Lecture Issues in economics today - Chapter 26

This chapter presents the following content: Fixed cost, variable cost, and total cost; marginal cost; short run and long run; shut-down and go-out-of-business decisions; average cost; graphing the AFC, AVC, ATC, and MC curves; the law of diminishing returns; economies and diseconomies of scale; the long-run planning envelope curve.

Chapter 26

Poverty and Welfare

Chapter Outline

• MEASURING POVERTY

• PROGRAMS FOR THE POOR

• INCENTIVES, DISINCENTIVES

MYTHS AND TRUTHS

• WELFARE REFORM

• “Relief” programs to help the poor

began in the 1930s during the Great Depression.

• Many programs were created and

others greatly expanded in the 1960s and 1970s

What is Poverty?

• Is it an absolute concept that is the same

across the world or

• Is it a relative concept that depends on the

incomes of others in the area?

• Can we say an American is poor if they have

a living standard that is higher than the average person in the rest or the world?

• A poor person today has a higher living

standard than an average person had 100 years ago Does that mean that today’s poor person is not really poor?

Measuring Poverty

• Poverty Line: that level of income sufficient

to provide a family with a minimally adequate standard of living

– The poverty line was originally established in the 1960s.

– Surveys indicated that poor families of four spent

an average of one-third of their income on food

– A survey established the cost of a minimally adequate diet and that figure was multiplied by 3

to get the poverty line

– Similar surveys established the poverty line for other family sizes.

– The figure is updated annually for inflation using the CPI.

Poverty Lines

1999

• Family of

– 4 the poverty line is $17,029 – 3 the poverty line is $13,290 – 2 the poverty line is $10,869 – 1 the poverty line is $8,501

Measuring Poverty

(continued)

• Poverty Rate: the percentage of people in

households whose incomes were under the poverty line In 1999 it was 11.8%

• Poverty Gap: the amount of money that would have to be transferred to households below the poverty line to get them out of poverty In

1999 it was $62 billion

Who’s Poor

• Those under the poverty line are

disproportionately

– Women

• A poverty rate 3 points higher than that of men

– Children

• a poverty rate twice that of adults

– Minorities

• a poverty rate 3 times higher than that or whites

– High School Dropouts

• a poverty rate 2.5 times higher than people who graduated high school and did not attend college.

10

15

20

25

30

35

40

1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998

year Poverty Rate People in families in Poverty (Million

People in Poverty (Millions)

Poverty Rate and Millions in Poverty

Problems with our Measures

of Poverty

• Concerns that suggest the poverty rate

is understated

– Child care costs are a bigger issue with today’s poor than those who were poor when the original poverty line was

established

Problems with our Measure of

Poverty (continued)

• Concerns that suggest the poverty rate is

overstated

– Americans under the poverty line consume more protein, have more living space, are more likely to have air

conditioning than the average European.

– Updates are based on the CPI which has consistently overstated the increase in the cost of living.

– The measure only counts income and not wealth There are nearly a million “poor” who own homes worth more than

$150,000.

– The measure only counts cash income and does not count the non-cash amounts people get from programs such as food stamps and Medicaid.

– The method of calculation misses a large proportion of income that we know exists.

The CPI point

2000

4000

6000

8000

10000

12000

14000

16000

18000

1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998

Year

Poverty Line

With and Without CPI Adjustment

• Concerns that suggest the poverty rate is

overstated for some and understated for others

– The measure treats as equal the incomes of residents of high cost cities and low costs towns This overstates rural poverty and understates

urban poverty

– The measure uses the overall CPI, which includes goods the poor cannot afford In some years, the prices of goods bought by the poor rise more than the CPI and in other years it rises less.

Problems with our Measure of

Poverty (continued)

Programs for the Poor

(Cash)

• Temporary Aid to Needy Families

– A program that gives money to states for them to work with the poor If there is a “welfare check,”

this is the program that grants it.

• Supplemental Security Income

– A program that gives money to widows, orphans and the disabled.

• Earned Income Tax Credit

– A program that gives to recipients money in the form of a tax refund that is much greater than the

Programs for the Poor

(In-Kind)

• In-Kind transfers : provisions of goods and

services in forms other than cash

– Women, Infants and Children (WIC): vouchers allow people to get basic food products for

pregnant women, new mothers and their children – Food Stamps: vouchers that enhance the

recipients ability to buy food – Medicaid: free health insurance – Section 8 or Housing Authority housing:

subsidized housing.

– Head Start: subsidized day care and preschool

Relative Costs of Cash and In-Kind Programs

• Total Costs of the programs $340 billion

– Cash programs $90 billion – In-Kind programs $250 billion

Why Spend $340 Billion on a

$62 Billion Problem

• Cash transfers would cost the government

less to administer

• Much of the benefit of the Medicaid goes to

children in households just above the poverty line

• Giving cash does not serve the goals of those helping the poor because Americans

generally

– believe the poor would waste the money.

– believe the poor would not spend the money on their children.

Myths, Incentives and

Disincentives

• Fact: Having a child can make someone who

is ineligible for a welfare program eligible for that program

• Fact: Having an additional child increases the amount of aid recipients are eligible for

• Myth: People have (more) children to get

(more) welfare

– Though economists recognize an incentive to have, or to have more children, they have

generally found little evidence to support that

Welfare Reform

• An optimal a welfare program would

– be sufficiently funded to solve the problem of poverty – provide an incentive to leave the program

– be politically sustainable by not putting an excessive burden

on taxpayers.

• The three can not be simultaneously met in

the U.S and the second has typically been the aspect sacrificed

– Prior to 1996 reform a person who worked part-time would have most of the benefit of working taken away because their benefits would be reduced.

– After 1996 reform a person must show they are working or seeking work Those who work part-time generally get to keep many of their welfare benefits They must leave many