Aug. 30 (Bloomberg) -- At a union hall in Detroit packed with 800 members of the AFL-CIO and their families, Democratic presidential candidate and New York Senator Hillary Rodham Clinton promises to break the mold on trade.

``If we don't have a strong manufacturing base in our economy, it won't be long until we don't have a strong economy,'' Clinton tells the union members at the June meeting. So, she says, she will vote against the U.S.-South Korea free- trade agreement just negotiated by President George W. Bush. The crowd cheers.

Clinton's statement contrasts with the position of the most recent Democratic president: her husband, Bill. Fourteen years ago, he defied labor union opposition and signed the North American Free Trade Agreement into law. Hillary Clinton, 59, promoted her husband's trade agenda for years -- until she began her own campaign for the highest U.S. office. She's been reading polls that say more than 40 percent of Americans see free trade as the main reason the U.S. is losing highly paid manufacturing and white-collar jobs.

Clinton is now parroting the economic positions of candidates from the 1980s. And she's not the only one. Former Massachusetts Governor Mitt Romney sounds like Ronald Reagan when he decries the deficit spending of President Bush. ``I'm somebody who believes in reducing government spending,'' Romney, 60, told Bloomberg Television on Aug. 28. ``I propose that not only should we reduce spending but we should have a cap.''

Presidential elections are supposed to be about the future. Yet when it comes to economic policy, the 2008 contest is shaping up as a campaign in which the Republicans hark back to the economic nostrums of 25 years ago, while the Democrats wax nostalgic for the time when U.S. industry faced little foreign competition and every high school graduate could count on a lifelong job in a steel mill or an auto plant.

Retronomics

Call it retronomics. ``They're looking to the past for their policies,'' says David Gergen, a professor of public service at Harvard University's Kennedy School of Government who served as an adviser to Presidents Richard Nixon, Gerald Ford, Reagan and Clinton. ``The Democrats' center of gravity has moved further to protectionism since Clinton left office, and the Republicans clearly are not going to hold George Bush up as a model president.''

The leading Republican candidates for president -- Rudolph Giuliani of New York, Romney and Arizona Senator John McCain -- all support Bush on the war in Iraq. On economic policy, they're backing away from the president, whose approval rating was 29 percent in a July Newsweek poll.

The Republicans' complaint is that Bush has abandoned his commitment to trimming the budget and reducing deficits. They hold up Reagan as their touchstone -- even though he had no more success at reducing the size of government than Bush has.

Reagan's Deficit

The budget deficit Reagan left his successor -- $153 billion -- was nearly twice the size of the one he inherited, according to the Congressional Budget Office.

The federal budget has grown 43 percent under Bush, to $2.7 trillion, according to the CBO, largely from funding of the war on terrorism, military operations in Iraq and Afghanistan and the new Medicare prescription drug plan. Last year, government outlays consumed 20.3 percent of the economy, the highest level since 1996, while the budget has gone from a $128 billion surplus in 2001, when Bush took office, to a $248 billion deficit last year, the CBO says. In fiscal 2004, the deficit set a record of $413 billion.

``Bush has claimed to be a small-government president when in fact he hasn't been one,'' says Gary Becker, a Nobel Prize- winning economist and professor at the University of Chicago.

Small Government

The three Republicans who lead in the polls have all put spending cuts at the heart of their economic platforms. McCain, 71, says profligate spending is the main reason Republicans lost control of Congress last year.

``We didn't lose the 2006 election because of the war in Iraq; we lost it because we in the Republican Party came to Washington to change government, and government changed us,'' McCain said in a May debate. ``We let spending go out of control.''

Romney promises to cap non-defense spending at inflation minus 1 percentage point -- a policy he predicts will save $300 billion over 10 years.

Giuliani, 63, has pledged to cut the federal civilian workforce by 20 percent by replacing only half of all federal employees due to retire over the next decade. He says the move will save taxpayers $21 billion a year.

