How The GOP Can Win The Upcoming Battle Over Income Inequality

incminequltyFollowing President Obama’s lead, the Democrats are seeking to make income inequality the wedge issue of the 2014 Congressional and Senate elections.  This unquestionably addresses an issue that — after forty years of middle class family wage stagnation — resonates with voters.  Yet the Republicans, thanks to Sen. John Cornyn (R-Tx) and Rep. Kevin Brady (R-Tx), not the Democrats, are better positioned to take this on.

The Republicans are far better positioned to get right and use the underlying issue — which is more one of inequity than inequality — to political advantage.  The rise of stagnation and inequality started (and continued and continues) with shabby monetary policy.  The GOP (which, by the way, has issued an authentic invitation for Democrats to engage with them) has taken the lead on getting to the root of stagnation and inequality. There is a Republican-authored, with one Democratic co-sponsor, pending proposal to form a Monetary Commission to get, among other things, to the bottom of this very issue.

This legislation was introduced slightly less than a year ago by Rep. Kevin Brady, chairman of the Congressional Joint Economic Committee.  It so far has attracted 33 House co-sponsors, 32 Republicans and one Democrat, and steadily is gaining.  This legislation took a giant leap forward on January 6th with companion legislation introduced into the US Senate by the Senate’s Number 2 Republican, John Cornyn.

Brady-Cornyn has the potential to become this era’s Kemp-Roth, something politically and economically transformational.  Think job creation.  Think opportunity — both working and political class.

Will the GOP pursue its advantage?  Or will it revert to its obsession with tax and regulatory policies which, while not wrong, are shopworn, not intuitively relevant to the struggling single working mom, and subject the GOP to caricature as the party of Thurston Howell III.

The Democrats are tackling inequality, initially, with unemployment benefits and the minimum wage.  This is well calculated.  Rank and file voters have an understandable propensity to look at Republicans as gimlet-eyed tightwads. Republicans have a certain affinity for gimlet-eyed tightwads and are vulnerable to playing into that role.  Yet it need not be that way.

Income inequality — and the stagnation of middle class wages — began to take off directly in the wake of President Richard M. Nixon’s final abandonment of the gold standard.  As public intellectual John Aziz notes, strikingly, in a post entitled Why the Left Misunderstands Income Inequality:

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.

Who owns the government? Political donors — they finance the political system. Before one vote is cast candidates tailor their platforms to meet the criteria of donors. Who are political donors? Well, they are people with spare capital to expend in the name of getting politicians elected.

So who are the biggest donors? Banks & large corporations: the very people who have benefited most from the post-1971 tidal wave of fiat credit creation.

So not only has an exorbitantly high proportion of new credit gone into corporate and financial profits, but the beneficiaries have used these fruits to buy out the political system, thus ensuring that they keep an even higher proportion of their incomes, while making up for this slump with greater borrowing, and greater taxation of payrolls.

Is this mere speculation?

Aziz asks Does Easy Monetary Policy Enrich the Financial Sector?  He posits a very plausible causal mechanism:

Yesterday, I strongly insinuated that easy monetary policy enriches the financial sector at the expense of the wider society. I realise that I need to illustrate this more fully than just to say that when the central bank engages in monetary policy, the financial sector gets the new money first and so receives an ex nihilo transfer of purchasing power (the Cantillon Effect).

Yet right now both parties are squabbling for political credit and to allocate blame rather than competing to solve the inequality problem.  The problem both parties are finding with their ideological fixations is that … voters are not idiots.

Right now it looks as if both parties are going to trot out their old warhorses in a bid for popularity.  The Democrats will ride extending unemployment benefits and raising the minimum wage.  The Republicans will ride tax cuts and deregulation.

Unfortunately for the Democrats, although a lopsided majority of voters support raising the minimum wage from $7.25 to $9 an hour, raising it is both trivial and tangential.  It is at best a band-aid solution to a major problem.  At worst it perpetuates the problem.

Unemployment benefits have a demonstrated tendency to perpetuate unemployment. This recently was referenced in a USA Today op ed by Sen. Rand Paul and Cato senior fellow Dan Mitchell.  Their conclusion is a common sense one.  Meanwhile a state-ordained minimum wage is a form of price control.  Real prices, including wages, are determined exclusively by supply and demand.   Artificially, instead of organically, raising wages tends to make entry-level jobs disappear.

Furthermore, voters are mostly interested in what’s in it for them. Neither unemployment insurance nor raising the minimum wage, even were they sound, broadly benefits the electorate.  The Democrats are just posturing.  Voters get that.  We want opportunity, not welfare.

For the Republicans, whose own strategies are stalled, major tax rate reductions are, for the foreseeable future, a dead end. It has not gone unnoticed that the effort by the good and idealistic Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, to reform the tax code stumbled out of the gate.  This is due to structural obstacles.  Such obstacles are not going away any time soon.  Republican efforts at deregulation too, at best, will be thwarted, at least for the next three years by a Democratic president.  Tax and regulatory reform thus, at best, are — and are seen by voters — a matter of political positioning rather than delivering the goods.

There is, however, a way, instead, to raise demand for labor — unskilled, semi-skilled and skilled.   Greater demand makes wages go up organically rather than artificially.  Moreover, wages go up across the board, allowing workers confidently to pursue merit-and-productivity based promotions and raises.  While Democrats advocate raising the minimum wage Republicans can stand for maximizing everyone’s earnings.  That’s a much sweeter initiative.

Raising the private sector’s demand for workers is the real deal.  It worked for both Reagan and Clinton.

But… how?

To gain the political edge in the upcoming fight over income inequality the GOP needs to pivot to the real presenting issue: restoring good money to America and the world.  The economy, notwithstanding the Bush tax cuts, has been, on average, stagnant for over a decade.  Punk job creation was, net, as horrendous under a Republican president as it now is under a Democratic president.

Only one of the major policy factors that can generate prosperity with equity dramatically changed from the Reagan-Clinton to the Bush-Obama era:  monetary policy.   The Federal Reserve went on a bender.  It made the dollar soggy and groggy.  Job creation withered.

Now economic thought leaders of the Congress — such as John Cornyn, Kevin Brady, House Financial Services Committee Chairman Jeb Hensarling (R-Tx), and, on the Democratic side, rising star freshman Rep. John Delaney (D-Md) — have put down a marker to open up a new national conversation. Could bad money be driving out good jobs?

The Brady-Cornyn Monetary Commission is meticulously structured as a bipartisan, bicameral, neutral forum to study the empirical data, draw conclusions, and report back to Congress with recommendations, fast.  Can this engage both parties?  Yes.  Kemp-Roth — which began the process of dramatically lowering marginal tax rates across-the-board — ignited a healthy competition between the parties.  Brady-Cornyn, if enacted, is likely to ignite a healthy competition between Republicans and Democrats on how, by restoring good money, to create jobs in a climate of equitable prosperity.

The GOP has an opportunity to tackle income inequality in a powerful, credible, big way.  (So do the Democrats.)  The GOP can climb out of the Democrats’ elephant trap by throwing its full weight behind the Brady-Cornyn Monetary Commission.  The Democrats can, and hopefully will, also rise to the challenge.  Then America is off to races to see what monetary policy is best calculated to foment massive creation of good jobs.   The way to win the upcoming battle over income inequality is through monetary reform.

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