Chapter 18

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Welfare state collection of government programs that are designed to alleviate economic hardship -large share of gov spending of all wealthy countries consists of gov. transfers payments by gov to individuals and families, that provide fin. Aid to the poor, assistance to unemployed workers, guaranteed income for elderly, assistance in paying med. Bills for those w large health care expenses.

3 major economic rationales for creation of welfare state. Alleviating Income Inequality o Based on the fact that marginal dollar is worth more to poor ppl than rich ppl; modest transfers from rich to poor will do the rich little harm, but benefit the poor a lot. o Poverty programs programs that are designed to aid the poor

Alleviating Economic Insecurity o Gov program that provides aid to families in distress, by taxing families that are having a good year. o Supposedly makes all families better off, bc each family will feel safer knowing that the gov stands ready to help when disaster strikes. o Social insurance programs designed to provide protection against unpredictable financial distress o Ability-to-pay principle people with low incomes, for whom an additional dollar makes a big difference to economic well being, should pay smaller fraction of their income in taxes than people with higher income whom an additional dollar makes much less difference.

Reducing Poverty and Providing Access to Health Care o o Social benefits of poverty reduction & access to health care Children from poor families are inclined to be unemployed, criminals, and impose social costs o Solution is to reduce poverty and provide access to health care liberal view: more govt intervention, conserv: less govt intervention

The Problem of Poverty Poverty threshold minimum annual income for which a family is poor Poverty rate percentage of population with incomes below poverty threshold o many of the poor are working poor: income falls below poverty threshold

What causes Poverty? o o o Education attainment has strong positive effect on income level Lack of proficiency in English is a barrier to high income racial/gender discrimination as well

luck counts too impoverished when wage-earner loses job or family member falls ill

Consequences of Poverty o Severe for children Associated w lack of access to health care Affordable housing is a problem, families must move a lot Children of poor start at such a disadvantage that its very hard for them to achieve a better life

Economic Inequality Americans live in poverty b/c income is unequally distributed Mean vs Median Household Income o o Household incomes are divided into quintiles Mean household income =avg household income, median = exact middle of income distribution o Median income is better guide to economic status of typical American families bc mean can deviate from wall streeters Gini Coefficient summarizes a countrys level of income inequality based on how unequally income is distributed across quintiles o Country w perfectly equal distr. Of income one in which bottom 20% of population received 20% of the income, etc. would have a Gini coefficient of 0 o High inequality = higher gini coefficient. Ex. Very equal income distro = 0.25, very high inequaliaty = 0.6. US =.41 Economic Insecurity o o Ex. Risk of a sudden loss of income, surge in expenses (medical) Most popular explanation for widening inequality is rapid tech change-> increases demand for other workers, leading to rise in wage gap between highly skilled and other workers. o Income inequality has increased substantially bc of increased inequality among highly educated workers.

18-2: The U.S Welfare State

U.S Welfare State

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Consists of Social Security, Medicare, and Medicaid, several other programs. Monetary Transfers Means-Tested Temporary assistance for Needy Families -22 bil Supplemental Security Income 44 bil Earned Income Tax Credit 55 bil Not-Means Tested Social security-707 bil Unemployment insurance-158b Medicare-519b In-Kind Food stamps-68bil Medicaid-273bil

Means-tested program- benefits are available only to families or individuals whose income and/or wealth falls below some minimum In-Kind benefit benefit given in the form of goods or services Not means-tested provide benefits to everyone Negative income tax program that supplements the income of low-income working families.

Social Security and Unemployment Insurance non-means tested program, guarantees retirement income to qualifying old people benefits are not strictly proportional to earnings; they are determined by formula that gives high earners more than low earners, w/ sliding scale that makes program relatively generous for low earners. 60% americans 65 and older rely on Social Security for more than half their income Unemployment insurance: provides workers who lose their jobs 35% of previous salary until they find new job for 26 weeks Effects of Welfare State on Poverty and Inequality Poverty rate w taxes and transfers < poverty rate w.out taxes and transfers for all ages.

18-3: Economics of Health Care

Economics of Health Care:

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Need for Health Insurance anyone can suddenly find themselves in need of expensive medical treatment beyond what they can afford. Private health insurance o Member of large pool in individuals agree to pay fixed amount annually(premium) into common fund that is managed by private company. o Benefit by reduction in risk o Problems w. market for private health insurance Medical expenses arent completely unpredictable Some ppl have some idea whether or not they are likely to face large medical bills = problem for private health insurance