Chapters 1, 2, 3, and 4: The Economics of Poverty and Discrimination

Chapter 2 Web Links: (Page 35)

American Enterprise Institute: www.aei.org Federal Reserve: www.fereralreserve.gov Pew Research Center: www.people-press.org/surveyreports US Census Bureau www.census.gov/hhes/www/income

Hardship Indices: (Page 43)

An alternative approach to identifying impoverishment is to specify the essentials of everyday life that people don't have. Because hardship indices are difficult to construct, money incomes remain the most convenient index of a family's living standard, and it is the yardstick the government uses for measuring poverty. From here on out, we will examine the official US Poverty Index, then discuss some of its limitations.

Too Low a Standard? (Page 52)

Liberals argue that the governmental poverty aid is too low, and object the use of the 1963 "food multiplier", as popular opinion tends to properly reflect the concerns of the level of income too low, yet it exceeds the official poverty standard, which may imply that it is "too low".

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.)

Gini Coefficient: (Page 27)

(Quizlet) Summation: A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income. Textbook Notes: A single statistic is often used to summarize the information arrayed along the Lorenz curve (almost as if a representation of the Lorenz curve) and provides a remarkably simple way to track and see inequality changes Developed in 1912 by an Italian mathematician, the Gini coefficient measure how far the Lorenz curve departs from the diagonal of equality. It is measured as the area between the diagonal and the Lorenz curve, divided by the area of the triangle formed by the diagonal.

Measurement Problems: (Page 51-52)

Although both the size of the poverty population and the poverty rate have fallen sharply over the last 40 years, 1/8 Americans are officially poor, with most very poor.

The Fuchs Point: (Pages 39-40)

An improved measure of relative poverty, developed by Stanford economist Victor Fuchs meets at least the first objection to relative definitions, stated as those with incomes less than half of the national median are poor. By contrast, the Fuchs point creates the possibility of eliminating poverty by merely reducing inequality, that is narrowing, buy not wholly eliminating income differences. Note that there is as much subjectivity involved in defining the Fuchs point as there is in defining absolute minimum standards of poverty. In reality, one's choice of a relative standard is likely to be influenced by the absolute standard of living implied, just as the choice of an absolute standard is likely to be affected by the degree of inequality and the general standards of living we observe.

Income Mobility: (Page 33-34)

Earnings are the largest but not the sole component of income. (Other components of income, like profits and capital gains, may, in fact, be even more variable, thus making income mobility greater than earnings mobility.) Despite these difficulties, some longitudinal surveys have been successfully undertaken. Over a lifetime, income mobility is even more substantial. For instance, 80% of Americans will experience a year of affluence, a year of poverty, and/or both situations during their life while 1/5 experience neither. Intergenerational mobility appears to be just as pervasive, as in children of the rich have no permanent hold on the highest rungs of the income ladder nor do the children of the poor forever entrapped in a poverty trap, as income mobility persists.

Sources of Mobility: (Page 29)

If equal opportunity is the test for accepting status inequality, then the extent of inter-class mobility is critical to normative judgments about inequality patterns. It is very extensive for a variety of reasons and illustrations include these sources: - Age-Related Mobility, - Changes in Family Structure, - Immigration, - Labor-Market Changes, - Financial Markets Volatility.

The Mobility Matrix: (Page 30-31)

In principle, income mobility is easy to measure by raking everyone according to their relative yearly income from year-to-year and observe the changes. Imagine a completely stratified society. Within there, everyone would be consistently at the same rank of income from year-to-year, as a representation of complete equality of opportunity (rather than scattered randomly across incomes). Although the mechanisms of measuring income mobility are straightforward, evidence of actual mobility patterns is scarce because the evidence must be gathered by observing the same individuals over a period of time. This is a longitudinal study, which is complex, expensive, and rarer than the norm, this norm is cross-sectional surveys across a few years.

Between-Group Averages: (Page 24-25)

One of the most common measures of inequality is the difference in incomes between distinct groups, such as between Whites, Blacks, and Hispanics in contrast; as well as married couples, and single-male or single-female parental households. These between-group averages are often the primary focus of inequality concerns. In later chapters, we will explore some of the reasons why such inequalities arise and persist. Before doing so, however, we will examine broader measures of inequality -- measures that go beyond simple between-group differences.

