Is the Third Way Finished?

In the last two years of his administration, Bill Clinton hosted
three conferences on the "Third Way" that included British Prime Minister Tony
Blair, Dutch Prime Minister Wim Kok, Italian Prime Minister Massimo D'Alema,
French Prime Minister Lionel Jospin, and German Chancellor Gerhard Schröder.
Three years later, only Blair and Schröder are still in office, and
Schröder may be gone by the end of September when he is up for re-election.
Does this mean that the third way is finished, as the German newspaper Die
recently concluded?

As a movement of elected heads of state, it is certainly kaput, at least for
the time being -- a victim of schisms on the left, imperfect execution, and the
post-September 11 fear of immigrants. But it remains the primary political
philosophy of the Democrats in the United States, Labour in Britain, and some of
the Social Democratic -- and even Christian Democratic -- parties in Europe. It is
the only politically viable alternative to laissez-faire conservatism and the
populist right, as well as to socialist or social-democratic politics of the old
left. Its main contribution has been in defining a new approach to economics, but
Blair and Clinton have developed foreign and social policies that could also be
defined as third way.

FOREIGN POLICY: Prior to the 1990s, both the Democratic Party in the United
States and the Labour Party in Britain were identified publicly with politicians
who distrusted the use of military force. In 1983 Labour was led by Michael Foot,
a pacifist pledged to unilateral disarmament. In 1991 most Democrats voted for
using economic sanctions rather than force to expel Iraq from Kuwait. By
contrast, Clinton and Blair used force in the Balkans when diplomacy failed, and
they accepted the importance of military power as a weapon in diplomacy. But
Blair and Clinton used force in order to create a new democratic community of
nations. They removed the stigma of pacifism from their parties, but on behalf of
a post-Cold War liberal internationalism.

SOCIAL POLICY: Prior to the 1990s, many Democrats dismissed a commitment to
"law and order" as Republican racism. They fretted more about rehabilitating the
perpetrators of crime than about caring for the victims of crime. Clinton managed
to reclaim law and order for the Democratic Party. Similarly, Blair outflanked the
Tories on urban crime, pledging to bring New York Mayor Rudolph Giuliani's "zero
tolerance" policies to England. Both men also deflected critics of the welfare
state by insisting that welfare spending had to link rights with

ECONOMIC POLICY: American liberals were not socialists, and soon after World
War II, European social democrats abandoned the quest to create a socialist
society. Instead, they sought to forge a regulated capitalism in which government
would guarantee full employment through selective nationalization, deficit
spending, trade protection, and strict labor regulations, and in which organized
labor would demand and get a constantly rising standard of living. Some version
of this strategy worked through the 1960s, but it depended on conditions peculiar
to an older industrial capitalism that ran more smoothly with stable, lifetime
employment and that was insulated from capital movements and global currency
speculation. By the mid-1970s, caught up in these new currents, the American and
European economies had begun to suffer from slow growth and unemployment.

Clinton, Blair, and Holland's Wim Kok attempted to devise a center-left
economic strategy appropriate to a new post-industrial capitalism that depended
on a market-driven process of creative destruction -- on the prevalence of
spin-offs, start-ups, and temporary and part-time workers, and on both low-wage
and high-wage service industries. Its hallmark in practice was letting the market
dictate (within limits) investment and jobs, but using government in a
traditional liberal manner to make workers more competitive and to protect them
from illness and poverty. Clinton rejected Keynesian demand management and trade
protection, but he also tried, against concerted opposition, to expand access to
health care, protect Social Security, increase spending on education, and
alleviate -- through measures such as the Earned Income Tax Credit -- the growing
inequality that is endemic to this new knowledge-based capitalism.

Blair forced Labour to adapt its rhetoric to reality by junking Clause IV in
its constitution, which had committed the party to nationalization of industry.
He removed government from everyday monetary policy and didn't attempt to undo
Margaret Thatcher's efforts at deregulation, but he tried to strengthen education
and the safety net. In his second term, he has finally turned his attention to
Britain's decaying National Health Service.

Kok showed that if third-way governments paid attention to the market needs of
the new economy, they could maintain very generous welfare systems. Under Kok,
Holland had some of the most generous benefits but also the highest rate of job
growth on the continent. There were two secrets to Kok's success, both of which
are best understood by contrasting the fate of the Dutch and German economies of
the 1990s.

