Introduction
Chapter Objectives
Bring It Home
Occupy Wall Street
In September 2011, a group of protesters gathered in Zuccotti Park in New York City to decry what they perceived as increasing social and economic inequality in the United States. Calling their protest “Occupy Wall Street,” they argued that the concentration of wealth among the richest 1 percent in the United States was both economically unsustainable and inequitable, and needed to be changed. The protest then spread to other major cities, and the Occupy Movement was born.
Economic inequality is a topic that generates considerable debate among economists. Some economists support the goals of the Occupy Movement. Others argue just as strongly that some inequality is an expected and acceptable outcome of a free market in a capitalist system, and that an efficient use of resources requires that risk takers, innovators, and those most talented be incentivized and rewarded appropriately. Regardless, the issue has recently come to the attention of politicians and policy makers, and economics can certainly lend some insight. This insight revolves around a set of basic questions. What do we mean by income inequality? What causes it? What are the impacts?
In this chapter, you will learn about the following:
- Drawing the poverty line
- The poverty trap
- The safety net
- Income inequality: measurement and causes
- Government policies to reduce income inequality
The labor markets that determine what workers are paid do not take into account how much income a family needs for food, shelter, clothing, and health care. Market forces do not worry about what happens to families when a major local employer goes out of business. Market forces do not take time to contemplate whether those who are earning higher incomes should pay an even higher share of taxes.
However, labor markets do create considerable inequalities of income. In 2014, the median American family income was $57,939 (the median is the level where half of all families had more than that level and half had less). According to the U.S. Census Bureau, almost nine million U.S. families were classified by the federal government as being below the poverty line in that year. Think about a family of three—perhaps a single mother with two children—attempting to pay for the basics of life on $17,916 per year. After paying for rent, health care, clothing, and transportation, such family might have $6,000 to spend on food. Spread over 365 days, the food budget for the entire family would be about $17 per day. This is $119 a week. While in some places around the U.S. this may be more than enough, by means of a simple comparison, the United States Department of Agriculture (USDA) estimates that to provide a nutritious diet for a family of four, $129.20 is needed per week.
This chapter explores how the U.S. government defines poverty, the balance between assisting the poor without discouraging work, and how federal antipoverty programs work. It also discusses income inequality—how economists measure inequality, why inequality has changed in recent decades, the range of possible government policies to reduce inequality, and the danger of a trade–off that too great a reduction in inequality may reduce incentives for producing output.