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The Democrats’ opportunity: Are they ready?

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Opinion pieces and speeches by EPI staff and associates.

[ THIS PIECE ORIGINALLY APPEARED IN THE WINTER 2006 ISSUE OF THE DISSENT MAGAZINE. ]

The Democrats’ Opportunity: Are They Ready?

By Jeff Faux

After World War I, a French general was asked how one fights the Germans. ?Retreat and retreat,? was the reply, ?and wait for the German mistake.?

So it has pretty much been with the Democratic Party generals after the watershed election of 1980, when Republicans took over as the party of the ideas that defined America?s political future. Since then, Democratic leaders, in and out of power, have steadily ceded ideological territory in the hopes that the right will overreach. That Democrats ?don?t stand for anything? is today a political cliché.

The party of Franklin Roosevelt has assumed the role that the Republicans played from 1932 to 1980, when the New Deal drove the country?s domestic development with a vision of public regulation of capitalist markets to make them more efficient and more fair. Republicans elected within that era could reduce our speed toward a social democratic future, but they could not alter the direction. Many policies that fit the framework of the New Deal?for example, federal aid to housing and education, welfare expansion, and protection of the environment?were substantially if reluctantly pursued by Dwight Eisenhower and Richard Nixon. Gary Wills once called Nixon ?the last liberal.?

Similarly, Bill Clinton?s two presidential terms played out in Ronald Reagan?s shadow. Clinton?s major accomplishments?the North American Free Trade Agreement, welfare reform, federal spending restraint, financial market deregulation, and the privatization of government services?reinforced Reagan?s agenda of freeing corporate capital from the social contract imposed by the New Deal. Clinton delivered some liberal programs, such as the expansion of the earned income tax credit and the right to unpaid medical leave, but they did not counterbalance his other Reagan-lite policies. The one Clinton proposal that might have altered the rising insecurity of the American working class was national health insurance, which he abandoned when confronted with the opposition of big business.

Waiting for the Republican mistake has been occasionally successful. Clinton won the 1992 election because Ross Perot split the Republican constituency and George H.W. Bush angered voters with his patrician indifference to a rising unemployment rate. He was re-elected four years later after Newt Gingrich forced a budget crisis that closed national parks and left government workers without a paycheck. In 2005, Democrats?refusing media demands that they present an alternative?ambushed George W. Bush?s overconfident assault on Social Security.

Passive resistance could even help the Democrats win November?s election. With the once fearsome Republican blitzkrieg bogged down in catastrophe in Iraq, incompetence in New Orleans, and corruption scandals in Washington, the Democrats may simply be the default option for voters disgusted with Bush, Tom DeLay, and Bill Frist. We will, of course, take any victory we can get. And a takeover of the House or Senate, or both, would presumably help prevent a lame-duck Bush administration from inflicting more damage on the nation and the world.

But if the Democrats are to truly lead the country in another direction, they will need more vision and imagination than they have thus far demonstrated.

In Reagan?s Shadow

The Democrats do not lack ?ideas,? per se. The party?s intellectual infrastructure?the academics, think-tankers, and leaders in exile?are, at the very least, an IQ-for-IQ match for their GOP equivalents. Among their Reagan-era leaders, Bill Clinton, Al Gore, and Michael Dukakis were genuine policy wonks. As compared with their opponents, so were Kerry and Mondale. But they were trapped?or have trapped themselves?in the Reagan narrative of how the system works.

For example, ever since Republican red ink began to flow in the 1980s, Democrats have presented themselves as budget hawks, convinced that they could capture the support of Wall Street, for which deficits were presumably a major concern. In partnership with the Reagan-appointed Federal Reserve chair Alan Greenspan, Clinton and his treasury secretary Robert Rubin (formerly with Goldman-Sachs, now with Citigroup) made fiscal conservatism their number one priority, crushing the hopes of the Democratic constituencies for the peace dividend that was promised at the end of the cold war.

