Robert B. Reich's Blog, page 156

National Fiscal Hypocrisy Week

Welcome to National Fiscal Hypocrisy Week.

Today (Monday), Congress takes up a measure delaying by one month a scheduled 23% cut in federal reimbursements to doctors. The cut will automatically go into effect unless Congress acts. But of course Congress will act. Doctors threaten to drop Medicare patients if their rates are cut. Congress has delayed scheduled Medicare cuts for years.

The best outcome would be an agreement to contain future health-care costs by allowing Medicare to use its bargaining power with drug companies and medical suppliers to reduce rates; by allowing Americans to buy drugs from Canada; by applying the antitrust laws to health insurers; and by giving the public an option to buy their health care from a government-run public option.

Likelihood of any of this happening over Republican and DINO objections is zero.

Tuesday, the President meets with Republican and Democratic congressional leaders to begin working out a compromise for extending the Bush tax cuts. Both parties say they want to preserve the tax cuts for lower- and middle-income families. But this would cost $3 trillion over the next decade. Republicans also want to extend them permanently for the top 2 percent of earners, for an added $700 billion. The top don't need the cuts, don't deserve them, and won't spend the windfall (and thereby stimulate the economy).

The best outcome would be an agreement to extend the tax cuts for the bottom 99 percent, for two years. This would stimulate the economy in the short term when it most needs it, and reduce the long-term deficit.

Likelihood of this happening over Republican and DINO objections is zero.

Meanwhile, unless Congress agrees to extend unemployment benefits by Tuesday, 800,000 long-term unemployed will start running out. Extended benefits are not only necessary given the record number and level of long-term unemployed, but they're also one of the best means of stimulating spending. The unemployed will spend every dollar of benefits they receive.

The best outcome would be another six-month extension, at a cost of $34 billion. This would help an additional 4 million long-term jobless who would otherwise run out of benefits over the next few months. Add in a new WPA that offers work to the jobless — everything from teacher's aides to improving public parks and installing insulation in public buildings.

Likelihood of this happening over Republican and DINO objections is zero.

Finally, on Wednesday, the President's deficit commission will issue a report on how to reduce the nation's long-term deficit. The initial draft was regressive — cutting $3 of spending for every $1 of tax increase, and decimating the Earned Income Tax Credit, among other things.

The best outcome would be a unanimous report that focused on taming rising health-care costs (see first item above), rejected Republican calls to extend the Bush tax cuts for the wealthy (see second item above), and supported extending unemployment benefits for the long-term jobless and a new WPA (third item). Ideally, the report would also call for new investments in infrastructure and education that would grow the economy and thereby shrink the deficit as a share of GDP.

Likelihood, zero.

National Fiscal Hypocrisy Week may be carried over into next week, too.

Sarah Palin's Presidential Strategy, and the Economy She Depends On

Monday night, Sarah Palin watched from the audience as daughter Bristol danced on ABC. Twenty-three million other Americans joined her from their homes. Tuesday, the former vice-presidential candidate started a 13-state book tour for her new book, "America By Heart," which has a first printing of 1 million. Her reality show on TLC, "Sarah Palin's Alaska," is in its third week. Last Sunday she was the cover story in the New York Times magazine.

It's all part of The Palin Strategy for becoming president in 2012 — or 2016 or 2020.

Republican leaders don't believe it. "If she wanted the Republican nomination she'd be working on the inside," one influential Republican told me a few days ago. "She'd be building relationships with Republican Senators and representatives, governors, and state party officials. She'd be smoothing the feathers she ruffled by backing Tea Party candidates. She'd be huddled with GOP kingmakers." When I suggested she has a different strategy, the influential Republican smiled knowingly. "That's how it's done – how McCain, Bush, and everyone has done it. That's the only way to do it. But all she really wants is celebrity."

The Republican establishment doesn't get it. Celebrity is part of The Palin Strategy – as is avoiding the insider game. She doesn't want to do what Huckabee, Pawlenty, Gingrich, or Romney have to do. She has an outside game.

Palin's game plan is directly related to America' white working class, and the economy it faces – and the economy it's likely to continue to experience for years.

