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Economics Of Poverty

by: Aaron Notetaker

Economics Of Poverty ECON 2456

Aaron Notetaker

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About this Document

Bringing the discussion of thoughts on poverty up to the Welfare Reforms of 1996
Economics of Poverty
D. Kennedy Jr
Class Notes
Economics, poverty, welfare
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This 4 page Class Notes was uploaded by Aaron Notetaker on Friday September 9, 2016. The Class Notes belongs to ECON 2456 at University of Connecticut taught by D. Kennedy Jr in Fall 2016. Since its upload, it has received 63 views. For similar materials see Economics of Poverty in Economics at University of Connecticut.


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Date Created: 09/09/16
Economics of Poverty WEEK 2 TH NEW THINKING OF 20 CENTURY – is poverty ‘necessary’ Marshall - Support of supporting policies with progressive income taxation Breakthroughs in science and health (indoor plumbing, medicine) caused an optimism that the younger generation would see greater opportunity than the older generation. Thus, investing in a child’s education was a less ‘risky’ investment. The Mother’s Pension – 1 welfare program for poor families with dependent children, established in Illinois before WWI, expanded to 20 other states Positive economics – objective statements that can be tested, amended or rejected by referring to the available evidence. Deals with objective explanation and the testing of theories Normative economics – subjective statements that carry value judgments – a statement of opinion Pareto – purely positive (empirical) evaluations of poverty. Cardinal Utility – assigns a number to the utility of each person, thus can be added up (Utilitarian view of utility) Pareto rejected the ability to measure utility in this way and so rejected Cardinal Utility and Utilitarianism. Instead based his economics on Ordinal Preferences (the ranking of bundles of goods in relation to each other. i.e. ‘good A is preferred to good B’). A utility function would only be assigned a number to represent the relationship of preference between bundles Pareto Optimal – when 2 people engage in trade, the result would be a win-win or a win-not lose. There is no win-lose. If markets are efficient this optimum can be reached through free exchange - mutually beneficial exchanges. Theory later formalized as the First Fundamental Theorem of Welfare Economics, namely that competitive market equilibria are Pareto Optimal - This theory reduces the measure for making welfare comparisons to purely ‘command over commodities’ POVERTY AND THE GREAT DEPRESSION The New Deal - Social Security Act - Federal Income Tax Poverty was no longer seen as primarily being caused by bad behavior (the Flawed Character view of poverty) Keynesian Revolution – significant shift in econ thinking about the role of gov’t in Macroeconomic stabilization. (belief that gov’t could stimulate economy for growth) Keynes’s Argument – inequality slows economic development. Refuted the Growth- Equity trade-off view. Argued that poor families tend to have a higher Marginal Propensity to Consume (MPC). His theory does not hold up in the long-run. But he was much more concerned with short-run. 2ND POVERTY ENLIGHTENMENT (post 1950s) As colonies gained their freedom in the 60s/70s, there was much political and economic unrest in the poor and undeveloped world. These events caused a new evaluation of economic thought on poverty. - Wave of new thought attached intrinsic value to rights and freedoms. Amartya Sen – the idea of poverty is fundamentally ‘a lack of individual freedom to live the life one wants. A severe deprivation of capabilities’ Functions - Being safe - Able to live to an old age - Being employed - Ability to participate in social and economic activities Capabilities – set of Functions actually available to a person, give his circumstances The Capabilities Approach aimed to address emphasis on command over commodities instead of lack of emphasis on rights and freedoms. However, does not deny people’s rationality (maximizing utility) Marxism and Socialism based on Ricardo’s work (which viewed capitalism as a class-based system, with workers only providing labor, landlords from rent, and capitalists from capital). This model of capitalism became less and less accurate as society developed, diversification of capital holders, etc. (simply working for a wage does not mean one is poor – Stratified Labor Market). New emphasis on economic returns to human capital. Key to understanding poverty was labor and credit market imperfections. Efficient Markets - Maximize their own self-interest (utility as consumers or profits as producers) - Have secure property rights (enforceable command over specific resources - Take prices as given (no monopoly power) - Have access to a complete set of markets with flexible prices that adjust freely to clear all markets (equating supply and demand in each market) Market imperfection – any situation in which conditions required for free markets to