1. To Accompany “Economics: Private and Public Choice 10th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text — Micro Only Text — Part: Chapter: Next page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Inequality and Poverty 527 3 15

2. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Resource Prices and Income Differences

3. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Resource Prices and Income Differences Market participants create income by supplying resources that are highly valued by others. This provides individuals with the incentive to develop skills, talents, and resources others value. The view that there is a fixed-size economic pie that can be sliced and divided among the citizenry is fallacious.

4. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Inequality in the United States

5. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Lowest 20% of recipients 4.5 4.8 5.4 5.1 4.6 4.3 12.2 24.0 12.2 23.8 11.6 24.3 10.8 23.8 9.8 22.8 12.0 23.4 41.3 40.9 41.6 44.3 47.4 42.7 1950 1960 1970 1980 1990 2000 17.4 17.8 17.6 17.5 16.6 15.5 Second quintile Third quintile Fourth quintile Top 20% of recipients Family income before taxes 3.7 4.6 10.3 22.7 9.0 23.0 46.7 49.5 Before After 14.8 15.7 Impact of taxes & transfers on 2000 household income 7.1 6.8 7.1 12.9 23.9 12.8 24.1 12.4 23.3 13.2 24.1 38.1 38.2 40.1 37.4 1961 1972 1980 1990 18.2 18.0 18.1 17.1 Household expenditures Sources: Bureau of the Census, Current Population Survey, Series P-60; Statistical Abstract of the United States: 1995, Table 733; Congressional Budget Office, 1994 Green Book, p. 1191; Bureau of the Census, Money Income in the United States: 2000; and Daniel T. Slesnick, “Consumption and Social Welfare: Living Standards and Their Distribution in the United States,” (Cambridge: Cambridge University Press, 2001). Share of Money Income by Quintile 7.4 12.9 23.438.8 1995 17.5

6. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Factors Influencing Income Distribution A high portion of annual income inequality is due to differences in: age, education, family size, marital status, number of earners in the family, and, time worked. Young, inexperienced workers, students, single-parent families, and retirees are over-represented among those with low incomes.

7. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Bottom 20% of income recipients 8.0 31.0 44.0 25.0 34.0 58.0 13.0 79.0 8.0 3.0 Percent with less than high school Percent with college degree or more under 35 35 - 64 65 and over Education of householder 49.0 51.0 6.0 94.0 Married-couple family (% of total) Single-parent family (% of total) 2.9 3.4 Source: U.S. Dept. of Commerce, Money Income in the United States: 2000 (Washington, D.C.: Government Printing Office 2001) Top 20% of income recipients Age of householder (percent distribution) Family status Persons per family 0.8 2.2 Earners per family 9.0 26.0 % of total hours worked supplied by group 13.063.0 % of married couple families in which wife works full-time High and Low Income Families, 2001

8. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Why Has Income Inequality Increased? Income inequality in the U.S. has increased due to the growth of: the share of families that are either single-parent or dual-earner earnings differentials on the basis of skill and education the number of “winner-take-all” markets the reported income of those in the top tax bracket due to lower marginal tax rates

9. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Mobility and Inequality in Economic Status

10. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Mobility Annual income data hide the movement of people up and down the distribution over time. Tracking of household income over time shows there is considerable movement both up and down the income spectrum.

11. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Top paid quintile 78.4 42.4 25.4 4.9 4.0 13.417.514.4 9.1 6.28.219.1 46.3 10.6 0.1 4.1 6.8 23.924.8 45.6 28.637.9 7.87.912.6 Next highest quintile Middle quintile Next lowest paid quintile Lowest paid quintile Source: Mary C. Daly and Greg J. Duncan, Earnings Mobility and Instability, 1969-1995, Federal Reserve Bank of San Francisco Working Paper 97-06, September 1997. Top-paid quintile Next-highest-quintile Middle-quintile Next-lowest-paid quintile Lowest-paid quintile Income Status of Individual in 1995 Income Status of Individual in 1985 Income Mobility The table above allows for us to see how individuals in each income bracket in the U.S. fared 10 years later. Does it appear to you that there is a significant amount of income mobility in the U.S. Economy?

12. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Household Expenditures and Inequality Many economists argue that differences in household expenditures are a more accurate indicator of economic status than income. To a large degree, current expenditures reflect long-term economic status. In contrast with the annual income data, household expenditure data do not indicate that there has been a major change in U.S. economic inequality.

13. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 1. Do you think the current distribution of income in the United States is too unequal? 2. Indicate three factors that have contributed to an increase in income inequality in the United States during the last two decades. 3. (Which of the following is true?) Data on income inequality in the U.S. indicate a. rich families stay rich; poor families stay poor. b. there is substantial movement among income groupings in the United States.

14. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Poverty in the United States

15. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Persons n.a. 22.2 12.6 13.0 11.3 1947 1960 1970 1980 1990 2000 Year Families 32.0 18.1 10.1 10.3 8.6 13.510.7 Poverty rate % Sources: Bureau of the Census, Current Population Reports, Series P60-210, Poverty in the United States, 2000; and Economic Report of the President, 1964, Table 7. Poverty Rate of Persons & Families in the United States 1947-2000 During the 1950s and 1960s, the poverty rate declined substantially. After rising slightly during the 1970s and 1980s, the official poverty rate has fallen modestly during the economic expansion of the 1990s.

16. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 5.3 6.2 Female Black 8.3 1959 1976 2000 Number of poor families (millions) Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and Poverty in the United States: 2000, p. 60-214. 48 50 23 Percent of poor families headed by a: Person who worked at least some during the year Elderly person (aged 65+) 30 27 26 14 10 22 55 53 70 All families Married-couple families 10.1 8.6 18.5 Poverty rate (%) Whites Female-headed families 7.2 4.7 15.8 32.5 24.7 42.6 9.1 9.4 18.1 Children (under age 18) Blacks 31.1 22.0 55.1 16.0 16.1 27.3 Changing Composition of the Poor

17. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Transfer Payments and the Poverty Rate Income transfers expanded rapidly over the past several decades. These transfers have been largely ineffective at reducing the poverty rate. Though per capita income has increased substantially over time (109% since 1965), the poverty rate of working-age Americans has stayed about the same.

18. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and Poverty in the United States: 2000, p. 60-241. Poverty rate Poverty Rate, 1947-2000 32.0 18.5 13.9 10.0 9.7 10.3 11.4 10.7 8.6 The official poverty rate of families declined sharply during the 1950’s and 60’s … changed little during the 70’s … and increased slightly during the ’80s. It has fallen since the mid 1980’s, and is now at its lowest recorded level since 1947. 194719591965196819751980198519902000

19. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 194719591965196819751980198519902000 Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and Poverty in the United States: 2000, p. 60-241. Poverty rate 32.0 18.5 13.9 10.0 9.7 10.3 11.4 10.7 8.6 Poverty Rate, 1947-2000 The orange shaded part of the bars indicate the drop in the poverty rate when non-cash benefits are counted as income. In 1990, the poverty rate adjusted for non-cash benefits was 8.4% (compared to 10.7% unadjusted). In 2000, it was 6.4% (compared to 8.6% unadjusted).

20. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 19591965196819751980198519902000 Poverty rate Poverty Rates for Elderly Families 30.0 22.8 17.0 8.9 9.1 7.0 6.3 5.4 The official poverty rate for elderly families has declined sharply since 1959. Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985).

21. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 19591965196819751980198519902000 Poverty rate Poverty Rates for Non-Elderly Families 16.6 10.9 9.0 9.8 10.5 12.2 11.5 9.2 In contrast, the official poverty rate for non-elderly families was been higher in the 1990’s that it was in the late 1960’s. Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985).

22. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Transfer Effects Income supplements large enough to significantly increase the economic status of poor people will: encourage behavior that increases the risk of poverty create high implicit marginal tax rates that reduce the recipient’s incentive to earn.

23. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Inequality: Some Concluding Thoughts

24. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Income Inequality Positive economics cannot determine how much inequality should be present. Income inequality reflects differences between individuals and influences their incentive to develop resources and engage in productive activities. The nature of the process as well as the pattern of income distribution is relevant to the issue of fairness.

25. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 1. What is the poverty threshold income level? How is it measured? Is the threshold adjusted for family size? Is it adjusted for inflation? 2. What impact did the expansion in government income transfers during the 1960s have on the poverty rate? Was the War on Poverty successful? Why or why not? 3. Do individuals have a property right to income they acquire from market transactions? Is it a proper function of government to tax some people in order to provide benefits to others? Why or why not?

26. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 4. What determines whether a distribution of income is fair? Do you think that the major income transfer programs of the U.S. more fair?

27. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. End Chapter 27