1 00:00:00,990 --> 00:00:03,465 [SQUEAKING] 2 00:00:03,465 --> 00:00:04,455 [RUSTLING] 3 00:00:04,455 --> 00:00:07,920 [CLICKING] 4 00:00:09,553 --> 00:00:10,970 JONATHAN GRUBER: Today we're going 5 00:00:10,970 --> 00:00:15,600 to move on to another topic I've kept hinting at all semester, 6 00:00:15,600 --> 00:00:17,030 but it's finally here. 7 00:00:17,030 --> 00:00:18,620 Which is to think more explicitly 8 00:00:18,620 --> 00:00:21,230 about equity, or fairness. 9 00:00:21,230 --> 00:00:24,440 So our discussions this semester have been almost solely couched 10 00:00:24,440 --> 00:00:26,300 in language of efficiency. 11 00:00:26,300 --> 00:00:29,780 We talk about maximizing social welfare, 12 00:00:29,780 --> 00:00:32,900 we talk about the total size of the triangle and the squares. 13 00:00:32,900 --> 00:00:35,510 But we don't actually talk about who gets what. 14 00:00:35,510 --> 00:00:39,050 We very much stayed away from equity concerns 15 00:00:39,050 --> 00:00:42,120 and focused just on efficiency concerns. 16 00:00:42,120 --> 00:00:45,960 The problem is, that doesn't lead us very far in life, 17 00:00:45,960 --> 00:00:47,610 because you can have many outcomes that 18 00:00:47,610 --> 00:00:51,450 are equally efficient, but have different equity consequences. 19 00:00:51,450 --> 00:00:54,750 The best example, of course, is perfect competition 20 00:00:54,750 --> 00:00:57,810 versus a perfectly priced discriminating monopolist. 21 00:00:57,810 --> 00:00:59,610 Remember, under perfect competition, 22 00:00:59,610 --> 00:01:01,530 you maximize welfare. 23 00:01:01,530 --> 00:01:03,810 But a perfectly priced discriminating monopolist 24 00:01:03,810 --> 00:01:05,627 also maximizes welfare. 25 00:01:05,627 --> 00:01:07,210 The difference is, in the latter case, 26 00:01:07,210 --> 00:01:10,200 the monopolist gets all the surplus, when the former case, 27 00:01:10,200 --> 00:01:13,403 it's shared between producers and consumers. 28 00:01:13,403 --> 00:01:14,820 So it's sort of weird to say we're 29 00:01:14,820 --> 00:01:17,760 indifferent between those two outcomes-- to one where Apple 30 00:01:17,760 --> 00:01:19,500 gets all our money, and one where 31 00:01:19,500 --> 00:01:21,960 Apple gets some of our money and we get some of our money. 32 00:01:21,960 --> 00:01:24,750 Seems strange to say we're indifferent 33 00:01:24,750 --> 00:01:26,730 between those outcomes. 34 00:01:26,730 --> 00:01:31,650 So now, in subsets, that's the easy case. 35 00:01:31,650 --> 00:01:36,630 So we're talking about equity efficiency. 36 00:01:36,630 --> 00:01:40,260 In some sense, the easy case is the case 37 00:01:40,260 --> 00:01:43,677 where there's two equally efficient outcomes, 38 00:01:43,677 --> 00:01:45,510 and they have different equity consequences. 39 00:01:45,510 --> 00:01:47,340 That's a rare case. 40 00:01:47,340 --> 00:01:50,850 The more common case is what we call the equity efficiency 41 00:01:50,850 --> 00:01:51,580 trade-off. 42 00:01:55,430 --> 00:01:59,370 Which is that by making distributions more equal, 43 00:01:59,370 --> 00:02:01,880 we are going to induce inefficiencies. 44 00:02:01,880 --> 00:02:04,880 That the act of making distribution more equal 45 00:02:04,880 --> 00:02:07,460 is going to introduce inefficiencies in the system. 46 00:02:07,460 --> 00:02:10,199 And that's where things get really interesting. 47 00:02:10,199 --> 00:02:11,500 OK? 48 00:02:11,500 --> 00:02:13,858 So in other words-- so the best way to think about this, 49 00:02:13,858 --> 00:02:16,150 I find most helpful, is due to a famous economist named 50 00:02:16,150 --> 00:02:20,780 Arthur Okun, and his thought example of the leaky bucket. 51 00:02:23,310 --> 00:02:25,445 Okun's thought example was the following-- imagine 52 00:02:25,445 --> 00:02:27,320 that the way the government distributed money 53 00:02:27,320 --> 00:02:28,820 from the rich the poor was literally 54 00:02:28,820 --> 00:02:31,880 they went to the rich, had the rich put money in a bucket, 55 00:02:31,880 --> 00:02:34,390 and they carried it and dumped out in front of the poor. 56 00:02:34,390 --> 00:02:37,060 Imagine that's the way distribution happened. 57 00:02:37,060 --> 00:02:39,780 Well, in that world, if I told you 58 00:02:39,780 --> 00:02:42,510 that every dollar a rich person put in the bucket got 59 00:02:42,510 --> 00:02:45,090 carried along and got handed to a poor person-- 60 00:02:45,090 --> 00:02:48,310 so Bill Gates' dollar became a homeless guy's dollar-- 61 00:02:48,310 --> 00:02:51,627 probably most of us would think that was OK. 62 00:02:51,627 --> 00:02:53,210 I think the vast majority of Americans 63 00:02:53,210 --> 00:02:54,960 would say, yeah, probably the homeless guy 64 00:02:54,960 --> 00:02:58,040 could use $1 more than Bill Gates could. 65 00:02:58,040 --> 00:03:01,850 But now, imagine that there was a leak in the bucket. 66 00:03:01,850 --> 00:03:04,015 Imagine Bill Gates put 100 pennies in, 67 00:03:04,015 --> 00:03:06,140 but along the way to the poor person it leaked out, 68 00:03:06,140 --> 00:03:08,140 and so we dumped it in front of the poor person, 69 00:03:08,140 --> 00:03:10,090 it was less than 100. 70 00:03:10,090 --> 00:03:12,490 Now, then the question is, how much leakage? 71 00:03:12,490 --> 00:03:14,950 Well, if the leakage was one penny out of 100, 72 00:03:14,950 --> 00:03:16,850 you probably wouldn't change your mind. 73 00:03:16,850 --> 00:03:20,320 Would it change your mind if it was 20 pennies out of 100? 74 00:03:20,320 --> 00:03:21,350 50 pennies out of 100? 75 00:03:21,350 --> 00:03:23,043 What if it was 100 pennies out of 100? 76 00:03:23,043 --> 00:03:24,460 What if taking $1 from Bill Gates, 77 00:03:24,460 --> 00:03:26,798 by the time it got to the poor person, it was all gone? 78 00:03:26,798 --> 00:03:28,590 At what point would you say, you know what? 79 00:03:28,590 --> 00:03:31,370 I don't think that's a good idea anymore. 80 00:03:31,370 --> 00:03:34,770 And really, that's a great way of thinking about the equity 81 00:03:34,770 --> 00:03:37,640 efficiency trade-off-- how much efficiency 82 00:03:37,640 --> 00:03:40,565 are you willing to give up to redistribute from rich to poor? 83 00:03:40,565 --> 00:03:42,440 And the efficiency you give up is represented 84 00:03:42,440 --> 00:03:43,648 by the leakage in the bucket. 85 00:03:46,100 --> 00:03:49,020 Now, what we're going to do with this 86 00:03:49,020 --> 00:03:51,570 in this lecture and next Monday's lecture, 87 00:03:51,570 --> 00:03:53,910 is we're going to discuss this equity efficiency 88 00:03:53,910 --> 00:03:57,540 trade-off in four steps. 89 00:03:57,540 --> 00:04:03,060 The first step is going to be talking about valuation-- 90 00:04:03,060 --> 00:04:05,950 that is taking the difficult step we've already taken so far 91 00:04:05,950 --> 00:04:08,190 and asking, how does society feel about some people 92 00:04:08,190 --> 00:04:09,360 versus other people? 93 00:04:09,360 --> 00:04:11,430 So far, we've just thought of one generic person, 94 00:04:11,430 --> 00:04:13,138 and they're represented by total surplus. 95 00:04:13,138 --> 00:04:15,055 But in fact, we have a distribution of people, 96 00:04:15,055 --> 00:04:17,190 and how do economists think about taking money away 97 00:04:17,190 --> 00:04:19,260 from person A and giving to person B. 98 00:04:19,260 --> 00:04:21,970 That's a new topic for us. 99 00:04:21,970 --> 00:04:24,360 The second thing we're going to talk about 100 00:04:24,360 --> 00:04:32,988 is what do we know about the facts on inequality? 101 00:04:32,988 --> 00:04:34,530 What do we know about what's actually 102 00:04:34,530 --> 00:04:38,220 happened to the distribution of resources in the US 103 00:04:38,220 --> 00:04:41,085 at a point in time, and over time? 104 00:04:41,085 --> 00:04:42,710 The third thing is, we're going to talk 105 00:04:42,710 --> 00:04:44,210 about the sources of leakage. 106 00:04:47,610 --> 00:04:49,900 That is, why does the bucket leak in practice? 107 00:04:49,900 --> 00:04:51,780 Why do we typically think there is an equity efficiency 108 00:04:51,780 --> 00:04:52,140 trade-off? 109 00:04:52,140 --> 00:04:53,850 Why can't we just take the dollar from the rich guy 110 00:04:53,850 --> 00:04:55,170 and give it to the poor guy? 111 00:04:55,170 --> 00:04:57,230 What caused the leakage? 112 00:04:57,230 --> 00:05:02,120 And then finally, we're going to talk about some examples 113 00:05:02,120 --> 00:05:05,687 of transfer mechanisms. 114 00:05:05,687 --> 00:05:07,270 We're going to talk about what society 115 00:05:07,270 --> 00:05:10,570 does in practice to transfer from rich to poor 116 00:05:10,570 --> 00:05:15,320 and how it works, and what the ultimate leakage looks like. 117 00:05:15,320 --> 00:05:18,085 So that's going to be our goal in the next two lectures. 118 00:05:18,085 --> 00:05:20,210 It's going to be think about this equity efficiency 119 00:05:20,210 --> 00:05:21,380 trade-off. 120 00:05:21,380 --> 00:05:25,370 So to start that goal, we have to start with this first issue 121 00:05:25,370 --> 00:05:27,440 of choosing the social optimum. 122 00:05:32,230 --> 00:05:37,180 That is, how do we evaluate transfers 123 00:05:37,180 --> 00:05:38,530 from one party to another party? 124 00:05:41,350 --> 00:05:45,670 And so to rank outcomes, what we're going to do is use 125 00:05:45,670 --> 00:05:48,130 the same thing we always do when we want to think about 126 00:05:48,130 --> 00:05:49,060 trade-offs-- 127 00:05:49,060 --> 00:05:51,310 which is, we're going to do a constrained maximization 128 00:05:51,310 --> 00:05:52,565 exercise. 129 00:05:52,565 --> 00:05:54,940 When I want to think about your trade-off between cookies 130 00:05:54,940 --> 00:05:57,368 and pizza, I did a constrained optimization 131 00:05:57,368 --> 00:05:59,410 of your utility functions, subject to your budget 132 00:05:59,410 --> 00:06:00,215 constraint. 133 00:06:00,215 --> 00:06:02,590 When, now I want to think about your trade-off between me 134 00:06:02,590 --> 00:06:06,480 and Patricia, now instead, we're going to a different utility 135 00:06:06,480 --> 00:06:06,980 function. 136 00:06:06,980 --> 00:06:09,430 In fact, we're going to use what we call a social welfare 137 00:06:09,430 --> 00:06:10,900 function. 138 00:06:10,900 --> 00:06:12,490 A social welfare function basically 139 00:06:12,490 --> 00:06:14,860 society's utility function. 140 00:06:14,860 --> 00:06:19,290 How does society value different individuals? 141 00:06:19,290 --> 00:06:21,670 So loosely speaking, social welfare function 142 00:06:21,670 --> 00:06:25,880 is some function of utility of person 1, common utility 143 00:06:25,880 --> 00:06:28,770 of person 2, common, dot, dot, dot, comma utility of person 144 00:06:28,770 --> 00:06:32,010 350 million, if it's the US. 145 00:06:32,010 --> 00:06:34,260 So it's some aggregation function. 146 00:06:34,260 --> 00:06:37,320 Just like we mathematically aggregate your taste 147 00:06:37,320 --> 00:06:39,330 for pizza and cookies. 