Income Distribution and Poverty Chapter 18 Income Distribution and Poverty

Learning Objectives When you have finished this chapter, you will know the answers to these questions: How unequal is income distribution in the U.S.? What determines how income is distributed? How does the distribution of income differ from the distribution of wealth? How is poverty defined? Who are the poor? What are the main government transfer payments to help the poor? What are the causes of poverty? What are the solutions? Has welfare reform been successful?

Income Distribution in the United States: Measurement Is it not accurate to just say arbitrarily that 20% of our population is poor, 20% is rich, and the middle 60% is middle class. Lorenz curve: shows the cumulative share of income earned by each quintile of households. A quintile = one-fifth (1/5) or 20%

Hypothetical Lorenz Curve Lorenz curve: Shows cumulative share of income by each quintile.

Lorenz Curve and Income Distribution of the U.S. (2006 vs. 1968) This is 2006. Where would you place 1968’s Lorenz Curve?

Income Distribution Getting More Uneven Income tax rates on capital gains were cut. This helped the rich and super-rich. Payroll taxes were raised. This hurt the lower income workers. About 75% of all Americans pay more in payroll taxes than in personal income tax. Average real wages have fallen. Relatively high-paying manufacturing jobs are being replaced with relatively low-paying service sector jobs.

Real Median Household Income: 1967 to 2006, in 2006 Dollars

Median Household Income, by Selected Characteristic, 2006

Distribution of Wealth in the United States More unequal than income distribution Since 1968, top quintile share rose while shares of bottom three quintiles fell. Forbes 2007 Top 10 List of American Billionaires:

Distribution of Income: Equity and Efficiency Income distribution affects our economic efficiency. Two things make our economy work, the carrot and the stick: The carrot is all the money you can make by working hard. The stick is if you don’t work, you don’t eat. Complete income equality would take away our productive incentives. But great income inequality means much human misery, because many of the poor would not even be able to afford the bare necessities of life.

Questions for Further Thought and Discussion What determines income distribution? Hard work? Luck? Something else? Do you think any policy to help redistribute income destroys incentives? Who are the rich and middle class? Does “the middle class” ever stop trying to move up? Does the lower class stop trying to move up?

Poverty Defined The relative concept of poverty We could define the poor as the lowest quintile (20%). But even if their income quadrupled this year, we would still call the lowest 20% poor even though most of the “poor” would be living better this year than the entire middle class lived last year! So “relative” to what??? The absolute concept of poverty Choose a line, a number, a dividing line. How is this determination reached? One approach is to set up a minimum basic standard of living and figure out how much it would cost to maintain it.

The Official Poverty Line in the U.S. Calculated annually by the U.S. Bureau of the Census Census Bureau has tracked poverty since 1959. Based on 1955 study that average poor family spends 1/3 of their income on food; thus a “market basket” of food is priced, then multiplied by 3. In 2006: $20,610 for a family of 4; can they live on this? When calculating the poverty rate the value of non-cash, or in-kind benefits given to the poor by the government are not counted. These include Medicaid, housing subsidies, low-rent public housing, food stamps, and school lunches.

U.S. Poverty rate: Percentage of Individuals below the Poverty Line, 1959-2006

Who Are the Poor? Elderly (people > 65 years of age) used to have highest U.S. poverty rates. But Medicare, higher social security benefits, and SSI have reduced elderly’s poverty rates. Most poor in U.S. are white (counted in millions). But poverty rates (percentages) are higher for black Americans. Poverty is high in the suburbs (not just cities and rural areas). The homeless, if counted, are poor. Child poverty is a serious problem today.

Children Under 18 below Poverty U.S. Poverty Rates in 2006 Children Under 18 below Poverty Poverty Rates by Race

Child Poverty Rates in Selected Countries, 2006

Government Transfer Programs Social Security Act (1935) Medicare (elderly) and Medicaid (poor) in mid-1960s Unemployment insurance Aid to Families with Dependent Children (AFDC) and now Temporary Assistance to Needy Families (TANF)

Theories of the Causes of Poverty The Poor are Lazy 2nd, 3rd, and 4th generation welfare families; teenage girls get pregnant and their kids repeat the cycle. Poverty Breeds Poverty This theory is related to the above theory. The Heritage of Slavery The effects of slavery until 1865 are still with us. Employment Discrimination Women and minorities still earn less than white men. Black Male Joblessness Black unemployment is twice white unemployment. Only 50% of black males aged 16 to 64 are employed. Inadequate Human Capital

The Conservative View versus the Liberal View The poverty theory debate Both agree on the ends—getting people off of welfare and into self-supporting jobs. They disagree on the means—how to do it.

The Conservative View Conservatives advocate the “stick approach”—you don’t work, you don’t eat. Most conservatives believe that the social programs of the 1960s and 1970s not only did not work but that they caused more poverty by destroying people’s incentive to work. Most conservatives believe that too much is being done to try to help the poor.

The Liberal View The “carrot approach”—training and jobs. Most liberals believe that had there been no 1960s and 1970s social programs, there would have been even more poverty than we have now. These programs prevented a bad situation from getting worse. During times of rising unemployment, especially among black males, it is a victory just to keep the poverty rate from rising. Most liberals believe that too little is being done to help the poor.

Solutions: Conservative and Liberal Conservatives: end public assistance. Liberals: jobs, jobs, jobs. Minimize employment discrimination. Provide the poor with better education and training. Provide the poor with millions of government jobs.

Welfare Reform: The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 Welfare is no longer an entitlement. Time limits: 2 years per occurrence, 5 years lifetime. Work requirements or community service. Each state receives a lump sum to run its own welfare and work programs. Up to 20% of those on public assistance—the ones who are least employable—are allowed to remain on the rolls beyond the time limit. Success in reducing the welfare rolls? Yes and No.

Recipients of Public Assistance (now TANF), 1985-2007

Current Issue: Will You Ever Be Poor? Thinking about the demographics of poverty (race, age, region, place of residence, employment status, education, etc.), what are the chances that your income will fall below the poverty line? What role does and will access to wealth (through assets and family) play in determining if you will ever be poor?