1. Income redistribution
Today: Conceptual issues Programs for the poor

2. Previously Income redistribution through Social Security
Redistribution from young to old
Redistribution from rich to poor
Redistribution from those that die young to those that die old

3. Today More on income redistribution Chapter 12 Chapter 13
Conceptual issues
Distribution of income
Rationales for redistribution
In-kind versus cash transfers
Chapter 13
Various welfare programs for the poor
TANF, EITC, Supplemental Security Income, Medicaid, Unemployment insurance, Nutrition programs, Housing assistance, Education/Job training

4. Conceptual issues How is income distributed?
Is there such a thing as “too much” income inequality?
Why should there be redistribution?
Simple utilitarianism
Maximin criterion
In-kind versus cash transfers
When income is redistributed, should recipients be forced to consume a minimum amount of certain goods?

5. Is there “too much” income inequality
Some people would argue yes
“Marginal utility of income is lower for somebody with high incomes”
“Each person has a right to a minimum standard of living”
“Social unrest may occur unless each person is above the poverty line”

6. Is there “too much” income inequality
Some people would argue no
“When economic incentives to make a good living go away, the economic pie becomes smaller”
Think about communist systems
“People that have a good work ethic and work hard should make more money”
“There are plenty of opportunities for anybody born today in the US to become successful”
Free K-12 education; subsidized colleges and universities

7. Absolute income Quintile 1980 1990 2000 Real income growth, 1980-2000
Bottom 20 percent
$12,756
$12,625
$14,232
Second 20 percent
$27,769
$29,448
$32,268
Middle 20 percent
$41,950
$45,352
$50,925
Fourth 20 percent
$58,200
$65,222
$74,918
Top 20 percent
$97,991
$121,212
$155,527
Top 5 percent
$139,302
$190,187
$272,349
Real income growth,
Bottom 20% has been flat
Top 20% has seen huge growth (59%)
Note that the “economic pie” is getting bigger
See also Table 12.1, p. 259, for more on this topic
Source: “Principles of Microeconomics” 3rd edition, by Frank and Bernanke

8. Problems with annual income figures
Ignores number of workers in a household
General trend from one earner to two
Expenses, such as child care, could be higher with in two-worker households
In-kind transfers ignored
Taxes change over time
Disposable income changes over time (given the same income)
Income changes over time
If a rich person earns no income in a calendar year, should she be considered “poor?”

9. Different views of income redistribution
Some people believe that utility, not income, should be maximized within a population
Additive social welfare function W = U1 + U2 + … + Un
See Figure 12.2, p. 264, for a model of optimal income distribution

10. Different views of income redistribution
Others believe that social welfare should be the minimum of the utilities of each person in society
“Veil of ignorance” argument developed by John Rawls
Conceals knowledge and talents from people
Risk averse people will want to have income equality under these conditions
No inferiority, jealousy or envy based on income

11. Different views of income redistribution
Commodity egalitarianism
Some things should be made available to everyone without restrictions
Right to vote (if 18 or older)
Basic education
“Needed” items such as food, shelter, and clothing
Basic medical care
Recall issues presented in Chapters 9 and 10

12. Some other factors
Income redistribution does not directly take into account other factors
Number of hours worked
If our goal is to maximize utility from income, why not reduce leisure?
Not necessarily, since additional leisure likely increases utility
Income depends on number of hours worked
Does relative income matter?
Does someone get a decrease in utility when his income remains the same and someone else’s increase?

13. In-kind versus money transfers
With some views, such as commodity egalitarianism, in-kind transfers have more appeal than monetary ones
How does this affect individual utility?
See Figures 12.3, p. 272, and 12.4, p. 273

14. Summary: Conceptual issues
People have conflicting opinions as to whether or not there is too much income inequality
Most increases in income in recent decades have gone to the wealthiest of Americans
Some arguments support the use of in-kind transfers rather than monetary transfers

15. Welfare programs for the poor
Over $500 billion in expenditures in 2002
TANF
EITC
Supplemental Security Income
Medicaid
Unemployment insurance
Nutrition programs
Housing assistance
Education/Job training

16. TANF Temporary Assistance for Needy Families
Federal government provides block grants to states for welfare spending
Over 80% of recipients in every state must be on TANF for five years or less
States face penalties if a substantial percentage of recipients are not working or in work preparation programs

17. TANF TANF replaced Aid to Families with Dependent Children (AFDC)
Under AFDC, some argued that many women on AFDC had children out of wedlock to continue get benefits and not have to work
If the mother had to work once the child reached kindergarten, then there would be an economic incentive to have another child

18. TANF and benefit reduction rates
TANF benefits are reduced when income reaches a certain level
Example: In California, recipients can earn up to $225 per month before benefits are reduced at a rate of 50% of money earned
How do people respond to these incentives in the short run?