148 00:06:39,330 --> 00:06:41,490 Now we're going to mathematically aggregate 149 00:06:41,490 --> 00:06:46,520 all society's utility to get a social welfare function. 150 00:06:46,520 --> 00:06:50,720 So for example, consider figure 21-1. 151 00:06:50,720 --> 00:06:53,390 Let's think of society as only two people, Homer and Ned-- 152 00:06:53,390 --> 00:06:55,723 let's imagine that's all of society, because once again, 153 00:06:55,723 --> 00:06:58,630 it's always these two by two examples are easy. 154 00:06:58,630 --> 00:07:04,180 What we've drawn here are what's called isowelfare curves. 155 00:07:04,180 --> 00:07:08,330 What these are, are basically society's indifference curves. 156 00:07:08,330 --> 00:07:12,600 Just like if these x and y-axis are pizza and cookies, 157 00:07:12,600 --> 00:07:15,210 I would draw a difference curve between pizza and cookies. 158 00:07:15,210 --> 00:07:17,690 Now drawing society as a difference curve 159 00:07:17,690 --> 00:07:19,400 between Homer and Ned. 160 00:07:19,400 --> 00:07:21,200 So in other words, what this says 161 00:07:21,200 --> 00:07:25,730 is that society's indifferent between Homer having U1 super 162 00:07:25,730 --> 00:07:30,200 H, and Ned having U1 super N, versus the Homer having 163 00:07:30,200 --> 00:07:32,750 U2 two super H and Ned having U2 super N. 164 00:07:32,750 --> 00:07:36,410 Those are combinations of resources across which 165 00:07:36,410 --> 00:07:38,738 society is indifferent. 166 00:07:38,738 --> 00:07:40,530 And much like any other indifference curve, 167 00:07:40,530 --> 00:07:41,910 further out is better. 168 00:07:41,910 --> 00:07:44,340 We'd all prefer both Homer and Ned to have more-- 169 00:07:44,340 --> 00:07:46,020 more is better. 170 00:07:46,020 --> 00:07:48,810 So that's easy-- the further out the isowelfare curve goes, 171 00:07:48,810 --> 00:07:50,040 the happier you are. 172 00:07:50,040 --> 00:07:52,890 And a long isowelfare curve are allocations 173 00:07:52,890 --> 00:07:55,847 of resource across individuals among which we're indifferent. 174 00:07:58,400 --> 00:08:01,520 Now, the question is, that's all well and easy to graph 175 00:08:01,520 --> 00:08:03,020 as a theoretical proposition. 176 00:08:03,020 --> 00:08:05,510 But in practice, what does a social welfare function 177 00:08:05,510 --> 00:08:06,350 look like? 178 00:08:06,350 --> 00:08:09,410 Utility functions, I just wrote down a usually function, 179 00:08:09,410 --> 00:08:10,970 and you took it as-- 180 00:08:10,970 --> 00:08:13,110 I wrote down square root, we worked with that. 181 00:08:13,110 --> 00:08:14,990 But there were some properties we wrote down 182 00:08:14,990 --> 00:08:17,837 that gave us a sense of what utility functions look like. 183 00:08:17,837 --> 00:08:19,670 Social welfare functions are much more open, 184 00:08:19,670 --> 00:08:21,080 because they don't come from introspection 185 00:08:21,080 --> 00:08:22,370 about your preferences. 186 00:08:22,370 --> 00:08:25,190 They come from introspection about society's preferences, 187 00:08:25,190 --> 00:08:26,270 which are much harder. 188 00:08:26,270 --> 00:08:28,850 So what we do here is we talk about some typical forms 189 00:08:28,850 --> 00:08:32,030 of social welfare functions that we use in economics. 190 00:08:32,030 --> 00:08:35,240 The most common form is what's called 191 00:08:35,240 --> 00:08:38,419 utilitarian social welfare function-- 192 00:08:38,419 --> 00:08:42,350 utilitarian social welfare function. 193 00:08:42,350 --> 00:08:44,600 This is due to the philosopher Jeremy Bentham-- 194 00:08:44,600 --> 00:08:46,717 if you ever visit University College London-- 195 00:08:46,717 --> 00:08:48,800 actually, if you did until about 15 years ago, you 196 00:08:48,800 --> 00:08:51,320 could see Jeremy Bentham's head, it was on display. 197 00:08:51,320 --> 00:08:52,790 He was a famous philosopher there. 198 00:08:52,790 --> 00:08:55,373 But apparently, students would take it out, use it for soccer. 199 00:08:55,373 --> 00:08:57,800 So they took it off display, you can't see it anymore. 200 00:08:57,800 --> 00:09:01,320 But he's a famous philosopher, and he came up 201 00:09:01,320 --> 00:09:03,680 with the idea of utilitarianism. 202 00:09:03,680 --> 00:09:06,500 And basically utilitarianism is, it simply says, 203 00:09:06,500 --> 00:09:10,640 the social welfare function is simply the linear aggregation 204 00:09:10,640 --> 00:09:12,260 of every individual's utility. 205 00:09:12,260 --> 00:09:14,810 So social welfare function is simply, 206 00:09:14,810 --> 00:09:20,270 U1 plus U2 plus U3 plus-- 207 00:09:20,270 --> 00:09:22,635 plus U 350 million. 208 00:09:22,635 --> 00:09:24,010 So the US social welfare function 209 00:09:24,010 --> 00:09:26,510 is literally, we just measure everyone's utility, add it up, 210 00:09:26,510 --> 00:09:28,970 and that's the social welfare function. 211 00:09:28,970 --> 00:09:31,662 And in subsets, it's a natural starting point. 212 00:09:31,662 --> 00:09:33,620 Right, you just say, look, it's just a linear-- 213 00:09:33,620 --> 00:09:35,770 it's like having a linear utility function. 214 00:09:35,770 --> 00:09:38,470 It's a linear utility function. 215 00:09:38,470 --> 00:09:41,680 Now, let's be clear-- 216 00:09:41,680 --> 00:09:44,560 what this says is that I don't care any more 217 00:09:44,560 --> 00:09:45,910 about anybody in society. 218 00:09:45,910 --> 00:09:48,400 So I don't care any more or less about Bill Gates 219 00:09:48,400 --> 00:09:50,150 and the homeless guy. 220 00:09:50,150 --> 00:09:51,530 I treat them-- 221 00:09:51,530 --> 00:09:54,800 I'm indifferent between them. 222 00:09:54,800 --> 00:09:57,140 But does this mean I wouldn't want 223 00:09:57,140 --> 00:10:01,070 to transfer money from Bill Gates the homeless guy? 224 00:10:01,070 --> 00:10:03,568 In fact, I still would want to transfer-- and why-- 225 00:10:03,568 --> 00:10:04,610 depending on the leakage. 226 00:10:04,610 --> 00:10:06,314 Why? 227 00:10:06,314 --> 00:10:08,490 AUDIENCE: Because of the condition of [INAUDIBLE].. 228 00:10:08,490 --> 00:10:09,240 JONATHAN GRUBER: Yeah, exactly. 229 00:10:09,240 --> 00:10:10,590 I care about the utility the same, 230 00:10:10,590 --> 00:10:12,500 but the next dollar's not worth anything to Bill Gates. 231 00:10:12,500 --> 00:10:14,280 It's worth a lot to the homeless guy. 232 00:10:14,280 --> 00:10:15,988 So a utilitarian social welfare function, 233 00:10:15,988 --> 00:10:17,447 which is a natural starting point-- 234 00:10:17,447 --> 00:10:19,440 I don't think it's particularly liberal, it's 235 00:10:19,440 --> 00:10:22,020 a natural starting point, you're just adding them up-- 236 00:10:22,020 --> 00:10:24,630 ends up with a very, in substance, redistributive 237 00:10:24,630 --> 00:10:27,120 conclusion, which is that you want 238 00:10:27,120 --> 00:10:29,100 to attribute from rich to poor. 239 00:10:29,100 --> 00:10:32,910 Indeed, what the optimum with utilitarian social welfare 240 00:10:32,910 --> 00:10:36,120 function is that you want to redistribute 241 00:10:36,120 --> 00:10:39,910 until marginal utilities are equal. 242 00:10:39,910 --> 00:10:42,720 So this social function calls for fairly radical 243 00:10:42,720 --> 00:10:44,040 redistribution. 244 00:10:44,040 --> 00:10:45,660 This says, you want to redistribute 245 00:10:45,660 --> 00:10:48,033 until utilities are equal. 246 00:10:48,033 --> 00:10:49,700 Marginal utilities are equal, I'm sorry. 247 00:10:49,700 --> 00:10:51,174 Yeah? 248 00:10:51,174 --> 00:10:55,210 AUDIENCE: So [INAUDIBLE] is constant [INAUDIBLE].. 249 00:10:55,210 --> 00:10:57,210 JONATHAN GRUBER: Well, once again, you're right, 250 00:10:57,210 --> 00:10:59,210 I mean, you just add people and subtract people. 251 00:10:59,210 --> 00:11:00,540 Wouldn't be a problem. 252 00:11:00,540 --> 00:11:02,415 But for now, let's just assume the copulation 253 00:11:02,415 --> 00:11:04,730 is because you've got one given society. 254 00:11:04,730 --> 00:11:06,740 OK, so if two people, it's just Ned and Homer, 255 00:11:06,740 --> 00:11:07,710 just add them up. 256 00:11:07,710 --> 00:11:10,380 All it says is, as Ned is more resources than Homer, 257 00:11:10,380 --> 00:11:11,670 we're going redistribute. 258 00:11:11,670 --> 00:11:15,900 Indeed, with this function, if we make the assumption 259 00:11:15,900 --> 00:11:19,500 that total social resources are fixed, 260 00:11:19,500 --> 00:11:24,520 that society has a fixed budget constraint that can't change, 261 00:11:24,520 --> 00:11:26,110 then what does this function imply 262 00:11:26,110 --> 00:11:29,400 would be the optimal distribution of income? 263 00:11:29,400 --> 00:11:32,130 So ignoring the fact that people might work less or more hard-- 264 00:11:32,130 --> 00:11:34,463 ignore that, imagine it's just the total amount of money 265 00:11:34,463 --> 00:11:35,250 a society has. 266 00:11:35,250 --> 00:11:37,500 If that's your social welfare function, 267 00:11:37,500 --> 00:11:40,632 what's the optimal distribution of income? 268 00:11:40,632 --> 00:11:41,132 Yeah? 269 00:11:41,132 --> 00:11:43,632 AUDIENCE: Are we assuming that makes everyone equally happy? 270 00:11:43,632 --> 00:11:45,120 JONATHAN GRUBER: Yes, everyone-- 271 00:11:45,120 --> 00:11:48,240 good point, fixed resources are identical utility functions. 272 00:11:48,240 --> 00:11:50,150 Great point. 273 00:11:50,150 --> 00:11:52,255 Yeah, exactly, great catch. 274 00:11:52,255 --> 00:11:53,630 If it's a fixed bundle of income, 275 00:11:53,630 --> 00:11:55,730 and everyone has identical utility functions, 276 00:11:55,730 --> 00:11:58,500 then we simply want everyone to have the same amount of money. 277 00:11:58,500 --> 00:11:59,330 Why? 278 00:11:59,330 --> 00:12:02,840 Because giving someone $1 would make them less happy 279 00:12:02,840 --> 00:12:05,330 than taking away from someone else would make them sad. 280 00:12:05,330 --> 00:12:07,247 It's all about diminishing margin of utility-- 281 00:12:07,247 --> 00:12:09,030 just like we talked about last time. 282 00:12:09,030 --> 00:12:11,750 So now, that might not be true, for example-- 283 00:12:11,750 --> 00:12:14,060 does anybody know who Scrooge McDuck is? 284 00:12:14,060 --> 00:12:15,880 Scrooge McDuck? 285 00:12:15,880 --> 00:12:17,710 Raise your hand if you know Scrooge McDuck. 286 00:12:17,710 --> 00:12:18,490 OK, not bad. 287 00:12:18,490 --> 00:12:19,570 Scrooge McDuck is this comic character 288 00:12:19,570 --> 00:12:21,100 from when I was a kid who used to like to dive 289 00:12:21,100 --> 00:12:22,232 and swim in his money. 290 00:12:22,232 --> 00:12:23,690 Now, he clearly had a higher margin 291 00:12:23,690 --> 00:12:25,810 of utility of the next dollar than I do. 292 00:12:25,810 --> 00:12:27,820 OK, so if Scrooge McDuck really likes money, 293 00:12:27,820 --> 00:12:30,340 we might want to let Scrooge McDuck have some extra money. 294 00:12:30,340 --> 00:12:32,010 But if utility functions are identical, 295 00:12:32,010 --> 00:12:34,270 and social resources are fixed, this is one equal distribution 296 00:12:34,270 --> 00:12:34,900 income. 297 00:12:34,900 --> 00:12:37,570 That's really radical. 