Samuelson's book Summary Chapter 19

Chapter 19 Summary

A. The Sources of Inequality 1. In the last century, the classical economists believed that inequality was a universal constant, unchangeable by public policy. This view does not stand up to scrutiny. Poverty made a glacial retreat over the early part of this century, and absolute incomes for those in the bottom part of the income distribution rose sharply. Since the early 1970s, this trend has reversed, and inequality has increased. 2. The Lorenz curve is a convenient device for measuring the spreads or inequalities of income distribution. It shows what percentage of total income goes to the poorest 1 percent of the population, to the poorest 10 percent, to the poorest 95 percent, and so forth. 3. Poverty is essentially a relative notion. In the United States, poverty was defined in terms of the adequacy of incomes in the early 1960s. By this standard of measured income, little progress in reducing inequality has been made in the last decade. 4. The distribution of American income today appears to be less unequal than in the early part of this century or than in less developed countries now. But it still shows a considerable measure of inequality and increasing inequality over the last quarter-century. Wealth is even more unequally distributed than is income, both in the United States and in other capitalist economies. 5. To explain the inequality in income distribution, we can look separately at labor income and property income. Labor earnings vary because of differences in abilities and in intensities of work (both hours and effort) and because occupational earnings differ, due to divergent amounts of human capital, among other factors. 6. Property incomes are more unevenly distributed than labor earnings, largely because of the great disparities in wealth. Inheritance helps the children of the wealthy begin ahead of the average person; only a small fraction of America's wealth can be accounted for by life_cycle savings. B. Antipoverty Policies 7. Political philosophers write of three types of equality: (a) equality of political rights, such as the right to vote; (b) equality of opportunity, providing equal access to jobs, education, and other social systems; and (c) equality of outcome, whereby people are guaranteed equal incomes or consumptions. Whereas the first two types of equality are increasingly accepted in most advanced democracies like the United States, equality of outcome is generally rejected as impractical and too harmful to economic efficiency. 8. Equality has costs as well as benefits; the costs show up as drains from Okun's "leaky bucket." That is, attempts to reduce income inequality by progressive taxation or transfer payments may harm economic incentives to work or save and may thereby reduce the size of national output. Potential leakages are administrative costs and reduced hours of work or savings rates. 9. Major programs to alleviate poverty are welfare payments, food stamps, Medicaid, and a group of smaller or less targeted programs. As a whole, these programs are criticized because they impose high benefit-reduction rates (or marginal "tax" rates) on low-income families when families begin to earn wages or other income. 10. People are divided on how to improve the current income-support system. One proposal, called the negative income tax, would consolidate current programs into a unified cash income supplement. The supplement would be reduced (that is, income would be "taxed") at a moderate rate (say, one-third or one-half), so that low-income families would have a significant incentive to seek market employment. The United States has adopted a variant known as the earned-income tax credit, which provides a wage supplement to families with low earnings. C. Health Care: The Problem That Won't Go Away 11. Health care is one of the largest and most rapidly growing sectors of the economy. It is characterized by multiple market failures that lead governments to intervene heavily. Health systems have major externalities, which include preventing communicable diseases and discovering new biomedical knowledge. In addition, there are market failures such as the asymmetric information between doctors and patients and between patients and insurance companies. These asymmetries lead to adverse selection in the purchase of insurance and to moral hazard (or the third-party payment syndrome) in excessive consumption of medical services. Finally, because health is so important to human welfare and to labor productivity, governments strive to provide a minimum standard of health care to the population. 12. Dissatisfaction with the health-care system - over rising costs, a growing number of uninsured, and lagging health status, particularly of poor and minority groups - has prompted proposals for reform. Few advocate returning to a pure-market system because of hardships on the poor and adverse effects on public health and on the generation of new biomedical knowledge. A nationalized system would provide universal coverage but ration health care by long waits for services. The predominant organization of the private health system in the United States today is managed care; this system provides a package of benefits for workers or those who can afford to buy care, but the provider limits access to curb costs.