Lecture Title

1
Poverty and Government Assistance
Professor Jane Leuthold Department of
Economics University of Illinois
Economics 214
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Topic for today ...

• How serious is the problem of poverty
• in the world?
• in the United states?
• Income inequality is it increasing? Why?
• Why is the alleviation of poverty a government
  problem?
• What do the candidates think?

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World-wide poverty

• In 1998 1.2 billion people world-wide had
  consumption levels below 1 a day -- 24 percent
  of the population of the
  developing world and 2.8 billion lived on less
  than 2 a day.

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Trends in world poverty

• Proportion living in extreme poverty has fallen
  from 28 in 1987 to 24 percent in 1998.
• Eight out of every 100 infants do not live to see
  their fifth birthday.
• Nine of every 100 boys and 14 of every 100 girls
  who reach school age do not attend school.

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Poverty at home

• The nation's poverty rate dropped from 12.7 in
  1998 to 11.8 in 1999.
• Real median household income reached 40,816, the
  highest level ever recorded by the Census Bureau.

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Measuring poverty

• The poverty threshold defines subsistence income
  for urban and rural families of different sizes
• In 1999, the poverty threshold was 17,000 for a
  family of four.

If you work full time (2000 hours/year) and the
minimum wage (5.15/hour), what is your annual
income?
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Poverty rate over time
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Poverty of children in the US

• Roughly one child in 6 is now considered poor
  (16.9 in 1999), and 38 of the poor are
  children.
• The poverty rate in mother-only families is
  around 50.
• More than half of all children will spend some
  portion of their minority years in a
  single-parent household.

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Poverty by age group
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Poverty by race
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Household income inequality
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Changes over time
Source Bureau of the Census
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Lorenz curve
100
Gini coefficient A A B
Line of Equality
Cumulative of income
A
Gini 1967 .399 1998 .456
B
100
Cumulative of families
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Inequality over time
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Explanation

• Higher returns to education?
• Increased labor force participation and earnings
  of women?
• Weaker unions?
• Intensified global competition and immigration?
• Erosion of the minimum wage?
• Increased divorce rates?
• ???

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Returns to education for men
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Returns to education for women
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Growth in earnings
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Poverty and market failure

• Interdependent utility functions -- when the
  well-being of those less fortunate affects ones
  own utility
• Negative externalities
• reduce social unrest
• reduce crime
• Uncertainties make it difficult to insure ones
  own future

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Income assistance as a public good
MB MC
MB
Private charity alone will lead to too little
income assistance because of the free rider
problem.
MC
MBLiberals
MBConservatives
I
Income assistance
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Rationale for public assistance

• To address the public good aspects of poverty
  (interdependent utility functions)
• To account for the negative externalities (crime
  and social unrest)
• To provide a social safety net (insurance against
  adversity)

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Discussion

• What are some ways government could encourage
  voluntary contributions from free riders?
• What stands are the Presidential candidates
  taking on the issue of poverty? Do you think the
  median voter theorem is influencing their
  positions? Explain.

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Candidate Gore

• Supports the current child tax credit
  of 500 and making it refundable for
  nontaxpayers.
• Supports extending the deduction for
  charitable contributions to those
  taxpayers who do not itemize.
• Supports increasing the Earned
  Income Credit earnings threshold.

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Candidate Bush

• Supports doubling the child tax
  credit to 1,000.
• Supports extending the deduction for
  charitable contributions to those
  taxpayers who do not itemize.
• Supports eliminating the estate tax
  by 2009.

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Soap Box
Search the Net to find out what your state has
done to assist recipients who receive funds under
the Temporary Assistance to Needy Families (TANF)
program in developing work skills and finding
work. Describe one aspect of the TANF program in
your state and explain why you think it will or
will not help reduce poverty and dependency. If
you are from another country, describe briefly
what your country is doing to address the problem
of poverty.
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Next time ...
Thurs Welfare Reform Text pages 245-250
268-269 271-282