Aggregate income in 2016 was $10,490 $10.490 million $10.490 billion $10.490 trillion none of these Question 2 (1 point) Aggregate income of the bottom 20% of the income distribution was 1.1% $115.45 billion $325.3 billion $4573.18 Gain(+)/loss(-) of income share 2nd quintile: 0-1.9 0-2.6 -1.8 +7.4 O none of these Question 4 (1 point) 1.1% of aggregate income in 2016 = $1.049 trillion $3.253 billion $115.45 billion $83105 none of these answers 20% of U.S. households in 2016 = 252,450 2,524,500 25,245,000 250,450,000 none of these answers Question 6 (1 point) Income lost by a household in the bottom 20% of the income distribution, on average = $4,573 $45,730 $9,977 $99,775 There's been a fair amount of talk about income inequality in the U.S. Or more to the point, talk about how inequality has been increasing. So has it? And to what extent? Determining this, and the causes behind it, would be an exercise in positive economics. Determining if this change should have been allowed to take place, if more inequality is a good or bad development, would be an application of normative economics. Here we're going to stick to positive economics, and we're not going to try to figure out why inequality has gone up or down. We just want to see if there's more or less inequality in the U.S. today than in the past. So, let's take a look at income shares to see what we can learn. We can take the income earned by every U.S. resident and add them all up. That's total or aggregate income. Then we can divide households up according to their incomes. Let's think that we put households on a "ladder" according to their incomes. We put the household with the lowest income on the bottom rung, the household with the next lowest income on the next rung, and so on, until we have every household on the ladder. The household with the highest income is on the top rung. Now let's put the 20% of the households at the bottom of the ladder into one group. The next 20% of households in a second group. The next 20% in a third group. The next 20% in a fourth group. The final 20% in a fifth group. After doing this, we have 5 groups with 20% of the households in the U.S. in each of these groups. These groupings are called income quintiles. OK, let's see what the average incomes of the members of these quintiles were in 2016: Bottom 20% 2nd 20% 3rd 20% 4th 20% Top 20% $12,943 $34,504 $59,149 $95,178 $213,941 Note that in 2016 there were 126,224,000 households in the U.S. Because each of these 5 groups have the same number of households in them (20% of the total number), we can figure out aggregate income by 1) averaging these five incomes and 2) multiplying that average by 126.224 million. Do that and put that number in 1) on the answer sheet. Note if you multiply using 126.224, the number you get is in millions of dollars. Keep that in mind when you're figuring total income. Putting 435,000 as the answer when the correct answer Note that in 2016 there were 126,224,000 households in the U.S. Because each of these 5 groups have the same number of households in them (20% of the total number), we can figure out aggregate income by 1) averaging these five incomes and 2) multiplying that average by 126.224 million. Do that and put that number in 1) on the answer sheet. Note if you multiply using 126.224, the number you get is in millions of dollars. Keep that in mind when you're figuring total income. Putting 435,000 as the answer when the correct answer is 435,000,000 means you did not put the right answer in. We can figure out the income share of each group by taking the total income of each group and dividing that by aggregate income. The U.S. Census does that and publishes the result. Here are the income shares of each of these income quintiles, in 1980 and 2016. Bottom 20% 2nd 20% 3rd 20% 4th 20% Top 20% share, % of agg. inc. 2016 3.1 8.3 14.2 22.9 51.5 share, % of agg. inc. 1980 4.2 10.2 16.8 24.7 44.1 For example, in 2016, households in the bottom 20% of the income distribution received 3.1% of aggregate income. How much was that? Put that amount in 2) on the answer sheet. For example, in 2016, households in the bottom 20% of the income distribution received 3.1% of aggregate income. How much was that? Put that amount in 2) on the answer sheet. In 3), put in the number of percentage points of income each quintile gained or lost from 1980 to 2016. I'll get you started. The bottom 20% lost 1.1% of total income (so you put - 1.1 under bottom 20%). In other words, that much of total income was paid to those households in 1980 but in 2016, that income went to households in other quintiles. Let's see what that means. First, figure what 1.1% of aggregate income was in 2016. Put that number in 4). Then figure out how many households are in a quintile (20% of households = .2 x total number of households) in 2016. Put that number in 5). Divide 5) into 4) and put that number in 6). There you have how much more income a household in the bottom 20% of the income distribution would have on average if the income distribution hadn't shifted. That is, if that group hadn't lost 1.1% of aggregate income. That's a fair amount of money for someone with an income like that. Look at how shares have changed and you see that every quintile lost share except for the top 20%! So if nothing else, you can certainly say that high income households have gained from the changes in the economy that have occurred since 1980 while low and middle income households have lost.. However, most of the income that has been redistributed from the bottom 80% of the income distribution to the top 20% went to the top 5% of the income distribution. In 1980, the top 5% of the income distribution received 16.5% of aggregate income and 22.5% in 2016. That's a 6 percentage point increase in share. The increase in the share of the top 20% was 7.4 percentage points. That means that only 1.4% of aggregate income was redistributed to households not in the top 5%. Are you curious as to how much a household in the top 5% earned in 2016? Yes? OK, the average income of a household in the top 5% of the income distribution was $375,088. Let's do one last calculation. Let's see how much more income households in the top 5% are receiving