The battle for the middle class

Can Republican presidential hopefuls offer an attractive alternative to Obama's economic vision?

This is a rush transcript from "Journal Editorial Report," January 24, 2015. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," the battle for the middle class. President Obama lays out his economic vision for next two years and sets the stage for Democrats in 2016. How should Republicans respond?

Plus, it's being called his Robin Hood tax plan but do the president's proposals target more than the rich?

And a showdown is brewing as the White House and Congress clash over Iran sanctions. So will a set of Democrats stand up to the president's veto threat?

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: Middle class economics means helping working families feel more secure in a world of constant change. That means helping folks afford child care, college, health care, a home, retirement.

(END VIDEO CLIP)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

First up this week, the battle for the middle class. That was President Obama in his State of the Union address, laying out his economic vision for the next two years and setting the stage for the coming presidential campaign. The president Tuesday night proposed hundreds of billions of dollars in new taxes in order to fund as slew of new government programs, all in the name of economic equality. So how will Republicans in Congress respond and can the GOP presidential hopefuls lay out an alternative vision for 2016?

Let's ask "Wall Street Journal" columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; and Washington columnist, Kim Strassel.

So, Kim, start with you.

The president's agenda sounded to me like one more appropriate to, say, one where Nancy Pelosi was speaker of the House --

(LAUGHTER)

-- kind of a wish list of things what's going to give away. What's the thinking here on his part, the political calculation?

KIM STRASSEL, WASHINGTON COLUMNIST: Well, if it wasn't clear already from his veto threats and his executive orders and general aggressiveness from the midterms, he has no real interest in working with Republicans over the next two years.

(CROSSTALK)

GIGOT: Really? It was that definitive of a declaration?

STRASSEL: Oh, yeah. I think that's what this State of the Union was declaring, which is he intends to use the next two years to lay the groundwork for, maybe even set the terms for a presidential run by Hillary Clinton or Elizabeth Warren, and it's going to be all about the middle class and how Democrats will make the argument that they can make things better with government giveaways to the middle class than Republicans ever can.

GIGOT: Well, I want to talk about the reason for that because now the economy is finally growing, as we know. The last six month, at least, it's grown better. But middle class incomes haven't risen.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: No.

GIGOT: In fact, we have a chart here that shows us that in the 1980s and 1990s, you had increases in median household income. And then they fell a bit during recessions. They came back in the mid 2000s. But in this recovery, as you can see, they have been flat. That's the kind of anxiety that the president is trying to address, James. The problem is it's anxiety that he's helped to cause.

FREEMAN: Yeah, his policies have really been the battle against the middle class. And you can think of all of these new proposals as kind of offsetting the damage that his tax and regulatory limits on growth have imposed from Washington.

GIGOT: Because we have had such slow growth.

FREEMAN: That's right.

GIGOT: That's why we don't see middle class incomes rising.

FREEMAN: Yeah. You're seeing basically now this is kind of a wish list that targets the people he thinks are Democratic voters within the middle class. In other words, within the middle class, not much here for people who pay taxes, who save, who are in households with a parent at home raising children. It's really geared toward people who don't have income, don't -- or don't have taxable income, don't save, two-earner couples or, you know, young childless adults getting more tax credits. But I think what Republicans have to do instead of trying to match his subsidies and say, here's how we grow the pie for everybody.

GIGOT: OK, well, let's talk about whether this pitch the president made is going to work.

DAN HENNINGER, COLUMNIST, DEPUTY EDITOR: Well, it could work if the Republicans don't push back against it and describe the world that Barack Obama is presenting to the American people. I think it's not just Obama. It's the Democrats. It's the Democratic left. They have an idea of an economy in which the government does all these things that he wants it to do. But if the government consumes that much of the nation's productivity, you will have a situation much like Europe, whose growth rates are at least a percentage point below ours. The result: high youth unemployment. In the European Union, last year, average youth unemployment was 22 percent. In Spain, 54 percent. In Italy, 34 percent. There were five million unemployed young people in Europe has year.

GIGOT: Yeah --

(CROSSTALK)

HENNINGER: And the way you compensate for that is by increasing the welfare state so people get money from the government.

GIGOT: Kim, a lot of debate in Washington among Republicans. Do Republicans need their own so called middle class agenda? What do you think?

STRASSEL: Well, the temptations for the Republicans -- and you already see this happening -- is for them to try to, as James said, match and also be the ones handing out goodies to Americans, in child care tax credits and health care and college. The problem is what they don't seem to understand is you can't win that war with Democrats because they're always too willing to spend more money than Republicans are. So what they really need to do in the discussion now is, how do you formulate a conservative alternative? And one of the things they're going to have to do is -- their policies are good. What they have not done as well is actually connecting them to the troubles that Americans are facing today, of declining wages and day to day issues. You'll need a presidential candidate who can do that. They have also got to remind everyone that while government free stuff sounds good, we just had a lot of examples, with Obamacare and elsewhere, where when government run these things, it doesn't turn out so well.

