Nov. 22 (Bloomberg) -- Democrats are returning to power on Capitol Hill just as two powerful wings of the party, labor and Wall Street, are colliding over economic issues.

The dispute over trade and budget policies prompted a high- level private meeting earlier this month between AFL-CIO President John Sweeney and former Treasury Secretary Robert Rubin, who is now chairman of the executive committee at New York-based Citigroup Inc.

AFL-CIO leaders, contending Democrats won the midterm elections because of voter concern about job security and stagnant wages, say it's time to set aside the free-trade policies touted by Rubin.

``We need to review the Rubin agenda that's led to millions of lost jobs and declining standard of living for the middle class,'' said United Steelworkers President Leo Girard. ``It's an agenda that has been very good for Citigroup and the financial community because they've been able to finance the relocation of jobs and refinance the trade deficits.''

Organized labor has long been at odds with ``Rubinomics,'' the phrase coined to describe President Bill Clinton's economic policy, masterminded by Rubin, to promote free trade and reduce the budget deficit. Now, with Democrats regaining control of Congress, such issues may take on new urgency as labor sees a chance to wield greater influence over policy.

A dispute between these two wings may cause Democratic lawmakers to avoid action on trade and other thorny economic issues that could divide the party.

``Do Democrats in this new Congress want to go out on a limb and shake things up, or rather hold their fire and keep their powder dry in anticipation of 2008?'' said Robert Reich, labor secretary under Clinton. ``How much can really be done is a big question mark.''

Benefits of Globalization

Peter Orszag, who co-founded with Rubin a domestic policy group called the Hamilton Project, said the group believes ``market competition and globalization generate significant economic benefits.'' While he agrees that attention must be paid to those displaced by globalization, he disagrees ``on principle'' with labor's call to put new trade deals on hold.

Another participant in the Hamilton Project, Robert Reischauer, disputed the notion that the voters who turned Congress over to the Democrats want the kinds of changes in economic policy called for by labor.

``The Democratic Party by and large will reflect the views and policies of those who invited them to the dance, which is in the middle of the political spectrum,'' said Reischauer, president of the Urban Institute, a Washington research group. ``There will be movement toward the center by all groups.''

Met Over Differences

In an airing of differences, Sweeney and AFL-CIO Treasurer Richard Trumka met earlier this month with Rubin and Roger Altman, chairman of New York-based merger advisory firm Evercore Partners Inc., Altman, 60, a former deputy Treasury secretary under Clinton, is a participant in the Hamilton Project.

Sweeney, 72, described the meeting as ``cordial'' while adding that it's ``easy to be tough and nice'' at the same time. While declining to discuss specifics, he said the meeting involved discussions on ``trade policy, budget deficits and wage and wealth-gap issues.''

The AFL-CIO and Rubin plan further meetings that will include union presidents, Sweeney said. Health-care is the likely topic of the next gathering, he said.

This month's meeting was prompted by a letter Trumka, 57, sent Rubin in response to Rubin's public advocacy of several policies that didn't sit well with organized labor.

Rubin's Approach

Rubin, 68, 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.''

`Agreed to Disagree'

Orszag, 37, an economist at Washington's Brookings Institution, acknowledged the Hamilton Project's differences with labor.

``Clearly, there are some differences, even with shared goals, in how one achieves them,'' Orszag said. ``There's also an eagerness to work together when possible.'' On trade, the two sides have largely ``agreed to disagree,'' said Orszag, who didn't attend this month's meeting.

Steven Rattner, co-founder of New York investment firm Quadrangle Group LLC and a member of the Hamilton Project's advisory council, gave voice to those differences in a July Wall Street Journal guest editorial.

Rattner criticized ``more extreme factions'' of the party who ``argue that the centrism of the Clinton administration doesn't adequately address 21st-century fears.'' He said they ``offer in its place statist visions of organizing economic policy around belittling American capitalism'' while trumpeting ``unionization and protection.''

Labor's Agenda

The AFL-CIO, the nation's largest labor federation, says it plans to push forward with an agenda that calls for a full review of U.S. trade policy. The group, which spent a record $40 million to oust Republicans in this year's elections, says it expects to be taken seriously by a Democratic majority that owes its existence at least in part to union members' efforts to mobilize voters.

``Because of what labor did in this election, we've got skin in the game,'' said Gerald McEntee, president of the American Federation of State, County and Municipal Employees and head of the AFL-CIO's political committee.

While Trumka, Sloan and others are critical of Rubin's remedies, they give him and others at the Hamilton Project credit for at least thinking about the need for a new direction.

``It's commendable they observe this problem of the struggle of people trying to make a living and the stagnation of wages and growing inequality,'' said Ron Blackwell, chief economist for the AFL-CIO, who also attended this month's meeting with Rubin. ``But the policies they are proposing aren't proportional to the problems.''

Wage Insurance

For example, Blackwell says the notion of wage insurance is a Band-Aid that doesn't get to the root of declining wages and working conditions as a result of trade agreements that make it attractive for companies to send jobs overseas.

Service Employees International Union President Andrew Stern, who broke from the AFL-CIO last year over differences in how to boost lagging union membership, agrees that wage insurance and other Hamilton Project proposals are off target.

``These ideas don't solve the problem,'' Stern said. ``They are a step forward, but many steps away from the real solutions.''

Labor leaders also take issue with Rubin and others touting more education as an answer to workers' woes.

``If you are sending more people to college, but there are no jobs, or just jobs earning $10,000 a year or less in real dollar terms compared to 10 years ago, then that doesn't fix the system,'' the Steelworkers' Girard said.

To contact the reporter on this story: Kim Chipman in Washington at kchipman@bloomberg.net.

Last Updated: November 22, 2006 15:08 EST