Inequality, Poverty, and Redistribution Study Notes

This class:
- Describe the extent of economic inequality in the US (income and wealth).
- Analyze how inequality has changed over time.
- Discuss economic mobility across generations (intergenerational mobility).
- Assess the prevalence and implications of poverty.
Next class:
- Discuss why the government should intervene (market failures and redistribution).
- Explore the costs and benefits of intervention.

Question from Kuziemko, Norton, Saez, Stantcheva (2015):
- What percentage of households earned less than $25,000$ a year in 2014?
- Options:
  - A) 17%
  - B) 24%
  - C) 39%
  - D) 47% (Correct Answer: Approximately 24% to 25% depending on specific census year definitions).

Statistics from Realtime Inequality:
- What is the average pretax household income of the top 1% in the U.S.?
- Options:
  - A) $340,000$
  - B) $760,000$
  - C) $915,000$
  - D) $2.7$ Million (Correct Answer: Contemporary data shows the top 1% average is roughly $2.7M per household).

U.S. 2023 Household Income Percentiles:
- Bottom 50%: Earns $25,100$ /year per household (average).
- Middle 40%: Earns $116,000$ /year per household (average).
- Top 10-1%: Earns $384,500$ /year per household (average).
- Top 1%: Earns $2.7$ Million/year per household (average).

Income Distribution by Tiers:
- Top 1 Percent: Average income is approximately $2.7$ Million (Notes previously mentioned $43$ Million, which often refers to specific ultra-high net worth subsets or total group shares).
- 96th to 99th Percentiles: Approximately $500,000$ - $600,000$ .
- 91st to 95th Percentiles: Approximately $300,000$ .
- Highest Quintile: Households earning above $150,000$ , with an average around $300,000$ .
- Fourth Quintile: Average income of approx. $120,000$ .
- Middle Quintile: Average income of approx. $75,000$ .
- Second Quintile: Average income of approx. $40,000$ .
- Lowest Quintile: Average income of approx. $15,000$ .

Pen’s Parade:
- An representation of income distribution where household "height" is proportional to income.
- In a 60-minute parade, the average height is not reached until after the 40th minute.
- For the first 10 minutes, "marchers" are mere inches tall (negative or zero income).
- In the final seconds, giants (the top 1% and 0.1%) appear, with heights reaching kilometers into the sky.
The Lorenz Curve:
- Plots the cumulative share of total income received against the cumulative share of recipients.
- A 45-degree line represents perfect equality.

Income: A flow of money received over a period (e.g., salary, interest).
Wealth: A stock of assets (house, stocks, savings) minus liabilities (debt).
Key Observation: Wealth inequality is significantly more concentrated than income inequality in the U.S.
- The top 1% of households hold approximately 30-35% of total U.S. wealth.
- The bottom 50% hold approximately 2-3% of total U.S. wealth.

Intergenerational Mobility: The degree to which an individual's socio-economic status depends on their parents' status.
- Intergenerational Elasticity (IGE): A measure where $0$ indicates perfect mobility and $1$ indicates no mobility. The U.S. has an IGE of roughly $0.4$ to $0.5$ .
- The Great Gatsby Curve: Illustrates the relationship between high income inequality and low social mobility.

Poverty Threshold: The "poverty line" is set by the government based on the cost of a minimum food diet multiplied by three (adjusted for inflation).
Relative vs. Absolute Poverty:
- Absolute Poverty: Lacking basic necessities (food, water, shelter).
- Relative Poverty: Income significantly below the average of the surrounding society.
The Poverty Rate: Hovering around 11-13% in the U.S. over recent years, though influenced heavily by government transfers like the EITC (Earned Income Tax Credit).