Costs of Inequality: (Page 19)

Other critics of inequality empathize the importance of social consequences of inequality. Inequalities of income may also foster more troubling inequities. Last, but certainly not least, income inequalities may skew the distribution of political power. Inequalities of income need not spawn all these other inequities. Strategies, such as campaign-finance reforms, focus on the consequences of inequality, not the existence of inequality; if income inequalities were eliminated, such compensatory interventions wouldn't be necessary.

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.

The Concept of Minimum Needs: (Pages 41-42)

Suppose there is a list of basic requirements of goods and services which can be met, such as an amount of calories, fuel, shelter, clothing, and transportation. Even if there are additions to this basic list of minimums, it is difficult to adequately assess the benefits to real life. Think of what 2,471 calories per day means in comparison to a fast food or four pounds of clothes in comparison to quality and coverage in the heat/cold, and so on... Still, there is no firm, absolute basis, despite the concept of these minimums, which can not be totally verified, however this thought is not useless, as if we could have a specific list of goods and services needed, this would greatly help in discussing how much poverty exists and how to go about solving it.

The Poverty Rate: (Page 51)

The increase in the size of the poverty population is hard to fathom, particularly in view of the growth of the American economy since 1963. Since 1963, the general US population has increased by nearly 120 million, here the growth in the changes of the number of poor people are far appropriately termed in comparison to the official poverty rate. Overall, the relative decline in poverty paints a far more meaningful picture than the increase in the absolute size of the poverty population during those years.

Stratification Versus Equality: (Page 28)

The same kind of normative considerations is relevant to income inequality. Income disparities are less onerous if everyone has a plausible chance of "hitting it big." Equality of opportunity, not equality of status, is the principle that commands near-universal allegiance. Class stratification refers to a situation in which people are trapped in a particular income rank. In such a stratified society, low-income people have no chance of becoming richer and/or escaping poverty due to class stratification.

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.

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.

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.

Cultural Context: (Page 49)

While we will concentrate our discussion on those persons we have defined as poor, it is important to remember that there are many, more people whose standard of living is only marginally higher than that of the poor (the "near poor").

The Number of Poor People & the Official Poverty Count: (Page 49-51) (Figure 3.3, Page 50)

With the official poverty index, the task of counting the number of poor people is straightforward. When the Census Bureau first counted the number of poor people in 1963, it concluded that 36 million Americans (1/5) people in US were poor, starting the "war on poverty", as the number seemed simply unimaginable. For a visualization of the poverty levels before, during, and after the "war on poverty", as well as its highs and lows, please look at Figure 3.3 (Page 50).

Benefits of Inequality: (Page 19)y

(Quizlet) Summation: Inequality acts as an incentive to workers to earn more by increasing their productivity. Workers deserve to earn high wages if their skills merit this. Inequality may be better than none, as it can result in a trickle-down effect, and so although an entrepreneur may earn far more than those he employs, at least there is some added income, which may alleviate poverty or raise living standards in general. Textbook Notes: Before seeking to eliminate income inequalities, however, we should at least consider the potential virtues of inequality. Economists also emphasize that inequalities can be a powerful motivation for working, studying, or investing. Inequalities create the same kind of material incentive in labor markets. Inequalities are also the by-product of incentives for saving and investing. The focus on the size of the collective pie is important. The allure of economic growth is that the entire pie is larger, as well as the total quantity of goods and services produced.

The Lorenz Curve: (Page 26)

(Quizlet) Summation: The curve that illustrates income distribution. Specifically, the degree of equality of income distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population. Textbook Notes: A popular method for illustrating the size distribution of income is the Lorenz curve, graphically illustrating the relationship between population shares and income shares. Suppose again that the population is arrayed in order of relative income; starting with the lowest, the Lorenz curve depicts the cumulative share of total income received by cumulative percentages of the population. If incomes were equally distributed, then 20% would receive exactly 20% of all income. The Lorenz curve not only provides a visual summary of the size distribution of income but also provides a convenient mechanism for illustrating changes in that distribution. The closer the Lorenz curve is to the diagonal, the more equal the distribution, and through this one can see via comparison the increasing or decreasing of inequality.

