Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 30 Income, Poverty, and Health Care

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Chapter 30

Income, Poverty, and Health Care

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 30-2

Introduction

A number of U.S. colleges advertise that a college graduate can anticipate earning at least $1 million more over a working lifetime than someone who has only a high school diploma.

In this chapter, you will learn about higher education as a key determinant of differences in people’s incomes.


Learning Objectives

• Describe how to use a Lorenz curve to represent a nation’s income distribution

• Identify the key determinants of income differences across individuals

• Discuss theories of desired income distribution


Learning Objectives (cont'd)

• Distinguish among alternative approaches to measuring and addressing poverty

• Recognize the major reasons for rising health care costs

• Explain the key elements of the new U.S. national health insurance program and evaluate its potential economic effects


Chapter Outline

• Income• Determinants of Income Differences• Theories of Desired Income Distribution

• Poverty and Attempts to Eliminate It• Health Care


Did You Know That ...

• During 2008, the wealth of people with at least $1 million in wealth declined by $33 trillion, or about two and a half times annual U.S. national income?

• This has affected the distribution of income.

• What other factors influence the distribution of income?


Income

• Income provides us a means of consuming and saving

– Can be payment for labor

– Can be payment for other factor

– Can be from gifts and government transfers


Income (cont'd)

• Distribution of Income

– The way income is allocated among the population based on groupings of residents


Income (cont'd)

• The Lorenz Curve

– A geometric representation of the distribution of income

– A Lorenz curve that is perfectly straight represents complete income equality

– The more bowed a Lorenz curve, the more unequally income is distributed


Figure 30-1 The Lorenz Curve


Income (cont'd)

• Criticisms of the Lorenz curve

1.It does not include income in kind:

• income received in the form of goods and services, such as housing or medical care

• to be contrasted with money income, which is simply income in dollars, or general purchasing power, that can be used to buy any goods and services


Income (cont'd)

• Criticisms of the Lorenz curve (cont’d)

2. It does not account for the differences in size of households or the number of wage earners households contain

3. It does not account for age differences

4. It ordinarily reflects money income before taxes

5. It does not measure unreported income


Figure 30-2 Lorenz Curves of Income Distribution, 1929 and 2011


Income (cont’d)

• Income distribution in the United States– In Table 30-1, we see the percentage share of income for households before direct taxes. The table groups households according to whether they are in the lowest 20 percent of the income distribution, the second lowest 20 percent, and so on.

– We see that in 2011, the lowest 20 percent had an estimated combined money income of 3.3 percent of the total money income of the entire population. This is less than the lowest 20 percent had at the end of World War II.


Table 30-1 Percentage Share of Money Income for Households Before Direct Taxes


Income (cont’d)

• The distribution of wealth

– Income—a flow—can be viewed as a return on wealth—a stock

– The distribution of income is not the same as the distribution of wealth

– Wealth includes tangible objects and human wealth


Figure 30-3 Measured Total Wealth Distribution


Determinants of Income Differences

• We know there are income differences; that is not in dispute

• A more important question is why these differences occur

• If we know, perhaps we can change policy, or better understand them


Determinants of Income Differences (cont'd)

• We will look at four determinants of income differences

1.Age

2.Marginal productivity

3.Inheritance

4.Discrimination



• Age-Earnings Cycle

– The regular earnings profile of an individual throughout his or her lifetime



• Age-earnings cycle

– At age 18, earnings from wages are relatively low

– Earnings gradually rise until they peak at about age 50

– Earnings then fall until retirement, when they become zero


Figure 30-4 Typical Age-Earnings Profile



• Marginal productivity

– Talent

– Experience

– Training

– Investment in human capital


Example: Women Discover Payoffs from Extra Education and Training

• Since 2007, for every 100 bachelor’s degrees earned by men in the United States, women have earned 135.

• Thus, although employed men still earn higher wages than employed women, the male-female wage differential has declined and it is likely to continue to narrow.