be efficient do not hold Failures can arise due to - Noncompetitive features (price controlling) - Prices do not adjust without a cost (factory pollution without incurring cost) - Incomplete markets (which may reflect the absence of markets for certain commodities) - Imperfect information (credit is only available to those who have sufficient wealth to put up collateral. Those with little or no wealth will be unable to borrow when they need to) - Asymmetric information (i.e. if lenders know less about a project than the borrowers, constraining the flow of credit) Market failure points to gov’t intervention to correct the failure. If the market fails after gov’t intervention, then the market failure would be ascribed to gov’t failure. Externalities – when a 3 party benefits or incurs a cost from a transaction it was not a part of, that transactions has generated an externality. Dual-Labor Market – theory that one labor market has high wages and good nd benefits, 2 has low wages and little benefits - High-Wage Segment emerges when profit-maximizing firms face high costs of monitoring workers, so instead pay workers a premium, above market- clearing wages, to incentivize them to do what employers want. Given the worker will face a wage-cut, if fired. - Low-Wage, Competitive segment is formed by activities with low monitoring costs (don’t have to pay the premium) Perfect Credit Market – poor parents could take out loans for schooling based on children’s future earnings. Enabling this market would be a Promotional (permanent fix) policy. What we see in reality is an imperfect credit market poor children will receive less schooling (poverty trap). POST WWII Urban/inner city poverty became a new force on the poverty map. Unskilled workers flooded into cities looking for work, but many did not find it. Those who could afford it moved outside the city, into suburbs, to take advantage of lower land costs (but required a minimum purchase that the poor could not make), therefore concentrating poverty in the inner city. - Lower tax bases in inner cities meant that locally financed services suffered (i.e. schooling, starting one aspect of the poverty trap mentioned above) - Cities did not have effective social institutions for support - Increasing rate of single-parent families Galbraith – 2 reasons why old poor were unable to participate in new opportunities, Book helped spark new awareness and activism - Case poverty – physical or mental disability - Insular poverty – trapped in geographic pockets of poverty War on Poverty - Social security amendments 1965 (created Medicare and Medicaid, expanded benefits) - Food stamp act of 1964 (made food stamps permanent) - Economics Opportunity Act of 1964 (11 major programs, including the Jobs Corps, VISTA, Federal Work-Study, Office of Economic Opportunity (OEO)) - Elementary and 2 ndareducation act 1965 (Title 1 Program, subsidizing poor school districts Richard Nixon – Dr. Jekyll and Mr. Hyde of the War on Poverty. Charged the newly appointed OEO director to dismantle the agency in 1969. However, the Economic Opportunity Act had a 10-year life by law, so the funds could not be withheld. So Nixon passed an amendment, transferring OEO programs to the Department of Health, Education, and Welfare and Department of Labor. Later bill under Ford superseded the then outdated EOA (Headstart Act of 1975, creating the Community Services Administration, which was eventually also abolished) SNAPS (food stamps) – Dr. Jekyll policy of Nixon Subsequent social welfare acts were enacted throughout the next few administrations. 1980s – started Welfare Reforms Family Support Act (FSA) of 1988 - Child support (withholding payments from noncustodial parents) - JOBS Program (participation was mandatory for most recipients. Emphasizing that welfare should be a short-term transition) - Work Incentives (Medicaid extended one full year after returning to work, guaranteed child care) - AFDC-UP (required all states to offer benefits to 2-parent families) - Funding Limitations (little federal appropriation, many services dependent on co-sharing from states, who could not afford the programs as the 1990-91 recession started) - 1991-95 amendment granted waivers to states in order to tailor the FSA to their own needs Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 - Ended federal entitlement and turned primary responsibility for welfare over to the states Anti-Welfare arguments - AFDC discouraged work (Marginal Tax Rate was 100%), those who left AFDC were worse off unless they found a very well-paying job - This disincentive creates a dependence on welfare - State dependence – more time in poverty=less likely to exit. Loss of contacts and skills - Individual heterogeneity – someone who is poor due to temporary factors (illness) can escape poverty easier than those with poor labor-market skills - Concern that welfare dependence would be passed down generation-to- generation (makes it more likely, but not statistically probable. As well as Neighborhood Effect, i.e. effect of poor environment)


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