The Third Way: Legacies of the Clinton

Administration and Prospects for the Future

TokyoDecember 12, 2000

The Third Way• Between socialism and laissez faire economics• Between "old democrats" and “Reagan republicans“ • Recognizes the importance of market failures

And

• Recognizes the limitations of government  • Recognizes historically that the most successful countries

have, by and large, been those in which government has played an important, although limited, role

Third Way continued

• Third way sees government and private sector as "partners" or "complementary" rather than as alternatives– Example: financial sector– Government does not do good job at allocating

investment– But without government regulation, private

sector repeatedly faces problems (no one advocates free banking any more)

Third Way continued

• Third way re-examines – What the government does– How it does it

  • Goals not just an increase in GDP

– Broader arena for collective action– Social justice

Third way based on modern economics

• Recognizes power of markets

• But also limits of markets

• Rejects simple minded application of "invisible hand"

• Rejects Darwinian "survival of the fittest" doctrines

Third Way based on modern economics

• Examples of market failures– Pollution– Under-investment in basic research

 

• Examples of limitations of markets– May not provide adequate income, health care

for the poor

Government Failures

• But government has not always succeeded in effectively addressing concerns, sometimes even exacerbates problems

 – Urban renewal projects that decrease supply of

low-income housing– Welfare programs that lead to welfare

dependency

Causes of Government Failures

• Inadequate understanding of complex social and economic phenomenon– Rent control intended to provide more affordable

housing, in long run may fail to do so

 • Capture by special interest groups

– Especially in trade and agriculture

Government’s Role

• In spite of these limitations, in most successful countries government has played key role

• Technology– Telecommunications

• Telegraph• Internet

– Agriculture

• Education• Financial regulation• Environmental protection• Consumer and worker protections

East Asia Led Path to Third way

• Government took active role

• Market was at the center, but government played central role in

• Governed market and helped create markets– e.g. helped promote high savings, and channel

savings to productive investments

Third Way and Redistribution

• Rejection of trickle down economics– The poor do not automatically gain from improvements in

GDP

 • There are policies which promote equality and growth

– Education for the poor– Land reform

• But there still may be trade-offs: third way focuses especially on enhancing opportunities rather than focusing on outcomes– Pre-school education– Guaranteed financial support for higher education

Third Way and Redistribution continued

• Third way also sensitive to equality of access to participation: voice of poor must be heard

 • Finally, third way sensitive to economic

security (and other aspects of security) – Important role played by safety net– Health security

The Third Way and Improving Government

• Government needs to focus on efficiency just as much as the private sector

• Government can employ private sector-like incentive structures– Corporatization– PBO's (performance based organizations)

• Discipline provided by transparency, accountability– Importance of right-to-know laws (freedom of information act) – Also important in checking power of special interests

• Government needs to think not only about internal efficiency but also about "capture" by special interests and domination by wealthy and powerful– Voter registration– Campaign financing

Third Way has Won the Debate• No one argues today about whether there is a role of

government, e.g. in the economy.• Debate surrounds what that role should be and how it can

perform that role• Bush with his "compassionate conservatism" has adopted

central tenets of 3rd way– Role for government in education– But larger role for private sector--vouchers

• While old democrats and Reagan republicans no longer viewed as mainstream--both viewed as too "extreme"--there is huge scope for debate about the proper role for government

• The real legacy: seeing society, and government, through new lens