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CHAPTER 19 LECTURE

CHAPTER 19 LECTURE. Income Inequality and Additional Issues ( Social Security and Health Care). Measures of Inequality. Inequality can be measured in several different ways, and each different way may be the most appropriate for a particular kind of analysis

gwendolyn-winters
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CHAPTER 19 LECTURE

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  1. CHAPTER 19 LECTURE Income Inequality and Additional Issues (Social Security and Health Care)

  2. Measures of Inequality • Inequality can be measured in several different ways, and each different way may be the most appropriate for a particular kind of analysis • Measures of inequality are based on how the average income of a given country is distributed across its population • To obtain a measure of inequality, we need information of income for each single individual in the country, or for a “sample” of individuals

  3. Functional Distribution of Income Based on Types of Income: Wages, Rent, Interest, Profit

  4. Income Inequality – Personal Distribution

  5. Economic Inequality in the United States • The Figure shows the distribution of income shares for the United States in 2011. • The poorest 20% of households received only 3.2% of the total income. • The second poorest 20% of households received 8.4% of the total income • The middle 20% received 14.3% of total income. • The next highest 20% of households received 23% of the total income. • The highest 20% received 51.1% of total income.

  6. The Lorenz Curve http://www.rrh.org.au/articles/subviewnew.asp?ArticleID=457 The Gini coefficient is the ratio of the areas A/(A+B) in the figure above

  7. The Gini Coefficient • To summarize inequality in a single number, some statistics were developed • The most popular one is the Gini coefficient • The ratio of the areas A/(A+B) • Larger Gini coefficient means larger inequality (note that the coefficient is between 0 and 1) • Keep in mind, however, sometimes the value is based on 100 point scale. • Another popular approach is to compare the income of different fractions of the population; for example: ratio between income of the 20% richest and income of the 20% poorest

  8. Economic Inequality in the United States Wealth is even more unequally distributed than income.

  9. Economic Inequality in the United States • The figure shows the U.S. Gini ratio from 1971 to 2011. • The Gini ratio shows that the distribution of income in the United States has become more unequal. • Despite the change in the definition in 1992, the trend is still visible.

  10. Facts About Income Inequality Impact of government taxes and transfers

  11. Inequality Depends on Factors that are Persistent Through Time • inequality in access to education and credit (entrepreneurship); • culture and social structures associated with discrimination; • inequality in political representation; • intergenerational transmission of inequality via fertility and educational decisions (poor people tend to have more kids and invest less in each). Some degree of inequality is due to the fact that different people have different levels of ability • also, some degree of inequality is necessary to generate incentives in the market  this is the way to make people work hard, or to give right incentives for creative people to innovate

  12. Causes of Income Inequality • Ability • Education and training • Discrimination • Preferences and risks • Unequal distribution of wealth • Market power • Luck, connections, and misfortune

  13. Income Redistribution Subsidized Services • A great deal of redistribution takes the form of subsidized services—services provided by the government at prices below the cost of production. • An example is primary and secondary public education, as well as state colleges and universities. • The students at these institutions generally pay tuition and fees that range from 20 to 25% of the actual cost of educating a college student. • The families of these students enjoy a sizeable subsidy for acquiring human capital.

  14. Income Redistribution The Big Tradeoff • Redistributing income leads to a tradeoff between equity and efficiency, known as the big tradeoff. • Programs to redistribute income are inefficient for three reasons: 1. Income redistribution uses up resources that could have otherwise been used for producing goods and services. 2. Redistribution of income requires taxes to be imposed and taxes generate a deadweight loss. 3. Income redistribution decreases the incentives for • Taxpaying workers to provide labor when leisure is a normal good (by decreasing income from work) and • Recipients of income assistance to provide labor and earn an income.

  15. Income Maintenance Programs vs. Social Insurance Programs • •Income Maintenance Programs • "welfare," "public assistance," "public charity"-Purpose: provide minimum level of income to all families and individuals-Must demonstrate economic "need" (means tested)-Examples: Temporary Assistance to Needy Families (TANF), Supplemental Security Income (SSI), food stamps, Medicaid, earned income tax credit (EITC), housing aid • •Social Insurance Programs • -Purpose: provide individuals with income/assistance at times when they cannot help themselves-Contingent upon an event occurring-Examples: Social Security, Medicare, unemployment insurance

  16. The Concept of Poverty We usually think of poverty as making less than a certain amount of income. Poverty, however, has many dimensions. • Food (and nutrition) and shelter: directly related to real income • Health: Social: • infant mortality - caste, gender • general health - freedoms • overall life expectancy • Education: Vulnerability: • Literacy - probability of being exposed • Skills to any type of deprivation

  17. Daily Life in Developing Countries So what would it be like living on $1.50 per day? An article from USA Today may put things into perspective. • Get rid of your car and all of your furniture and appliances except one chair and one table – no TV, stereo, refrigerator, dishwasher, clothes washer, dryer, or even lamps. • Get rid of all your clothing except your oldest, most beaten-up shirt and pair of jeans. If you're the head of the family, you can keep one pair of shoes. If not, get rid of them too. • Remove the food from the kitchen. You can keep one small bag of flour, some sugar and salt, and a few potatoes, onions, cabbages or dry beans. You'll cook with firewood or dried cow dung. • Shut off the water, gas and electricity. While you're at it, dismantle the bathroom. Your new bathroom will be the local stream or pond. You'll get your drinking water from there too.

