Principles of economics asarta butters 2nd edition

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ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics, The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition

PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Economics First Edition Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition Frank, Bernanke, Antonovics, and Heffetz Streamlined Editions: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, Macroeconomics Twenty-First Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition

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Issues in Economics Today

Eighth Edition

ROBERT C. GUELL Indiana State University

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ISSUES IN ECONOMICS TODAY, EIGHTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2015, 2012, and 2010. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

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Library of Congress Cataloging-in-Publication Data

Guell, Robert C., author. Issues in economics today/Robert C. Guell, Indiana State University. Eighth edition. | New York, NY : McGraw-Hill Education, [2018] LCCN 2017003633 | ISBN 9781259746390 (alk. paper) LCSH: Economics. LCC HB87 .G83 2018 | DDC 330—dc23 LC record available at https://lccn.loc.gov/2017003633

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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To Susan, Katie, Manny, Angel, Matt, and Lilly

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vi

About the Author Dr. Robert C. Guell (pronounced “Gill”) is a professor of economics at Indiana State University in Terre Haute, Indiana. He earned a B.A. in statistics and economics in 1986 and an M.S. in economics one year later from the University of Missouri–Columbia. In 1991, he earned a Ph.D. from Syracuse University, where he discovered the thrill of teaching. He has taught courses for freshmen, upper-division undergraduates, and graduate students from the principles level, through public finance, all the way to mathematical economics and econometrics.

Dr. Guell has published numerous peer-reviewed articles in scholarly journals. He has worked extensively in the area of pharmaceutical economics, suggesting that the private market’s patent system, while necessary for drug innovation, is unnecessary and inefficient for production.

In 1998, Dr. Guell was the youngest faculty member ever to have been given Indiana State University’s Caleb Mills Distinguished Teaching Award. His talent as a champion of quality teaching was recognized again in 2000 when he was named project manager for the Lilly Project to Transform the First-Year Experience, a Lilly Endowment–funded project to raise first-year persistence rates at Indiana State University. He was ISU’s Coordinator of First-Year Programs until January 2008, when he happily stepped aside to rejoin his depart- ment full time.

Dr. Guell’s passion for teaching economics led him to request an assignment with the larg- est impact. The one-semester general education basic economics course became the vehicle to express that passion. Unsatisfied with the books available for the course, he made it his calling to produce what you have before you today—an all-in-one readable issues-based text.

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vii

Brief Contents Preface xviii Issues for Different Course Themes xxviii Required Theory Table xxx

1 Economics: The Study of Opportunity Cost 1

2 Supply and Demand 19 3 The Concept of Elasticity and Consumer

and Producer Surplus 40 4 Firm Production, Cost, and Revenue 56 5 Perfect Competition, Monopoly, and

Economic versus Normal Profit 68 6 Every Macroeconomic Word You

Ever Heard: Gross Domestic Product, Inflation, Unemployment, Recession, and Depression 79

7 Interest Rates and Present Value 98 8 Aggregate Demand and Aggregate

Supply 107 9 Fiscal Policy 119 10 Monetary Policy 131 11 Federal Spending 145 12 Federal Deficits, Surpluses, and the

National Debt 155 13 The Housing Bubble 168 14 The Recession of 2007–2009: Causes

and Policy Responses 177 15 Is Economic Stagnation the

New Normal? 186 16 Is the (Fiscal) Sky Falling?: An

Examination of Unfunded Social Security, Medicare, and State and Local Pension Liabilities 193

17 International Trade: Does It Jeopardize American Jobs? 201

18 International Finance and Exchange Rates 213

19 European Debt Crisis 222 20 Economic Growth and Development 231 21 NAFTA, CAFTA, GATT, TPP, WTO:

Are Trade Agreements Good for Us? 238 22 The Line between Legal and Illegal

Goods 248 23 Natural Resources, the Environment,

and Climate Change 258 24 Health Care 271 25 Government-Provided Health Insurance:

Medicaid, Medicare, and the Children’s Health Insurance Program 283

26 The Economics of Prescription Drugs 296 27 So You Want to Be a Lawyer: Economics

and the Law 304 28 The Economics of Crime 310 29 Antitrust 319 30 The Economics of Race and Sex

Discrimination 327 31 Income and Wealth Inequality:

What’s Fair? 339 32 Farm Policy 349 33 Minimum Wage 358 34 Ticket Brokers and Ticket Scalping 366 35 Rent Control 373 36 The Economics of K–12 Education 379 37 College and University Education: Why Is

It So Expensive? 390

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viii Brief Contents

38 Poverty and Welfare 400 39 Head Start 411 40 Social Security 418 41 Personal Income Taxes 429 42 Energy Prices 440 43 If We Build It, Will They Come?

