Chapter 30 Income, Poverty, and Health Care

1. Chapter 30 Income, Poverty, and Health Care

2. Introduction Three decades ago, the annual earnings of female workers in the United States averaged about 63 percent of annual earnings for male workers. This ratio has now increased to 83 percent. What role does education play in equalizing earnings between genders? Why do some economists forecast that average earnings for women may eventually surpass average earnings of men? In reading this chapter, you will understand the answers to these questions.

3. Learning Objectives • Describe how to use a Lorenz curve to represent a nation’s income distribution • Identify the key determinants of income differences across individuals • Discuss theories of desired income distribution

4. Learning Objectives (cont'd) • Distinguish among alternative approaches to measuring and addressing poverty • Recognize the major reasons for rising health care costs • Explain the key elements of the new U.S. national health insurance program and evaluate its potential economic effects

5. Chapter Outline • Income • Determinants of Income Differences • Theories of Desired Income Distribution • Poverty and Attempts to Eliminate It • Health Care

6. Did You Know That ... • Today, only 51 percent of adult U.S. residents are married, as compared with 72 percent in 1960? • Tax laws and government benefits are a contributing factor to the decline in the proportion of married adults. • Also, many people between the ages of 18 and 24 delay marriage in order to obtain a college education.

7. Did You Know That ... (cont’d) • Economists have found that patterns of marriage have substantial effects on the distribution of income, which is the way that income is allocated among the population. • In this chapter, you will read about factors determining the distribution of income as well as the government’s new health care program.

8. Income • Income provides us a means of consuming and saving • Can be payment for labor • Can be payment for other factor • Can be from gifts and government transfers

9. Income (cont'd) • Distribution of Income • The way income is allocated among the population based on groupings of residents

10. Income (cont'd) • The Lorenz Curve • A geometric representation of the distribution of income • A Lorenz curve that is perfectly straight represents complete income equality • The more bowed a Lorenz curve, the more unequally income is distributed

11. Figure 30-1 The Lorenz Curve

12. Income (cont'd) • Criticisms of the Lorenz curve • It does not include income in kind: • income received in the form of goods and services, such as housing or medical care • to be contrasted with money income, which is simply income in dollars, or general purchasing power, that can be used to buy any goods and services

13. Income (cont'd) • Criticisms of the Lorenz curve (cont’d) • It does not account for the differences in size of households or the number of wage earners households contain • It does not account for age differences • It ordinarily reflects money income before taxes • It does not measure unreported income

14. Figure 30-2 Lorenz Curves of Income Distribution, 1929 and 2013 Source: U.S. Department of Commerce.

15. Income (cont’d) • Income distribution in the United States • In Table 30-1 on the next slide, we see the percentage share of income for households before direct taxes. • The table groups households according to whether they are in the lowest 20 percent of the income distribution, the second lowest 20 percent, and so on.

16. Table 30-1 Percentage Share of Money Income for Households Before Direct Taxes

17. Example: U.S. Residents Move Among Income Groups Over Time • Economists Gerald Auten and Geoffrey Gee have found evidence of considerable income mobility among U.S. residents. • They found that within a given 10-year period, about 57 percent of people initially receiving money incomes placing them in the lowest 20 percent moved into the group with the next-highest 20 percent of incomes. • Furthermore, the average money incomes of people who began with incomes among the top 20 percent declined within each decade.

18. Income (cont’d) • The distribution of wealth • Income—a flow—can be viewed as a return on wealth—a stock • The distribution of income is not the same as the distribution of wealth • Wealth includes tangible objects and human wealth

19. Figure 30-3 Measured Total Wealth Distribution Source: Board of Governors of the Federal Reserve.

20. Determinants of Income Differences • We know there are income differences; that is not in dispute • A more important question is why these differences occur • If we know, perhaps we can change policy, or better understand them

21. Determinants of Income Differences (cont'd) • We will look at four determinants of income differences • Age • Marginal productivity • Inheritance • Discrimination

22. Determinants of Income Differences (cont'd) • Age-Earnings Cycle • The regular earnings profile of an individual throughout his or her lifetime

23. Determinants of Income Differences (cont'd) • Age-earnings cycle • At age 18, earnings from wages are relatively low • Earnings gradually rise until they peak at about age 50 • Earnings then fall until retirement, when they become zero

24. Figure 30-4 Typical Age-Earnings Profile

25. Determinants of Income Differences (cont'd) • Marginal productivity • Talent • Experience • Training • Investment in human capital

26. Determinants of Income Differences (cont'd) • Inheritance • 10% of inequality traced to inheritance • Discrimination • Different pay for equal MRP • Equal pay for different MRP

27. Determinants of Income Differences (cont'd) • Access to education • Minorities have faced discrimination in the acquisition of human capital • The unexplained income differential between whites and blacks is often attributed to discrimination in the labor market. Because no better explanation is offered, we will infer that discrimination in the labor market does indeed still exist

28. Theories of Desired Income Distribution • The productivity standard • “To each according to what she or he produces” • Also called the contributive standard, or referred to as the merit standard • Equality—the egalitarian principle • “To each exactly the same”

29. Poverty and Attempts to Eliminate It • Throughout history mass poverty has been accepted as inevitable • Sustained economic growth has wiped out mass poverty in many countries • How can there be so much poverty in a nation of such abundance?

