No-win situation

The Republican defeat in the congressional elections is not likely to bring about a course correction in the U.S. economy.

THE recent congressional elections were as much about the war on Iraq as they were about the performance of the U.S. economy. The worries on the economic front were not merely focussed on that magic statistic, the gross domestic product (GDP), but about real, everyday issues such as jobs, prices (particularly houses and fuel) and wages. The biggest worry was the realisation that the benefits of growth had simply not "trickled down" as promised by those in charge of the economy. Post-elections, the question is whether the new Congress, in which the Democrats have a lead, albeit narrow, will do enough to close the widening gap between the super rich and the rest of America.

The elections could not have been held at a more inopportune moment for the Bush administration. Data on the GDP, arriving just days before the elections, showed that the U.S. economy grew by only 1.6 per cent in the third quarter of 2006, compared to 2.6 per cent in the previous quarter. This gave a clear indication that the economy was faltering towards a recession.

More critically, the performance of the housing sector, a crucial prop to the economy, has been worrying. Growth of residential housing fell by 17.4 per cent in the third quarter, following a 11.1 per cent fall in the previous quarter. The slowdown in the housing sector has been worrisome because it is a major provider of jobs. In 2005, the sector accounted for 15 per cent of the new jobs created economy-wide, according to the Economic Policy Institute (EPI). The slowdown means only 5 per cent more new jobs are likely to be created in this sector during 2006.

Four days before the elections, President George Bush tried to salvage something from the just-released numbers on the employment front. He claimed credit for the fact that the unemployment rate had fallen to 4.4 per cent in October, down from 4.6 per cent in the previous month. He claimed credit for the fact that this was the lowest since May 2001, when it was 4.3 per cent.

Analysts, however, dismissed these claims, arguing that the job market had been slowing down in the three months ending October. They also pointed out that the increase was concentrated mainly in temporary and part-time jobs, which are low-paying and offer curtailed access to benefits that normally accompany tenured employment. About 39,000 jobs in factories were lost in October, the worst case since August 2003. There is clear evidence that the quality of employment has been deteriorating, which cannot be captured solely by the unemployment rate. During their campaign, the Democrats highlighted the fact that 2.9 million jobs in manufacturing have been shed since Bush first assumed office. More crucially, the average length of unemployment of those seeking employment has reached its highest level in 10 years.

In the run-up to the elections the Democrats highlighted the plight of ordinary Americans. "The Bush Economy," they alleged, "has not been kind to working Americans." Their manifesto, "New direction for America", packaged as the Six for '06 action plan, focussed on these concerns. Apart from "reclaiming American leadership with a tough, smart plan to transform the failed Bush administration's failed policies in Iraq", the Six for '06 plan had the following:

* Raise minimum wages;

* Use the government's authority to cap the soaring prices of medicines and extend health care coverage;

* Cut subsidies for oil companies and reduce incentives to industries, which result in the export of jobs;

* Encourage stem cell research;* Cut interest rates on student loans.

Clearly, the Democrats hoped to cash in on the widespread unhappiness over the nature and quality of the economy's performance.

In her first reactions after the elections, Nancy Pelosi, who is expected to head the House of Representatives, said the first 100 hours of the new Congress would be devoted to implementing the Six for '06 agenda. There is hope that Bush's plan to privatise social security will be resisted by Congress; in fact, the resistance is likely to become bipartisan in the new situation. The proposals to proceed further with tax cuts, another Bush favourite, are likely to be opposed by Congress. However, Bush still has the option of vetoing opposition to his measures. The new Congress is also unlikely to agree to fresh Free Trade Agreements planned by Bush.

An increase in the minimum wage figured at the top of the Democrats' agenda. The minimum wage, at $5.15 an hour, has been at this level for a decade. In fact, in real terms, it is now at its lowest level in 50 years. This situation, it argued, "is unjust and un-American". The Democrats alleged that their proposal to increase the minimum wage to $7.25 an hour, from which at least 7.3 million people - including 1.8 million parents with children - would benefit, has been resisted by Republicans in Congress.

Mark Weisbrot, co-director, Centre for Economic and Policy Research, has described the political class' refusal to raise the minimum wage as "a quiet war against America's working poor". He has pointed out that the minimum wage rate, which implies an annual wage level of $10,300 for a full-time worker, is about 20 per cent below the poverty threshold of $13,000. About eight million people eke out a living on the minimum wage. More significantly, these workers bring in about two-thirds of their families' income. Weisbrot pointed out that even the proposed increase in the minimum wage would only bring the real wage to its level in 1968, despite the fact that output per worker has increased by about 80 per cent since then.

