American political futures: In conversation with Elaine Kamarck and Robert Reich

Juncture:Can we start with the economy. What do you think Obama's economic policy priorities should be in the second term?

Robert Reich: I don't think there's much debate that we need to return to the level of jobs and rate of growth that we had before the Great Recession. I would make our goal the level of jobs and growth we had in the latter years of the Clinton administration, when unemployment was around 4 per cent. I don't think deficit reduction should be the priority. My fear is that too great an emphasis on deficit reduction will actually distract us from the primary goal: that the economy is still operating with a great deal of underutilised capacity, including high unemployment. Under these circumstances we should, if anything, be spending more and running a larger deficit.

I favour a 'trigger mechanism' - perhaps built directly into any so-called 'grand bargain' over tax reform and spending cuts - such that the deficit reduction would begin in earnest only when unemployment has fallen under 6 per cent unemployment - preferably 5 per cent or below - and we have achieved at least a 3 per cent annualised rate of growth for at least two consecutive quarters. I'd build all these requirements into the legislation. Otherwise I'm afraid that we run the risk of following Europe's terrible example: an austerity trap, in which the deficit becomes larger and larger as a percentage of the total economy because economic austerity has won the day.

Elaine Kamarck: I basically agree with Bob: the US has a very fragile economy; deficit reduction is extremely dangerous - especially the kind of deficit reduction that the Republican majority in the Congress is seeking right now. I would differ slightly, however, in the following: I think that the economy would benefit from a commitment to deficit reduction that is gradual over a period of some years, that does take more from the rich, that does do more to decrease the inequalities which we have seen - and I think we all know from many years of history that societies which reach high levels of inequality are not societies which grow or prosper. I would not, as Bob suggests, peg this to certain levels of growth, because I think that it all moves as one. In the Clinton administration we saw a gradual and consistent commitment to smaller government and deficit reduction, and we also raised revenue and got a 'virtuous circle' going. We got some growth and that growth brought in more revenue - by the end of the Clinton administration we had managed to balance the budget.

Instead of a growth peg, I would set out a plan for deficit reduction that did two things: I would seek to raise revenues from the wealthy, and I would seek to limit tax expenditures for upper income people - and, frankly, for corporations as well. We've got a very counterproductive tax code, and while we are setting out a plan for gradual deficit reduction, we should also look at setting out a plan for tax reform that gets rid of the distortions in the tax system - the skewed tax preferences which benefit the wealthy - and make it more progressive. While I agree with Bob that it's a very dangerous thing to be doing right now, particularly in a difficult economic situation, I would get a plan going to do that in a gradual and responsible way.

You also have to wonder how credible a trigger mechanism would be in practice. This is what Congress did in creating the fiscal cliff, but if they just wriggle themselves out of it, which is a distinct possibility, then I think that the markets will discount these kinds of legislative devices. They'll know that Congress can just change its mind to avoid tough choices.

RR: I am very much in favour of a more progressive tax code, and particularly one that doesn't only look at the rates.

Getting back to Elaine's point about gradualism on the deficit, even a gradual reduction runs the risk of reducing demand in an economy, when demand is already perilously low. One of the key reasons that we are having so much trouble escaping the gravitational pull of the Great Recession is that the vast middle class in the US doesn't have enough purchasing power to lift the economy out of recessionary orbit. And the reason it doesn't have that power has a lot to do with the point that Elaine made about widening inequality. When you have 20 or 25 per cent of total income going to the top 1 per cent then you run the risk of lack of adequate demand, for the simple and well-understood reason that the rich just don't spend as much of their income as someone who is in the middle class, or who is poor. The marginal propensity to spend - to use that technical term - is far less among the wealthy because they have most of what they want already. That's what it means to be wealthy. There's only a certain number of $300 dinners or extravagant vacations the rich can buy - so they save. Under normal circumstances, saving is a good thing. But we're not in normal circumstances. We have vastly underutilised capacity - and anyway, in a global economy, those savings tend to move around the world to wherever they can get the highest return.

I'd also like to say something about a trigger mechanism. The only way I can square not doing deficit reduction with the need to reassure financial markets would be to put a trigger mechanism in the legislation that is very strict and cannot be overridden without a two-thirds majority vote in both houses of Congress and with the agreement of the president. Otherwise, financial markets will be increasingly nervous about long-term inflation and higher interest rates over the very long term.

J:We've talked predominantly about tax and spend. Do you think Obama should also be seeking to shift the distribution of wages before taxes and benefits? Is there an agenda around issues like trade unions, higher minimum wages and other structural reforms of the labour market?

RR: With regard to labour unions, I am a strong believer that labour needs more bargaining power, especially with regard to those sectors of the economy that are sheltered from international competition and dominated by low-wage national employers, such as retail chains, restaurant chains, hospital chains, hotel chains, and so forth. Wal-Mart refuses to be unionised. It has used every trick in the book to avoid unionisation. Its employees have an average wage of $8.80 an hour, and one-third of them don't have any benefits at all. And yet Wal-Mart is the largest single private employer in the US, making very, very large profits. I think that is contributing substantially to inequality in this country. I don't think we want to preserve and protect American jobs that are becoming uncompetitive internationally, but there's no question in my mind that in sheltered service occupations we want to encourage unionisation, rather than discourage it.

