The State of the Union and a Winning GOP Strategy

NEW YORK (TheStreet) -- President Obama, dogged by the bungled rollout of the Affordable Care Act and a slow economic recovery, is declaring war on inequality. It's an age-old problem made worse by his policies. He offers more opiates -- like raising the minimum wage -- that fail to address the root causes of vanishing opportunities and falling incomes for most Americans.

Market capitalism has proven a superior system to anything Old World socialists and American liberals can contrive. To the misfortune of Utopians seeking both equality and prosperity, the system rewards intelligence and hard work and requires some inequality to accomplish prosperity.

Globalization, promoted through free trade agreements by presidents since Kennedy, has opened vast markets and increased the incomes of the most talented and industrious Americans, while subjecting more ordinary citizens to more intense competition from workers in Asia and elsewhere.

Sadly, foreign markets for what many Americans make remain largely closed. General Motors (GM) boasts some of the best selling cars in China, but high tariffs and regulations keep out U.S.-made vehicles. That denies ordinary workers good paying jobs.

In tandem, domestic policies encourage the monopolization of markets and big paydays for top executives and star performers. They also impose higher prices and lower living standards on ordinary Americans.

Dodd-Frank has not stopped reckless risk taking and some of the big paydays on Wall Street, but its regulatory costs have compelled many smaller banks to sell out to big banks. Having a tighter grip on markets, larger banks charge higher fees, pay less interest on savings and reward top executives.

The Federal Communications Commission does not classify cable television providers as utilities or permit regulation of their rates. Monthly fees rise with the rhythmic certainty of the onset of winter and permit huge payouts to the NFL. That makes Peyton Manning richer and subscribers poorer, regardless of whether or not they watch football.

Obamacare and the broader morass of federal and state health care regulations have encouraged the consolidation of hospitals around many major cities, and reduced the number of health insurance companies operating in regional markets. Less competition increases salaries for hospital administrators, insurance company executives and some medical specialties.

Overall, Americans pay 50% more for health care than the Germans and the Dutch, who also have private providers and high quality care, as well as universal health care. Americans compete less effectively in world markets and earn lower wages for that difference.

As the president suggests, raising the minimum wage would help many poor Americans, but it would destroy jobs. A better strategy would be to junk the wage floor altogether and combine all federal income support programs -- the earned income tax credit, food stamps, Medicaid, Obamacare subsidies for health insurance premiums and the like -- into something more coherent like a family allowance for each child. That would level incomes a bit and eliminate a lot of bureaucracy that is slowing businesses, weighing down growth and keeping most Americans from earning bigger paychecks.

However, for such pro-market approaches to work, Republicans would have to accept that in some places markets need help to be effective and fair.

If they want free trade, then they must support agreements that give American workers a better deal. To junk Obamacare, they must come up with a regulatory framework that actually lowers prices and costs. And if we are to rely more on markets and less on regulation to discipline the banks, then it is time to break up the big banks to foster genuine competition.

Obama is surely right about one thing. If Republicans want to change things, then they have to win more elections. That will require more pragmatism and less ideology. Opposing the president, no matter how wrong-headed some of his policies may be, is simply not enough.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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