Income Inequality and Poverty

This news story generally analyses the ever increasing inequality in income while no change is observed in the poverty levels. While states have widely declared the fight against poverty, the effect has hardly been felt. This has been a great blow to the economic sector of most nations and has left the situation almost worst off and very wanting. Regardless of the fact that economists claim an end of the Great Recession and the U.S gross domestic product is recorded to have grown by 1.8 percent, every economic gain ounce has gone to the top and the worst is still lingering in the air in terms of the economy growth.

From the annual population survey, the Census Bureau states that the median household income in 2011 was $50,000. This turns out to be 1.5 percent lower than 2010. An 8.1 percent overall fall of the median household income has been experienced since 2007 a year before the Great Recession (Potts). The President of the Center on Budget and Policy Priorities, Robert Greenstein and a senior economist Jared Bernstein declared in a conference hall that the middle-level incomes were actually stagnant before 2007 and were thus just holding steady before they declined.

Poverty, as opposed to the expectations of economists did not increase but rather just held steady at 15 percent. This was despite the fact that poverty had actually been increasing for the past 3 years steadily. The middle-income levels were affected by this trend and were pushed downwards leading to Bernstein concluding that the jobs that were being added to the economy were in rather low-wage jobs in disproportionate numbers.

The supplemental poverty measure is another aspect that requires close analysis. The measure of supplemental poverty would include various issues such as the form of income, food stamps, and tax credits that are specifically for low income families. This measure excludes various expenditures such as the out-of-pocket expenses for health care that are experienced by many seniors thus expressing how the poor are affected by policies. Poverty levels were prevented from rising by the increase in food stamps as well as the earned income tax credit for families with children.

Income inequality and poverty brings adverse effects to both individuals and the society at large. Some of the factors that bring effect to income inequality include changes in technology and demography, the decline and growth of several industries, variations in international trade patterns, and cyclical unemployment. Poverty on the other hand has been greatly influenced by factors such as the rate of economic growth, and factors that influence income inequality variations particularly unemployment and demographic change.

Economic efficiency is badly off with excessive equal income distribution. Socialist countries for instance have low inequalities as the difference in salaries and wages is highly reduced and there are no private profits. These countries however face the danger of reduced economic development since there are no incentives for individuals to work extra hard, take part in economic development and involve themselves in entrepreneurial activities. Socialist equalization also brings other consequences such as, low initiative and reduced discipline in workers, inadequate selection of goods and services, sluggish technical development, poor quality of products and a slow economic progression that leads to further poverty (Potts).

Excessive income inequality negatively affects the quality of people’s life. This thus leads to greater poverty incidences and hinders progress in both the education and health sectors, as well as contributes to increasing crime rates. Political stability is greatly threatened by high income inequality due to the dissatisfaction of the residents of a given state. This makes it difficult for population groups with high and low incomes to reach any political consensus. A state with political instability gives no incentive to invest and this significantly undercuts economic progress.

Income inequality undermines the use of vital market instruments. These market instruments include fines and changes in price. A government might consider it more beneficial to impose higher rates for electricity and hot water as it would support efficiency in energy. However, this might not work in a state that has extremely high income inequality since an introduction of higher rates will lead to deprivation of these services to the citizens in the poor end of the living standards.

Several basic norms for instance, commitment and trust may be discouraged by high income inequality. This generally occurs to the key economic agents, either individuals or enterprises. Economic growth is greatly affected by higher cost of contract execution and higher business risks thus leading to the deceleration of economic transactions.

Income inequality and poverty may be reduced by the government through the implementation of certain economic policies and strategies. Certain policies by the government reduce poverty and narrow the income gap and thus improve the economic development of a country. These policies include the principle of horizontal and vertical equity, tax and benefits system and unemployment reduction policies.

The principle of horizontal and vertical equity is geared towards the reduction of poverty and income inequality. The principle of horizontal equity basically means that individuals who are in a similar financial circumstance have the same ultimate ability to pay taxes and should thus be taxed at the same rate. Vertical equity on the other hand suggests that in the case where individuals are in different circumstances and have different capacities to pay taxes, they should be taxed at different rates (Berliant, 181). Higher income individuals thus get the same tax free allowances as the low paid and would similarly pay tax at the same as others regardless of being in different income bands.

Poverty and income inequality can also be reduced through the government intervention by implementation of an effective tax and benefits system. The employment of a progressive tax and benefit system is very vital in reduction of poverty and promotion of income equality. Through these systems, more tax is collected from individuals on higher levels of income and welfare benefits are efficiently redistributed to those on lower incomes (Berliant, 185).

Unemployment is another key area that increases poverty levels and income inequality in the society. Policies to reduce unemployment would be very beneficial to the society. Cases of unemployment would be reduced through several strategies such as, job creation schemes sponsored by the government, increasing employability through an active labor market scheme, a monetary stimulus to the aggregate demand, and encouragement of labor market participation through welfare-to-work schemes (Potts).

It is thus justifiable to conclude that any attempt to fight urban poverty should appreciate the interrelationship between both welfare and non-welfare policies. The non-welfare policies consider the importance of the poor as a factor of production that requires proper integration in the economic development process. Poor human’s capital should thus be promoted through skill development programs. Welfare policies on the other hand promotes the improvement of the poor individual’s welfare through the provision of basic social welfare services such as, tenure security, education, family planning, low-cost housing, health and nutrition care. Reduction of income inequality and poverty through government policies will help accelerate economic and human development for a better future.