And Other Sports Questions 455 44 The Stock Market and Crashes 467

45 Unions 478 46 Walmart: Always Low Prices

(and Low Wages)—Always 488 47 The Economic Impact of Casino

and Sports Gambling 494 48 The Economics of Terrorism 499

Index 505

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ix

Table of Contents Preface xviii Issues for Different Course Themes xxviii Required Theory Table xxx

Chapter 1 Economics: The Study of Opportunity Cost 1 Economics and Opportunity Cost 1

Economics Defined 1 Choices Have Consequences 2

Modeling Opportunity Cost Using the Production Possibilities Frontier 2 The Intuition behind Our First Graph 2 The Starting Point for a Production Possibilities Frontier 3 Points between the Extremes of a Production

Possibilities Frontier 3 Attributes of the Production Possibilities Frontier 5

Increasing and Constant Opportunity Cost 5 Economic Growth 6

How Is Growth Modeled? 6 Sources of Economic Growth 7

The Big Picture 7 Circular Flow Model: A Model That Shows the

Interactions of All Economic Actors 8 Thinking Economically 8

Marginal Analysis 8 Positive and Normative Analysis 8 Economic Incentives 9 Fallacy of Composition 9 Correlation ≠ Causation 10

Kick It Up a Notch: Demonstrating Constant and Increasing Opportunity Cost on a Production Possibilities Frontier 10 Demonstrating Increasing Opportunity Cost 11 Demonstrating Constant Opportunity Cost 11

Summary 11

Appendix 1A Graphing: Yes, You Can. 15 Cartesian Coordinates 15 Please! Not Y = MX + B . . . Sorry. 16

What on God’s Green Earth Does This Have to Do with Economics? 18

Chapter 2 Supply and Demand 19 Supply and Demand Defined 20

Markets 20 Quantity Demanded and Quantity Supplied 20 Ceteris Paribus 22 Demand and Supply 22

The Supply and Demand Model 22 Demand 22 Supply 23 Equilibrium 24 Shortages and Surpluses 25

All about Demand 25 The Law of Demand 25 Why Does the Law of Demand Make Sense? 25

All about Supply 26 The Law of Supply 26 Why Does the Law of Supply Make Sense? 26

Determinants of Demand 27 Taste 28 Income 28 Price of Other Goods 28 Population of Potential Buyers 29 Expected Price 29 Excise Taxes 29 Subsidies 29 The Effect of Changes in the Determinants of Demand

on the Supply and Demand Model 29 Determinants of Supply 31

Price of Inputs 31 Technology 32 Price of Other Potential Outputs 32 Number of Sellers 32 Expected Price 32 Excise Taxes 33 Subsidies 33 The Effect of Changes in the Determinants of

Supply on the Supply and Demand Model 33 The Effect of Changes in Price Expectations on the

Supply and Demand Model 35

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Kick It Up a Notch: Why the New Equilibrium? 35 Summary 37

Chapter 3 The Concept of Elasticity and Consumer and Producer Surplus 40 Elasticity of Demand 41

Intuition 41 Definition of Elasticity and Its Formula 41 Elasticity Labels 42

Alternative Ways to Understand Elasticity 42 The Graphical Explanation 42 The Verbal Explanation 43 Seeing Elasticity through Total Expenditures 44

More on Elasticity 44 Determinants of Elasticity of Demand 44 Elasticity and the Demand Curve 44 Elasticity of Supply 46 Determinants of the Elasticity of Supply 47

Consumer and Producer Surplus 49 Consumer Surplus 49 Producer Surplus 49 Market Failure 50 Categorizing Goods 50

Kick It Up a Notch: Deadweight Loss 51 Summary 52

Chapter 4 Firm Production, Cost, and Revenue 56 Production 57

Just Words 57 Graphical Explanation 58 Numerical Example 58

Costs 59 Just Words 59 Numerical Example 60

Revenue 62 Just Words 62 Numerical Example 63

Maximizing Profit 64 Graphical Explanation 64 Numerical Example 64

Summary 65

Chapter 5 Perfect Competition, Monopoly, and Economic versus Normal Profit 68 From Perfect Competition to Monopoly 69