Income Mobility: (Page 28)

(Quizlet) Summation: The extent to which income receivers move from one part of the income distribution to another over some period of time. Textbook Notes: No one has an objective measure for ascertaining the optimal degree of inequality. As noted earlier, the inequality that some people regard as excessive, others may see as completely fine. One criterion used to judge the harshness of inequality is fairness in how it came to be, such as if every individual had an equal chance of "winning".

Income Shares: (Page 25)

(Quizlet) Summation:: Shares in which you get all the dividend rather than have it reinvested. Textbook Notes: To develop broader measures of the distribution of income, the population must first be arrayed in order of relative income. The size distribution of income refers to the rank ordering of individuals (families, or households) by the size of their incomes. The most common category is quintiles, or subgroups containing 1/5th the population. To articulate further, the top 10% is a decile, the top 5% is a ventile, and the top percent is the top 1%. Most people use much less precise references to income ranks.

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.

Declining Relative Standard: (Page 47-48)

A poverty line that adjusts only for changing prices leaves the absolute standard of living of the poor unchanged. (Like any absolute poverty line, the official poverty thresholds imply increasing relative poverty over time.) Despite the limitations of current poverty line adjustments, we will adhere to official standards. Enumeration of the persons below either the 1963 or the updated poverty line is a simple and straightforward task; unfortunately, the clinical nature of the statistical operation tends to impress the observer very little with the real impoverishment that the numbers represent. The austerity of the poverty budget was well described by B. Seebohm Rowntree, an English sociologist in 1901. The essence of his description is still valid today, which can be summed up as so: "Essentially here, as a poverty standard so absolute, that there are no frills, only the most absolute basic needs, even if that means eating a lot of hot dogs and spaghetti with no entertainment; just what one needs to live..."

Age-Related Mobility: (Page 29)

A prime source of income mobility is the life cycle itself, such as how young people start out with little, though, over time and age, they gain more.

Earnings Mobility: (Page 31-33)

A source of longitudinal data is the US Social Security Administration. The SSA's earnings were used to complete one of the first studies of earnings mobility. Within this study, the latter intra-cohort observations are vital to note due to them excluding the inter-generational mobility due to life-cycle patterns. Although earnings mobility is pervasive, it is not as common at the ends of the income distribution. Overall, the indications of earnings mobility were confirmed to be as prevalent since the study in the 1980s and common among women/POC workers, also.

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.

Mobility Patterns: (Page 30)

All of these and other forces keep relative income positions in constant flux. The reshuffling of income positions isn't so random nor so frequent; there is far more income mobility than most people expect. An analogy of this representation is the outcomes of a game of "Musical Chairs" with some "comfy", "uncomfy", or with nothing at all.

Trend Distortions: (Page 22-23)

All of these complications become more pressing when trends in inequality are sought. When examining demographic effects on inequality, for instance, the average household slice may seem to shrink in certain cases, yet this statistical reduction in average incomes and equality is not very informative. Similar distortions in income trends arise when the composition of incomes changes. International comparisons of income suffer from these same distortions. Concerning this, available data via surveys can only offer rough international comparisons of income equality.

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.

Immigration: (Page 29)

Another important source of intra-generational and inter-generational mobility is immigration. The influx of immigrants into the lowest ranks of the income distribution has two (2) important effects on measured inequality: 1) It pushes nonimmigrants up into higher quintiles, due to crowding into the lowest income ranks 2) The process of assimilation starts often at low wages though aspire, and move up the economic ladder.

The Relative Approach (Pages 38-39)

As a practical matter, the yardstick used to measure absolute poverty is not really so absolute. Inevitably, it incorporates subjective views about what is minimally necessary for survival, whether physiologically or socially. (In other words, as an alternative approach, some prefer a relative or subjective definition of poverty.) In essence, it states that a person is poor when his or her income is significantly less than the average income of the population, which empathizes the inequality of incomes, and a broader perspective. However, as attractive as this seems, it does not resolve the core measure problem of "who is poor or not". This category of concepts illustrates the two, basic weaknesses of the relative approach to poverty. First, it perpetuates poverty in a statistical sense if some fixed proportion of the population is always seen as poor; it will always exist. Second, a relative measure of poverty on its own says not a thing about the quality of life for the people at the bottom of the income distribution. (In other words, we may want to know how much money poor families need to reach an acceptable living standard.)

