The widening gap between the richest and poorest US residents has not been the focus of attention by anyone in the Bush administration until Henry Paulson, the new Treasury Secretary who sees it as a long-term economic policy challenge. Paulson appears to attempt to reframe the policy debate on this fundamental issue as a solution to the trade problem. The trade problem is rooted in global income inequality which is a problem that the US cannot solve without first addressing its domestic income inequality.

The wealth gap is a fixture of the industrialization phase of US economic history but relative income equality has been the dynamo of the US consumer economy. Fordism put the US on the road to rising industrial wages to create the US middle class out of factory workers and allow the US economy to overtake its older European competitors. The two world wars gave US workers income growth that consistently outstripped inflation and allowed productivity growth to sustain spectacular growth of consumer demand, a key component in the success of the US economy.

Market capitalism naturally produces income disparity and polarization that lead to recurrent economic crises. To correct this structural flaw, the nation adopted an income policy. Income redistribution has been the tradition of the US tax regime since the New Deal. With the onset of 8 years of supply-side "Reaganomics", followed by another 8 years of neo-liberal "Rubinomics" under Clinton, whom orthodox liberals Democrats accuse as the best Republican president in history, inequality has been growing in US society to fuel a vibrant economy. While the Republicans adopted a new income policy to redistribute income upward with the watering down of the progressive income tax, the neo-liberal Clinton Democrats used outsourcing in a globalized market economy to keep US wages from rising, and built a fiscal surplus by starving social spending. The nest result is to expand the globalized economy at the expense of the US domestic economy.

For the past two decades, two-party democracy has failed to provide alternative choices in economic policy for the US electorate. And outsourcing is not the only factor driving US wages down, even as average worker productivity within the US has surged, average hourly earnings have stagnated, while the nation's economic elites have prospered with astronomical levels of incomes. New sectors such as the high-tech, information technology and financial services operate on the model of low salaries and high stock options. Even for investors, the trend has been to favor equity appreciation over dividend income. Neo-liberal economists seemed to have forgotten the basic rule in finance: Income is all. Economic growth without income is a fantasy.

Income disparity has now reached obscene levels. Capital One Financial CEO Richard Fairbank exercised 3.6 million options for gains of nearly $250 million, on which he pay tax on the lower capital gain rate rather the income tax rate. His personal take exceeded the annual corporate profits of more than half of the Fortune 1000 companies, including Goodyear Tire & Rubber, Reebok and Pier One. Median pay among chief executives running most of the nation's 100 largest companies soared 25% to $17.9 million in 2005, dwarfing the 3.1% average gain by typical US workers. And Congress is in the midst of a passionate debate over raising the minimum wage from the current $5.15 an hour to $7.25 an hour in 2009 in three steps, with opponents to the proposed bill claiming that such a raise would destroy the US economy. The idea of indexing the minimum wage to inflation is considered a legislative non-starter.

US corporate earnings are at an all-time high because wages have been stagnant. Corporations are overflowing with cash but they refuse to pass it on to their workers. Instead, corporations adopt share buybacks scheme with the surplus cash to raise the market value of the stocks.

To his credit, Paulson is the first treasury secretary in recent history to focus on the inequality problem. In his first major speech as treasury secretary, Paulson said: "Amid this country's strong economic expansion, many Americans simply aren't feeling the benefits. Their increases in wages are being eaten up by high energy prices and rising healthcare costs, among others." Paulson gave notice that this issue will be a priority in his agenda to restructure the US economy.

A Federal Reserve survey shows that between 2001 and 2004, the median income of US workers with college degrees barely budged, rising from $72,300 to $73,000, after adjusting for inflation. The Clinton administration did almost nothing to advance the interests of organized labor or working people more generally. Union membership continued its long decline during the Clinton presidency, standing at 13.5% of the total workforce when he left office. A paper co-authored by Rubin observed: "Prosperity has neither trickled down nor rippled outward. Between 1973 and 2003, real GDP per capita in the United States increased 73%, while real median hourly compensation rose only 13%."

A new wave of economic populism is surging along with Democratic victory at the [2006 mid-term] polls. Yet these new populists seem to exclusively target foreign trade, not realizing that the imbalanced trade is the result rather than the cause of the new age of economic inequality, the fountainhead of which originated in US domestic policy. If Paulson really wants to deal with the problem of persistent US trade deficits, the solution lies not in Beijing, but at home in the US.

The new populists argue that the trade agreements beginning with NAFTA and continuing through the various World Trade Organization negotiations have failed to protect workers' rights to organize unions and thus raise wages in the low-wage countries. Instead, wages in high wage countries have continued to stagnate or drift downwards in real purchasing power. They also insist not only on an increase in the minimum wage but on tying it to the cost of living so that future inflation will not erode its real value, as it has in the past.