No prospective candidate so sharply embodies the anger of America's white working class as does Palin. And none is channeling that anger nearly as effectively.

White working class anger isn't new, of course, nor is the Republican Party's use of it. Apart from the South, where the anger came in response to the Civil Rights movement of the 1960s, the more widespread working-class anxiety began in the late 1970s when the median male wage that had been rising for three decades began to stagnate.

As I noted in "Aftershock," families responded by sending wives and mothers into the paid workforce, working longer hours, and then, finally, going deep into debt. These coping mechanisms allayed but did not remove the growing anxiety.

Over the years, Republicans have channeled the anxiety into anger, through overt appeals to a so-called "silent majority" that were overlooked by Democrats and liberals; through "tax revolts" by working and middle-class families that couldn't afford to pay more; and in subtle and not-so-subtle appeals to racist fears (Willie Horton).

But now that the Great Recession has eliminated the last coping mechanism – ending the easy borrowing, and ratcheting up unemployment – the working class's economic insecurities have soared. A recent Washington Post poll showed 53 percent of homeowners worried about meeting their mortgage payments. Home foreclosures have slowed largely because of bad paperwork on the part of banks, but the threat remains. Housing prices are still dropping.

The white working class has not benefitted from the recent rise in corporate profits and stock prices. To the contrary, both have been fueled by foreign sales of goods made abroad and by labor-saving technologies that have allowed American companies to do more with fewer workers here at home. 

Joblessness among the white working class is far higher than the 9.6 percent average for the nation. While the unemployment rate among college grads (most of whom are professionals or managers) is around 5 percent, the average unemployment rate for people with only a high school degree or less (blue-collar, pink-collar, clerical) is almost 20 percent.

All of this is spawning a new and more virulent politics of anger in the nation's white working class, stoked by Republicans – anger against immigrants, blacks, gays, intellectuals, and international bankers (consider the latest Fox News salvos against George Soros).

According to the right-wing narrative, the calamity that's befallen the white working class is due to the global and intellectual elites who run the mainstream media, direct the government, dispense benefits to the undeserving, and dominate popular culture. (The story and targets are not substantially different from those that have fueled right-wing and fascist movements during times of economic stress for more than a century, here and abroad.)

Sarah Palin has special appeal because she wraps the story in an upbeat message. She avoids the bilious rants of Rush, Sean Hannity, and their ilk. But her cheerfulness isn't sunny; she doesn't promise Morning in America. She offers pure snark, and promises revenge. Over and over again she tells the same snide, sarcastic, inside joke, but in different words: "They think they can keep screwing us, but (wink, wink), we know something they don't. We're gonna take over and screw them."

The Palin Strategy is to circumvent the Republican establishment, filled as it is with career Republicans, business executives, and Wall Streeters. That's why her path to the Republican nomination isn't the usual insider game. It's a celebrity game – a snark-fest with the nation's entire white working class. Vote for Bristol and we'll show the media establishment how powerful we are! Buy my book and we'll show the know-it-all coastal elites a real book directed at real people! Tune into my cable show and we'll show the real America – far from the urban centers with immigrants and blacks and fancy city slickers!

As I believe will become clearer, the Palin Strategy will involve a political threat to the GOP establishment: Deny her the nomination she'll run as independent. This will split off much of the white working class and guarantee defeat of the Republican establishment candidate. It will also result in her defeat in 2012, but that's a small price to pay for gaining the credibility and power to demand the nomination in 2016, or threaten another third-party run in 2020.

Once nominated, her campaign for the general election will be purely populist. She'll seek to broaden her base to become the candidate of the people, taking on America's vested Establishment.

More than anything else, the Palin Strategy depends on the continuing fear and anger of America's white working class. She's betting that their economic prospects will not improve by 2012, or even by 2016 and beyond.

Sadly, this is likely to be the case. On Tuesday, the Fed issued a gloomy prognosis. Even if the U.S. economy began to grow at a rate more typical of recoveries than the current anemic 2 percent, unemployment won't drop to its pre-recession level for 5 to 7 years. A minority of the Fed thought this was too optimistic.

