THE EDUCATION AND INCOME INEQUALITY FINAL PAPER 1
The Education and Income Inequality Final Paper
ECO 203 Principles of Macroeconomics
The United States economy is important to the world’s economy because of its size. Creating a system of quantifying data and setting measurements is currently used to detect the health of the market. Gross domestic product (GDP) according to the Bureau of Economic Analysis (BEA), is defined as “A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health.” (Gross Domestic Product) While Americans can use the GDP growth or decline percentage as an economic barometer, recent thought patterns indicate that the current GDP measurement system does not fully account for all the intellectual property.
Importance of the GDP
The GDP is incredibly important to create transparency for the American people. Living in a country where the people have no idea about what the country is producing and how successful or profitable the country is could be disheartening. I think GDP is most importantly laid the groundwork for new ideas for measuring total production. GDP has widely been used for many years when it began in 1944. While it has been an effective tool in the past, it does not consider new parts of a thriving economy.
Shortcomings of the GDP Measurement
The GDP has several shortcomings when considering the measurement of our economic health. For instance, many kinds of productivity activities are not counted in GDP. And non-market production is not included in GDP so if a car needs to be fixed only the parts you purchase are counted. If the same car went to a service station for repairs, instead, all of the repairs enter into GDP. In this sense, GDP also does not account for financial transactions or transfer payments since they do not represent current production. Diminishing environmental quality is also not accounted for in GDP. The cost associated with environmental sustainability, such as, Changing a method of production, currently cannot be calculated into the GDP. Lastly
“GDP figures alone do not show the distribution of income and inequality of financial wealth.”
(Amacher & Pate, 2019, sec 5.2)
Describe how a country can measure its income inequality.
Income inequality can be measured in a few different ways, which ultimately paint a wider more complete picture of the actual state of income inequality. According to Drew Desilver, the U.S. The Census Bureau publishes 2 separate analyses on income inequality annually. The Census Bureau also publishes the Gini index which is, “ a summary statistic that measures the dispersion of incomes on a scale of zero (everyone has exactly the same income) to one (one person has all the income).” (Drew Desilver)
Evaluate the effect of income inequality on the U.S. economy, such as unemployment,
economic growth, and other economic factors.
Income inequality has many effects on the U.S. Economy. Table 1 illustrates that US unemployment rates and educational attainment are strongly connected to each other. The better educated a person is the less likely they will be unemployed.
While Table 2 illustrates the average income inequality based on education level.
These factors alone not only affect the U.S. economies rate of production, but also supply and demand. The economy is not able to grow when inflation occurs and the standard cost of living rises while the minimum wages remain the same. An example of this is the financial crisis that occurs between 2007 and 2009.
There is no one source for the blame of the economic crisis. The government, banks, and consumers all contributed to improper borrowing and lending, which in turn created a downward spiraling economy. (Boundless Economics) One of the primary causes of the financial crisis, “began with the failure of a series of derivative-based consolidation of mortgage-backed securities that encapsulated extremely high-risk loans to home-owners into a falsely ‘safe’ investment.” (Boundless Economics) This is why the economic crisis is now commonly referred to as the subprime mortgage crisis. Essentially, banks were offering loans to borrowers who could not afford them, then packaging these loans together and selling the unsecured debt off to another collector. While “The banking crisis spread into a broader financial crisis as companies were negatively affected by the crisis in financial institutions to which they were connected.” (Boundless Economics) The U.S. government did not regulate the housing market resulting in the elimination of two clauses that helped create secured loans: a 20% down payment on the home and verification of income. Finally, The stock market began to feel the banking errors when investment confidence fell drastically, which in turn cut the value of the New York Stock Exchange by half, which reduced the value of the U.S. economy.