Conventional wisdom among the punditry is that Clinton?s strategy was brilliant. Yet this is exactly what Reagan intended: as reported by his chief economist Murray Weidenbaum, Reagan thought deficits ?serve a good purpose?they keep the liberals from new spending programs.? So they did. Clinton campaigned in 1996 on the defense of Social Security, Medicare, and federal environment protection??big government? programs all. But as soon as he was re-elected he declared that the ?era of big government is over? and pledged to eradicate the entire national debt?words to warm the heart of Calvin Coolidge

By Clinton?s last year, the trap had been sprung completely; the Republicans controlled the House, the Democrats? base in labor and the domestic public sector had been demoralized, and military spending was back to cold war levels. To top it off, in the first month of George W. Bush?s presidency, Greenspan shamelessly endorsed the new president?s tax cuts that would drive deficits to unprecedented heights. The chair, it turned out was not interested in balancing budgets; as with Reagan, fiscal conservatism was his instrument for dismantling the New Deal. After Clinton spent eight years starving his own constituency to pay off Reagan?s debts, Bush II, with Greenspan?s sly encouragement, opened up the Treasury once again to be looted by the GOP corporate clients.

Rank-and-file Democrats are also intimidated by Reagan?s shadow. In the decisive Iowa caucuses of 2004, Democratic voters said that they agreed with Howard Dean on the issues, but chose John Kerry precisely because his blurry, split-the-difference moderation would make him more ?credible? with swing voters. Like the party?s elites, they decided that Kerry was salable as a war hero in contrast with the draft-dodging George W. Bush. But to live by the image is to die by it. Republicans neutralized Kerry?s medals with savage personal attacks, and the Democrats were left with someone who appeared less forthright than the liar in the White House.

Like Reagan?s budget policy, Bush?s Iraq policy trapped the Democrats who fell for it. Once people like Kerry, Hillary Clinton, John Edwards, and Diane Feinstein accepted the legitimacy of invading, their criticism of Bush?s handling of the war seemed like carping.

Americans tuning into the campaign in the last two months?when most do?would have heard Kerry say that he would have voted for the resolution supporting the invasion of Iraq even if he had known that Saddam Hussein had no weapons of mass destruction and no connection with the September 11, 2001, attacks. They would have heard him propose sending another forty thousand troops to Iraq at the same time he was complaining that Bush?s commitment of resources there had let Osama bin Laden escape in Afghanistan. Three months after the election, Kerry opposed a specific timetable for getting the troops out of Iraq. Nine months after that?when the polls seemed to have decisively turned against the war?Kerry called for a pullout in fifteen months. Does anyone know what he really thinks?

In their defense, Democratic leaders point out that they live in a more conservative time that has forced limited horizons upon them. Bill Clinton often complained that he did not ha
ve the crisis needed to make him a great president. It?s a valid, if self-serving point. George W. Bush is an example; he was falling in the polls just before the crisis of 9/11, which he then exploited to the fullest.

Democrats were saved by his overreach. Fortunately for them and the nation, Karl Rove?s expectation that the 2004 election would complete Reagan?s revolution and ensure Republican hegemony for decades to come did not pan out. The country remains, as the pundits tirelessly tell us, just about split down the middle between states?and states of mind?red and blue.

The nature of that division is still defined by the ideologically hegemonic Republicans in cultural terms, rather than along the lines of economic class, which is where the Democrats? advantage lies.

Yet the last two truly watershed elections?ones that changed the country?s direction?were not driven by cultural divisions, but by what voters perceived as fundamental threats to their standard of living. In 1932, with the election of Franklin Roosevelt, it was, of course, the Great Depression. In 1980, the threat came from inflation that had risen to double digits and Jimmy Carter?s attempts to fight it with an austerity budget that created back-to-back recessions in an election year. Despite the media focus on the hostages held in Iran, 1980 exit polls showed that high prices, high interest rates, and rising unemployment were much more important?and decisive.

A common element in the Roosevelt and Reagan revolutions was the prior existence of a body of ideas that provided a credible explanation for the pain and generated a set of solutions. Although Roosevelt saw himself as an experimenter rather than an expert, he brought into office people who for years had been thinking about how to manage capitalism, an activity that prior to the depression was seen as hopelessly utopian. Programs like Social Security, public works jobs, and the Tennessee Valley Authority flowed from this pool of ?utopian? ideas?as did the later rapid spread of John Maynard Keynes?s concept of a full-employment economy that could support a constantly improving social contract.