GIGOT: Is Hillary Clinton going to essentially adopt the Obama agenda? Is that what you think -- is she going to come there --

(CROSSTALK)

FREEMAN: She's going to try. Obviously, it's gotten a lot harder for her as her wealth has soared and her speaking fees have gone past the $200,000 mark --

(LAUGHTER)

-- to associate herself with the middle class. But I think certainly she's going to try to adopt this. But it will be tough because what she's got to do is take the message, but disassociate herself from the results for the middle class that President Obama has actually delivered.

GIGOT: All right. Describing the results are key to the Republican response and making sure people understand who is responsible.

All right. It is being called his Robin Hood tax plan. When we come back, we'll take a closer look at the president's proposals to take from the rich and give to others. But is it just the 1 percent who stand to lose?

(COMMERCIAL BREAK)

GIGOT: Well, it's being dubbed his Robin Hood tax plan and President Obama hit the road this week to sell the proposals he laid out in his State of the Union address, including $320 billion in new taxes on savings and investment. But is it just the rich who stand to lose?

We're back with Dan Henninger and James Freeman. And Wall Street Journal columnist, Mary Anastasia O'Grady, joins us also.

So, Mary, here's a question I wonder if you can answer. He's already raised taxes considerably on the so-called wealthy. Why do it again when you have the economy now moving ahead, looks like we could get faster growth? Why put a tax on savings and investment?

MARY ANASTASIA O'GRADY, COLUMNIST: Well, Paul, you're asking me to get inside the president's head. I'm not exactly sure because it doesn't make sense to me. But my guess is that he is so obsessed with this idea of making everybody equal, sort of this fairness. It is really not -- he's not probably going to collect enough money to make big changes in the economy. But he will bring people, who are making more money and are more ambitious, down, and that's one of his objectives, that we'll all be equal.

GIGOT: And just to support your point, in the campaign, remember, famously, he was asked once, in 2008, why raise capital gains taxes if the revenue you get from it isn't there, and he said, well, it's fairness. That's the point. So the point is punitive, not necessarily practical in getting more out of you.

FREEMAN: Yeah, and that's dangerous, obviously, if the focus is not a tax system to fund government or to help our economy grow but to kind of punish those who have been successful. What you're seeing now with this tax plan essentially hitting new death taxes and new taxes on investment, what that does is discourage the money that ultimate creates middle class jobs, when it's invested in expanding factories, in building new businesses. And so I think the response from the Republicans has to talk about what works for the middle class is freedom. That's how you get growth in incomes.

GIGOT: Dan, you have a sense of whether any of this is going to pass?

HENNINGER: None of it is going to pass. I mean, it's a Republican- controlled Senate now, so there's no chance whatsoever. Raising the question of what exactly is Barack Obama doing? And I think he's an obsessive presidency. He gets the ideas in his head. He wants to spread - - look, Obama is basically a Socialist, OK? I mean --

GIGOT: Really?

HENNINGER: Oh, come on. It's so obvious.

(LAUGHTER)

I mean, people have been shouting that in e-mails to us for years. It's clearly true.

The second point is Barack Obama has no understanding whatsoever of how the private economy works. No experience --

GIGOT: Wait a minute --

HENNINGER: -- never been around it.

GIGOT: He'll say, look, all I'm trying to do is raise the capital gains tax to 28 percent. It's 23.8 percent now.

HENNINGER: Yeah.

GIGOT: He raised it from 15 to 23.8.

HENNINGER: Right.

GIGOT: It was 28 percent when Ronald Reagan was president.

HENNINGER: Exactly.

GIGOT: So what's the big deal, Henninger? Is Ronald Reagan a Socialist --

(CROSSTALK)

HENNINGER: The big deal, because when Ronald Reagan put it at 28 percent, he had just lowered the top rate from 50 percent to 28 percent, OK, for personal incomes. Now, it's 39.6 percent under Obama.

GIGOT: But surcharges --

HENNINGER: Plus, a lot of surcharges.

GIGOT: -- at 44 percent, so --

O'GRADY: You know, Paul --

HENNINGER: Smothering the economy.

O'GRADY: -- the other thing is -- the other thing is he wants to now remove the tax benefits that people have for saving for education. And basically, the message there is that if you have enough money, if you make enough money to be able to save for the future, you are one of the elites in this country and, therefore, you -- that right or that privilege should be taken away from you.

GIGOT: Let's tease out some of the details that Mary referenced. The 529 plans that, I think, 18 million accounts? Those are the --

(CROSSTALK)

FREEMAN: 11.8 million accounts.

