ch07 - Chapter 7 Government Subsidies and Income Support...

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1 Chapter 7 Government Subsidies and Income Support for the Poor
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2 Poverty in 2001 33 million people in U.S. affected 12% of the population classified as poor
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3 Poverty in the United States Poverty threshold or poverty line in 2001 Family Structure Threshold ($ income annually) Single $9,214 One Adult-Two Children $14,269 Two Adults-Two Children $17,960
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4 Poverty line Poverty Line: originally created by the Social Security Administration as three times the cost of a nutritionally adequate diet Updated annually for inflation using the CPI
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5 Changing the Poverty Line New definition proposed during Clinton Administration would have included child care and other expenses and would have raised the threshold to almost $20,000. Such a change would have increased the poverty line in 1998 from 12.7% to 17%. Politics are involved in setting poverty thresholds because many government means-tested programs are tied to the definition of poverty .
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6 Poverty Rate 1960-2001
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7 Why We Have Government Programs to Aid the Poor Concern about e quity-efficiency trade- offs. Creates the p ositive externality of social stability.
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8 Equity-Efficiency Trade-offs Transfers to low-income persons can: decrease incentives to work. distort consumption patterns. This approach recognizes that the way the “pie ” is divided can ultimately affect its size.
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9 The Positive Externality: Social Stability Charity has characteristics of a public-good. It creates social stability that benefits everyone. Because of the free-rider problem, voluntary donations to the poor are likely to result in an undersupply of income redistribution to low-income groups relative to the efficient amount. Government action to redistribute income can establish uniform standards of eligibility for aid that reflect political compromise.
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10 Entitlement Programs : Government programs that guarantee recipients benefits as long as they meet eligibility tests Means Tests : typically income and wealth criteria that must be met for an individual or family to be eligible for a program Status Tests: typically disability, children, and age criteria that must be met for an individual or family to be eligible for a program. .
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Cash Programs TANF: Temporary Aid to Needy Families Program most identified with a welfare check; may provide for child-care expenses or job retraining SSI: Supplemental Security Income Program provides cash payments to the widowed, orphaned and disabled. EITC:
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This note was uploaded on 10/28/2011 for the course ECON 332 taught by Professor D.hyman during the Spring '11 term at American University of Beirut.

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ch07 - Chapter 7 Government Subsidies and Income Support...

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