chapter 31 income, poverty, and health care. copyright © 2008 pearson addison wesley. all rights...
TRANSCRIPT
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Introduction
Some economists find that there is less “income mobility” than there used to be, yet others are not convinced.
To understand the disagreement, we turn our attention to the distribution of income, a key topic in this chapter.
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Learning Objectives
• Describe how to use a Lorenz curve to represent a nation’s income distribution
• Identify the key determinants of income differences across individuals
• Discuss theories of desired income distribution
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Learning Objectives (cont'd)
• Distinguish among alternative approaches to measuring and addressing poverty
• Recognize the major reasons for rising health care costs
• Describe alternative approaches to paying for health care
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Chapter Outline
• Income
• Determinants of Income Differences
• Theories of Desired Income Distribution
• Poverty and Attempts to Eliminate It
• Health Care
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Did You Know That...
• One of every 125 U.S. residents is a “millionaire?”
• About 30,000 people possess personal wealth exceeding $30 million?
• At the other end, there are 37 million U.S. residents in poverty?
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Income
• Income provides us a means of consuming and saving
Can be payment for labor
Can be payment for other factor
Can be from gifts and government transfers
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Income (cont'd)
• Distribution of Income
The way income is allocated among the population
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Income (cont'd)
• Lorenz Curve
A geometric representation of the distribution of income
A Lorenz curve that is perfectly straight represents complete income equality.
The more bowed a Lorenz curve, the more unequally income is distributed.
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Income (cont'd)
• Criticisms of the Lorenz curve
1. It does not include income in kind: income received in the form of goods and services.
2. It does not account for the differences in size of households or the number of wage earners households contain.
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Income (cont'd)
• Criticisms of the Lorenz curve
3. It does not account for age differences.
4. It ordinarily reflects money income before taxes.
5. It does not measure unreported income.
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Figure 31-2 Lorenz Curves of Income Distribution, 1929 and 2007
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Table 31-1 Percentage Share of Money Income for Households Before Direct Taxes
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Example: Why it is Misleading to Examine Only Wages and Salaries
• Today, only about 52% of national income is derived from wages and salaries.
• Total compensation received has remained close to 70% of national income.
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Figure 31-3 Wages and Salaries and Total Labor Compensation as Percentages of U.S. National Income
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The Distribution of Wealth
• Income—a flow—can be viewed as a return on wealth—a stock.
• The distribution of income is not the same as the distribution of wealth.
• Wealth includes tangible objects and human wealth.
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Figure 31-4 Measured Total Wealth Distribution
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Determinants of Income Differences
• We know there are income differences; that is not in dispute.
• A more important question is why these differences occur.
• If we know, perhaps we can change policy, or better understand them.
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Determinants of Income Differences (cont'd)
• We will look at four determinants of income differences
1. Age
2. Marginal productivity
3. Inheritance
4. Discrimination
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Determinants of Income Differences (cont'd)
• Age-Earnings Cycle
The regular earnings profile of an individual throughout his or her lifetime
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Determinants of Income Differences (cont'd)
• Age-earnings cycle
At age 18, earnings from wages are relatively low.
Earnings gradually rise until they peak at about age 50.
Earnings then fall until retirement, when they become zero.
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Figure 31-5 Typical Age-Earnings Profile
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Determinants of Income Differences (cont'd)
• Marginal productivity
Talent
Experience
Training
Investment in human capital
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Determinants of Income Differences (cont'd)
• Inheritance 10% of inequality traced to inheritance
• Discrimination Different pay for equal MRP
Equal pay for different MRP
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Determinants of Income Differences (cont'd)
• Access to education
Minorities face discrimination in the acquisition of human capital.
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Determinants of Income Differences (cont'd)
• Doctrine of Comparable Worth
The belief that women should receive the same wages as men if the levels of skill and responsibility in their jobs are equivalent
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Theories of Desired Income Distribution
• The productivity standard “To each according to what she or
he produces”Also called the contributive standard, or
referred to as the merit standard
• Equality—the egalitarian principle “To each exactly the same”
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Poverty and Attempts to Eliminate It
• Throughout history mass poverty has been accepted as inevitable.
• Sustained economic growth has wiped out mass poverty in many countries.
• How can there be so much poverty in a nation of such abundance?
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Figure 31-6 Official Number of Poor in the United States, Panel (a)
Source: U.S. Department of Labor
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Figure 31-6 Official Number of Poor in the United States, Panel (b)
Source: U.S. Department of Labor
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Poverty and Attempts to Eliminate It (cont'd)
• Defining poverty
Official poverty level in 2007 for an urban family of four around $21,000
Adjusted based on CPI
Does not include cash and non-cash transfer payments
• Absolute poverty not the same as relative poverty
In a relative sense, poverty will always exist even if absolute poverty eliminated.
