CHAPTER 20 – THE DISTRIBUTION OF INCOME

  1. CHAPTER QUESTIONS:
  2. How much inequality is there?
  1. What do different political philosophies have to say about the government’s role in altering the distribution of income?
  1. What are the various government policies that are used to help the poor?
  1. MEASURING INEQUALITY
  2. U.S. Income Inequality
  1. Income distribution is presented in charts that are broken down into QUINTILES.
  1. General Observations about Inequality:
  2. Throughout the past several decades, the bottom 1/5th of the population has received about 4 to 5% of the income, while the top 1/5 has received 40 to 50%.
  1. From 1935 to 1970, the distribution gradually became more equal. Since 1970, this trend has reversed itself.
  1. The Women’s Movement and Income Distribution:
  1. Over the past several decades, the % of women holding jobs has increased.
  1. This increase has led to less equality in family incomes.
  1. The Women’s Movement has had the greatest impact on high income households. Research indicates that if the spouse is a professional, chances are that the other spouse will be too; thereby increasing the family’s income.
  1. Income Inequality Around the World – When countries are ranked by inequality, the U.S. ends up around the middle of the pack.
  1. Poverty
  2. Poverty Line - $19,350 for a family of 4 in 2005.
  1. Poverty Rate – 37 million people in 2004 (12.7% of the nation); up from 35.9 million in 2003 (12.5% of the nation).
  1. Observations:
  2. Between 1959 and 1973, poverty fell from 22.4% to 11.1%.
  1. Since 1973, the increase in income inequality has prevented the poverty rate from declining further.
  1. Correlations:
  2. with Race: Blacks and Hispanics are more likely than whites.
  1. with Age – children are more likely to live in poverty and the elderly are less likely to live in poverty.
  1. with Family Composition – families headed by a single female adult w/o a spouse present are more likely to live in poverty than a family headed by a married couple.
  1. Problems in Measuring Inequality:
  2. In-Kind Transfers – transfers to the poor given in the form of goods and services rather than in cash.
  1. Standard Measures of Income Inequality are only based on a family’s income and do not take into account the In-Kind Transfers that the family receives.
  1. The Census Bureau reports that, if In-Kind Transfers are included in the annual income at their market value, the number of families living in poverty would decline by 10%.
  1. This implies that as the composition of cash-assistance and In-Kind Transfers changes, the poverty rate may change, but this may not mean that the level of economic deprivation of the country’s families has changed.
  1. The Economic Life Cycle – the regular pattern of income variation over a person’s life.
  2. Young workers typically have lower incomes. Income rises as the worker matures and gains experience, and peaks around age 50. Income then declines until the worker retires at age 65.
  1. People borrow and save to smooth out life-cycle changes in income. Borrowing often occurs when the individual is young, and most individuals save during middle-age.
  1. To gain a better assessment of income inequality, we would need data on lifetime incomes, and such data is not available.
  1. Transitory vs. Permanent Income (a person’s normal income)
  2. To gauge inequality of living standards, the distribution of permanent income is more relevant than the distribution of annual income.
  1. Economic Mobility – the movement of people among income classes and occurs often in the U.S. economy.
  1. Because of upward economic mobility, many of those below the poverty line are only there temporarily.
  1. Approximately 80% of the millionaires in the U.S. made their money on their own.
  1. THE POLITICAL PHILOSOPHY OF REDISTRIBUTING INCOME
  2. Utilitarianism – the philosophy according to which the govt. should choose policies to maximize the total utility of everyone in society.
  1. Utility – a measure of happiness and satisfaction.
  1. The case for redistributing income is based on the assumption of diminishing marginal utility:
  2. An extra dollar of income to a poor person provides that person with more additional utility than to a rich person.
  1. As a person’s income rises, the extra satisfaction from an additional dollar of income declines.
  1. Do not believe that all incomes should be equal.
  2. People respond to incentives and if incomes were equalized, this would reduce the incentive to work hard.
  1. A Utilitarian’s opinion of the govt. is that they must balance the gains from greater equality against the losses caused by the distorted incentives.
  1. Liberalism – the political philosophy according to which the govt. should choose policies deemed to be just, as evaluated by an impartial observer behind a “veil of ignorance.”
  2. Based on what is best for the worst-off person in society.
  3. Maximin Criterion – the claim that the govt. should aim to maximize the well-being of the worst-off person in society.
  4. If the govt. promised to equalize incomes, there would be no incentive to work hard, society’s total income would fall substantially, and the least fortunate person would be worse off. Thus, the maximin criterion still allows disparities in income, because such disparities can improve incentives, and thereby raise society’s ability to help the poor.
  5. The idea proposes that we should consider income redistribution as a form of social insurance.