Perfect Competition 69 Monopoly 70 Monopolistic Competition 70 Oligopoly 71 Which Model Fits Reality 71

Supply under Perfect Competition 73 Normal versus Economic Profit 73 When and Why Economic Profits Go to Zero 73 Why Supply Is Marginal Cost under Perfect Competition 74 Just Words 74 Numerical Example 74 Graphical Explanation 75

Summary 76

Chapter 6 Every Macroeconomic Word You Ever Heard: Gross Domestic Product, Inflation, Unemployment, Recession, and Depression 79 Measuring the Economy 80

Measuring Nominal Output 80 Measuring Prices and Inflation 81 Problems Measuring Inflation 83

Real Gross Domestic Product and Why It Is Not Synonymous with Social Welfare 86 Real Gross Domestic Product 86 Problems with Real GDP 86

Measuring and Describing Unemployment 87 Measuring Unemployment 87 Problems Measuring Unemployment 89 Types of Unemployment 90

Productivity 90 Measuring and Describing Productivity 90

Seasonal Adjustment 91 Business Cycles 92 Kick It Up a Notch: National Income and Product

Accounting 94 Summary 95

Chapter 7 Interest Rates and Present Value 98 Interest Rates 99

The Market for Money 99 Nominal Interest Rates versus Real Interest Rates 99

Present Value 100 Simple Calculations 100 Mortgages, Car Payments, and Other Multipayment

Examples 101

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Future Value 102 Kick It Up a Notch: Risk and Reward 104 Summary 104

Chapter 8 Aggregate Demand and Aggregate Supply 107 Aggregate Demand 108

Definition 108 Why Aggregate Demand Is Downward

Sloping 108 Aggregate Supply 109

Definition 109 Competing Views of the Shape of Aggregate

Supply 109 Shifts in Aggregate Demand and Aggregate

Supply 110 Variables That Shift Aggregate Demand 110 Variables That Shift Aggregate Supply 113

Causes of Inflation 114 How the Government Can Influence

(but Probably Not Control) the Economy 115 Demand-Side Macroeconomics 115 Supply-Side Macroeconomics 115

Summary 116

Chapter 9 Fiscal Policy 119 Nondiscretionary and Discretionary

Fiscal Policy 119 How They Work 119 Using Aggregate Supply and Aggregate Demand

to Model Fiscal Policy 120 Using Fiscal Policy to

Counteract “Shocks” 121 Aggregate Demand Shocks 121 Aggregate Supply Shocks 122

Evaluating Fiscal Policy 123 Nondiscretionary Fiscal Policy 123 Discretionary Fiscal Policy 123 The Political Problems with Fiscal Policy 124 Criticism from the Right and Left 125 The Rise, Fall, and Rebirth of

Discretionary Fiscal Policy 125 The Obama Stimulus Plan 126 Kick It Up a Notch: Aggregate Supply

Shocks 128 Summary 128

Chapter 10 Monetary Policy 131 Goals, Tools, and a Model of Monetary Policy 132

Goals of Monetary Policy 132 Traditional and Ordinary Tools of Monetary Policy 132 Modeling Monetary Policy 133 The Monetary Transmission Mechanism 134 The Additional Tools of Monetary Policy Created

in 2008 135 Central Bank Independence 137 Modern Monetary Policy 138

The Last 30 Years 138 Summary 143

Chapter 11 Federal Spending 145 A Primer on the Constitution and Spending Money 146

What the Constitution Says 146 Shenanigans 146 Dealing with Disagreements 147

Using Our Understanding of Opportunity Cost 148 Mandatory versus Discretionary Spending 148 Where the Money Goes 149

Using Our Understanding of Marginal Analysis 151 The Size of the Federal Government 151 The Distribution of Federal Spending 151

Budgeting for the Future 151 Baseline versus Current-Services Budgeting 151

Summary 152

Chapter 12 Federal Deficits, Surpluses, and the National Debt 155 Surpluses, Deficits, and the Debt: Definitions

and History 156 Definitions 156 History 156

How Economists See the Deficit and the Debt 159 Operating and Capital Budgets 159 Cyclical and Structural Deficits 159 The Debt as a Percentage of GDP 160 International Comparisons 160 Generational Accounting 161