due to the change in the income distribution. Take 6% of aggregate income and divide that by 5% of households. Put that number in 7). Let's do one last calculation. Let's see how much more income households in the top 5% are receiving due to the change in the income distribution. Take 6% of aggregate income and divide that by 5% of households. Put that number in 7). All right, there are different ways of measuring inequality. One measure is the ratio of the income share of the top 20% to the income share of the bottom 20%. Calculate that ratio for 1980 and put that number in 8). Calculate that ratio for 2016 and put that number in 9). Conclusion: by that measure, inequality went up quite a bit. OK, now that we've established that by some criteria, inequality increased, let's think about the normative question here: should this have been allowed? In thinking about this, we're going to see that normative economists may be incapable of telling us whether a policy should or shouldn't be adopted. Let's think about what a change in the distribution of income means: some individuals get more income and some individuals get less. Well, it's safe to say that those individuals getting more income are better off from the change in how income is distributed while those getting less are worse off. Well, there is nothing in economics that enables us to determine if the welfare gains of one group are more (or less) important than the welfare losses of another group. And so the economist shrugs and says: I have no opinion on whether or not the change that took place is good for income are better off from the change in how income is distributed while those getting less are worse off. Well, there is nothing in economics that enables us to determine if the welfare gains of one grou are more (or less) important than the welfare losses of another group. And so the economist shrugs and says: I have no opinion on whether or not the change that took place is good for society or bad for society. This is not an economic question. It has to be answered using som discipline other than economics. But wait you say. Can't we apply the compensation principle? We can try, so let's. Here's the thought experiment we have to conduct. I'm going to give you a $100 bill. Will you give me a dollar bill in exchange? Of course. How about a fiver? Yes. A ten? Obviously. Let's cut to the chase. Will you give me $99 for that $100 bill? Again, the answer is yes. What we see is that a person's willingness to pay for a payment to them of X $ is X S. And so you should be able to see that a person's willingness to accept compensation for having X $ taken from them is X $. Thus, the aggregate benefit from Z $ of income given to group A is Z S. The aggregate cost of taking those Z $ from members of group B is Z $. This means that any transfer of this sort does not pass the benefit-cost test. Therefore, we cannot use the compensation principle to justify taking income from one group and giving it to another. In short, there is no economic basis for redistributing income. And this is true whether we are making cash transfers (taking money from one group and giving that money to members of another group, e.g. taxing the rich to give money to the poor) or in-kind transfers (taxing one group and using that money to give goods to members of another group, as is the case with programs like Medicaid, Housing Choice Vouchers, Supplemental Nutrition Assistance (SNAP cards), etc.). Here's one more problem. Let's say that "we" decide to give "food stamps" to a group of people. A person getting these "stamps" can only use them to buy food. Also, no one else can use them. So if you get them, you can't sell them to someone else. All you can do is buy food, stuff to eat.. No beverages with alcohol in them. In fact, no soda pop, or any drink with sugar or caffeine added. You can only buy certain snack items. You can buy pretzels and peanuts, but not potato shine ate erson's see that a person's willingness to accept compensation for having X $ taken from them is X S. Thus, the aggregate benefit from Z $ of income given to group A is Z S. The aggregate cost of taking those Z $ from members of group B is Z $. This means that any transfer of this sort does not pass the benefit-cost test. Therefore, we cannot use the compensation principle to justify taking income from one group and giving it to another. In short, there is no economic basis for redistributing income. And this is true whether we are making cash transfers (= taking money from one group and giving that money to members of another group, e.g. taxing the rich to give money to the poor) or in-kind transfers (taxing one group and using that money to give goods to members of another group, as is the case with programs like Medicaid, Housing Choice Vouchers, Supplemental Nutrition Assistance (SNAP cards), etc.). Here's one more problem. Let's say that "we" decide to give "food stamps" to a group of people. A person getting these "stamps" can only use them to buy food. Also, no one else can use them. So if you get them, you can't sell them to someone else. All you can do is buy food, stuff to eat. No beverages with alcohol in them. In fact, no soda pop, or any drink with sugar or caffeine added. You can only buy certain snack items. You can buy pretzels and peanuts, but not potato chips, etc. OK, Let me ask you this question: I give you the choice of $250 of food stamps each month, or $220 cash. Do you care which it is? If you have a preference, what is it for, the cash or the stamps? Suppose we have decided to give everyone in this group $250 of food stamps each month. And suppose our objective is to make these people better off than they would otherwise be. Now, before we initiate the program, we find that people in this group would choose $220 cash over $250 in food stamps. If this is the case, the economist would argue that the food stamp is less efficient than the cash payments. Why is that? Say there are 1,000,000 people who will be given stamps or cash. Those not in the group have to pay for those stamps or that cash that will be handed out. How much less will the cash transfer cost society? Put that number in 10). For 11) and 12) fill in the blanks