New study exposes income-inequality "crisis" as bogus

How does one manufacture a class-warfare fight?  For a good start, find a study that leaves out a great deal of information to claim that the middle class is shrinking and got left behind in the greatest economic expansion in modern American history — and hope that no one notices.  Unfortunately for Barack Obama and the White House, Cornell University has completed a much more comprehensive study of economic progress over the last several decades, and has found the holes in the study that Obama uses to proclaim that the middle class got screwed, as Jim Pethokoukis reports for The American, emphases in the original:

Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007.  (All figures are inflation adjusted.)

So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.

But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University.(Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.

So what got left out?  Plenty, although some of it won’t warm the hearts of fiscal conservatives and libertarians:

See, Piketty and Saez made lots of odd choices about what to measure and how to measure it. They chose to measure something called “tax units” rather than households, a move which ignores the statistical impact —  including economies of scale — of couples who cohabitate, kids who move back in with their parents after college, and senior parents who live with their adult children.

They chose to ignore the value of all government transfers — including welfare, Social Security, and other government provided cash assistance — received by the household.

They chose to ignore the role of taxes and tax credits.

They chose to ignore the value of healthcare benefits.

This is an interesting conundrum for both sides.  Obama has been hammering Republicans for opposing his massive expansion of entitlements, claiming that they have been enacted on a bipartisan basis in the past, and that they do … pretty much what the Cornell study says they do.  If Obama wanted to do so, he could embrace this study to make his point, but then it would devastate his class-warfare arguments and his demand for Buffett Rules, higher capital-gains taxes, and so on.  On the other hand, Republicans can use this study to fight those policies, but it would hem in their arguments about safety-net programs and the complications of the tax code.

However, the bottom line is clear: there is no income-inequality “crisis.”  At best it’s a misunderstanding of the data based on incomplete and irregular analysis, and at worst it’s a demagogic lie intended to divide Americans along false lines.  In fact, it’s most likely both.