Chapter 1: The Economics of Poverty and Discrimination
Division of Labor: (PowerPoint, Taylor 4E CH 01)
People earn income by specializing in what they produce and then use that income to purchase the products they desire.
Command Economy: (PowerPoint, Taylor 4E CH 01)
The government makes most economic decisions; individual and business decisions play only a background role. (In other words, the government is in the hot seat.)
Life-Cycle Dynamics: (Page 14)
When viewed over time, individual incomes also exhibit a pattern of change associated with age. These life-cycle patterns create substantial inequality across age groups. At a minimum, life-cycle dynamics add an important dimension to interpretations of observed inequality.
Web Links of Chapter 1: (Page 17)
Children's Defense Fund (https://www.chidrendefense.org) EPN News (https://www.movingideas.org) Gallup Organization (https://www.galluppoll.com) Institute for Research on Poverty (https://www.ssc.wise.edu/irp) Joint Center for Poverty Research (https://www.jcpr.org)
How is an economy interconnected? Please explain. (PowerPoint, Taylor 4E CH 01)
The interconnectedness of an economy is displayed in how a modern economy is entwined. Every person and every good is linked by economic transactions—sometimes directly, often indirectly— to a vast array of other goods, people, and businesses.
Difference Explanations (of Inequality): (Page 10-11)
The various theories offered to explain poverty can be tested in the broader context of inequality. Restricted Opportunity perspectives may also be relevant, as differences in opportunity may be as instrumental in creating class divisions as in explaining pockets of poverty. The Big Brother argument is also germane to broader inequality concerns: government taxes, expenditures, and regulations rarely affect everyone equally. Public opinions recognize these multiple influences on inequality. Public attitudes toward inequality, like those concerning poverty, also tend to mirror cyclical changes in the economy. When the economy slumps, however, perceptions change as people may feel suddenly cheated by the system.
Economy: (Start: PowerPoint, Taylor 4E CH 01)
The way in which a society organizes the production, distribution, and consumption of goods and services.
Causes and Cures: (Page 4)
These contrasting explanations of inequality are mirrored in arguments about the causes of poverty. Public opinion is sharply divided; most blame the poor while a few less (than the most) blame circumstances out of their control.
Self-Interest: (Page 7-8)
While examining these different views of poverty, we must be mindful of how they appeal to self-interest. Economic interests are also concealed in the Flawed Character argument. The Restricted Opportunity argument, similarly, derives support from biases. The Big Brother argument also appeals to identifiable interests.
Through monetary policy and fiscal policy, the four main goals of macroeconomics are: (End: PowerPoint, Taylor 4E CH 01)
1) Growth in the standard of living. 2) Low unemployment. 3) Low inflation. 4) Sustainable Balance of trade. (As a friendly reminder, the two types of policies for pursuing the goals above include monetary policy and fiscal policy.)
What three questions does the economy answer? (This is the *economies of scale*.) (PowerPoint, Taylor 4E CH 01)
1) What is produced? 2) How is it produced? 3) Whom is it produced for?
Social Equality: (Page 15)
A full measure of inequality would take into account not only the material dimensions of life but its social dimensions as well. Social equality also implies the absence of class stratification. Kaus (Mickey) laments that a reduction in social equality has made money inequality less bearable and that we should reverse trends that tear the threads of social equality.
The division of labor allows individuals and firms to specialize and to produce more for several reasons; here are three: (PowerPoint, Taylor 4E CH 01)
A) It allows the agents to focus on areas of advantage due to natural factors and skill levels. B) It encourages the agents to learn and invent. C) It allows agents to take advantage of *economies of scale*, the set of social institutions that answers what is produced, how is it produced, and for whom is it produced.
