Economics 5180/6180

Economics 5180/6180

Poverty and Inequality

1. Answer the following related questions about immigration. Address each question separately and specifically, with reference to the findings discussed in the course. (30 points)
   1. Would increasing legal resident immigration (with birthright citizenship for immigrants’ children) increase or decrease inequality within the United States?

It will decrease inequality. This is because a resident immigrant is a citizen of the United States and the state one is born and therefore has the chance of going to school and acquiring the requisite skills and access to federal benefits. The incorporation of a resident immigrant who is skilled would increase their competitive advantage in the market. Exposure to legal employment practices has the potential of enhancing the economic status of resident immigrants hence reducing the levels of income inequality. Since earned income as a benefit from the federal and state government provides a social safety net to cushion citizens from financial constraints, eligibility to the resident immigrants will enhance their financial stability and subsequently lower income inequality within the states. Increasing legal resident immigration has the potential of increasing social mobility and, subsequently, intergenerational mobility. Children of the legal resident immigrants are more likely to experience faster social mobility and hence adapt well.

1. Would increasing legal resident immigration (with birthright citizenship for immigrants’ children) increase or decrease global inequality?

The country of residence determines legal resident immigrant’s children’s income. A child born in a legal resident immigrant family is likely to earn more if he/she is born in a wealthy country. Being born in a foreign country would make the children enjoy certain rights such as the right to work and live in the country. Childbirth citizenship also ensures that children of legal resident immigrants are protected by laws of the local or state jurisdictions. For instance, if a person was earning $1000 in their country and in moving to a foreign country, it doubles to $5000, global inequality is decreased. This will enable such a legal resident immigrant to access relatively good education and health, subsequently increasing intergenerational mobility. Access to education and quality healthcare would increase upward social mobility. The reduction in global inequality is possible where immigration is from poor to wealthy countries.

1. How does immigration affect inequality within the United States if immigration is illegal or non-resident (guest worker programs, for example), or does not come with birthright citizenship for immigrants’ children?

Illegal immigration has the potential of increasing income inequality. The majority of illegal immigrants are low skilled and contribute to an increase in the low skill labor supply. An increase in the labor supply contributes to the widening of the wage inequality gap. Most of the immigrants tend to occupy low wage jobs such as construction, gardening, among others. A flooded low wage labor market shifts the supply-demand labor dynamics and hence increases income inequality. Non-resident immigrants also face the challenge of being constrained by legal employment practices in residential or work jurisdictions. They are therefore likely not to be eligible for the welfare programs hence contributing to depression of their income as compared to natives, subsequent increase in income inequality.

1. Do you agree that Milanovic’s proposal to “trade off” birthright citizenship in destination countries in favor of more international immigration would reduce global inequality, as intended?

I do not agree with Milanovic’s postulation that everyone in destination countries should have a path to citizenship. While the trade-off appears appealing from the perspective of a policymaker for a country, it may enhance incoherence. How does a voluntary choice for an international immigrant be regarded as consenting to an inferior status? Offering immigrants a reduced set of rights to improve immigration may reduce global inequality in the short-run but not in the long-run. If, for instance, migrants have a justified claim to rights to citizenship, there is a probability of reducing global inequality as intended. However, the claims should not be set aside just because a globally just distributive goal such as reducing global poverty needs to be promoted.

1. What would be the effect of reducing birthright citizenship for the children of immigrants on intergenerational social mobility for immigrant families vis a vis native families?

Reducing birthright citizenship for children of immigrants would reduce intergenerational social mobility for immigrant families. Citizenship premium offers an advantage to immigrants because it entitles them benefits that can enhance social mobility. Reducing birthright citizenship would therefore, lead to an influx in undocumented immigrants since babies are born without citizenship due to reduced assimilation. An undocumented immigrant has no guaranteed access to healthcare, good jobs, and schools, and hence a reduction in immigrant families’ birthright citizenship will reduce intergenerational social mobility in the long-run. To the native families, the decline in birthright citizenship for immigrant families will reduce the pressure on healthcare facilities and resources, leading to better healthcare outcomes.

2. Answer each question with reference to material discussed in the course. (30 points)
3. Does increasing mothers’ legal ability to compel child support from their children’s biological fathers increase or reduce gender inequality? Is it likely to increase or reduce women’s employment rates?

It reduces gender inequality. This is because child support ensures that men are also committed to the future transfers of the child in case any eventuality happens. Child support helps women because it reduces the chances of abortions. This is because the prospect of raising a child as a single mother of a single father is diminished. It also reduces the probability of having a shotgun marriage. The law also has an effect regarding selection into marriage and fertility. It ensures that the non-custodial parent also contributed to child-rearing. A reduction in shotgun marriages reduces gender inequality. The laws are also likely to increase women’s employment rates. In a situation where a woman has a reward for not marrying, the effect of such a decision will increase her chances of securing a job without worrying about challenges of child rearing. It will also make it flexible for women to explore higher education and enhance their social mobility.

