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Chapter 18

12/2/2012 8:54:00 AM

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

would have a Gini coefficient of 0 o  High inequality = higher gini coefficient.6. very high inequaliaty = 0. etc. surge in expenses (medical) Most popular explanation for widening inequality is rapid tech change-> increases demand for other workers. Very equal income distro = 0. Risk of a sudden loss of income.25. US =. Ex. Of income – one in which bottom 20% of population received 20% of the 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 country’s level of income inequality based on how unequally income is distributed across quintiles o Country w perfectly equal distr. o Income inequality has increased substantially bc of increased inequality among highly educated workers. families must move a lot Children of poor start at such a disadvantage that it’s 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. leading to rise in wage gap between highly skilled and other workers.41 Economic Insecurity o o Ex.o  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. .

.   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. Medicare.S Welfare State U. 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. Social Security and Unemployment Insurance   non-means tested program. several other programs.18-2: The U. and Medicaid. they are determined by formula that gives high earners more than low earners. w/ sliding scale that makes program relatively generous for low earners.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.out taxes and transfers for all ages.S Welfare State  12/2/2012 8:54:00 AM Consists of Social Security. guarantees retirement income to qualifying old people benefits are not strictly proportional to earnings.

o Benefit by reduction in risk o Problems w.  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. market for private health insurance  Medical expenses aren’t completely unpredictable  Some ppl have some idea whether or not they are likely to face large medical bills = problem for private health insurance .18-3: Economics of Health Care Economics of Health Care: 12/2/2012 8:54:00 AM Need for Health Insurance  anyone can suddenly find themselves in need of expensive medical treatment beyond what they can afford.