RICHARD BERMAN: Elizabeth Warren’s flawed income inequality argument

OPINION:

Ted Cruz’s announcement this week that he’s running for president has officially kicked off the 2016 primary season and has put the pressure on other potential GOP candidates to declare. On the Democratic side of the scrum there is Elizabeth Warren, whom progressives hope is the candidate-in-waiting to lead their pitchfork brigade against the “1 percent.” While it’s still unclear whether Mrs. Warren will announce, it’s assured that her income inequality position will drive a major plank in the eventual Democratic nominee’s platform.

President Obama has called income inequality “the defining challenge of our time.” Scarcely a day goes by without some publication highlighting its scourge. The New York Times has run more than 260 different articles mentioning it in 2014. Meanwhile, conservatives and libertarians have largely sat on the sidelines, leaving leftists alone on the field to run up the score on this issue.

Let’s be honest: Some aspects of the income inequality argument are true. The top 1 percent of earners do take home a greater share of income than they did a generation ago. This is partially the result of secular economic trends that have seen the economy move away from a post-war manufacturing base where productivity gains allowed for higher incomes in blue-collar jobs.

However, Mrs. Warren and her sycophants make many bad inequality arguments that defenders of the free market should call out. For example, Mrs. Warren cites data from economists Thomas Piketty and Emmanuel Saez to conflate income inequality with income stagnation, saying: “Since 1980, guess how much of the growth income the [bottom] 90 percent got? Nothing. None. Zero.”

But the Piketty-Saez data has been criticized for focusing too narrowly on tax return data that doesn’t give a complete picture of income. When Cornell University economist Richard Burkhauser and his colleagues expanded the analysis to look at households and include additional income sources such as benefits, tax credits and social welfare programs, they reached a very different conclusion: The bottom three income quintiles saw their real income rise by approximately 35 percent between 1979 and 2007.

Mrs. Warren also mistakenly conflates income inequality with income mobility — the opportunity to become wealthy — claiming “the game is rigged” against the middle class. But there is very little data to suggest that income mobility has fallen. In a definitive study on the issue released last year, economists at Harvard and the University of California-Berkeley found that income mobility among the lowest quintile of earners has actually held steady over time. Translation: People do move up.

Ironically, Mrs. Warren’s proposed solutions to income inequality — namely, greater income redistribution — could threaten this mobility. Her calls for higher marginal tax rates on the rich reflect the pre-Kennedy days of a 91 percent top marginal tax rate for those earning above $3 million in today’s dollars. Economists and common sense, though, suggest that few people would be willing to invest, work hard and create job opportunities for an after-tax return of nine cents on a dollar.

Mrs. Warren’s calls for a minimum wage hike to “stop income inequality in America” are similarly problematic. There is no credible evidence to suggest that minimum wage hikes reduce income inequality. Separate analyses of minimum wages hikes in 2003-07 and 2007-09 found no associated reduction in poverty. Certainly, some people do get raises, but it is generally at the expense of others, who lose income as business adjusts. According to Census Bureau data, most minimum wage employees are not members of poor families, so the idea is bankrupt at several levels.

While Mrs. Warren demagogues the income inequality issue for political purposes, she ignores the obvious: Income gains at the top give us a bigger economic pie, and help support job creation and income gains across other tax brackets. Yes, there is a trickle-down effect. It may not be as large as some would like, but screw down the existing incentives on top earners to succeed and the current inequality will worsen and be baked into the system. That kind of thinking might be new to the Warrenistas, but it’s no surprise to those who ever took economics 101.

• Richard Berman is president of Berman and Co., a Washington public affairs firm.