For most of the 1990s, Bill Clinton led America through what in retrospect seems to have been the golden age of globalisation. Judging by the mood of leading Democratic contenders in next Tuesday’s heated midterm congressional elections, Mr Clinton would find it much harder now to sustain his party’s support for an America that is open to the world.

In the six years since George W. Bush took office, the forces of economic populism in the US have been gradually rising – largely because of the stagnating incomes of America’s middle classes. After adjusting for inflation, the median American household is earning less than it was in 2000. According to a recent poll, three-
quarters of Americans say they are either worse off or no better off than they were six years ago.

Some blame illegal immigration, others unfair trade competition from China – or even globalisation in general. For the Republicans, the discontent of the “anxious middle” is an obvious concern heading into the elections, which the Democrats are expected to make big gains. But the issue presents a bigger headache for the Democrats to which many of America’s middle-class voters look for answers.

America’s “essential bargain with the middle classes is breaking down”, Hillary Clinton, a likely presidential contender, said in a speech earlier this year. “Yes, trade has winners and losers. But we need to make sure we lower the number of losers . . . not only because it’s the right thing to do but because we want a political climate that keeps America open to the world.”

To judge by the rhetoric of many of Mrs Clinton’s colleagues, America’s economic openness to the world is no longer viewed an unqualified benefit. One of the most closely watched races is in Ohio, the critical swing state in the declining industrial belt of the Midwest, where a narrow margin for Mr Bush helped deliver him a second term in the White House in 2004.

This time round, the state is clearly swinging towards the Democrats. Having lost more than 200,000 manufacturing jobs since 2001, Ohio’s races are dominated by what the Democrats refer to as “the middle-class squeeze” and what economists call median wage stagnation.

Sherrod Brown, the Democratic senate candidate, strikes a very different note to Mrs Clinton and other free traders who controlled the party during the 1990s. A visceral critic of the North America Free Trade Agreement, which he opposed as a congressman in the 1990s, Mr Brown is author of a book Myths of Free Trade.

His platform includes opposition to further trade deals, such as the stalled multilateral Doha round, and rewards for US companies that create jobs at home rather than overseas. Mr Brown led Democratic opposition to last year’s Central America Free Trade Agreement, which Congress passed by just one vote. “Under Republican rule, companies are rewarded for sending good-paying jobs overseas and replacing them with low-wage service positions, which provide little or no benefits to their employees,” says Mr Brown.

Because of Ohio’s totemic importance as a swing state, a decisive victory for Mr Brown next week could have a disproportionate influence on the policies of Democratic presidential contenders, whose informal campaigns will start in earnest from January. In particular, it could put wind behind the sails of the more populist potential candidates such as John Edwards, the losing vice-presidential contender in the 2004 election.

Votng intention by household income

Many Clintonite Democrats are concerned. Other campaigns that have sought to benefit from the backlash against globalisation include that of Bob Casey in Pennsylvania, who is on track to unseat Rick Santorum, a socially conservative Republican senator, and Harold Ford in Tennessee, who is in a close race with Bob Corker, his Republican opponent.

“Because we as a party have not yet really tackled median wage stagnation and middle-class anxiety in a coherent way, the path is open for people like Sherrod Brown to fill that vacuum,” says a leading Democratic think-tanker in Washington. “It seems increasingly likely that the 2008 presidential election will be dominated by economic issues.”

But developing a coherent Democratic policy to tackle median wage stagnation is no easy task. The party relies on an increasingly disparate range of groups that find it hard to unify around a single economic platform. A large share of Democratic votes are drawn from the declining industrial belts in the Midwest and on the east coast, where trade unions are still strong. But an overwhelming chunk of the funds that Democrats raise nationally for election campaigns comes either from Wall Street financiers or Silicon Valley software

Often there are tensions between the leading unions – such as the AFL-CIO and the Service Employees International Union, which also spend heavily on the Democrats – and their counterparts in business, whose largesse is highly influential. Differences in their perspectives on median wage stagnation are stark.