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?)

Changes in Family Structure: (Page 29)

Changes in family structure also cause a lot of income mobility, such as marriage (and divorce, or death of a spouse to contrast), and childbirth.

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)

Too High a Standard? (Page 52-53)

Conservatives argue that the government under-counts the poor, does not take all income, and exaggerates the amount of poor people, as the war on poverty has been won, yet there are a few million people still poor in America, saying that the extent of poverty is only a tiny faction of the government's official amount.

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

Introduction to Chapter 3: (Page 36)

Defining, measuring, and interpreting inequality are not simple tasks, as well as the difficulty in determining who is poor. Defining poverty and counting the poor are highly controversial endeavors. An examination of alternate concepts of poverty, an official poverty definition, and deciding who is poor by that definition will surmise.

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".

The Official Poverty Index: (Page 46)

Despite the considerable sophistication of the 1963 SSA poverty index, no one claimed it was perfect. It was recognized that as prices and living standards continued to rise, the SSA poverty lines would require repeated upward adjustments.

Alternative Yardsticks: (Page 24)

Despite the many difficulties in defining income and its distribution, people want to measure the distribution and track changes therein. To this end, several related yardsticks are commonly employed.

Family Size (CEA) (Page 45)

Despite the promising CEA, one glaring error doomed it to obsolescence where the CEA calculated a poverty budget for a typical family of two adults and two children. It is important to state that not all families are four people, and not all four-person families have consistent, typical needs. Also, this CEA definition must be adjusted for varying family size, and different needs due to age, location, or family structure.

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.

Hard Choices: (Page 48-49)

Essentially, the absolute poverty standard comes nowhere near as close as what the average American needs to make ends meet. Hard choices must be made, such as a want, like alcohol/steak, or shoes that are proper and well-fitted. Every day, a poor person and/or family must choose between the most adequate diet or something better, even if it means holes in their shoes, quite literally. Consider living on this absolute (or relative) standard of poverty for a period of time. Now, consider what it would be to live like that forever. This is what the poor experience, and even an affluent person, may do so as an experiment that will end; it will never end for the poor. Overall, the main takeaway is that poverty is far more than a budgeting problem, it becomes a determinant of life chances, which is made clearer when seeing the physical and psychological effects of children growing up in poor families.

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.

The CEA Line (Pages 44-45)

In 1963, the President's Council of Economic Advisers (CEA) officially sanctioned a poverty line of 3,000 per annnum for a typical American family, rooted in the concept of absolute poverty, and the notion of minimally adequately food intake. The DEA estimates a dollar threshold for the nutrition standard of poverty, and came up with three minimally adequate meals a day for a typical family of two adults and two children, $2.736 a day. Using this observation as a benchmark, determining the total income a poor family needed over how much people spent on food, was this exact requirement formed. However, in the words of Michael Harrington, "We should not allow statistical quibbling to obscure the huge, enormous, and intolerable fact of poverty in America." We must not overlook the imperfections in the CEA's estimation procedures.

Labor-Market Changes: (Page 29-30)

In addition to the demographic forces of aging, family dynamics, and immigration, changes in the labor market also foster income mobility, like recovering after a depression (or, on the contrary, deterioration in recessions).

Normative Versus Objective Observations: (Page 27-28)

In principle, some value for the Gini coefficient represents the optimal level of inequality, which is not zero. Without making a normative judgment about how much inequality is acceptable, we can still compare and contrast income distributions across time and space. To illustrate the Gini coefficient further, a tax cut that increases the coefficient favors the rich, while if economic growth lowers the Gini coefficient, then it is sure to pro-poor redistribution.

Whose Standard (of Poverty)? (Page 40)

In searching for the poverty line, we cannot conclude that one approach to defining poverty is inherently better than another. Instead, we will simply note that the contrast between relative and absolute measure of poverty highlights a basic policy issue. Is our primary policy concern the misery of those who command low incomes, or are we concerned with the unequal distribution of incomes (inequity/inequality)? Though income distribution and poverty are intrinsically related, they can be approached separately.

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.

