Inequality, Redistribution and Health Care

1. Inequality, Redistribution and Health Care • Principles of Microeconomic Theory, ECO 284 • John Eastwood • CBA 247, 523-7353 • e-mail address: John.Eastwood@nau.edu

2. Learning Objectives • Describe the inequality in income and wealth in the United States • Explain why wealth inequality is greater than income inequality • Explain how economic inequality arises

3. Learning Objectives (cont.) • Explain the effects of taxes and social security and welfare programs on economic inequality • Explain the effects of health-care reform on economic inequality

4. Learning Objectives • Describe the inequality in income and wealth in the United States • Explain why wealth inequality is greater than income inequality • Explain how economic inequality arises

5. Economic Inequality in the United States • Should we look at the distribution of income or wealth? • Income is the amount that is received in a given period of time. • In 1995, the richest 20% of families received 49.4% of total income • The poorest richest 20% of families received 3.6% of total income

6. Economic Inequality in the United States • Should we look at the distribution of income or wealth? • Wealth is the value of the things it owns at a point in time. • The wealthiest 1% of families owned 33% of total wealth. • The next 9% of families owned 33% of total wealth. • The remaining 90% of families owned the rest.

7. Economic Inequality in the United States • Lorenz Curves • A Lorenz curve graphs the cumulative percentage of income against the cumulative percentage of families.

8. Lorenz Curves for Income and Wealth Families Income Wealth Cumulative Cumulative Cumulative Percentage Percentage Percentage Percentage Percentage Percentage aLowest 20 20 3.6 3.6 0 0 b Second 20 40 8.9 12.5 0 0 c Third 20 60 15.2 27.5 4 4 d Fourth 20 80 23.2 50.7 11 15 e Highest 20 100 49.4 100.0 85 100

9. Lorenz Curves for Income and Wealth 100 80 Cumulative % of income & wealth 60 Line of equality 40 20 0 20 40 60 80 100 Cumulative % of families

10. Lorenz Curves for Income and Wealth 100 e 80 Cumulative % of income & wealth 60 d Line of equality Income 40 c Wealth b 20 a 0 20 40 60 80 100 Cumulative % of families

11. Trends in the Distribution of Income: 1950–1995

12. Economic Inequality in the United States • Who Are the Rich and the Poor? • The poorest household is likely to be: • a black woman • over 65 years of age • lives in the South • has fewer than eight years of education

13. Economic Inequality in the United States • Who Are the Rich and the Poor? • The wealthiest household is likely to be: • a college-educated white married couple • between 45 and 54 years of age • has two children • lives in the West

14. The Distribution of Income by Selected Family Characteristics in 1994

15. Economic Inequality in the United States • Poverty • Poverty is a state in which a family’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary. • Poverty is a relative concept. • The distribution of poverty by race is unequal. • 11% of white families • 27.1% of Hispanic-origin families • 26.5% of black families

16. Poverty level by family size http://www.ssa.gov/statistics/Supplement/1998/Tables/PDF/t3e1.pdf

17. Learning Objectives • Describe the inequality in income and wealth in the United States • Explain why wealth inequality is greater than income inequality • Explain how economic inequality arises

18. Comparing Like with Like • How do we measure a person’s economic situation? • Measure their income? • Measure their wealth? • Long period of time? • Short period of time?

19. Comparing Like with Like • Wealth Versus Income • Wealth is a stock of assets. • Income is a flow of earnings that results from the stock of wealth. • Wealth data measures tangible assets and exclude human capital. • Income data measures income from both tangible assets and human capital.

20. Capital, Wealth, and Income LeePeter Wealth Income Wealth Income Human Capital 200,000 10,000 499,000 24,950 Nonhuman Capital 800,000 40,000 1,000 50 Total $1,000,000 $50,000 $500,000 $25,000 Peter has exactly one-half of Lee’s wealth and income, but measured wealth excludes human capital. Thus Lee’s measured wealth is 800x Peter’s measured wealth.

21. Comparing Like with Like • Annual or Lifetime Income and Wealth? • Incomes vary with age. • Some inequality results from differences in peoples' stage of the life cycle • Therefore, inequality of annual incomes overstates the degree of lifetime inequality. • Measure lifetime income.