Giuliani's Budget Cuts

``If you can lower spending in New York City, Washington is easier than New York City to deal with,'' Giuliani said in a May debate in Columbia, South Carolina.

``Mayor Giuliani believes that it's vital to control spending,'' says Michael Boskin, chief economic adviser to the Giuliani campaign. Boskin, 62, who served as chairman of the Council of Economic Advisers under former President George H.W. Bush, says Giuliani, to balance the New York budget, asked agency heads to identify potential savings of as much as 20 percent during his 1994-2002 mayoralty.

``He actually cut spending,'' Boskin says. ``Real per- capita spending was less the day he left office than the day he entered, eight years earlier. That is a rarity in American politics.''

Giuliani says that when Michael Bloomberg succeeded him as mayor in January 2002, New York had a $681 million surplus. Bloomberg said in February of that year that he faced a $4.7 billion budget shortfall. Bloomberg is the founder and majority owner of Bloomberg LP, parent of Bloomberg News.

Balancing the budget, a priority for President Clinton, rarely comes up in the Democrats' debates and speeches. Instead, the candidates focus on what their economic advisers perceive as voter discontent over lost jobs, stagnant incomes and the growing gap between rich and poor.

Rich-Poor Gap

Six of 10 respondents in an April Bloomberg/Los Angeles Times poll said there will be a recession within a year. Three- quarters of those surveyed in a December Bloomberg poll said the widening gap between rich and poor is a serious concern, while six in 10 of those surveyed in June disapproved of the way Bush is handling the economy.

Administration officials, including Treasury Secretary Henry Paulson, defend Bush's economic record by pointing to steady, if unspectacular, economic growth. June was the 67th consecutive month of expansion, according to the National Bureau of Economic Research. And unemployment, at 4.6 percent in July, remains close to a six-year low.

``The issue driving the anxiety is not the number of jobs but the kinds of jobs being created,'' says Matthew Slaughter, a professor of economics at Dartmouth College in New Hampshire who served Bush as a member of the Council of Economic Advisers from 2005 to February 2007.

Low Income Growth

``Real income growth for many Americans has been quite poor in recent years, with a lack of strong earnings growth along all parts of the income distribution,'' Slaughter says.

From 2000 through the first half of '07, high-paid workers at the 90th percentile of earnings saw their income rise 6.4 percent, while salaries for those at the 10th percentile fell 2.9 percent, according to a study by the Washington-based Economic Policy Institute.

Democrat John Edwards is focusing his campaign on this disparity. ``He's very concerned about 37 million impoverished people, 45 million without health care and 150 million Americans who combined earn what the top 300,000 earn,'' says Leo Hindery, senior economic policy adviser to the Edwards campaign and managing partner of InterMedia Partners LP, a media investment firm in New York.

Like other candidates, Edwards, 54, looks to history for his model on economic reform: He ended an eight-state tour of poor communities in July in Prestonsburg, Kentucky, the same town that presidential candidate Robert F. Kennedy chose to conclude his own tour of Appalachia in February 1968, four months before he was assassinated.

Ross Perot Redux

Fear of free trade is as strong as it was when independent candidate Ross Perot, who campaigned against Nafta, took 19 percent of the popular vote in the 1992 presidential election. And that's hurting Bush's effort to promote new trade deals. He has negotiated four new treaties in the past two years, with Colombia, Panama, Peru and South Korea.

``Peru and Panama have the best chance, while Colombia and South Korea are up in the air,'' says Claude Barfield, a trade expert at the American Enterprise Institute in Washington. The AFL-CIO says the Colombian government has done too little to stop an assassination campaign that has killed more than 400 union members since 2002.

The South Korean pact is looking fragile as U.S. automakers and beef exporters complain that their access to the Korean market is limited, Barfield says.

Gephardt Advises Clinton

Assertions that unfettered global trade harms American workers have been a staple of Democratic campaigns for more than 20 years. In 1988, Dick Gephardt won the Iowa caucuses partly, polls said at the time, because he blamed U.S. economic woes on the Japanese and South Koreans. Gephardt, 66, who retired from Congress in 2005 after a second failed bid for the Democratic nomination in 2004, is now a top economic adviser to Hillary Clinton.

