Is the Third Way a new public philosophy likely to shape capitalism in a postcommunist twenty-first century? Or is it, as some from both ends of the political spectrum suspect, little more than a watered-down version of Reaganism-Thatcherism: less a new movement than a pragmatic, if not cynical, means of keeping liberals mollified while continuing the long-term shift rightward—a global version of Dick Morris's "triangulation"? Years ago, the "Third Way" referred to Sweden's social democratic middle ground between capitalism and communism, but in recent years the term has taken on a more varied meaning. Around Boston the "third way" describes the back route to Logan Airport, avoiding the tunnels. Others have used it in reference to a novel position for having sex. But when Britain's Tony Blair used the phrase in his successful bid to oust the Tories in 1997, he had something different in mind: a set of public policies equidistant from Margaret Thatcher and Old Labour, redolent of Bill Clinton's winning New Democratic formula of 1992. Since then, most of the newly elected left-of-center leaders of Europe—including Germany's Gerhard Schroeder and France's Lionel Jospin—have committed themselves to some variation of the Third Way, and Bill Clinton himself has been using the term with increasing frequency. (In an early warm-up speech for the next presidential election, Al Gore recently substituted "practical idealism," but it's essentially the same idea.) The White House and 10 Downing Street have even had discussions about establishing a loose international group of Third Way leaders.
As one of the contributing progenitors of Clintonism, I saw the original Third Way up close. And in the two years since I left the administration I've also spoken with left-of-center political leaders around Europe and elsewhere, seeking to understand where they're heading. My verdict: There is a Third Way. But it's going to be extremely difficult to implement. Third Way politics are perilous. And Europe's new left-of-center governments will be sorely tempted to claim they're implementing it while in fact achieving something far short of the goal—which is precisely what has happened in the United States.
Philosophy of the Third Way
The Third Way has no formal statement of principles (and probably never will, even with the ministrations of Clinton and Blair). Moreover, the Continental version is clearly to the left of the Anglo-Saxon one. But several common ideas lie at the core.
First: The Third Way rejects state ownership of the economy. This was never much of an issue in postwar America. Here, the closest analogy has been government regulation, where Bill Clinton's Third Way has largely followed the same path as his Republican predecessors' agenda, recently culminating in deregulation of telecommunications, electricity, and banking. In Britain, where state ownership had remained a glint in the eye of Old Labour, Tony Blair renounced the ambition early on. German Social Democrats used to talk about slowing down the privatization of former East German industries. No longer.
Second: Global trade and investment are inevitable, even desirable. Bill Clinton endorsed the North American Free Trade Agreement when he was running for president in 1992, got it enacted (to the severe discomfort of organized labor), went on to sign a new General Agreement on Tariffs and Trade which yielded a new World Trade Organization, and ran into trouble only when he tried to get congressional authority to move trade treaties quickly through Congress without amendment. But he's still trying. And Tony Blair is an outspoken trade enthusiast. While other center-left governments in Europe are hardly euphoric over free trade, none resist it. Schroeder and Jospin have talked vaguely about slowing down speculative flows of global capital and perhaps conditioning global commerce on some minimal social standards, but they have no interest in blocking trade and investment outright.
Third: Labor markets should be reasonably "flexible"—that is, wages should be allowed to move up and down in response to changes in demand, and employers should have wide latitude in hiring and firing employees. Apart from some general talk about "corporate responsibility," Clinton has refrained from criticizing profitable companies that sharply downsize. Nor has Blair opted to constrain management. Jospin's French Socialists recognize the need for more flexibility, although Jospin is sticking to his plan to impose a 35-hour workweek. Germany's Schroeder talks openly about the need for Germany to become more competitive by cutting labor costs, although there's still quite a bit of confusion about what he intends to do.
Fourth: Social safety nets must be trimmed, and able-bodied people put to work. Bill Clinton campaigned to "end welfare as we know it," and ended up signing a law giving people a maximum of five years of welfare during their lifetimes. Tony Blair wants to move away from a guaranteed minimum family allowance. Here, too, Third Wayers in continental Europe and elsewhere are following behind, although more tentatively. They want to make the welfare state more flexible, not necessarily smaller.
Finally: Budget deficits must be slashed. Bill Clinton led the charge, leaving macroeconomic policy largely in the hands of Alan Greenspan and his fellow bankers at the Federal Reserve Board. 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. 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. 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.
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.
