Inequality – Part 3, Republican Presidential Candidates’ Solutions

Recently, some Republican Candidates have begun to acknowledge that income inequality is a legitimate issue. They, for the most part, differ from Democrats mainly by blaming inequality more on government policy than on the actions of the wealthy.

While inequality is not prominent on the websites for the Republican candidates, one can glean from a variety of sources some of the viewpoints the candidates hold.

Ted Cruz On Inequality

Senator Ted Cruz stated on Fox News after President Obama’s 2015 state of the union address that not since 1928 has the top one percent earned a higher share of our national income. He went on to blame big government’s (under the Obama administration) catering to the rich and powerful as the cause.

Cruz’s “Five for Freedom” plan proposes large cuts in government spending by eliminating the IRS, the Department of Education, the Department of Energy, the Department of Commerce, and the Department of Housing and Urban Development.

He is in favor of a balanced budget amendment and seeks a reduction in government regulation of business.  He proposes a flat tax of 10% with the first $36,000 tax-free for a family of four. Charitable and mortgage deductions are preserved. So, it is not really a flat tax.

Cruz attributes most of our economic woes to government waste and spending. Though he mentioned crony capitalism in his response to the state of the union speech, this and other structural issues remain unaddressed on his website where I could find no mention of inequality let alone how he might address it.

He does mention another plan that would qualify as addressing structural issues, if only his solution were more robust. He proposes an audit of the Federal Reserve and favors a rules-based monetary system. Under such a system, the central banks’ actions on interest rates would be directed by pre-set rules that would be predictable to the market and that would presumably, according to Cruz, stabilize the international currency system. Such a rules-based monetary system depends on accurate assessment of inflation and economic output, something that is far from a sure thing. More importantly since it does not eliminate some of the basic problems created by a central bank (see Rand Paul discussion below for one of them) I don’t consider this a solution to structural deficiencies in our economy that lead to inequality. If his overall plan for the Federal Reserve is to stop the transfer of wealth to the rich via bailouts, then that is a good start. However, any plan that does not address all the advantages given to owners of capital and to the financial sector by the Federal Reserve will fall woefully short of solving the problem of inequality.

Cruz’s overall message seems to be that if we stop government spending and eliminate the nation’s debt and if the markets were left alone, unencumbered by government, then prosperity from which all would benefit would return.  While many of his proposals are necessary, especially a balanced budget coupled with smaller government and eliminating crony capitalism, they are not sufficient to solve our economic problems or the problem of income and wealth inequality.

Cruz’s plan has a lot of good features and is, in itself, a big bite to chew. It’s sort of a first things first approach that I can appreciate. One can only hope that he and other government officials do not stop with these measures leaving significant structural problems of our economy unaddressed because they placed too much faith in the ability of a free market to correct itself.

Rand Paul On Inequality

Senator Rand Paul, in an article coauthored with Mark Spitznagel entitled “The Federal Reserve Is Not Your Friend”,1 states that the Federal Reserve benefits Wall Street at the expense of Main Street.  The most discerning comment, however, is that low-interest rates benefit owners of capital and those who have first access to borrowing.

Let me expound on this a little.  Inflation is built into our economy by the Federal Reserve’s target inflation rate of 2%. Because first users of new money spend it before it loses its purchasing power and because those last in line for the new money find their savings worth less and the purchasing power of their wages diminished, there is a distinct advantage in being the first to get the new money. This insight is attributed to 18th century economist Richard Cantillon and is known as the “Cantillon effect”. The currency that the Federal Reserve creates out of thin air goes to the financial industry first. Thus, banks and those who already have a lot of money to invest (the rich) are able to invest in real estate and stocks, sparking a rise in prices. This is, on average, almost a guarantee of being able to buy low and sell high.2 Of course, the rest of us end up purchasing assets at the higher price, especially when interest rates are very low and large sums of cash are directed into an asset bubble.

Paul wants to audit the Federal Reserve and place its regulatory power under the control of Congress.

Senator Paul will work for a balanced budget. He wants to repeal the entire IRS tax code and replace it with a flat 14.5% tax on all forms of income. The affordability of the plan is dependent upon a projected increase in GDP, job creation and abolishing tax loopholes used by the rich.

It is not surprising I could not find the word inequality on Paul’s website. He is on record as saying that inequality is due to some people working harder than others.3 And then there is the debate whether his flat tax is a gift to the rich that will make inequality worse.

 

To be continued…

 

Notes:

  1. The Federal Reserve Is Not Your Friend, Reason.com (Aug 20, 2015))
  2. Greed and folly can ruin any “sure thing” and many investment banks got burned by their excesses when the housing bubble burst in 2008. But the system, rigged as it is, made sure the too-big-to-fail banks were bailed out.  More money was spent on bailouts than on unemployment benefits and workers were laid off to pay huge bonuses to the CEOs who were largely responsible for the financial meltdown.
  3. Fox News Sunday, Aug. 9, 2015

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