298 00:12:37,570 --> 00:12:40,360 That's beyond what any country in the world does-- 299 00:12:40,360 --> 00:12:42,190 a perfect equal distribution of income. 300 00:12:42,190 --> 00:12:45,190 But it comes naturally out of this fairly plain vanilla 301 00:12:45,190 --> 00:12:46,690 social welfare function. 302 00:12:46,690 --> 00:12:49,470 Quite a striking finding, right? 303 00:12:49,470 --> 00:12:52,530 Now, but in fact, if we think of this 304 00:12:52,530 --> 00:12:54,750 as sort of our starting point-- 305 00:12:54,750 --> 00:12:56,190 Bentham was actually conservative, 306 00:12:56,190 --> 00:12:58,270 this is typically viewed as a conservative starting point, 307 00:12:58,270 --> 00:13:00,420 even though it has a very liberal conclusion. 308 00:13:00,420 --> 00:13:02,700 The more liberal extreme is what we 309 00:13:02,700 --> 00:13:08,040 call a Rawlsian social welfare function, due to philosopher 310 00:13:08,040 --> 00:13:10,290 James, I think, Rawls, who was at Harvard-- 311 00:13:10,290 --> 00:13:13,070 Philip John Rawls, I'm sorry. 312 00:13:13,070 --> 00:13:19,010 He said the goal of society is to maximize the well-being 313 00:13:19,010 --> 00:13:21,530 of its worst-off member. 314 00:13:21,530 --> 00:13:24,200 So Rawlsian social welfare function 315 00:13:24,200 --> 00:13:29,940 is the minimum of U1 comma U2 comma dot, dot, dot. 316 00:13:29,940 --> 00:13:31,560 In other words, all you care about 317 00:13:31,560 --> 00:13:34,860 is the worst-off person in society. 318 00:13:34,860 --> 00:13:37,400 OK, so Rawlsian social welfare function would say, 319 00:13:37,400 --> 00:13:40,710 all we care about is the worst-off person in society. 320 00:13:40,710 --> 00:13:43,680 Now, unless you think this is crazy, 321 00:13:43,680 --> 00:13:47,360 let's think about where Rawls came at this from. 322 00:13:47,360 --> 00:13:49,075 Rawls came at this from the concept 323 00:13:49,075 --> 00:13:51,440 that he called the veil of ignorance. 324 00:13:51,440 --> 00:13:54,672 Which he said, look, before you were born, 325 00:13:54,672 --> 00:13:56,630 you know nothing about what you're going to be. 326 00:13:56,630 --> 00:13:59,522 You could be born to rich or poor, healthy, sick, 327 00:13:59,522 --> 00:14:00,230 you have no idea. 328 00:14:00,230 --> 00:14:02,990 You're just a little embryo. 329 00:14:02,990 --> 00:14:04,490 From that perspective, he said, what 330 00:14:04,490 --> 00:14:08,210 you would want is to make sure that you're going to be OK. 331 00:14:08,210 --> 00:14:09,790 And so from that perspective, society 332 00:14:09,790 --> 00:14:11,373 should want to minimize the well-being 333 00:14:11,373 --> 00:14:13,220 of the worst-off member. 334 00:14:13,220 --> 00:14:15,320 That was his rationalization. 335 00:14:15,320 --> 00:14:17,882 But this has really radical implications. 336 00:14:17,882 --> 00:14:20,090 Not only does this say, we want an equal distribution 337 00:14:20,090 --> 00:14:22,610 of income, this says, we would destroy 338 00:14:22,610 --> 00:14:26,477 any amount of money of the rich to give some money to the poor. 339 00:14:26,477 --> 00:14:28,310 So imagine what this says, if I could take-- 340 00:14:28,310 --> 00:14:31,010 if everyone's distribution of income was equal in this class, 341 00:14:31,010 --> 00:14:33,870 let's say our society, except Patricia 342 00:14:33,870 --> 00:14:38,460 has $40,000 more than everyone else, then what that would say 343 00:14:38,460 --> 00:14:41,160 is, we would happily take $40,000 away from Patricia 344 00:14:41,160 --> 00:14:44,610 and give $1 to me. 345 00:14:44,610 --> 00:14:46,860 Because I'm, like everyone else, the worst-off member. 346 00:14:46,860 --> 00:14:49,430 But let's say I'm $1 less than the rest of you, make it easy. 347 00:14:49,430 --> 00:14:51,597 So you all the same amount of money, I have $1 less, 348 00:14:51,597 --> 00:14:53,870 she has $40,000 more. 349 00:14:53,870 --> 00:14:55,620 Rawlsian would say, we'd happily take away 350 00:14:55,620 --> 00:14:57,530 her $40,000 to give me $1. 351 00:14:57,530 --> 00:14:59,970 It doesn't make a whole lot of sense. 352 00:14:59,970 --> 00:15:02,200 But it's one sort of extreme, and it's basically 353 00:15:02,200 --> 00:15:03,090 this notion of-- 354 00:15:03,090 --> 00:15:04,560 it's in some sense, Rawlsian. 355 00:15:04,560 --> 00:15:07,350 Think of an extremely risk-averse embryo, 356 00:15:07,350 --> 00:15:08,400 gives you the Rawlsian. 357 00:15:08,400 --> 00:15:10,140 The idea that, I don't know what my income is going to be, 358 00:15:10,140 --> 00:15:11,945 but I want to make sure I'm not poor. 359 00:15:11,945 --> 00:15:14,070 Then I would want sort of a Rawlsian social welfare 360 00:15:14,070 --> 00:15:15,240 function. 361 00:15:15,240 --> 00:15:20,470 So that's sort of a liberal extreme. 362 00:15:20,470 --> 00:15:23,850 Now, there's two other views, which 363 00:15:23,850 --> 00:15:25,740 are harder to write down mathematically-- 364 00:15:25,740 --> 00:15:29,790 at least in the context of 1401, but are important. 365 00:15:29,790 --> 00:15:32,040 Let's take the most conservative extreme. 366 00:15:32,040 --> 00:15:34,170 So if Rawlsian is the most liberal extreme, 367 00:15:34,170 --> 00:15:37,820 the most conservative extreme would be the Nozick-- 368 00:15:37,820 --> 00:15:42,030 Nozickian argument-- it's not really social welfare function. 369 00:15:42,030 --> 00:15:47,850 His argument is that we should never redistribute income. 370 00:15:47,850 --> 00:15:50,700 We should only redistribute opportunities. 371 00:15:50,700 --> 00:15:53,633 In other words, once everyone has equal opportunities, 372 00:15:53,633 --> 00:15:55,050 then we just roll the dice and let 373 00:15:55,050 --> 00:15:57,210 things lay in where they may. 374 00:15:57,210 --> 00:15:58,927 So here's an example. 375 00:15:58,927 --> 00:16:01,260 Let's say all of us are born with the same opportunities 376 00:16:01,260 --> 00:16:04,080 in life, and we end up where we are today. 377 00:16:04,080 --> 00:16:07,770 And let's say that you guys are willing to pay me 378 00:16:07,770 --> 00:16:10,218 $10 every lecture to hear me lecture. 379 00:16:10,218 --> 00:16:12,260 Well, if that's true, at the end of the semester. 380 00:16:12,260 --> 00:16:14,670 I have a lot more money than you. 381 00:16:14,670 --> 00:16:16,170 Nozick would say, well, why should I 382 00:16:16,170 --> 00:16:17,670 be taxed and given to you? 383 00:16:17,670 --> 00:16:18,520 That makes no sense. 384 00:16:18,520 --> 00:16:20,300 You voluntarily payed me. 385 00:16:20,300 --> 00:16:22,800 Why should LeBron James, we're voluntarily paying to see him 386 00:16:22,800 --> 00:16:25,440 play, why should he then be taxed on the money we 387 00:16:25,440 --> 00:16:27,190 voluntarily gave him? 388 00:16:27,190 --> 00:16:28,690 So Nozick's views, as long as we all 389 00:16:28,690 --> 00:16:31,450 start with the equality of opportunity, let the dice roll. 390 00:16:31,450 --> 00:16:33,730 If someone has more talents and skills, 391 00:16:33,730 --> 00:16:37,290 and people want to pay them, then let them keep it. 392 00:16:37,290 --> 00:16:42,180 So basically, Nozick's idea is to essentially equalize 393 00:16:42,180 --> 00:16:44,470 opportunity, and letting the dice land where they may. 394 00:16:44,470 --> 00:16:46,675 Yeah? 395 00:16:46,675 --> 00:16:49,680 AUDIENCE: Is this just like opportunity 396 00:16:49,680 --> 00:16:50,903 that can be regulated? 397 00:16:50,903 --> 00:16:54,344 Or is it-- I was thinking that [INAUDIBLE] 398 00:16:54,344 --> 00:16:58,022 might mean like [INAUDIBLE] doesn't have equal opportunity. 399 00:16:58,022 --> 00:16:58,980 JONATHAN GRUBER: Right. 400 00:16:58,980 --> 00:17:01,170 So there's two problems with the Nozickian view. 401 00:17:01,170 --> 00:17:03,060 One is, what is opportunity? 402 00:17:03,060 --> 00:17:06,109 What is equal opportunity mean? 403 00:17:06,109 --> 00:17:08,089 And the answer is, it's not clear-- there's 404 00:17:08,089 --> 00:17:09,359 genetic equal opportunity. 405 00:17:09,359 --> 00:17:11,240 There's the fact that if I'm born in poverty, 406 00:17:11,240 --> 00:17:13,160 I go to lower quality schools, so I don't really 407 00:17:13,160 --> 00:17:14,243 have an equal opportunity. 408 00:17:14,243 --> 00:17:16,490 I went to a ritzy public high school in New Jersey, 409 00:17:16,490 --> 00:17:18,109 because my parents were well-off. 410 00:17:18,109 --> 00:17:20,849 Like someone who went to high school in some poor town of New 411 00:17:20,849 --> 00:17:22,849 Jersey didn't have the same opportunities I did. 412 00:17:22,849 --> 00:17:26,720 So the first problem with this argument is that, in some sense 413 00:17:26,720 --> 00:17:28,490 it's impossible to equalize opportunity. 414 00:17:28,490 --> 00:17:31,460 And so it starts with a false premise. 415 00:17:31,460 --> 00:17:34,640 The second problem with this argument is it ignores luck. 416 00:17:37,890 --> 00:17:40,350 It ignores luck. 417 00:17:40,350 --> 00:17:43,260 Which is that in fact, if you look at why some people are 418 00:17:43,260 --> 00:17:45,810 rich and some people are poor, even with equal opportunities, 419 00:17:45,810 --> 00:17:48,842 a lot of it's not skill or talent, it's luck. 420 00:17:48,842 --> 00:17:50,800 They were in the right place at the right time, 421 00:17:50,800 --> 00:17:55,147 had the right parents who gave them the right inheritance. 422 00:17:55,147 --> 00:17:56,980 They met the right person in business school 423 00:17:56,980 --> 00:17:59,700 and that person brought them into their company. 424 00:17:59,700 --> 00:18:00,200 It's luck. 425 00:18:00,200 --> 00:18:03,490 Indeed, if you try to explain differences in income 426 00:18:03,490 --> 00:18:06,760 by any measure of skill we have, you can never explain even half 427 00:18:06,760 --> 00:18:08,830 of the difference in income across people. 428 00:18:08,830 --> 00:18:10,510 A lot of it appears to be luck. 429 00:18:10,510 --> 00:18:12,910 Well, in that case, we would then not 430 00:18:12,910 --> 00:18:16,135 want to let lucky people be richer than unlucky people. 431 00:18:16,135 --> 00:18:17,760 That doesn't really seem to make sense. 432 00:18:17,760 --> 00:18:20,140 So I want skilled people richer than unskilled people, 433 00:18:20,140 --> 00:18:22,300 but it seems like we might redistribute 434 00:18:22,300 --> 00:18:24,010 against from the lucky to the unlucky. 435 00:18:24,010 --> 00:18:28,380 So that's the other problem with the Nozickian notion. 436 00:18:28,380 --> 00:18:32,970 And then finally, the fourth approach, the fourth approach 437 00:18:32,970 --> 00:18:38,670 is a totally alternative view, which we 438 00:18:38,670 --> 00:18:44,380 call commodity egalitarianism. 439 00:18:44,380 --> 00:18:46,090 Commodity egalitarianism. 440 00:18:49,970 --> 00:18:52,080 This view is simply saying, look, 441 00:18:52,080 --> 00:18:56,020 who cares how much money I have relative to you? 442 00:18:56,020 --> 00:18:59,212 All that matters, that you can live a decent life. 443 00:18:59,212 --> 00:19:00,940 So this says is what matters is not 444 00:19:00,940 --> 00:19:04,540 relative income but absolute resources. 