How The Republicans Can Win The Upcoming Battle Over Income Inequality

by Ralph Benko 

GOP_Logo1_svgFollowing 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.

Published with permission of Forbes.com

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