SOLUTIONS TO SELF-CHECK QUESTIONS
14.1 Drawing the Poverty Line
- Poverty is an absolute measure of the standard of living of individuals, whereas inequality is a relative measure of the differences between individuals.
- Poverty falls, inequality rises.
- Poverty rises, inequality falls.
14.2 The Poverty Trap
- The poverty trap occurs when welfare payments are more generous than the payment a person would receive at an entry level or part-time job. In such a case, it is more financially rewarding not to work than to find and take a job.
- Welfare payments must be designed in such a way that they reduce gradually with income, so that there is still an incentive to take even a low-paying job.
14.3 The Safety Net
- The earned income tax credit works like this: a poor family receives a tax break that increases according to how much they work. Families that work more, get more. In that sense it loosens the poverty trap by encouraging work. But as families earn above the poverty level, the earned income tax credit is gradually reduced. For those near-poor families, the earned income tax credit is a partial disincentive to work.
- TANF attempts to loosen the poverty trap by providing incentives to work in other ways. Specifically, it requires that people work (or complete their education) as a condition of receiving TANF benefits, and it places a time limit on benefits.
14.4 Income Inequality: Measurement and Causes
- A forty-five degree line.
- Income inequality has increased since the 1970s.
14.5 Government Policies to Reduce Income Inequality
- Pure redistribution is more likely to cause a sharp trade-off between economic output and equality than policies aimed at the ladder of opportunity. A production possibility frontier showing a strict trade-off between economic output and equality will be downward sloping. A PPF showing that it is possible to increase equality, at least to some extent, while either increasing output or at least not diminishing it would have a PPF that first rises, perhaps has a flat area, and then falls.
- Many view the redistribution of income to achieve greater equality as taking away from the rich to pay the poor, or as a “zero sum” game. By taking taxes from one group of people and redistributing them to another, the tax system is robbing some of the American Dream.