20.2. The Political philosophy of Redistributing Income
Political philosophy shapes economics, three main branches of it are utilitarianism, liberalism and libertarianism.
There are many philosophies on public policies. Three are presented here, but there are more.
Utilitarianism
J. Bentham and J. S. Mill pioneered utilitarianism in the 19th century. The idea rests on the concept of utility, which is basically happiness and satisfaction. Everyone’s utility should be maximized by government policy. According to these philosophers there is a diminishing marginal utility, meaning that an additional unit of anything including income decreases the more of it you have. For example an extra 100 dollars to a poor person may mean better nutrition, which is very important, while to a rich person it may mean a bottle of wine. However utilitarian’s are not for complete equalization of income because they are aware that this would destroy any kind of monetary
incentives for people to work hard and better society.
Liberalism
The idea of liberalism is largely accredited to the late 20th century philosopher Rawls, which stated that public policy should be just. Justice should be decided without bias and being as objective as possible. As if before being born and unaware of the social class that we would be born into, we would decide what is socially just. Since people are risk averse no one would want to be poor and in destitute that is why everyone would want to follow the principle of maxim in criterion, which states that the person
worse-off in society should be take care of the most. Rawls does not forget about
incentives and does not advocate total equality of income, but says that there should be social insurance and a benefits system, which would take care of the worse-off.
Libertarianism
Libertarians criticize both utilitarianism and liberalism, because they believe that society has no income to redistribute, only individuals earn income. Hence libertarians
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20.3. Policies to Reduce Poverty
Four methods of public policy to alleviate poverty are: minimum wage laws, welfare, negative taxation and in-kind transfers.
Poverty is an ever-present issue for every government. Not only because of the human suffering has it caused, but also because it is very complex and extremely difficult, if at all possible, to solve. There are several methods that governments all around the world use to tackle and alleviate poverty.
Minimum-wage laws
A minimum wage law is like a price floor on labour. It prevents companies from
exploiting the poor and makes them legally obliged to pay a certain wage. If this wage is below the equilibrium free market wage then it simply has no effect, however, if it is higher than equilibrium it has an effect on the market. If the wage is higher than the equilibrium by a significant amount and if the demand for labour is elastic then high unemployment may be a result of minimum wage laws. This effect can be considered negative and that is why some political figures and some economists oppose it.
However some argue that the demand for unskilled labour is inelastic and therefore minimum wage laws do not cause unemployment.
Welfare
Welfare is a broad term for various government programs to supplement the income of the needy. Normally to receive welfare a person not only has to have low income, but also some additional need such as a disability or small children with no other parent to take care of them. In the US a large proportion of welfare recipients are poor single mothers. There also is some indication, although highly debatable, that increases in welfare increase the number of single mothers, which makes some argue that welfare actually motivates people to become needy such as divorce and become a single parent.
On the other hand it is difficult to imagine that someone would be somehow motivated to choose such an already difficult existence as being a poor single parent.
Negative income tax
Everybody has to pay a tax on their income, but some cannot afford to and need a supplement to their income in order to have a decent standard of living. One measure of solving this problem is a negative income tax. Everybody pays a certain percentage of their income to the government, let’s say a person owes the government 1/3(income)
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– 10,000$. A person who earns 60,000% will have to pay 10,000$ in tax; one, who earns 90,000$, will pay 20,000$; an earner of 30,000$ a year will pay nothing and a family that earns only 15,000$ a year will owe the government -5000$ or in other words the government will pay them 5000$ a year. It is good that this depends only on the level of income and no other needs, since it does not give any perverse incentives in that regard, however, some argue that this means that the government will also pay simply lazy people and discourage work.
In-kind transfers
These are supplements to the poor that are done not in money, but in things that the poor need the most. For example, low-income people can get food stamps from the government, which they can exchange for food in supermarkets. Proponents of these kinds of programs say that this way the poor get what they need most and the problem of drug and alcohol addiction is low-income communities is avoided. However, others say that this is disrespectful and inefficient; because the government cannot possibly know what each individual actually needs the most.
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