Reagan built his success on the assertion that the inflation of the seventies was driven by out-of-control big government created by the New Deal. Inspired by the anti-Keynesians F.A. Hayek and Milton Friedman, the Republican right developed arguments among academics, journalists, and in the rhetorical echo chamber of Washington speeches, hearings, and receptions. Their simplistic story of inflation as a creation of welfare state spending was at first ignored; most people blamed the oil cartels and the Vietnam War. But gradually these reactionary ideas became the conventional explanation for rising prices.

Reagan?s tale of Big Government connected the cultural and economic issues, convincing many struggling middle-class families that Wall Street was a fellow victim of liberal politics, against whom they needed a united front. It is, of course, a fraud?the systematic transfer of wealth from one part of the Reagan coalition to the other. The process is neatly illustrated by Thomas Frank in his book What?s the Matter with Kansas?: ?When two female rock stars exchange a lascivious kiss on TV, Kansas goes haywire. Kansas screams for the heads of the liberal elite. Kansas comes running to the polling place. And Kansas cuts those rock stars? taxes.?

The Democrats? continuing desperate search for ways to talk about ?values? reflects the widespread assumption that in one form or another Reagan?s political smoke-and-mirrors will continue to cloud the public?s mind. It would not be an unreasonable assumption, except for the fact that the next major threat to U.S. living standards is now well on its way.

The Next Watershed Election

The election of 1932 was a reaction to depression. The election of 1980 was a reaction to inflation. The next watershed election will be a reaction to the undercutting of American living standards by globalization. Under the current structure of the global market, the real income of the typical American household will have to fall.

One visible symptom of the weakening foundations of the U.S. economy is the off-shoring of skilled jobs. Until recently, accepted wisdom held that casualties from global competition would be largely restricted to blue-collar manufacturing workers, who could be retrained for jobs further up the skill ladder. Those who could not, would at least see their children in the better jobs created by the new high-tech economy. But today the floodwaters of globalization are rapidly reaching the high ground. The ?China price? (a symbol not only of competition from China, but India and other ?emerging? economies as well) is now undercutting the wages of U.S. financial analysts, accountants, computer programmers, design engineers, radiologists, and other highly skilled professionals whose jobs are increasingly outsourced. The still modest levels of off-shoring of these jobs have already produced considerable anxiety. Princeton economist Alan Blinder, former vice chair of the Federal Reserve Board, and a certified free-trader, recently told a meeting of congressional Democrats that ?tens of millions of additional workers will start to experience an element of job insecurity that has heretofore been reserved for manufacturing workers. It is predictable that they will not like it.? [Emphasis added.]

Another less visible symptom is the relentlessly rising U.S. trade deficit being financed by a foreign debt that is expanding faster than our income. For more than a quarter of a century, the people of the United States have been buying more from the rest of the world than they have been selling. Simple arithmetic tells us that this cannot be sustained. Already our international finances are imbalanced to the point where, were we a smaller nation, the International Monetary Fund would be running our domestic economy. When the day of reckoning comes, high interest rates and a falling dollar will force us to rebalance our trade by cutting the price of what we sell and raising the price of what we buy, lowering real incomes. The crisis in the nation?s trade sector will be quickly transmitted to the rest of the economy, which has been made extremely vulnerable to rising interest rates and squeezed wages by over-indebted consumers, overleveraged pension funds, and overpriced houses. Thanks to George W. Bush?s reckless deficits, the federal government will have little ability to overcome an economic crisis with an infusion of spending, as it did in the last economic downturn.

The basics of this hard-times scenario are not much in dispute. Similar grim forecasts can be found in recent pages of the Economist, Business Week, and other business periodicals. Given the reluctance of important people in the financial world to rile the markets, the increasing number of them openly predicting a U.S. economic crisis is ominous. The timing is unknown, of course, but it is certainly drawing closer. Former Fed chair Paul Volcker has said that there is a 75 percent chance of an economic crisis by 2009. Trends forecast by economists at the respected Levy Institute suggest a crisis within five years. Others?including the economist turned columnist Paul Krugman?openly worry that it will come sooner than that.

