Clinton’s Policies Have FDR Rolling in His Grave : Presidency: The deficit obsession and higher taxes for the ‘working rich’ have brought Republicans back to life. Old Democratic lessons forgotten.

WASHINGTON —  Those who have seen parallels between Jimmy Carter and Bill Clinton should note another: Not since the Plains, Ga., peanut farmer took the near-corpse of the post-Watergate GOP, gave it adrenaline and pointed it toward victory over his own failed Administration in 1980 has a Democratic President done so much to revitalize a stricken opposition. The Republican Party, already sitting up and taking nourishment from Clinton’s unpopularity, could be headed for victories nobody would have imagined in the gloom of last Thanksgiving and Christmas.

The extent to which Clinton has abandoned old Democratic victory formulas must have Franklin D. Roosevelt rolling over in his grave. FDR, who was elected in mid-Depression 1932 despite archaic talk about balanced budgets but who then rose above his campaign rhetoric to stimulate the economy and dispel the public’s fear, has now seen fellow Democrat Clinton emerge as a kind of Roosevelt-in-reverse. The Ozark Kid, elected on a platform of economic stimulus, broke his campaign promises to embrace higher taxes in the name of deficit reduction, thereby rekindling voter economic fears that his election had briefly eased. Since Congress passed Clinton’s economic program, including a reversal of Roosevelt fairness on taxes, consumer confidence has plummeted in three major surveys.

Clinton may even be on his way to grabbing the mantle of Herbert Hoover, carried off the field by George Bush last year after helping New England, New York, California and a few other states stage the late-20th Century’s closest re-enactment of the Great Depression. The man from Hope hasn’t quite gone that far yet, but there’s no doubt that Clintonomics will be reducing economic growth over the next few years, and the surge in the bond market, which feeds on bad news, reflects increased belief that a Clinton recession is coming.

During the Reagan and Bush years, the economy regularly weakened in time to hurt the GOP in the midterm elections of 1982, 1986 and 1990. Now, Clinton could be about to hang the same midterm lead weights on congressional Democrats. GOP hopes are further whetted by the extraordinary disarray in the ranks of the Democratic leadership of the House of Representatives: Ways & Means Committee Chairman Dan Rostenkowski is apparently close to being indicted; Majority Leader Richard A. Gephardt has just broken with the Administration on free trade with Mexico and will oppose the White House’s North American Free Trade Agreement, and rumors about the departure of lackluster Speaker Tom S. Foley have several key Democrats already maneuvering to replace him.

The upshot is that the Republicans may be positioned for serious midterm congressional gains in 1994, and the odds are that the GOP and Perot votes together will total well above 50% in 1996. So, although Republican gains next year aren’t likely to give the GOP control of either house of Congress, the party could come close in the Senate, and it’s conceivable that the Republican contingent in the House will rise above the 200 mark for the first time since the 1950s.

If that happens, Clinton won’t be able to pass anything resembling a liberal Democratic agenda. All his references to having “beaten gridlock” will turn into sitcom fodder, even if the GOP, too, winds up embarrassed by lack of achievement.

Neither of the two issues coming before Congress in September--health reform and NAFTA--look like they’ll do much to change the political equation. So far, Clinton is being cautious on health care, avoiding the heavy-handed government role and payroll taxes he seemed to be pointing toward several months ago. His advisers are also talking about protecting small business and phasing in the program over five to seven years to avoid any major economic dislocations. That won’t give the Republicans the sort of tax-and-spend arguments they had with Clinton’s economic program, unless there is a recession next year. In that case, Clinton would have to be doubly careful of the effects his health-reform demands might have on small business and on climbing budget deficits.

NAFTA, by contrast, will be a three-way chess game among the Democrats, the Republicans and Ross Perot. The critical tight vote should come in the House, where about two-thirds of the Republicans will vote for the agreement, and as many as two-thirds of the divided Democrats could vote against. Clinton, knowing he could lose NAFTA, doesn’t want to look like he places too much priority on something that was, after all, largely a Bush Administration blueprint on behalf of the United States and Mexican business and financial communities. The Republicans, by contrast, sense another opportunity. They want to: a) display a pseudo-bipartisanship in rallying behind NAFTA to rebut charges of always being negative, while b) simultaneously trying to exploit the free-trade debate to maximize the internal damage it inflicts within the Democratic Party.

There is a danger. The GOP could be ignoring Perot, whose third voice in the debate will put him on the popular side of economic nationalism and at loggerheads with pro-NAFTA Democratic and Republican leadership elites. Gallup polls show that two-thirds of Americans agree with Perot’s contentions that a NAFTA deal would help suck even more U.S. jobs to Mexico. Moreover, if Perot supports a number of Republican congressional candidates over reform and House “institutional corruption” issues, it could serve his bipartisan purposes to also try to beat six to eight GOP representatives who forget the factories in their districts by supporting NAFTA. If Perot can use the free-trade debate to position himself as the one economic nationalist in a three-way 1996 presidential race, the theory goes, he could laugh all the way to the ballot box.

In the end, though, the key to 1994 and probably 1996 is less likely to be health reform or NAFTA than the usual 800-pound gorilla of national politics--the economy and what happens to it. And this is where Clinton’s surprising Roosevelt-in-reverse economic program is taking its second big gamble: not just in squeezing the economy through tax hikes and deficit reduction, but also in the strongly un-Rooseveltian nature of a tax program that imposes higher marginal tax rates on the engine of the economy--the upper-middle class--than on the multimillionaire speculators and investors at the top of the top 1%.

Just as Clinton, for all his talk about FDR, didn’t follow his example on stimulus vs. squeeze economics, he hasn’t followed the careful example Roosevelt set in his famous 1935 income-tax revisions. In a nutshell, whereas Clinton has embraced a single top rate (36%) for the top 2% of American incomes, and a 10% surtax for the top 1%, FDR favored multiple rates for the top 1% to make certain he didn’t unfairly clobber the upper-middle class with the same 70% rates aimed at the multimillion-dollar incomes of the Mellons and Rockefellers. Thus, FDR’s tax tables imposed a marginal rate of only 12% on upper-middle-class families ($15,000 in those days) who were just inside the top 1%.

Under Clinton, by contrast, just-inside-the-1% incomes of $250,000 or $300,000 wind up with marginal rates in the 40%-45% range (based on the 36% rate, the 3.6% surcharge and a 2.9% Medicare tax on earned income). Many speculators and coupon-clippers with mega-money, meanwhile, will have much or all of their income taxed at lower rates--28% on capital gains, a 28% alternative minimum-tax rate and no Medicare tax on unearned income.

It’s a philosophic betrayal of FDR, because just as Roosevelt fought Wall Street, Clinton’s economic package was partly scripted and managed by ex-Wall Streeters--from National Economic Council chief Robert E. Rubin to Deputy Treasury Secretary Roger Altman. Yet, the Democrats are also taking an economic risk, because the new taxes hung on the upper-middle class add up to the biggest marginal-rate increases since the 1930s, and with the biggest weights placed on the “working prosperous” rather than the “idle rich.” If this turns out to be economically counterproductive, and even recessionist, Americans will know where to look--at the man who repackaged the New Deal as the Raw Deal.

Meantime, of course, the Democrats are not without their own hopes. There may not be a recession, and the Republicans may decide that requiring businesses to provide employees with health insurance is un-American. But for now, Clinton, so far, has done more for the Republican Party in six months than its own leaders could have done in four years.