Econ 248, UW-Milwaukee Overview of Inequality and Poverty Econ 248: Economics of Poverty and Discrimination Professor Keith Bender

Econ 248, UW-Milwaukee How do you define poverty? 1.When income is below what you need to survive. 2.When income is significantly less than average income. 3.When sickness or disability causes you to miss work opportunities. 4.When discrimination keeps you from getting work opportunities.

Econ 248, UW-Milwaukee What Causes Poverty? (The computer did not save what we came up with in class because it froze up. These are just a few of the things I remember.) Laziness Natural disasters Physical and mental problems Lack of education The economy Welfare programs not being generous enough Lack of willingness to find a job Capitalism Bad life choices Drugs Lack of health care

Econ 248, UW-Milwaukee Outline 1.Discuss Three Theories that summarize these reasons. 2.Discuss how these Three Theories would solve or cure the poverty problem. 3.Discuss other measures of well-being.

Econ 248, UW-Milwaukee Three Theories Schiller groups the reasons into Three Theories of Poverty 1.Flawed Character 2.Restricted Opportunity 3.Big Brother Key to distinguishing these theories is who is at fault for poverty.

Econ 248, UW-Milwaukee Flawed Character Here – the individual in poverty is at fault. They lack the motivation or work ethic to go out and get a job that would pull them out of poverty. Or they lack the motivation to get the education they need. Key is that people have full control over their socio-economic status

Econ 248, UW-Milwaukee Human Capital Theory Latter of these relies on an economic concept called Human Capital Theory. Main idea is that the more education or skills you posses (i.e. investing in human capital), the higher your productivity will be and the higher pay you will get. Sounds great and intuitive, but…

Econ 248, UW-Milwaukee HCT Assumptions There are important assumptions to be made here 1.More investment leads to a higher payoff 2.Rational choice (comparing costs and benefits) Key here is ‘Information’ 3.Pervasive Opportunity Everyone has a chance to get schooling and job

Econ 248, UW-Milwaukee Restricted Opportunity Other end of the spectrum Restricted Opportunity is when something happens beyond the control of the poor to put/keep them in poverty For example –Death of main income provider –Poor public education –No access to transportation –Sudden illness or disability –Natural Disasters–Discrimination

Econ 248, UW-Milwaukee Big Brother Here the government is at fault, but in a way it is a combination of the previous two Argument is that welfare programs distort the incentives to work. –Why work when you can sit on your rear end and get a check for ‘doing nothing’?!

Econ 248, UW-Milwaukee So which do you think is the main cause? 1.Flawed Character 2.Restricted Opportunity 3.Big Brother 4.Something else X

Econ 248, UW-Milwaukee What do other people think causes poverty? NPR/Kennedy School/Kaiser Foundation Poll and series of radio reports Key phrases General attitudes, laziness Something for free Do something about it (college) Bad life choices Don’t do enough to help themselves Drug abuse Single parent families Not enough high paying jobs Poor public schools Too many immigrants Single parent families Cycles of poverty/product of environment Why work when you can receive a check

Results from NPR Survey Theory 6536 Flawed Character Restricted Opportunity Big Brother 1716 * >200% %<100%Total No item a major cause Don’t know None of these Poor quality of public schools Decline in moral values Poor people lacking motivation Too many immigrants The Welfare system A shortage of jobs Too many single parent families Too many jobs being part time/low wage Medical Bills Drug Abuse Most Important Cause From These results are Copyright © 2001 by National Public Radio, Washington, D.C.

Econ 248, UW-Milwaukee How do you ‘fix’ poverty? Flawed Character 1.Do nothing – can’t change motivation 2.Give them training and they will get good jobs Key assumption – that the jobs are there Restricted Opportunity –Get rid of restriction Big Brother –Cut (end?!) welfare programs to get rid of work disincentives

Econ 248, UW-Milwaukee From Schiller p. 2

Econ 248, UW-Milwaukee Which of the following increases your well-being the most? 1.Increasing your income by $10,000 2.Increasing your wealth by $10,000 3.Having safe water to drink and air to breathe 4.Knowing that there are social safety nets such as unemployment insurance and welfare programs 5.Having a good park system 6.Knowing that your UWM degree will open (good paying!!) job opportunities when you graduate

Econ 248, UW-Milwaukee Money isn’t everything, is it? Assumption to now (and for the rest of the class) is that money is key indicator of well-being. Economists don’t really believe this, but it is easy to measure and it is probably correlated with well-being But… there are other things that influence well-being.

Econ 248, UW-Milwaukee Other indicators of well-being 1.Wealth –Accumulated assets over a lifetime –Are people with high assets and low income in poverty? Maybe, but maybe not! –Caveat (ie. Warning!) Not all wealth is the same – some is not liquid – that is, it is difficult to turn some assets into cash e.g. housing wealth, pension wealth So, some of those with high wealth have no cash

Econ 248, UW-Milwaukee Other indicators con’d 2.Transitory vs. permanent income –Time is key here –Transitory – snapshot of income, income in a year –Permanent – average income over a number of years –Key issue here – transitory income doesn’t tell you a lot, since well-being does not drop by a lot if permanent income is high –Eg – farmers, athletes

Econ 248, UW-Milwaukee Other indicators con’d 3.Life cycle of Income –Age-Income relationship is key here –So where you are in your life cycle tells you about your overall well-being –However, so is the level of consumption –Consider two cases… Income Age Income Age

Econ 248, UW-Milwaukee Other indicators con’d 4.Government provision of Goods and Services Can be geared to poor – welfare, unemployment benefits Or to all – public schools, libraries, parks 5.Non-monetary issues – ‘Social Equality’ Equal access to justice, police protection, voting, equal treatment under law Breaks down class distinctions

Econ 248, UW-Milwaukee Review Question 1: The Flawed Character Theory of Poverty is based on what economic theory? 1.Life Cycle Theory of Earnings 2.Human Capital Theory 3.Discrimination 4.Work disincentive theory

Econ 248, UW-Milwaukee Review Question 2: A person believes that poverty is caused by the poor public transportation system that is subsidized by the government. Which ‘theory’ of poverty is this most closely related? 1.Flawed Character 2.Restricted Opportunity 3.Big Brother 4.Human Capital 5.Physical Capital

Econ 248, UW-Milwaukee Review Question 3: A key variable that is highlighted by the ‘Life-cycle’ theory in regards to well-being measures is 1.time or age. 2.wealth. 3.social justice. 4.human capital. 5.discrimination.

Econ 248, UW-Milwaukee A Question for You: Which poverty theory do you think is the best explanation for poverty? 1.Flawed Character 2.Restricted Opportunity 3.Big Brother 4.Still don’t think any are right! X

Econ 248, UW-Milwaukee Questions for Me? Next Lecture is on Inequality