19. Work incentives The Basic Trade-offs B = G – tE
The Basic Trade-offs
B = G – tE
B = 0 if E = G/t
G – basic grant if not working
t – rate at which grant reduced when recipient earns money
B – benefit received
the higher G, the higher t
higher G or lower t leads to a higher breakeven E which raises the costs of the system and includes more people

20. Analysis of work incentives
Figure 13.1, p. 281
Budget constraint for leisure and income
Figure 13.2, p. 282
Utility maximization based on the labor-leisure options

21. Analysis of work incentives
Figure 13.4, p. 284
In this example, someone can get $100 in TANF benefits if not working
Between point Q and point S, an implicit tax rate of 25% is imposed
Note that there are some incentives to work while still receiving benefits
Figure 13.6, p. 286
In this case, a 100% implicit tax rate is imposed after a benefit of $338 is received

22. Analysis of work incentives
This person is indifferent between working and receiving benefits.
See also Figure 13.7, p. 286, for a case in which an individual chooses to work. D E2
Income per month (= earnings + transfers) R P G
Hours worked (if working) M T
Hours of leisure per month

23. EITC The earned income tax credit
A success story for the working poor
Provides credits to workers within low incomes
How it worked in 2006 for a family with 2 or more kids
40% credit for first $11,340 earned
No additional credit for next $5,470 earned
Phased out at a 21.06% rate after $16,810 is earned, until the credit is gone at $38,348 earned
See Figure 13.8, p. 289, for two graphs about this

24. What has the EITC done? Households with nobody working
Encourages one person to work
Households with one person working
Additional work not encouraged once a family with 2+ kids earns $11,340
Does not encourage additional hours of work of the person already working
Does not encourage a second worker in the household to work

25. Supplemental Security Income (SSI)
Federal program that provides benefits for the aged, blind, and disabled with little or no assets
In 2003, average benefit was $342
SSI recipients can earn up to $65 per month without loss in benefits
After $65 is earned, additional earnings have a 50% implicit tax rate

26. Medicaid Medicaid affects incentives to work
Under old incentive structures, people often lost eligibility once they earned enough money to get off of welfare
This created a “Medicaid notch”
See Figure 13.9, p. 292
For main details about Medicaid, see Chapter 10

27. Solving the Medicaid notch problem
In recent years, families that earn enough to leave welfare can often stay on Medicaid
12 month coverage after leaving TANF
Low-income children and pregnant women

28. Unemployment insurance (UI)
States provides insurance for unemployment due to adverse selection and moral hazard reasons
Benefits
Average weekly benefit in 2005: $266
Maximum length of benefits in most states: 26 weeks
Typically financed by a payroll tax on employers
Empirical studies find that increasing benefits increases the duration of unemployment

29. Food stamps Many poor households are eligible for food stamps
Can only be used for purchasing domestically-produced food, excluding alcohol and animal food
2004 averages
Monthly benefit was about $200
23.9 million people on food stamps in a given month

30. Housing assistance Public housing projects Section 8
Largest program, currently about 1.3 million units
When kids see building with everyone with low incomes, there are no role models for being successful
Crime is a big problem
Section 8
Recipients rent a unit in the private market
Government provides subsidy if unit meets certain requirements

31. Education and job training
Programs aimed at poor families
Head Start
Results mixed, but mostly positive
Training programs
Evidence shows that costs are higher than benefits
Job search programs
Not effective in increasing living standards of many people

32. Overview
See Figure 13.10, p. 299
Estimates marginal tax rates for a one-parent, two-child household residing in Wisconsin
Negative until about $10,000 per year
Over 40% from about $12,000-$31,000 per year

33. Future of social insurance?
Academics are starting to study alternate ideas to help the poor
Providing benefits to those most in need, rather than those that are already “in the system”
“One-stop shopping” for help
Faith-based support
Government provides cash to the faith-based organization, and the organization provides the service

34. Summary: Welfare programs for the poor
Many programs exist to support poor people
Some programs give little economic incentive to work
Exception: Earned income tax credit

35. End of Unit 3 Next lecture, begin Unit 4 Tax-related topics
Read Chapters 14 and 15