Chapter 18: Income Inequality & Poverty

policies to reduce poverty

- minimum wage laws: no government cost, but reduces the quantity of labor demanded by employees, and depends on the industry - social security: supplement the incomes of the needy, may create bad incentives - negative income tax: a tax system that collects revenue from high-income tax payers and gives transfers to low-income households - in-kind transfers: transfers to the poor given in the form of goods and services rather than cash, debate over whether this is giving the poor what they need or disrespecting them - anti-poverty policies can discourage the poor from leaving poverty

absolute poverty

a level of poverty where someone doesn't have access to the basics of life - food, clothing, shelter

the gini coefficient

a measure of the degree of income inequality GC = area between the line of perfect inequality and the Lorenz curve/are under the line of perfect inequality ranges from 0 to 1 0 = perfect income inequality 1 = one household has all the wealth (ex UK's GC has risen from 0.13 to 0.38)

permanent income

a person's normal/average income. The distribution of permanent income is a better gauge of standard of living. People borrow or save in order to maintain their permanent income/standard of living.

poverty line

an absolute level of income set by the government below which a family is deemed to be in poverty. (ex. UK and Europe - measured by earnings less than 60% of the median income)

relative poverty

an individual isn't able to access what would be considered acceptable standards of living in society

libertarianism

government should punish crimes and enforce voluntary agreements, but not redistribute income. Society itself doesn't have an income. As long as the process by which economic outcomes arise are legal (ex. stealing should be punished)

income inequality

income distribution can be seen by dividing families into 10% (decile) chunks or 20% (quintile) chunks the skew to the right indicates that the mean is greater than the median

maximum criterion

justifies the equalization of distributions of income, but not a completely egalitarian society because people would have no incentive to work hard (redistribution of income is like a social insurance policy)

libertarian paternalism

people should be free to choose, but that "choice architects" (the government) have a role in influencing people's behavior in order to improve their utility "nudges"

liberalism

political philosophy according to which the government should choose policies deemed to be just as evaluated by an impartial observer behind a "veil of ignorance" in an "original position." maximum criterion - we should aim to raise the welfare of the worst off person in society

transitory income

random and transitory forces can cause changes in income (ex. frost affects the apple harvest, so a farmer has less income for this year).

the lorenz curve

relationship between cumulative % households and cumulative % income. If income if distributed evenly, graph is a straight line. 45 degrees is perfect equality Higher income inequality = more bowing in the graph

economic mobility

the movement of people among income classes. Good or bad luck, laziness or hard work can move people up or down in income class. Economic mobility can be gauged from the persistence of economic success from one generation to another.

poverty rate

the percentage of the population whose family income falls below an absolute level - the poverty line

utilitarianism

the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society - redistribute income based on the diminishing marginal utility. The reduction of utility for the richer person isn't as much as the increase in utility in the poorer person. - they don't want to equalize income though, because total income is not fixed. High taxes = deadweight losses - richer people have less incentive to work hard - society will earn less overall = lower utility overall.

economic life cycle

the regular pattern of income variation over a person's life. Income is lower when you're a student, rises, and lowers again when you're retired. Young people often take out loans and pay it back in middle age - smooths out average income. Life cycle causes inequality in the distribution of annual income but doesn't represent living standards.