In the 1992 race for the Democratic presidential nomination, Senator Bob Kerrey of Nebraska ran an ad in which he appeared dressed as a hockey goalie on an empty rink. ``Others guard their goal to keep our products out -- while we leave our net wide open,'' he said.

In that campaign, even Bill Clinton talked about forcing U.S. trade partners to adhere to stricter labor standards. While he was president, though, Clinton oversaw the passage of Nafta, the ratification of the Uruguay Round of world trade talks that established the World Trade Organization in 1995 and the extension of permanent normal trading status to China.

Hillary Reverses Course

In her role as First Lady from 1993 to 2001, Hillary Clinton held out trade as a solution, not a problem. ``The simple fact is, nations with free-market systems do better,'' she said in a 1997 speech to the Corporate Council on Africa. ``Look around the globe: Those nations which have lowered trade barriers are prospering more than those that have not.''

Since Bill Clinton left office, Americans have soured on free trade. In a January Bloomberg/Los Angeles Times poll, 41 percent of respondents said trade had hurt the economy, while 28 percent said it had helped. Among Democrats, the margin was 39 percent to 18 percent. In a 1997 Los Angeles Times poll, 39 percent of respondents said trade helped the economy.

``Because the AFL-CIO and other unions sincerely believe that trade is causing pressure on wages, and unions have a big effect on elections, free trade is now a third rail in the Democratic Party,'' says Jagdish Bhagwati, an economics professor at Columbia University in New York and author of ``In Defense of Globalization'' (Oxford University Press, 2004).

Unfair Competition

No major candidate endorses the tariffs and quotas that used to keep foreign goods from U.S. shores. Instead, they argue that foreign manufacturers compete unfairly by providing low wages and poor working conditions or by not being held to U.S. environmental standards.

In 2005, as New York's junior senator, Clinton voted against the Central American Free Trade Agreement and then in June announced her opposition to the free trade deal with South Korea. Cafta, which Democratic candidate Senator Barack Obama of Illinois also rejected, passed anyway in August 2005. In 2006, U.S. exports to four Central American countries increased 18 percent, according to U.S. Census data.

Clinton has said she wants language in trade treaties that forbids child labor, harsh working conditions and long hours, and that gives workers the right to organize. ``We've got to have a better approach to what we're going to do when it comes to trade around the world,'' Clinton said in an August debate in Chicago.

Edwards Attacks Outsourcing

Edwards also wants to include labor standards in every trade treaty. On the stump, he tries to personalize the loss of U.S. jobs to globalization. ``What do you say to a 55-year-old man who has spent his entire life, with dignity and self- respect, supporting his family?'' Edwards, 54, asked in a July speech in Cleveland hosted by the United Steelworkers. ``You're going to re-educate him? Re-educate him to do what?''

Among the Democratic candidates, Obama, 46, has had the least to say about trade. He recognizes the benefits of lowering tariffs, according to his top economic adviser, Austan Goolsbee, a University of Chicago economist. ``However, he has repeatedly said we need to be mindful about those left behind,'' Goolsbee says.

Former Secretary of Commerce William Daley, who as special counsel to Bill Clinton was the point man on getting Nafta through Congress, says more and more Americans believe free trade is to blame for the decline of U.S. manufacturing. ``What you're seeing is a big, deep breath being taken on free trade and globalization,'' he says. ``We did not openly acknowledge that there were losers, and there were negatives to this new world we were entering.''

Protectionism

For Columbia's Bhagwati, any change in policy would be a step backward. ``The call for labor standards in trade agreements is protectionism dressed up as altruism,'' Bhagwati says. ``It's prompted by fear of competition.''

On the Republican side, many of the economic gurus stumping for balanced budgets and spending cuts got their start in 1994, when the Republicans took over Congress. The favored candidate among small-government advocates from that era: Giuliani.