Earlier this year a Washington-based Democratic organiser made a presentation to supporters on Wall Street on the stagnation of middle-class incomes. Having watched America’s equity markets soar (the Dow Jones industrial average recently hit an all-time high) and corporate profits climb to a near-record 13.6 per cent of gross domestic product, the financiers were sceptical.

“One of them said to me: ‘Your numbers must be wrong – America is booming. I just don’t believe you’,” says the Democrat. “It drove home to me what a disconnect there is between the wealthier supporters of our party on the two coasts and the larger numbers of
middle-class people who vote for us.”

This same disconnect helps explain why Mr Bush’s Republicans have had such difficulty in persuading America’s electorate the economy is booming – even though the macroeconomic performance clearly supports the White House’s argument. Since it came out of recession in 2002, the US has recorded four straight years of economic growth of more than 3 per cent. Unemployment has fallen to a relatively low 4.6 per cent.

Yet the Democrats retain poll leads of up to 30 percentage points over the Republicans on the economy. One reason is that Americans who lose their jobs often find new ones quite rapidly. But average pay is 17 per cent below what they earned previously, according to the Bureau of Labour Statistics.

Another is that the costs of healthcare are outstripping inflation, at a time when an increasing proportion of US employers are paring back on the health benefits they provide to their workforce. A third is that almost 2m people have dropped out of the labour market and are not recorded as unemployed – most of them women who had previously contributed to dual-income households.

“The White House still doesn’t seem to understand why a majority of people don’t feel good about the economy,” says William Hawkins, senior fellow at the non-partisan US Business and Industry Council. “People have jobs but they aren’t as good as they would like to have. Wages have been stagnant or falling for a lot of people. And they see a connection between that and the influx of imported goods they see in the stores.”

Wage stagnation also threatens to drive a wedge between the “Reagan Democrats” – working-class conservatives – and the party’s business elite. Some Republicans, such as Glenn Hubbard, dean of the Columbia Business School, favour increasing government funding to help workers displaced by trade to find new careers. “In Economics 101 we say the great thing about trade is that the winners can compensate the losers and still be better off,” he says. “But we never do.”

Yet even assistance of this nature cuts against the grain of traditional Republican hostility to government intervention. “The problem is that there is no political defender” for this kind of targeted intervention, says Mr Hubbard.

Democrats are more divided. Some, including a number of think-tanks in Washington, argue for measures that would strengthen the economic security of the middle classes without compromising the party’s philosophy of economic openness. These would include larger tax breaks to encourage workers to save more and more generous assistance for higher education and healthcare. They also play down any emphasis on America’s growing rates of inequality.

“We talk about wage decline rather than inequality because Americans do not respond well to anything that could be portrayed as class warfare or the politics of envy,” says Simon Rosenberg, head of the New Democratic Network, a moderate Democratic group. “But we also recognise that the old agenda of reducing the fiscal deficit and promoting free trade is no longer enough to address the economic problems facing America today.”

Others believe the Clinton-era approach of stressing the return to skills and education does not go far enough to address the gravity of what is facing a majority of Americans. “If you look at the numbers, income stagnation is affecting people with college degrees as much, if not more, as those with only high school diplomas,” says Larry Mishel, head of the Economic Policy Institute, a left-leaning think-tank. “We are not saying that America should close the door to globalisation. But if we want to sustain further globalisation, we need to find a domestic policy that will support it.”

The Democrats’ midterm election promises consist of little more than raising a minimum wage that has not budged since the rate of $5.15 an hour was set in 1997, boosting tax breaks for college tuition and reversing many of the income tax cuts that Mr Bush has pushed through since 2001. Those hoping for a more carefully developed approach will have to watch what Democrats do in the next session of Congress, which starts in January, and listen to presidential contenders over the next 18 months.

But, as has been argued by Mrs Clinton, who is still the Democrats’ leading presidential hopeful, finding a solution will not be easy. “Our manufacturing economy has ceased to be a job creating engine that propelled workers into the middle class,” she said. “And we don’t know what’s going to replace it.”

Additional reporting by Alim Remtulla

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