Today: My plan is to go over some multiple choice questions by way of review and cover Chapter 16 on income distribution today.

Final Exam at 4PM, Saturday May 17, Totman Gym.

If something happens (like a train wreck) that makes it impossible for you to attend the exam, please email me or leave a message on my office phone (545-3283). I am much more forgiving BEFORE the exam if I have been notified than AFTER the exam.

Make-up Exam Friday May 23, 1PM, HAS 134. This is also the exam for LDSS students.

YOUR NAME MUST BE ON THE LIST TO TAKE THIS EXAM.

Information on review sessions:

Michele Mattingly will be offering a review session on Wednesday, May 14 at 6PM, HAS 124.

Katie Kontak will be offering a review session on Thursday, May 15^th, from 3-5, room to be announced.

Ceren Ozselcuk will be offering a review session on Friday, May16th, Friday from 3-5PM, HAS 134.

Chapter 16. 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?

Some possible answers to part 1:

* 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. In other words, it creates negative externalities--e.g. crime, mental illness, ill temper....

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 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

* increases 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)