445 00:19:04,540 --> 00:19:06,610 What matters is making sure everyone in society 446 00:19:06,610 --> 00:19:10,240 has food and shelter, and I would 447 00:19:10,240 --> 00:19:13,100 argue health care, et cetera. 448 00:19:13,100 --> 00:19:15,710 A set of base things everyone should have. 449 00:19:15,710 --> 00:19:18,130 And then above that, who cares? 450 00:19:18,130 --> 00:19:20,350 So in substance, commodity egalitarianism 451 00:19:20,350 --> 00:19:22,970 is a mix of Rawls and Nozick. 452 00:19:22,970 --> 00:19:24,540 It cares about the minimum, saying 453 00:19:24,540 --> 00:19:25,530 we've got to make sure everyone has 454 00:19:25,530 --> 00:19:26,697 a decent standard of living. 455 00:19:26,697 --> 00:19:29,130 But above that, let's roll the dice. 456 00:19:29,130 --> 00:19:31,380 As long as we're providing a decent standard of living 457 00:19:31,380 --> 00:19:33,630 for everyone, that if someone can make a lot of money, 458 00:19:33,630 --> 00:19:36,050 let's let them. 459 00:19:36,050 --> 00:19:38,930 So this is a very interesting view. 460 00:19:38,930 --> 00:19:42,350 And it basically talks about the view of 461 00:19:42,350 --> 00:19:45,932 should we give people money or stuff? 462 00:19:45,932 --> 00:19:47,990 In the sense of commodity egalitarianism view, 463 00:19:47,990 --> 00:19:49,475 says, look, let's worry less about money 464 00:19:49,475 --> 00:19:50,300 and more about stuff. 465 00:19:50,300 --> 00:19:52,050 Let's make sure everybody has enough stuff 466 00:19:52,050 --> 00:19:53,760 to live a decent life. 467 00:19:53,760 --> 00:19:56,310 And then we'll roll the dice from there. 468 00:19:56,310 --> 00:19:58,260 So let me start-- 469 00:19:58,260 --> 00:20:01,830 if I was not clear enough at all, none of these are right. 470 00:20:01,830 --> 00:20:03,930 These are all alternative views. 471 00:20:03,930 --> 00:20:05,498 It is harder to write down to make 472 00:20:05,498 --> 00:20:07,290 an assumption about social welfare function 473 00:20:07,290 --> 00:20:08,790 than it is about a utility function. 474 00:20:08,790 --> 00:20:10,350 We have less parameters to draw on. 475 00:20:10,350 --> 00:20:13,117 But the point is, these are all different ways of thinking 476 00:20:13,117 --> 00:20:13,950 about the trade-off. 477 00:20:13,950 --> 00:20:16,050 We can't avoid thinking about the trade-off. 478 00:20:16,050 --> 00:20:18,330 That's why, once again, we're the dismal science-- 479 00:20:18,330 --> 00:20:19,410 because nothing's free. 480 00:20:19,410 --> 00:20:20,490 We can't avoid thinking about the trade-off. 481 00:20:20,490 --> 00:20:22,237 We have to think about redistribution. 482 00:20:22,237 --> 00:20:23,820 And these give us different frameworks 483 00:20:23,820 --> 00:20:26,040 for thinking about that. 484 00:20:26,040 --> 00:20:27,590 Questions about that? 485 00:20:27,590 --> 00:20:28,880 Yeah? 486 00:20:28,880 --> 00:20:33,020 AUDIENCE: What-- for the Nozickian and the other one, 487 00:20:33,020 --> 00:20:36,620 what happens if there are individuals that just don't-- 488 00:20:36,620 --> 00:20:40,860 they always make the wrong decision. 489 00:20:40,860 --> 00:20:43,420 They'll spend all their money irresponsibly, 490 00:20:43,420 --> 00:20:45,670 and therefore, they can't have a producing [INAUDIBLE] 491 00:20:45,670 --> 00:20:47,212 JONATHAN GRUBER: Well, I mean, that's 492 00:20:47,212 --> 00:20:48,440 a very interesting question. 493 00:20:48,440 --> 00:20:50,025 So I think Nozick-- 494 00:20:50,025 --> 00:20:52,400 I mean, I don't know, I don't know how hard-hearted a guy 495 00:20:52,400 --> 00:20:53,357 Nozick is-- 496 00:20:53,357 --> 00:20:55,440 but if you took the Nozickian view to the extreme, 497 00:20:55,440 --> 00:20:57,648 as long as that person had an equal opportunity, then 498 00:20:57,648 --> 00:20:59,323 they should just die. 499 00:20:59,323 --> 00:21:00,990 You know, they had an equal opportunity, 500 00:21:00,990 --> 00:21:04,917 if they made a series of bad decisions, why should we care? 501 00:21:04,917 --> 00:21:06,500 Now, that's obviously an extreme view, 502 00:21:06,500 --> 00:21:09,110 but I think that would be the view there. 503 00:21:09,110 --> 00:21:11,540 Whereas, commodity egalitarianism would say, look, 504 00:21:11,540 --> 00:21:14,600 let's at least make sure that, despite their bad decisions, 505 00:21:14,600 --> 00:21:15,350 they don't starve. 506 00:21:15,350 --> 00:21:17,267 But we don't want to make them rich if they're 507 00:21:17,267 --> 00:21:18,398 making bad decisions. 508 00:21:18,398 --> 00:21:20,440 So let's just set a minimum and get them to that, 509 00:21:20,440 --> 00:21:23,900 and then let things go from there. 510 00:21:23,900 --> 00:21:24,420 Yeah? 511 00:21:24,420 --> 00:21:27,105 AUDIENCE: Is that where the idea of basic income comes from? 512 00:21:27,605 --> 00:21:28,330 JONATHAN GRUBER: That's a great segue to what 513 00:21:28,330 --> 00:21:29,760 I want to talk about next. 514 00:21:29,760 --> 00:21:31,430 Which is, let's actually talk about-- 515 00:21:31,430 --> 00:21:34,403 turn these into practice, and measuring inequality. 516 00:21:39,610 --> 00:21:41,610 And I'm going to back to your basic income point 517 00:21:41,610 --> 00:21:42,750 in a couple of minutes. 518 00:21:42,750 --> 00:21:46,220 So let's talk about actually measuring inequality. 519 00:21:46,220 --> 00:21:47,690 And the reason we're going to talk 520 00:21:47,690 --> 00:21:49,065 about this, because it highlights 521 00:21:49,065 --> 00:21:50,365 how important this issue is. 522 00:21:50,365 --> 00:21:51,740 So let's go to some facts-- these 523 00:21:51,740 --> 00:21:56,010 are from my textbook from 1441. 524 00:21:56,010 --> 00:21:57,465 So go to Figure 21-2. 525 00:22:00,450 --> 00:22:04,110 Ignore the last row for second, focus on the first five rows. 526 00:22:04,110 --> 00:22:07,290 What the first five rows show is the percent 527 00:22:07,290 --> 00:22:11,550 of income received by each quintile, or each fifth, 528 00:22:11,550 --> 00:22:13,680 of the income distribution. 529 00:22:13,680 --> 00:22:16,590 In other words, each row is 20% of people. 530 00:22:16,590 --> 00:22:18,980 So the first row is the poorest 20% of people, 531 00:22:18,980 --> 00:22:21,290 the next row is the second poorest 20% of people, 532 00:22:21,290 --> 00:22:23,080 and so on. 533 00:22:23,080 --> 00:22:25,780 The numbers in each cell are the share 534 00:22:25,780 --> 00:22:27,505 of income held by that quintile. 535 00:22:27,505 --> 00:22:29,380 In other words, if the distribution of income 536 00:22:29,380 --> 00:22:31,977 was totally equal, every one of these numbers would be 20. 537 00:22:31,977 --> 00:22:33,810 If distribution of income was totally equal, 538 00:22:33,810 --> 00:22:35,237 every quintile would have 20. 539 00:22:35,237 --> 00:22:37,320 But in fact, that's never been true in any society 540 00:22:37,320 --> 00:22:38,773 ever in history-- 541 00:22:38,773 --> 00:22:40,690 the richest always have more than the poorest. 542 00:22:40,690 --> 00:22:42,440 We have no perfect distribution of income. 543 00:22:42,440 --> 00:22:44,920 And you see that if you look at in 1967, 544 00:22:44,920 --> 00:22:47,460 when these data first are reliably collected, 545 00:22:47,460 --> 00:22:50,950 you see that the highest 20% of individuals 546 00:22:50,950 --> 00:22:53,140 had about 10 times as much as the lowest 20%. 547 00:22:55,780 --> 00:22:59,780 That there was a lot of inequality. 548 00:22:59,780 --> 00:23:02,720 Now, if you roll forward till about 1980, 549 00:23:02,720 --> 00:23:05,060 that gap was shrinking. 550 00:23:05,060 --> 00:23:07,970 So you saw that the highest 20% share was about fixed, 551 00:23:07,970 --> 00:23:11,000 but the lowest 20% was rising. 552 00:23:11,000 --> 00:23:12,620 But then, if you look since 1980, 553 00:23:12,620 --> 00:23:15,220 that gap has widened enormously. 554 00:23:15,220 --> 00:23:18,680 To the point now where the 2013 is 555 00:23:18,680 --> 00:23:21,140 the latest here, but the facts haven't really changed-- 556 00:23:21,140 --> 00:23:24,710 the richest 20% of Americans earn more than half the income 557 00:23:24,710 --> 00:23:25,790 in America. 558 00:23:25,790 --> 00:23:28,100 And the poorest 20% earn only about 3% 559 00:23:28,100 --> 00:23:29,690 of the income in America. 560 00:23:29,690 --> 00:23:34,790 So inequality has widened massively in the US. 561 00:23:34,790 --> 00:23:38,450 How does that put us in international terms? 562 00:23:38,450 --> 00:23:41,330 And I'm sorry, and the last row was the share of the top 5%-- 563 00:23:41,330 --> 00:23:42,680 this is particular striking. 564 00:23:42,680 --> 00:23:44,165 In fact, go to the next page-- this 565 00:23:44,165 --> 00:23:46,748 is a graph of the share of the top 1% of income 566 00:23:46,748 --> 00:23:47,540 holders in America. 567 00:23:47,540 --> 00:23:50,900 So this is the share of income held by the 1% richest 568 00:23:50,900 --> 00:23:51,980 Americans. 569 00:23:51,980 --> 00:23:55,220 You can see that in the early 20th century, that 570 00:23:55,220 --> 00:23:57,170 was pretty high, almost 20%. 571 00:23:57,170 --> 00:24:00,500 It then fell down about 10% by the early 1970s. 572 00:24:00,500 --> 00:24:03,650 It's now up-- and by the latest date, up to about 25%. 573 00:24:03,650 --> 00:24:06,210 It's higher than it was at the beginning of 20th century. 574 00:24:06,210 --> 00:24:08,870 So the 1% of richest Americans have about 25% 575 00:24:08,870 --> 00:24:10,760 of the income earned in society. 576 00:24:10,760 --> 00:24:13,280 So it's extremely unequal income distribution. 577 00:24:13,280 --> 00:24:14,870 Once again, not saying bad or good-- 578 00:24:14,870 --> 00:24:16,203 I'm making a positive statement. 579 00:24:16,203 --> 00:24:18,140 Unequal is irrefutable. 580 00:24:18,140 --> 00:24:19,887 Bad or good, we'll get to. 581 00:24:19,887 --> 00:24:22,220 But it's irrefutable a very unequal income distribution. 582 00:24:22,220 --> 00:24:25,370 It's also irrefutable, we have a much more unequal distribution 583 00:24:25,370 --> 00:24:27,330 of income than the rest of the world. 584 00:24:27,330 --> 00:24:30,350 So Figure 21-4, we compare the facts for the US 585 00:24:30,350 --> 00:24:31,762 to the rest of the OECD, which is 586 00:24:31,762 --> 00:24:32,970 a set of developed economies. 587 00:24:32,970 --> 00:24:34,134 Yeah? 588 00:24:34,134 --> 00:24:36,707 AUDIENCE: Is this before or after income tax? 589 00:24:36,707 --> 00:24:38,290 JONATHAN GRUBER: That's a great point. 590 00:24:38,290 --> 00:24:41,300 This all before tax, before tax. 591 00:24:41,300 --> 00:24:43,230 But if anything, if you add taxes, 592 00:24:43,230 --> 00:24:44,820 it makes us look even worse relative to other countries, 593 00:24:44,820 --> 00:24:46,500 because our tax are less progressive 594 00:24:46,500 --> 00:24:48,570 than other countries. 595 00:24:48,570 --> 00:24:50,680 This is before tax and before transfers. 