Inequality is the wedge issue that Democrats hope will carry them through the 2014 and 2016 elections, neutralizing the ObamaCare fiasco. The issue has popular appeal because median incomes (after inflation) have been falling throughout the recovery, while high-end incomes are increasing rapidly.
For progressives, this situation seems made to order: If you want a flatter income distribution, don't you need bigger government to get it? Yet experience shows the opposite: Washington's increased size and power has concentrated income and wealth in fewer hands. Making government bigger will exacerbate this problem—it is already too big, intrusive and expensive to allow a robust economy that benefits everyone.
President Ronald Reagan rejected class warfare, advocating sound money and lower tax rates to boost growth and living standards. His policies worked. The economy grew faster than 7% in real terms for five quarters in a row starting in the second quarter of 1983. Gross domestic product grew on average 4.6% per year in real terms during the 1983-88 expansion, while real median incomes grew 2.1%. His policies were such an economic success that appeals to class warfare gained relatively little political traction for 25 years.

Today, almost five years after the recession officially ended in June 2009, job growth from new business formation is running one-third below average, according to the Labor Department's Employment Dynamics report. Real GDP growth has averaged a weak 2.3% over the past three years, while real median incomes have fallen 0.6% per year. This disastrous economic result sets up a political confrontation between those who believe that a bigger government makes things better and those who believe that it concentrates power and income in fewer hands, undercutting the middle class.
Since the Reagan years, growth policies have faded while the government has increased its control over the economy and national income. Top marginal federal income-tax rates have risen to nearly 44% today from 28% in 1988. The dollar has weakened while consumer prices have doubled in 25 years. Federal nondefense spending has nearly quadrupled to $2.8 trillion in 2013 from $750 billion in 1988, adding a huge burden on taxpayers as national debt grows.
Progressives may concede the weakness of the economic recovery. Yet they urge more government spending and higher taxes, claiming that their policies will achieve higher growth and a fairer distribution of income.
Conservatives need to champion economic growth as Reagan did, but they also need to make a more forceful connection between the government's centralization of power and income inequality.
Big government expansions in recent years have harmed individuals with modest incomes while exempting or benefiting people with higher incomes. These include the federal takeover of the mortgage industry, and the Federal Reserve's decisions to keep interest rates near zero and buy some $3 trillion in bonds. Both of these expansions channel credit to the government and the well-connected at the expense of savers and new businesses.
Middle-income earners used to be the primary beneficiary of the rise in the value of their houses. Housing gains now lift Washington, allowing the government to pay itself huge "dividends" from Fannie MaeFNMA +0.32% Freddie Mac FMCC -0.33% and the Federal Reserve, which owns nearly $1.5 trillion in the government's housing-related bonds. The government promptly spends the windfalls, fueling a further accumulation of wealth and income for those with Washington access.
The financial industry is making billions in profits fueled by the government's provision of zero-rate loans for those with connections and collateral. Wall Street's upper crust is the epicenter for financing the contractors, lobbyists and lawyers that help the government spend money. Meanwhile, government grabs a huge share of the profits generated by small businesses. It piles on opaque regulations, complex tax rules and countless independent agencies, producing a system that works against small businesses and the middle class. The Affordable Care Act takes pains to exempt Congress, government, corporations and unions, but leaves the rest severely exposed, adding to inequality.
This week's congressional budget deal saw a narrow group of Washington's elite legislators and lobbyists working over the weekend to divvy up nearly $1.1 trillion in discretionary spending for 2014. Much of the spending and all of the lobbying and debt underwriting costs will benefit those with high incomes while the extra debt falls heavily on the middle class.
There is nothing wrong with an appropriate level of government services—it's necessary. But we are long past that level. Growing the government shrinks the rest of the economy and after-tax paychecks.
The next debt limit increase is approaching fast, probably in March. Fiscal conservatives are likely to argue along traditional lines for a few spending cuts or some votes to highlight the ObamaCare calamity. That leaves Democrats with the inequality argument to use as a bludgeon against Republicans.
The debt-limit debate should be a national referendum on the size of the federal government and the need for new controls on its growth and power. That will be a critical step in restoring income growth, but as currently written, the debt-limit law forces votes in favor of more debt.
I've advocated strengthening the debt limit by adding a declining debt-to-GDP ceiling that, when exceeded, triggers extra controls on spending and a hair shirt for Washington. Extra debt should trigger a slowdown in automatic entitlement growth, pay cuts for senior officials and reductions in their subsidized benefits until they resolve the spending crisis.
A new debt law offering spending restraint would boost confidence among investors and entrepreneurs. Most important, it would allow median incomes to begin rising again once Washington leaves private enterprise more room to breathe and grow.
Mr. Malpass is president of Encima Global LLC. He served as deputy assistant Treasury secretary in the Reagan administration and deputy assistant secretary of state in the George H.W. Bush administration.
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3)Time to Be A Statesman, Not a Partisan
Prime Minister Harper’s trip to Israel and the West Bank will not be just a simple filling out of hisresumé and staging a series of photo-ops geared to the 2015 election—although it will certainly be both of those things. The domestic Canadian politics of the visit have been made more urgent by the Liberals’ point that Justin Trudeau has already been to Israel and the curiously incurious Prime Minister has not, either before coming to office or in the eight years since. Beyond the “comms plans“ and optics, though, it is the substance that matters, as the visit falls in the middle of some of the most politically and strategically fraught negotiations of our times--the quest for a two state solution for Israel and Palestine and the curtailing of the Iranian nuclear program. Success or failure in each of these talks will have profound consequences, including for Canadians. The national interest requires the Prime Minister to be more statesman than partisan.