• This has caused a gradual shift in the U.S. income distribution.

• Female workers have also found that obtaining more education and training pays off in the form of higher income.



• Inheritance– 10% of inequality traced to inheritance

• Discrimination– Different pay for equal MRP

– Equal pay for different MRP



• Access to education

– Minorities have faced discrimination in the acquisition of human capital

– The unexplained income differential between whites and blacks is often attributed to discrimination in the labor market. Because no better explanation is offered, we will infer that discrimination in the labor market does indeed still exist


Theories of Desired Income Distribution

• The productivity standard– “To each according to what she or he produces”• Also called the contributive standard, or referred to as the merit standard

• Equality—the egalitarian principle– “To each exactly the same”


Poverty and Attempts to Eliminate It

• Throughout history mass poverty has been accepted as inevitable

• Sustained economic growth has wiped out mass poverty in many countries

• How can there be so much poverty in a nation of such abundance?


Figure 30-5 The Official Poverty Rate in the United States


Poverty and Attempts to Eliminate It (cont'd)

• Defining poverty

– Official poverty level in 2011 for an urban family of four around $22,000• Adjusted based on CPI

• Does not include cash and non-cash transfer payments

• Absolute poverty not the same as relative poverty

– In a relative sense, poverty will always exist even if absolute poverty eliminated



• The official poverty level is based on pretax income but not in-kind subsidies, like food stamps– If we include such benefits, the percentage of people living below the poverty line drops dramatically

– Some of the nation’s official poor do not report all income

– Some of the nation’s official poor benefit from owning their own home


Figure 30-6 Relative Poverty: Comparing Household Income and Household Spending



• Attacks on poverty: major income maintenance programs

– Social Security which has been called OASDI

– 90% of all employed persons covered

– In 2007, 49 million people received checks averaging $960 a month



• Supplemental Security Income (SSI)

– Minimum income for the

• Aged

• Blind

• Disabled



• Temporary Assistance to Needy Families (TANF)

– State administered program financed in part by federal grants

– The program provides aid to families in need.



• Food stamps

– Government-issued coupons (or e-debit cards) that can be used to purchase food

– In 1964, some 367,000 Americans received food stamps

– In 2009, one in nine citizens received food stamps



• Earned Income Tax Credit Program (EITC)

– Designed to provide rebates to low-income workers

– Each year federal government grants $43 billion in benefits

– Over one-fifth of all tax returns claim an EITC



• No apparent reduction in poverty rates

– 1973: 11%

– 1983: 15%

– 1997: 12%

– Since then >14%


Health Care

• Health care is intimately related to the distribution of income and poverty


Health Care (cont'd)

• The U.S. health care situation

– Portion of national income spent on health care has risen steadily since 1965

• 16% of U.S. real GDP is devoted to spending on health care

• Per capita spending greater than anywhere else in the world


Figure 30-7 Percentage of Total National Income Spent on Health Care in the United States



• Question – Why have health care costs risen so much?

• Answers – The age-health care expenditure equation

– New technologies

– Third-party financing



• Third Parties

– Parties who are not directly involved in a given activity or transaction

– Fees may be paid by third parties (insurance companies, government)


Figure 30-8 Third-Party versus Out-of-Pocket Health Care Payments



• Price, quantity demanded, and the question of moral hazard

– Large percent of medical services payments made by third parties

– Price to the consumer drops and the quantity demanded increases

– An individual with a zero deductible may engage in a less healthful lifestyle


Figure 30-9 The Demand for Health Care Services

At P1 quantitydemanded is Q1

If the price falls to zero, quantity demanded increases to Q2



• Moral hazard as it affects physicians and hospitals

– Due to third-party payments, patients do not have to worry about the cost of operations and medical procedures

– Physicians and hospitals order more of them since they are reimbursed on the basis of medical procedures



• Medicare expenditures are one of the most serious problems facing the federal government today

• The number of beneficiaries has increased from 19.1 million in 1966 to more than 40 million in 2011

• Federal spending on Medicare has increased about 10% a year, adjusted for inflation


Figure 30-10 Federal Medicare Spending



• Is national health insurance the answer?