When Bill Clinton came to office, traditional Democratic constituencies—the AFL-CIO, teachers, California liberals—were hardly enamored of his free market leanings. The North American Free Trade Agreement, in particular, was roundly condemned. The constituents went along, ultimately. And they reluctantly acceded to deregulation, fiscal austerity, and welfare "reform." But they have never accepted the basic premise—that education, retraining, wage subsidies (like the earned income tax credit), and the rest of the mix would compensate for the larger insecurities of a freer market. "Retraining for what?" I used to be asked. 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. "Globalization" remains unpopular in America, not only among blue-collar voters but across the board. 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 1994 or 1996 objected to both initiatives.
In a poll taken in December 1998 by the Wall Street Journal, 58 percent of respondents agreed that foreign trade is "bad for the U.S. economy, because cheap imports hurt wages and jobs," while only 32 percent thought the trade was "good for the U.S. economy; it creates foreign demand, U.S. economic growth, and jobs." That this lopsided response occurred at a time when unemployment was at its lowest rate in more than 30 years is all the more remarkable. 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. And a tight labor market can go a long way toward getting them jobs. But if they're to remain employed they often need help. The welfare-to-work proposal that first emerged from Clinton's Department of Health and Human Services in early 1994 was estimated to cost almost $2 billion a year more than was then being spent on welfare payments, because it included job training, child care, health care, and public-service jobs if no private jobs were available. It was a political nonstarter.
The usual bromide offered by economists is that all change requires some pain. People will change only if they have to. This may be correct as a matter of economic theory, and it may even have some basis in behavioral psychology. But it ignores social and political reality. The social reality is that, for many people, change is exceedingly difficult. Even when an economy is speeding along on all cylinders, many people still can't find and keep a job that pays enough to live on. The political reality is that citizens who rationally fear they'll bear most of the burden of economic change and enjoy few of its benefits will resist it. In a democracy, their resistance will take the form of support for (and support of candidates who promise) job protection, trade protection, subsidies for old industries, and cushy safety nets. And such determined resistance will assuredly hobble the Third Way.
Here's the brick wall of the dilemma, into which Clinton crashed headlong (and so eventually might Blair, Jospin, and Schroeder). There are only two ways to raise the money that's needed to make economic change politically palatable. If the extra money comes from more government borrowing, the bond markets get nervous. There's no right-wing conspiracy of international financiers at work here. It's simple logic. If lenders and their intermediaries suspect that borrowers are going to live beyond their means (in the case of governments, that means spending more than they recoup in taxes), lenders will naturally charge a higher fee to cover the added risk. Left-of-center governments carry a higher burden of proof in this regard than conservative ones because their traditional constituents have wanted their governments to spend more money on them, and the bond markets know that. This was part of Clinton's dilemma. The deficit had swelled under his Republican predecessors. But he was even more constrained than they were, because he had to prove he could be trusted to control it. Hence, the necessity of fiscal prudence. Clinton had to slash the budget deficit before interest rates would come down. All Third Way governments have to demonstrate similar fiscal prudence.
This leaves only one other required source of money: the better-off members of society have to pony up. Their taxes must be raised. In theory at least, the better off should have no problem with this. After all, they're the ones who will gain the most from the move to an unfettered market, because they already have the education, skills, and social connections to virtually guarantee themselves (and their progeny) the best jobs. They should be willing to commit some of this gain to help those who are less well situated across the great divide, in return for their cooperation in unfettering the market.
But political reality is messier. Before they part with any of their burgeoning income, the wealthier will resist. And they have an ever-expanding arsenal at their disposal—campaign contributions, lobbyists, issue advertisements, and a plethora of conservative magazines and think tanks. In 1993, Bill Clinton narrowly (by one vote) passed a budget through a Democrat-controlled Congress that raised income taxes on the top 1.5 percent of citizens. (The fuel tax, also enacted, had no practical impact on most people because fuel prices declined.) But that was the last of it. Since then, taxes on the wealthy have been steadily lowered.
This puts Third Way governments in a quandary. It means that the overarching agenda—to liberate market forces while easing the transition for those who would otherwise fall behind—has no natural core of strong support among the electorate. Support won't be found among the traditional left, many of whom would rather protect and preserve the old economy. Nor will it be found among the conservative right, many of whom are flourishing in the new economy and don't want an activist government taking their money away.