1. How did the combination of “welfare reform” (conversion of Aid to Families with Dependent Children to Temporary Aid to Needy Families) and the expansion of the Earned Income Tax Credit in the 1990s affect gender inequality?

The combination of welfare reform and expansion of the Earned Income Tax Credit in the 1990s boosted work effort for single mothers. Earned Income Tax Credit in the 1990s incentivized single mothers and female heads of households. The single mothers who were beneficiaries at the time experienced higher growth in wages when compared to those single women who were not beneficiaries. As an empowerment of women, the combination boosted the amount of social security benefits accrued that they received upon retirement. Besides, the health of infants and others was boosted as shown by the birth indicators of premature births and incomplete abortions. The wages received at the time also enhanced their educational attainment, their children went to better schools and hence were less predisposed to illnesses.

1. Did the combination increase or reduce women’s employment rates?

The combination increased employment prospects for women at the time. This is because the combination contributed to incentivizing low-income parents into going to work. Since many women wanted to move out of poverty, the option provided through the combination availed sufficient supplementation of their earnings.

1. One part of the historical background to the temporary period in the 20th century when r < g was the reduction in public debt-to-national-income ratios even though the public debt was not directly repaid with a currency of constant value. (30 points)
   1. Explain how and why public debt ratios were reduced while the debt itself was not repaid in Germany, France, the UK, and the United States, including the different mechanisms and policy alternatives used by each country.

The public debt ratios were stable in the 20th century mainly due to the privatization of a significant fraction of public assets especially the shares in public or semi-private firms for many of the developed countries. In the same period, the market value of public assets such as public buildings, hosting administrations, schools, hospitals, universities, among other public services increased during the 20th century. Countries experienced a decline in the value of public property compared to private property.

High savings rate and a slowdown in growth contributed to about 60% of the increase in the national wealth-income ratios in wealthy countries such as Germany, France, the UK, and the United States.

The evolution of the national wealth income ratio was due to price and volume effects. On volume effects, the higher the national savings, the larger the accumulation of national assets and subsequently wealth. It also depends on the level of growth whereby for given savings, a lower population and growth in productivity has the probability of raising the ratio of national wealth to national income.

On price effects, the removal of rent control contributed to increase in housing prices over the same period as investment and saving strategies.

Germany

Germany strived to create a fiscal environment for investment as well as social spending in education, health and housing among others. The adoption of the London Debt Agreement (LDA) enhanced foreign investor confidence by eliminating any chances of defaulting its loans, which boosted growth. The enhanced appetite for foreign investors in Germany contributed to faster growth in economy. Further, the introduction of Deutschemark was part of the currency reform which was initially volatile but stabilized inflation later. Finally, debt restructuring also helped in enhancing public investments.

France

Introduction of more laissez-faire economic policies, such as privatizations of large state owned enterprises and the development of financial markets. As a result, there was a significant increase in saving rates and housing prices which was critical in reducing wealthy inequalities and rising housing prices.

Changes in the tax system and tax progressivity post world war II, financial regulation and deregulation after the great depression, reduction in capital controls, introduction, and end to rent controls also contributed to the management of public debt ratios.

United Kingdom (UK)

Use of distinct bonds, as well as short-term and medium-term maturities, drove the market value of debts in the 20th century. The bondholders in the 20th century got poor real rates of return as the state maximized on inflation without the use of surpluses to control debt. The country managed to finance its expenditures using deficits and declines obtained from long-bond prices.

Change in composition of property ownership where private landlords were replaced with social ownership. The housing policy evolved the housing market, selling off council houses increased housing wealth. UK government also consolidated its debt through the running of budget surpluses.

United States:

The adoption of inflation and financial repression helped the US to reduce domestic claims on the public sector. Rapid economic growth and budgetary discipline also helped in managing public debt ratios. Inflation was also critical in eroding the US public debt. Moreover, after the world war, US embarked on the conversion of short-term notes into long-term bonds. Tax revenues were also used to pay interest accrued on debt.

A combination of economic growth and tax revenue targets was critical in managing the public debt ratios.

1. Why does reducing the public-debt-to-income ratio without repaying debt reduce r?

Piketty brings into perspective a capital argument that wealth inequality is set to increase due to a relationship; r > g. according to the formula, the net rate of return to capital (r) exceeds the growth rate of output (g). Reducing the public-debt-to-income ratio without repaying the debt would reduce r because of a reduction in the growth rate of output. Without debt, repayment will affect investor confidence and limit capital investment. Therefore it would mean that the net rate of return to capital is less than growth rate of output.

1. What does the method by which each country handled its public debt tell us about wealth inequality and its causes?

Wealth inequality dynamics are influenced by regulatory policies, savings rates as well as habit formation. Effective policies such as school organization, access rules and educational structuring policies can promote intergenerational mobility. Wealthy inequality is caused by the inability of governments or lack of resources to invest in healthcare, education, and environmental protection. While austerity measures are critical in consolidating public debts, the measures only serve to widen the wealth inequality gaps because they hardly help improve quality of opportunity for most of its citizens.