Income redistributionPreviouslyTodayConceptual issuesIs there “too much” income inequalitySlide 6Absolute incomeProblems with annual income figuresDifferent views of income redistributionSlide 10Slide 11Some other factorsIn-kind versus money transfersSummary: Conceptual issuesWelfare programs for the poorTANFSlide 17TANF and benefit reduction ratesWork incentivesAnalysis of work incentivesSlide 21Slide 22EITCWhat has the EITC done?Supplemental Security Income (SSI)MedicaidSolving the Medicaid notch problemUnemployment insurance (UI)Food stampsHousing assistanceEducation and job trainingOverviewFuture of social insurance?Summary: Welfare programs for the poorEnd of Unit 3Income redistributionToday: Conceptual issues Programs for the poorPreviouslyIncome redistribution through Social SecurityRedistribution from young to oldRedistribution from rich to poorRedistribution from those that die young to those that die oldTodayMore on income redistributionChapter 12Conceptual issuesDistribution of incomeRationales for redistributionIn-kind versus cash transfersChapter 13Various welfare programs for the poorTANF, EITC, Supplemental Security Income, Medicaid, Unemployment insurance, Nutrition programs, Housing assistance, Education/Job trainingConceptual issuesHow is income distributed?Is there such a thing as “too much” income inequality?Why should there be redistribution?Simple utilitarianismMaximin criterionIn-kind versus cash transfersWhen income is redistributed, should recipients be forced to consume a minimum amount of certain goods?Is there “too much” income inequalitySome people would argue yes“Marginal utility of income is lower for somebody with high incomes”“Each person has a right to a minimum standard of living”“Social unrest may occur unless each person is above the poverty line”Is there “too much” income inequalitySome people would argue no“When economic incentives to make a good living go away, the economic pie becomes smaller”Think about communist systems“People that have a good work ethic and work hard should make more money”“There are plenty of opportunities for anybody born today in the US to become successful”Free K-12 education; subsidized colleges and universitiesAbsolute incomeReal income growth, 1980-2000Bottom 20% has been flatTop 20% has seen huge growth (59%)Note that the “economic pie” is getting biggerSee also Table 12.1, p. 259, for more on this topicQuintile 1980 1990 2000Bottom 20 percent $12,756 $12,625 $14,232Second 20 percent $27,769 $29,448 $32,268Middle 20 percent $41,950 $45,352 $50,925Fourth 20 percent $58,200 $65,222 $74,918Top 20 percent $97,991 $121,212 $155,527Top 5 percent $139,302 $190,187 $272,349Source: “Principles of Microeconomics” 3rd edition, by Frank and BernankeProblems with annual income figuresIgnores number of workers in a householdGeneral trend from one earner to twoExpenses, such as child care, could be higher with in two-worker householdsIn-kind transfers ignoredTaxes change over timeDisposable income changes over time (given the same income)Income changes over timeIf a rich person earns no income in a calendar year, should she be considered “poor?”Different views of income redistributionSome people believe that utility, not income, should be maximized within a populationAdditive social welfare functionW = U1 + U2 + … + UnSee Figure 12.2, p. 264, for a model of optimal income distributionDifferent views of income redistributionOthers believe that social welfare should be the minimum of the utilities of each person in society“Veil of ignorance” argument developed by John RawlsConceals knowledge and talents from peopleRisk averse people will want to have income equality under these conditionsNo inferiority, jealousy or envy based on incomeDifferent views of income redistributionCommodity egalitarianismSome things should be made available to everyone without restrictionsRight to vote (if 18 or older)Basic education“Needed” items such as food, shelter, and clothingBasic medical careRecall issues presented in Chapters 9 and 10Some other factorsIncome redistribution does not directly take into account other factorsNumber of hours workedIf our goal is to maximize utility from income, why not reduce leisure?Not necessarily, since additional leisure likely increases utilityIncome depends on number of hours workedDoes relative income matter?Does someone get a decrease in utility when his income remains the same and someone else’s increase?In-kind versus money transfersWith some views, such as commodity egalitarianism, in-kind transfers have more appeal than monetary onesHow does this affect individual utility?See Figures 12.3, p. 272, and 12.4, p. 273Summary: Conceptual issuesPeople have conflicting opinions as to whether or not there is too much income inequalityMost increases in income in recent decades have gone to the wealthiest of AmericansSome arguments support the use of in-kind transfers rather than monetary transfersWelfare programs for the poorOver $500 billion in expenditures in 2002TANFEITCSupplemental Security IncomeMedicaidUnemployment insuranceNutrition programsHousing assistanceEducation/Job trainingTANFTemporary Assistance for Needy FamiliesFederal government provides block grants to states for welfare spendingOver 80% of recipients in every state must be on TANF for five years or lessStates face penalties if a substantial percentage of recipients are not working or in work preparation programsTANFTANF replaced Aid to Families with Dependent Children (AFDC)Under AFDC, some argued that many women on AFDC had children out of wedlock to continue get benefits and not have to workIf the mother had to work once the child reached kindergarten, then there would be an economic incentive to have another childTANF and benefit reduction ratesTANF benefits are reduced when income reaches a certain levelExample: In California, recipients can earn up to $225 per month before benefits are reduced at a rate of 50% of money earnedHow do people respond to these incentives in the short run?Work incentivesB = G – tEB = 0 if E = G/tThe Basic Trade-offsG – basic grant if not workingt – rate at