The Democrat playbook for 2014, we are told, intends to focus on U.S. inequality, and to suggest that only redistributive taxation will solve it or even alleviate it. Certainly it’s possible to reduce inequality through punitive levels of taxation – at the cost of making everybody poorer. I thus though it worthwhile to disentangle the current causes of U.S. inequality, to see how we might alleviate it by raising the incomes of the poor rather than simply depressing those of the rich. With good policies, this could even provide general economic uplift, rather than depression as would happen with redistributive tax.

The policy emphasis in the campaign against inequality looks likely to focus on a campaign to increase the minimum wage from the current $7.25 an hour, at which it was set in 2009. Traditionally, economists were pretty well unanimous that increasing the minimum wage, as distinct from attacking poverty by direct transfers or the Earned Income Tax Credit, is damaging, because it tend to increase unemployment among those receiving it. Employers forced to pay a wage higher than the market-clearing level will outsource activities or replace workers with robots; hence a minimum wage increase will do little for living standards but much to increase unemployment and reduce job opportunities.

However of those paid at or below the minimum wage in 2011, 51% worked in leisure and hospitality, according to the Bureau of Labor Statistics, while another 17% worked in retailing and 9% in education and health services. Only 2% worked in manufacturing and 1% in each of agriculture and construction. While one can suspect that agriculture and construction employed armies of low-paid people who weren’t recorded on the BLS books because they were illegal immigrants, the fact remains that for legal U.S. residents, more than three quarters of minimum wage jobs were in sectors that cannot effectively be outsourced overseas and for which automation is both complex and costly.

Thus a moderate rise in the minimum wage, to no more than $10 an hour or so, would not cause massive job losses to emerging markets. Starbucks has customers in New York; it cannot serve them by relocating its stores to Shanghai. In the very long run, expensive low-skill workers are vulnerable to robotization; in practice the costs and difficulties of replacing baristas with robots are such that it will only be tried in areas like Silicon Valley and suburban Washington DC, where the customers are robot-savvy and low-wage workers are scarce. Even McDonalds, the quintessential low-wage, high volume food service company, spends only 28% of its total cost budget on labor (including all its expensive top management) so a moderate rise in the minimum wage is unlikely to destroy its business model.

There are two caveats to this. First, a nationwide minimum wage is far too broad; it does not discriminate between places such as Silicon Valley, where demand for labor is robust and wages high, and modest-sized communities in the Rust Belt, where costs are low and $7.25 per hour is a wage sufficiently high to deter marginal employers from operating. Minimum wages should be set at a state not national level, and even within states the differentials in Virginia between the affluent Washington DC suburbs and the coal country, or in New York between Manhattan and Binghamton, are sufficiently large as to make local minimum wages the best way forward.

The second caveat is that ensuring that the demand for jobs cannot flit overseas after an increase in minimum wages is not enough; we must also be sure that the supply of limited-skill workers cannot be artificially increased. $10 an hour is a lot of money in Ecuador; hence the pressure on immigration would be increased by such a 38% rise in the U.S. minimum wage. It is thus essential that low-skill immigration be appropriately restricted (for example, by abolishing the visa lottery) and, more important that the borders be controlled and immigration policy properly enforced to prevent the flood of illegal immigrants that blighted the lives of the domestic low-skilled in 2001-07. “Comprehensive immigration reform” along the lines of the current Senate bill, which would double legal immigration while doing very little to restrict the flow of illegal immigrants, must be resisted a l’outrance; when considering which politicians to support this should be non-negotiable.

Nevertheless with these two provisos, a differential between high-wage and low-wage areas and provisions to prevent oversupply of cheap labor, a rise in the minimum wage should be seriously considered. It rectifies the very unequal balance in bargaining power between low-skill workers and their employers, without driving significant numbers of jobs overseas or eliminating them altogether. Thereby it provides some income uplift to the low-skilled, lessening their claims on the welfare system and reducing inequality. Theoretical free-market economists may loathe the measure, and the cheap-labor lobby of the U.S. Chamber of Commerce certainly does, but in this case they’re wrong.