First, as head of the Dutch labor federation in the 1980s, Kok oversaw a wage
agreement that held down wages over the next two decades and spurred new
investment. In the 1980s and 1990s, real wages in manufacturing in the
Netherlands grew only 0.4 percent a year, compared with 1.5 percent in Germany.
According to Ronald Schettkat of Utrecht University, the lower costs in the
Netherlands made possible a boom in trade and employment, while higher wages in
Germany have held down growth and employment. By 2000, Dutch unemployment was at
2.6 percent, the lowest in Europe, while Germany's unemployment was hovering
around 10 percent.

Secondly, under Kok, the Dutch did not tighten -- and in some instances
reduced -- labor regulations that prevented firing and layoffs and that discouraged
part-time and temporary workers. As a result, their service sector boomed in the
1990s -- rising to 49 percent from 33 percent of the workforce -- while Germany's
over-regulated service sector only grew to 38 percent from 34 percent.

Of course, this third-way strategy has not been without problems. Third-way
governments must choose between easing inequality and discouraging growth, and
between fulfilling social needs through government spending and meeting budgetary
targets. Blair clearly faces a dilemma in trying to finance an improvement in
Britain's health-care system. But it is not as if a center-left government can
avoid these choices.

The third way has been at least a partial political success.
Clinton was the first Democrat re-elected since Roosevelt; and Blair was the first
Labour prime minister ever to succeed himself. Democrat Al Gore was narrowly
defeated in 2000, but certainly not because the public rejected the politics of
the third way. The American public continues to support the Clinton-Blair
third-way assumptions on Social Security, health care, pensions, and education,
and to oppose the conservative alternative of privatization.

In Holland, Kok's party was thrashed by the Christian Democrats, who
gained a plurality of seats, and by the late Pim Fortuyn's party. Nevertheless,
the election was not a repudiation of third-way politics. The ruling Christian
Democrats will follow a third-way strategy of spurring market growth while
safeguarding workers and enhancing their productivity. (In the campaign, the
Christian Democrats called for increased health-care spending.)

Part of what hurt the Dutch Labour Party was its social policy, which dated
from the 1960s New Left. Kok's administration ignored urban crime, much of it
committed by immigrants, leaving an opening for Fortuyn who ran as a kind of gay
Giuliani against the Dutch equivalent of liberal David Dinkins. Kok's party also
passed laws legalizing gay marriage and euthanasia, which contributed to the
landslide vote in the Dutch countryside that came from socially conservative (by
Dutch standards) Christian Democrats.

If you want a clear indication of what happens when liberal or left-wing
politicians spurn the third-way economic strategy, look at France's Jospin or
Germany's Schröder. Jospin attended one of Clinton's third-way conferences
but clung to the rhetoric of the socialist past. "We are not 'liberals of the
left', we are socialists," he declared. Yet Jospin sought to privatize France's
state-owned industries. As a result, he confused his political base (much of
which stayed away from the initial vote or backed splinter groups) without
attracting the kind of new middle-class voters that have flocked to Britain's
Labour Party or the Democratic Party here.

Schröder still claims to be the follower of the third way, but his Social
Democratic Party has failed to challenge the status quo of high-wage costs,
driven by an aggressive labor movement, and draconian labor regulations that make
it extremely difficult to lay off or dismiss workers, or to hire temporary or
part-time workers. While these regulations have protected the already employed,
they have held back the growth of a new information economy and the spread of a
low-wage service sector that could reduce Germany's chronically high jobless rate
by employing young and unskilled workers, including millions of immigrants.

America's Democrats, Schröder, Jospin, and Kok have all suffered from the
after-effects of September 11. France's Jean-Marie Le Pen, Holland's Fortuyn, and
Germany's Christian Democrats and Conservative Social Union have fanned fear of
immigrants to the detriment of the democratic left. If Europe were to endure a
decade of economic stagnation, one could certainly imagine even the most creative
third-way parties being marginalized by the populist right. Similarly, if
America's war on terrorism were to last a decade, it is possible to imagine the
Republicans, who still enjoy an advantage on security issues, leaving the
Democrats in the dust. But it's likely that the European hysteria about
immigrants will eventually abate, along with the threat of Osama bin Laden. When
that happens, Europe and the United States will be ready to consider again the
politics of the third way.

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