Robert Reich. We are all now following the Third Way

We are all now following the Third Way
Part 2

Robert Reich

Publication date: December 15, 2000

Risky politics

This all makes sense in theory (remember, I'm a biased observer). But after six years of Bill Clinton's Third Way , belated wisdom suggests some skepticism is appropriate. The point is not that the goal turned out to be wrong or that it was set insincerely. The problem is that the policy of implementing the Third Way turned out to be much more risky than one might have expected. And even if we leave aside the uniqueness of the American political system and the rigidity of the pro-Republican Congress, it must be recognized that these risks are likely to manifest themselves in other countries of the world. Any serious attempt to take a nation along the Third Way will have to confront them.

The Third Way has a difficult pedigree. Being a kind of political hybrid, he does not have normal parents - he does not have an original electoral base. This makes him vulnerable to the momentary whims and winds of politics. Political leaders are free to act for a time due to the will of the voters expressed in elections. But ultimately they will have to rely on the enthusiasm and commitment of only those groups of people who firmly believe in the correctness of the course chosen by the leaders. Political movements can be driven from above, but they need to receive support from below. However, the Third Way has no grassroots roots. When Bill Clinton took office, the Democrats' traditional base - the AFL-CIO , teachers, California liberals - were unlikely to be carried away by his free-market leanings. The North American Free Trade Agreement in particular has been outright condemned. Ultimately, voters moved ahead, reluctantly but willingly, to deregulation, fiscal austerity, and welfare “reform.” But they never accepted the basic premise - that is, the idea that education, retraining, wage subsidies (such as income tax cuts) and the rest could offset the vastly greater uncertainties of the free market. "Retraining for what ?" - they usually asked me. And then invariably came the refrain: "Oh yes, America is creating millions of new jobs. And I have to work on three of them."

Of course, the American economy is in much better shape today than it was a few years ago, but skepticism remains. The threat of losing your current job is a much more powerful incentive to political action than the abstract possibility of getting a new job, even one in which you can earn a little more. "Globalization" remains unpopular in America, not just among blue-collar voters, but among the general population. Bill Clinton faced a hostile Congress when he tried to push through trade agreements last year without amending them, and more recently when he sought additional funding for the International Monetary Fund. And this hostility was not limited to Democrats. Most Republicans first elected to Congress in 1994 and 1996 opposed both initiatives.

In a Wall Street Journal poll conducted in December 1998, 58% of respondents agreed that foreign trade "is harmful to the American economy because cheap imported goods hurt wages and jobs ," while only 32% thought it trade "benefits the American economy" by creating foreign demand for American goods and contributing to US economic growth and the creation of new jobs in the country. Most noticeably, this skewed view exists at a time when unemployment is at its lowest level in more than 30 years. As the economy slows and unemployment rises, trading may only become even less popular.

In theory, of course, you can win the support of people who might be harmed by economic change if you make the change attractive enough to them. Give them a sense of real opportunity and show them that good jobs are waiting for them. But instilling that confidence requires money: the schools have to be really good, college has to be really affordable, and the training has to be top notch. When someone must take a low-paying job, the subsidies must be generous enough to make up a significant portion of the shortfall. When private sector jobs are not available, the public sector must provide them quickly. And along with this, there must be other forms of support - social security for children, good public transport to get to and from work, healthcare - to make it easier for people to practically adapt to new conditions.

Even moving people from welfare to paid work is expensive if done in a way that keeps them in their new jobs. It’s easy to remove people from social benefits: just stop paying them. And even a tight labor market can go a long way toward providing them with jobs. But when it comes to maintaining their employment, they may often need help to do this. The proposal to move people off welfare into paid work, which first came out of Clinton's Department of Health and Human Services in early 1994, would cost nearly $2 billion a year more to pay for welfare because it included costs for vocational training, child welfare, health care, and job creation in the public sector in the absence of any in the private sector. This proposal had no political prospects.