30. Figure 30-5 The Official Poverty Rate in the United States Source: U.S. Department of Labor.

31. Poverty and Attempts to Eliminate It (cont'd) • Defining poverty • Official poverty level in 2011 for an urban family of four around $22,000 • Adjusted based on CPI • Does not include cash and non-cash transfer payments • Absolute poverty is not the same as relative poverty • In a relative sense, poverty will always exist even if absolute poverty eliminated

32. Poverty and Attempts to Eliminate It (cont'd) • Attacks on poverty: major income maintenance programs • Social Security which has been called OASDI • 90% of all employed persons covered • In 2013, 55 million people received checks averaging $1,000 a month

33. Poverty and Attempts to Eliminate It (cont'd) • Supplemental Security Income (SSI) • Minimum income for the • Aged • Blind • Disabled

34. Poverty and Attempts to Eliminate It (cont'd) • Temporary Assistance to Needy Families (TANF) • State administered program financed in part by federal grants • The program provides aid to families in need.

35. Poverty and Attempts to Eliminate It (cont'd) • Food stamps • Government-issued coupons (or e-debit cards) that can be used to purchase food • The supplemental Nutrition Assistance Program (SNAP, commonly known as “food stamps”) provides government-issued, electronic debit cards that can be used to purchase food. • In 2013, almost one in every seven citizens (including children) was receiving SNAP benefits.

36. Poverty and Attempts to Eliminate It (cont'd) • Earned Income Tax Credit Program (EITC) • Designed to provide rebates to low-income workers • Each year federal government grants more than $46 billion in these credits • Over one-fifth of all tax returns claim an EITC

37. Poverty and Attempts to Eliminate It (cont'd) • No apparent reduction in poverty rates • 1973: 11% • 1983: 15% • 1997: 12% • Since then >14%

38. Health Care • Health care is intimately related to the distribution of income and poverty

39. Health Care (cont'd) • The U.S. health care situation • Portion of national income spent on health care has risen steadily since 1965 • 16% of U.S. real GDP is devoted to spending on health care • Per capita spending greater than anywhere else in the world

40. Figure 30-6 Percentage of Total National Income Spent on Health Care in the United States Sources: U.S. Department of Commerce; U.S. Department of Health and Human Services; Deloitte and Touche LLP; VHA, Inc.

41. Health Care (cont'd) • Question • Why have health care costs risen so much? • Answers • The age-health care expenditure equation • New technologies • Third-party financing

42. What If . . . The government forced lower spending on health care by placing legal limits on prices? • Legal ceilings on prices of health care services would reduce the quantities of services offered by physicians and hospitals, and this would in turn reduce overall health care expenditures. • However, this would also diminish the availability of medical treatment for illness and injury.

43. Health Care (cont'd) • Third Parties • Parties who are not directly involved in a given activity or transaction • Fees may be paid by third parties (insurance companies, government)

44. Figure 30-7 Third-Party versus Out-of-Pocket Health Care Payments Sources: Health Care Financing Administration; U.S. Department of Health and Human Services.

45. Figure 30-8 The Demand for Health Care Services

46. Health Care (cont'd) • Price, quantity demanded, and the question of moral hazard • Large percent of medical services payments made by third parties • Price to the consumer drops and the quantity demanded increases • An individual with a zero deductible may engage in a less healthful lifestyle

47. Figure 30-9 Federal Medicare Spending Sources: Economic Report of the President; U.S.Bureau of Labor Statistics.

48. Health Care (cont'd) • Moral hazard as it affects physicians and hospitals • Due to third-party payments, patients do not have to worry about the cost of operations and medical procedures • Physicians and hospitals order more of them since they are reimbursed on the basis of medical procedures

49. Health Care (cont'd) • Medicare expenditures are one of the most serious problems facing the federal government today • The number of beneficiaries has increased from 19.1 million in 1966 to more than 40 million in 2011 • Federal spending on Medicare has increased about 10% a year, adjusted for inflation

50. Policy Example: Dual Coverage Drives Up Federal Health Care Spending • At present, 61 million elderly and disabled people are enrolled in Medicare and 65 million low-income citizens are covered by Medicaid. • Both groups of people include about 10 million individuals who qualify for “dual coverage,” meaning that their health care expenses are covered by both federal programs simultaneously. • Poor administrative coordination between Medicare and Medicaid gives a health care provider the incentive to bill the one program that pays the higher reimbursement rate.