As Growth Sizzles, What's A Dem To Do?

Presidential hopefuls will try to ignite middle class rage over breaks for the wealthy

As democrats dream of defeating President Bush in 2004, their minds drift back to 1992 and the class warfare argument mounted by a young governor from Arkansas. Then, as now, the U.S. economy was struggling out of recession. Sensing an opportunity, Bill Clinton targeted hard-pressed middle-class voters, blasted President George H.W. Bush for rushing headlong to help the rich, and captured the White House.

The Clinton nostalgia doesn't extend merely to his 1992 campaign. Even as today's economy improves, Democrats are reminding middle-class voters of the 22 million jobs created during Clinton's Administration. While Al Gore was reluctant to embrace his boss's Presidency in 2000 -- fearing a focus on sex, not success -- today's candidates are readily invoking the Man from Hope. "If you liked Bill Clinton's economy, you're going to love John Kerry's," the Massachusetts Senator said on Oct. 26.

But this time, the Democrats' economic message is going to be a tougher sell. The party's nine Presidential hopefuls had been counting on the dismal trifecta of a soft economy, a stagnant job market, and a rising deficit to make their case against the current President Bush. The Democrats never found their voice in the 2002 midterm elections, at a time when the economy was far worse than it is today and when they might have turned voters against the GOP. And now, with the economy expanding at a thumping 7.2% rate between July and September and projected to grow smartly for the next year, they could wind up sounding like economic scolds.

Still, Democrats think the economy is not a slam-dunk for Bush. Their prime target: jobs. Almost 3 million workers have lost jobs since 2001, and even with solid growth, employment is unlikely to rebound fully by next fall. "There is still enormous anxiety from job losses," says Gene Sperling, a former Clinton aide who advises several Democrats, including retired General Wesley Clark.

A better measure of voter sentiment is personal income. And while incomes rose in the Bush years, most of the gain has been limited to the wealthy. After adjusting for inflation, median aftertax family income dropped 3.3% from 2000 to 2002. "Sixty to eighty percent of the country has lost ground or stagnated in terms of income," says Robert J. Shapiro, another Clinton economic aide who is helping several Democratic hopefuls.

Income growth has been driven by tax cuts and mortgage refinancings -- which are slowing -- rather than wages. Salaries were flat in the strong third quarter, but tax relief added 5% to incomes.

Since most long-term benefits of Bush's tax cuts are skewed to the wealthy, Democrats think they can use taxes as a wedge in the fairness debate. The roughly 2.5 million families who will make more than $225,000 in 2004 will enjoy nearly 40% of the benefits of the three Bush-era cuts, while 70 million families making up to $60,000 will get only about 20%. "Huge tax cuts that benefit the wealthy," says former Vermont Governor Howard Dean, "are starving essential government services and forcing states and local governments to increase [taxes]."

But raising taxes is not a strategy to induce growth. And while the spending that Dean and others favor may boost the economy in the short run, it won't do much for long-term business investment and job creation. In fact, Democrats have yet to develop any long-run growth agenda.


Until they do, they'll focus on taxes and fairness. And recent polls suggest they may get traction on the issue. According to a Sept. 28-Oct. 1 New York Times (NYT )/CBS News (VIA ) poll, just 19% of those surveyed thought their taxes had gone down during the Bush years -- while 29% thought their taxes rose.

But Democrats can't agree on how to exploit the issue. Dean and Representative Dick Gephardt (D-Mo.) would roll back all of Bush's tax cuts. Dean would use the money for deficit reduction, health care, and other initiatives. Gephardt would shift $2 trillion over to fund near-universal health care.

Other Democrats are copying Clinton -- who in 1992 proposed raising taxes on the wealthy while reducing them for the middle class. Senator Joe Lieberman (D-Conn.) already has such a plan. Clark and Kerry may follow suit.

Even some Republicans call this approach a winner. "Electorally, it's very shrewd," says Kevin Hassett, the top economic adviser for the 2000 Presidential run of Senator John McCain (R-Ariz.). "You're offering 80% of Americans a tax cut financed by a tax hike on 20%. How does Bush run against that?"

Democrats such as Lieberman, Kerry, and Clark are also casting their plans as tax reform. Their idea: Shift taxes from the middle class to the wealthy and business and simplify the tax code. They also may propose savings incentives aimed at working families who have joined the new investor class. "When people look at something so complex that nobody understands it, they're left with the impression that rich, smart guys are beating the system, that it's very unfair," says former Federal Reserve Vice-Chairman Alan S. Blinder.

Most Democratic strategists agree that there is little profit in tying tax hikes to a balanced budget, especially in a growing economy. Focusing on red ink worked for Ronald Reagan in the midst of the 1980 slump and for Clinton and H. Ross Perot in 1992. But Walter Mondale's 1984 anti-deficit plan, proposed during an expansion, flopped. That's one reason Dems will talk about long-term fiscal responsibility but soft-peddle the need for budget balance. "I don't have a date to balance the budget because I think it's important to meet America's urgent needs in health care, education, and Social Security," Clark says.

Even in an improving national economy, Democrats think they can make inroads among hard-pressed manufacturing workers -- especially in battleground states such as Michigan and Ohio. The key issue: trade. Democrats blast the President for allowing countries such as China to manipulate their currencies and violate trade rules. But while Gephardt and Dean are harsh critics of free-trade agreements with Canada, Mexico, and China, Lieberman, Clark, and Kerry support such deals. Strategists fear that harsh protectionism won't sell outside the Rust and Textile Belts -- and that candidates can't deliver on promises to restore manufacturing jobs. Says one party veteran: "This is akin to William Jennings Bryan complaining about the economy moving away from agriculture 100 years ago."

Privately, Democrats concede that in a bulking-up economy, they'll have an uphill battle against Bush. But, they insist, the President is still vulnerable, especially to charges that poor Presidential judgment is to blame for both the mess in postwar Iraq and lagging jobs and incomes at home. But as growth picks up, that sales pitch will only get harder.

By Howard Gleckman, with Rich Miller, in Washington

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