Who Owns the Debt? 161 Externally Held Debt 162

A Balanced-Budget Amendment 162 Projections 165 Summary 166

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Chapter 13 The Housing Bubble 168 How Much Is a House Really Worth? 168 Mortgages 170 How to Make a Bubble 172 Pop Goes the Bubble! 173 The Effect on the Overall Economy 174 Summary 175

Chapter 14 The Recession of 2007–2009: Causes and Policy Responses 177 Before It Began 177 Late 2007: The Recession Begins as Do the

Initial Policy Reactions 180 The Bottom Falls Out in Fall 2008 181 The Obama Stimulus Package 182 Extraordinary Monetary Stimulus 183 Summary 184

Chapter 15 Is Economic Stagnation the New Normal? 186 Periods of Robust Economic Growth 187 Sources of Growth 187 Causes and Consequences of Slowing

Growth 187 Causes 187 Consequences 188

What Can Be Done to Jump-Start Growth, or Is This the New Normal? 189

Summary 191

Chapter 16 Is the (Fiscal) Sky Falling?: An Examination of Unfunded Social Security, Medicare, and State and Local Pension Liabilities 193 What Is the Source of the Problem? 193 How Big Is the Social Security and Medicare

Problem? 194 How Big Is the State and Local Pension

Problem? 196 Is It Possible That the Fiscal Sky Isn’t

About to Fall? 198 Summary 199

Chapter 17 International Trade: Does It Jeopardize American Jobs? 201 What We Trade and with Whom 201 The Benefits of International Trade 204

Comparative and Absolute Advantage 204 Demonstrating the Gains from Trade 205 Production Possibilities Frontier

Analysis 205 Supply and Demand Analysis 206 Whom Does Trade Harm? 206

Trade Barriers 207 Reasons for Limiting Trade 207 Methods of Limiting Trade 208

Trade as a Diplomatic Weapon 209 Kick It Up a Notch: Costs of Protectionism 210 Summary 210

Chapter 18 International Finance and Exchange Rates 213 International Financial Transactions 213 Foreign Exchange Markets 215 Alternative Foreign Exchange Systems 217 Determinants of Exchange Rates 219 Summary 220

Chapter 19 European Debt Crisis 222 In the Beginning There Were 17 Currencies

in 17 Countries 222 The Effect of the Euro 223 Why Couldn’t They Pull Themselves Out?

The United States Did 226 Is It Too Late to Leave the Euro? 228 Where Should Europe Go from Here? 229 Summary 229

Chapter 20 Economic Growth and Development 231 Growth in Already Developed Countries 231 Comparing Developed Countries and Developing

Countries 233 Fostering (and Inhibiting) Development 234

The Challenges Facing Developing Countries 235 What Works 236

Summary 236

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Chapter 21 NAFTA, CAFTA, GATT, TPP, WTO: Are Trade Agreements Good for Us? 238 The Benefits of Free Trade 239 Why Do We Need Trade Agreements? 239

Strategic Trade 240 Special Interests 240 What Trade Agreements Prevent 240

Trade Agreements and Institutions 241 Alphabet Soup 241 Are They Working? 242

Economic and Political Impacts of Trade 243 The Bottom Line 245 Summary 245

Chapter 22 The Line between Legal and Illegal Goods 248 An Economic Model of Tobacco, Alcohol,

and Illegal Goods and Services 249 Why Is Regulation Warranted? 249

The Information Problem 249 External Costs 250 Morality Issues 252

Taxes on Tobacco and Alcohol 253 Modeling Taxes 253 The Tobacco Settlement and Why Elasticity

Matters 254 Why Are Certain Goods and Services

Illegal? 254 The Impact of Decriminalization on the Market

for the Goods 254 The External Costs of Decriminalization 255

Summary 255

Chapter 23 Natural Resources, the Environment, and Climate Change 258 Using Natural Resources 259 How Clean Is Clean Enough? 259 The Externalities Approach 260

When the Market Works for Everyone 260 When the Market Does Not Work for Everyone 260

The Property Rights Approach to the Environment and Natural Resources 262 Why You Do Not Mess Up Your Own Property 262 Why You Do Mess Up Common Property 262

Natural Resources and the Importance of Property Rights 262

Environmental Problems and Their Economic Solutions 263 Environmental Problems 263 Economic Solutions: Using Taxes to Solve

