- Study Guide (Course-wide Content)
A. The Sources of Inequality
- In the previous century, the classical economists believed that inequality was a universal constant, unchangeable by public policy. This view does not stand up to scrutiny. Poverty made a glacial retreat over the early part of twentieth century, and absolute incomes for those in the bottom part of the income distribution rose sharply. Since around 1980, this trend has reversed, and inequality has increased.
- The Lorenz curve is a convenient device for measuring the spreads or inequalities of income distribution. It shows what percentage of total income goes to the poorest 1 percent of the population, to the poorest 10 percent, to the poorest 95 percent, and so forth. The Gini coefficient is a quantitative measure of inequality.
- Poverty is essentially a relative notion. In the United States, poverty was defined in terms of the adequacy of incomes in the early 1960s. By this standard of measured income, little progress in reducing inequality has been made in the last decade.
- Income inequality declined markedly over most of the twentieth century. Then, beginning around 1975, the gap between rich and poor began to widen. The largest income gains have gone to the very top of the income distribution, to the richest 0.1 percent of people. Analysts believe that the "rich man's crash" of 2007–2009 will narrow income gaps at the very top. Wealth is even more unequally distributed than is income, both in the United States and in other capitalist economies.
- Political philosophers write of three types of equality: (a) equality of political rights, such as the right to vote; (b) equality of opportunity, providing equal access to jobs, education, and other social systems; and (c) equality of outcomes, whereby people are guaranteed equal incomes or consumptions. Whereas the first two types of equality are increasingly accepted in most advanced democracies like the United States, equality of outcomes is generally rejected as impractical and too harmful to economic efficiency.
- Equality has costs as well as benefits; the costs show up as drains from Okun's "leaky bucket." That is, attempts to reduce income inequality by progressive taxation or transfer payments may harm economic incentives to work or save and may thereby reduce the size of national output.
- Major programs to alleviate poverty are welfare payments, food stamps, Medicaid, and a group of smaller or less targeted programs. As a whole, these programs are criticized because they impose high benefit-reduction rates (or marginal "tax" rates) on low-income families when families begin to earn wages or other income.