The debate is between those who foresee a hard landing and those who believe that the world?s central bankers will somehow figure out a way to limit the damage. But hard landing or soft, even the staunchest supporters of globalization admit that lower living standards are in the cards. The otherwise optimistic N. Gregory Mankiw, who as George W. Bush?s chief economist famously praised the off-shoring of American jobs, recently acknowledged to the Wall Street Journal that U.S. reliance on foreign savings to support its consumption means a ?less prosperous future.?

Democrats Still in the Dark

The political implications for workers at all but the very
top of the social pyramid are enormous. As financier Warren Buffett put it, the coming deflation of the U.S. debt bubble will ?produce significant political unrest.? Yet the looming prospect has scarcely been noticed in the mainstream political debate.

Of course, ?a less prosperous future? is not something that you would expect a Republican Party that controls all three branches of government to be talking much about. On the other hand, one would think that this would be a major topic in the intellectual haunts of the opposition Democrats. But as the Democrats have become more dependent on financing from the rich and globally connected, the party?s Washington policy apparatus?dominated by Clinton New Democrats?tend to avoid thoughts that give discomfort to the multinational investor class. The result is that the ideas upon which the Democrats are planning for their next chance to rule do not reach the scale of the problems the country faces.

A good place to examine this is in a new book by Gene Sperling. The smart, well-connected Sperling was a member of Clinton?s inner circle from the beginning of the 1992 campaign and a protégé of Clinton?s treasury secretary, Robert Rubin, who is arguably the single most powerful individual in the Democratic Party. Sperling was an adviser to Kerry and can expect to be whispering in the ear of leading Democratic candidates for the next presidential elections. His views are as representative of the Democratic establishment?s thinkers as you can get.

Sperling begins the Pro-Growth Progressive by setting himself the task of finding a middle ground between what he regards as the unintelligent left that doesn?t understand market economics and the heartless right that lacks compassion for those the market leaves behind. Given that this is a book of ideas, the deck is stacked right away against those characterized as ignorant. Readers who remember that the Clinton administration?s famous ?triangulation? skewed decidedly to the conservative side might occasionally check their political wallets while reading Sperling?s text.

The book starts, sensibly enough, with the problem of global competitiveness. Having helped promote the opening up of the U.S. economy to low-wage competition, Sperling is a bit sobered that things have not worked out as promised for many American workers. He sympathizes with those who are thrown into the street by low-wage competition and left to the mercies of such ruthless employers as Wal-Mart. He also acknowledges the hypocrisy of those elites who praise the virtues of competition when their own jobs and incomes are safe. He chastises Bush for not taking China to task for distorting its markets and oppressing its workers?although China?s proclivities were well known when the Clinton administration opened up the U.S. economy to the governing class of the Peoples? Republic.

Sperling seems to understand that the global economy has no social contract. NAFTA, the World Trade Organization, and the other international financial institutions protect the rich and powerful and leave people and the environment to the market?s mercies. Under these conditions, the more the United States is open to the global economy, the more the labor, consumer, and environmental laws that took a century of struggle to establish are undercut.

But at the same time Sperling cannot bring himself to accept the implications: that under these conditions, maintaining the social contract requires either that the economy be protected or that there be enforceable global standards for labor and the environment. To get around this, he retreats into policy fantasies, such as relying on the moral conscience of multinational capital: ?U.S. companies who argued alongside us that China?s WTO entry would bring American values and labor standards to China should help ensure that increased economic engagement moves China in that direction by adopting voluntary codes of conduct, monitoring factories, and standing up to worker suppression.?

One might forgive a less intelligent and experienced analyst for this statement. But it is hard to believe that Sperling seriously expects the corporate investor class that profits from this exploitation to voluntarily try to end it. It is not ?China? that we are competing against; it is the marriage of American capitalists, who supply the money and technology, and Chinese commissars, who supply the labor. Had we waited for the robber barons of the late nineteenth and early twentieth century to voluntarily improve the conditions of labor in America, we?d still be employing twelve-year-olds in coal mines.

