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Module 40
The Economics of the Welfare State
What’s New in the Fourth Edition?
• Updated business cases
• Handouts for use in class
Module Objectives
• What is the welfare state and how does it benefit society?
• What are the causes and consequences of poverty?
• How has income inequality in America changed over time?
• What are the special concerns of private health insurance and how have governments acted to address
them?
Teaching Tips
Poverty, Inequality, and Public Policy
Creating Student Interest
Ask students if they consider themselves (or the average college student) “rich” or “poor.” Ask them how
they might define “rich” and “poor.” Are they poor compared with the average person in the United States?
What about the average person in Africa? What about the average university faculty member?
Presenting the Material
• Give the students the most recent poverty threshold information. For 2016, the poverty threshold
was $11,880 for an individual and $24,300 for a family of four (two adults, two children). Explain
that poverty looks at the relationship between the minimum needs of people and their ability to meet
those needs. This brings up two important questions: “What are minimum needs?” and “What
amount of money is required to meet those needs?”
Present the federal government’s approach to answering those questions (e.g., the calculation of
the poverty threshold). The Census Bureau’s website (see Web Resources) provides complete
information on the measurement of poverty, its history, and issues related to the poverty threshold.
1. Identify the lowest monetary cost of a nutritionally sound minimum diet. Ask students
how well they think they could identify a nutritionally sound diet—and find the lowest-
cost way to provide it. Most people would not be able to determine a nutritionally sound
diet (and if they could, would have real difficulty finding the lowest-cost way to provide
it). Ask the students what types of foods are nutritionally sound and low cost. Note that
the minimum diet contains sufficient calories to maintain body weight (i.e., not starve!).
2. Multiply by three to allow for expenditures for nonfood goods and services. Why by
three? When the poverty threshold was first developed, it was assumed that low-income
families spend one-third of their income on food. Ask students if they think they spend
one-third of their income on food. Do most people spend one-third of their income on
food? What must be covered by the other two-thirds of the poor family’s income?
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3. Take the poverty threshold for an individual or family of four and walk the class through
the following calculations.
The U.S. Welfare State
Creating Student Interest
• Ask students what types of government assistance is available for college students. Examples will
include scholarships, grants, loans, and work-study programs. Classify each of the types of
assistance as means-tested or not. (What other types of “tests” are used to allocate assistance?)
Identify in-kind assistance (providing books, computers, housing, or meals). What are the pros and
cons of means-tested programs versus programs based on other qualifications (e.g., ability-based)?
Compare the benefits of in-kind assistance versus cash assistance.
Presenting the Material
• Explain to students the three reasons for government spending:
1. To provide public goods (e.g., national defense)
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Federal Spending 2015
Category
Percent of federal spending
Social Security
24%
Defense
16
Various safety net programs
10
Medicare, Medicaid, the Children’s Health
Insurance Program (CHIP), and Affordable
Care Act (ACA) marketplace subsidies
25
Interest
6
Education, training, and employment
6
Veterans’ benefits and federal retirees
8
Transportation
3
Discuss each category and whether it is a part of the welfare state. Ask students which spending categories
they think are most likely to reduce poverty and income inequality and why.
Health Care and the Welfare State
Creating Student Interest
• Ask students where they would go if they were sick and needed health care. Responses will include
the student health center on campus, the emergency room of a nearby hospital, a local emergency
care center, and their family physician. Ask students what their options for health care would be if
they weren’t college students and had no private insurance.
Presenting the Material
• Figure 40-3 in the text identifies who pays for healthcare in the United States (private or
government) as of 2016. A good place to search for updated information is the Center on Budget
Module Outline
I. Poverty, Inequality, and Public Policy
A. The logic of the welfare state
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1. The welfare state is the collection of government programs designed to alleviate
economic hardship, including government transfers, poverty programs, and social
insurance programs.
B. The problem of poverty
1. Trends in poverty
a. A graph of the U.S. poverty rate from 1967 to 2015 is presented in the text.
2. Who are the poor?
a. Minorities
b. Female-headed households
c. The underemployed
3. What causes poverty?
a. Lack of education
b. Racial and gender discrimination
c. Bad luck
4. Consequences of poverty
a. Lack of access to healthcare
b. Difficulty finding affordable housing
c. Children are not given an equal opportunity to succeed
C. Economic inequality
1. When the bottom 20% of the population receives 20% of the income, then income
distribution is perfectly equal.
2. The distribution of income around the world is illustrated in the text.
D. Economic insecurity
1. The welfare state exists to reduce poverty and inequality and to reduce income
insecurity.
2. Income insecurity can come from a sudden loss of income or a sudden increase in
expenses.
II. The U.S. Welfare State
A. The U.S. welfare state consists of three huge programs (Social Security, Medicare, and
Medicaid), several large programs (temporary assistance for needy families, food stamps, and
the negative income tax), and some smaller programs. The costs of the major programs are
listed in text Table 40-2.
B. Social Security and unemployment insurance
1. Social security guarantees retirement income to qualified Americans and provides
benefits to disabled workers and surviving spouses.
2. Unemployment insurance provides to workers who lose their job about 35% of their
previous salary until they find a job or until 26 weeks have passed.
C. The effects of the welfare state on poverty and inequality
1. Text Table 40-3 presents information about how government programs affect poverty.
2. Text Table 40-4 presents information about how government programs affect income
inequality.
III. Health Care and the Welfare State
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A. In the United States, the government pays almost half of all healthcare costs and indirectly
subsidizes private health insurance through the tax code.
B. The Economics of Health Insurance
1. In 2016, U.S. healthcare costs averaged over $10,372 per person, much of which was
covered by insurance.
C. Government health insurance
1. In 2015, the majority of Americans who were not covered by private insurance were
covered by the government under Medicare or Medicaid.
2. Medicare is available to all Americans 65 and older and is financed by payroll taxes.
3. Medicaid is a means-tested program paid for with federal and state government revenue.
4. The Veterans Health Administration is run by the government and takes care of those
who were and are in the military.
D. The Affordable Care Act
1. In 2010, Congress passed the Affordable Care Act.
2. Covering the uninsured is one objective of the ACA.
a. ACA adopted the “individual mandate” – a requirement that all individuals must be
insured.
Case Studies in the Text
Economics in Action
Long-Term Trends in Income Inequality—This EIA presents trends in income inequality in the United
States over time.
Ask students the following questions:
1. What happened to income inequality in the United States from the 1930s to today?
2. What “possible explanations” are given for the changes in income inequality during
3. What characteristic of income inequality do the possible explanations fail to account
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Web Resources
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Handout 40-1
Date_________ Name____________________________ Class________ Professor________________
Are Taxes Theft?
Robert Nozick, in his book Anarchy, State and Utopia (1974), argued that taxes are theft and violate a
person’s basic property rights. In other words, taxes by their very nature are unfair. Develop arguments
for and against this proposition.
To Each According . . .
Evaluate the famous quote from Karl Marx: “From each according to his ability, to each according to his
needs.” What does this statement mean? If an economy were organized this way, would it be efficient?
Why or why not? Would it be fair?