Mankiw's Principles of Microeconomics Chapter 20

The standard way of thinking about income inequality would have us believe that the rich get richer, and the poor get poorer, however that’s not always the case. In fact according to the US Bureau of the Census, in 1935 the top 5% of income earners were earning 26.5% of total income, in comparison to 1980 the top 5% of income earners were earning 15.3% of total income. During this time period the rich actually got poorer by 11%. If we ask ourselves where that money went, the data will show us that over the same time span, the bottom fifth of income earners earned 4.1% in 1935 and 5.2% in 1980. These data support the findings that income is redistributed through the establishment of government policies. Questions about equality across the pay scale can stir up quite a debate in today’s economic climate, but one thing we can all reach an agreement on is that some form of government assistance is necessary in our society in order to keep a civilized culture. The point at which a disagreement brews is when we ask the question of how much of a role the government should play in redistributing income.

There are several factors that influence the level of compensation for a worker, reasons such as the amount of human capital an employee brings to the table, their natural ability, what career field they decide to work in, and surprisingly discrimination plays a role in our compensation as well. Workers can also experience transitory shifts in income and because of this they may need additional support from those that are better off in our society. This is where the concept of income redistribution comes into play. 

The poverty rate is defined as the percentage of the population whose family income falls below an absolute level. In 2008, this income level was $22,025. Surprisingly, even though the average household income has continued to rise since 1970, the poverty rate has never dropped below the lowest rate it was at in 1973. These findings add weight to the argument that if the rate of inequality is on the rise, and the poverty line has remained relatively unchanged, it essentially disproves what we hear concerning the theories of trickle-down economics. In other words, just because the rich get richer doesn't mean that the poor get richer too. 

Nonetheless, poverty continues to be a difficult problem to solve. The solutions to poverty are not as simple as just allowing the government to freely reallocate resources as elected officials see fit. While the government can intervene, any form of intervention decreases efficiency in the marketplace, and the result is not always fair to all parties involved. Some of the policies and programs our government uses to reallocate resources are in-kind transfers such as food stamps, housing programs, and medical services. In this chapter, a question was posed about the 2 different views on in-kind transfers. On one side, advocates of the program will often argue that offering these benefits as opposed to cash payments is most beneficial. They believe that avoiding cash payments to the poor ensures that the money spent by the tax payers on these programs goes towards what it was intended for (food, housing, medical care). On the other side, advocates of cash payments believe that the poor should be given the choice to make their own decision on how the monetary value of these programs would be best spent. They believe that most poor people still retain the drive to succeed; as such the individual will spend the money in a manner that attempts to accelerate their economic mobility. 

Whichever side you choose to put your flag on, the ultimate goal of all government assistance programs is to create a utilitarian objective. For it is the assumption of society that all actions should create more happiness than pain, therefore as taxpayers we may all pay into a social insurance program that we may never use, however, the protection against the risks of an adverse event having a major impact on our wellbeing is at least partially averted; and that in and of itself leads to a happy productive society.