Restricted Opportunity: (Page 6)
An alternate explanation of poverty claims that impoverishment may result from circumstances beyond the control of the individual. According to this argument, the Restricted Opportunity argument, the poor are poor because they do not have adequate access to good schools, jobs, and income. The Restricted Opportunity argument denies a critical premise of the Flawed Character argument. Restrictions on opportunity need not originate in overt discrimination. A basic implication of the Restricted Opportunity argument is that improved opportunities are needed if the number of people we count as poor is to be reduced. The improved opportunities may entail improved access to quality education, better enforcement of child-support obligations, new job openings, or expanded health and child care assistance.
Introduction to Chapter 1: (Page 1)
As a very rich nation, America produces over 20% of the world's output while around half of the world's population struggles with severe poverty and inaccessibility to items and inventions that are not considered a luxury in the States. For instance, America can easily access these items, yet other countries struggle to access a telephone, food security, a full kitchen with appliances, a variety of doctors, and quality healthcare, indoor plumbing, such as heated water and indoor toilets.
Or, Too Much Aid? (Page 2-3)
As seen again, ~33% (or one-third) of Americans believe that there is too much aid, which is not needed. To them, poverty is seen as exaggerated, invalidated by seeing what programs and material they already have access to, already compensated by the government, or even believe that there is too much help for those who struggle with day-to-day living. To argue for this point, the CEO of Yahoo made $230,000,000 (230 million) while others have an income of less than 25,000 (far smaller); so, shouldn't his effort be rewarded? (Counterpoint - He is rewarded with the money he makes; those who are well-off may never understand how people who struggle in life due to poverty/being poor affects their life. Shouldn't they be awarded the safety of a decent life?)
2013 Index of Economic Freedom: (PowerPoint, Taylor 4E CH 01)
Countries with the Most Economic Freedom: 1) Hong Kong 2) Singapore 3) Australia 4) New Zealand 5) Switzerland 6) Canada 7) Chile 8) Mauritius 9) Denmark 10) United States of America Countries with the Least Economic Freedom: 168) Iran 169) Turkmenistan 170) Equatorial Guinea 171) Democratic Republic of Congo 172) Bruma 173) Eritrea 174) Venezuela 175) Zimbabwe 176) Cuba 177) North Korea
The Continuing Controversy: (Page 1)
Despite America's riches, poverty is a hot topic that Americans feel worsen each year, as a major issue. Although poverty-stricken individuals such as the homeless, families needing welfare, farmworkers, and the elderly may be doing better than other countries, their day-to-day living conditions dare them so below it is justified to label them as "poor".
Historical Perspectives: (Page 8-10)
Different historical phases of antipoverty activity in America illustrate this interdependence of causal perspectives and policy prescriptions. It was not until the depression of the 1930s that many people seriously began to question the Flawed Character proposition that poverty resulted from sin and slovenliness. From one point of view, our experience with depressions and poverty may have been too brief. In 1961, President Kennedy proclaimed that "a rising tide lifts all boats". (Counterpoint - Regarding this metaphor, what about the Titanic?) When economic growth faltered in the mid-1970s, Americans viewed the problems of the poor in a more charitable light. During the economic expansion of the 1980s, public sentiment shifted again. Another economic boom took place from 1991-2001. Current American attitudes toward poverty are best described as ambivalent. Against this background of uncertainty about the causes of poverty, it is not surprising that public policy is ambivalent and often ineffective. Before reaching any policy conclusions, however, we should at least try to sort out the various arguments. Which explanations make the most sense on poverty? To answer this, we will look at the dimension of poverty then examine their causes and evaluate and suggest new antipoverty policies.
Market Incentives: (Page 3)
Economists stress the importance of monetary goods and materials in helping others to influence and improve the poverty and total output of the nation. If this incentive is taken away and given automatically to the poor by the government themselves, the argument is that they are enabled to stray from working and may make the economy worse; as a result, far more people have less.
Equity Versus Efficiency: (Difference Explanation of Inequality) (Page 12)
Equity and efficiency are also key issues in the inequality debate, as the opportunity to strike it rich can serve as a tremendous incentive to seek out new and better ways of producing goods and services. Even if inequalities spur efficiency in production, however, they may be so large that they violate our notions of equity.