Environmental Problems 265 Economic Solutions: Using Property Rights

to Solve Environmental Problems 265 No Solution: When There Is No Government

to Tax or Regulate 267 Summary 268

Chapter 24 Health Care 271 Where the Money Goes and Where

It Comes From 271 Insurance in the United States 272

How Insurance Works 272 Varieties of Private Insurance 273 Public Insurance 273

Economic Models of Health Care 274 Why Health Care Is Not Just Another Good 274 Implications of Public Insurance 275 Efficiency Problems with Private Insurance 276 Major Changes to Insurance Resulting from PPACA 277 The Blood and Organ Problem 279

Comparing the United States with the Rest of the World 279

Summary 281

Chapter 25 Government-Provided Health Insurance: Medicaid, Medicare, and the Children’s Health Insurance Program 283 Medicaid: What, Who, and How Much 284 Why Medicaid Costs So Much 285

Why Spending Is Greater on the Elderly 286 Cost-Saving Measures in Medicaid 287

Medicare: Public Insurance and the Elderly 287 Why Private Insurance May Not Work 287 Why Medicare’s Costs Are High 288

Medicare’s Nuts and Bolts 289 Provider Types 289 Part A 289 Part B 290 Prescription Drug Coverage (Part D) 290 Cost Control Provisions in Medicare 291

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The Medicare Trust Fund 292 The Relationship between Medicaid and

Medicare 293 Children’s Health Insurance Program 293 Summary 294

Chapter 26 The Economics of Prescription Drugs 296 Profiteers or Benevolent Scientists? 297 Monopoly Power Applied to Drugs 297 Important Questions 299

Expensive Necessities or Relatively Inexpensive Godsends? 299

Price Controls: Are They the Answer? 301 FDA Approval: Too Stringent or Too Lax? 301

Summary 302

Chapter 27 So You Want to Be a Lawyer: Economics and the Law 304 Private Property 304

Intellectual Property 305 Contracts 305 Enforcing Various Property Rights and Contracts 305 Negative Consequences of Private Property Rights 306

Bankruptcy 306 Civil Liability 306 Summary 308

Chapter 28 The Economics of Crime 310 Who Commits Crimes and Why 310 The Rational Criminal Model 311

Crime Falls When Legal Income Rises 311 Crime Falls When the Likelihood and Consequences

of Getting Caught Rise 312 Problems with the Rationality Assumption 312

The Costs of Crime 312 How Much Does an Average Crime Cost? 313 How Much Crime Does an Average Criminal

Commit? 313 Optimal Spending on Crime Control 314

What Is the Optimal Amount to Spend? 314 Is the Money Spent in the Right Way? 315 Are the Right People in Jail? 315 What Laws Should We Rigorously Enforce? 315 What Is the Optimal Sentence? 316

Summary 317

Chapter 29 Antitrust 319 What’s Wrong with Monopoly? 319

High Prices, Low Output, and Deadweight Loss 319

Reduced Innovation 320 Natural Monopolies and Necessary Monopolies 320

Natural Monopoly 320 Patents, Copyrights, and Other Necessary

Monopolies 321 Monopolies and the Law 322

The Sherman Anti-Trust Act 322 What Constitutes a Monopoly? 323

Examples of Antitrust Action 323 Standard Oil 323 IBM 324 Microsoft 324 Apple, Google, and the European Union 325

Summary 325

Chapter 30 The Economics of Race and Sex Discrimination 327 The Economic Status of Women and Minorities 327

Women 327 Minorities 328

Definitions and Detection of Discrimination 330 Discrimination, Definitions, and the Law 330 Detecting and Measuring Discrimination 331

Discrimination in Labor, Consumption, and Lending 332 Labor Market Discrimination 332 Consumption Market and Lending Market

Discrimination 333 Affirmative Action 334

The Economics of Affirmative Action 334 What Is Affirmative Action? 335 Gradations of Affirmative Action 335

Summary 336

Chapter 31 Income and Wealth Inequality: What’s Fair? 339 Measurement of Inequality 339

Income Inequality 339 Wealth Inequality 342

The Shrinking Middle Class 343

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Causes of Household Income and Wealth Inequality 344 Costs and Benefits of Income Inequality 345 Summary 347