A common platitude heard by economists is that all change causes some pain. People will only make changes if they are forced to do so. This may be true as a proposition of economic theory, and it may even have some basis in behavioral psychology. But we should also not forget about social and political reality. The social reality is that many people find change extremely difficult. Even when the economy is growing at its best, many people are unable to find or maintain jobs that provide them with sufficient income to support themselves. The political reality is that citizens who reasonably fear that they will bear more of the brunt of economic change while enjoying few of its benefits will resist change. In a democracy, their resistance will take the form of supporting politicians who promise job protection, trade protectionism, subsidies for old industries and welfare cash transfers. And such determined resistance will undoubtedly complicate the Third Way.

Predicament

may ultimately run into This is the obstacle that Clinton ran headlong into (and into which Blair , Jospin and Schröder ). There are only two ways to raise the money needed to make economic change politically acceptable. If additional funds are obtained through large government borrowings, then the long-term loan capital markets become nervous. And this is not about some kind of right-wing conspiracy of international financiers. It's a matter of simple logic. If lenders and their intermediaries suspect that borrowers are going to live beyond their means (in the case of governments, this means that they will spend more than they collect in taxes), then lenders will naturally raise fees to cover the additional risk. Center-left governments have a higher burden of proof of their creditworthiness than conservative governments because their traditional electorate wants the government to spend more money on them, and capital markets know this. This was part of Clinton's dilemma. The deficit grew under his Republican predecessors. But Clinton was even more constrained by the deficit than they were, because he had to prove that he could be trusted to control the deficit. Hence the need for financial frugality. Clinton had to cut the budget sharply before interest rates on debt could come down. All Third Way governments are forced to demonstrate similar financial frugality.

In this regard, there is only one source of money left: the more prosperous members of society must pay. Taxes on their income should be increased. At least in theory, the rich shouldn't have a problem with this. In any case, they are the ones who will benefit most from the transition to an unrestricted market, since they already have the education, qualifications and social connections to provide themselves (and their descendants) with the best jobs. It should be in their interests to share part of their wealth to help those least adapted to the great changes, in exchange for the cooperation of this part of the population in freeing the market from all restrictions. However, the political reality is not so simple. Before the richest share any part of their expanding income, they will resist. And they have an extremely wide arsenal of means at their disposal to do this - financial contributions to various political campaigns, lobbyists, advertising activities and many conservative magazines and think tanks. In 1993, Bill Clinton narrowly passed a budget in the Democratic-controlled Congress that increased taxes on the top 1.5 percent of the population, by a narrow margin of just one vote. But this was the last of what was done. Since then, taxes on the rich have been steadily reduced.

This puts Third Way governments in a difficult position. This means that the conceptual basis of their policies, which seek to free market forces by making it easier for those who might otherwise lose out to adapt to change, does not have a natural core of strong support among the electorate. This support cannot be found among the traditional left, many of whom would rather protect and preserve the old economy. But it can't be found on the conservative right either, many of whom are thriving in the new economy and don't want an active government taking their money.

The results of the Clinton administration are indicative in this regard. Of course, some of the President's proposals have been implemented, but very few have been implemented on the scale necessary to make significant progress towards the Third Way. Education and training initiatives are mostly insufficient relative to overall need. The tax cut for low-wage workers is significant, but lacks strong public support (most of the public doesn't even know about it) and is therefore vulnerable to budget cuts. Tax incentives for industry, which are supposed to create jobs in inner cities, are unlikely to achieve this goal, and banks serving small businesses are barely getting on their feet. Proposals to expand child welfare and health care have achieved some results, but needs are growing faster than they are being met. As a result, a larger share of the American population needs health and child welfare services today than was the case when Bill Clinton took office.