– Over 40 million Americans are uninsured at some point during the year

– Federal spending might increase from $60 to $100 billion



• In March 2010, President Barack Obama signed a law that will govern the future operation of U.S. health care markets

• As shown in Table 30-2, the key features:

– Government health insurance mandates

– Government health care subsidies

– Government health insurance exchanges

– Regulations and taxes


Table 30-2 Key Components of the Federal Government’s National Health Care Program



• Health Insurance Exchanges– Government agencies to which the national health care program assigns the task of assisting individuals, families, and small businesses in identifying health insurance policies to purchase


Why Not … have all physicians work for the federal government?

• One difficulty is that the government would have to determine what the equilibrium payments to physicians in various specializations otherwise would be in a private market.

• Too low the payments would result in physician shortages in delivering the care promised by the national health care program.



• Economic effects of the national health care program– Higher health care spending and a worsened moral hazard problem

– Because the price people actually pay out of their own pockets to consume health care services will decline, the quantity of health care services demanded will increase

– Because health insurers will be required to cover this expanded quantity demanded of services, total expenditures on health care will increase

– Because people will pay a smaller portion of the actual cost of treating health problems, more individuals will have reduced incentives to make decisions that promote better health.



• Economic effects of the national health care program (cont’d)– Impacts on the rest of the U.S. economy

– Labor market: The effective wage rate will increase as firms are now required to provide health insurance

– Market for goods and services: The increase in labor costs that firms incur will raise their marginal costs and thus their output prices

– Government budgets: The federal government ultimately will have to search for ways to reduce its health care expenditures and to raise more tax revenues to fund the program


International Example: The U.S. Health Care Program’s Benefits for Indian Workers

• Among the increasing number of U.S. firms that outsource labor are health insurers, most of which hire workers in India to perform a variety of record-keeping tasks.

• The new health care law has imposed many new record-keeping requirements on health insurers.

• Thus, implementation of the new U.S. health care program has increased demand for outsourced Indian labor.


You Are There: In Massachusetts, Public Health Care Means Price Controls

• The governor of Massachusetts responds to the rising costs of its state health care program, in which everyone is charged nearly the same premiums, by giving the state health care regulator the power to review the prices charged by physicians and hospitals.

• If the regulator determines that current prices are too high, then the state government will establish ceilings on health care prices.


Issues & Applications: Is Your College Degree Worth $1 Million?

• The $1 million lifetime income differential claimed is the annual income boost of $26,000 from attending college, multiplied by 40 years.

• Table 30-3 shows that the average lifetime earnings drop to $711,243 if the discounted present value of $1 million is computed at an annual interest rate of just 2 percent.

• The net income gain should also include explicit expenses ($18,000 annually) and the opportunity cost ($32,000 annually) of attending college for four years.


Table 30-3 Estimated Lifetime Income Gains from Obtaining a College Degree


Summary Discussion of Learning Objectives

• Using a Lorenz curve to represent a nation’s income distribution– The more bowed a Lorenz curve, the more unequally income is distributed

• Key determinants of income differences across individuals– Age

– Marginal productivity differences

– Discrimination


Summary Discussion of Learning Objectives (cont'd)

• Theories of desired income distribution– Productivity standard

– Egalitarian principle

• Alternative approaches to measuring and addressing poverty– Absolute poverty standard

– Relative poverty standard



• Major reasons for rising health care costs

– Aging U.S. population

– Higher priced medical technologies

– Third-party financing of health care expenditures

– Moral hazard



• Economic effects of the national health care program– Higher health care spending and a worsened moral hazard problem

– Impacts on the rest of the U.S. economy– Labor market– Market for goods and services– Government budgets

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Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 30 Income, Poverty, and Health Care