The Clinton administration's record offers a case in point. Some of the President's proposals have been enacted, to be sure, but few on the scale necessary to make significant progress toward a Third Way. Most education and training initiatives have been meager relative to the overall need. The expanded earned income tax credit is significant but has no sustained public support (most of the public doesn't even know it exists) and thus is vulnerable to budget cuts. Tax incentives for industry to create jobs in poor inner cities have hardly been up to the task, and the micro-enterprise banks have barely gotten off the ground. Proposals to expand health care and child care have resulted in marginal gains, but the need has grown even faster. As a result, a larger portion of the American public lacks health care and child care today than was the case before Bill Clinton came to office.
Any future Third Wayer (or "practical idealist") is likely to face precisely the same problems. Scandals aside, Bill Clinton's popularity has reflected the health of the economy, but there is no strongly committed base to champion a Third Way agenda. One overt measure of that absence is evidenced by the current debate over what to do with the budget surplus, now estimated to reach $10.5 trillion over the next ten years. In response to Republican demands that the surplus be applied to tax cuts, Clinton was forced to play the old Social Security card, arguing that the surplus should be saved in order to keep Social Security solvent beyond 34 years from now, when it is projected to be able to pay only 75 cents on every dollar of promised benefits.
Such advanced planning may be commendable but has little to do with the Third Way. Social Security isn't in trouble. Its solvency could be guaranteed through the next century by means of small increases in amounts paid into the system or small decreases in amounts paid out (ideally, in either case only affecting the more affluent). Moreover, using Social Security as a bulwark against tax cuts has given Republican tax cutters an opening: all they need to do is argue that once the projected budget surpluses are high enough to cover the projected Social Security shortfall, every remaining dollar of surplus should be given back in the form of a tax cut. And since most tax revenues are collected from people who earn the most, the financial benefits of any cut will be enjoyed primarily by people who have already safely crossed from the old economy to the new. Had the President been able to cultivate a strong constituency committed to the Third Way, he could have drawn upon them to make the case that the surpluses be used to help equip all Americans for the crossing.
Pundits are fond of claiming the American public is in no "mood" for anything more ambitious than TSGs, as we used to call them—tiny symbolic gestures. Perhaps that is the case, but it's hardly an explanation. Why the mood? The current economic expansion offers no real justification either, because good economies can induce generosity (as we saw in the 1960s) as readily as they can engender apathy, while bad economies can either bring people together in common pursuit of remedies or bring out stinginess and cynicism.
The American public is in no "mood" to do much of anything, let alone vigorously pursue a Third Way, because it has not been inspired to be. The President's 1996 campaign platform was largely an exercise in TSGs. And Dick Morris's "triangulation" strategy served more readily to distract attention from any coherent Third Way vision than to reinforce it. But the fundamental problem is more generic, more inherent in the way modern politics in the global age is playing itself out, both here and abroad.
A New Social Contract
The real lesson for the new center-left governments now gaining power around the world, and the lesson for a future Democratic administration, is that there is a legitimate Third Way to deal with the stresses of a rapidly globalizing economy. But the political reality is that our populations are becoming ever more divided between the two old ways—either preserve and protect jobs, or let the free market rip. Bill Clinton is still talking about a Third Way, but he has had to settle mostly for the Second. For the Third Way to succeed, it will need to be turned into a political movement all its own. And that is no easy matter.
In order to summon the resources needed to make change attractive to those who fear it and to get them over the fence and into the new economy, Third Way leaders will have to broker a new social contract between those who have been winning and those who have been losing. In return for giving the winners what they need in order to do even better—further moves toward deregulation, privatization, free trade, flexible labor markets, and smaller safety nets—the winners must agree to apply a portion of their added booty to equipping the losers. The deal has got to be explicit, and must be framed as a choice: either most of our citizens will move into the fast-moving global economy together or else only a privileged few will adapt and those who cannot adapt will need to be supported by safety nets and job protections. We would all do significantly better if we chose the former, and did so soon. The good times aren't likely to last forever. A deal like this is easier to accomplish when the economy is strong.
Thus could the Third Way become something of a crusade—and at its base a moral one. The issue confronting advanced nations involves the very meaning of patriotism in the new global economy. The Third Way, properly conceived, has an answer, I believe, but its new crop of leaders must articulate it clearly: A nation is more than a flag and an anthem; it is a collection of people who, because they are linked by culture and belief, are willing to pool certain of their resources so that all of their members have a fair chance of succeeding. Only out of such an ideal can a new political movement emerge; only out of such a movement does the Third Way have half a chance of success. Bill Clinton has failed to turn the Third Way into a moral crusade. It is now up to Blair, Schroeder, Jospin, and a future American president to try.