Divided Economic Vision Blurs Democratic Outlook : Politics: Strategists see a renewed consensus as vital to targeting what may be the only chink in Bush’s armor.

Whenever Democrats try to plot their path back to the White House, the road always runs past the factory gate and the kitchen table.

Bread and butter economics--the promise of rising incomes and upward mobility--has historically been the glue binding Democrats who disagree on foreign policy, social issues, civil rights, and everything else but the weather.

But a decade out of power has left the Democrats struggling to find a common voice on economic questions too. As the 1992 presidential campaign approaches, the party is still searching for a response to the message of limited government on which first Ronald Reagan and now George Bush have built their political appeal.

“The Democratic Party does not have at the national level an economic policy worthy of the name,” says former Sen. Paul E. Tsongas, the only announced Democratic presidential candidate.

In their search for one, Democrats have explored, and sometimes exhumed, an astonishing array of economic ideas over the past decade: industrial policy, fairness, tax reform, protectionism, workplace democracy, leveraged liberalism, and soak-the-rich populism.

But the party’s fundamental problem today remains not much different than it was on the morning after Jimmy Carter’s landslide defeat in 1980: Democrats still need a way to affirm a positive role for government in the economy, without validating Republican charges that they ache to return to the policies of tax and spend.

Threading that needle may be the most exacting test for the potential Democratic candidates. To the extent Democratic strategists see a chink in Bush’s armor, it is on his handling of domestic problems and especially the economy--where he draws much lower marks from the public than on his management of foreign affairs.

But savvy Democrats understand that skepticism will not help them much, unless they can restore their own frayed credibility as economic managers. From 1950 through 1980, Democrats consistently led Republicans when the Gallup Organization Inc. asked Americans which party could do a better job of keeping the nation prosperous. But late in Reagan’s first term, Republicans gained the lead on this crucial measure of public trust--and they have held it (with brief exception) ever since, even through the current recession.

“Voters used to have a clear idea of what Democratic economics was,” acknowledges Paul Tully, political director at the Democratic National Committee. “But with the problems in the Carter Administration--the stagflation--voters no longer start with an equation of what Democratic economics means.”

If the public is confused about the Democratic economic vision, it is probably because the party is also.

From the New Deal through the 1970s, Democrats largely agreed on an economic strategy. Management of demand through federal fiscal policy and the opening of new markets abroad would encourage growth. Growth would provide the revenue to fund government programs for the poor. The rising tide would lift all boats. For more than a generation this strategy proved itself on the bottom line: From 1947 through 1973, the median family income doubled.

So great was the power of this economic doctrine that Republicans largely absorbed it too. But the inflation sparked by the Vietnam War during the 1960s began to erode its foundations--and then the structure collapsed entirely.

Built on the principle of balancing inflation against recession, the fiscal policy followed by the Democrats had no answer to their common incidence--the stagflation that recurred through the decade of the 1970s. Inflation, meanwhile, pushed working- and middle-class families into higher tax brackets and swelled property taxes, unleashing the great tax revolt that rolled east from California like a tsunami after 1978.

“After people began to realize that next year they wouldn’t be doing as well, the support for expanded government, particularly if it involves any kind of redistribution, declined dramatically,” says Barry Bluestone, a professor of political economy at the University of Massachusetts (Boston).

All this created a receptive audience in 1980 for Reagan’s uncompromising anti-tax, anti-spending, anti-government message. Bush has departed from the Reagan blueprint in several respects, proposing greater spending on some social programs, tolerating stricter environmental regulation, and above all, accepting new taxes as part of last year’s budget deal. But none of this has materially shifted the lines of partisan debate engraved during the Reagan era.

Though the emphasis has varied some from year to year, the Democratic litany has remained remarkably consistent since the Republicans took power in 1981: Now, as then, Democrats allege that Republican economic policies have favored the rich and squeezed the middle class, burdened future generations with a debilitating federal debt, slighted pressing domestic social needs, ignored the loss of high-paying manufacturing jobs to unfair foreign competition, and encouraged through deregulation a casino economy of junk bond speculation and savings and loan looting.

For Democrats, fashioning the critique has been the easy part; developing a credible alternative the rub. “It’s easy to be against,” says Democratic consultant Victor S. Kamber. “The tough thing is having an answer.”