EK: There are two sides to this union question which are important. On one side, I think that it would be very useful for Obama to attempt to use his electoral mandate - such as it is - to try to make some reform to the laws regarding labour union organisation. That has eluded many Democratic presidents. Until we get some labour law reform, it's just too easy to keep labour from organising in the first place.

The second problem is on the labour side. Unions in the US have not really sat down and rethought their 21st-century role. They haven't rethought what workers need, how they can provide it, how they can add to the social safety net for workers, how they can help them move up - and I think that is another reason why our labour unions have suffered. Less than 7 per cent of the private sector workforce is unionised right now. In the 1950s and 1960s, it was 33 per cent. We really have a crisis in unionisation - it could be partially helped by some labour law reform, but it also needs some bigger and more fundamental rethinking about what a labour union looks like the 21st century.

J: Are there other areas where you think there's scope for the Democrats to be bolder in the coming four years?

RR: I think that President Obama's re-election clears the way for immigration reform of the sort which we came close to achieving when Senator Teddy Kennedy and President George W Bush were close to an agreement: immigration reform that regularises the status of undocumented immigrants here in the US, giving them a path to becoming full citizens. I think the Republicans have learned their lesson and will do a deal. They can't simply be xenophobic or exclusionist. They've got to be reasonable with regard to the very large number of undocumented immigrants in our midst.

Secondly, I think the election also made it quite clear that Americans favour increasing taxes - both rates and revenue contributions - from the wealthy. The polls even before the election showed that about 60 per cent of Americans thought that taxes on the wealthy should be increased, and since that was the major point of differentiation between Obama and Romney, the election results provide the president with a clear mandate.

EK: Let me just add to that. The exit polls on immigration were quite astounding. Fully 65 per cent of voters said that we should offer legal status to immigrants. That is a big, big change from previous years. There is quite a powerful mandate on immigration, and it's pretty clear why. Part of the reason is the entrance of many new Hispanic voters into the population. But it's also broader than that - it's indicative of the attitudes of the younger generation of non-Hispanics.

As Bob mentioned, there is also quite a mandate on taxing the rich - those making more than $250,000 a year - although they may end up with a compromise at $500,000 or doing something with the rates and deductions. But in any case, there's definitely a mandate for that.

What is less clear - and this is very interesting to me - is healthcare reform. The voters were evenly split on it, as they have been for some time now. This reflects split attitudes towards the overall role of the government: 51 per cent say government is doing too much - and there's obviously a couple of Obama voters in there. So the president still needs to be careful with issues around the role of government, particularly as they begin to implement the healthcare law over the next couple of years.

J:Can we turn to the broader political landscape. How do you envisage the Republicans responding to Obama's victory?

RR: There is a civil war going on in the Republican party between the Tea party populists, who continue to resist any tax increases, even on the wealthy, and more sober-minded Republicans who can see the election results for what they are. A similar battle continues to rage over women's reproductive rights. Some of the evangelical Protestants in the Tea party and in the right wing of the Republican party refuse to budge on equal marriage rights, women's reproductive rights, or any of these social issues. I think that there too, the few level-headed people left in the Republican party understand that the GOP is on a death march if it doesn't change its ways. We've already talked about the Latino vote and the importance to the GOP of jumping on the immigration reform bandwagon. I think in all these areas the Republican party is in danger not just of shrinking and becoming a minority party by 2014, but of becoming dysfunctional. We need, in our system of government, two parties - both of which are vital, and both of which, at the very least, speak to the times. But frankly I worry about the Republicans.

EK: I'm a little more sanguine about the Republicans' prospects, because the portion of that party which is really out of touch on women's issues, reproductive rights, immigration and so forth is the oldest part, which is dying out. There are big differences between older evangelicals and younger evangelicals, even on issues like gay marriage, where the younger generation are a lot less extreme. So while it's true that the attitudes of some Republicans today could certainly hurt them in the next couple of elections, the fact of the matter is that while most of the younger people have been ardent Obama supporters - and we hope they'll remain Democrats - I think there's a younger Republican party that is not as enamored of these really retro ideas. I fully expect a more modern Republican party to emerge in the coming years.

J: So do you think that there is a prospect of America being less divided in the coming decade, or are some of the divisions going to deepen?

EK: I think that we will be less divided, only because I keep seeing such a generational aspect to a lot of these issues. The same kind of division is not there in younger generations. We may muddle along with an extremely polarised state for the next couple of years, but I don't see this as a persistent problem.

RR: Let me half agree with Elaine. I think that on social issues - marriage equality, reproductive rights, inclusion of ethnic minorities and reform of immigration - the younger generation is quite different from the older generation, and it's pushing America inevitably in a more progressive direction.

But on economic issues, the gap and partisanship is growing, and I think that has a lot to do with widening inequality and the decline of the median wage. The median wage today is 8 per cent below what it was in 2000. The typical male worker without a college degree - and that still describes 80 per cent of workers - is earning less than he was earning 30 years ago. The economic stresses on lower-middle income, working class and poor families are growing. With that growth and with widening inequality comes a whole new set of political challenges. These people who feel that the game is rigged against them are easy pickings for demagogues - on the right or the left - who want to use the politics of resentment to scapegoat different groups, whether that's the rich, or foreigners, or minorities, or anyone else. I think the Democrats have got to be very much bolder than they have been in coming to the rescue of the lower-middle class and working class, regardless of race, and this has got to be the central focus of Democrat policy and politics for the decade ahead.

This is an edited version of a full interview which appears in the latest edition of Juncture, IPPR's journal for rethinking the centre left