US politics: new breed of Democrat doesn't want to sell out US economy to rest of world

Here Come the Economic Populists – by LOUIS UCHITELLE/NY Times

FOR years, the Clinton wing of the Democratic Party, exercising a lock on the party’s economic policies, argued that the economy could achieve sustained growth only if markets were allowed to operate unfettered and globally.

Overcoming protests from labor unions, a traditional constituency, the Clinton administration vigorously supported free trade agreements like Nafta and agreed to China’s admission into the World Trade Organization . If there was damage to workers, then the Clinton camp proposed dealing with it after it occurred — through wage insurance, for example, or worker retraining and other safety-net measures.

This approach coincided with a period of economic prosperity, low unemployment and falling deficits. Over time, this combination — called Rubinomics after the Clinton administration’s Treasury secretary, Robert E. Rubin — became the Democratic establishment’s accepted model for the future.

Not anymore. With the Democrats having won a majority in Congress, and disquiet over globalization growing, a party faction that has been powerless — the economic populists — is emerging and strongly promoting an alternative to Rubinomics.

The populists argue that the national income has flowed disproportionately into corporate coffers and the nation’s wealthiest households, and that the imbalance has grown worse in recent years. They want to rethink America’s role in the global economy. They would intervene in markets and regulate them much more than the Rubinites would. For a start, they would declare a moratorium on new trade agreements until clauses were included that would, for example, restrict layoffs and protect incomes.

“We are at a point where the Reagan era might finally be over, including the eight years of Bill Clinton ,” said Jeff Faux, a fellow at the Economic Policy Institute, a labor-oriented research group partly financed by the A.F.L.-C.I.O. “The historic juncture here is whether the Democrats can come up with policies that get to the level of the problem.”

The split is not over the damage from globalization. Mr. Rubin and his followers increasingly say that globalization has not brought job security or rising incomes to millions of Americans. The “share of the pie may even be shrinking” for vast segments of the middle class, Mr. Rubin’s successor as Treasury secretary under President Clinton, Lawrence H. Summers , recently wrote in an op-ed in The Financial Times. And the populists certainly agree.

But the Rubin camp argues that regulating trade, or imposing other market restrictions, would be self-defeating.

“You pay a steep economic cost when you adopt market interventions,” said Peter R. Orszag, a senior fellow at the Brookings Institution and a leader of the Rubin group. He argued, for example, that restrictions on layoffs “would impede the ability of markets to reallocate labor efficiently.”

As a result, the Rubinites contend, there would be slower economic growth and less national income to distribute — equally or unequally. It was an argument that President Clinton embraced 15 years ago in pushing Congress to approve the North American Free Trade Agreement. For workers who were damaged by free trade, the administration offered a safety net, not immunity from damage.

The economic populists argue that the trade agreements themselves are the problem. They cite several studies showing that more jobs shifted to Mexico as a result of Nafta than were created in the United States to serve the Mexican market.

“I don’t see Congress passing any bilateral trade agreement that does not have strong labor and environmental standards written into it,” Representative Sherrod Brown of Ohio, a Democrat just elected to the Senate, said in an interview last week.

Economic populists in and out of Congress are organizing to push their proposals, coalescing around the Economic Policy Institute. The A.F.L.-C.I.O. is a very visible member of this coalition. Unions have gained political influence because of their get-out-the vote role in battleground states like Ohio, where Democrats made substantial gains in the midterm election.

“We feel we have a stronger voice now in the deliberations of the Democratic Party,” said Ronald Blackwell, the A.F.L.-C.I.O.’s chief economist.

Just as the populists have organized, tentatively calling their group Shared Prosperity, so has the Democratic establishment. Its counterpart is “the Hamilton Project,” formed last spring to elaborate policies in anticipation of a Democratic Congress and, in 2008, a Democratic victor in the presidential election. Mr. Orszag, who was a senior economist in the Clinton administration, directs the project. The financing comes from wealthy Democrats, among them Mr. Rubin.

As the two groups face off, Lawrence Mishel, president of the Economic Policy Institute, contends that the populists are pushing much harder than the Rubinites for government-subsidized universal health care. They also favor expanding Social Security to offset the decline in pension coverage in the private sector.

Apart from such differences, there are nevertheless crucial issues on which the groups agree. Both would sponsor legislation that reduced college tuition, mainly through tax credits or lower interest rates on student loans. Both would expand the earned-income tax credit to subsidize the working poor. Both would have the government negotiate lower drug prices for Medicare’s prescription drug plan. And despite their relentless criticisms of President Bush’s tax cuts, neither the populists nor the Rubinite regulars would try to roll them back now, risking a veto that the Democrats lack the votes to override.

“Any solution that you put up is going to get knocked down before you put it up,” Mr. Rubin said in an interview last week, referring mainly to taxes.

Noting the Democrats’ slim majority in Congress, he added, “I think you need a process that involves the president of the United States, the leaders of both parties and the leaders of both houses.”

The threat of a Bush veto affects another piece of the Democratic agenda — an increase in the minimum wage. Both Democratic factions support a bill, to be introduced in January, that would raise the minimum wage to $7.25 an hour from the current $5.15. The increase would come in three steps, spread over more than two years, with the final $7.25 not reached until spring 2009 at the earliest.

That is the same $7.25 that would be effective today if Congress had given its approval when Senator Edward M. Kennedy of Massachusetts first proposed the increase in 2004. Yet Mr. Kennedy is the chief sponsor of the new attempt to raise the minimum, his strategy being that the $7.25, stretched out to 2009, is mild enough to be acceptable to Mr. Bush and many Republicans .

“After we successfully pass this increase,” Mr. Kennedy said last week, “I plan to introduce a new proposal right away that will ensure that minimum-wage workers never again fall so far behind in our economy.”

The minimum wage debate illustrates that in the end, economic policy might be determined less by partisan goals than by the constraints of pragmatic politics.

Representative Maurice D. Hinchey, a Democrat whose New York district includes Kingston and other economically struggling cities, asserts that the federal minimum should be $10 an hour now. Going that high right away is unrealistic, he acknowledged, but in the Congressional debate over the Kennedy proposal, Mr. Hinchey will push to have the $7.25 effective no later than the spring 2008, not 2009.

“If I went out on the street in Kingston,” Mr. Hinchey said, “and said to people that the minimum wage is not going up to $7.25 until 2009, they would say to me, ‘That is all the Democrats are going to do? Why did I vote for you?’ ”