The greatest impediment to finding that answer has been the public’s persistent resistance to new taxes--and equally stubborn skepticism that government spends its money effectively.

“The Democrats have not been effective at convincing people that they are giving good value for their dollar,” acknowledges Sen. John D. (Jay) Rockefeller IV (D-W.Va.), a potential presidential candidate. “Middle-class America does not believe that the Democrats can be sufficiently trusted to be tough enough on whatever it is they are proposing.”

As the 1992 race approaches, overcoming that skepticism once again looms as a crucial task for Democrats because the party remains indivisibly committed to the idea of an activist government responding to social problems with new programs.

That unifying belief has not changed since the Great Depression. But a decade of bruising combat with GOP presidents over the size and responsibility of government has gradually altered Democratic views on what it means in practice--what kind of programs the federal government should initiate, how they should be financed, and how they can be balanced with the public’s demand for fiscal discipline.

To a considerable degree, the eventual Democratic candidates will differentiate themselves by how they answer those questions--how they solve the riddle of winning support for federal activism in an era when the public believes the government wastes about 40 cents of every dollar it raises, according to recent private polls.

If there is a core to Democratic economics in 1991--a point at which virtually all segments of the party converge--it is the idea of investing in the productivity of American workers. So-called “investment economics” is a theme as central to the Rev. Jesse Jackson and New York Gov. Mario M. Cuomo as it is to their critics at the Democratic Leadership Council.

Just about everything Democrats want to do domestically is now marketed under the rubric of “investing” in the building blocks of productivity: increasing spending on education, job training, and federal scientific research, building new roads and bridges, assisting children in poverty, and establishing apprenticeship programs for teen-agers not bound for college.

Sen. Albert Gore Jr., (D-Tenn.), raises the specter of falling behind the Japanese to sell his idea of constructing national “information superhighways” to link supercomputers.

“Infrastructure has to be redefined,” says Gore, enthusiastically if somewhat obliquely, “because transportation is no longer the principal determinant of national competitive advantage. Our ability to handle knowledge is.”

One dispute in the upcoming presidential contest will come over the best way to execute these government investments: Democratic revisionists such as Arkansas Gov. Bill Clinton and the Democratic Leadership Council are much more enthusiastic than the party’s traditional wing about structuring programs in new and decentralized ways, such as allowing parents more choice in selecting their children’s schools.

But the greater conflict is likely to arise from trying to square the goal of increasing investment with the Democrats’ reluctance to propose major new spending. “The reality of the budget deficit,” says Rep. Henry A. Waxman (D-Los Angeles), one of the House’s leading liberals, “has changed people’s thinking about what government can and cannot do.”

That reticence has not stymied all initiatives; Senate Democrats, for example, recently introduced an ambitious plan to extend health insurance to all Americans which could cost $25 billion in general revenues, as well as impose a new tax on businesses that do not insure their workers. But that proposal, which was introduced without a plan on how to cover the $25 billion, faces a tortuous road to passage.

The general Democratic trend has been away from proposing expensive programs. In 1984, Walter F. Mondale proposed a tax hike to reduce the deficit and restore some of Reagan’s budget cuts, not to launch new programs. Four years later, Michael S. Dukakis was even more wary of new spending, preferring a “leveraged liberalism,” that sought to trigger private responses to social problems with limited public funds. For example, Dukakis proposed to revive construction of low income housing through public-private partnerships, in which the federal government provided only seed money to local nonprofit organizations.

As the 1992 campaign approaches, some leading Democrats are going yet a step further, taking the heretical position that government austerity can be not a burden but a liberal value in itself. Virginia Gov. L. Douglas Wilder, who is actively exploring the race, has made this case most adamantly. “The most progressive action government can undertake,” he says often, “is to root out and to prevent wasteful and unnecessary spending of hard-earned taxpayer dollars.” Likewise, Clinton has talked about limiting the growth in government spending to increases in per capita income.

The turning point of this internal debate about spending could be last year’s budget agreement, which requires that all new domestic initiatives be paid for with offseting cuts or tax increases, and, though substantially reducing defense spending, prevents the transfer of any additional cuts into social programs.