The disturbing truth is the bad economy is likely to continue for most Americans beyond 7 years — maybe for ten or more — because of a chronic lack of aggregate demand. Apart from inevitable inventory replacements and the necessary replacements by consumers of cars, appliances, and clothing that wear out, nothing will propel the U.S. economy forward. So much income and wealth have now concentrated at the top that the broad middle and working class no longer has the buying power to do so. The top will resume buying but their purchases won't be nearly enough.

Japan lost a decade of economic growth after its real estate bubble exploded. It seems entirely probable that the United States will suffer the same fate. Our economic structure – how we now allocate the gains of growth, the yawning gap between Wall Street and Main Street, the incentives operating on large corporations to pare American payrolls and expand abroad – almost dictates it.

We might change that structure, of course. But at this point that doesn't seem in the cards. The President seems unable or unwilling to provide the clear narrative that explains what's happened and what needs to be done, and Republicans are at this moment ascendant. 

It all fits into Sarah Palin's strategy. 

Why the Lame Duck Congress Must Extend Jobless Benefits For Hard-hit Families But Not Tax Cuts For the Rich

America's long-term unemployed — an estimated 4 million or more — constitute the single newest and biggest social problem facing America.

Now their unemployment benefits are about to run out, and the lame-duck Congress may not have the votes to extend them. (You can forget about the next Congress.)

The long-term unemployed can't get work because there are still five people needing work for every job opening. And the long-term jobless are often at the end of the job line: Either they don't have the right skills or enough eduction, or have been out of work so long prospective employers are nervous about hiring them.

They're also a big problem for the economy. Without enough money in their pockets, they and their families can't pay their mortgages, which keeps fueling the mortgage crisis. Nor can they replace worn-out cars and clothing, or buy muchof anything else, which is a drag on the economy.

Republicans and many blue-dog Dems say we can't afford another extension.

But these are many of the same people who say we should extend the Bush tax cuts for the wealthy for at least another two years.

Extending the Bush tax cuts for the top 1 percent would cost an estimated $120 billion over the next two years. That's more than another unemployment benefit extension would cost.

The unemployed need the money. The rich don't.

Moreover, the top 1 percent spends a small fraction of their income. That's what it means to be rich — you already have most of what you want. So extending the Bush tax cut to them won't stimulate the economy.

Yet people without jobs, and their families, are likely to spend every penny of unemployment benefits they receive. That will go back into the economy and save or create jobs.

A Labor Department report shows that for every $1 spent on unemployment insurance, $2 are spent in the economy. If you don't believe the Labor Department, maybe you'll believe Goldman Sachs analyst Alec Phillips, who estimates that if unemployment benefits are allowed to expire, the American economy would slow by a half a percent.

Republicans are still spouting nutty Social Darwinism. Cutting taxes on the rich is better than helping the unemployed, they say, because the rich will create jobs with their extra money while giving money to the unemployed reduces their desire to look for work.

Rubbish. The Bush tax cuts on the top never trickled down. Between 2002 and 2007 the median wage dropped, adjusted for inflation. And job growth was pathetic.

Jobless benefits don't deter the unemployed from finding work. In most states, unemployment benefits are a fraction of former wages. And as long as unemployment remains sky-high, there are no jobs to be had anyway.

Besides, the economic downturn was hardly their fault. If anyone is to blame it's the high-flyers on Wall Street who gambled away other people's money, and the rich denizens of corporate executive suites who have sliced payrolls in order to show higher profits (and get more money from their stock options).

So why reward the people at the top with an extension of the Bush tax cut that will blow a hole in the budget deficit? And why fail to extend jobless benefits to hardworking Americans who got the boot?

Quick action is needed. Jobless benefits begin to lapse in just two weeks. Two million unemployed workers will be affected. If Congress fails to act, another 1.2 million will stop receiving benefits by the end of December. Most of the rest of those who now receive federal emergency extended benefits will gradually lose them.

Don't extend the Bush tax cuts to the wealthy. Give unemployment benefits to people who need them.

