1. Next Exam
!
Exam 6
Thursday December 26
!
Chapters 18, 19, 20 and 21

2. Microeconomics
Lecture 20
!
Income Inequality and
Poverty

3. The internet is
the most powerful
idea creation and
testing factory

4. Ideas Grow Faster than Population
Patents
Population
600
Ideas grow
exponentially
500
400
300
200
100
0
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011

5. The Power of Compounding
Rate/
Period
0
1
2
3
4
5
6
7
8
9
10
2%
1.00
1.02
1.04
1.06
1.08
1.10
1.13
1.15
1.17
1.20
1.22
5%
1.00
1.05
1.10
1.16
1.22
1.28
1.34
1.41
1.48
1.55
1.63
10%
1.00
1.10
1.21
1.33
1.46
1.61
1.77
1.95
2.14
2.36
2.59
25%
1.00
1.25
1.56
1.95
2.44
3.05
3.81
4.77
5.96
7.45
9.31
50%
1.00
1.50
2.25
3.38
5.06
7.59
11.39
17.09
25.63
38.44
57.67
100%
1.00
2.00
4.00
8.00
16.00
32.00
64.00
128.00 256.00 512.00 1,024.00

6. The Power of Compounding
1200
Rate/
Period
2
3
4
5
6
7
8
9
10
1.00
1.02
1.04
1.06
1.08
1.10
1.13
1.15
1.17
1.20
1.22
5%
1.00
1.05
1.10
1.16
1.22
1.28
1.34
1.41
1.48
1.55
1.63
10%
1.00
1.10
1.21
1.33
1.46
1.61
1.77
1.95
2.14
2.36
2.59
25%
1.00
1.25
1.56
1.95
2.44
3.05
3.81
4.77
5.96
7.45
9.31
50%
1.00
1.50
2.25
3.38
5.06
7.59
11.39
17.09
25.63
38.44
57.67
100%
600
1
2%
900
0
1.00
2.00
4.00
8.00
16.00
32.00
64.00
128.00 256.00 512.00 1,024.00
300
0
0
1
2
3
4
5
6
7
8
9
10

7. Intellectual
Human
Entrepreneur
Culture
Financial
Physical

8. What capital was used
to create the iPhone?
Why wasn’t the iPhone
created in Syria?

11. Income is
unequal

12. Remember:
income must be
created before it can
be distributed or
redistributed

13. Earning Income
Who makes it
Distributing Income
Who gets it
!
!

14. Distributing Income
Earner distributes it
Redistributing Income
Government takes
from earner and
distributes
!
!

15. Fairness

16. Fairness is
not an
objectively
determined
concept
Milton Friedman
(1912 - 2006)

17. Fairness
Two
Definitions

18. Redistributive Fairness
It is fair to equalize
rewards.
Inequality is inherently
unfair.

19. Meritocratic Fairness
Fairness means matching
reward to merit.
!
Forced equality is
inherently unfair

20. The worst form of
inequality is to try to
make unequal things
equal.
!
– Aristotle

21. THE REAL QUESTION
is not whether fairness
matters
it does...
but which definition is
correct for public policy.

22. Quiz
1. What is Redistributive Fairness?
!
2. What is Meritocratic Fairness?

23. How you
slice the pie
Culture
determines
the size of
the pie
!

24. China
switched
the fairness
definition
in1989

25. Quintile
Line up by income
One-Fifth

26. Income Inequality by Quintile
Middle East North Africa (MENA)
50%
45%
45%
40%
Percent
of
Income
35%
30%
25%
Perfect Equality
20%
21%
15%
15%
10%
5%
0%
11%
8%
Bottom 20%
4th 20%
3rd 20%
2nd 20%
Top 20%

27. Poverty Line
A level of income set by the
government below which is
deemed to be in poverty

28. Poverty Rate
The percentage of the
population living below the
poverty line

29. Percent Below
Poverty Line
Egypt
20
Gaza
70
Iran
18
Iraq
25
Jordan
14
Syria
12
UAE
19
Yemen
45

30. The Income Lifecycle
Peak at 50
Earning
Varies
+
$0
Born
Level
Spending
Go to Work
Retire
Age
Die

31. Unadjusted
Income
Consumption Gap
Top 20%
to Bottom 20%
15 x
After Taxes
14 x
Consumption
4x
Household Size
2x

32. What percent of
millionaires inherited their
wealth?
20% Inherited
80% Earned

33. What would you rather
be?
Rich in poor country
or
Poor in a rich country

34. Who is richer?

38. Price Drop since 1953 - 90 Percent

41. Price Drop since 1953 - 90 Percent

43. Contact Lenses
1971 95 hours
1997
4 hours
- 96%

44. 1954
30,000 SAR
2013
3,000 SAR

48. 2013 vs. 1953
Cell Phone
Internet
Air Conditioner
Jet Travel
Medicine
Entertainment
Car
Housing
Food
Opportunities

49. Your
Income
Average
Income
A
100,000
100,000
B
200,000
300,000
C
50,000
25,000
Absolute or Relative?

50. What should the
government do about
income inequality?

51. Government can make
income more equal
Distorts incentives
Alters behavior
Less efficient allocation

52. How much inequality?
What can government do?
How to help the poor

53. Utilitarianism
the government
tries to maximize
total utility

54. Utility
a measure of
happiness or
satisfaction

55. If you take from the
rich and give to the
poor
both have less
incentive to work

56. If you take 25% from
the A student and give
to the F student
both have less
incentive to study

57. Libertarianism
the government should
enforce contracts and
punish crimes but not
redistribute income

58. Libertarianism
the process is more
important than the
outcomes

59. Libertarianism
if the process is just
then the outcome is fair
regardless of the
inequality