Economics Principles and Policy Chapter 20

Economics: Principles and Policy

• Textbook title: Economics: Principles and Policy
• Version: 14th edition
• Authors: William J. Baumol, Alan S. Blinder, John L. Solow
• Slides prepared by: Philip Heap, James Madison University

Part 4: The Distribution of Income

• Part 4 focuses on the distribution of income

Chapter 20: Poverty, Inequality, and Discrimination

• Introduces the topic of poverty, inequality, and discrimination
• Includes an opening quote from Sitting Bull

An Opening Quote

• "The white man knows how to make everything, but he does not know how to distribute it." - Sitting Bull

Three Questions to Address

• How unequal are incomes in the U.S., and why?
• How can society decide how much equality it wants?
• What policies are available to achieve this goal?

The Facts: Poverty

• War on Poverty (LBJ in 1964)
• Poverty line: $3,000 (1964) and $24,858 (2017) for a family of four
• 12.3% fell below the line in a certain year
• Characteristics of the poor: Black, women, less educated, poorer health; one-third are children
• Progress made in poverty reduction (graph shown in presentation)

The Facts: Poverty (continued)

• Defining "poor": Absolute poverty- falling below a minimum standard of living
• Relative poverty- falling too far behind the average income
• No sharp distinction between poor and rich
• The rich becoming richer may drive the poor to be poorer

The Facts: Inequality

• Market systems naturally create or allow inequality
• Rewards and penalties (incentivizing harder work) are a core element of efficiency. Experiment discussed to get students to think of this issue.
• Distribution of household income in the U.S. in 2017 (table included)

The Facts: Inequality (continued)

• Income distribution over time (table with income shares in selected years)
• Greater inequality since approximately 1980
• Comparing U.S. to other rich countries: U.S. has higher inequality (more unequal) than most other industrialized nations (e.g., Denmark, Finland, Iceland)

Some Reasons for Unequal Incomes

• Difference in ability, work experience, intensity of work
• Risk-taking
• Compensating wage differentials
• Schooling and other training
• Inherited wealth
• Luck

The Facts: Discrimination

• Economic discrimination: factors receiving unequal payments for equal output
• Men are typically more productive than women; that alone does not necessarily indicate discrimination
• Incorrect measure of discrimination: comparing median incomes of different groups (table of median incomes in 2017)

The Tradeoff Between Equality and Efficiency

• Two opposing views on inequality: -Conservative: inequality is a result of market mechanisms; government intervention may harm efficiency
  • Liberal: a good society does not have high and rising inequality; government should impose policies to reduce inequality
• Trump Tax Cuts as an example of this tradeoff

Ideas for Beyond the Final Exam

• The tradeoff between equality and efficiency is a crucial consideration
• Policies that promote efficiency (high-reward systems) may have adverse effects on income equality
• Should society be more concerned with equality or efficiency?

Policies to Combat Poverty

• Education (boosts earnings, but can be difficult to provide quality education for poor children)
• Welfare programs (including TANF, which placed limits on the amount of time people could be on welfare)
• Food stamps (delivered via electronic methods)
• In-kind transfers

Policies to Combat Poverty (continued)

• Negative income tax (example with guaranteed income and internal tax rate)
• Earned income tax credit (EITC) -grants are proportionally to earnings

Other Policies to Combat Inequality

• Progressive income taxes (take a larger share of income from the rich)
• Death duties / taxes (limits wealth transfer to next generation)
• Other taxes: (e.g., sales, payroll, property taxes) are largely regressive. The U.S. tax system as a whole is considered to be slightly progressive.

Policies to Combat Discrimination

• Civil Rights Act of 1964 (outlawed discrimination) and establishment of the Equal Employment Opportunity Commission (EEOC)
• Affirmative action (efforts to locate and hire members of underrepresented groups.) Also may have controversies (quotas creating inefficiency)

A Look Back

• How well the market handles income distribution
• Market relies on marginal productivity principle to distribute income
• Scarce factors get higher prices than abundant ones
• Market distributes income unequally

This quiz explores Chapter 20 from 'Economics: Principles and Policy', focusing on poverty, inequality, and discrimination. It includes key questions about income distribution in the U.S. and examines the historical context of the War on Poverty. Engage with the critical issues of economic equality and available policy options.