Economics: Principles and Policy (2000) Past PowerPoint

Economics: Principles and Policy William J. Baumol, Alan S. Blinder, John L. Solow 14th edition Powerpoint Slides prepared by: Philip Heap, James Madison University Baumol, Blinder and Solow, Economics: Princ...

Economics: Principles and Policy William J. Baumol, Alan S. Blinder, John L. Solow 14th edition Powerpoint Slides prepared by: Philip Heap, James Madison University Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © 2000 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Part 4 The Distribution of Income Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Chapter 20 Poverty, Inequality and Discrimination Baumol, Blinder and Solow, Economics: Principles and Policy, 14 th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  An Opening Quote The white man knows how to make everything, but he does not know how to distribute it. Sitting Bull Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  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? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Poverty War on Poverty (LBJ in 1964) Poverty line: An amount of income below which a family of four is considered poor $3,000 in 1964; $24,858 in 2017 12.3% fell below the line Who are the poor? Black, women, less educated, poorer health Third of the poor are children What progress have we made in reducing poverty? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1 Progress in the War on Poverty Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Poverty Problem with defining “poor”: Absolute poverty: If you fall short of a certain minimum standard of living, you are poor Once you pass this standard, you are no longer poor Simple but arbitrary Relative poverty: The poor are those who fall too far behind the average income No longer a sharp distinction between poor and rich ▶ Are the poor, poor, because the rich are rich? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Inequality Market system tends to allow or even foster inequality Basic source of efficiency is the system of rewards and penalties An experiment: Write down what you think your household’s (parents) before-tax income was in 2017 Try to guess what % of American households had incomes lower than this amount Finally, if there are three classes - rich, middle class, and poor - which group are you in Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Table 1 Distribution of Household Income in the United States in 2017 Households in This Households in This Income Range Range and Lower Range Ranges Less than $15,000 10.7% 10.7% Poor $15,000 to $24,999 9.6 20.3 $25,000 to $34,999 9.2 29.5 $35,000 to $49,999 12.3 41.8 Median: $50,000 to $74,999 16.5 58.3 $61,400 $75,000 to $99,999 12.5 70.8 $100,000 to $149,999 14.5 85.3 Rich $150,000 to $199,999 7.0 92.3 > $127,000 $200,000 or more 7.7 100.0 Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Inequality What has happened to the distribution of income over time? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Table 2 Income Shares in Selected Years Income 2017 1997 1987 1977 Group Lowest fifth 3.1 3.6 3.8 4.2 Second fifth 8.2 8.9 9.6 10.2 Middle fifth 14.3 15.0 16.1 16.9 Fourth fifth 23.0 23.2 24.3 24.7 Highest fifth 51.5 49.4 46.2 44.0 Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Inequality What has happened to the distribution of income over time? Grown more unequal since about 1980 How does the United States compare to other rich countries? U.S has more income inequality than most other industrialized countries Denmark, Finland, Iceland had the most equal income distributions A note of caution: Do not judge the outcome as “unfair” until... Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Some Reasons for Unequal Incomes What are some causes of income inequality? Differences in ability Work experience Differences in intensity of work Risk taking Compensating wage differentials Schooling and other training Inherited wealth Luck Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Facts: Discrimination Economic discrimination: Occurs when equivalent factors of production receive different payments for equal contributions to output If men more productive than women, their higher wages not discriminatory But discrimination normally subtle Incorrect measure of discrimination Compare median incomes of different groups Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Table 3 Median Incomes in 2017 Percentage of Population Group Median Income White Male Income White males $41,578 100 Black males 29,962 72 White females 25,793 62 Black females 23,499 57 Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Tradeoff Between Equality and Efficiency Two opposing views on inequality: “Conservative” Inequality is a result of the market mechanism Government interference will impair efficiency “Liberal” “Good society” does not have high and rising inequality Government should impose policies to reduce income disparities What economists can and cannot say about inequality Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Ideas for Beyond the Final Exam The Tradeoff Between Equality and Efficiency Imagine we are baking a chocolate cream pie Efficiency would lead to largest possible pie But those who work harder, are more productive get a bigger piece What happens to their incentive to work hard if we take some of their pie and give it to someone else? Policies that redistribute income Reduce (raise) rewards of high-income (low-income) earners Therefore, reduce incentive to earn high income Policies directed at increasing economic equality will Reduce economic efficiency and reduce society’s total output Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Ideas for Beyond the Final Exam Does not mean we should not try to reduce income inequality. Issue is how? Two lessons: 1. Seek policies that do the least possible harm to incentives and efficiency 2. Equality has a price Rationally decide how much to “purchase” Neither complete laissez-faire nor complete equality is socially optimal ▶ Would you support a 100% tax on all income, and then share equally? ▶ Would you support a 0.1% tax on billionaires to help poor children? Optimal policy is somewhere between, but where? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Tradeoff Between Equality and Efficiency Tradeoffs with Trump Tax Cuts Benefits high income household and corporations so more inequality Improves incentives so greater efficiency How much is equality worth to you? Okun’s leaky bucket Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Education More education boosts earnings Difficult to deliver quality education to poor children Children are ill-equipped to learn Schools are ill-equipped to teach High dropout rates Not an effective way to lift adults out of poverty Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Welfare programs: Specifically designed to alleviate poverty Earlier programs (before 1990s) inefficiently structured No incentive to work: payments reduced $1 for each $1 earned Temporary Assistance to Needy Families: TANF(1996) Eligibility for welfare limited to two years at a time, five year lifetime limit Recipients find jobs before reach limits Is it mean spirited or does it provide the right incentives? TANF during 2001 and 2007-2009 recessions Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Other welfare programs: Food stamps “Stamps” delivered via an electronic benefits card Benefits increase as income decreases In 2017, 42.1 million Americans received food stamps (47.6 million in 2013) Would it be better to give poor families cash rather than food stamps? In-kind transfers Important goods provided at no or low price Medical care and subsidized public housing Benefits that decline as family income rises Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty One problem with previous welfare programs: Poor families taxed heavily if their earnings rise Incentives to work become quite weak Negative income tax How it works: Pick two numbers: ▶ A minimum income level below which no family is allowed to fall (guarantee) ▶ An internal tax rate at which benefits are “taxed away” as income rises Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Negative income tax: An example: Guaranteed income: $12,000 50% internal tax rate Income from work: $8,000 ▶ Government gives a benefit of: ⁃ $12,000 – 0.50 x $8,000 = $8,000 So total income to person: ▶ $8,000 + $8,000 = $16,000 Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 4 Illustration of Negative Income Tax Plan Earnings Benefits Paid Total Income $0 $12,000 $12,000 4,000 10,000 14,000 8,000 8,000 16,000 12,000 6,000 18,000 16,000 4,000 20,000 20,000 2,000 22,000 24,000 0 24,000 Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Negative income tax: Since additional income is taxed at 50%, there is an incentive to work A problem: Break even level: Level of income at which benefits cease ($24,000) ▶ Guarantee = Tax Rate x Breakeven Level To reduce poverty, guarantee needs to be close to poverty line ▶ But with 50% tax rate would mean a fairly high breakeven level ▶ Families not “poor” receive benefits To keep guarantee close to breakeven level, would need high tax rate ▶ But then you take away incentive to work Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Poverty Earned income tax credit, EITC Program in which the federal government gives out grants to certain families proportional to their earnings Two thresholds: ▶ From $0 - $14,290 (2018), government supplements income with grant proportional to earnings ▶ Beyond, $24,250, the grant is scale back America’s biggest income-support program: 27 million workers at a cost of $65 billion per year. Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Other Policies to Combat Inequality A broader view Objective is to eliminate income disparities, not just poverty Personal income tax Progressive so takes larger share of income from the rich Incomes after tax are distributed more equally than incomes before tax Death duties and other taxes Limits incomes of the rich or ability to transfer wealth to the next generation Only provides 1% of total tax revenue Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Other Policies to Combat Inequality Other taxes (sales, payroll, property) are all regressive Overall, the U.S tax system is slightly progressive Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Discrimination Civil Rights Act of 1964 Outlawed many forms of discrimination Established Equal Employment Opportunity Commission (EEOC) Initial efforts attacked problems of pay and hiring discrimination Problem of showing unequal pay for “equal” work Affirmative action Active efforts to locate and hire members of underrepresented groups Firms required to show that they were taking steps to reduce imbalance Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Policies to Combat Discrimination Affirmative action controversies: Con: Quotas and compulsory hiring creates inefficiencies Pro: Necessary to redress past wrongs Prevent claims that unable to find qualified minorities ▶ But how do you decide who is “qualified” Why is this another trade-off between equality and efficiency issue? Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  A Look Back What does the market do well, and what does it do poorly when it comes to income distribution? A market economy relies on the marginal productivity principle to assign income Scarce factors receive high prices, abundant factors, low prices, therefore, Society’s resources used efficiently But this mechanism may create an unequal income distribution Market does a poor job of distributing income equitably The market has both virtues and vices Baumol, Blinder and Solow, Economics: Principles and Policy, 14th Edition. © Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.