Before readers think this column has gone soft, let me put in a good word for a measure that is hard-hearted but economically efficient: the lapsing of the 99-week limit for claiming unemployment benefits and its reversion to 26 weeks. While there needs to be a safety-net to avoid absolute destitution, prolonged unemployment benefits tend to produce prolonged unemployment, as workers fail to take the difficult decisions necessary to keep themselves actively engaged in the job market. It’s also not an insignificant cost element; at $25 billion a year the saving makes a significant dent in the deficit, which as I shall explain below is a crucial element in restoring the living standards of America’s modestly qualified.

There are however two factors more important than minimum wage legislation or the termination of unemployment compensation if you want to reduce U.S. inequality and get the low-skilled back to decently paid work: they are fiscal policy and monetary policy, both of which have been terribly distorted in recent years and need to be thoroughly reformed.

Since the turn of the century, the United States has run a balance of payments deficit of $500 billion or more, every single year. This is far more than an accounting problem. On the financial side, it de-capitalizes the U.S. economy by this amount every year, building up liabilities to foreigners who may not be willing to roll them over forever. The cartoon image of Americans working for cruel Chinese bosses by 2030 is not entirely fictional; it needs only a few more years of bad management to come true.

More important even than the drain of capital, as far as American workers are concerned, is the persistent shortage of manufacturing jobs, which normally pay much better than low-skill service jobs. If imports persistently exceed exports by $500 billion annually, that’s $500 billion of products that would in equilibrium be manufactured in the United States but in current conditions are being manufactured overseas. In rough terms, that’s around 3-4 million jobs that should exist but don’t, keeping the unemployment rate about 2% higher than it should be (mostly by suppressing the labor participation rate rather than raising reported unemployment, which is kept artificially low by the Bureau of Labor Statistics definition of “participation” so that the long-term unemployed are not counted in the official 7% unemployment rate, but are assumed to have left the workforce altogether.)

However since the overall books must balance, the $500 billion annual payments deficit is a creature of two factors, the current $560 billion (projected for the year to September 2014) budget deficit and the excessively low U.S. savings ratio, which forces U.S. investments to be financed from abroad. Hence arithmetically, to eliminate the payments deficit and restore U.S. jobs, we must eliminate the budget deficit and increase the savings ratio. That in turn requires deep reforms in both fiscal and monetary policy.

Budget deficits have been over $1 trillion annually since 2009, with the exception of the year immediately past. Some progress has been made on reducing them, but the Ryan-Murray agreement just before Christmas, which increased spending in the short term, shows that even the modest spending cuts in the sequester were too much for many politicians. Studies have shown that budget balancing attempts that get more than 25% of the money from tax increases are highly damaging to economic growth. Hence, in rough terms, the legislators need to find $420 billion in annual spending cuts, which they can then balance with $140 billion in tax increases.

Finding that level of spending cuts is not economically difficult – it is only about 2.6% of GDP — but it requires political courage. The most egregious spending, on agriculture and “green energy” subsidies, should be eliminated altogether. Further cuts can be made in the defense budget by assuming a foreign policy posture that intervenes much less than in the past decade. “Waste and fraud” is huge and can be cut back (for example in the food stamps program, the number of recipients of which has expanded more than the number of unemployed, but also in fraudulent Medicare/Medicaid reimbursements.) Only then should modest cuts be made in entitlement programs, ideally by delaying their eligibility age to reflect higher life expectancies.

Just as the U.S. fiscal position needs to be restored to its historical balance, so does its monetary policy. Interest rates have been negative in real terms (below the inflation rate) since 2008, and for much of the period before then. Thus U.S. savers have been consistently penalized for thrift; every dollar they save is eaten away by even modest inflation and they are compelled to speculate in stocks, gold or Bitcoin in order to break-even in real terms. Conversely the very rich, who have access to cheap leverage, are artificially subsidized by being able to borrow for free. This has caused a savings deficit which is preventing the baby boomers from preparing properly for retirement, and in many cases is keeping them artificially in the workforce (participation rates for the over 55s have increased substantially since 2007, the only age group for which this is true.) However, except for the few who make exceptional economic contributions, every geezer clinging desperately to his job displaces a young person who can’t get one.

Whatever the Keynesian ill-effects of balancing the budget and raising interest rates, they are short-term. It is now more than 5 years since the crash, well past time for policy to be normalized. By doing so, and at the margin raising the minimum wage, curbing immigration and cutting the length of unemployment benefits, the policy mix will once again be restored to one that provides decent jobs for all except the disabled. And, to agree with the left for one rare moment, this will produce a very much healthier society.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)