No Such Thing as a Free Lunch: Principles of Economics (Part 82)

“As technology accumulates and people in more parts of the planet become interdependent, the hatred between them tends to decrease, for the simple reason that you can't kill someone and trade with him too.”

― Steven Pinker, The Blank Slate: The Modern Denial of Human Nature

Income Distribution and Poverty (Part B)

By

Charles Lamson

The Distribution of Income

Despite the many problems with using income as a measure of well-being, it is useful to know something about how income is actually distributed. Before we examine these data, we should pin down precisely what the data represent.

Economic income is defined as the amount of money a household can spend during a given period without increasing or decreasing its net assets. Economic income includes anything that enhances your ability to spend---wages, salaries, dividends, interest received, proprietors' income, transfer payments, rents, and so forth. If you own an asset (such as a share of stock) that increases in value, that gain is part of your income, whether you sell the asset to "realize" the gain or not. Normally, we speak of "before-tax" income, with taxes considered a use of income.

Income Inequality in the United States

Transfer payments include Social Security benefits, unemployment compensation, and welfare payments, as well as an estimate of nonmonetary transfers from the government to households---food stamps and Medicaid and Medicare program benefits, for example. Transfers flow to low-income households, but not solely to them. Social Security benefits, for example, which account for about half of all transfer payments, flow to everyone who participated in the system for the requisite number of years and who has reached the required age, regardless of income. Nonetheless, transfers represent a much more important income component at the bottom of the distribution than at the top.

Differences between African-American Households, White Households, and Single-Person Households So far we have been looking at income distribution among all families. Looking just at families without differentiating them in any way hides some needed distinctions. First, income distribution differs significantly between African-American and Hispanic families and white families. Second, many people do not belong to a family---they may be unmarried living alone or they may be part of a group of unrelated people living together.

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 335-338*

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