Chapter 32 Farm Policy 349 Farm Prices Since 1950 349

Corn and Gasoline 350 Price Variation as a Justification for Government

Intervention 351 The Case for Price Supports 351 The Case against Price Supports 352

Consumer and Producer Surplus Analysis of Price Floors 352 One Floor in One Market 352 Variable Floors in Multiple Markets 353 What Would Happen without Price Supports? 353

Price Support Mechanisms and Their History 353 Price Support Mechanisms 353 History of Price Supports 355

Is There a Bubble on the Farm? 355 Kick It Up a Notch 356 Summary 356

Chapter 33 Minimum Wage 358 Traditional Economic Analysis of a Minimum

Wage 359 Labor Markets and Consumer and Producer Surplus 359 A Relevant versus an Irrelevant Minimum Wage 360 What Is Wrong with a Minimum Wage? 361 Real-World Implications of the Minimum Wage 361 Alternatives to the Minimum Wage 362

Rebuttals to the Traditional Analysis 362 The Macroeconomics Argument 362 The Work Effort Argument 363 The Elasticity Argument 363

Where Are Economists Now? 363 Kick It Up a Notch 364 Summary 364

Chapter 34 Ticket Brokers and Ticket Scalping 366 Defining Brokering and Scalping 367 An Economic Model of Ticket Sales 367

Marginal Cost 367 The Promoter as Monopolist 367 The Perfect Arena 368

Why Promoters Charge Less Than They Could 369 An Economic Model of Scalping 369 Legitimate Scalpers 370 Summary 371

Chapter 35 Rent Control 373 Rents in a Free Market 373 Reasons for Controlling Rents 374 Consequences of Rent Control 375 Why Does Rent Control Survive? 377 Summary 378

Chapter 36 The Economics of K–12 Education 379 Investments in Human Capital 379

Present Value Analysis 380 External Benefits 380

Should We Spend More? 381 The Basic Data 381 Cautions about Quick Conclusions 383 Literature on Whether More Money Will Improve

Educational Outcomes 385 School Reform Issues 385

The Public School Monopoly 385 Merit Pay and Tenure 386 Private versus Public Education 386 School Vouchers 387 Collective Bargaining 387

Summary 388

Chapter 37 College and University Education: Why Is It So Expensive? 390 Why Are the Costs So High? 390 Why Are College Costs Rising So Fast? 392 Why Have Textbook Costs Risen So

Rapidly? 393 What a College Degree Is Worth 395 How Do People Pay for College? 396 Summary 398

Chapter 38 Poverty and Welfare 400 Measuring Poverty 400

The Poverty Line 401 Who’s Poor? 401

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Poverty through History 402 Problems with Our Measure of Poverty 403 Poverty in the United States versus Europe 404

Programs for the Poor 404 In Kind versus In Cash 404 Why Spend $789 Billion on a $96 Billion

Problem? 406 Is $789 Billion Even a Lot Compared to

Other Countries? 406 Incentives, Disincentives, Myths,

and Truths 406 Welfare Reform 407

Is There a Solution? 407 Welfare as We Now Know It 408 Is Poverty Necessarily Bad? 408

Summary 408

Chapter 39 Head Start 411 Head Start as an Investment 411

The Early Intervention Premise 411 Present Value Analysis 412 External Benefits 412 The Early Evidence 412 The Remaining Doubts 412

The Head Start Program 413 The Current Evidence 414

Evidence that Head Start Works 414 Evidence that Head Start Does Not Work 415 More Evidence Is Coming and Some Is In 415

The Opportunity Cost of Fully Funding Head Start 416

Summary 416

Chapter 40 Social Security 418 The Basics 418

The Beginning 418 Taxes 419 Benefits 419 Changes over Time 419

Why Do We Need Social Security? 420 Social Security’s Effect on the

Economy 421 Effect on Work 421 Effect on Saving 421

Whom Is the Program Good For? 422 Will the System Be There for Me? 424

Why Social Security Is in Trouble 424 The Social Security Trust Fund 424 Options for Fixing Social Security 425

Summary 426

Chapter 41 Personal Income Taxes 429 How Income Taxes Work 429 Issues in Income Taxation 434

Horizontal and Vertical Equity 434 Equity versus Simplicity 434

Incentives and the Tax Code 434 Do Taxes Alter Work Decisions? 435 Do Taxes Alter Savings Decisions? 435 Taxes for Social Engineering 435