WASHINGTON -- With two weeks to go before they take control of Congress, Democrats are taking sides in what is shaping up as one of the party's biggest divides -- its identity on economic issues.
The brewing debate has been overshadowed by the national focus on Iraq. But at stake is the legacy of Bill Clinton and his treasury secretary, Robert Rubin, who in the 1990s redefined the formerly protectionist, free-spending party as a champion of free trade and balanced budgets. That "establishment" view now is under challenge from party populists and organized labor, who have been emboldened by gains in last month's elections to press their case against globalization and fiscal austerity.
The back-to-the-future push reflects a restiveness among Democratic and independent voters. The economy is growing, the stock market is climbing, and incomes are rising at the very top of the pyramid. However, inflation-adjusted wages haven't risen much, if at all, for many Americans in the middle, employers have been trimming health and retirement benefits, and anxiety about outsourcing has spread from blue-collar factory workers to their white-collar counterparts.
How Democrats respond to these concerns will go far toward shaping the coming Congress after they take power in January -- and in defining the contest for the 2008 presidential nomination. At this early point, New York Sen. Hillary Clinton is viewed as promising a continuance of her husband's policies, though advisers say she will seek her own distinct voice. Many populists, meanwhile, see an appealing candidate in former North Carolina Sen. John Edwards, who has campaigned since 2004 on the theme that the nation is increasingly split into "Two Americas" -- one made up of the haves and the other of the have-nots.
The intraparty tensions were evident recently when House Speaker-to-be Nancy Pelosi had Mr. Rubin, along with former Clinton economic adviser Gene Sperling, address a caucus of more than 100 Democrats. The group included both incumbents and newcomers elected on promises of changing the economic course set by Republicans. Mr. Rubin, a Wall Street veteran credited with devising the Clinton economic policy, which has become known as "Rubinomics," got an earful at the meeting, participants say.
"There's universal consensus that jobs are leaving and the government is not standing up for the people in this country. I believe in trade, but for lack of a better word, 'fair trade,' " says Rep.-elect Joe Donnelly of Indiana, suggesting the need for labor standards to be built into trade agreements. "I understand the Wall Street perspective," says Mr. Donnelly, who ousted a Republican to capture a district that includes industrial Kokomo and South Bend. "But I was saying, 'Here's the reality of life for my constituents. How do we solve the problem? How do we make America work again for the middle class?' "
Other Democrats likewise took turns at the caucus lamenting what they see as the threat to the middle class from the loss of manufacturing jobs and the rise of low-wage, low-benefit alternatives, but without offering prescriptions.
"They're very troubled, and they're right to be troubled," Mr. Rubin said in an interview. "They're not wrong about what's happening; they're right in what they're describing. The question is, what do you do?"
In his remarks to the Democrats, Mr. Rubin anticipated the sentiment among some of them for import limits, acknowledging that "trade barriers can be tempting." But he warned they would be counterproductive. He also acknowledged the role of globalization in holding down wages and contributing to income inequality.
Yet, he insisted "our country can do very well" in meeting global competition, particularly from China and India, but only with free trade alongside a "powerful domestic agenda" that combines fiscal conservatism with investments in infrastructure, education, basic research, health and energy.
For his part, Mr. Rubin is trying to flesh out that policy prescription through the Hamilton Project, which he helped found and fund last year. It is producing research papers aimed at providing new ideas for a centrist domestic agenda. Another recently formed group of centrist Democrats, Third Way, is completing an "agenda for a 21st-century economy" that foresees the battle lines forming between "economic realists" and the growing ranks of "neopopulists."
"Neopopulists have correctly diagnosed genuine middle-class economic anxiety about the future, and they rightly recognize that the market alone will not meet the challenges of the new age," a draft overview from the Third Way paper says. "But where they go wrong is to see the vast economic structural changes that are occurring as mainly a threat to the middle class that requires American economic policy to turn inward."
Rep. Rahm Emanuel of Chicago, a pro-trade centrist whom House Democrats recently elected as their caucus chairman, has sought to persuade business groups to work with the party toward policies that would ease the pressures to retreat from free trade or fiscal conservatism. As a Clinton adviser, Mr. Emanuel helped win passage of the North American Free Trade Agreement in 1993. But he says he recently told the Business Roundtable, an organization made up of top corporate chief executives, "We can't do what you want if all our constituents believe globalization is a knife at their throats."
On the party's left, meanwhile, the AFL-CIO is mobilizing along with allies in advocacy groups such as the Campaign for America's Future and the Economic Policy Institute. The groups say any trade agreements should include rules to safeguard workers and the environment. They say they plan to lobby to repeal tax breaks and subsidies that they believe encourage corporations to send work abroad, and push for the government to do more to promote health-care coverage, education and retirement security. EPI's founder, Jeff Faux, expresses hope that Democrats' takeover of Congress will mark the end of the pro-business Reagan era. He considers President Clinton's two terms to be part of that era.
"The Democrats now have a historic opportunity," he wrote recently. "The opposition will inevitably charge" Democrats with socialism, tax-and-spend and protectionism, he said, but "if this intimidates the Democrats, the opportunity will pass them by."
That's not an attitude congressional Democrats or most of the 2008 presidential hopefuls are likely to adopt anytime soon, especially while Mr. Bush holds the presidency and its veto power. Moreover, last month's elections added to the ranks of fiscally conservative Democrats -- Mr. Donnelly among them -- who campaigned to put the nation back on a path to balanced budgets. That goal is shared by the incoming chairmen of the House and Senate Budget committees, Rep. John Spratt of South Carolina and Sen. Kent Conrad of North Dakota.
While liberal groups believe they have the party establishment on the defensive on trade, they complain that on budget and spending issues, fiscal conservatives have the upper hand. That stems in large part from Democrats' 2006 campaign promise to restore a "pay as you go" budget rule, which would require that any new spending, or tax cuts, be accompanied by offsetting revenue increases or spending cuts to avoid widening the deficit.
Robert Borosage, co-director of the liberal Campaign for America's Future, objects that by insisting on a pay-as-you-go approach Democrats are tying their own hands as they turn toward addressing "decade-old pent-up demands" for domestic spending.
Republicans, he says, never worry about deficits when they cut taxes. "What pay-go says is that the nation's first priority is the budget deficit, and that's just not true," Mr. Borosage says, citing instead the war in Iraq, global warming, energy dependence and trade deficits as bigger problems than the budget shortfall. "When you have a national crisis, you spend the money."