Income Distribution


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Definitions and Basics

    Distribution of Income, from the Concise Encyclopedia of Economics
    The distribution of income is central to one of the most enduring issues in political economics. On one extreme are those who argue that all incomes should be the same, or as nearly so as possible, and that a principal function of government should be to redistribute income from the haves to the have-nots. On the other extreme are those who argue that any income redistribution by government is bad....

    A statistical summary of U.S. family income distribution since World War II shows the following:
    • 1. The U.S. family income distribution is highly unequal.
    • 2. The degree of income inequality is not much greater today than it was at the end of World War II.
    • 3. Family income inequality declined slowly from 1946 through 1969, increased slowly from 1970 through 1979, and has increased somewhat faster since then....
    Redistribution of Income, from the Concise Encyclopedia of Economics
    Since the Great Depression most Americans have agreed that a principal responsibility of government is to redistribute income from the well-to-do to the impoverished and to those who are temporarily disadvantaged, most notably the unemployed. While many people complain about waste, fraud, and abuse in government income-transfer programs, or about the extent of income redistribution, few dispute the proposition that some level of redistribution is needed. Over the last twenty years, however, many economists—including some on the political left—have raised serious questions about the effectiveness of current transfer programs in helping the poor. While government policies do redistribute enormous amounts of money each year, the actual benefits to the poor may be much smaller than people presume....

In the News and Examples

    Thomas Sowell on Economic Facts and Fallacies. Podcast on EconTalk, February 25, 2008.
    Thomas Sowell of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the ideas in his new book, Economic Facts and Fallacies. He discusses the misleading nature of measured income inequality, CEO pay, why nations grow or stay poor, the role of intellectuals and experts in designing public policy, and immigration....
    William Bernstein on Inequality. Podcast on EconTalk, October 6, 2008.
    Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature....
    Richard Epstein on Happiness, Inequality, and Envy. Podcast on EconTalk, November 3, 2008.
    Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature....
    Ugly Betty and the telenovela's depiction of how to get rich: Global Soap: Poverty Bears a Woman's Face, by Ibsen Martinez. Econlib, November 7, 2005.
    Strikingly, the telenovela only rarely tells the tale of how a family business is founded and becomes prosperous. The family fortune is already there when the story begins. The soap opera limits itself to narrating how someone recoups a stolen inheritance. Invariably, that someone is a woman.

    The focus on legacies underscores the central role of the rights of succession in nearly all of Latin America, where it is seen both in fiction and in real life as the way to get rich. Perhaps because of that, the question asked in the most successful telenovelas isn't, "Who shot the woman?," but, "Who is the woman's real father?" Of equal importance: "Will she able to prove it?"...
    Poverty in the United States, from the Concise Encyclopedia of Economics
    Poverty is one of America's most persistent and serious problems. The United States produces more per capita than any other industrialized country, and in recent years has devoted more than $500 billion per year, or about 12 percent of its gross national product, to public assistance and social insurance programs like Social Security, Medicare, Aid to Families with Dependent Children (AFDC), food stamps, and Medicaid....
    Why not just take all the money away from the wealthy? The Rich and the Poor: A Fairy Tale, by Jane Haldimand Marcet in John Hopkins's Notions on Political Economy. 1831.
    In the time of the Fairies, things went on no better than they do at present. John Hopkins, a poor labourer, who had a large family of children to support upon very scanty wages, applied to a Fairy for assistance. "Here am I half starving," said he, "while my landlord rides about in a fine carriage; his children are pampered with the most dainty fare, and even his servants are bedizened with gaudy liveries: in a word, rich men, by their extravagance, deprive us poor men of bread. In order to gratify them with luxuries, we are debarred almost the necessaries of life."...

A Little History: Primary Sources and References

    Politics and Welfare: The Political Economy of the English Poor Laws, by George Boyer on Econlib.
    Economists and even some politicians are skeptical of the need for agricultural subsidies in America. Yet just this past year, Congress increased such subsidies dramatically. The persistence of agricultural subsidies often is attributed to the political power of farmers. When every state gets two senators, those from farm states get clout out of proportion to the population they represent.

    The political power of farmers also helps explain a political economy puzzle of the early nineteenth century. Between 1780 and 1820, aid to the poor in England more than doubled. No other western European country experienced such a rapid increase in relief spending. As a result, poor relief expenditures as a share of national product were significantly higher in England than elsewhere in western Europe from 1795 to 1834. How and why this increase in spending occurred largely is a political story—a story of how farmers used the Poor Law to reduce their labor costs, by substituting relief benefits for wage payments. The increase in relief expenditures helped subsidize farmers at the expense of non-farming taxpayers. By the second decade of the nineteenth century relief spending was so high that it alarmed the British public...
    The Economics of Welfare, by Arthur Pigou.

Advanced Resources

    Humorous essay. 0-sum games like income redistribution are more exciting than economic fundamentals like the gains from trade. Why is Economics So Boring?, by Donald Cox. Econlib, November 7, 2005.
    Stan: Ollie, you know the worst part about being an economist? You meet someone at a cocktail party, you tell them you teach economics.

    Ollie: ...and they say "Oh, yeah, I took that in college. I hated it. It was sooo boring!"...

    ... getting the credit for Equation 14 is a zero sum game. And we care about zero sum games. There's drama. There's tension. There's a loser for every winner. It makes for good TV, doesn't it? But it's not very common in reality. What common in reality is both sides are better off. The buyer and the seller of the car in the ad. That's reality. No violence, no theft. Boring balloons. Boring happy people. Economics is boring....
    Income distribution over time is mismeasured because of positional goods: Economic Growth and True Inequality (Part 1) and Irreducible Inequality (Part 2), John V.C. Nye. Econlib, January 28, 2002 and April 1, 2002.
    Studies of income inequality focus on the widening gap between the have-a-littles and the have-a-lot-mores. Many are sure that whatever gains in progress may have come were disproportionately enjoyed by the wealthiest and most economically successful groups.... [from Part 1]

    Our understanding of the rich and the poor has been skewed by what we choose to measure, and not realizing how different are the classes of goods that the rich and poor consume.... [from Part 1]

    First, consider what are known as positional goods. As first elaborated by the economist Fred Hirsch, positional goods are those products and services which are inherently impossible to mass produce because their value is mostly, if not exclusively, a function of their relative desirability. Consider a simple ranking of the best restaurants. Assume for simplicity that the best restaurants are the most fashionable and most desirable eateries. However good the general run of restaurants are, the most favored top shops are still better, more desirable, and more exclusive than the others.... [from Part 2]
    The Distribution of Wealth, by John Bates Clark
    For practical men, and hence for students, supreme importance attaches to one economic problem—that of the distribution of wealth among different claimants. Is there a natural law according to which the income of society is divided into wages, interest and profits? If so, what is that law? This is the problem which demands solution....
    Capital, Interest, and Rent: Essays in the Theory of Distribution, by Frank Fetter

    Risk, Uncertainty, and Profit, by Frank H. Knight

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