The Failure of the G-20 Summit

The President emerged today from a meeting with the heads of state and finance ministers of the 20 biggest economies, in Soeul, South Korea, saying they had agree to "get the global economy back on the path of recovery."

But where are the specifics? The three-page communique that also emerged from the session brims with bromides about the importance of "rebalancing" the global economy, "coordinating" policies, and refraining from "competitive devaluations."

All nice, but not a single word of agreement from China about revaluating the yuan, or from the United States about refraining from further moves by the Fed to flood the U.S. economy with money (thereby reducing interest rates, causing global investors to look elsewhere for higher returns, and lowering the value of the dollar).

China and the U.S. are the only big players in the currency game. And with neither of them stepping up to bat, the game is in dangerous territory. Other nations will now do whatever they can to reduce the value of their currencies in order to stimulate more exports — and therefore create more jobs.

The underlying problem isn't just or even mainly an international imbalance. It's an imbalance within many nations — especially inside the United States and China. In the U.S., more and more income is concentrating at the top, thereby reducing the relative purchasing power of the vast American middle class. That means more pressure on exports to fill the gap.

In China, more and more income is going to the productive sector of its huge economy rather than to Chinese consumers, thereby reducing the relative purchasing power of the Chinese relative to what the nation is producing. That means more pressure on exports to fill the gap.

It's always nice to talk about international cooperation, and to create global photo ops. But the truth is much more needs to be done to ease tensions that are moving the global economy closer to the brink of outright protectionism. The key responsibility falls to China and America — both in terms of what they do internationally and also what they do domestically.

Both have failed.

Why We Should Beware Budget-Deficit Mania

We're in for another round of budget-deficit mania.

The first draft of the President's deficit commission, written by its co-chairmen Erskine Bowles and Alan Simpson, is a pastiche of ideas – some good, some dumb, some intriguing, some wacky. The only unifying principle behind their effort seems to be to throw enough at the wall that something's bound to stick.

At their best, presidential commissions focus the public's attention — not only on the right solution to some important problem but also on the right problem. Sadly, this preliminary report does neither.

As to solution, the report mentions but doesn't emphasize the biggest driver of future deficits  – the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft.

The report suffers a more fundamental error — the unquestioned assumption that America's biggest economic challenge is to reduce the federal budget deficit.

The size of the budget deficit (and cumulative debt) is meaningless without reference to the size of the economy. What looks like a big debt 10 or 20 years from now may turn out to be small if growth has been rapid in the intervening years. By the same token, a seemingly small future debt can become unmanageable if the economy tanks, or barely grows at all.

In 1945, the nation's debt was 120 percent of GDP. That proved to be no problem in later years, not because the debt shrank but because the U.S. economy soared.

Our biggest problem isn't the size of pending federal budget deficits or debt but an anemic recovery that may drag on for years. And unless we're careful, budget-deficit mania may further slow economic growth – thereby making future debts even less manageable.

If Congress and the President started right now to cut the federal deficit – slashing spending and raising taxes on the middle class – our anemic economy would quickly become comatose.

That's because consumers still aren't spending much. They're overburdened by personal debt and don't qualify for new bank loans. And absent enough consumers, businesses still aren't spending on new factories, equipment, additional hiring.  Instead, they're expanding capacity abroad, buying back their own shares of stock, and gobbling up other companies. Exports can't possibly make up the slack.

That leaves government. Until we get out of the gravitational pull of the Great Recession, government is the only remaining booster rocket. If anything, we need more government spending and lower taxes on the middle class. This means bigger deficits, at least for the time being.

Even worse, budget-deficit mania will slow future growth if it forces government to cut the things that fuel growth  – education, basic R&D, child health, improved infrastructure.

No smart family would choose to balance the family budget over borrowing money to send the kids to college. The same logic holds for the nation as a whole. If certain government spending generates higher future productivity, we'd be nuts not to make the investment just to avoid a larger deficit.

Public investments like these are becoming ever more important to our future well being because private investment is more footloose globally. Giant American-based companies are now making more money abroad – and investing more there — than in the U.S. How do we get global capital to create good jobs in America? By having the skills and infrastructure to attract it.

