© terrel gallaway data & charts from us census unless otherwise noted 1

© Terrel GallawayData & Charts from US Census unless otherwise noted

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Child Poverty Source US Census, Joint Center for Poverty Research


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Who is poor?

Working & non-workingUrban & RuralBlacksHispanicsSingle MomsChildren


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Limits to Poverty Statistics

Income measured as cash receipts, ignores in-kind transfers and other, imputed rent, etc.

Often reported as before tax and transfers

Looks at annual, not lifetime income Most of us are poorer

and richer at some point in our lives

Units of observation are somewhat ambiguous How do you compare 2

single people to 2 married people to 2 cohabitating people?


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Rationales for Income Redistribution: Simple Utilitarianism

Assume a additive, utilitarian social welfare function W = U1 + U2 + … + UN

Also assume: identical utility functions, diminishing marginal utility of income, total income is not affected by redistribution

Then, while taking from a rich person decreases utility and thereby SWF, giving that income to a poor person increases their utility (and SWF) by a greater amount.

Poor value the income more and so SWF increases as they get a larger share, see graph


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Rationales for Income Redistribution: Rawls

Maximin criterion W = min(U1, U2…UN) Goal is to elevate the poorest person

Based on John Rawl’s ethical premise that, a person in the original position, behind a veil of ignorance, would choose such a distribution If you didn’t know into what family you’d be born, you’d want to

make sure their were no families living on the street eating garbage

Departures from perfect equality are okay as long as they elevate the lot of the poorest person

Assumes strict risk aversion Help many if it increased inequality?


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Rationales for Income Redistribution: Public Good Argument

Income redistribution, and acts of charity, can be viewed as public goods

e.g. Many people can benefit when housing is provided to the homeless (for reasons including aesthetics, feelings of guilt, perceptions of safety, nuisance factor)

Charity is underprovided because of the free rider problem

Government can use it’s coercive power to overcome the free rider problem

Unlike other arguments, this one rests on Pareto Improvements

Rationales for Income Redistribution: Simple Utilitarianism


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Rationales for Income Redistribution: Non-Individualistic Views

Some believe inequality per se is a bad thing, something to be minimized

Plato argued the income of the rich should be no more than four times that of the poor

Others desire complete equality Commodity Egalitarianism (e.g. Tobin) argues

some specific goods should be available to all. e.g. Basic food, shelter, clothing, education,

medical care How much?

Rationales for Income Redistribution: Rawls


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Other Issues Relative Price Effects: Government spending on housing

for the poor, for example, can raise it’s price, as well as the wages of construction workers. The poor aren't the only ones helped, and they are not likely

helped by the full value of the expenditure Difficult to measure distributional impact of government

expenditures on goods that are consumed jointly (public goods) Are benefits of roads a function of family size, income, or miles

traveled, Is it regressive or progressive? In-kind transfers are often worth less to the recipient than

the cost of the good because. A smaller amount of cash may very well do more good because it gives the recipient greater flexibility.


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Valuing In-Kind Transfers

Transfer lets them buy more of one good (cheese), than at each previous bundle of goods.

However, it does not raise the maximum amount of all other goods that can be consumed.

This makes the budget constraint kinked Constrains their ability to choose the exact mix that is

best for them In-kind transfers are never better than money, money is

often better than in-kind transfers. i.e., It is likely that you could increase utility by just as

much, or more, but at less expense, by using cash. Greater flexibility.


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Valuing In-Kind Transfers


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Expenditure Programs


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Expenditure Programs

Table 8.1 shows that welfare spending is a shared expense between the federal and state/local governments.

Subsidized medical care (mainly Medicaid) exceeded $215 billion in 2000.

Cash assistance (including the Earned Income Tax Credit) exceeded $91 billion in 2000.


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AFDC Started 1935, Gutted 1996 Many argued it decreased work incentives May do so, look at indifference curves &budget constraint flowing

from a time endowment. (leisure, income) Kinked, budget constraint, not likely to decrease leisure over

horizontal part of BC Welfare dependence 25% of women who received AFDC stayed on it 10 years or more Doesn’t mean they don’t want to work, could mean options remain

poor Some argue it hurts the family structure Between 60s & 80s, WF benefits decreased in real terms while the

proportion of children not living w/ 2 parents continued to increase No demonstrated connection between WF & family structure (including # of children, there is however links between affluence &

small families & between education & small families)

© terrel gallaway data & charts from us census unless otherwise noted 1

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