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Source: Bureau of Labor Statistics; U.S. Bureau of the Census
Figure 31-7 Relative Poverty: Comparing Household Income and Household Spending
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Poverty and Attempts to Eliminate It (cont'd)
• Attacks on poverty: major income maintenance programs
Social Security which has been called OASDI
90% of all employed persons covered
In 2007, 49 million people received checks averaging $960 a month.
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Poverty and Attempts to Eliminate It (cont'd)
• Supplemental Security Income (SSI)
Minimum income for the
Aged
Blind
Disabled
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Poverty and Attempts to Eliminate It (cont'd)
• Temporary Assistance to Needy Families (TANF)
State administered program financed in part by federal grants
The program provides aid to families in need.
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Poverty and Attempts to Eliminate It (cont'd)
• Food stamps
Government-issued coupons (or e-debit cards) that can be used to purchase food
In 1964, some 367,000 Americans received food stamps.
In 2007, one in nine citizens received food stamps.
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Policy Example: What are Food Stamps Worth?
• Recipients qualify for food stamps because they have low incomes.
• There are times when these recipients need cash more than food stamps.
• Diane Whitmore of the University of Chicago sought to determine value.
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Policy Example: What are Food Stamps Worth? (cont'd)
• She found 20 to 30% purchased more food (than if they received cash).
• This group placed an average cash value of 80 cents per $1 in food stamps.
• She found that stamps trade in the underground market for 65 cents per $1.
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Poverty and Attempts to Eliminate It (cont'd)
• Earned Income Tax Credit Program (EITC)
Designed to provide rebates to low- income workers
Each year federal government grants $36 billion in benefits.
Over one-fifth of all tax returns claim an EITC.
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Poverty and Attempts to Eliminate It (cont'd)
• No apparent reduction in poverty
1973: 11%
1983: 15%
1990: 13.1%
Since fallen to 12%
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Health Care
• Health care is intimately related to the distribution of income and poverty
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Health Care (cont'd)
• America’s health care situation
Portion of national income spent on health care has risen steadily since 1965.
16% of U.S. real GDP is devoted to spending on health care.
Per capita spending greater than anywhere else in the world
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Source: U.S. Department of Commerce; U.S. Department of Health and Human Services; Deloitte and Touch LLP; VHA, Inc.
Figure 31-8 Percentage of Total National Income Spent on Health Care in the United States
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Health Care (cont'd)
• Question Why have health care costs risen
so much?
• Answers The age-health care expenditure equation
New technologies
Third-party financing
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Health Care (cont'd)
• Third Parties
Parties who are not directly involved in a given activity or transaction
Fees may be paid by third parties (insurance companies, government)
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Source: Health Care Financing Administration; U.S. Department of Health and Human Services
Figure 31-9 Third-Party versus Out-of-Pocket Health Care Payments
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Health Care (cont'd)
• Price, quantity demanded, and moral hazard
Large percent of medical services payments made by third parties
Price to the consumer drops and the quantity demanded increases
An individual with a zero deductible may engage in a less healthful lifestyle
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Figure 31-10 The Demand for Health Care Services
At P1 quantitydemanded is Q1
If the price falls to zero, quantity demanded increases to Q2
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Health Care (cont'd)
• Moral hazard as it affects physicians and hospitals
Due to third-party payments, patients do not have to worry about the cost of operations and medical procedures.
Physicians and hospitals order more of them since they are reimbursed on the basis of medical procedures.
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Health Care (cont'd)
• Medicare expenditures are one of the most serious problems facing the federal government today.
• The number of beneficiaries has increased from 19.1 million in 1966 to more than 40 million in 2007.
• Federal spending on Medicare has increased about 10% a year, adjusted for inflation.
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Figure 31-11 Federal Medicare Spending
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Health Care (cont'd)
• Is national health insurance the answer?
Over 40 million Americans are uninsured at some point during the year.
Federal spending might increase from $60 to $100 billion.
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Health Care (cont'd)
• Countering the moral hazard problem: Health Savings Account (HSA)
A tax-exempt health care account
To which individuals can pay on a regular basis
And out of which medical care expenses can be paid
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Issues and Applications: Is the United States No Longer an Income-Mobile Nation?
• Past evidence supporting high U.S. income mobility.
• Is mobility giving way to more rigid income-class structure?
• Recent immigrants complicate interpreting the data.
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Summary Discussion of Learning Objectives
• Using a Lorenz curve to represent a nation’s income distribution The more bowed a Lorenz curve, the more
unequally income is distributed
• Key determinants of income differences across individuals Age
Marginal productivity differences
Discrimination
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Summary Discussion of Learning Objectives (cont'd)
• Theories of desired income distribution Productivity standard
Egalitarian principle
• Alternative approaches to measuring and addressing poverty Absolute poverty standard
Relative poverty standard
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Summary Discussion of Learning Objectives (cont'd)
• Major reasons for rising health care costs
Aging U.S. population
Higher priced medical technologies
Third-party financing of health care expenditures
Moral hazard
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Summary Discussion of Learning Objectives (cont'd)
• Alternative approaches to paying for health care
Governmental funding
Income-based national health insurance program
Health savings accounts