Yet the deficit maniacs often want to slash spending across the board, including such key investments. And they often want to eliminate tax breaks that encourage these investments. (The Bowles-Simpson report is guilty of this.)

Don't get me wrong. America's projected budget deficits require attention. But in addressing them we need to focus on the right solutions, and make sure we're solving the right problem.

The preliminary report of the President's deficit commission doesn't help. It's another example of budget-deficit mania generating more heat than light. 

Obama's First Stand

The President says a Republican proposal to extend the Bush tax cuts to everyone for two years is a "basis for conversation." I hope this doesn't mean another Obama cave-in. 

Yes, the President needs to acknowledge the Republican sweep on Election Day. But he can do that by offering his own version of a compromise that's both economically sensible and politically smart. Instead of limiting the extension to $250,000 of income (the bottom 98 percent of Americans), he should offer to extend it to all incomes under $500,000 (essentially the bottom 99 percent), for two years.

The economics are clear:

First, the top 1 percent spends a much smaller proportion of their income than everyone else, so there's very little economic stimulus at these lofty heights.

On the other hand, giving the top 1 percent a two-year extension would cost the Treasury $130 billion over two years, thereby blowing a giant hole in efforts to get the deficit under control.

Alternatively, $130 billion would be enough to rehire every teacher, firefighter, and police officer laid off over the last two years and save the jobs of all of them now on the chopping block. Not only are these people critical to our security and the future of our children but, unlike the top 1 percent, they could be expected to spend all of their earnings and thereby stimulate the economy.

Conservative supply-siders who argue the top 1 percent will stop working as hard if they have to return to the 39 percent marginal rate of the Clinton years must be smoking something (probably an expensive grade).

Their incomes of the top are already soaring (Wall Street is reading a 5% boost in bonuses, executive salaries and perks are back on the trajectory they were on before the collapse, and the stock market is booming), so it's hard to argue much hardship.

Besides, only earnings over $500,000 would be affected because — remember — we're talking about the marginal tax rate.

In addition, the Clinton years weren't exactly bad years, economically, for the top 1 percent.

Finally, the Bush tax cuts didn't trickle down anyway. To the contrary, between 2001 and 2007, the median wage dropped. And Bush's record on jobs was pitiful.

The politics are even clearer. Over the next two years, Obama must clarify for the nation whose side he's on and whose side his Republican opponents are on. What better issue to begin with than this one?

The top 1 percent now takes in almost a quarter of all national income (up from 9 percent in the late 1970s), and its political power is evident in everything from hedge-fund and private-equity fund managers who can treat their incomes as capital gains (subject to a 15 percent tax) to multi-million dollar home interest deductions on executive mansions. 

If the President can't or won't take a stand now — when he still has a chance to prevail in the upcoming lame-duck Congress — when will he ever?

America's Two Economies, and Why One is Recovering and the Other Isn't.

Next time you hear an economist or denizen of Wall Street talk about how the "American economy" is doing these days, watch your wallet.

There are two American economies. One is on the mend. The other is still coming apart.

The one that's mending is America's Big Money economy. It's comprised of Wall Street traders, big investors, and top professionals and corporate executives.

The Big Money economy is doing well these days. That's partly thanks to Ben Bernanke, whose Fed is keeping interest rates near zero by printing money as fast as it dare. It's essentially free money to America's Big Money economy.

Free money can almost always be put to uses that create more of it. Big corporations are buying back their shares of stock, thereby boosting corporate earnings. They're merging and acquiring other companies.

And they're going abroad in search of customers.

Thanks to fast-growing China, India, and Brazil, giant American corporations are racking up sales. They're selling Asian and Latin American consumers everything from cars and cell phones to fancy Internet software and iPads. Forty percent of the S&P 500 biggest corporations are now doing more than 60 percent of their business abroad. And America's biggest investors are also going abroad to get a nice return on their money.

So don't worry about America's Big Money economy. According to a Wall Street Journal survey released Thursday, overall compensation in financial services will rise 5 percent this year, and employees in some businesses like asset management will get increases of 15 percent.