  18. Move out of the house and into the toolshed. Your neighborhood will be a small village or shantytown. • Don't waste any time on newspapers, books and magazines. They'll be meaningless to you because you'll give up literacy. • Hold $10 in case of emergency – no bank account, pension plan or insurance policies. • Cultivate three acres as a tenant farmer. If the weather's good, you can expect $300 to $500 per year in cash crops. You'll pay one third of that to the landlord and another tenth to the moneylender. • No need to worry about keeping yourself busy in retirement, because you'll be lucky if you live past 55 or 60.

  19. Distinction Between Economic Growth and Economic Development • Economic Growth – takes place when there is a sustained (ongoing for at least 1-2 years) increase in a country’s output (as measured by GDP or GNP) or in the per capita output (GDP or GNP per person) • Economic Development – occurs when the standard of living of a large majority of the population rises, including both income and other dimensions like health and literacy Why is there a distinction?

  20. ADDITIONAL ISSUES Social Security and Health Care

  21. Aging • In the U.S., persons 65 years or older number more than 12% of the population—that is close to one in every eight Americans. • In 2005, the 65-74 age group was 8 times larger than in 1900. The 75-84 group was 12 times larger. The 85+ group was 22 times larger. • The median age in 1850 was 18.9. Now it is 40. • The growth of the older population in the U.S. has contributed to a variety of economic issues. http://www.allcountries.org/uscensus/1353_age_distribution_by_country.html

  22. Age Distribution USA

  23. Also known as Old-Age, Survivors, and Disability Insurance (OASDI). In the U.S., Social Security and Medicare are financed by a payroll tax. The Federal Insurance Corporation of America (FICA) charges equal portions of the tax to the employer and to the employee. The FICA tax rate is 6.2% on the first $97,500 of earnings for the social security contribution and 1.45% on all earnings for the Medicare contribution. Social security tax revenues exceed 11% of personal income. Social security expenditures have risen more rapidly than any other government program. Social security outlays are currently about 7% of GDP, whereas national defense is about 5.5%. Social Security

  24. Increasing taxes. Increasing the eligibility age. The age at which individuals can start collecting Social Security has been increased from 59 to 67 for those born in 1960 or later. Means testing or not paying social security benefits to anyone earning above a certain level of income. Holding down cost-of-living increases. Alternatives to Address Concerns about Social Security

  25. Healthcare Spending Council of Economic Advisers Estimates

  26. More US Health Care Data

  27. Government spending on healthcare, through programs like Medicare and Medicaid, constitutes 45% of the total spending. Medicare is a federal healthcare program for the elderly and the disabled. Medicaid is a joint federal-state program that pays for health care for poor families, the neediest elderly, and disabled persons. Health Economics

  28. The aging of the population stimulates the demand for health care. The Financing Mechanism--For demand to increase, the aged must be able to pay for it. The emergence of Medicare and Medicaid in 1966 gave many elderly the ability. Rising income New medical technologies provide the very sick with increased opportunities for survival. Defensive medicine Medical ethics Demand Increase

  29. The Market forMedical Care: Demand Shift The demand for medical care has increased, shifting the demand curve to the right, as a result of the aging population, the financing mechanism, and the new and expensive technologies being employed.

  30. Even if the demand curve for medical care was not shifting out rapidly, the cost of medical care could be forced up by a leftward shift of the supply curve. The supply curve shifts up if the cost of producing medical care is rising. The three largest resources in the medical industry in terms of total expenditures are hospitals, physicians, and nursing homes. Supply

  31. The Market forMedical Care: Supply Shift Only a small fraction of the cost of hospital care is paid by patients. The bulk comes from third parties, of which the government is the most important. Third-party payers refers to insurance companies and government programs. Rising physician fees and the prices of drugs have also added to the rising cost of medical care.

  32. Reduced access to care Labor market effects Slower wage growth Part-time and temporary workers Outsourcing and offshoring Personal bankruptcies Impact on government budgets Economic Implications of Rising Costs

  33. Prescription drug expenditures have grown by an annual average of 15% since 2000. Prescription Drugs • What are some of the issues

  34. Other Issues • Are we healthier? • Too much spending? • Limited access • The uninsured

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