econ 248, uw-milwaukee overview of inequality and poverty econ 248: economics of poverty and...

Econ 248, UW-Milwaukee

Overview of Inequality and Poverty

Econ 248: Economics of Poverty and Discrimination

Professor Keith Bender


How do you define poverty?

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1. When income is below what you need to survive.

2. When income is significantly less than average income.

3. When sickness or disability causes you to miss work opportunities.

4. When discrimination keeps you from getting work opportunities.


What Causes Poverty?• (The computer did not save

what we came up with in class because it froze up. These are just a few of the things I remember.)

• Laziness• Natural disasters• Physical and mental problems• Lack of education• The economy• Welfare programs not being

generous enough• Lack of willingness to find a job• Capitalism

• Bad life choices• Drugs• Lack of health care


Outline

1. Discuss Three Theories that summarize these reasons.

2. Discuss how these Three Theories would solve or cure the poverty problem.

3. Discuss other measures of well-being.


Three Theories

• Schiller groups the reasons into Three Theories of Poverty

1. Flawed Character

2. Restricted Opportunity

3. Big Brother

• Key to distinguishing these theories is who is at fault for poverty.


Flawed Character

• Here – the individual in poverty is at fault.

• They lack the motivation or work ethic to go out and get a job that would pull them out of poverty.

• Or they lack the motivation to get the education they need.

• Key is that people have full control over their socio-economic status


Human Capital Theory

• Latter of these relies on an economic concept called Human Capital Theory.

• Main idea is that the more education or skills you posses (i.e. investing in human capital), the higher your productivity will be and the higher pay you will get.

• Sounds great and intuitive, but…


HCT Assumptions

• There are important assumptions to be made here

1. More investment leads to a higher payoff

2. Rational choice (comparing costs and benefits)• Key here is ‘Information’

3. Pervasive Opportunity• Everyone has a chance to get schooling and job


Restricted Opportunity

• Other end of the spectrum• Restricted Opportunity is when something

happens beyond the control of the poor to put/keep them in poverty

• For example

– Death of main income provider

– Poor public education

– No access to transportation

– Sudden illness or disability

– Natural Disasters– Discrimination


Big Brother

• Here the government is at fault, but in a way it is a combination of the previous two

• Argument is that welfare programs distort the incentives to work.– Why work when you can sit on your rear end

and get a check for ‘doing nothing’?!


So which do you think is the main cause?

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1. Flawed Character


3. Big Brother

4. Something else

X


What do other people think causes poverty?

• NPR/Kennedy School/Kaiser Foundation Poll and series of radio reportshttp://www.npr.org/programs/specials/poll/poverty

• Key phrases•General attitudes, laziness•Something for free•Do something about it (college)•Bad life choices•Don’t do enough to help themselves•Drug abuse•Single parent families

•Not enough high paying jobs•Poor public schools•Too many immigrants•Single parent families•Cycles of poverty/product of environment

•Why work when you can receive a check

http://www.npr.org/programs/specials/poll/poverty

Results from NPR Survey

44434245

45465145

Theory

6536

Flawed Character

Restricted Opportunity

Big Brother

1716

*

2

1

9

6

8

5

3

6

13

13

2

3

1

4

6

5

7

5

10

17

10

2

3

1

11

4

6

6

8

6

14

12

12

11

12

10

1222

13

13

13

>200%100-200%<100%Total

No item a major cause

Don’t know

None of these

Poor quality of public schools

Decline in moral values

Poor people lacking motivation

Too many immigrants

The Welfare system

A shortage of jobs

Too many single parent families

Too many jobs being part time/low wage

Medical Bills

Drug Abuse

Most Important Cause

1

4

2

5

5

7

8

9

From http://www.npr.org/programs/specials/poll/poverty/staticresults1.html. These results are Copyright © 2001 by National Public Radio, Washington, D.C.


How do you ‘fix’ poverty?• Flawed Character

1. Do nothing – can’t change motivation

2. Give them training and they will get good jobs• Key assumption – that the jobs are there

• Restricted Opportunity– Get rid of restriction

• Big Brother– Cut (end?!) welfare programs to get rid of

work disincentives


From Schiller p. 2


Which of the following increases your well-being the most?

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19%

13%

57%

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1. Increasing your income by $10,000

2. Increasing your wealth by $10,000

3. Having safe water to drink and air to breathe

4. Knowing that there are social safety nets such as unemployment insurance and welfare programs

5. Having a good park system

6. Knowing that your UWM degree will open (good paying!!) job opportunities when you graduate


Money isn’t everything, is it?

• Assumption to now (and for the rest of the class) is that money is key indicator of well-being.

• Economists don’t really believe this, but it is easy to measure and it is probably correlated with well-being

• But… there are other things that influence well-being.


Other indicators of well-being

1. Wealth– Accumulated assets over a lifetime

– Are people with high assets and low income in poverty?

• Maybe, but maybe not!

– Caveat (ie. Warning!)• Not all wealth is the same – some is not liquid – that is, it is

difficult to turn some assets into cash• e.g. housing wealth, pension wealth• So, some of those with high wealth have no cash


Other indicators con’d

2. Transitory vs. permanent income– Time is key here– Transitory – snapshot of income, income in a year– Permanent – average income over a number of

years– Key issue here – transitory income doesn’t tell you a

lot, since well-being does not drop by a lot if permanent income is high

– Eg – farmers, athletes



3. Life cycle of Income– Age-Income relationship

is key here– So where you are in your

life cycle tells you about your overall well-being

– However, so is the level of consumption

– Consider two cases…

Income

Age

Income

Age



4. Government provision of Goods and Services

• Can be geared to poor – welfare, unemployment benefits

• Or to all – public schools, libraries, parks

5. Non-monetary issues – ‘Social Equality’• Equal access to justice, police protection,

voting, equal treatment under law• Breaks down class distinctions


Review Question 1: The Flawed Character Theory of Poverty is based on what

economic theory?

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1. Life Cycle Theory of Earnings

2. Human Capital Theory

3. Discrimination

4. Work disincentive theory


Review Question 2: A person believes that poverty is caused by the poor public transportation system that is

subsidized by the government. Which ‘theory’ of poverty is this most closely related?

Fla

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Res

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Big

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Hum

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Phys

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Cap

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1. Flawed Character


3. Big Brother

4. Human Capital

5. Physical Capital


Review Question 3: A key variable that is highlighted by the ‘Life-cycle’ theory in regards to

well-being measures is

tim

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1. time or age.

2. wealth.

3. social justice.

4. human capital.

5. discrimination.


A Question for You: Which poverty theory do you think is the best explanation

for poverty?

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1. Flawed Character


3. Big Brother

4. Still don’t think any are right!

X


Questions for Me?

Next Lecture is on Inequality

econ 248, uw-milwaukee overview of inequality and poverty econ 248: economics of poverty and...

Documents

poverty econ

uwmilwaukee outline

theories of poverty

uwmilwaukee big brother

uwmilwaukee flawed character

job slide

uwmilwaukee hct assumptions

x slide