Guide The Economics of the Third Way: Experiences from Around the World

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One of Tony Blair's first major decisions was to confer independence on the Bank of England, and he has kept within the taxing and spending limits established by his Tory predecessor. Socialist Lionel Jospin came to office last year vowing to make jobs, rather than deficit reduction, his top priority, but since then he has radically trimmed France's budget. He had little choice if France was to qualify for membership in the euro currency union, but the economic recovery helped the country achieve the goal. If this were all there was to it-deregulation and privatization, free trade, flexible labor markets, smaller safety nets, and fiscal austerity-the Third Way wouldn't be a third way at all.

It would be the Second Way, blazed by Reagan and Thatcher. But there's more, and here's the crucial difference. The distinct theme uniting Blair, Clinton, Schroeder, and Jospin is that the economically displaced must be brought along. Rather than redistribute income to them as was the strategy of the First Way , the idea is to make it easier for them to obtain good jobs and thus become economic winners.

The central faith of the Third Way-a faith based, admittedly, more on hope than experience-is that the economic growth spurred by its free market policies can be widely shared if those who are initially hurt by them are given the means to adapt. This was the heart of the public philosophy with which Bill Clinton came to office, and I believe it still animates much of what he tries to do when he's not dodging Republican bullets or apologizing for his indiscretions. It's also central to Al Gore's approach to government.

It has been the conceptual force behind administration proposals for improving schools, broadening access to college, and providing opportunities for lifelong learning and retraining. And it has guided the many initiatives to help people into jobs and then to make the jobs pay enough to live on-the expanded earned income tax credit to subsidize low-wage work, the higher minimum wage, the tax incentives for moving jobs to the inner cities, the micro-enterprise banks, and the proposals for child care and health care.

Importantly, it is a moral precept as well as a policy idea: work is the core responsibility. If people are willing to work hard, they should have a job that pays enough for them to live on. In order to qualify for such a job, they should have access to adequate job skills. If that's not enough, their job should be subsidized. It's a win-win catechism: governments should not try to block change.

They should not protect or subsidize old jobs in old industries or keep unemployed people on the dole.

The Economics of the Third Way

Instead, governments should embrace economic change, but-and here's the sharp break from Reagan and Thatcher-they should do it in a way that enables everyone to change along with the economy. Such broadly based change will not happen automatically. Financial capital adapts much more easily to changed circumstances than do people. People often have the wrong skills or no skills, or they're in the wrong places, or they're burdened with costs and responsibilities that make it hard for them to work.

So it follows that government must be actively involved-helping people over the fence. Look closely at the plans of other Third Wayers around the world and you see roughly the same set of proposals. What's Tony Blair up to when he's not pursuing the free market policies of his predecessors?

Promoting education, training, lifelong learning, a "working families tax credit" for lower-income workers, a minimum wage, tax incentives for business relocation into poorer areas, and so on. Schroeder and Jospin advocate similar policies.


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It's not the old left's activist government, which preserved and protected. It's not the right's absent government, which let people drown. It's a Third Way. All of this makes good sense in theory I am a biased observer, remember. But after six years of Bill Clinton's Third Way, the wisdom of hindsight suggests some skepticism may be in order. It is not that the goal is wrong or insincerely held. It is that the politics of pursuing the Third Way are more perilous than anyone assumed.

And even controlling for the uniqueness of the American political system and the obduracy of a conservative Repub lican Congress, those perils are likely to show up elsewhere around the globe. Any serious attempt to lead a nation toward a Third Way will have to cope with them.


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Begin with the awkward lineage of the Third Way. As a political hybrid, it has no natural parents-no preexisting constituencies. This makes it vulnerable to the short-term whims and winds of politics. Political leaders can ride for a time on the goodwill an electoral victory confers upon them, but eventually they will need to count on the passion and commitment of groups who firmly believe in the direction the leaders want to take them in. Political movements may be catalyzed from the top, but they need to draw their sustaining energy from the bottom.

The Third Way, however, has no grass roots. The constituents went along, ultimately. And they reluctantly acceded to deregulation, fiscal austerity, and welfare "reform. And then, invariably, came the refrain: "Oh sure, America is creating millions of new jobs. And I've got three of them. The American economy is surely much better now than it was several years ago, but the skepticism remains. A current job in danger of being lost presents a more powerful incentive for political action than does the abstract possibility of a new job, even one that might pay slightly more.

Bill Clinton was confronted with a hostile Congress last year when he tried to get authority to move trade treaties without amendment, and, more recently, when he sought extra funding for the International Monetary Fund. And the hostility was not limited to Democrats. A majority of Republicans first elected to office in or objected to both initiatives. In a poll taken in December by the Wall Street Journal , 58 percent of respondents agreed that foreign trade is "bad for the U.