Sperling?s response is that economic growth raises all boats. So it does. And the bubbling economy of the last two Clinton years demonstrates the point. But bubbles are not sustainable, and it will take years before the memory of the market crash has faded enough to generate the next speculative boom. More important, the benefits of growth only spread when laws and institutions spread them. Put Americans in competition with workers in developed countries whose leaders are more protective of their industries, or in developing countries whose leaders respond to labor organizing and protests with nightsticks and bullets, and you have a guaranteed formula for ripping up the American social contract.

Like most of the punditry, Sperling asserts a simple equation of trade liberalization with economic growth but offers no evidence. No wonder: as Harvard economist Dani Rodrik tells us, ?No widely accepted [economic] model attributes to postwar trade liberalization more than a tiny fraction of the increased prosperity of advanced industrial countries.?

Indeed, Sperling shifts gears when it comes to this question, and in the end seems to rest his case for free trade not on growth but on lower consumer prices. Before the Clinton administration?s trade policies, he says, Christmas toys were burdened with a 5 percent tariff. True enough, but of all the problems that America faced in 1992?and faces today?nowhere near the top of any serious adult?s list is the lack of cheap toys. It borders on a caricature of the consumerist American soul to demand undercutting the gains of a century of social struggle in exchange for a 5 percent cut in the price of a Barbie doll.

Sperling is on firmer ground with his list of sensible proposals for strengthening the social safety net. He doesn?t use the phrase, but his ideas sum up to a sort of cradle-to-the-layoff education program that includes a tax credit for the baby, universal preschool for the toddler, after-school programs for the teenager, and more subsidies for the poor high school graduate to get to community college. At college, minorities and the disabled will be provided with extra help. For those who go on to graduate school in science and technology areas, especially women, there will be increased federal grants for research in nanotechnologies and other cutting-edge disciplines. And for those who lose their jobs to imports, the government will retrain them, or pay private insurance companies to offer workers health, mortgage, and wage insurance. To this he adds a plea for the government to spend more on basic research that would lead to marketable goods and services.

These are generally good ideas, and the country should embrace them. Most Democrats already do. Unfortunately, they do not much address the competitiveness problem that Sperling identifies as the center of our economic dilemma. His central notion that education and retraining would enable Americans to overcome their enormous wage cost disadvantage is, to be kind, a day late and a dollar short. Indeed, the history of the last decade and a half is of millions of Americans sacrificing and borrowing to further their education, only to have their jobs shipped overseas and their lives made less financially secure than those of their less educated parents.

One addition to the social safety net that would clearly help would be universal health care. It costs at least $1,000 more a year to produce a car in Detroit, Mi
chigan, than in Windsor, Ontario, because in Canada, health insurance is a government-organized program and not the responsibility of the employer. One would think that for a self-styled ?Pro-Growth Progressive? advocating something similar for the United States would be a no-brainer. Yet the best Sperling can do is to call for the government to subsidize catastrophic-illness insurance, leaving the wasteful, costly, and competitively burdensome system pretty much as it is.

Perhaps nothing illustrates the Democrats? retreat mentality more than his comments on health care. Like his model, Bill Clinton, Sperling likes to puff up the liberal headline, which he then deflates in the fine print. Thus, he tells Democrats they should ?Articulate a Bold Commitment to Progressive Values.? But an apparently bolder commitment to Conservative Values means progressive ones can?t be funded. So we must now be content with an ?ultimate? goal of ?universal health care for all children.? [emphasis added], which not only puts it off into the future, but is a dramatic ratcheting back of Clinton?s original promise of health care for all.

There might have been a moment, in Clinton?s first years, when his administration could have at least extracted concessions that would have better prepared American workers for the insecurity of the global market (national health insurance being one example) as the price of the free-trade and deregulation that corporate America desperately wanted. But the New Democrats simply opened the barn door, and now the big-business horses are gone. American multinational business and banks are pouring investments into China, India, and other places where labor is skilled, cheap, and docile. They now have little incentive to support even the mild strengthening of the social safety net that Sperling recommends.

Given that, the almost unanimous call among Democrats (and many Republicans) for the U.S. government to spend taxpayers? money on more basic research and development seems a bit perverse. With manufacturing fleeing the country, the actual marketable products that come from such efforts would most certainly be produced in other countries.