596 00:24:51,180 --> 00:24:52,980 So if you look at other-- 597 00:24:52,980 --> 00:24:54,990 so this list is a lot of numbers. 598 00:24:54,990 --> 00:24:56,500 Look at the bottom line. 599 00:24:56,500 --> 00:25:00,300 The bottom line is the average across all non-US countries 600 00:25:00,300 --> 00:25:02,970 of the share of income held by each part of the income 601 00:25:02,970 --> 00:25:04,170 distribution. 602 00:25:04,170 --> 00:25:06,780 And the next to bottom line, and the bottom line is the US. 603 00:25:06,780 --> 00:25:10,500 So we say the bottom 10% of income distribution, 604 00:25:10,500 --> 00:25:13,530 on average across these countries, has 3% of income. 605 00:25:13,530 --> 00:25:17,130 Indeed, nowhere except for Mexico 606 00:25:17,130 --> 00:25:20,820 is the number lower than the 1.6% in the US. 607 00:25:20,820 --> 00:25:24,000 Likewise, you look at the top 10% of income earners, 608 00:25:24,000 --> 00:25:26,520 on average across these countries, 609 00:25:26,520 --> 00:25:28,290 they earn 25% of the income. 610 00:25:28,290 --> 00:25:30,000 In the US, it's 30%. 611 00:25:30,000 --> 00:25:33,090 And indeed, nowhere is the number higher than in-- 612 00:25:33,090 --> 00:25:35,670 except in Mexico and Turkey. 613 00:25:35,670 --> 00:25:39,910 So we are the most unequal country, except for Mexico, 614 00:25:39,910 --> 00:25:42,010 on this list. 615 00:25:42,010 --> 00:25:46,190 Once again, not saying good or bad, just saying the facts. 616 00:25:46,190 --> 00:25:49,990 We're going to come to how we think about good or bad. 617 00:25:49,990 --> 00:25:51,910 So those are the facts about inequality. 618 00:25:51,910 --> 00:25:53,680 But as the question here pointed out, 619 00:25:53,680 --> 00:25:56,200 it's not clear we care about inequality. 620 00:25:56,200 --> 00:25:58,520 Indeed, in a standard economic framework, 621 00:25:58,520 --> 00:25:59,770 I don't care about inequality. 622 00:25:59,770 --> 00:26:02,440 My utility is a function of my consumption, not 623 00:26:02,440 --> 00:26:04,307 your consumption. 624 00:26:04,307 --> 00:26:06,890 Sustainable economic framework, I don't care about inequality, 625 00:26:06,890 --> 00:26:08,990 I just care about what I have. 626 00:26:08,990 --> 00:26:12,980 And that speaks more to the commodity egalitarianism view. 627 00:26:12,980 --> 00:26:16,640 Which is, how are we doing in making sure people have enough 628 00:26:16,640 --> 00:26:18,350 to live? 629 00:26:18,350 --> 00:26:22,660 And to do that, we say, we move from-- 630 00:26:22,660 --> 00:26:25,760 so when we talk about inequality, 631 00:26:25,760 --> 00:26:33,620 inequality is a measure of relative distribution. 632 00:26:33,620 --> 00:26:37,770 Want to move to something which is the measure of absolute-- 633 00:26:37,770 --> 00:26:41,850 absolute income, and that's what we call the poverty line. 634 00:26:44,675 --> 00:26:46,300 The poverty line in the US is a measure 635 00:26:46,300 --> 00:26:49,920 of absolute deprivation-- 636 00:26:49,920 --> 00:26:54,330 what share of Americans are earning less than some minimum 637 00:26:54,330 --> 00:26:56,740 standard they need to live? 638 00:26:56,740 --> 00:26:58,930 Now, you can immediately see the problem. 639 00:26:58,930 --> 00:27:02,020 With inequality, it's unit free, right? 640 00:27:02,020 --> 00:27:03,935 I simply compare dollars to dollars. 641 00:27:03,935 --> 00:27:06,310 Once I start going here, I have to make a judgment, which 642 00:27:06,310 --> 00:27:07,870 is, what is deprivation? 643 00:27:07,870 --> 00:27:09,850 What do you need to live? 644 00:27:09,850 --> 00:27:13,002 So in substance, this makes more sense-- 645 00:27:13,002 --> 00:27:14,710 absolutely makes more sense, in substance 646 00:27:14,710 --> 00:27:15,910 it makes more sense to think about, 647 00:27:15,910 --> 00:27:17,285 do people have enough to live on? 648 00:27:17,285 --> 00:27:18,880 But it is more difficult, because you 649 00:27:18,880 --> 00:27:21,560 have to draw a judgment about what it is. 650 00:27:21,560 --> 00:27:24,290 So the judgment we've drawn is what's called the poverty line. 651 00:27:24,290 --> 00:27:26,830 The poverty line was invented by a civil servant 652 00:27:26,830 --> 00:27:29,632 in the 1960s, Molly Orshansky. 653 00:27:29,632 --> 00:27:31,840 She said, well, what does it take to live in America? 654 00:27:31,840 --> 00:27:34,132 She said, well, the typical person spends about a third 655 00:27:34,132 --> 00:27:37,280 of their budget on food in the 1960s. 656 00:27:37,280 --> 00:27:40,960 So let's cost out the cost of a nutritionally adequate bundle 657 00:27:40,960 --> 00:27:45,190 of food, multiplied by it three, and call that the poverty line. 658 00:27:45,190 --> 00:27:47,830 She did that, and that's still the poverty line. 659 00:27:47,830 --> 00:27:50,310 All we've done is taken that and updated it by inflation. 660 00:27:50,310 --> 00:27:52,690 Remember, we talked about the CPI, the inflation rate? 661 00:27:52,690 --> 00:27:54,940 All we've done is taken Molly Orshansky's poverty line 662 00:27:54,940 --> 00:27:57,290 and updated it by inflation ever since. 663 00:27:57,290 --> 00:27:58,500 And what do we get? 664 00:27:58,500 --> 00:28:00,380 Well, if you look at table 21-5, this 665 00:28:00,380 --> 00:28:03,810 shows you the poverty line in the US today. 666 00:28:03,810 --> 00:28:06,330 It varies by family size, because you need more resources 667 00:28:06,330 --> 00:28:07,380 with a bigger family. 668 00:28:07,380 --> 00:28:10,770 But not one to one, because of economies of scale 669 00:28:10,770 --> 00:28:12,023 in the household. 670 00:28:12,023 --> 00:28:13,440 You don't need twice as much money 671 00:28:13,440 --> 00:28:14,940 to have a household with two people, 672 00:28:14,940 --> 00:28:17,070 because you still only need one living unit, 673 00:28:17,070 --> 00:28:19,687 you can share cookware, you only have 674 00:28:19,687 --> 00:28:21,270 to heat-- heating for two people isn't 675 00:28:21,270 --> 00:28:23,728 much more expensive than heating for one person, et cetera. 676 00:28:23,728 --> 00:28:26,400 So there's economies of scale within the household. 677 00:28:26,400 --> 00:28:28,230 So the poverty line does not go up-- 678 00:28:28,230 --> 00:28:29,700 does not double with every person, 679 00:28:29,700 --> 00:28:33,300 does not double you go from one to two-- it less than doubles. 680 00:28:33,300 --> 00:28:34,890 And you could see this scale-- 681 00:28:34,890 --> 00:28:37,260 essentially we say that-- 682 00:28:37,260 --> 00:28:39,900 this is 2015, so it's higher now-- 683 00:28:39,900 --> 00:28:42,180 but basically says that one person 684 00:28:42,180 --> 00:28:45,660 with income below $11,170 is living in poverty. 685 00:28:45,660 --> 00:28:48,390 And a family of four, it's about $24,250. 686 00:28:50,860 --> 00:28:54,190 So it basically says, a family below $25,000-- 687 00:28:54,190 --> 00:28:59,170 a family of four below $25,000, is living in poverty. 688 00:28:59,170 --> 00:29:04,010 Now is that the right number? 689 00:29:04,010 --> 00:29:05,050 Well-- yeah? 690 00:29:05,050 --> 00:29:06,487 AUDIENCE: Is it different based on where in the country 691 00:29:06,487 --> 00:29:07,050 you live? 692 00:29:07,050 --> 00:29:08,410 JONATHAN GRUBER: There's a number of reasons it might not 693 00:29:08,410 --> 00:29:09,370 be the right number. 694 00:29:09,370 --> 00:29:10,843 First of all, it does not differ based on where in the country 695 00:29:10,843 --> 00:29:11,343 you live. 696 00:29:11,343 --> 00:29:14,410 So if you are-- you guys don't know because you're sheltered-- 697 00:29:14,410 --> 00:29:17,080 but if you right now tried to take $25,000 698 00:29:17,080 --> 00:29:19,510 and go live in Boston, there's no way. 699 00:29:19,510 --> 00:29:21,453 I mean, it's just, like, impossible. 700 00:29:21,453 --> 00:29:22,870 Whereas, in rural Mississippi, you 701 00:29:22,870 --> 00:29:25,230 can probably do OK on $25,000. 702 00:29:25,230 --> 00:29:27,640 But it doesn't vary by area. 703 00:29:27,640 --> 00:29:31,685 It doesn't vary-- also the poverty line calculation is all 704 00:29:31,685 --> 00:29:33,310 messed up now, because when she did it, 705 00:29:33,310 --> 00:29:35,050 food was a third of people's budgets. 706 00:29:35,050 --> 00:29:36,880 It's now more like 20% of people's budgets. 707 00:29:36,880 --> 00:29:38,140 It's fallen enormously. 708 00:29:38,140 --> 00:29:40,870 And the other elements that poor people have to pay, 709 00:29:40,870 --> 00:29:43,480 notably housing and medical care, have gone up much faster. 710 00:29:43,480 --> 00:29:46,370 The poverty line hasn't accounted for that. 711 00:29:46,370 --> 00:29:48,250 So in fact, there's lots of reasons 712 00:29:48,250 --> 00:29:49,930 that this line is problematic. 713 00:29:49,930 --> 00:29:52,540 Nonetheless, it's very hard to change it. 714 00:29:52,540 --> 00:29:55,870 Indeed, I was in the US government for 14 months, 715 00:29:55,870 --> 00:30:00,010 and I only went to one super duper secret meeting. 716 00:30:00,010 --> 00:30:02,770 I went to a lot of meetings with the president, stuff like that. 717 00:30:02,770 --> 00:30:04,480 But one time, my secretary said, there's a meeting, 718 00:30:04,480 --> 00:30:06,022 and I can't tell you what it's about, 719 00:30:06,022 --> 00:30:07,900 and I can't even tell you where it is. 720 00:30:07,900 --> 00:30:10,275 When the time comes, they will come get you and bring you 721 00:30:10,275 --> 00:30:10,960 there. 722 00:30:10,960 --> 00:30:13,060 I was like, Jesus, it's nuclear war. 723 00:30:13,060 --> 00:30:14,597 Like, what the hell? 724 00:30:14,597 --> 00:30:16,930 So they brought me to this room, we're all in this room. 725 00:30:16,930 --> 00:30:17,620 I'm like, what's going on? 726 00:30:17,620 --> 00:30:20,320 They're like, we need to discuss revising the poverty line. 727 00:30:20,320 --> 00:30:21,670 I'm like, what? 728 00:30:21,670 --> 00:30:23,530 Well, why is it super secret? 729 00:30:23,530 --> 00:30:27,670 Because the US today distributes more than a $1 trillion a year 730 00:30:27,670 --> 00:30:29,660 based on the poverty line. 731 00:30:29,660 --> 00:30:33,650 So any changes you make is going to create winners and losers. 732 00:30:33,650 --> 00:30:36,760 And the losers are going to be really mad. 733 00:30:36,760 --> 00:30:39,010 And as a result, it's been incredibly hard to change 734 00:30:39,010 --> 00:30:39,795 the poverty line. 735 00:30:39,795 --> 00:30:41,170 Because for example, let's say we 736 00:30:41,170 --> 00:30:43,600 change it to recognize the fact that it should be higher 737 00:30:43,600 --> 00:30:44,920 in New York than Mississippi. 738 00:30:44,920 --> 00:30:46,503 Well, that means New Yorkers would win 739 00:30:46,503 --> 00:30:47,950 and Mississippians would lose. 740 00:30:47,950 --> 00:30:49,150 Bad news, politically. 741 00:30:49,150 --> 00:30:50,180 New Yorkers would be happy, Mississippians 742 00:30:50,180 --> 00:30:52,600 would be sad, but because of diminishing marginal utility, 743 00:30:52,600 --> 00:30:54,160 and the laws of politics, the guys who are sad 744 00:30:54,160 --> 00:30:56,240 make more noise than the guys who are happy. 