Any future Third Way politician (or "practical idealist") will most likely face these same problems. Famous scandals aside, Bill Clinton's popularity reflects the health of the economy, but the Third Way adherent has no strong social base. A clear indication of this is the current debate over what to do with the budget surplus, which, according to current estimates, could reach $10.5 trillion over the next ten years. Responding to Republican demands to use this excess of revenue over spending to cut taxes, Clinton was forced to play the old Social Security card, arguing that the expected surplus money should be saved in order to be able to maintain the solvency of the Social Security program in 34 years, when they, are projected to be able to provide only 75 cents of every dollar of promised benefits.

Such long-term planning may be commendable, but it has little in common with the Third Way. The Social Security system is not in trouble. Its solvency could be guaranteed over the next century by small increases in social contributions or small cuts in social benefits (ideally, in either case, this would only affect the better off). Moreover, using Social Security as a countermeasure to tax cut plans provides a strong argument for Republican tax cut advocates: all they have to do is prove that the expected budget surplus is large enough to cover the expected deficit in the system. Social Security, and that every remaining dollar in the budget surplus should be given back in the form of a tax cut. And since most tax revenue is collected from the highest earners, the financial benefits of any tax cuts will primarily accrue to those people who have already made the transition safely from the old economy to the new. If the president could build a strong base committed to the Third Way, he could build on it by arguing that budget surpluses would be used to help all Americans gain what they need to make the transition.

Pundits like to argue that the American people are not "in the mood" for anything more ambitious than what we usually call NSPs - small symbolic actions. This may be true, but it hardly serves as an explanation. Why are the sentiments like this? The current economic growth does not provide any real explanation, since a good economy can stimulate generous acts (as we saw in the 60s) as much as apathy, and a bad economy can either rally people in a common search for a way out from difficulties, or generate stinginess and cynicism.

The American people are not "in the mood" to do anything significant (and this is not just a lack of vigorous pursuit of the Third Way) because they have not been inspired to do so. The presidential platform during the 1996 campaign was largely an exercise in the NSP. And Dick Morris's strategy served more to distract attention from any coherent vision of the Third Way than to strengthen it. However, the fundamental problem is more general, being an essential feature of the way modern politics is conducted in a global era - both here and abroad.

New social contract

The real lesson for the new center-left governments now coming to power in the world, as well as the lesson for any future democratic administration, is that there is a legitimate Third Way needed to solve the problems of a rapidly globalizing economy . However, the political reality is that our populations are becoming more divided than ever between two old paths - either to preserve and protect jobs, or to open the way to the free market. Bill Clinton still talks about the Third Way, but he mostly has to settle for the Second. For the Third Way to achieve its goal, it must be transformed into an independent political movement. This, however, is not a simple matter.

The funds needed to make change attractive to those who fear it and to help them enter the new economy can be raised by Third Way leaders if they become agents of a new social contract between winners and losers. In exchange for giving the winners what they need to get even more (further steps towards deregulation, privatization, free trade, flexible labor markets and reduced welfare benefits), the winners must agree to give up some of their additional spoils to help the losers get what they need. The deal is clear, and it could take the form of a choice: either the majority of our citizens will join together in the fast-growing global economy, or only a privileged minority will adapt, and those who fail to adapt will need to be supported through social benefits and worker protections places We will all benefit greatly if we choose the first option and do it as quickly as possible. Good times are unlikely to last forever. A deal like this is easier to make when the economy is strong. So the Third Way could become something like a crusade - and on its basis acquire moral meaning. The challenge facing developed nations concerns the very meaning of patriotism in the new global economy. I believe that a properly conceived Third Way has the answer, but the new crop of its leaders must articulate it in crystal clear terms. A nation is more than a flag and a national anthem; it is a community of people who, because they are bound by culture and belief, wish to pool a certain portion of their resources in such a way that all its members have a fair chance to prosper. Only from such an ideal can a new political movement arise, and only from such a movement can the Third Way find the possibility of its success. Bill Clinton failed to turn the Third Way into some kind of moral crusade. And now Blair, Schroeder, Jospin and a future American president will have to try to do this.

First published in The American Prospect , #43, March-April 1999

Translation by Grigory Weinstein