The Dow Jones Industrial Average is back to where it was before the Lehman bankruptcy filing triggered the financial collapse. And profits at America's largest corporations are heading upward.

But there's another American economy, and it's not on the mend. Call it the Average Worker economy.

Last Friday's jobs report showed 159,000 new private-sector jobs in October. That's better than previous months. But 125,000 net new jobs are needed just to keep up with the growth of the American labor force. So another way of expressing what happened to jobs in October is to say 24,000 were added over what we need just to stay even.

Yet the American economy has lost 15 million jobs since the start of the Great Recession. And if you add in the growth of the labor force – including everyone too discouraged to look for a job – we're down about 22 million.

Or to put it another way, we're still getting nowhere on jobs.

One out of eight breadwinners is still out of work. Most families in the Average Worker economy rely on two breadwinners. So if one out of eight isn't working, chances are high that family incomes are down compared to what they were three years ago.

And that means the bills aren't getting paid.

According to a recent Washington Post poll, more than half of all Americans — 53 percent — are worried about making their mortgage payments. This is many more than were worried two years ago, when the Great Recession hit bottom. Then, 37 percent expressed worry.

Delinquency rates on home loans are rising. Distressed sales are up as a percent of total sales.

Most people in the Average Worker economy own few shares of stock, if any. Their equity is in their homes. But with all the delinquencies and distressed sales, the housing market has a glut of homes for sale. As a result, home prices are still dropping. So the net worth of most Americans is still dropping.

And even though interest rates are falling, most people in the Average Worker economy can't refinance their homes. They can't get home equity loans. Banks don't want to lend to the Average Worker economy because people in it are considered bad credit risks. They still owe lots of money, their family incomes are down, and their net worth has fallen.

And according to the Reuters/University of Michigan survey of American consumers, expectations about personal finances are at an all time low.

Inhabitants of the Big Money economy are celebrating Republican wins last week. They figure financial regulations will be rolled back, environmental regulations will be canned, the Bush tax cut will be extended to the top 1 percent, and it will be harder for workers to form unions.

Inhabitants of the Average Worker economy aren't so sure. The economy has been so bad they're angry at politicians. They showed their anger at the ballot box. They took it out on incumbents.

But if nothing changes in the Average Worker economy, there will be hell to pay.

The Republican Recipe for An Anemic Economy Through Election Day 2012

The real message from voters was "Fix this stinking economy." But Republicans have no intention of doing so.

With Republicans in control of the House, forget spending increases or tax cuts to stimulate the economy.

Republicans don't believe in stimulating economies. They think markets eventually clear — once the pain is sufficient. Or in the immortal words of Herbert Hoover's treasury secretary, millionaire industrialist Andrew Mellon: "Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life."

Of course, Mellon was dead wrong. Nothing was purged. Instead, the economy sunk into deeper and deeper depression.

So how do we get out of this bog?

By default, all the responsibility is on the Federal Reserve — which announced today (Wednesday) it will pump $600 billion into the economy between now and June to reduce long-term interest rates ("quantitative easing" in Fed-speak).

The Fed thinks lower long-term rates will (1) push more businesses to expand capacity and hire workers; (2) push the dollar downward and make American exports more competitive and therefore generate more jobs; and (3) allow more Americans to refinance their homes at low rates, thereby giving them more cash to spend and thereby stimulate more jobs.

But without an expansionary fiscal policy, the Fed's goals are pipe dreams.

Lower rates won't spur businesses to expand capacity and jobs because there aren't enough consumers to buy additional goods and services.

Lower rates won't push down the dollar and spur more exports. They'll only spur more competitive devaluations by other nations determined not to lose export shares and jobs.

And lower rates won't allow middle-class and working-class Americans to refinance their homes because banks won't lend to families whose incomes have dropped, whose debts have risen, or who owe more on their homes than the homes are worth. That is, most of us.

Without an expansive fiscal policy that puts more money into the pockets of consumers and gets them out from under their huge debt load, the Fed's billions will just fuel another stock-market bubble.