Congressional leaders still cautiously defend the agreement. “I continue to believe this is better than the alternative, which was nothing,” says Richard A. Gephardt (D-Mo.). But several other potential candidates--primarily liberals positioning themselves as anti-Washington insurgents--have denounced it.

Cuomo has said the deal “stinks” and should be reopened to find more cuts in both defense spending and entitlements that could pay other domestic programs. Jackson recently complained that the package prevents “any serious change of priorities at the end of the Cold War.” Iowa Sen. Tom Harkin says the deal should be “chucked out the window.”

While the deal remains the law, though, it is compelling Democrats to rank their priorities. In the name of tax fairness, much of the party now wants to raise taxes on the wealthiest Americans. But some want to use the revenue to fund a tax cut for the middle class, while others want to put the money into new services.

This debate, which is likely to continue through the congressional session and into the presidential campaign, illustrates another important change in Democratic thinking. Since the early 1980s, Democratic calls for “fairness” in economic policy have migrated up the income ladder.

Democrats demanding fairness from Reagan in the early 1980s typically juxtaposed tax breaks given the rich against cuts made in government programs for the poor and elderly, particularly Social Security; now Democrats are more likely to compare tax reductions for the wealthy with the economic squeeze on the middle class.

Appeals to middle-class families now drive almost every social initiative stirring in the party. Rockefeller, a principal architect of the Democratic Senate health care plan, is quick to point out that 70% of Americans who lack health insurance are not poor--and that even the millions of middle-class Americans with health insurance would benefit from provisions in the plan which would attempt to contain rising health care costs through regulation.

Gephardt recently introduced legislation to expand federal college grant and loan benefits for the middle class--as an alternative to an Administration proposal that seeks to save money by targeting benefits only toward the very poor. The Gephardt plan would cost over $1 billion, but he has not yet proposed a financing mechanism.

This emphasis on middle-class concerns is most apparent in the stack of proposals to promote tax “fairness” now accumulating in the congressional tax committees.

New York Sen. Daniel Patrick Moynihan has pushed a plan to reduce the regressive payroll tax that funds Social Security. Sen. Lloyd Bentsen (D-Tex.) wants to make individual retirement accounts available again to middle-class taxpayers--and allow them to be used to finance college education, catastrophic medical expenses, and first-time home purchases. Gore and Rep. Thomas J. Downey (D-N.Y.) have introduced a proposal to convert the personal exemption for children into a refundable tax credit that would target the greatest benefits toward working families, coupled with a new top tax bracket to pay for it. The National Commission on Children proposed a variation on that plan that would spread benefits more widely throughout the middle class.

These ideas all intrigue party strategists. But in general, sponsors have been reluctant to identify how they will pay for their plans, and few party leaders are optimistic that Congress--hesitant about raising some taxes even to cut others--will pass any of them.

The Senate has already rejected Moynihan’s plan decisively. “When the Democrats are divided on Pat Moynihan’s Social Security cut we are in trouble,” says John Sasso, Dukakis’ top adviser in 1988.

On the fringes of this debate are a handful of Democrats arguing that the party’s tax policy should advance not only fairness, but also growth. With that aim, Cuomo has proposed a new investment tax credit and also advocated a targeted cut in the capital gains tax to be paid for with an increase in the top income tax bracket. But most Democrats are leery of new tax breaks for business and reject a capital gains cut as a windfall for the wealthy.

The Democratic agonizing over taxes encapsulates the party’s entire decade of economic frustration. Democrats have no shortage of ideas about how they believe they can regain the economic high ground. What they have lacked is a congressional consensus deep enough to put their most ambitious ideas on the President’s desk, or a presidential candidate credible enough to synthesize them into a compelling national message. The task in the coming months remains no more complicated, and no less arduous, than that.

Declining Faith in Democrat Economics

From 1950 through 1980, Americans believed the Democrats could do a better job of keeping the country prosperous, according to Gallup Organization surveys. But during the Ronald Reagan Administration, Republicans gained the lead on this crucial measure of public trust-and they have held it (with brief exception) ever since.

Which political party-the Republicans or the Democrats-will do a better job of keeping the country prosperous?

Source: Gallup Organization, American Enterprise Institute