745 00:30:56,240 --> 00:30:57,865 So it's very, very hard to change this, 746 00:30:57,865 --> 00:31:00,190 despite its problematic features. 747 00:31:00,190 --> 00:31:02,265 Nonetheless, it's still a useful benchmark. 748 00:31:02,265 --> 00:31:03,890 It is useful that it's fixed over time, 749 00:31:03,890 --> 00:31:05,682 because it allows us to essentially see how 750 00:31:05,682 --> 00:31:07,150 things have evolved over time. 751 00:31:07,150 --> 00:31:11,360 And we can see that in Figure 21-6. 752 00:31:11,360 --> 00:31:14,340 This shows the poverty rate over time. 753 00:31:14,340 --> 00:31:19,070 And it shows it for everybody, that's the red. 754 00:31:19,070 --> 00:31:22,220 It shows it for the elderly, that's the blue. 755 00:31:22,220 --> 00:31:24,380 For kids, that's the green. 756 00:31:24,380 --> 00:31:27,230 And for non-elderly adults, that's the yellow. 757 00:31:27,230 --> 00:31:27,980 So what do we see? 758 00:31:27,980 --> 00:31:29,063 We see a couple of things. 759 00:31:29,063 --> 00:31:32,360 First of all, for every group, poverty fell enormously 760 00:31:32,360 --> 00:31:34,370 during the 1960s. 761 00:31:34,370 --> 00:31:36,280 That's the so-called war on poverty, 762 00:31:36,280 --> 00:31:38,720 which used a number of social programs 763 00:31:38,720 --> 00:31:42,650 that lowered poverty enormously during the 1960s. 764 00:31:42,650 --> 00:31:45,020 For the elderly, it kept going down. 765 00:31:45,020 --> 00:31:47,450 And the elderly went from the most impoverished group 766 00:31:47,450 --> 00:31:50,440 in society to the least. 767 00:31:50,440 --> 00:31:53,230 For kids, it bounced back up. 768 00:31:53,230 --> 00:31:56,230 And now kid poverty rates are nearly as high 769 00:31:56,230 --> 00:31:59,310 as they were back in the early 1960s. 770 00:31:59,310 --> 00:32:01,850 For the rest of folks, it sort of went down then flattened. 771 00:32:01,850 --> 00:32:03,010 Yeah? 772 00:32:03,010 --> 00:32:05,502 AUDIENCE: How do you determined how much wealth a kid has? 773 00:32:05,502 --> 00:32:07,710 JONATHAN GRUBER: It's based on their family's income. 774 00:32:07,710 --> 00:32:08,820 This is not wealth, it's income. 775 00:32:08,820 --> 00:32:10,200 It's based on their-- so basically, 776 00:32:10,200 --> 00:32:12,242 when asked does a kid live in poverty, it's like, 777 00:32:12,242 --> 00:32:15,840 do they live in a household that's below the poverty line? 778 00:32:15,840 --> 00:32:17,340 So the bottom line is-- 779 00:32:17,340 --> 00:32:19,192 think of it as families with kids, 780 00:32:19,192 --> 00:32:20,650 is another way to think about this. 781 00:32:20,650 --> 00:32:22,860 The bottom line is, essentially, poverty 782 00:32:22,860 --> 00:32:24,120 hasn't done a whole lot. 783 00:32:24,120 --> 00:32:28,507 We haven't done a whole lot on poverty in the last 50 years. 784 00:32:28,507 --> 00:32:30,840 We sort of lowered a lot in the '60s, and then it's been 785 00:32:30,840 --> 00:32:34,740 bounced up and down, but it's been pretty flat-- 786 00:32:34,740 --> 00:32:37,480 is the result there. 787 00:32:37,480 --> 00:32:39,963 Now, the bottom line is-- 788 00:32:39,963 --> 00:32:41,380 now my take, now I'm going to draw 789 00:32:41,380 --> 00:32:44,200 a judgment-- my take is, along either of these dimensions, 790 00:32:44,200 --> 00:32:45,790 we don't look so hot. 791 00:32:45,790 --> 00:32:47,800 We're the most unequal nation the world. 792 00:32:47,800 --> 00:32:52,210 And we have-- still, if you look at all people, 793 00:32:52,210 --> 00:32:55,030 we have 15% of our people living below some standard 794 00:32:55,030 --> 00:32:57,070 of absolute deprivation. 795 00:32:57,070 --> 00:32:59,590 Literally saying, we are accepting that 15% of people 796 00:32:59,590 --> 00:33:02,180 America cannot afford to live. 797 00:33:02,180 --> 00:33:07,260 We are accepting that, including more than 20% of kids. 798 00:33:07,260 --> 00:33:09,420 So I don't think we're doing that well. 799 00:33:09,420 --> 00:33:13,444 But in some sense, this is even the most-- yeah, go ahead. 800 00:33:13,444 --> 00:33:17,200 AUDIENCE: 18 to 64 people, are those single people? 801 00:33:17,200 --> 00:33:19,603 Because I imagine kids would fall into-- 802 00:33:19,603 --> 00:33:22,020 JONATHAN GRUBER: I mean, that's like the average of all 18 803 00:33:22,020 --> 00:33:24,510 to 64, including those that have kids and don't. 804 00:33:24,510 --> 00:33:27,610 So like a child at the age of 64, that would come down more. 805 00:33:27,610 --> 00:33:30,020 It's just the average. 806 00:33:30,020 --> 00:33:32,750 Now, this is a striking set of facts, but not to my mind 807 00:33:32,750 --> 00:33:34,090 the most striking. 808 00:33:34,090 --> 00:33:36,432 Probably the most striking fact that probably-- probably 809 00:33:36,432 --> 00:33:38,390 the fact that has seen the most influence on me 810 00:33:38,390 --> 00:33:43,198 in the last 10 years is shown in Figure 21-7. 811 00:33:43,198 --> 00:33:45,740 This is a figure put together in the wake of the Freddie Gray 812 00:33:45,740 --> 00:33:46,587 riots in Baltimore. 813 00:33:46,587 --> 00:33:48,170 You may have heard about those, that's 814 00:33:48,170 --> 00:33:51,320 when a prisoner was beat to death in the back of a police 815 00:33:51,320 --> 00:33:52,430 van. 816 00:33:52,430 --> 00:33:55,670 And he was from the area of Sandtown-- 817 00:33:58,230 --> 00:34:00,580 Sandtown, Winchester, which is a super bad area. 818 00:34:00,580 --> 00:34:02,920 Think The Wire-- if you've seen The Wire, super bad area 819 00:34:02,920 --> 00:34:05,770 of Baltimore. 820 00:34:05,770 --> 00:34:09,159 About 3 miles away is an area called Roland Park, 821 00:34:09,159 --> 00:34:11,340 which is a very rich area. 822 00:34:11,340 --> 00:34:16,590 The average life expectancy in Roland Park is 84 years. 823 00:34:16,590 --> 00:34:18,670 That's above the US average. 824 00:34:18,670 --> 00:34:20,219 That's pretty good. 825 00:34:20,219 --> 00:34:23,580 The average life expectancy 3 miles away 826 00:34:23,580 --> 00:34:28,460 is 67 years, which is below North Korea. 827 00:34:28,460 --> 00:34:32,659 And what it was around World War II in the US. 828 00:34:32,659 --> 00:34:36,860 3 miles, and we got a 17-year difference 829 00:34:36,860 --> 00:34:39,210 in the average life expectancy. 830 00:34:39,210 --> 00:34:40,350 What's going on? 831 00:34:40,350 --> 00:34:42,270 Well, what you'd expect. 832 00:34:42,270 --> 00:34:43,980 People are way poor. 833 00:34:43,980 --> 00:34:47,219 In Sandtown, the average income is $107,000-- 834 00:34:47,219 --> 00:34:49,320 I'm sorry, Roland Park is $107,000, 835 00:34:49,320 --> 00:34:51,630 and Sandtown is $24,000-- the average income is 836 00:34:51,630 --> 00:34:53,850 below the poverty line. 837 00:34:53,850 --> 00:34:57,240 In Roland Park, 2.5% of kids live in poverty. 838 00:34:57,240 --> 00:35:01,520 In Sandtown, it's 55% of kids. 839 00:35:01,520 --> 00:35:05,018 So basically, you have incredible inequality 840 00:35:05,018 --> 00:35:05,810 in short distances. 841 00:35:05,810 --> 00:35:07,670 To me, this is striking, because it really 842 00:35:07,670 --> 00:35:11,600 brings home inequality by putting it 843 00:35:11,600 --> 00:35:14,640 in such sort of close geographic terms. 844 00:35:14,640 --> 00:35:16,260 So we have a lot of inequality. 845 00:35:16,260 --> 00:35:18,330 There's no question. 846 00:35:18,330 --> 00:35:20,100 And it certainly motivates-- 847 00:35:20,100 --> 00:35:22,510 I think it's hard to look at facts like this, 848 00:35:22,510 --> 00:35:24,240 regardless of your political stripe, 849 00:35:24,240 --> 00:35:27,273 and not worry, not at least worry, 850 00:35:27,273 --> 00:35:29,940 and consider the fact that there may be some role for government 851 00:35:29,940 --> 00:35:32,390 redistribution. 852 00:35:32,390 --> 00:35:35,900 But that's not the end of the discussion. 853 00:35:35,900 --> 00:35:39,470 This in some sense-- think of this part of the lecture 854 00:35:39,470 --> 00:35:41,820 as the benefits of government redistribution. 855 00:35:41,820 --> 00:35:43,528 The benefits of government redistribution 856 00:35:43,528 --> 00:35:46,100 is we have incredible inequality, incredible poverty, 857 00:35:46,100 --> 00:35:47,678 all around the country. 858 00:35:47,678 --> 00:35:49,220 Now, we have to come-- but of course, 859 00:35:49,220 --> 00:35:50,870 in economics, nothing free. 860 00:35:50,870 --> 00:35:54,500 Now we have to come to the costs of redistribution. 861 00:35:54,500 --> 00:35:56,270 The benefits are clear. 862 00:35:56,270 --> 00:35:57,890 What about the costs? 863 00:35:57,890 --> 00:36:02,060 And so now we have to talk about the efficiency 864 00:36:02,060 --> 00:36:05,120 costs, or the leakage. 865 00:36:05,120 --> 00:36:12,960 Efficiency costs-- costs of redistribution. 866 00:36:12,960 --> 00:36:16,120 Or in other words, how big is the leakage? 867 00:36:16,120 --> 00:36:19,075 So going back to Okun, I hope that these figures inspire 868 00:36:19,075 --> 00:36:21,450 you to think we out to be putting some money into buckets 869 00:36:21,450 --> 00:36:23,280 and giving it to poor people. 870 00:36:23,280 --> 00:36:25,230 But now the question is, should we? 871 00:36:25,230 --> 00:36:26,280 What if it all leaks out? 872 00:36:26,280 --> 00:36:27,960 How leaky is the bucket? 873 00:36:27,960 --> 00:36:30,810 And that's what we need to talk about now. 874 00:36:30,810 --> 00:36:36,130 And basically, leakages in the bucket come from three sources. 875 00:36:36,130 --> 00:36:40,390 The first and least important source is administrative costs. 876 00:36:40,390 --> 00:36:43,122 Literally got to pay someone to carry the bucket. 877 00:36:43,122 --> 00:36:45,080 So if you put a dollar in and carry the bucket, 878 00:36:45,080 --> 00:36:46,320 he's going to take some money out 879 00:36:46,320 --> 00:36:47,862 for the right of carrying the bucket. 880 00:36:47,862 --> 00:36:50,070 That's small, but non-trivial. 881 00:36:50,070 --> 00:36:53,050 Maybe low single digits. 882 00:36:53,050 --> 00:36:58,780 The second source of leakage is the efficiency costs 883 00:36:58,780 --> 00:36:59,290 of taxation. 884 00:37:06,790 --> 00:37:10,390 If you tax people and take their money away, 885 00:37:10,390 --> 00:37:13,195 they may work less hard. 886 00:37:13,195 --> 00:37:15,320 Think about the extreme case, where I'm at to say-- 887 00:37:15,320 --> 00:37:16,550 I'm going to go back to the utilitarian world, 888 00:37:16,550 --> 00:37:19,520 I'm going to tell everyone, we're going to equalize income. 889 00:37:19,520 --> 00:37:22,400 That means that everyone, no matter what they make, 890 00:37:22,400 --> 00:37:24,910 example, the same amount of money. 891 00:37:24,910 --> 00:37:26,035 Why would you work? 892 00:37:26,035 --> 00:37:27,910 I mean, you guys would, because you're tools. 893 00:37:27,910 --> 00:37:33,250 But why would regular people work? 894 00:37:33,250 --> 00:37:34,240 They wouldn't. 895 00:37:34,240 --> 00:37:35,080 Because no matter what you do, you 896 00:37:35,080 --> 00:37:36,370 end up with the same income. 