More on income distributionReminder on Test 2Income distributionMean income table (families)The gap between rich and poor widensProblems with annual income figuresIs there “too much” income inequalityArguments for less income inequalityOther problems with income inequalityMore on fairnessDifferent views of fairnessImplications for additive utilitiesSlide 13ProblemOptimal amount of income inequality?Slide 16Some other factorsIn-kind versus money transfersIn-kind TransfersSlide 20If income redistribution is good…Some methods of income redistributionTANFSlide 24TANF and benefit reduction ratesWork incentivesAnalysis of work incentivesSlide 28Slide 29Slide 30Slide 31Slide 32Supplemental Security Income (SSI)MedicaidThe Medicaid notchSolving the Medicaid notch problemUnemployment insurance (UI)EITCSlide 39The earned income tax creditWhat has the EITC done?Other ideasWhat about public employment?Future of social insurance?OverviewSummary: Welfare programs for the poorRecall TimothyNow we add value to leisureTabitha’s problemNo Medicaid benefitsWhat is Tabitha’s utility w/o Medicaid?What about if she works less?What is Tabitha’s utility with Medicaid?What should Tabitha do?How do we solve poverty?More on income distributionToday: Family income distributionShould we redistribute income? Why?Some government programsReminder on Test 2Test 2 Wednesday65 minutesRestrictions on calculators are the same as for Test 1Income distributionHow is income distributed?Is there such a thing as “too much” income inequality?Why should there be redistribution?In-kind versus cash transfersWhen income is redistributed, should recipients be forced to consume a minimum amount of certain goods?What are the problems of redistribution?Mean income table (families)Real income growth, 1980-2000Bottom 20% has been flatTop 20% has seen huge growth (59%)Quintile 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 $272,349Note: More recent figures show that family incomes in the bottom 60% have stayed about the same since 2000 (source: http://www.census.gov/hhes/www/income/histinc/h01AR.html)Source: “Principles of Microeconomics” 3rd edition, by Frank and BernankeThe gap between rich and poor widensThe rich are getting richer, but the poor are notnot getting poorerThe middle class has seen moderate real growth in income16-29% growth for the categories in the middle 60%Some of this is due to more middle-class families having two incomesProblems 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 within 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?”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 universitiesArguments for less income inequality“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”Other problems with income inequalityThose that are relatively poor may feel inferiorThis problem may perpetuate to their childrenJealousy towards other peopleEnvy towards other people’s accomplishmentsMore on fairness There are different views of fairnessAdditive social welfare function“Veil of ignorance”Social welfare function should be minimum utility of all people in a societyCommodity egalitarianismDifferent views of fairnessSome people believe that utility, not income, should be maximized within a populationAdditive social welfare functionW = U1 + U2 + … + UnImplications for additive utilitiesPaul’s marginal utilityPeter’s marginal utilityPaul’s income Peter’s income 0 0’MUPaulMUPeteraecdfI*bPaul’s incomePeter’s incomeTake ab from Peter and give to PaulPaul gains this much utilityPeter loses this much utilityThis is the net gain to societySocial welfare maximizedDifferent views of fairness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 incomeProblemThe “economic pie” will shrink with Rawls’ ideasIf income was guaranteed to be equal to everyone, nobody will have an economic incentive to gain human capitalSmaller “economic pie”Less human capitalPeople work lessOptimal amount of income inequality?Impossible to answerDifferent people have different opinions about effectiveness of realistic ways to redistribute incomeDifferent views of fairness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?In-kind TransfersPounds of cheese per