The alleged Iranian nuclear weapons program will likely be preoccupying PM Harper’s Israeli hosts. Jerusalem has gone to great lengths to warn that a nuclear weapon-equipped Iran would be a danger to Israel and could trigger a nuclear arms race in the Middle East as Saudi Arabia, Egypt and Turkey seek means to deter Iran and defend themselves. Were all that to happen, Israel’s nuclear deterrent would lose some or all of its value and its own strategic situation would become near incalculably complex. Under pressure from Israel the US has sworn not just to “contain” Iran but to use force if necessary to prevent the Shia state from producing nuclear weapons. Despite the posturing in Jerusalem, the view is widely held that on its own Israel could only interrupt Iran’s nuclear program briefly not stop it and that American participation, even leadership, in attacks on Iran’s nuclear facilities would be indispensable to any mission’s operational success. The American time frame for any such military action is considerably longer and more conditional than Tel Aviv’s because of Washington’s vastly greater technical capability and the president’s sharing of the public’s skepticism of preventive wars.

The unintended consequences of a military attack on Iran would probably include the destruction of the international consensus for imposing sanctions on Iran; redoubled determination on the part of Iranian hardliners to escape the confines of the Non-Proliferation Treaty; deepening Muslim hatred of the US (and Israel) for an attack on yet another Muslim country; opportunistic political profit-taking by Moscow and Beijing; disruption of oil and possibly financial markets at least temporarily and the concomitant impacts on European economies; and destruction of potentially thousands of lives.
Those are some of the consequences if the attack succeeds in crippling the Iranian nuclear program. A failed operation would be all that and worse, not least, the shredding of Israel’s political and military reputation. Further, Americans’ attitudes towards Israel could be undermined if the US public, already fed up with fighting in the Middle East, came to believe that Israel had dragged them into another war.

For all of Prime Minister Netanyahu’s outrage, real or feigned for bad cop effect, the temporary deal and the ongoing negotiations between Teheran and Security Council members on the Iranian nuclear program is vastly preferable to war.  The negotiations might lead Iran to accept limits on its nuclear program, pull Teheran out of its isolation and lead to more normal relations with a democracy-hungry Iranian people. The Iranians have not eternally been enemies of the US or of Israel. Times can change.

The Iranian and Palestinian issues are linked, at least indirectly. The Israeli government’s determination to keep building settlements is eroding support for Israel internationally at precisely the time it needs international legitimacy to attract support for action against Iran. In the words of former Israeli national security adviser Uzi Arad “the Prime Minister (Netanyahu) has been dealing with Iran as if there were no Palestine and Palestine as if there were no Iran” (quoted by Ari Shavit in “Does This Mean War?”Haaretz, 2012). But, for Israel, the road to Teheran runs through Washington because the decision-makers on Iran are the decision-makers on Palestine. In addition to its intrinsic merits, an agreement on a two-state solution would give Washington greater “cover” in the Middle East, and in the mid-West too, for military action if Teheran proved intransigent. Given these highly complex circumstances, Prime Minister Harper needs to take special care not to complicate Secretary Kerry’s efforts, and to contribute judiciously to them where he can.

The status quo in the West Bank will not endure eternally whatever some Israelis might wish and neither side will get all it wants in negotiations whatever some Palestinians might hope. Partly because there are people including cabinet ministers on both sides, not just among the Palestinians, who do not believe the other side has a right to exist, Mr. Harper ought to reiterate publically Canada’s long-standing support for a two state solution -- based on the pre-1967 lines and mutually agreed land swaps. To be taken seriously by Israelis, Mr. Harper will want to demonstrate publically as well as privately that he understands Israel’s need for security and its right to defend itself when threatened. To be taken seriously by others, he will need to accord greater importance than heretofore to the Palestinians’ desire for a state of their own. He should spend some of the political capital he has amassed from  unwavering  support of the Israeli government to urge Israel to cease building settlements, which are illegal under international law and render a two-state solution moot. Mr. Harper should program enough time in the West Bank to see for himself how difficult life there is.

On Iran, Mr. Harper should not endorse Prime Minister Netanyahu’s impatience with a diplomatic solution—even prominent Israeli national security specialists are divided on the necessity of military action -- and should manifest strong support for a negotiated outcome.  He needs to be more statesman than partisan. Too much is at stake for free-lancing and self-serving expressions of skepticism. He should make the point with the Israelis that progress on the Palestine question would strengthen Israel’s standing internationally and attract more support when Israel rings the alarm about Iran’s nuclear intentions.

Finally, Ottawa’s Global Markets Action Plan calls for harnessing all its diplomatic assets, including presumably its chief diplomatic asset,  “to support the pursuit of commercial success by Canadian companies and investors in key foreign markets”. Given all that we have at stake in our own relations with Washington, Mr. Harper will presumably connect the dots from political to economic diplomacy and take care not to alienate the US Secretary of State and President, the recommender and decider-in-chief respectively, of the Keystone pipeline project. The Middle East trip provides him an opportunity to lend a hand to the US administration on issues that matter to us as well as to President Obama and to do so prior to the President’s decision on the Keystone pipeline. That would be statesmanship.

Paul Heinbecker is a former Chief foreign policy advisor to Prime Minister Brian Mulroney. He is currently with the Centre for International Governance Innovation and Laurier University in Waterloo.