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Warren Buffett's Bold Plan to Fix America's Inequality

By Chris Brantley – Mar 15, 2014 at 12:00PM

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What's the best economic solution for boosting the incomes of the working poor? Buffett tackles that question and more.

Source: Flickr / Ethan Bloch.

When Warren Buffett of Berkshire Hathaway speaks, people actually do stop and listen.

According to recent CNN headlines, he said this: "I'd love to see minimum wage at $15 an hour."

So yes, when I see a smart guy say something interesting and controversial, I listen... or in this case, click and read the rest of the story.

The whole story
Here's what I found. The whole quote: "If you could have a minimum wage of $15 and it didn't hurt anything else, I would love it," he said. "But clearly that isn't the case."

As Buffett said, you can love something or want something personally, and it can still be bad economic policy. The same is true of company stocks, so you have to invest with your head, not your heart.

Buffett's solution
Buffett takes it a step further and offers what he believes to be a better economic solution for the working poor. His advice: Raise the Earned Income Tax Credit (EITC).

The EITC provides a tax credit -- and even a potential refund -- to those earning a low to moderate income. This would have less negative effects than the unknowns of raising the minimum wage, according to Buffett.

As usual, he pooh-poohs the so-called experts who try and estimate job losses due to a higher minimum wage, admitting, "it's very hard to quantify those losses."

A second opinion
This echoes an article by Christina Romer, former head of President Obama's Council of Economic Advisers, that was published in The New York Times. In the piece,"The Business of the Minimum Wage," she (like Buffett) argues that the EITC is a more proven and targeted approach for helping the working poor.

After running through differing ideas on how raising minimum wage is expected to hurt or help the working poor and/or the economy, she reveals the reason why most economists prefer the EITC over hiking the minimum wage. In her words, "It's precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families."

Targeted and business friendly
The EITC is 100% targeted at those who are actually poor, while only about half the workers benefiting from a minimum wage increase would be in families earning less than $40,000 a year. Businesses can also benefit from the proposal, and employment rates should go up. This may displease some who only want to redistribute wealth, but rising employment rates and jobs help workers overcome poverty. According to Romer:

"By raising the reward for working, this tax credit also tends to increase the supply of labor... And a job may ultimately be the most valuable thing for a family struggling to escape poverty."

Like Buffett who realizes the realities of raising the minimum wage, Romer concludes the effects of the EITC are more predictable than the outcomes of a minimum wage hike. She states, "The economics of the minimum wage are complicated, and it's far from obvious what an increase would accomplish."

Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Apple, Berkshire Hathaway, and Google. The Motley Fool owns shares of Apple, Berkshire Hathaway, Google, and International Business Machines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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