When the economy slows and unem ployment rises, trade can only grow less popular. In theory, of course, it's possible to rally the support of people who might otherwise be hurt by economic change-if change is made sufficiently attractive to them. Give them a sense of real opportunity; show them that good jobs await them.

But to do this credibly requires money: schools have to be good enough, college has to be truly accessible, and retraining has to be state-of-the-art. When someone has to settle for a lower-paying job, the wage subsidy has to be sufficiently generous to make up for much of the difference. When no private-sector jobs are available, the public sector has to step in with them quickly.

And other supports need to be in place-child care, good public transportation to and from jobs, health care-so that it's easy as a practical matter to adapt to the new circumstances. Even moving people from welfare to work is costly if it's done in a way likely to keep people in their new jobs. Getting them off welfare is simple: just stop doling it out.

2. This cause aligns with timeless American values.

And a tight labor market can go a long way toward getting them jobs. Constructive criticism is healthy; lazy negativism is not. I want to lay to rest some of the myths around the third way. It is not a third way between conservative and social democratic philosophy.


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  8. It is social democracy renewed. It is firmly anchored in the tradition of progressive politics and the values which have motivated the democratic left for more than a century. It is a third way for Britain because it represents a third phase of post-war history-following the settlements of and It is a third way for the left too.

    In the last century, the tradition of social liberalism emphasised individual freedom in a market economy. Social democracy used the power of government to advance social justice. The third way works to combine their commitments in a relevant way for the 21st century. The new progressive politics has two driving concepts behind it.

    Non-Capitalist Economies and the Postcommunist Transition

    First it defines a new role for collective action-national and local government, voluntary and community organisations, trade unions-which advances the interests of the individual. The purpose of such action is to empower individuals to fulfil their potential and meet their responsibilities. It is not about dictating to the individual; it is not about the supremacy of the collective good over individual aspirations. It is there to help people make the most of themselves, recognising that in unequal societies, in the absence of such collective help, only the privileged few will get the chance to succeed.

    But it does not stand for rigid forms of state ownership or provision. It is pragmatic as to whether public or private means are the best delivery mechanism. This is why reform of public services and of the role of government are high on the policy agenda of every progressive government. Secondly the third way represents a historic realignment of economic and social policy, at a time when the old boundaries between economy, state and society are breaking down. For years, the economic framework of the British left was dominated by questions of public ownership.

    Markets were poorly understood, their obvious limits leading the left to neglect their great potential for enhancing choice, quality and innovation. When the contradictions and economic inefficiencies of communism, and even some of the planning of traditional democratic socialism, finally became evident, it seemed easier for the left to opt out of serious economic policy. This was, and is, a position of wholly unnecessary defeatism and weakness.

    We Are All Third Wayers Now

    In reality, a whole new economic agenda is before us, one that sharply divides the centre-left from the right, and which plays to our strengths. Effective markets are a pre-condition for a successful modern economy. The question is not whether to have them, but how to empower individuals to succeed within them.

    What used to be socially important is now an economic imperative. Individuals need opportunities as well as safeguards within the market-above all opportunities to gain new knowledge and skill to develop their potential. Without the assertion of equal worth, without the extension to all of basic entitlements at work, and without investment in their talents, both economy and society are impoverished. Social exclusion, poor education, high unemployment, racism and sexism, are not just socially wrong but economically inefficient.

    A tough criminal justice system which does not tackle the causes of crime never works. That is why the social indifference of laissez-faire seems so bankrupt-as an economic as well as social policy. In the UK, we have the opportunity to combine values traditionally associated with Europe-fairness, solidarity -with the economic dynamism traditionally associated with the US. But our insights about collective action and political economy, apply not just to our country, but to relations between countries. Nations, to be powerful as well as successful, need to work in alliance together.

    The problems can be tackled in no other way. The intellectual ascendancy of these ideas does not provide grounds for complacency. Governments can only win re-election if they deliver, and work each day to earn trust. But successful delivery is just the start; re-election depends on renewal, and the development of new ideas based on close analysis and real imagination. That is why it is important to understand the nature of the new phase we are in. In the s the arguments for the third way in Britain were pitted against the still strong forces of the new right and the old left.

    1. This cause reflects voters’ lived experience in the Digital Age.

    The new right argued that problems of inequality, social exclusion and long-term unemployment were the price of a dynamic economy. The old left increasingly saw that the old nostrums-nationalisation, crude demand management, even protectionism-were inadequate, but insisted that revisionism was no different from capitulation. The challenge for centre-left parties was to show that while economic and social change had destroyed traditional models of socialism, new means could serve old ends. Here our record in government is important.

    Unemployment, child poverty and crime in Britain are down; school test results, nurse and doctor numbers, capital investment, are rising sharply. Revived progressive parties have proved their competence in government. Having successfully colonised the political mainstream, we can now reshape its content.