Equity and Efficiency: (Keyword: Discrimination) (Page 3-4)
Even if one accepts the premise of consumer choice and the importance of material incentives, one does not have to accept market outcomes as completely fair or efficient. For instance, at the opposite end of high-income due to their connections or information to earn the rich workplace, others are locked out of good jobs, schools, and neighborhoods, as the market *discriminates*.
Public Provisions: (Page 14-15)
Even when perceptions of inequality are adjusted for wealth holdings, transitory fluctuations, or life-cycle dynamics, they may still fail to capture the full dimensions of economic status. The provision of public goods and services complicates perceptions of inequality in at least two ways. Perceptions of changes in inequality or poverty are also affected by the public provision of goods and services.
The Microeconomics Perspective: (PowerPoint, Taylor 4E CH 01)
Focuses on parts of the economy: individuals, firms, and industries. (Like, pieces of the pie, not the whole pie.)
Rational Choices: (Page 3)
Further building onto the foundation that government aid is counterintuitive, low-income is seen as a rational choice. For instance, a person may prefer leisure over working for a stable income, whereas a high income might be due to working harder. In this view, government redistribution is not only inefficient by blunting work incentives but unfair by violating individual preferences.
Poverty - Drawing a Line: (Page 16)
How far down are the lower rungs of the economic ladder? Aside from broader concerns about inequality, nations everywhere also worry specifically about the lowest rungs of the ladder, where the "poor" reside. Although concern for the poor is nearly universal, there is no real consensus on exactly who is "poor". Any attempt at drawing a poverty line will have to confront all of the inequality issues outlined previously. In the next, three chapters the concepts of inequality and poverty will be examined more closely, first in the US economy, then in the global, and then assessing the various explanations for US inequality and poverty and policy solutions for overcoming these problems.
Too Little Government Assistance? (Page 2)
In solving the problem of poverty, the most radical suggestion is to have the government redistribute American funds so everyone has an acceptable slice of salary. In a sense, this already occurs with welfare benefits, food stamps, subsidized housing, and other assistance for the poor. Yet, even with poverty seen as a societal failure, only 12% of American adults want the government to give more to the poor (and social programs outweigh this option). (In other words, they think "too little" is already enough, or rather, far "too much".)
Income Versus Wealth (Dimensions of Well-being:) (Page 12-13)
Income refers to the number of money receipts a person collects in a year. The common characteristic of all forms of income is that they represent a flow of receipts received during some period of time. The distinction between income and wealth raises some preliminary questions about notions of inequality and poverty.
Market-Oriented Economy: (PowerPoint, Taylor 4E CH 01)
Individuals and businesses make the most economic decisions, with the government playing a background role. (In other words, the government is not in the hot seat.)
Summary of Chapter 1: (Page 16-17)
Inequality and poverty are subjects that generate impassioned debates. The debates begin with truly basic questions about the dimensions of inequality and poverty. What degree is too much or how low of income defines poverty? The debate over the causes of poverty and inequality is even more intense. Inequality is a complex notion that is not adequately reflected in a single dimension. The significance of any given level of income also depends on how representative it is of longer-term economic status. Discrimination plays a dual role in inequality dynamics, as it perpetuates income and wealth inequalities that can never be completely constricted to only finances. Poverty refers to those individuals at the bottom of the income distribution who do not have enough income to satisfy basic needs, which is dependent on societal perception of absolute and relative deprivation.
The Macroeconomics Perspective: (PowerPoint, Taylor 4E CH 01)
Looks at the economy as a whole, focusing on overall issues like growth in the standard of living, unemployment, inflation, and levels of foreign trade. (Like, the whole pie, not just pieces.)
Dimensions of Well-being: (Page 12)
Most debates about inequality and poverty focus on income, that is, how much money some people receive compared to others. Professor Lane did make an exception for poor people, as those on the lowest rungs of the income ladder sees that additional money increases their happiness for those in poverty; it is important to realize that poverty does not equal unhappiness.
