Poverty

1
Poverty Discrimination
Rural as well as Urban Problem
2
War on Poverty

• 1964 President Johnson declared War on Poverty
• Cure and Prevent
• 35 million people in poverty in 1964 15 of
  population
• 32 million people in poverty in 1999 11.8
  population
• Planned stepped up federal aid to low income
  people
• Expanded health care program
• New housing subsidies
• Expanded federal aid to education
• Job training
• 3 trillion and 3 decades later little progress
  was made

3
Objectives

• Define poverty
• Analyze income inequality and who is in poverty
• Analyze past and current programs to solve
• Political philosophy for equalizing incomes
• Utilitarianism
• Liberalism
• Libertarianism

Helping Hand
Invisible Hand
Social Security Issues
4
Defining Poverty

• Poverty in U.S. is paradox. With the highest
  world avg. income of 64,000 in 1999, how can
  there be poverty in U.S.?
• Those at the bottom are always worse off then
  those at the top
• Poverty in U.S. is less sever than in other
  countries unless of course we are one of the
  poor!
• Averages do miss lead
• Poor may be defined in two ways
• Not able to provide necessities of life with
  given income
• Having a relative low income compared to rest of
  society
• The first definition is measured by the absolute
  income test
• The second definition is measured by the relative
  income test

5
Absolute Income Test

• Absolute income test Sets a specific income
  level below which a person is consider poor or
  cannot provide necessities of life.
• Family of 4 poverty line in 1993 14,763
• Family of 4 poverty line in 2005 19,391
• The poverty line based on 1955 Dept of Ag.
  guidelines in which a family of 4 spends at least
  1/3 income on food. (Necessity)
• Does not guarantee that all necessities are met

6
Relative Income Test

• A relative income test identifies those at the
  bottom of the income distribution to be poor
• Using this definition, poverty never solved
• Also does not consider regional
• differences
• In general, think of persons with less income
  as poor, thus relative is the measure used by
  general populous

7
Relative Incomes
8
Relative Incomes
l Incomes
9
Relative Incomes Lorenz Curve
More inequitable in recent years
Lorenz curve illustrates the equality or
inequality for any
Population. In this case for income at a point
in time. Studies suggest that individual
families do not stay in the same quadrant .
There is income mobility from lower to higher and
from higher to lower
10
Income Mobility
140,000
A V g. E A R N I N G s
70,000
50,000
38,000
age
11
Reasons for Income Inequality

• Invisible hand in general market is very
  efficient but does not have conscience
• Rewards based upon individual contributions and
  opportunities
• Invisible hand responds to
• Education changing job opportunities
• Experience and life cycle
• Ability
• Preferences and risk
• Unequal distribution of wealth
• Luck, connections and misfortune
• Market power
• Discrimination

12
Reasons for Income Inequality More Detail

• Preferences and Risk
• Entrepreneur example
• Arduous unpleasant jobs may earn more
• Those who work harder more income than for those
  who chose leisure
• Elect to stay home with family, retire early, or
  work part time may earn less
• Those who are not mobile earn less
• Heritage Foundation uses statistics to show that
  the bottom 1/5 of income earners perform only 6
  of hours worked
• Problem with this statistic is that many poor
  are children, sick, old, little ability and/or
  no education (Is it a preference)

13
Reasons for Income Inequality More Detail

• Unequal distribution of wealth
• Income is generated from the four factors of
  production
• Ownership of capital and land is wealth and
  generates income streams
• In 1998, top 10 households owned 69 of wealth
• In 1998, middle 70 owned 31 of wealth
• In 1998, bottom 20 had no assets
• Wealth has become more skewed in recent years and
  reduction ore elimination of death tax (estate or
  net worth) will enhance
• Will proposed changes in SS enhance wealth of
  middle group?

14
Reasons for Income Inequality More Detail

• Luck, connections and misfortune
• Luck or being in the right place at the right
  time
• Housing purchase or stock or bond purchase
• Owning land near city
• Insider information on stocks and bonds
• Misfortunes include
• Illness
• Death
• Accidents
• Unemployment caused by free trade, etc.

