Dividing Up GDP--1: Income Inequality Big National Income Pie: Who Gets What Shares? • In a capitalist market economy, we should expect inequality. o Differences in family background. o Occupations are rewarded differently. o Differences in skill, effort, luck. o Unemployment. o Perpetuation of differences. • How much inequality is fair? o Greg Mankiw vs. Paul Krugman. Equalizing Institutions/Policies • Welfare state policies. o Social Insurance. o Health; pensions. o Minimum Wages and Unions. o Public Education and Health Care. o Progressive Taxation. • What has been happened with inequality? Why U.S. Inequality has Risen? • Equalizing institutions/policies after 1930s. o Unions after 1930s. o Government spending on social programs. o Regulating finance. • The Great U-Turn. o Anti-Tax movement in 1970s. o Anti-Union trend, starting with Reagan. o Deregulation of finance. o Globalization. Loss of worker bargaining power. Dividing Up GDP--2: Income Inequality and Poverty Poverty: One Feature of Inequality. • What is Poverty?—Official definition. o “The state of one who lacks a usual or socially acceptable amount of money or material possessions. Poverty is said to exist when people lack the means to satisfy their basic needs.” o But what are people’s “basic needs?” o Do we measure this in absolute or relative terms? ▪ How can you be “poor” if you have a TV or car? Poverty and “Capabilities.” • Amartya Sen defines poverty relative to absence of “capabilities.” o Ability to read and write. o To lead long and healthy life.o Freedom of movement. o Participate meaningfully in the civic life of one’s community. Official U.S. Measure, 2016 from U.S. Census Department
Official Poverty Threshold
• What has been happened with inequality?
• How much inequality is fair?
Big National Income Pie: Who Gets What Shares?
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How Did They Get Those Figures? • Spending on Food in 1963. o “Economy Food Budget.” • Multiply Food Budget by Three Three = poverty line. • Problem with Official Poverty Line. o Low-income people spend more on non-food necessities than 1963. ▪ Child care, health care. o Due to mother’s entering the work force, rising health care. o Government recognizes problem of low poverty line in defining eligibility for programs such as food stamps. ▪ 130 percent of poverty line. But is Poverty Simply a Matter of Too Little Money? • James Q. Wilson, January 2012: o “Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills, and induce them to join the legitimate work force. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.” Causes of Poverty and Solutions? • Sen and Wilson would agree on some causes: o Lack of decent educational opportunities. o Lack of job opportunities. • But what is causing these problems? o What are some solutions?