One of Giuliani's advisers is former presidential candidate Steve Forbes, chief executive officer of Forbes Inc. -- though Giuliani has not signed on to the flat tax that was at the heart of Forbes's economic plan.

Another is Martin Anderson, a principal architect of the economic philosophy that came to be known as Reaganomics and now a senior fellow at the Stanford University-based Hoover Institution. Reaganomics' goals were to shrink government, cut taxes and limit regulation. Anderson, 70, says when he sat down to talk with Giuliani in early 2007, he found a soul mate.

Control Spending First

``He's got the same ideas as Reagan,'' Anderson says. ``You've got to control spending, and then you can look at the rest of it.''

McCain's top economic adviser is Douglas Holtz-Eakin, a former director of the CBO. ``First and foremost is to control the growth in spending,'' he says. ``That's been the great political failure of the Republican Party in recent years. It's the economic policy challenge going forward.'' Holtz-Eakin, 49, is a senior fellow at the Peterson Institute for International Economics in Washington.

A return to the ideas that drove policy under Reagan is just what the Republican Party needs, says Bob Bixby, executive director of the Concord Coalition, a Washington-based group that advocates fiscal restraint. ``The Bush administration has embraced a kind of big-government conservatism,'' he says. ``If that sounds like an oxymoron, it is.''

Rhetoric, No Action

While Bixby holds up Reagan as a model, he acknowledges that the ex-movie actor fell short of his goal to shrink government. ``A combination of tax cuts and defense buildup led to enormous deficits in the Reagan years,'' Bixby says. ``There was a rhetorical commitment to small government, but it wasn't put into action.'' He laughs. ``Sound familiar?''

University of Chicago economist Becker doesn't think the Republicans' angle of attack will earn them many votes in November 2008. ``If Republican candidates want to really go back to a small-government era and cut a lot of spending programs like health, they're going to find the American people aren't interested in that,'' he says.

One issue that dominated past Republican campaigns, tax cuts, has so far not made much impact on the 2008 race. That's partly because Bush has been unparalleled as a tax cutter. From 2001 to '03, he reduced the top income tax rate to 35 percent from 39.6 percent. He increased the child tax credit to $1,000 per child from $600. He reduced taxes on dividends to 15 percent from as high as 38.6 percent, cut the tax on capital gains to 15 percent from 20 percent and phased out the estate tax. Most of the tax cuts will expire by the end of 2010.

Taxes, Taxes

While every Republican candidate has promised not to raise taxes, so far none has actually proposed another major tax cut, says Pat Toomey, president of the Club for Growth, a Washington- based group that advocates the lowest possible taxes. ``I'm hoping that one of them will separate himself from the pack by taking an aggressive position on tax simplification and tax reduction,'' says Toomey, who represented Pennsylvania's 15th Congressional district in the House of Representatives from 1999 to 2005.

From the Democratic side of the campaign comes a familiar refrain: Tax the rich. ``We now have the greatest income inequality since the Great Depression,'' Edwards said in Prestonsburg. He wants to raise taxes on buyout firms and hedge funds to help pay for government programs for the poor.

Back to 1789

Clinton looks all the way back to 1789 for her reference point. ``Our founders knew that inequality wasn't good for our country,'' she said in May in New Hampshire. ``They believed that vast concentrations of wealth were a threat to democracy.'' She has proposed higher taxes on oil and gas companies and wealthy families, while keeping middle-class tax relief in place.

Clinton can hold her husband up as an exemplar on tax policy. In 1993, his government raised the top income tax rate to 36 percent from 31 percent. He also added what the press dubbed the ``millionaire surcharge,'' a 39.6 percent rate that applied to anyone who earned more than $250,000.

Retronomics on taxes -- another third rail of politics -- can be a dangerous game. The year after Clinton pushed through his tax increase, the Democrats lost control of Congress in a Republican landslide.

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

Last Updated: August 30, 2007 00:12 EDT