Examine the causes that aggravated the financial crisis during the period
The causes that aggravated the financial crisis during the economic crisis have created an impact that is still unfolding. A reasonable perspective to have is to consider the various contributors. First, and most frankly, Banks practices predatory lending, which is where a lender will allow the borrowed money under circumstances the lender knows are impossible for the borrower to meet. Yet, many predatory loans prevailed, and when the borrowers could not pay, a collapse ensued. Banks are notorious for participating in unethical activities, in fact, in 1937 the
Federal Home Owners’ Loan Corporation (HOLC) published a map,
“Intentionally and legally segregated neighborhoods and steering African Americans to buy homes in those neighborhoods at exorbitant prices through lending contracts, not federally secure mortgages, so you could never really own the home. You’ll be in debt forever and can’t create wealth, though it created wealth in the white world and increased poverty in the black world.” (Marc Steiner 2019)
Even though the Fair Housing Act of 1968, a form of Redlining occurs even today, “In 2015, Hudson City Savings Bank was ordered to pay more than $27 million in damages for the practice, plus a $5.5 million penalty.” (Weintraub 2019) Secondly, Banks then grouped this bad debt together and called it collateralized debt obligations (CDO) and sold them as safe derivative investments, which they absolutely were not safe.
Consumers are not free of blame either. These consumers accepted loan terms, which they should have been cognizant enough to know how they loan terms were not in their favor and passed on the loan. The government played its role by not regulating the housing market and in classical terms allowing the market to regulate itself. It became easier for consumers to get approved for mortgages they could not afford since verification of income was not established before acceptance of the loan. Many parties can be blamed for the aggravation of the economy. This just proves that the classical economic theory of self-governing sustainability may not be entirely possible.
Evaluate the actions that the Federal Reserve and the government took during this period.
The Federal Reserve did play a role in reversing the recession; we should also consider the actions of more entities. The Federal Reserve utilized unprecedented monetary policy actions, and, “Thanks to a massive countercyclical fiscal stimulus” (Boushey, Nunn, &
Shambaugh, 2019). The U.S. GDP was able to rebound by the 3rd quarter of 2009. According to Heather Boushey, Ryan Nunn, and Jay Shambaugh; Authors of Recession Ready, “Recessions are inevitable. Policymakers who might rely on Federal Reserve policy as the sole response to recession should think again; we know that fiscal stimulus is effective.” (Boushey, Nunn, & Shambaugh, 2019) One of the actions the Federal reserve took was to lower the federal funds rate from 5% to 0.25%.
In addition, the Federal Reserve two other policies during this time. One set of policies intended to increase credit flows by reducing the cost of credit. Another set of policies consisted of large scale asset purchase programs. In 2008 The Federal Reserve announced it would purchase mortgage-backed securities. (Rich 2013) The Federal Reserve played a part in helping the economy bounce back. I believe that both monetary and fiscal policy can be used together and effectively.
Estimate the gap between those who hold bachelor’s and higher (master or doctoral)
degrees and those who do not.
As illustrated in table 2, the mean earning of a person who carries a bachelor’s degree is 57,000 US Dollars annually. While a masters earns 74,000 and a Doctorate level earns approximately 103,000. This dataset also indicates that a person who simply does not graduate highschool will earn 20,000. This is a huge difference in wages based on education levels.
Explain reasons why the inequality gap between educated and less-educated workers has
Over the more recent years many different specializations have come to light across several industries. It seems like a new type of doctor is being created every few years. While in the energy sector new forms of generating energy and storing it are being made possible. New types of engineers dedicated solely to battery technology exist now whereas, 25 years ago the job market for battery specializations would have been much slimmer.
Evaluate whether increasing opportunities for higher education can reduce income
Increasing opportunities in education could help impact income inequality. For instance many companies now offer educational options in the form of benefits. Some employers even go as far as sponsoring the educational grant 100 percent and then helping the employee with job placement after the program of study is complete. By allowing more citizens to gain higher education more citizens can have access to higher paying jobs.
Analyze what else causes U.S. income inequality to widen.
Many factors affect income inequality in the United States. For instance racial and gender discrimination has played a role in many financial flukes. I have already pointed out that redlining occurs even today. However, gender inequality also still occurs. According to a survey taken on North Carolina citizens in 1989.
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