Debunking Elizabeth Warren, (D-Occupy)

Recall what Elizabeth Warren — consumer advocate, Harvard law professor, and now Democrat U.S. Senate candidate in Massachusetts — said last October when the Occupy movement was cresting:

Democratic Senate candidate Elizabeth Warren claims much of the credit for the Occupy Wall Street protests sweeping the nation. “I created much of the intellectual foundation for what they do,” the Harvard Law School professor and former Obama administration consumer advocate told Samuel P. Jacobs of The Daily Beast. “I support what they do.”

And what was that intellectual foundation? In 2003’s “The Two-Income Trap: Why Middle-Class Parents are Going Broke,” Warren made the case that income stagnation — caused by failed pro-market policies — is killing the middle class, forcing them to take on ever greater amounts of debt to afford a traditional middle-class lifestyle. Indeed, this theory is also the economic foundation of liberal Democratic politics the past decade, including President Obama’s 2008 and current presidential campaigns.

Except none of it seems to be true. First of all, income has not been stagnant — certainly not when Warren’s book was first written — as this new chart from Jim Glassman of JPMorgan shows:

Indeed, Glassman is actually far too generous to the income stagnation theory since he assumes inflation is properly calculated by government statisticians, which it almost certainly hasn’t been. So-called flat wages are actually up 40 percent or more in recent decades if you do the math correctly.

Second, Glassman offers an alternative theory to wage stagnation as to the rise in household leverage:

Instead, the rise in household leverage, which began long before the housing debacle, appears to be a response to the secular decline in interest rates, a benefit of the secular decline in interest rates (see the illustration below) that spurred a rise in mortgage leverage. The circumstantial evidence for this more benign interpretation of US leverage trends is found in household debt service trends, the ratio of monthly debt service payments to income (not shown). Although household debt-to-income ratios are double those in the 1970s, debt service burdens are no different. Household debt service was 11.09 percent of disposable personal income in September 2011, similar to that in the 1970s, according to the Federal Reserve. The same is true for financial obligations, which include lease payments.

And the story of the past decade is one of a) slow economic growth and b) devastating crony capitalism in the housing and financial sectors. Too much government, too little entrepreneurial capitalism. Yet Warren wants far more of the former and seems disinterested in the latter, at least as demonstrated in this viral video. (More on that to come.)