15
Reasons for Income Inequality More Detail

• Market power
• Prohibits the competitiveness of the invisible
  hand
• Groups or individuals are able to reduce
  competition by reducing the supply of resources
  (labor for example), occupational licenses
  (health sector), gaining monopoly power
  (Microsoft Windows system and through patents
  (pharmacy companies), and laws enacted (cant
  import prescription drugs or can only use
  nursing homes for care)

16
Reasons for Income Inequality More Detail

• Discrimination is defined as a practice when
  people with similar economic, personal, and
  educational characteristics experience different
  economic outcomes (lower wages) because of their
  race, gender, age, or other non economic
  characteristics
• Discrimination in education, hiring, promotion,
  etc. is a cause
• Statistics suggest that women and minorities with
  similar backgrounds, education, experience, and
  talents earn less than white male counterparts
  when performing same job.
• Also, some evidence that professions that draw
  women have lower pay scale. Examples are
  secretary, social workers, nurse, teacher

17
Reasons for Income Inequality More Detail

• Discrimination continued
• In 1992, Professor Becker from University of
  Chicago won Nobel prce in Economics for work in
  this area.
• Becker suggested that discrimination occurs
  because of peoples preferences or attitude
  markets will respond to these preferences
• Preferences may keep one group from buying from
  another, from hiring, etc. based on assumption
  that the less desirable group is less productive.
  His model follows

18
3-Major Causes of Growing Income Inequality

• Demand for higher skilled workers
• Technology Capital
• What will be the choices for bottom 20
• Demographic Changes
• Baby boomers entering workforce during 70 80
  with less skills and experiences (younger work
  force)
• Married couples both working
• Single head of households primarily women
• International Trade, Immigration and Decline in
  Unionism

19
Who is in Poverty?

• From Who Was Poor in 2003
• During 1980s and 90s poverty rate for Blacks and
  Hispanics approached 30 and declined into 2000s
• In 2003, 12.5 of population lived in poverty
• Blacks and Hispanics poverty rate was about 22 to
  21
• Poverty rates for Asians was 11.8
• Poverty rate for children under 18 was 17.6
  unchanged
• Poverty rate for 65 was 10.2 and is declining
• Poverty rate for whites was 8.2
• Poverty rate for single women head of households
  was 28 compared to 5.4 for married couples
• Intercity poverty rate is 17.5 percent with
  Southern region U.S. at 14.1
• Current article suggests that problem is growing
  into 2004 and 2005?

20
Programs to Solve

• Economic growth and the invisible hand approach
• Income-Maintenance System entitlement programs
• All persons who are eligible have access to
  benefits most paid for by fed and state gov.
• 1) Social Insurance Programs- Replace earnings
  that have been lost to retirement, disability,
  temporary unemployment health insurance for
  elderly
• S.S. or Old Age, Survivors, and Disability
  insurance also Medicare
• 2) Public Assistance or Welfare

21
Social Insurance Programs SS

• Financed by required payroll taxes on workers and
  employers at 15.3 14 self employed
• Covers 90 of workforce with avg monthly payout
  of 804 upon retirement
• Also provides disability pay and survivor
  benefits
• Women and Minorities are most likely to depend
  upon it exclusively

22
Social Insurance Programs SS Cont

• Since inception, inpay (taxes) exceeded payout
  (benefits)
• Gov. treated as general revenue, invested it in a
  form of gov. bonds, which they suggest now has no
  value. More than a trillion dollars worth of
  bonds.
• With aging population and smaller workforce,
  projected shortfall in 2047. Remedies
• Reduce payments (avg is less that 900/mo and
  women and minorities most dependent)
• Raise taxes and/or raise income level that is
  taxed
• Supplement program by transferring part of SS
  revenue into stock market (President Bush
  program)

23
Social Insurance Programs Medicare

• Medicare introduced in 1965 provides medical
  insurance for elderly and disable
• Major drain on resources and more on this later
• After deductible, pays 80 of bills
• In 2006, pharisaical products are to be added
  costing about 500 billion
• Remember that the poverty rate among the elderly
  has declined from about 15 to 10. This is the
  benefit but what is the O.C.?
• Not considered welfare!!

24
Social Insurance Programs

• Unemployment Compensation
• A tax paid by employers to compensate workers who
  have been laid off from their job.
• Available in all 50 states
• Covers almost all wage and salary workers
• Payments vary by state with benefits of
  approximately 33 of workers wages up to a
  maximum
• Average pay is about 200 per week and number
  drawing often depends on overall economic health
  of economy
• Not Considered to be Welfare!!