GIGOT: I'm sorry, 11.8 million accounts. Those are accounts that people put in and they can raise money -- they put in after-tax money.

FREEMAN: Right.

GIGOT: But then it raises tax free, and you can withdraw as long as it's for education without paying a tax penalty.

FREEMAN: That's right. And as you said --

(CROSSTALK)

GIGOT: He wants to limit --

FREEMAN: -- popular. And what he's saying now is let's start taxing as income the withdrawal on earnings on those contributions in the future.

GIGOT: Right.

FREEMAN: You could argue, if we have a simplified tax system, and we'd like one, you wouldn't have --

(CROSSTALK)

GIGOT: You wouldn't have anything like this.

FREEMAN: -- like this.

GIGOT: Right.

FREEMAN: But the fact is, given what government has done, driving up the cost of education, given the difficulty for middle class people to save, this is a big benefit for people trying to put kids through college. And to target this, it really -- this is one really discordant note on the rhetoric about the middle class, because the average account is a little over $20,000, closer to $21,000. This is not just targeting the 1 percenters.

O'GRADY: But again --

(CROSSTALK)

FREEMAN: This is going after the main vehicle --

(CROSSTALK)

GIGOT: That's not Warren Buffett's 401K.

FREEMAN: Right. Exactly.

O'GRADY: But, again, the message there is, if you have enough income to save that means you're a rich person. Obviously, anybody who doesn't save in these accounts --

FREEMAN: Or if you made the sacrifices to save.

O'GRADY: Well, of course, that's what people do.

FREEMAN: I mean, a lot of these people, they're not making that much, but they made a commitment, I want my kids to go to college, I want them to do better than I did, and this is ending that.

GIGOT: Quickly, Dan, corporate tax reform, the president barely touched on it. And then, by way of saying we'll close loopholes, he didn't talk about lower rates. Does that mean corporate tax reform is dead? We only have a little time.

HENNINGER: I think it means tax -- it is dead. And tax reform itself is going to be dead. It is very unfortunate the president cannot at least approach the Republicans to do that one piece. It looks like it won't happen.

GIGOT: All right. It's a shame.

All right, when we come back, a showdown is brewing between the White House and Congress over new Iran sanctions. So will Senate Democrats stand up to President Obama's veto threat?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

OBAMA: Our diplomacy doesn't work with respect to Iran where, for the first time in a decade, we have halted the progress of its nuclear program and reduced its stockpile of nuclear material. But new sanctions passed by this Congress, at this moment in time, will all but guarantee that diplomacy fails and that's why I will veto any new sanctions bill that threatens to undo this progress.

(END VIDEO CLIP)

GIGOT: President Tuesday night touting progress in nuclear negotiations with Iran and warning Congress that he'll veto any new sanctions as talks continue, setting him on a collision course with members of both parties. On Wednesday, House Speaker John Boehner sidestepped the White House and invited Israeli Prime Minister Benjamin Netanyahu to address Congress next month about the growing threat from Tehran.

And Senator Robert Menendez, the top Democrat on the Foreign Relations Committee, had this to say about the administration's diplomatic approach.

(BEGIN VIDEO CLIP)

SEN. ROBERT MENENDEZ, D-N.J.: Iran is clearly taking steps that can only be interpreted as provocative, yet the administration appears willing to excuse away any connection between these developments and signs of Iran's bad faith in negotiations.

I have to be honest with you, the more I hear from the administration and its quotes, the more it sounds like talking points that come straight out of Tehran.

(END VIDEO CLIP)

GIGOT: Dan, striking language from a member of the president's own party. Why aren't members of both parties challenging the president so strongly on Iran?

HENNINGER: Well, I think the reason, Paul, is we have arrived at a point where the members of the Senate who work on these subjects have lost faith in the president's ability to negotiate a secure agreement with the Iranians. And the specific point there we showed the president saying he had halted the progress of their program. Look, in nuclear arms negotiations, every detail, every phrase is vetted carefully. Why did he say "halted"? Because the arms control community immediately jumped on this and said, this is not true.

GIGOT: They're still enriching uranium.

HENNINGER: They're still enriching uranium, low-grade uranium, storing it. They're still working on their centrifuges, not adding more, but working on the production of those centrifuges. So if the president's view is so far from the reality, then Senator Menendez I think is entitled to say that they are not doing a deal that he can support.

GIGOT: Mary, do you agree with the speaker's decision to invite Prime Minister Netanyahu without asking the White House first?

O'GRADY: I think it's completely -- obviously, it's completely within his rights.

GIGOT: Right.