22. Resource Prices, Endowment, and Choices • Family income depends upon: • Resource prices • Resource endowments • Choices

23. Resource Prices, Endowment, and Choices • Resource Prices • Individuals with different skill levels earn different incomes. • Resource Endowments • Individuals have different family endowments in capital and human abilities. • Distribution of income and wealth is non-normally distributed

24. The Distribution of Income 8 Percentage of households 6 4 2 0 10 20 30 40 50 60 Income (thousands of dollars per year)

25. Resource Prices, Endowment, and Choices • Choices • Wages and the Supply of Labor • People who earn higher wage rates tend to work more hours. • Savings and Bequests • Debts Cannot Be Bequeathed • Assortative Mating

26. Learning Objectives (cont.) • Explain the effects of taxes and social security and welfare programs on economic inequality • Explain the effects of health-care reform on economic inequality

27. Income Taxes • Income Taxes • Regressive • Proportional • Progressive • Equity & the ability to pay principle • Horizontal equity - equal treatment of equals • Vertical equity - unequal treatment of the unequal • those with greater ability pay more according to some collectively chosen notion of fairness

28. The Scale of Income Redistribution • Market income is a family’s income in the absence of government redistribution. • Redistribution reduces the inequality of incomes. See Figure 17.5, page 373. • 1st quintile 3.6% to 13% after taxes & benefits • 5th quintile 49.4% to 31% after taxes & benefits

29. Income Redistribution 100 80 Cumulative % of income & wealth 60 40 20 0 20 40 60 80 100 Cumulative % of families

30. Income Redistribution • The Big Tradeoff • Income redistribution creates a big tradeoff • Uses scarce resources • Weakens incentives

31. Welfare Reform • 1996 Personal Responsibility and Work Opportunities Reconciliation Act • Eliminated AFDC—Created TANF • AFDC • Anyone could receive benefits • A mother lost benefits if she worked • TANF • Requires work or community service • Limited to 5 years during an individual’s lifetime

32. Negative Income Tax • Negative Income Tax gives every family a guaranteed minimum annual income and taxes all income above the guaranteed minimum at a fixed marginal rate.

33. Comparing Traditional Programs and a Negative Income Tax Current redistribution arrangements Income after redistribution G 0 A C Market Income

34. Comparing Traditional Programs and a Negative Income Tax Current redistribution arrangements No redistribution Taxes Income after redistribution Welfare trap Current programs and taxes G Benefits 0 A C Market Income

35. Comparing Traditional Programs and a Negative Income Tax A negative income tax No redistribution Current programs and taxes Income after redistribution Negative income tax G 0 B Market Income

36. Comparing Traditional Programs and a Negative Income Tax A negative income tax No redistribution Current programs and taxes Income after redistribution Higher benefits Negative income tax Higher taxes G Break-even income 0 B Market Income

37. What does it take to be rich?

38. Table F-1. Income Limits for Each Fifth Families (All Races, current $): http://www.census.gov/hhes/income/histinc/f01.html Families Upper limit of each fifth (dollars)(000) Lowest Second Third Fourth 2000 72,383 $24,000 $41,000 $61,378 $91,700 1999 72,031 22,826 39,600 59,400 88,082 1998 71,551 21,600 37,692 56,020 83,693

39. Table F-1 (continued) Income Limits for Top 5 Percent of Families (All Races, current $): http://www.census.gov/hhes/income/histinc/f01.html

40. Median Net Worth and Distribution of Net Worth by Monthly Household Income Quintiles http://www.census.gov/hhes/www/wealth/1995/wealth95.html

41. Learning Objectives (cont.) • Explain the effects of taxes and social security and welfare programs on economic inequality • Explain the effects of health-care reform on economic inequality

42. Health-Care Reform • Two major problem areas: • Health-care costs appear to be out of control. • Private health-care insurance does not cover everyone.

43. Who Pays for Health Care?

44. Problems of Health-Care Costs • Health-care costs have increased more rapidly than consumer prices due to: • Limitations on labor-saving technological change • Expensive technologies to treat medical conditions that were previously untreatable

45. The Rising Cost of Health Care

46. S1 D1 The Market for Health Care S0 Price of health care P1 P0 D0 0 Q0 Q1 Quantity of health care

47. Health-Care Insurance • Two Problems With Health-Care Insurance • Moral Hazard • Insured people are less concerned with health risks. • Adverse Selection • People who know they have a high chance of falling ill are more likely to buy insurance.

48. Moral Hazard • “A situation in which one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party.” Parkin’s definition

49. Adverse Selection • “The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less-informed party.” Parkin’s definition

50. Reform Proposals A Bigger Role for Government? Canada • The government is the sole provider of health care services. • It runs the hospitals, pays the doctors and other health care professionals, and buys drugs for people with low incomes. • Private health care is illegal in Canada. • Doctors ration procedures for which there is an excess demand by lengthening waiting periods.