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Table of Contents

Principles of Microeconomics, v. 1.0

by Libby Rittenberg and Timothy Tregarthen

Chapter 19 Inequality, Poverty, and Discrimination

Start Up: Poverty in the United States

The United States is the richest large country on the planet. Yet, in 2006, 36.5 million people in the United States were, by the official definition, poor. The United States has a greater percentage of its people in poverty than does any other industrialized country. How can a nation that is so rich have so many people that are poor?

It was January 8, 1964 when President Lyndon B. Johnson stood before the Congress of the United States to make his first State of the Union address and to declare a new kind of war, a War on Poverty. “This administration today here and now declares unconditional war on poverty in America,” the President said. “Our aim is not only to relieve the symptoms of poverty but to cure it; and, above, all, to prevent it.” In the United States that year, 35.1 million people, about 22% of the population, were, by the official definition, poor.

The President’s plan included stepped-up federal aid to low-income people, an expanded health-care program for the poor, new housing subsidies, expanded federal aid to education, and job training programs. The proposal became law later that same year.

More than four decades and trillions of dollars in federal antipoverty spending later, the nation seems to have made little progress toward the President’s goal. While the percentage of people living in poverty has fallen since Johnson was president, the number of people living in poverty is actually slightly higher than it was then.

Moreover, over the past four decades, the distribution of income has also become more skewed. The share of income going to the rich has risen, while the share going to the poor has fallen.

Income inequality took center stage during the 2008 U.S. presidential election. Both Democratic candidate Barack Obama and Republican candidate John McCain campaigned on platforms to address this issue. McCain advocated making permanent tax cuts voted in under President George W. Bush that are set to expire. Obama advocated an increase in taxes on wealthy Americans and a reduction in taxes for most others. The issue came to the fore in the last presidential debate as the two candidates sparred around the image of “Joe the Plumber.” The conversation went like this:

McCain: You know, when Senator Obama ended up his conversation with Joe the plumber—we need to spread the wealth around. In other words, we’re going to take Joe’s money, give it to Senator Obama, and let him spread the wealth around. I want Joe the plumber to spread that wealth around. You told him you wanted to spread the wealth around. The whole premise behind Senator Obama’s plans are class warfare, let’s spread the wealth around. I want small businesses—and by the way, the small businesses that we’re talking about would receive an increase in their taxes right now. Who—why would you want to increase anybody’s taxes right now? Why would you want to do that, anyone, anyone in America, when we have such a tough time, when these small business people, like Joe the plumber, are going to create jobs, unless you take that money from him and spread the wealth around. I’m not going to…

Obama: OK. Can I…

McCain: We’re not going to do that in my administration.

Obama: If I can answer the question. Number one, I want to cut taxes for 95% of Americans. Now, it is true that my friend and supporter, Warren Buffett, for example, could afford to pay a little more in taxes in order…

McCain: We’re talking about Joe the plumber.

Obama:… in order to give—in order to give additional tax cuts to Joe the plumber before he was at the point where he could make $250,000. Then Exxon Mobil, which made $12 billion, record profits, over the last several quarters, they can afford to pay a little more so that ordinary families who are hurting out there—they’re trying to figure out how they’re going to afford food, how they’re going to save for their kids’ college education, they need a break. So, look, nobody likes taxes. I would prefer that none of us had to pay taxes, including myself. But ultimately, we’ve got to pay for the core investments that make this economy strong and somebody’s got to do it.

McCain: Nobody likes taxes. Let’s not raise anybody’s taxes. OK?

Obama: Well, I don’t mind paying a little more.

McCain: The fact is that businesses in America today are paying the second highest tax rate of anywhere in the world. Our tax rate for business in America is 35%. Ireland, it’s 11%. Where are companies going to go where they can create jobs and where they can do best in business? We need to cut the business tax rate in America. We need to encourage business. Now, of all times in America, we need to cut people’s taxes. We need to encourage business, create jobs, not spread the wealth around.

The candidates thus presented strikingly different views of how to promote prosperity and fairness. In this chapter we shall analyze three issues related to the question of fairness. We begin by looking at income inequality and explanations of why the distribution of income in the United States has grown more unequal in recent years. We shall then analyze poverty. We shall examine government programs designed to alleviate poverty and explore why so little progress appears to have been made toward eliminating it after all these years.

We shall also explore the problem of discrimination. Being at the lower end of the income distribution and being poor are more prevalent among racial minorities and among women than among white males. To a degree, this situation may reflect discrimination. We shall investigate the economics of discrimination and its consequences for the victims and for the economy. We shall also assess efforts by the public sector to eliminate discrimination.

Questions of fairness often accompany discussions of income inequality, poverty, and discrimination. Answering them ultimately involves value judgments; they are normative questions, not positive ones. You must decide for yourself if a particular distribution of income is fair or if society has made adequate progress toward reducing poverty or discrimination. The material in this chapter will not answer those questions for you; rather, in order for you to have a more informed basis for making your own value judgments, it will shed light on what economists have learned about these issues through study and testing of hypotheses.