Reflections on Chapter 20: Income Inequality & Poverty

The poverty line is a level set by the federal government for each family size. The percentage of family incomes falling below that line is called the poverty rate. In the U.S., equality is measure by comparing family incomes. The poverty rate in the U.S. decreased in the '60s when the economic health of the nation improved. It has remained steady since then even though our economic growth has continued. This fact points to increasing national inequality.

There are several problems with the way in which we measure inequality. In-kind transfers (non-cash government supplied benefits), life cycles (people's incomes tend to vary with stages of life), transitory versus permanent income (incomes decline temporarily during transitions), and economic mobility (the "poor" are not the same families year after year) all play a part in skewing the picture of inequality in our country. There are three major political philosophies regarding income redistribution to reduce inequality. Utilitarians and Liberals believe it's necessary but not so much that it distorts work incentives and Libertarians think we should not redistribute incomes at all. Minimum wage laws, welfare, negative income tax, and in-kind transfers are policies created to reduce poverty but all can have negative unintended consequences. Minimum wage laws increase unemployment of the lowest skilled workers and the others policies discourage the poor from earning more as to not lose their benefits. The government faces the difficult balancing act of reducing inequality by assisting the poor without decreasing work incentives.