Next Exam !

Exam 6 Thursday December 26

!

Chapters 18, 19, 20 and 21

Microeconomics Lecture 20

!

Income Inequality and Poverty

The internet is the most powerful idea creation and

testing factory

0

100

200

300

400

500

600

1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Patents Population

Ideas Grow Faster than Population

Ideas grow exponentially

Rate/Period 0 1 2 3 4 5 6 7 8 9 10

2% 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22

5% 1.00 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.63

10% 1.00 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59

25% 1.00 1.25 1.56 1.95 2.44 3.05 3.81 4.77 5.96 7.45 9.31

50% 1.00 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67

100% 1.00 2.00 4.00 8.00 16.00 32.00 64.00 128.00 256.00 512.00 1,024.00

The Power of Compounding

0

300

600

900

1200

0 1 2 3 4 5 6 7 8 9 10

Rate/Period

0 1 2 3 4 5 6 7 8 9 10

2% 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22

5% 1.00 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.63

10% 1.00 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59

25% 1.00 1.25 1.56 1.95 2.44 3.05 3.81 4.77 5.96 7.45 9.31

50% 1.00 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67

100% 1.00 2.00 4.00 8.00 16.00 32.00 64.00 128.00 256.00 512.00 1,024.00

The Power of Compounding

Intellectual

Financial Physical

Human

Culture

Entrepreneur

What capital was used to create the iPhone?

Why wasn’t the iPhone created in Syria?

Income is unequal

Remember: income must be

created before it can be distributed or

redistributed

Earning Income !

Distributing IncomeWho makes it

!

Who gets it

Distributing Income !

Redistributing IncomeEarner distributes it

!

Government takes from earner and

distributes

Fairness

Milton Friedman (1912 - 2006)

Fairness is not an

objectively determined

concept

Fairness

Two Definitions

Redistributive Fairness

It is fair to equalize rewards.

Inequality is inherently

unfair.

Meritocratic Fairness

Fairness means matching reward to merit.

!

Forced equality is inherently unfair

The worst form of inequality is to try to make unequal things

equal. !

– Aristotle

THE REAL QUESTION is not whether fairness

mattersit does...

but which definition is correct for public policy.

Quiz1. What is Redistributive Fairness? !

2. What is Meritocratic Fairness?

How you slice the pie

!

determines the size of

the pie

Culture

China switched

the fairness definition in1989

QuintileLine up by income

One-Fifth

Perfect Equality

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Bottom 20% 4th 20% 3rd 20% 2nd 20% Top 20%

45%

21%

15%

11%8%

Income Inequality by Quintile Middle East North Africa (MENA)

Percent of

Income

Poverty LineA level of income set by the government below which is deemed to be in poverty

Poverty RateThe percentage of the

population living below the poverty line

Percent Below Poverty Line

Egypt 20

Gaza 70

Iran 18

Iraq 25

Jordan 14

Syria 12

UAE 19

Yemen 45

$0

Age

The Income Lifecycle

Born Die

Go to Work

Peak at 50

Retire-

+

Level Spending

Earning Varies

Consumption Gap Top 20%

to Bottom 20%Unadjusted

Income 15 x

After Taxes 14 x

Consumption 4 x

Household Size 2 x

What percent of millionaires inherited their

wealth?20% Inherited

80% Earned

What would you rather be?

Rich in poor country or

Poor in a rich country

Who is richer?

Price Drop since 1953 - 90 Percent

Price Drop since 1953 - 90 Percent

Contact Lenses

1971 95 hours

1997 4 hours

- 96%

1954

30,000 SAR2013

3,000 SAR

Cell Phone Internet Air Conditioner Jet Travel Medicine

2013 vs. 1953Entertainment Car Housing Food Opportunities

Your Income

Average Income

A 100,000 100,000

B 200,000 300,000

C 50,000 25,000

Absolute or Relative?

What should the government do about

income inequality?

Government can make income more equal

Distorts incentives Alters behavior

Less efficient allocation

How much inequality?

What can government do?

How to help the poor

Utilitarianismthe government

tries to maximize total utility

Utilitya measure of happiness or satisfaction

If you take from the rich and give to the

poorboth have less

incentive to work

If you take 25% from the A student and give

to the F student

both have less incentive to study

Libertarianismthe government should enforce contracts and punish crimes but not redistribute income

Libertarianismthe process is more important than the

outcomes

Libertarianismif the process is just

then the outcome is fair regardless of the

inequality