O'GRADY: And I think it's the right thing to do because the president is not being straight with the American people. I mean, not only did he say in the State of the Union that they had halted the program, but he also talks about these proposed sanctions as if they're talking about putting them on now. The reason the word "dead" is in "deadline" is it's supposed to mean that when you reach that point, the talking is over and they have to deliver by June 30th.

GIGOT: And they have extended it twice already.

O'GRADY: Exactly. So all of the Republicans and Bob Menendez -- it's a bipartisan effort -- are talking about doing is saying to Iran, if we get to that deadline and you don't have an agreement, this is -- we're going to put new sanctions on.

GIGOT: But what about those who say that the invitation to Netanyahu was needlessly disrespectful of the president who, after all, is the person who has to negotiate and deal with these heads of state.

O'GRADY: Well, I think we're talking about something so serious here. I mean, this isn't a domestic issue that the Congress and the president can debate back and forth, and be changed in the next term if there's a Republican president. This is something that if Iran goes forward with its nuclear program, will change not only things between the U.S. and Iran, but will change the contour of the Middle East forever with an arms race developing. That's extremely dangerous for the world.

GIGOT: Kim, on the politics of this, I wonder where you think these - - the challenge is going to go. Because you have the Kirk-Menendez bill, on the one hand, which would do what Mary said, you ramp up sanctions if there's no deal, and then you have an effort by Senator Bob Corker, the Republican of Tennessee, also bipartisan, that would say, Congress must vote on any deal that the president sends up with Iran. Are either of these likely to pass?

STRASSEL: So you currently have 12 sitting Senate Democrats that have in the past all cosponsored legislation to impose new sanctions on Iran. That's an important number, Paul, because you begin to get, when you add them to Republicans, the number which you could override the presidential veto.

GIGOT: Close.

STRASSEL: However --

GIGOT: That would be 66. You need 67.

STRASSEL: 66, you need 67, but you're getting close. And that's why you see enormous pressure coming from the White House at the moment to get some of these people to back down. And you are seeing some Senate Democrats back down from that.

The Corker legislation may have more of an immediate impact and more momentum, only in that it gets into congressional prerogative. A lot of people on both sides of the aisle like that, giving Congress some control over saying whether or not an ultimate deal gets their stamp of approval. And a little bit of an insurance policy and, hopefully, a little bit of a way of keeping the president in line in negotiations. So there's a lot of interest in that.

GIGOT: Briefly, Dan, a lot of members of Congress are think, why shouldn't this be treated as a treaty since, as Mary suggested, it's so serious?

HENNINGER: All the arms agreements, virtually all the arms agreements of the Soviet era, from the 1970s through the 1990s, were treaties, which were sent to Congress sent there for ratification. The two that were not were sent there for a joint resolution vote. The Corker amendment is what has traditionally been done with these agreements.

GIGOT: All right, Dan.

We have to take one more break. When we come back, our "Hits & Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Time now for "Hits & Misses" of the week.

Dan, start us off.

HENNINGER: Well, Paul, I'm going to give a big hit to the new Clint Eastwood movie, "American Sniper," which I saw the other night. And not merely because it's about the legendary sniper, Chris Kyle, but it really does depict the sacrifice and commitment that the Marines and soldiers made to pacify Iraq. I mean, the psychological, personal, physical toll is extraordinary. It's very touching because, as we know, President Obama pulled all of the troops out in 2011 and allowed Iraq to fend for itself. Islamic State has now retaken the area that these guys sacrificed to grab for us. It was just awful.

GIGOT: All right, Dan.

Kim?

STRASSEL: We now have 42 cases of measles linked to Disneyland in California. Those numbers are likely to rise. This is part of a disturbing new trend in the United States. Over 611 cases of measles last year, which is more than three times the year before. So this is a miss, once again, to the anti-vaccine community, which continues to spread falsehoods about vaccines, including that it causes autism. We have got to start getting the real information out about this. It's dangerous for kids.

GIGOT: Thanks, Kim.

And, James?

FREEMAN: Well, in some cases, deflation can be a good thing, but not when it comes to football.

(LAUGHTER)

So this is a miss to the New England Patriots who played last week with underinflated footballs, which makes it easier to throw and catch. Tom Brady, the quarterback, and Coach Bill Belichick have denied involvement, but this is a problem for a franchise that has been caught for much more serious cheating in the past. You'd hate to think that this is going to go down as the McGwire/Sosa era of football. But at the press conference this week, Tom Brady, he said, basically, it wasn't as bad as ISIS.

(CROSSTALK)

So that's where we're setting the bar? I'm sure former player Aaron Hernandez hasn't been accused of--

(CROSSTALK)

GIGOT: All right, James.

FREEMAN: Disappointing.

GIGOT: The free blitz on Belichick by Freeman.

That's it for this week's show. Thanks to my panel and all of you for watching. I'm Paul Gigot. Hope to see you right here next week.

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