It's already started. Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders who can't get much of any return from their loans are shifting into stocks. Companies are buying back more shares of their own stock. And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

In other words, with Republicans in charge of the House, the economy remains anemic. It may even succumb to another bubble that bursts.

Could it be that Republicans want to keep the economy this way through Election Day, 2012?

Extend the Bush Tax Cut to the Bottom 99 Percent, But Not The Top 1 Percent

Expect the President to be under more pressure to give in to Republican demands that the Bush tax cut be extended to everyone — not just the bottom 98 percent but also the the top 2 percent, earning over $250K.

He should respond by offering this olive branch: Extend the Bush tax cuts to the bottom 99 percent — to families earning less than half a million dollars.

But not to the top 1 percent.

The top 1 percent now gets almost a quarter of the nation's total income — a larger share than at any time since the 1920s. The top 1 percent have also received about 40 percent of the benefits of the Bush tax cuts.

The "Not for the Top 1 Percent" olive branch will draw a clear line in the sand. If Republicans won't accept the offer, let them threaten to raise everyone else's taxes in order to get a sweet deal for their patrons at the very top.

Why Obama Should Learn the Lesson of 1936, not 1996

Which lesson will the President learn — that of Clinton in 1996, or FDR in 1936? The choice will determine his strategy over the next two years. Hopefully, he'll find 1936 more relevant.

Obama shouldn't be fooled into thinking Bill Clinton was reelected in 1996 because he moved to the center. I was there. Clinton was reelected because by then the economy had come roaring back to life.

Dick Morris, Clinton's pollster and chief political advisor (who effectively took over the White House policymaking apparatus shortly after Newt Gingrich and the Republicans took over Congress in 1995), told the President to say only "the economy's booming and you ain't seen anything yet."  

President Obama won't have that luxury in 2012. In all likelihood, the economy will still be anemic. It's now growing at the rate of no more than 2 percent a year – far too slow to bring down the jobless rate. Even now, sales are slowing. Business revenues are slowing. Home sales are down. Home prices are down. Foreclosures are increasing.

For the next two years Republicans will try to paint Obama as a big-government liberal out of touch with America, who's responsible for the continuing bad economy.

Obama won't be able to win this argument by moving to the center — seeking to paint himself as a smaller-government moderate. This only confirms the Republican's views that the central issue is size of government, that it's been too large, and the economy can improve only if it's smaller.

On the Republican playing field, Republicans always win.

Obama's best hope of reelection will be to reframe the debate, making the central issue the power of big businesses and Wall Street to gain economic advantage at the expense of the rest of us. This is the Democratic playing field, and it's more relevant today than at any time since the 1930s.

The top 1 percent of Americans, by income, is now taking home almost a quarter of all income, and accounting for almost 40 percent of all wealth. Meanwhile, large numbers of Americans are losing their homes because banks won't let them reorganize their mortgages under bankruptcy. And corporations continue to lay off (and not rehire) even larger numbers.

With Republicans controlling more of Congress, their pending votes against extended unemployment benefits, jobs bills, and work programs will more sharply reveal whose side they're on. Their attempt to extort extended tax cuts for the wealthy by threatening tax increases on the middle class will offer even more evidence. As will their refusal to disclose their sources of campaign funding.

The relevant political lesson isn't Bill Clinton in 1996. It's Franklin D. Roosevelt in 1936.

By the election of 1936 the Great Depression was entering its eighth year. Roosevelt had already been President for four of them. Yet he won the biggest electoral victory since the start of the two-party system in the 1850s. How?

FDR shifted the debate from what he failed to accomplish to the irresponsibility of his opponents. Again and again he let the public know whose side he was on, and whose side they were on. Republicans stood for "business and financial monopoly, speculation, and reckless banking," he said over and over.

And he made it clear they wanted to prevent him from helping ordinary Americans. "Never before have these forces been so united against one candidate as they stand today," he thundered. "They are unanimous in their hate for me – and I welcome their hatred."

The 2012 economy won't be as bad as the 1936 economy, hopefully. But it won't be nearly as good as the 1996 economy. For a president running in 2012, 1936 is the more relevant.