Crisis Gives Obama a Chance to Make Long-Term Electoral Gains

Feb. 27 (Bloomberg) -- The $2 trillion of federal spending President Barack Obama proposed to stimulate the economy, stabilize housing markets, curb financial excesses and remake the health care system packs a political punch too.

By shifting the focus of government policy away from upper- income Americans and targeting the vast numbers who consider themselves middle-class, Obama’s proposals may yield dividends for the Democratic Party.

Just as Franklin Roosevelt used the New Deal to create a loyal voter base that endured for four decades, Obama’s approach to fixing the economy offers the president an opportunity to recast political allegiances among swing voters. It also unwinds the policies of Ronald Reagan by dramatically increasing the role that government plays in the lives of voters and companies.

“It’s clear that Obama benefits politically by targeting programs precisely at these voters,” said Bruce Buchanan, a presidential scholar at the University of Texas in Austin. “It all ties up into a little ball, and I can understand why Republicans are worried.”

The president’s strategy for boosting growth is a clear departure from his predecessor, George W. Bush, whose policies gave the greatest increases in after-tax income to people at the top end of the distribution.

“Bush’s argument was that they’re the engines of prosperity, they’ll invest and create jobs, and prosperity will trickle down,” said Roberton Williams, an analyst at the Tax Policy Center in Washington. Median income for U.S. households fell to $50,233 in 2007 from $50,557 seven years earlier, adjusted for inflation, according to the U.S. Census Bureau.

Delivering Tax Breaks

Obama has made shifting the tax burden from the middle class to the wealthy central to his economic plan. His campaign proposals would provide the largest immediate breaks to Americans in the third and fourth income quintiles, or those with incomes between $38,000 and $112,000, while pushing average taxes up for those earning more than $225,000, according to an analysis by the Tax Policy Center. Those making more than $600,000 would see substantially higher taxes.

Obama’s first budget outline, put forth yesterday, proposed almost $1 trillion in higher taxes on the 2.6 million highest- earning Americans, Wall Street financiers, U.S.-based multinational corporations, and oil companies to pay for permanent tax breaks for lower earners.

New Democratic Voters

Obama lost voters making between $50,000 and $75,000 by one percentage point to Republican candidate John McCain, and he won those making $75,000 to $100,000 by just three percentage points, according to CNN exit polls. The two groups account for roughly a third of the electorate.

In addition, the $787 billion stimulus plan enacted earlier this month provides new funding for Medicaid, food stamps and similar programs for low-income Americans, a traditional Democratic constituency, along with $140 billion to help states avoid layoffs. Since the recession began in December 2007, 38 states have announced workforce cuts, according to the Center on Budget and Policy Priorities in Washington.

Money to states is a lifeline to middle-class employees on state and municipal payrolls, analysts say. A police officer married to a senior teacher in a school system is a typical household that will see tangible benefits, said Robert Reischauer, president of the Urban Institute in Washington.

Households earning between $66,000 and $112,000 would see their taxes drop, on average, by almost $1,300 if all of Obama’s tax plans are enacted, according to the Tax Policy Center.

Housing Relief

At least seven million homeowners will be eligible for assistance from Obama’s housing stability plan, estimates Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia.

“These borrowers look like middle-income America,” said Wachter. In addition, they’re geographically concentrated in what she calls the “sand states” of Nevada, Arizona, Florida and California.

Other states with soaring mortgage delinquency rates include Indiana, with 9.31 percent of loans delinquent in the third quarter of 2008, the most recent with available data, and Ohio, with 8.31 percent delinquent. Together with Florida, where the rate is 9.11 percent, those states were crucial to swinging the election to Obama.

“They want these voters to be very cognizant of the fact that the Obama administration in Washington is looking out for them,” said Ruy Teixeira, an expert on political demography at the Brookings Institution in Washington.

‘Big Headway’

“Look within any of those states and you see typically that Democrats are making big headway in bigger and more dynamic metropolitan areas and their suburbs, and Republican areas are shrinking,” he said.

Extending health care to the 46 million Americans who lack it may be the ultimate political weapon, analysts say.

“Universal health care is a concrete benefit that would be seen as a Democratic program and could have effects well beyond Obama’s presidency,” said Julian Zelizer, a presidential historian at Princeton University in New Jersey.

Obama’s budget proposes spending $634 billion to expand U.S. health care, financed by increased taxes on wealthy Americans and less government money for some drugmakers and health insurers like UnitedHealth Group Inc. and Humana Inc.

Accomplishing universal coverage, which would help primarily middle- and low-income workers who struggle with the rising costs of insurance, could accelerate the return of white working class voters to the Democratic Party. Once a reliable constituency, those voters began siding with Republicans in the 1970s and 1980s due to cultural issues like crime, race, abortion and religion.

Job Losses

They’ve begun to drift back to the Democrats in recent elections as stagnant wages and disappearing manufacturing jobs began to trump other concerns. Nearly one in five U.S. manufacturing jobs has disappeared since 2001, according to the Department of Labor.

Republicans won the group by only 10 points in the 2006 congressional elections, down from a 20-point margin in 2004. Obama lost the group by 18 points in 2008, a five-point improvement over John Kerry, the Democratic presidential nominee in 2004.

The Republican Party would like to reverse that trend, but at the moment it’s divided over how to do so, and Republican thinkers are expressing surprise at the ambitiousness of Obama’s agenda.

“There’s a rekindled boldness in the recent proposals,” said John Fortier, a scholar at the conservative American Enterprise Institute in Washington. He said his party may have to wait “until the downsides of these programs become more evident for a chance to make a better case against them.”

2010 Deadline

A lasting voter realignment is no sure thing. There have been only two since 1932, according to Curtis Gans, director of the Center for Study of the American Electorate. He estimates that Obama has until mid-2010 to show some tangible results before voters sour on him.

Obama’s programs have a potential similar to Roosevelt’s New Deal to deliver for Democrats, said William Leuchtenburg, a history professor at the University of North Carolina in Chapel Hill and author of “Franklin D. Roosevelt and the New Deal.”

“Over time the benefits of the 1935 Social Security Act became part of a program very much associated with the Democratic Party, and in elections to come was a very important mainstay for the Democrats,” said Leuchtenburg.

Obama’s plans won’t appeal to hard-working, middle-class voters, said Representative Mike Pence of Indiana, who is chairman of the House Republican Conference. Republicans will advocate “the kinds of policies that are going to create jobs and opportunities in a fiscally responsible way,” including middle-class tax relief and fiscal discipline, he said.

“The question is whether those principles have relevance to the majority of Americans being hurt by this crisis,” said Gans. “Right now the Republican cupboard is pretty bare.”

To contact the reporter responsible for this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net .