Sperling?s final answer is a series of proposals to increase the national savings rate. His concern for the savings rate is well taken, both at the level of the citizen and the country. Private guaranteed-benefit pensions have gone the way of the dinosaur, individual 401(k) plans are stuck in a floundering stock market, and over half of U.S. workers have no pension security at all beyond Social Security. On the level of the national economy, that the United States does not save enough to pay for its imports is simple economic reality.

Predictably, Sperling?s first, second, and third priorities are to eliminate the fiscal deficit. At the same time he wants to spend more on his domestic programs. It would be unfair to demand that Sperling tell us precisely how these numbers would add up, but given his heavy insistence on ?fiscal responsibility,? he does have an obligation to tell us a little more about which?spending or saving?has the greater priority.

Sperling would also have the government subsidize 401(k)s, and give poor people money to save. Anything that would help poor working people with a few more dollars is welcome, but the increase in public spending would for the most part offset the increase in private saving and not make a serious contribution to the national savings rate.

The more fundamental flaw in this part of Sperling?s ?growth? agenda is that it does not address the brutal fact that saving more means consuming less, and consumption in our ?shop-till-we-drop? culture is the engine of American economic growth. Increasing savings thus means fewer jobs and stagnant wages?unless we can force China, India, and the rest of the world to buy more U.S. goods at high prices while selling us less. After George W. Bush?s systematic alienation of our allies and trading partners, to expect them to sacrifice in order to maintain the living standards of the citizens of what most think is an arrogant, violent, and extremely wasteful society is quite a stretch.

One has the impression that Sperling does see bad times ahead, but to fully acknowledge the problem would require a political aggressiveness that the party?s generals and financiers would rather avoid. So, in the end, Sperling pretty much leaves us where we began: facing an inevitable crisis in living standards that the politicians are loath to admit and for which therefore the people are unprepared.

Adequately confronting a ?less prosperous future? would necessitate a dramatic change in our view of what is politically possible. Raising the savings rate and paying for the education and infrastructure investments to make the country more competitive will require higher taxes and forced savings. Reducing the health care burden on American manufacturers will require government-sponsored health insurance and a direct assault on the corporate privileges that help make U.S. medical care the most expensive and wasteful system in the industrial world. Exporting more will require rebuilding our industrial base and controlling imports and discouraging off-shoring of jobs. Convincing our trading partners to accept more U.S. exports will require major political concessions and a pull-back from unilateral military adventurism, which we will no longer be able to afford in any case. And creating a responsible government will require limiting the role of money in politics far beyond the timid McCain-Feingold law. Most of all, it will require an assertion about democracy and the right of citizens through their public institutions to plan for the future.

One can argue against this particular policy mix, but whatever the mix, the policies have to be powerful enough to address the shock of declining incomes, honest enough to gain public credibility, and inspiring enough to give hope. In the absence of a program that matches the scale of the economic forces impinging on U.S. society, popular reaction could turn ugly?anti-immigrant and anti-foreigner, with an increased danger of trade tensions with countries like China turning into military conflict.

The Republican Party, still mired in discredited, supply-side economic dogma and dragged down by religious reactionaries, cannot lead the nation through the coming storm. Can the Democrats? Under present political conditions, to ask the question is to answer it?in the negative.

But it seems certain that current political conditions will not hold. The economic insecurity will worsen for the average citizen. Increasingly, voters? worries over paying their bills should loom larger in our politics than their discomfort with liberal social policies. There is already evidence of a split in American business, between those whose fate still is tied to America and those who are now part of a global investor class?elites who have more in common with each other than with those with whom they happen to share nationality. And as the last election showed, the Democratic activists are learning to raise money from their base, making them less dependent on the business classes for financing.

At a recent symposium in the U.S. capitol, Representative John Spratt?the leading Democrat on the House budget committee?bemoaned the lack of political support for addressing the looming economic problems. One of his co-panelists was the conservative Republican economist Bruce Bartlett, who had spent the late 1970s as a congressional aide promoting supply-side economics when the Democrats were firmly in control of the presidency and both houses of Congress. Bartlett leaned forward sympathetically, and assured Spratt that on the basis of his own experience, when the hard times come, the politics will rapidly change.

Jeff Faux was the founding president and is now Distinguished Fellow of the Economic Policy Institute in Washington, D.C.

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