Summary of Chapter 2, Inequality: (Page 34-35)

Inequality is an issue that evokes great social concern. Many people worry that inequality is not only inherently unjust, but that it also spawns social resentment, political isolation, and crime. On the other hand, inequalities also act as economic incentives to study, work, save, and invest harder. The optimal degree of inequality entails a subjective balancing of these equity and efficiency concerns. At best, incomes gauge only a portion of social status. Wealth, political power, and social access are also important, and not always correlated with current income. Income itself is also difficult to measure, especially when fringe benefits, in-kind transfers, profits, capital gains, and other receipts are available. Inequality in the US has increased by the last 30 years, and offset to an extent due to the amazing growth of mobility. However, income inequality need not imply class stratification. People move from one income rank to another, as income mobility makes income inequality more acceptable.

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.)

Why Inequality Matters: (Page 1)

Many people regard inequality as a synonym for unfairness. Less extreme visions of a just society relax the inequality standard. Incomes don't have to be exactly equal; some inequality is acceptable. Evaluating the standards of inequality requires a subjective judgment of how much is acceptable.

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.

Introduction to Chapter 2: (Page 18)

The Declaration of Independence boldly proclaims that all men are created equal, which is not true. This chapter describes the degree of inequality in the United States. As we'll see, understanding the broader phenomenon of inequality is an important foundation for addressing the narrower issue of poverty, how inequality is measured, and patterns have changed. We start with a basic question, "Why is inequality such a critical issue?"

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

The Absolute Approach: (Pages 36-38)

The absolute approach to defining poverty begins with the concept of minimum subsistence, that is, some bundle of goods and services that is regarded as essential to the physical well-being of a family unit. From the World Bank instance, the minimum caloric intake essential to existence, maybe some form of shelter, and only $1 a day, with poor less than a dollar a day. However, people in industrialized communities tend to have more generous notions of "minimum needs", which, of course, is the fundamental problem with the absolute definition of poverty. A British survey conducted in the 1980s asked people to identify items that were absolutely necessary for subsistence, which included a damp-free home, three meals a day for children, and a TV, car, VCR, and a pack of cigarettes, every other day; here, three or more missing equates to poor. In principle, a list of absolute necessities should change very little over time, and the concept of minimum needs having universality, as both are not so "absolute", such as the concepts of the amount of money needed to "get by", "live reasonably comfortably", or "fulfill all your dreams". These diverse perceptions of the minimal needs raise the question of who should draw the absolute poverty line, such as nutrition and physiology experts sharing a standard, a cross-section of society consultation, or perhaps, one on relative standards.

Monetary Measures: (Pages 42-43)

The achievement of a consensus on an absolute poverty standard is facilitated by translating generic standards into dollars. Not only is such a summary measure convenient, but it also facilitates the compromise that produced the standard itself. Although we need the food, shelter, and other items on our shopping list daily, it is not necessary to have the right amount of cash every day. The best single indicator of a person's purchasing power over a period of time is income. Finally, many people obtain goods and services directly without payment of cash or even a promise to pay (credit). Money incomes have become a less reliable index of living standards, especially at the low end of the income distribution.

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.

Poverty - Drawing a Line: (Page 36)

The distribution of income is a continuum, stretching from the lowest-income individual to the individual with the highest income. Studies of inequality typically partition the income distribution into rank-ordered categories, each containing an equal number of individuals (or another household unit). The challenge is to identify who is "poor" in these partitions, such as where the line should be drawn, and defining which areas are. Two distinct approaches are used for identifying poor people in the broader distribution of income. The first approach seeks an *absolute standard* of deprivation, while the second relies on *relative standards* of adequacy.

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.

Financial Markets Volatility: (Page 30)

The financial markets also reshuffle income shares. In the late 1990s, the stock market bestowed multi-million-dollar prizes on dot-com entrepreneurs and investors; workers at some companies became overnight millionaires. When the dot-com bubble burst in the early 2000s, this income mobility reversed course, from rags to riches to rags after the value of their sticks crashed.

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.

Equity Versus Efficiency: (Page 20)

The link between incentives and economic growth suggests a certain trade-off between equity and efficiency. The promise of material riches may spur some people to produce more and better products, enhancing our economic efficiency. One last consideration in assessing the degree of inequality is the perceived level of fairness in slicing the pie. Although opinion polls reveal that few Americans begrudge millionaires for their wealth, and the non-rich believe the rich earned what they got, in the case of suspicious sources of wealth, respect turns into resentment.

