Quiz 6: Us Poverty

Business

Income inequality is the difference in the income levels between different groups in a country. During recent times, the income inequality has increased in Country U.S. But some level of inequality is necessary for the economy to grow. That means, only when there is inequality in the economy, the individuals would have the incentive to grow and increase their productivity. Therefore, the income in Country U.S. should not be distributed equally. But currently, as the income inequality is increasing in country U.S., the incentives that the poorest individuals or category would have in increasing their productivity would be too low. The poorest individuals would have poor health and low educational qualifications. This would further contribute to their low productivities. This implies that the poorest individuals in the society may not always have the incentive to rise above. Therefore, there should be atleast more equality than Country U.S. presently has. Now, the advantages of greater equality are that it gives people the incentive to rise above, and the better nutritional and health status of the people contributes to their higher productivity. The better education status also helps the people by increasing their productivity. The disadvantages of greater equality are that the people may become satisfied with what they have, and not want to innovate and contribute to increasing their efficiencies. Greater equality can be achieved through making changes in nation's tax system and by doing some structural changes in economy of the country such as anti-discrimination policies, higher minimum wage, negative income tax, and other welfare schemes.

It is quite surprising to know that the United States has least equal income distribution of all the Western industrialized nations for which data are available. Some of the reasons for this are recession, poor labor productivity, structural changes in economy, demographic trends, budget cuts and personal factors like lack of adequate skills etc.

No, the official government definition of poverty is not an adequate one. Some economists argued that official poverty statistics do not exaggerate the actual extent of poverty in our country, but rather underestimate it. They argue that the concept of household income used to measure poverty ought to be after -tax income because this is the income that can actually be used by households for their personal needs. Some economists and politicians have argued that this indicator exaggerates the true extent of poverty in the country because it ignores the receipt of in-kind transfers. Because these benefits are ignored in calculating a family's money income, the family may be classified as officially poor, even though its actual well-being is enhanced by transfers such as food stamps and Medical health coverage. Another problem arises when adjusting the poverty line for inflation. Many economists believe that the Consumer Price Index, which is used to measure inflation, actually overstates the extent of inflation. In this case inflation adjustments would result in an artificially high poverty line and an overstatement of the extent of poverty.