By GREG IP and JOHN D. MCKINNON
March 26, 2007; Page A2
WASHINGTON -- Until January, President Bush seldom acknowledged the widening gap between the rich and the middle class. Then, in a speech, he declared: "I know some of our citizens worry about the fact that our dynamic economy is leaving working people behind. ...Income inequality is real." He has raised the subject several times since.
This isn't a sudden change in Mr. Bush's economic philosophy, but rather a change in tactics forced by the changing political environment, say current and former administration officials and outsiders in touch with the White House.
Top White House economic officials still don't consider today's inequality -- the growing share of income going to those at the top -- an inherently bad thing; they believe it simply reflects the rising rewards accruing to society's most skilled and productive members. Nor do they see merit in various Democratic proposals to reduce inequality, such as ending Mr. Bush's tax cuts on the highest-earners, raising the minimum wage, making it easier to form unions and including labor standards in trade agreements.
But Democrats' takeover of Congress makes avoiding the issue difficult, particularly if the president is to win congressional backing for free-trade pacts and for extending his authority to negotiate new ones.
Pushed by Treasury Secretary Henry Paulson, who raised the inequality issue in his first big speech after taking office, the administration is reorienting its rhetoric. Treasury has framed Mr. Bush's health-care proposal as a form of income redistribution, because it caps the tax break for employer-provided health insurance for more affluent workers in order to finance tax breaks for individuals who buy it on their own.
In his January speech, Mr. Bush cited several education initiatives he thinks are particularly important in addressing inequality -- making schools more accountable for their performance; improving math and science education; and making it easier for lower-income students to afford college.
To offset globalization's impact, the administration is pondering improvements in Trade Adjustment Assistance, a federal program to aid workers hurt by trade. That program is up for renewal this year.
But the administration hasn't yet offered any sweeping proposals to resist the market forces producing inequality -- and probably won't. Indeed, skeptics say the administration will address inequality only as much as needed to win votes in Congress, where the widespread public belief that globalization benefits only a small share of Americans has become an obstacle to Bush-backed efforts to liberalize trade and foreign investment.
The election wasn't "a wake-up call" in which the White House discovered " 'people are worried about wages and we have to get on board,' " says Howard Rosen of the Peterson Institute for International Economics, who has a longstanding interest in programs to aid dislocated workers. Rather, he says, the White House realized: " 'We have a new Congress, and it will be harder to get our agenda through.' "
Top administration officials, however, play down the election result as a factor in their new rhetoric.
Income inequality by most measures has been growing since the 1970s, and is one reason the typical worker's pay has grown only 0.3%, adjusted for inflation, since the expansion began at the end of 2001 while the economy has grown 16%. The share of total income going to the richest 1% of Americans rose to a postwar record of 17.4% in 2005, according to economist Emmanuel Saez of the University of California at Berkeley. And the premium employers paid to hire the most-educated workers has grown.
Until recently, talking about inequality was considered almost taboo among administration officials. Even raising the issue was seen as handing Democrats an advantage. When Bush advisers discussed inequality, it was often to play down negative connotations.
'The term 'income inequality' is a bit misleading because it suggests in a somewhat pejorative way that the rich are getting richer at the expense of the poor," Edward Lazear, a Stanford University labor economist who is now chairman of Mr. Bush's Council of Economic Advisers, said last May. While it's a concern that some people are being left behind, he said, "There is some good news...most of the inequality reflects an increase in returns to 'investing in skills.'"
Mr. Lazear has nurtured his relationship with Mr. Bush. His office is decorated with photos of the two mountain biking. When he gave Mr. Bush a copy of the Economic Report of the President this year, Mr. Bush gave him a bear hug and kissed the top of his bald head, according to people who were present.
Some economists question Mr. Lazear's assertion that, for instance, raising taxes on higher-wage earners will reduce individuals' incentive to acquire new skills. Lawrence Katz, a Harvard University labor economist who served in the Clinton Labor Department, says there's "not a shred of evidence" lower taxes boost educational attainment. "That's first-order goofball."
Even before Republicans' November defeat at the polls, some administration allies were warning that economic insecurity was eroding Republican support. A business coalition hired pollster David Winston to figure out why voters remained so dissatisfied with the economy. His focus groups of middle-income voters in Cincinnati and Pittsburgh found voters going deeper into debt to keep up with rising costs of health care and energy. Executive compensation "is getting to the point where it's obscene," said one focus-group participant.
The more politicians talked about how good the economy was, the worse these voters felt. "It's almost as if these folks are floating around in the ocean, watching the yachts and speedboats go by, thinking, 'Hey, I'm here, someone notice me,'" says Dirk Van Dongen, a co-chairman of the coalition and president of the National Association of Wholesaler-Distributors. Mr. Winston advised Republicans: "Our message should be that while the economy is getting back on track, we need to do more to help people with the cost of living."
But Republican strategists largely ignored the findings. Led by Karl Rove, they wanted to avoid blunting one of their few advantages in the 2006 campaign -- the economy's broad strength. One adviser adds that Iraq would have overshadowed any new economic proposals. Mr. Rove notes the president did talk about health care, college and other pocketbook issues during the campaign.
Over the past several months, debate inside the administration has shifted some. When he ran Goldman Sachs Group Inc., Mr. Paulson had invited former Clinton aides Gene Sperling and Princeton University labor economist Alan Krueger to brief him on the impact of globalization on wages and inequality. At a staff meeting soon after taking the Treasury post in July, he expressed puzzlement about the administration's opposition to raising the minimum wage, a person familiar with the meeting says. He has dispatched Undersecretary Robert Steel, another Goldman alumnus, to scout for ideas to boost the lower middle class.
Other officials -- including White House international-economics aide David McCormick and Matthew Slaughter, until recently a member of Mr. Lazear's council -- argued internally that addressing inequality was needed to damp protectionist sentiment fueled by voters who believe they are hurt, not helped, by globalization, insiders say.
Mr. Bush's acknowledgment that inequality is widening and the renewed focus on health care and revamping aid to dislocated workers suggest the administration appreciates the issue's political potency. "Voters' perceptions of economic health are very different than they used to be," said Mark McKinnon, Mr. Bush's former media adviser and now an adviser to Sen. John McCain, the Arizona Republican seeking to succeed Mr. Bush. "The old indicators that we reliably counted on -- unemployment, the stock market -- don't seem to matter much anymore. And other things do -- health care and pensions."
Adds former Treasury Secretary John Snow, now chairman of private-equity buyout firm Cerberus Capital Management: "The Democrats sense they have an issue here and are going to try to push it, and the Republicans are going to have to have an answer."