the Elasticity of demand
31 Policies to Reduce Poverty WelfareGovernment programs that supplement the incomes of the needyTo qualifyLow incomeAdditional “need”Temporary Assistance for Needy Families (TANF)Assists families with children and no adult able to support the familySupplemental Security Income (SSI)Assistance to the poor who are sick or disabled
32 Policies to Reduce Poverty Welfare CriticismWelfare programs - create incentives for people to become “needy”May encourage families to break upMay encourage illegitimate birthsExacerbate the very problems they are supposed to cure
33 Policies to Reduce Poverty Negative income taxTax system that collects revenue from high-income householdsGives subsidies to low-income householdsPoor families – receive financial assistance without having to demonstrate needSubsidize not only the unfortunate but also those who are simply lazyEarned Income Tax Credit (EITC) applies only to the working poor
34 Policies to Reduce Poverty In-kind transfersProvide poor people directly with some of the goods and services they need to raise their living standardsFood stampsGovernment vouchers - used to buy food at storesHealthcare: MedicaidCritics: give the poor people cash
35 Policies to Reduce Poverty Antipoverty programs and work incentivesMany policies aimed at helping the poorUnintended effectsDiscouraging the poor from escaping poverty on their ownVery high effective marginal tax ratesDiscourage families from workingSolutionReduce benefits more gradually as incomes riseHigher cost of antipoverty programs
36 Policies to Reduce Poverty Antipoverty programs and work incentivesTrade-offBurdening the poorHigh effective marginal tax ratesBurdening taxpayersCostly programs to reduce poverty
37 Policies to Reduce Poverty Antipoverty programs and work incentivesOther ways to reduce the work disincentive of antipoverty programs:WorkfareRequire any person collecting benefits to accept a government-provided jobProvide benefits for only a limited period of time
38 Key Questions for Chapter 20 Review How is poverty in society measured?How much income inequality is present in the US today?What groups are more likely to be poor? Why?What are the political philosophies that relate to poverty?What possible solutions to poverty are there?