Lecture Notes: Dec. 9

Econ. 103, Fall 2002, Prof. Nancy Folbre

On Friday, your teaching assistants have set up an open question-and-answer session for Friday, December 13, 12-2PM, in BART 65. For this to work effectively, you must come prepared with questions.

Chapter 15. Income Distribution

Let's divide this material into three parts--

1. how SHOULD income be distributed (relevant to your Utopia survey)

2. how IS income in the U.S. distributed (and how is its distribution changing over time)

3. what kinds of public policies could increase both equity and efficiency?

1. How should income be distributed. Some possible answers :

* we could just follow the golden rule (he who has the gold makes the rules) and/or just say "too difficult to deal with economic justice, it's hopeless"; whatever is must be right...

problem: economic injustice is not just immoral. It also pisses people off and leads to social and economic instability, which, in turn, lead to inefficiency. We figured out some principles of political justice we feel good about (e.g. human rights, democracy); Why not try to figure out some principles of economic justice?

* we could distribute income so as to maximize total happiness or well-being (a utilitarian principle)

problem: how do measure people's happiness and compare levels across people?

* we could distribute income so as to reward hard work, creativity, and innovation.

problems: Some people may just be lucky (or unlucky). Also, some people inherit wealth in the form of financial assets or human capital (a great education). Some forms of work (e.g. raising children) are not rewarded in the market.

* we could try to find a compromise--

one principle of compromise is articulated by philosopher John Rawls--

let's try to improve the position of the least well-off (which, if we are risk averse, is what we would choose behind a "veil of ignorance") but not redistribute income in ways that would lower overall efficiency, because this would hurt the least well-off as well as everyone else

another principle of compromise is articulated by social democracy--

let's combine a competitive market in some areas of the economy with public provision of basic needs such as health, education, a social safety net, and progressive taxes that prevent inequalities from becoming too extreme

This is the strategy being pursued by many of the countries of Northwestern Europe. They pay higher taxes than we do, but they also enjoy a higher quality of life in many respects.

problem: may be hard to implement; conservatives argue it lowers productivity; radicals argue that it doesn't challenge fundamental inequalities

Think about the optimal distribution of grades in a course like this one: I have followed a basically social-democratic strategy--I don't give grades based on maximizing happiness, but on performance. But I try to set the rewards to encourage effort from everyone, not just from those who happen to come into the course with a strong intellectual background, and good study habits.

Thus, I don't grade on a curve, but on an absolute standard: If your average is 93 or above, you'll get an A in the course, and so on down the line, with a six point range for every other grade category (86 to 92 is an AB, etc.).

Alternatively, a "winner take all" distribution would be a curve in which the person with the highest average would get an A, maybe the next ten would get an AB, the next 20 a B, the next 30 a BC, etc. Question: would this elicit greater effort overall? Note--this is not the same as asking if YOU, individually would have worked harder. Much depends on how you rate your own probability of success under a strategy--imagine, instead that you are behind a Rawlsian veil of ignorance--and write this up in your Utopia Survey.

Turn to empirical evidence.
 2. How is income distributed in the U.S. Very unequally.

Some examples from your text:

The top 5% of family income earners in 1998 averaged about $250,000, more than 20 times as much.

The richest one percent of Americans own as much wealth as the bottom 95%.

A fact not found in your text: the percentage of American kids who live in poverty, about 16%, is the highest of all the Western industrialized countries. More than 40% of Black and Hispanic kids are living in poverty. And poverty has negative effects on outcomes for kids.

Also not found in your text: global income and wealth inequalities are increasing. Do Americans earn more than Iraqis because we are smarter and harder working? Probably. But why are we smarter and harder working? Probably because we grew up in the U.S. with access to a higher standard of living.

Empirical evidence of how much people get is much easier to find than a convincing analysis of WHY they get what they get.

As long as increased inequality seems to be associated with economic growth and opportunities for advancement, as it was for much of the 1990s, ordinary people seem to be willing to put up with it. But history shows that increased inequality often comes in boom/bust cycles. It seems at least possible that we are now entering a bust--stock market still way down compared to its highs in 2000. Unemployment up to 6%. Bush has fired two of his leading economic advisors...

Corporate accounting scandals continue to proliferate. Voters are unhappy with the Democrats for not offering any specific solutions....even Republicans like John McCain complain about the "plutocracy."

3. Policies that could increase both equity and efficiency:

* high quality early childhood education and more generous public support for higher education

* measures to reduce poverty among children

* a higher minimum wage and/or hikes in the Earned Income Tax Credit

* guaranteed minimum income along with a work requirement (public jobs)

* more progressive taxes, aimed to discourage environmentally harmful forms of consumption

* strict and effective standards of political and economic regulation (from campaign finance reform to corporate finance accounting)

 

income of a person in the most well off group

___________________________ = ?

income of a person in the least well off group

Now, indicate how important the following should be in determining who should be in which group (give each of the characteristics which you think should determine how well off a person is a percentage, with the total adding up to 100%. You may give 100% to a single characteristic if you want.

? % how much property the person owns.

? % the person's characteristics at birth (e.g. aristocracy, caste, race, gender)

? % the person's need for the goods

? % how much or how hard the person has worked (time or effort)

? % luck

If a good is both nonrival and nonexcludable it is a(n)________good.

a. private

b. public

c. collective

d. commons

e. none of the above

An example of a good that is rival but nonexcludable would be

a. a hamburger

b. military spending

c. fish

d. lobsters

e. the Dave Letterman show

If the proportion of income paid in taxes decreases as income increases, the tax is a(n)

a. head tax

b. regressive tax

c. proportional tax

d. progressive tax

e. equal tax