In-Kind Income: (Page 53-54)

The major deficiency of official poverty is that they only count a family's cash income, not their in-kind income, which can be substantial.

The Official Poverty Line: (Page 41)

The official government measure of poverty uses the absolute approach to defining poverty, which requires the government to identify the minimum amount of money needed to sustain a family. However, before analyzing this further, we should first take a closer look at how the governmental poverty threshold was obtained and the comprehension of what it means to be poor.

Inflation Adjustments: (Page 46-47)

The official poverty index now in use has been revised to account for the rising prices of goods and services, but not for steadily increasing standards of living. Today's increased poverty threshold reflects four more hears of inflation. Thus, if we wanted to increase the standard of living of those whom we define as poor (and so many affluent people are so inclined) then, we would have to raise the index by more than the inflation adjustment.

How Poor? (& The Poverty Gap) (Page 51)

The poverty count tells us how many people fall below the official poverty index, but not how far below it they are, which is a critical issue. If most poor people were only a few dollars short of the poverty line, the poverty problem would be much less serious. However, if far below, it may take far much effort to help them back up. The aggregate poverty gap refers to the total amount of the income shortfall experienced by poor people. In 2005, the poverty gap amounted to $120 billion, less than 1% of total US income. The aggregate poverty gap implies that the average poor person has an annual income ~$3,200 below the official poverty threshold.

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?"

Social Inequality: (Page 34)

The studies on mobility shed important new light on inequality statistics. It is important to note that the principle of equal opportunity commands more universal acceptance than the principle of equal income; even increasing inequality may be accepted alongside increasing mobility. However, even extensive income mobility is not synonymous with increased social equality...

Income Concepts: (Page 21-22)

The term income refers to the flow of economic compensation received in a given time period which takes many forms, such as salaries (and access to benefits on top of the salary). Furthermore, capital gains, when a stock or other asset is sold for a price higher than it was bought, has the gain counted as income. Wealth, distinguished from income, is the stock of assets one owns. The existence of wealth, fringe benefits, and unrealized capital gains imply that "income" won't always be reflected in the size of the pie. In other words, consumption patterns (the distribution of slices) may depart significantly from the distribution of incomes. Also, upon sale, a realized capital gain remains as wealth, not income. The gap between consumption and income may be particularly large for low-income people. The tax system also creates a divergence between income and consumption patterns... However, this representation may be distorted, as most income data comes from tax returns, which can affect the observation of income distribution.

"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.

The SSA Index (CEA) (Pages 45-46)

These basic refinements of the CEA's poverty line were undertaken by Mollie Orshansky of the Social Security Administration (SSA). She first adjusted for family size, which was not an easy division, as she had to compute "equivalency scales" that translated from a four-person poverty budget into households of other sizes (even considering the differing shared economies of scales). (In other words, she had to figure out what an equivalent poverty budget really was for households of one, two, three, or four or more units.) For the typical family of four, the SSA poverty budget and the CEA's own budget were very similar. However, the SSA adjustments counted many more large families and fewer smaller families as poor due to different family needs.

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.

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.

Poverty Thresholds: (Page 44)

We are now in a position to identify what may be called a poverty line. We have established the process by which an absolute poverty line may be formulated; all that remains is to apply the process, especially considering the comparison of single persons and families. Since Booth's time, our standards of living have grown enormously, and vary across the ages; it is important to identify which former poverty lines have significance, and instructive to examine two of the most influential formations, such as the CEA Line and SSA Index.

Unit of Observation: (Page 22)

We run into another conceptual problem with the unit of observation. Two questions arise: 1) Is our primary concern with the income received by individuals? 2) Or, is the family a more appropriate unit of observation? Here, a common unit of observation is the household, defined as one or more persons living under the same roof and sharing kitchen facilities. A family, however, is people related by blood/marriage. The US Census Bureau data is collected from households, and because of this, income patterns may not accurately demonstrate individual/inter-family patterns of well-being & consumption.

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.

Inequality of What? (Page 21)

When we speak of inequality, most people immediately think in terms of income or wealth. But, these aren't the only relevant dimensions of social status, nor are the concepts of income and wealth, as precise as one assumes; we have to clarify what we are seeking in a description of inequalities.

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).