In fact, "welfare reform" undertaken 10 years ago has played a critical role in widening inequalities. For instance, since "reform" a growing proportion of women with children have been pushed into the labour force. In 1996, about half of low-income mothers were in the labour force; by 2002 this proportion had increased to two-thirds.

Indeed, if economic growth is the yardstick for performance, the U.S. economy has done rather well in the last 25 years. GDP increased at an annual average rate of about 3 per cent between 1980 and 2005. However, the benefits have been distributed in an utterly uneven fashion. In fact, the gap between productivity gains registered by the U.S. economy and the wage levels is regarded as lying at the root of the widening inequalities in American society. In 1962, the average wealth per household in the richest one per cent of America was 125 times the wealth of a typical household in the middle of the wealth scale. By 2004 the richest 1 per cent had 190 times the wealth of an ordinary household.

The Bush administration's drive towards lowering tax rates has exacerbated these inequalities. While running for re-election in 2004, Bush claimed the tax cuts during his first term had benefited middle- and low-income families. However, evidence shows that only the creme de la creme of American society - the top 0.01 per cent - benefited from the tax cuts.

The utterly regressive nature of the tax policy is brought out by the fact that in 2005, the 400 top taxpayers paid taxes at the same rate as those with an annual income between $50,000 and $75,000. Studies of the Bush tax cuts conducted by the Citizens for Tax Justice show that the cuts are mainly meant for the wealthy. It has estimated that about 80 per cent of the population would not benefit at all; 10 per cent of taxpayers would get less than $100 each; and that more than half the benefit generated by the tax cuts would reach the richest 1 per cent.

Pulitzer Prize-winning journalist David Cay Johnston calculated that between 1990 and 2002, for each additional dollar earned by the bottom 90 per cent of America, the richest one-thousandth earned an extra $18,000 each. In contrast, between 1950 and 1970, a phase which coincided with the post-War economic boom, the richest 0.01 per cent earned $162 for every dollar earned by the bottom 90 per cent of America.

This situation, bad as it was, worsened with the Bush administration's attack on social security, education and health care. The attack on social security is premised on the contention that it is "in crisis", which many, including noted economist Paul Krugman, have dismissed as a phoney claim. Critics allege that the administration's real intention is to privatise social security.

In the realm of health care and health insurance, too, a growing number of Americans are being excluded from coverage. This is mainly because of the continued erosion of employer-provided health insurance, which is the primary means of health insurance. Almost 50 million Americans were uninsured in 2005 - seven million more than in 2000. Indeed, the growing dissatisfaction with medicare, particularly the manner in which drug companies rather than patients are benefiting, made it an important election plank for the Democrats.

In the area of education policy, represented in the main by the Bush administration's No Child Left Behind Act (2001), the moves have been to reinforce the economic processes at work in society. In particular, this has meant preparing children for outsourcing and downsizing in the name of "flexibility" and "efficiency".

Do the Democrats have an alternative plan? Or, does their record give reason for hope? The record of the Clinton presidency offers lessons on what to expect from the Democrats. Robert Pollin, author of Contours of Descent (2005), explored what exactly was new in the "Third Way" adopted by Bill Clinton. He observed that much of the "new" things during the Clinton presidency actually resulted in a worsening of labour's position vis-a-vis capital. Trade agreements, for instance, drove wages down.

Going against conventional wisdom, which attributes low wages to the lack of skills among workers in a period of technological change, Pollin argued that structural factors were far more important in keeping wages depressed. Weak labour legislation, the diminishing strength of labour unions and the general apathy to the "concerns of the working people" contributed to their worsening plight. Not surprisingly, Clinton, who positioned himself as a "New Democrat", according to one observer, "has probably identified less with organised labour than any Democratic President this century".

Clinton's commitment to "balanced budgets" set serious limits on meaningful efforts to rectify the economic divides in American society. These were reflected in policies relating to labour, health, education and social welfare. There was tokenism for the poor, while the give-aways to the rich were substantive. During Clinton's tenure, real wages declined, inequalities widened and incidence of poverty worsened.

Neoliberalism by its very nature restricts the range of policy options available to politicians and political parties. This implies that parties try and position themselves differently from one another, often based on faint distinctions.

For the Democrats this has meant positioning themselves as being closer to labour than the Republicans. However, as Pollin points out, this differentiation was not substantive because "the centre of gravity of the system [political, economic and social] has shifted steadily to the Right over the past generation".

Gore Vidal's observations, made before the last presidential election, captured this problem of choices perfectly (The Nation, September 13, 2004). He said, "We have only one political party in the United States, the Property Party, with two right wings, Republican and Democrat."