25
Public Assistance Programs

• The Public Assistance programs (welfare) provide
  benefits to those with low incomes handicaps,
  and/or have dependent children.
• Financed by general tax revenue
• Requires means tests to prove eligibility
  (costly)
• Two thirds paid by fed gov and remainder by
  state. Recently fed has shifted to states as
  medicate payments declined and educational
  requirements increased
• Programs include
• Supplemental Security Income, Temporary
  Assistance for Needy Families, Food Stamp
  Programs, Medicaid, and Earned Income Tax Credit
  (Negative income tax suggested)

26
Public Assistance Programs

• Supplemental Security Income
• Its purpose is to provide uniform nationwide
  minimum income for the aged, blind, and disable
  who are not eligible for other programs.
• About 50 of states provide additional funding
• Temporary Assistance for Needy Families
• Provides cash assistance to families with
  children and seeks to reduce welfare depedency by
  promoting job preparation and work.
• Has work and/or educational requirements and
  limits time on program

27
Public Assistance Programs Cont

• Food Stamp Program
• Provides low income families with adequatre diet
• Receive stamps which can be cashed in for food at
  stores
• Limits what may be purchased
• Boost again for farm and food business because
  increases demand.
• Those not on program pay twice, tax revenue and
  higher food prices
• Costly for stores to maintain records

28
Public Assistance Programs Cont

• Medicade
• It pays for medical expenses for individuals
  participating in the Public Assistance Programs
• Same problems as Medicare in that very expensive
• Fed is shifting responsibility to states for
  financing
• States, which must balance budget have been
  reducing benefits
• We as citizens will pay for medical benefits
  whether this program does or does not exist (more
  later)
• Earned-Income Tax Credit
• It is a credit to low income working families.
  It reduces tax owed or provides cash payment if
  credit exceeds tax liability
• As a negative income tax, not costly to provide

29
Welfare Reform Temporary Assistance to Needy
Families

• With the exception of the program for the aged,
  poverty was not declining
• Also, generations of families have lived on
  welfare since the 1960s
• Concern that the created dependency on the gov
  and robbe individuals of motivation and dignity.
• The welfare program was reformed in 1996 by
  eliminating the guarantees
• Also make it a state program by providing lump
  sum payments to states
• States have rights but now responsibilities.
  (Medicaid benefits declining)
• Program limits benefits to 5 years, requires work
  , ended food stam program for able bodied age 18
  to 50 without dependents, tightened the
  definition of disabled children, and established
  5-year waiting period for new citizens
• Jury is out on success of changes

30
Other Programs

• Private Sector and churches provide various
  programs
• Food Pantry See article Demand for food growing
• Pharisaical companies provide free or low cost
  supplies to low income persons. Well kept secret
  and not uniform distribution. Physicians also
  provide some free samples
• Efforts made by groups to help reduce drug and
  alcohol use, crime issues, etc. AA comes to mind
  has an excellent program
• Faith based programs are now in vogue

31
Political philosophy for equalizing incomes

• Political philosophy impacts how we would strive
  to resolve the poverty issue
• It is value based but some economic principles
  can be used to reinforce the arguments.
• Three camps exist
• Utilitarianism Developed in 18 century, the
  goal is to use government to maximize total
  utility of everyone in society
• Liberalism Developed in
  the 20 century, this philosophy focuses on
  government policy that is deemed to be just as
  evaluated by an impartial observer
• Libertarianism An enforcer of the invisible hand
  and competition where government role should be
  to punish crime, set up the rules and not
  redistribute income

32
Utilitarianism

• The goal is to redistribute income to maximize
  total welfore for the whole society.
• Transfer income from the wealthy to the lower
  levels. Purpose of progressive income tax
• May limit incentives reducing total wealth for
  all
• Due to the law of diminishing returns, a person
  with a large income gets less satisfaction from
  buying the next of goods than does the poor
  person. By transferring income, total
  satisfaction increases. Ignores the satisfaction
  earned from savings.

33
Liberalism

• The philosophy is based on concept that societys
  institutions, laws, and policies should be just
• Voting rights and non discrimination laws of 1960
• Problem is what is just? Depends on the person
• Solution proposed was to assume that all
  individuals did not know what their opportunities
  would be in the future. In fact each person
  might decide that they could be the least bless
  rather than the most blessed.
• Most would fear that they would be at the bottom
  and thus would not attempt to max total utility
  but would maximize the minimum utility. Transfer
  of income to the poor raises the well-being of
  the lest blessed.
• With complete equalization, there would be no
  incentives and thus incomes would decline and
  lest would be worse off.
• Is views lead to social insurance

34
Libertarianism

• A form of conservatism where it is argued that
  society does not earn income, individuals earn
  income.
• Gov. should not redistribute income to solve
  poverty issue because the private system provides
  the incentives for necessary adjustment.
• Equality and inequality issues are not addressed
• Government role is to establish fair rules and
  prevent crime and allow the markets to work.
  The equality of opportunity is more important
  than equality