The Democrats' economic wish list

The Democrats have won control of Congress. But will that really enhance the prosperity of middle-class and poor Americans, as party advocates maintain?

Since the 1990s, most people in the United States have been treading water, economically. American paychecks began to rise faster than the cost of living only in October. Extra inflation, however, could again stall real wage gains.

"There will be some changes – but minor ones" with Democrats in charge on Capitol Hill, predicts Alan Blinder. He's a Princeton University economist who advised the failed presidential campaigns of Democrats Al Gore and John Kerry.

As Dr. Blinder puts it, the "800-pound gorilla" influencing the welfare of working people is "the market," that is, the status of the economy in the years ahead. The latest numbers indicate that the economy is slowing – not good news if this pattern continues into the new year.

Nonetheless, the "small monkey in the cage" with the gorilla is policy changes that Democrats may be able to make – if they can avoid a presidential veto.

Because the size of the government in the United States is relatively small compared with that of most other industrial nations, changes in government policies can have only limited impact on the distribution of income.

Presumably the Democrats will "do things that mitigate rather than exacerbate inequality," Blinder holds. They won't cut the taxes of the rich as much as the Republican-led Congress did.

The No. 1 measure promised by the Democrats is a popular, two-step hike in the federal minimum wage from $5.15 an hour to $7.25 by 2009.

Already, 70 percent of the nation's workforce live in states that have upped their minimum wage above the federal level. Potentially, a federal bill could give as many as 5.5 million more low-income workers a pay hike. Another 7 million now earning a little more than the federal minimum also could see their pay bumped up, says Jared Bernstein, an economist with the Economic Policy Institute, a liberal think tank in Washington.

Probably President Bush will go along with a Democratic wage proposal, though maybe only if the bill includes offsetting tax cuts for small businesses.

Conservative economists like to point out that "there is no free lunch." In other words, customers of fast food restaurants, garden services, etc., that employ minimum-wage workers may have to pay more for their hamburgers and mowed lawns – unless those businesses can reduce costs by reducing employee turnover or other efficiencies.

The Democratic wish list also includes an expanded No Child Left Behind education program, bigger student loan subsidies, improved Medicare prescription-drug assistance, and expanded health insurance, especially for poor children.

All these measures require more federal spending. The money will be hard to find with about $150 billion in Iraq costs next year. Further, Democrats talk of reinstituting a full "pay as you go" system. Any new or enlarged spending program must include a plan to provide the revenues for that program.

It's expected that Mr. Bush will veto any new taxes Congress proposes. Beyond 2008 – even if Republicans retain control of the White House – a Democratic Congress could allow the Bush tax cuts to expire (as they are now scheduled to) in order to raise more money. For example, the federal estate tax – under present law – will end in 2010 and return to its 2001 level in 2011. That would raise $40 billion. Letting the tax rate on dividends and capital gains return from its present 15 percent level to an income-tax level would also boost revenues hugely, mostly by hitting the well-to-do.

Another simple way to hike revenues is to allow the maximum personal income tax rate return to 39.6 percent from 35 percent for the rich, suggests Robert Atkinson, the economist president of the Information Technology & Innovation Foundation, a group concerned with the outflow of research and development from the US to other nations. "There is absolutely no evidence [the tax hike] will damage economic growth," he says, adding that the move would raise national savings by trimming the federal deficit.

Mr. Atkinson says the US has a "winner take all" economy, with exorbitant pay for CEOs, top entertainers, star athletes, and Wall Street financiers.

To temper this pattern, liberal economists have several suggestions for the new Congress. Blinder would like the law changed to make it easier for trade union organizers to recruit new members. He also wants shareholders given the right to approve or disapprove more transparent CEO compensation.

Edward Wolff, a New York University expert on wealth and income, urges better unemployment insurance, which is partly paid by Washington. Only one-third of workers are eligible for that benefit nowadays. The Earned Income Tax Credit that helps the working poor also could be expanded, he adds.

But such measures, even if passed by a Democratic Congress, will probably not escape a Bush veto in the next two years.