897 00:37:36,370 --> 00:37:37,840 It's 100% tax. 898 00:37:37,840 --> 00:37:38,950 So why would you work? 899 00:37:38,950 --> 00:37:40,030 And that's extreme, but the point 900 00:37:40,030 --> 00:37:41,655 is, the extreme example makes the point 901 00:37:41,655 --> 00:37:43,300 that when you tax people, there's 902 00:37:43,300 --> 00:37:44,800 potential efficiency costs, in terms 903 00:37:44,800 --> 00:37:47,910 of them earning less income. 904 00:37:47,910 --> 00:37:55,020 The third issue is the efficiency costs of transfers. 905 00:37:58,990 --> 00:38:03,410 Which is when you give people money, 906 00:38:03,410 --> 00:38:06,310 and when you give people money, they may also work less. 907 00:38:06,310 --> 00:38:08,510 So not only might I work less when you tax me, 908 00:38:08,510 --> 00:38:10,430 I might work less if you give me money. 909 00:38:10,430 --> 00:38:13,490 Why should I go to work if you're sending me a check? 910 00:38:13,490 --> 00:38:15,560 So not only would equal distribution of income 911 00:38:15,560 --> 00:38:17,080 lead me to work less because I'm being taxed, 912 00:38:17,080 --> 00:38:18,470 leading me to work less because I'm getting money. 913 00:38:18,470 --> 00:38:20,260 So why should I bother working? 914 00:38:20,260 --> 00:38:22,400 As long as leisure is a normal good, remember? 915 00:38:22,400 --> 00:38:24,000 I don't want to work. 916 00:38:24,000 --> 00:38:28,850 So if you're just sending me money, why would I go to work? 917 00:38:28,850 --> 00:38:31,130 So to see this, we can sort of summarize 918 00:38:31,130 --> 00:38:33,300 this with one example. 919 00:38:33,300 --> 00:38:37,280 So let's go to Figure 21-8, and I want to walk through-- 920 00:38:37,280 --> 00:38:39,710 it's a fairly complicated example-- let's walk through-- 921 00:38:39,710 --> 00:38:43,040 this a simple illustration of a tax and transfer scheme 922 00:38:43,040 --> 00:38:46,010 of the type we have in America. 923 00:38:46,010 --> 00:38:51,890 We start in this example with an individual earning $20 an hour. 924 00:38:51,890 --> 00:38:54,270 So the slope of this line is negative $20 an hour. 925 00:38:54,270 --> 00:38:56,550 This person can work-- 926 00:38:56,550 --> 00:38:59,050 and remember, we don't model work, we model leisure. 927 00:38:59,050 --> 00:39:00,280 I almost made the mistake. 928 00:39:00,280 --> 00:39:02,490 Remember, we don't model the bad, we model the good. 929 00:39:02,490 --> 00:39:05,010 We don't model labor, we model leisure. 930 00:39:05,010 --> 00:39:09,715 Let's say that the max leisure you can take is 2,000 hours. 931 00:39:09,715 --> 00:39:11,590 So you can either take 2,000 hours of leisure 932 00:39:11,590 --> 00:39:15,930 and consume nothing, or you could take no leisure 933 00:39:15,930 --> 00:39:17,310 and consume 40,000. 934 00:39:17,310 --> 00:39:20,510 Let's say consumption is income, no savings in this model. 935 00:39:20,510 --> 00:39:24,910 So you earn $20 an hour, you consume your whole income, 936 00:39:24,910 --> 00:39:28,830 and you can take up to 2,000 hours of leisure. 937 00:39:28,830 --> 00:39:32,400 So your budget constraint is the dark line running from 40,000 938 00:39:32,400 --> 00:39:36,210 on the y-axis, 2,000 on the x-axis. 939 00:39:36,210 --> 00:39:38,940 Now, let's say that we're going to put in, 940 00:39:38,940 --> 00:39:42,100 into this budget constraint, we're going to add two things. 941 00:39:42,100 --> 00:39:45,210 The first is a transfer program to the poor. 942 00:39:45,210 --> 00:39:47,240 We're worried about poverty. 943 00:39:47,240 --> 00:39:48,990 So we're going to have a new program, that 944 00:39:48,990 --> 00:39:54,615 says that every American gets at least $10,000. 945 00:39:54,615 --> 00:39:57,270 Everybody gets $10,000. 946 00:39:57,270 --> 00:40:01,440 But as their income goes up, we're going to take that away. 947 00:40:01,440 --> 00:40:04,288 So we're going to say, since we have a transfer program, 948 00:40:04,288 --> 00:40:06,330 the transfer program is going to be of the form-- 949 00:40:06,330 --> 00:40:11,900 the transfer you get is the max of 0 comma 950 00:40:11,900 --> 00:40:15,790 10,000 minus your income. 951 00:40:15,790 --> 00:40:17,120 That's our transfer program. 952 00:40:17,120 --> 00:40:20,130 So if your income is 0, you get 10,000. 953 00:40:20,130 --> 00:40:21,880 If your income is 10,000, you get zero. 954 00:40:21,880 --> 00:40:23,850 We're just making sure everybody gets $10,000. 955 00:40:23,850 --> 00:40:25,850 We don't care about people having more and that, 956 00:40:25,850 --> 00:40:26,700 so we're going take it away. 957 00:40:26,700 --> 00:40:29,242 We're going to say, look, want to make sure you have $10,000, 958 00:40:29,242 --> 00:40:31,910 but above that, we don't care about you. 959 00:40:31,910 --> 00:40:33,570 So if you're someone earning $100,000, 960 00:40:33,570 --> 00:40:36,130 this program's irrelevant. 961 00:40:36,130 --> 00:40:37,570 If you're someone earning $5,000, 962 00:40:37,570 --> 00:40:42,320 we'll give you another $5,000 to get you up to $10,000. 963 00:40:42,320 --> 00:40:44,060 So that's based on a transfer program. 964 00:40:44,060 --> 00:40:45,920 This is typically the way welfare programs 965 00:40:45,920 --> 00:40:47,895 work around the world. 966 00:40:47,895 --> 00:40:49,270 Essentially, they give you money, 967 00:40:49,270 --> 00:40:51,550 but then they take it away as you get richer, 968 00:40:51,550 --> 00:40:54,670 to make sure the money is targeted to the poorest people. 969 00:40:54,670 --> 00:40:57,050 So that's our transfer program. 970 00:40:57,050 --> 00:40:59,290 That's the first thing it's going to do. 971 00:40:59,290 --> 00:41:01,470 The second thing-- we've got a transfer program, 972 00:41:01,470 --> 00:41:03,180 but we've got to pay for this. 973 00:41:03,180 --> 00:41:05,003 To pay for this, we have to have a tax. 974 00:41:05,003 --> 00:41:06,420 Now, let's say we only want to tax 975 00:41:06,420 --> 00:41:07,620 the rich-- you don't want to tax the poor, 976 00:41:07,620 --> 00:41:09,078 you want to give money to the poor. 977 00:41:09,078 --> 00:41:12,540 So let's say our tax program is of the following form-- 978 00:41:12,540 --> 00:41:16,460 anyone making more than $20,000 per year 979 00:41:16,460 --> 00:41:20,570 pays a 20% tax rate on the income above $20,000. 980 00:41:20,570 --> 00:41:23,130 So no one's taxed on the first $20,000. 981 00:41:23,130 --> 00:41:25,610 But on every dollar above $20,000, 982 00:41:25,610 --> 00:41:27,320 you pay $0.20 to the government. 983 00:41:27,320 --> 00:41:29,240 It's what's called a marginal tax. 984 00:41:32,630 --> 00:41:35,500 You have a marginal tax rate of 20%. 985 00:41:35,500 --> 00:41:36,500 What does marginal mean? 986 00:41:36,500 --> 00:41:39,050 It means you only pay on the next dollar. 987 00:41:39,050 --> 00:41:44,730 So it's a marginal tax rate of 20% above $20k. 988 00:41:44,730 --> 00:41:48,380 OK, so once you earn $20k, of $20k, you pay nothing. 989 00:41:48,380 --> 00:41:51,650 Once you've earned $20k, on every dollar above $20k, 990 00:41:51,650 --> 00:41:53,750 you face a marginal tax rate of 20%. 991 00:41:53,750 --> 00:41:58,210 You pay $0.20 of every dollar of the government. 992 00:41:58,210 --> 00:42:00,288 So that is our tax program. 993 00:42:00,288 --> 00:42:01,330 Now, look at the diagram. 994 00:42:01,330 --> 00:42:03,205 Do people understand how these programs work? 995 00:42:03,205 --> 00:42:04,300 Forgetting the diagram. 996 00:42:04,300 --> 00:42:05,516 Yeah, Manny? 997 00:42:05,516 --> 00:42:07,910 AUDIENCE: In other countries, is there 998 00:42:07,910 --> 00:42:11,480 any other data to show how this affects the number of hours 999 00:42:11,480 --> 00:42:12,040 people work? 1000 00:42:12,040 --> 00:42:14,950 JONATHAN GRUBER: That's exactly what we're getting to. 1001 00:42:14,950 --> 00:42:16,300 That's our concern, right? 1002 00:42:16,300 --> 00:42:18,550 Is that that's my point here, is that this might lower 1003 00:42:18,550 --> 00:42:19,778 how many hours people work. 1004 00:42:19,778 --> 00:42:20,820 And let's talk about why. 1005 00:42:20,820 --> 00:42:23,112 But the question about the logistics of these programs, 1006 00:42:23,112 --> 00:42:23,860 first. 1007 00:42:23,860 --> 00:42:25,860 Let's talk about how it affect the hours worked. 1008 00:42:25,860 --> 00:42:29,820 Let's go to the diagram. 1009 00:42:29,820 --> 00:42:31,770 Let's go to the diagram. 1010 00:42:31,770 --> 00:42:33,990 Let's consider several different people. 1011 00:42:33,990 --> 00:42:40,230 Start with person A. Person A earned-- 1012 00:42:40,230 --> 00:42:42,720 before this program was in place, 1013 00:42:42,720 --> 00:42:45,510 they would have chosen to be a high leisure, low consumption 1014 00:42:45,510 --> 00:42:47,295 person. 1015 00:42:47,295 --> 00:42:51,100 When this program's in place we tell them, look, person A, 1016 00:42:51,100 --> 00:42:56,230 you can get more of both, more leisure and more consumption, 1017 00:42:56,230 --> 00:42:58,440 all you have to do is quit. 1018 00:42:58,440 --> 00:42:59,670 Stop working. 1019 00:42:59,670 --> 00:43:02,360 You move from point A to point D. 1020 00:43:02,360 --> 00:43:04,880 You get more leisure and more consumption. 1021 00:43:04,880 --> 00:43:06,800 So that naturally happens. 1022 00:43:06,800 --> 00:43:10,280 So everyone earning less than $10,000, immediately quits. 1023 00:43:10,280 --> 00:43:12,320 Once again, assuming leisure is the normal good. 1024 00:43:12,320 --> 00:43:15,410 Immediately quits because look, once you're below $10,000, 1025 00:43:15,410 --> 00:43:16,970 it's 100% tax rate. 1026 00:43:16,970 --> 00:43:18,710 Why work? 1027 00:43:18,710 --> 00:43:22,017 So anyone who would have earned less than $10,000 doesn't work. 1028 00:43:22,017 --> 00:43:24,350 Because you're just going to give back to the government 1029 00:43:24,350 --> 00:43:26,210 anyway, why do you care? 1030 00:43:26,210 --> 00:43:28,130 That's person A. What about person B? 1031 00:43:28,130 --> 00:43:31,690 Person B earns more than $10,000. 1032 00:43:31,690 --> 00:43:35,200 But note, their indifference curve 1033 00:43:35,200 --> 00:43:36,948 crosses below the new budget constraint. 1034 00:43:36,948 --> 00:43:38,740 Let me step back, the new budget constraint 1035 00:43:38,740 --> 00:43:41,470 is the red segments plus the black segment in the middle. 1036 00:43:41,470 --> 00:43:46,110 New budget constraint runs from $32,000 on the y-axis, 1037 00:43:46,110 --> 00:43:48,480 it intersects the black line, the old budget constraint 1038 00:43:48,480 --> 00:43:50,220 at $20,000. 1039 00:43:50,220 --> 00:43:53,760 It's the old budget constraint from $20,000 down to $10,000, 1040 00:43:53,760 --> 00:43:55,218 and it becomes the new red segment. 1041 00:43:55,218 --> 00:43:56,218 I should mentioned that. 1042 00:43:56,218 --> 00:43:58,500 So the budget constraint is the two red segments 1043 00:43:58,500 --> 00:44:00,450 and the black segment in between. 