    But the world has not stood still since the early s, and neither must we. And, after two decades of almost exclusive focus on the economy, it has put itself in a position to be able to address those social issues more actively although that approach is still likely to be combined with economic interests If re-politicisation is required to pursue democracy, it may also reopen the door to bad politics. In that sense, re-politicisation contains both great opportunities and enormous dangers that have the potential to push China forward or roll the country back on its road to development, particularly when people are unprepared for it.

    It should be noted that establishing a focus on the economy was never easy, and was almost tantamount to a regime change. Upholding it could prove even harder. That determination of policy, drawing on the painful past experience of lost economic opportunities as well as on current personal, factional and Party interests, etc.

    Many post-communist countries, including Russia Without persistently putting its shoulder to the economic wheel with hard-devised strategies that will assure victory, a reformist leadership may accomplish no more than lip service, or disservice, through endless economic and political chaos. The point is that no matter how important a general public policy is to politicians, it is the people that have the highest stake in it.

    In this regard, the notion of development as a right declared by the United Nations in should be heeded Recently, for instance, some figures who questioned the move by the United States towards war against Iraq were pressured off the political scene.

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    This is not surprising even in a Western democracy if the concerns were considered only as particular, sectoral policy-making issues with immediate consequences in international relations. However, if they were expressed in terms of the general public policy and whether the country would be led down a non-developmental path, then the close monitoring and questioning would be fully legitimised.

    As the people have the right to development, they have the right to be concerned about the general public policy of their state and of other states in the world, for these will no doubt affect their lives in a global environment. The concern in the case of Iraq is, on the surface, one of whether the Iraqi general public policy is anti-developmental in both a national and international sense and whether a regime change could be justified, as in Afghanistan, and how.

    The deeper issue is whether warfare will take control of the general public policies of the nation-states and bring about more rather than fewer non-developmental cases or periods This discussion would be more meaningful than general talks on peace vs. The most obvious evidence is its ending of the Cultural Revolution and its bold measures to unilaterally cut its armed forces by one million under Deng Xiaoping and half a million again under his successor Jiang Zemin. This difference in the general public policies of the nations will not be able to facilitate the process unless changes forced or conscious take place in either or both of them.

    The study of general public policy is first concerned with the non-developmental vs. Although there is always a mix and no pure pattern will be found in reality, some theoretical archetypes e. It should be noted that the recognition of different general public policy patterns, particularly the classification of practical paradigms, may be a matter of academic controversy and even political confrontation.

    For instance, some Americans and others may argue that American governments often, if sometimes forced to, put at least moderate emphasis on the stimulation of economic growth. It should also be noted that the meaning of the theoretical archetypes and the characterisation of practical paradigms are constantly changing or developing, as should our understanding. For instance, the Chinese economic state has been attributed very different importance in the post-Mao era compared with the Mao era.

    There are just and unjust wars, and politics may hinder or liberate productive forces. For instance, although confrontations are often costly and destructive , while they are overbearing they will seldom gain appreciation and reciprocal benefits even in cases where international policing or peace-keeping is needed However, from a long-term point of view, there is historical evidence that the economic and welfare states can be considered developmental states while warfare and political-ideological states are non-developmental or counterproductive.

    Because of the importance of the general public policy in its effect on all sectoral policies, the problems we face in developmental studies are firstly issues confronting the different policy paradigms. The Chinese case shows that de-politicisation has largely resulted in the ideological issue of socialism vs. Chinese communists, of course, would hardly accept such a label as pragmatism for what they have been doing, though switching from dogmatism to pragmatism was necessary for de-politicisation. This serious developmental issue has led to a Western-wide movement towards welfare reform, which is also part of the reason why China will not become a welfare state, at least in the near future.

    However, this reform has not produced its expected effects The key is that pro-work welfare reform requires a good economy In fact, the idea of workfare is nothing new, and the reliance on behavioural change has never been successful in addressing welfare as an economic issue. If we look at China, the lesson is different but bears on the same point.

    Just as the dilemmas of the welfare state have led to welfare reform, the problems of the economic state have led to economic reform. Studies of socialist welfare in Eastern Europe also contain similar implications In contrast, Western welfare reform has not been a successful economic reform since it has not found an effective way to link welfare with work.

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    Yet the broader lesson to be shared by the welfare and economic states is that welfare reform and economic reform must go hand in hand. And the primacy of the economy in development must be recognised and reflected 35 , however differently, in the general public policies or development strategies of both economic and welfare states. Others talk about its resilience in the face of current challenges 38 and argue that the welfare state will continue to spread around the world These declarations, however, can hardly be fruitful without a new path being mapped out for the economic future of the welfare state.

    In this regard, attention needs to be paid to a recent effort that attempts to re introduce to social policy in the West the idea of development in its basic economic sense. Among the scholars, an outstanding advocate of the developmental approach to the future of the welfare state is Midgley