Struggle Over Dem Economic Policy Looms

There is a battle shaping up over Democratic economic policy in the next Congress. New York Times reporter Louis Uchitelle identified the players and stakes here, and there is an in-depth report on Alternet as well. David Sirota also weighs in, naming names in a piece that defines the battle as "The People Party" vs. "The Money Party."

On the one hand you have Clinton-era "centrist" economics, associated with Treasury Secretary Robert Rubin and called "Rubinomics" for short. This perspective resists market intervention and welcomes free trade. On the other hand you have the populist variety of economics espoused by a number of successful 2006 candidates, notably Sen.-elect Sherrod Brown (D-Avon, OH) and Sen.-elect Jim Webb (D-VA), which favors greater market intervention and includes the "fair trade" position of opposing trade agreements without labor and environmental protections (e.g., NAFTA and CAFTA). The populist perspective is championed by labor union economists and the Economic Policy Institute. The centrist "Rubinomics" perspective is advanced by the recently formed Hamilton Project, a unit of the Brookings Institution.

It is important to note that these two economic perspectives are in agreement on a number of basic points. They agree that the middle class has largely been left out of the economic revival of the last few years, and they agree that globalization has hurt American workers. Some of their policy proposals are indistinguishable:

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.

However, on other points their ideas diverge sharply:

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.

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.

This divide is likely to spill over into lobbying reform (the populists will want to reduce the influence of Wall Street and corporate interests much more sharply) and tax policy (for example, Sherrod Brown has advocated not only stopping incentives to off-shoring of jobs, but putting in new incentives to promote domestic production).

How are battle lines shaping up? As reported in The Nation here, new House Majority Leader Nancy Pelosi (D-CA) has expressed a determination to "govern from the middle," and apparently part of her resistance to any left-ward shift was having only Robert Rubin speak to freshman legislators about economic policy. Labor unions sought to supplement Rubin with one or more economists of their own choosing, but were rebuffed. Also, AFL-CIO President John Sweeney met privately with Rubin earlier this month to air their differences over trade policy, budget deficits, and wage and wealth-gap issues, according to this story at Bloomberg.com. Additional meetings are planned. These get-togethers were occasioned by a letter written by AFL-CIO Treasurer Richard Trumpka:

[Rubin] has called for a new economic direction by balancing the federal government's budget through spending cuts and tax increases, more free-trade agreements, wage insurance for workers dislocated by globalization and restraining personal- injury lawsuits.

"The strategy you propose offers little, in my view, to either bolster economic growth or address the stagnating wages and living standards of American working families," Trumka wrote in a Feb. 7 letter to Rubin. "I am simply astonished that you would suggest such a politically toxic agenda for the Democratic Party."

"When the wizards of Wall Street start dictating Democratic policy, the first to be forgotten are the Democratic voters who made these election successes possible," said Rick Sloan, a spokesman for the International Association of Machinists and Aerospace Workers. "We get screwed every time these guys grab the handles of power. They forget the need to create jobs. They are much more interested in Chinese growth than Cleveland's growth."

When the new Congress gets underway, this polarization over economic policy will likely escalate, and if neither camp prevails then gridlock on economic initiatives may result. However, that is not the only potential battleground. The primaries for the 2008 presidential election are likely to feature a continuing debate about "Rubinomics" vs. populist economics. Assuming that Sen. Hillary Clinton (D-NY) is involved, her association with Clinton-era free trade policy (i.e., NAFTA) will be a hot issue.