1044 00:44:00,450 --> 00:44:02,290 That's the new budget constraint. 1045 00:44:02,290 --> 00:44:06,970 So let's look at person B. What happens to person B and why? 1046 00:44:06,970 --> 00:44:08,150 What does person B do? 1047 00:44:08,150 --> 00:44:08,650 Yeah? 1048 00:44:08,650 --> 00:44:09,650 AUDIENCE: [INAUDIBLE] 1049 00:44:09,650 --> 00:44:10,525 JONATHAN GRUBER: Why? 1050 00:44:10,525 --> 00:44:12,640 AUDIENCE: Because it's a higher [INAUDIBLE].. 1051 00:44:12,640 --> 00:44:14,950 JONATHAN GRUBER: Right, crucially, since person 1052 00:44:14,950 --> 00:44:18,400 B never crosses the red line, we know 1053 00:44:18,400 --> 00:44:22,480 they must be better off at point D than at point B. 1054 00:44:22,480 --> 00:44:25,870 Because we know that since point D is above that line, that's 1055 00:44:25,870 --> 00:44:28,870 a higher indifference curve than they're on at point B. 1056 00:44:28,870 --> 00:44:31,600 So not only do you cause every person below $10,000 to quit, 1057 00:44:31,600 --> 00:44:34,930 you also cause some people above $10,000 to quit. 1058 00:44:34,930 --> 00:44:35,570 Why? 1059 00:44:35,570 --> 00:44:37,237 Well, they give up a little consumption, 1060 00:44:37,237 --> 00:44:38,547 but they get a ton of leisure. 1061 00:44:38,547 --> 00:44:40,380 So let's say someone is at $11,000, $12,000, 1062 00:44:40,380 --> 00:44:42,710 like, wait a second, all my work is only 1063 00:44:42,710 --> 00:44:44,460 getting me $1,000 or $2,000 over quitting. 1064 00:44:44,460 --> 00:44:45,880 I might as well quit. 1065 00:44:45,880 --> 00:44:48,958 So this welfare program causes a ton of people to quit. 1066 00:44:48,958 --> 00:44:51,000 All the people who were going to earn very little 1067 00:44:51,000 --> 00:44:53,458 quit, and some people who are going to earn somewhat little 1068 00:44:53,458 --> 00:44:55,678 quit. 1069 00:44:55,678 --> 00:44:56,470 But that's not all. 1070 00:44:56,470 --> 00:45:00,650 Let's look at person C. Person C used 1071 00:45:00,650 --> 00:45:02,330 to work a certain amount-- you know, 1072 00:45:02,330 --> 00:45:05,420 used to work more than 1,000 hours. 1073 00:45:05,420 --> 00:45:08,390 Take less than 1,000 hours of leisure. 1074 00:45:08,390 --> 00:45:12,010 Now what happens, well what happens-- 1075 00:45:12,010 --> 00:45:13,840 forget the diagram, step back. 1076 00:45:13,840 --> 00:45:17,590 If I take someone and choose a marginal tax rate, 1077 00:45:17,590 --> 00:45:21,530 what happens to their labor supply and why? 1078 00:45:21,530 --> 00:45:23,240 What happens to their leisure and why? 1079 00:45:25,870 --> 00:45:27,110 So I take you. 1080 00:45:27,110 --> 00:45:29,180 You're working-- let's say you're 1081 00:45:29,180 --> 00:45:32,410 taking 800 hours of leisure, doesn't matter what 1082 00:45:32,410 --> 00:45:33,770 the exact number was. 1083 00:45:33,770 --> 00:45:35,710 I then come and save you have a 20% tax rate 1084 00:45:35,710 --> 00:45:37,930 on every earnings above $20,000. 1085 00:45:37,930 --> 00:45:42,725 How does that affect your leisure? 1086 00:45:42,725 --> 00:45:43,225 Yeah? 1087 00:45:43,225 --> 00:45:45,400 AUDIENCE: Might as well increase it. 1088 00:45:45,400 --> 00:45:47,380 JONATHAN GRUBER: You would increase it, why? 1089 00:45:47,380 --> 00:45:50,865 AUDIENCE: Because then above $10,000, 1090 00:45:50,865 --> 00:45:52,240 I guess you would get less money, 1091 00:45:52,240 --> 00:45:54,447 but I guess maybe less utility above $10k, 1092 00:45:54,447 --> 00:45:56,530 because you're going to give it to the government? 1093 00:45:56,530 --> 00:45:58,155 JONATHAN GRUBER: You might increase it. 1094 00:45:58,155 --> 00:45:59,450 But what might else you do? 1095 00:45:59,450 --> 00:45:59,950 Yeah? 1096 00:45:59,950 --> 00:46:01,660 AUDIENCE: The wage effectively decreases, 1097 00:46:01,660 --> 00:46:03,370 so the price of leisure decreases. 1098 00:46:03,370 --> 00:46:04,958 So you take more of it? 1099 00:46:04,958 --> 00:46:07,000 JONATHAN GRUBER: Right, I think that you increase 1100 00:46:07,000 --> 00:46:08,580 leisure, that's what he said. 1101 00:46:08,580 --> 00:46:10,390 OK, increased leisure, but what else? 1102 00:46:10,390 --> 00:46:10,960 Yeah? 1103 00:46:10,960 --> 00:46:14,008 AUDIENCE: Might increase it just to cover taxes, 1104 00:46:14,008 --> 00:46:14,800 so you might work-- 1105 00:46:14,800 --> 00:46:17,080 JONATHAN GRUBER: Yeah, what do we call the two effects? 1106 00:46:17,080 --> 00:46:18,400 AUDIENCE: Oh, your income and substitution. 1107 00:46:18,400 --> 00:46:20,200 JONATHAN GRUBER: Exactly, we have substitution income 1108 00:46:20,200 --> 00:46:20,890 effects. 1109 00:46:20,890 --> 00:46:25,090 The substitution effect, let's say your net wage is lower, 1110 00:46:25,090 --> 00:46:29,920 your net wage just went from $20 an hour to $16 an hour, right? 1111 00:46:29,920 --> 00:46:32,110 So a lower net wage, you work less, 1112 00:46:32,110 --> 00:46:34,600 but the income effect says, you work more. 1113 00:46:34,600 --> 00:46:37,860 Because you're now effectively poorer. 1114 00:46:37,860 --> 00:46:40,480 When you're poorer, you consume less of everything, 1115 00:46:40,480 --> 00:46:42,780 including leisure. 1116 00:46:42,780 --> 00:46:48,710 So when you tax my wage, I might take less leisure, i.e. 1117 00:46:48,710 --> 00:46:52,260 work more, through the substitution effect-- 1118 00:46:52,260 --> 00:46:56,580 I'm sorry, we tax my wage, I might take more leisure, i.e. 1119 00:46:56,580 --> 00:46:59,100 work less, through the substitution effect, 1120 00:46:59,100 --> 00:47:01,450 because the returns to work are lower. 1121 00:47:01,450 --> 00:47:03,530 But I might take less leisure, i.e. work more, 1122 00:47:03,530 --> 00:47:05,500 because I'm now poorer. 1123 00:47:05,500 --> 00:47:07,700 So we don't know what's going to happen. 1124 00:47:07,700 --> 00:47:10,370 But we typically assume substitution effects dominate. 1125 00:47:10,370 --> 00:47:13,680 You can't go wrong in this class without making that assumption. 1126 00:47:13,680 --> 00:47:15,470 We want you remember the trade-off-- 1127 00:47:15,470 --> 00:47:17,470 but typically, some substitute effects dominate. 1128 00:47:17,470 --> 00:47:19,750 So we typically think people will work less. 1129 00:47:19,750 --> 00:47:22,420 We think taxing people will cause them to work less. 1130 00:47:22,420 --> 00:47:25,212 But be clear, it's not obvious it will. 1131 00:47:25,212 --> 00:47:26,920 But we typically think that's the result. 1132 00:47:26,920 --> 00:47:29,337 And typically, once again, when you average men and women, 1133 00:47:29,337 --> 00:47:31,600 as we discussed in our labor supply lecture, overall, 1134 00:47:31,600 --> 00:47:33,910 you get an upward slope in labor supply curve. 1135 00:47:33,910 --> 00:47:38,220 That is overall if you tax people that work less. 1136 00:47:38,220 --> 00:47:42,150 So what that does, it lowers the hours of work for person C. 1137 00:47:42,150 --> 00:47:44,450 This is our leaks in the bucket. 1138 00:47:44,450 --> 00:47:47,420 We've suddenly massively reduced the amount, potentially 1139 00:47:47,420 --> 00:47:50,840 massively, reduced the amount people who want to work. 1140 00:47:50,840 --> 00:47:52,010 Why do we care? 1141 00:47:52,010 --> 00:47:55,350 We care because a Figure 21-9. 1142 00:47:55,350 --> 00:47:56,800 What have we done? 1143 00:47:56,800 --> 00:48:00,810 We've gone from an initial point where people initially 1144 00:48:00,810 --> 00:48:05,010 had initial supply curve of S1, and demand curve of D. 1145 00:48:05,010 --> 00:48:08,700 And therefore, we're supplying L1 hours of labor 1146 00:48:08,700 --> 00:48:10,470 at a wage, W1. 1147 00:48:10,470 --> 00:48:13,920 Now they're producing less-- their supply curve shifts in. 1148 00:48:13,920 --> 00:48:17,320 That's created a deadweight loss. 1149 00:48:17,320 --> 00:48:21,250 There is less stuff being produced, 1150 00:48:21,250 --> 00:48:24,850 because people are staying home rather than working. 1151 00:48:24,850 --> 00:48:26,642 And the key point is, that's not a problem. 1152 00:48:26,642 --> 00:48:28,975 Staying home rather than [INAUDIBLE] is not the problem. 1153 00:48:28,975 --> 00:48:31,810 The problem is, they're staying home only because we've 1154 00:48:31,810 --> 00:48:34,840 reduced the price of labor. 1155 00:48:34,840 --> 00:48:36,580 We've increased the price-- we've 1156 00:48:36,580 --> 00:48:38,290 reduced the price of leisure, I'm sorry. 1157 00:48:38,290 --> 00:48:40,270 We've reduced the return to labor, 1158 00:48:40,270 --> 00:48:42,440 reduced the price of leisure. 1159 00:48:42,440 --> 00:48:44,480 As a result, people are staying home. 1160 00:48:44,480 --> 00:48:46,460 We've distorted their behavior. 1161 00:48:46,460 --> 00:48:48,430 We've caused them to stay home and not work. 1162 00:48:48,430 --> 00:48:49,410 We cause them to stay home and not work, 1163 00:48:49,410 --> 00:48:51,270 there's less stuff for the rest of us. 1164 00:48:51,270 --> 00:48:53,840 So it's a deadweight loss. 1165 00:48:53,840 --> 00:48:55,580 Efficiency falls. 1166 00:48:55,580 --> 00:48:58,130 And that is the efficiency equity trade-off. 1167 00:48:58,130 --> 00:49:01,370 This deadweight loss is Okun's leak. 1168 00:49:01,370 --> 00:49:04,600 That's the leak it Okun's bucket. 1169 00:49:04,600 --> 00:49:06,820 So now we have the trade-off. 1170 00:49:06,820 --> 00:49:09,510 On the one hand, we have an incredibly unequal society, 1171 00:49:09,510 --> 00:49:12,010 where a program like this can really make people better off. 1172 00:49:12,010 --> 00:49:13,927 Take money from rich people who don't need it, 1173 00:49:13,927 --> 00:49:15,298 give it to poor people who do. 1174 00:49:15,298 --> 00:49:16,840 On the other hand, in doing so, we're 1175 00:49:16,840 --> 00:49:18,860 going to have less stuff as a society. 1176 00:49:18,860 --> 00:49:21,220 We're going to shrink the size of the pie 1177 00:49:21,220 --> 00:49:23,950 in order to redistribute the slices of the pie. 1178 00:49:23,950 --> 00:49:25,540 Is it worth it? 1179 00:49:25,540 --> 00:49:28,090 That's where the social welfare function comes in. 1180 00:49:28,090 --> 00:49:29,800 The social welfare function allows 1181 00:49:29,800 --> 00:49:32,350 you to evaluate whether something like this 1182 00:49:32,350 --> 00:49:33,220 is worth it. 1183 00:49:33,220 --> 00:49:34,637 Without a social welfare function, 1184 00:49:34,637 --> 00:49:36,100 you can never answer that question. 1185 00:49:36,100 --> 00:49:38,540 You just can't, because there's one hand and the other hand. 1186 00:49:38,540 --> 00:49:39,520 What the social welfare function does 1187 00:49:39,520 --> 00:49:41,890 is give you a mathematical representation that allows 1188 00:49:41,890 --> 00:49:42,790 you to answer that question. 1189 00:49:42,790 --> 00:49:44,290 So in section on Friday, you'll work 1190 00:49:44,290 --> 00:49:46,750 through an example of using a social welfare 1191 00:49:46,750 --> 00:49:50,380 function to evaluate a welfare transfer program like this. 1192 00:49:50,380 --> 00:49:53,640 And they'll come back on Monday and talk more about taxation.