Transitory Versus Permanent Income: (Dimensions of Well-being:) (Page 13-14)
The ability to convert wealth into income also raises a question about the time frame used to assess inequalities. A graduate student in law or medicine raises similar problems for characterizations of inequality. Incomes fluctuate from year-to-year for many reasons, such as a recession, and it is important to distinguish between short-term and long-term expenditure patterns. Accordingly, the distinction between transitory incomes and more permanent measures of economic status should be considered in characterizations of either inequality or poverty
Discrimination: (Page 15-16)
The concept of social (in)equality also raises the issue of discrimination. Polls reveal that minority members feel they get less than a fair deal when compared to whites with similar incomes. Discrimination not only drives a wedge between social equality and income equality but also prevents the attainment of income equality in the first place; this is seen as a disproportionate number number of black, Hispanic, and other minority households are detained on the lower rungs.
Concerning the Market-Oriented Economy and the Command Economy, most economies lie somewhere between these two extremes and have a substantial role for both the market and the government, although... (PowerPoint, Taylor 4E CH 01).
The emphasis varies in different countries.
One way to measure globalization is to look at the export/GDP ratio. Considering this, for the world economy and most individual countries... (PowerPoint, Taylor 4E CH 01)
The export/GDP ratio has risen in recent decades.
Inequality: (Page 10)
The poverty debate is often treated as a self-contained issue. In reality, however, it is hard to isolate discussions of poverty from broader concerns about inequality.
What to Do? (Continuation of The Continuing Controversy) (Page 1-2)
The slice of economic funds is unevenly split; some get plenty, and others, next to none. To illustrate, even though America's total output exceeds $14,000,000,000,000 (14 trillion), the nation's people still face homelessness and the struggles of impoverishment. Concerning this, there are many ideas of how to solve this issue. However, there is little to no consensus on what to do, as not every American believes the government should even help the poor. According to the survey in Table 1.1, the preferred ways to help include better education and more skill training. Still, with presidents and politicians, there is no one set answer to the question, "What to do?"
"Big Brother": (Page 6-7)
There is a third view of poverty that falls between the two extremes, the Big Brother argument, that blames the government for destroying incentives for stable families and economic self-sufficiency. The availability of welfare benefits, for example, may discourage people from working. By curtailing welfare benefits, the government might encourage people to make greater efforts on their own. Murray suggests the elimination of welfare programs would ultimately change the culture and behavior of the poor that promote financial independence.
Flawed Character: (Keywords: Human Capital, Investments, Rational Choice.) (Page 4-6)
Those Americans who blame the poor themselves for poverty see the problem as one of flawed character, the result of the individual. In theory, this is seen in the economic concept of *human capital* where if one seeks out college and/or job training, this will increase their chance to earn *investments* (as the product of their "honed skills") or that they did not try enough. Basically, individuals are responsible for their socioeconomic status. There are three essential links in the human capital explanation of flawed character: 1) Assumption that human capital is rewarded in the marketplace. 2) Rational choice, as one makes the wrong choices, that understandably leads to their poverty. 3) Investing in human capital, and making the effort to move up the income ladder is possible by work in jobs and/or education.
Policy Implications: (Page 8)
Which view of poverty we ultimately embrace will have a direct bearing on the public policies we pursue. Some people reject the notion that society's antipoverty efforts should be predicated on the causes of poverty. Even if we accept an ethical obligation to help the poor, we may still be concerned about the efficiency of our anti-poverty efforts.
Explain the aspect of globalization (processes in a worldwide scope) in terms of the rise in economies. (PowerPoint, Taylor 4E CH 01)
• The last few decades have seen globalization evolve as a result of growth in commercial and financial networks that cross national borders. • Due to this, globalization makes businesses and workers from different economies increasingly interdependent (dependent on each other).