Just as the neo-conservatives have hijacked foreign policy in the Bush Administration, the neo-liberal Clinton wing of the Democratic Party hijacked the party's economic policies. The Clinton neo-liberals imported the Republican ideology that the economy could achieve sustained growth only if markets were allowed to operate unregulated globally. Treating labor as a captured constituency, the Clinton administration vigorously supported free trade agreements like NAFTA and agreed to China's admission into the World Trade Organization (WTO) to expand the global economy at the expense of the US domestic economy, with half-hearted promises of worker retraining and other safety-net measures that Clinton's balanced budget could not fund. The adverse effects of Rubinomics were masked by a temporary burst of unsustainable economic prosperity caused by corporate and consumer debt.

The new populists want an alternative to Rubinomics, one that registers growth by the income received by the middle class. They argue that the national income has increasingly flowed disproportionately into corporate profit and the rich. They call for a review of US-led globalization and for new terms of trade that do not put the cost of economic expansion entirely on the chronic poor, the newly poor and the powerless both domestically and globally. They call for government regulation in the terms of trade to distribute the benefits more equitably.

The free traders accused the new populists of being protectionists. Rubin admits that globalization has not brought job security or rising incomes to US workers and that as the global economy expands to benefit the US in general, it does so at the expense of shrinking the US middle class's share of the economic pie. Yet Rubinomists stick to the worn-out Maragret Thatcher claim of TINA (There Is No Alternative), arguing that regulating trade and imposing market restrictions would be self-defeating. There is now enough historical data to question the false claim about the benefits of financial globalization, which has brought about monetary and financial crises around the world every few years. The emergence of unregulated capital, debt and currency markets has prevented government around the world from effectively using sovereign credit to finance domestic development and force all nations to distort their economies toward over-reliance on exports for dollars and to compete by joining the race to the bottom on wages and environmental abuse.

And it is not clear that Rubinomics was really responsible for the economic growth of the 1990s. Historical data suggest that the information revolution greatly improved productivity even in economies insulated from Rubinomics, such as China and India.

The free market does not know best. Left undirected, a free market will race ahead at unsafe speed towards accidents waiting to happen. A more balanced US economic policy away from maximization of profits might have let that productivity burst lift the global economy into a higher plane without the distortions that are haunting it now.

In his 2003 book, In an Uncertain World, Rubin admits: "In retrospect, the effect of the Clinton economic plan on business and consumer confidence may have been even more important than the effect on interest rates." Business investment during the Clinton boom years was not exceptional vigorous. It was the brain-power intensive information revolution that helped trigger big gains in productivity and growth despite a comparative low capital input compared to earlier capital-intensive cycles, such as the railroad age.

The 1997 "Economic Report of the President" [Clinton] released in February, five months before the 1997 Asian financial crisis, predicted that growth would average a meager 2.2% over the next four years. The actual growth rate turned out to be 3.9%, almost double. A case can be made that the high growth rate was the result of the Fed's monetary easing in response to the Asian crisis that started on July 2, 1997 in Thailand and whirled around Asia via contagion like a tornado. When contagion hit Wall Street in October, the Fed did what no other central banks could do. It printed dollars to provide liquidity to the US banking system to not only contain the crisis, but also to allow US banks to buy up distressed Asia assets at fire sale prices. It was a clear example of how dollar hegemony works.

Rubinomics is a doctrine of aggressive trade liberalization paid for by squeezing domestic and foreign workers while balancing the fiscal budget at home by cutting social programs to avoid the need for raising taxes progressively. The Clinton federal surplus came directly from the pockets of workers. Yet Rubin has said publicly that he understands that income inequality, both domestic and around the world, will produce a political backlash at the core that threatens the neo-liberal trading system, even the stability of capitalistic democracy. Rubin acknowledges the ill effect of globalization on US wages which takes on political significance when the squeeze shifts from just the poor who seldom vote, to the politically active middle class. The favoritism of government policy towards the rich, particularly the tax structure, has become so embarrassingly obscene that even the super-rich such as Warren Buffet complain about its unfairness.

Rubin has launched the Hamilton Project, a policy group of like-minded economists and financiers who are developing ameliorative measures to aid the threatened workforce and to create a broader political constituency that will defend the trading system against populist backlash. Yet how can one defend a system that creates wealth by making the majority poor? It is not possible to deify Mammon, the demon of the love of money.

The populist tidal wave may well build up to tsunami scale. As outsourcing moves up the skill ladder, threatening the job security of not just assembly line workers, but highly educated, resourceful and active workers in high-tech, information technology, medicine and finance, the democratic process will turn against neo-liberal globalization. The backlash can turn ugly, mixing xenophobia with anti-Semitism.

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