Support 100 years of independent journalism.

  1. Long reads
3 May 1999

We must still tax and spend

The Third Way, argues Robert Reich, means a deal between economic winners and losers. But the winner

By Robert Reich

Later this month, Tony Blair travels to Washington to discuss, among other things, the Third Way. Rarely in the history of world politics has a term gone so directly from obscurity to meaninglessness without any intervening period of coherence. Is the Third Way a new public philosophy likely to reshape capitalism in a postmodern, post-communist 21st century? Or is it nothing more than a pragmatic, if not cynical, means of keeping the left mollified while continuing the long-term shift rightward? The Clinton-Blair meeting and the anniversary of two years of Labour government provide an opportunity to sum up what we’ve learnt so far.

Some years ago, the “third way” referred to Sweden’s social-democratic middle ground between capitalism and communism. In recent years, with the fall of communism, the middle ground has moved right. When Tony Blair used the phrase in his successful bid to oust the Tories in 1997, he had in mind a set of policies equidistant from Margaret Thatcher and old Labour, redolent of Bill Clinton’s winning new Democratic formula of 1992, which had positioned him somewhere between Ronald Reagan and the old Democrats. Since then, most of the newly elected left-of-centre leaders of Europe – including Germany’s Gerhard Schroder and France’s Lionel Jospin – have committed themselves to some version of the Third Way.

The Third Way has no formal statement of principles (and probably never will). Several common ideas seem to lie at its core, though: deregulation and privatisation, free trade, flexible labour markets, smaller safety nets and fiscal austerity. If this were all there was to it, though, the Third Way would simply 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, Schroder and Jospin is that the economic losers 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. 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 wages should be subsidised.

All this makes good sense in theory (I confess to being a biased observer, since I helped craft part of this doctrine for Bill Clinton in 1992, and then served as his labour secretary for the next four years). But after more than six years of the Clinton administration, and two years of Labour, the wisdom of hindsight suggests some scepticism may be in order. It is not that the goal is wrong or insincerely held. It is that the politics of pursuing it is more perilous than anyone had assumed at the start.

Select and enter your email address Quick and essential guide to domestic and global politics from the New Statesman's politics team. A weekly newsletter helping you fit together the pieces of the global economic slowdown. The New Statesman’s global affairs newsletter, every Monday and Friday. The New Statesman’s weekly environment email on the politics, business and culture of the climate and nature crises - in your inbox every Thursday. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A newsletter showcasing the finest writing from the ideas section and the NS archive, covering political ideas, philosophy, criticism and intellectual history - sent every Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.

When Bill Clinton came to office, traditional Democratic constituencies – unions, teachers, California liberals – were hardly enamoured of his free-market leanings. The constituents only reluctantly acceded to deregulation, fiscal austerity and welfare “reform”. But they have never accepted the basic premise – that education, retraining, wage subsidies and the rest of the mix would compensate for the larger insecurities of a freer market.

The American economy is surely much better now than it was several years ago, but the mistrust remains. Polls show continuing fear of job losses and widespread opposition to free trade. Such anxieties are especially evident among workers without college degrees, whose incomes have suffered the most. Elsewhere around the world, there is a growing backlash against open and deregulated markets.

It can be argued that it is 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 not just a philosophical commitment. It also requires money: schools have to be good enough, colleges have to be truly accessible, retraining has to be state-of-the-art and public service jobs have to be available in the event that no private job turns up. In addition, workers need the assurance that a combination of minimum wage and wage subsidy will be adequate to keep them and their families afloat.

Even moving people from welfare to work will be costly, if it is to be done in a way likely to keep them in the job. Getting them off welfare is easy; just stop doling it out. But if they are to remain employed they often need help. The original welfare-to-work proposal that emerged from Clinton’s Department of Health and Human Resources 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 became available. It was a political non-starter.

The usual bromide offered by economists is that 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 behavioural 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 have difficulty finding and keeping a job that pays enough to live on. The political reality is that citizens who fear they’ll bear most of the burden of economic change, and enjoy few of its benefits, will resist it.

Here’s the brick wall of the dilemma into which Clinton crashed headlong – and so, unless they are very careful, will Blair, Jospin and Schroder. There are only two ways to raise the money that is needed to make economic change politically acceptable. The government can borrow the money, but that makes the bond markets nervous. 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 charge a higher fee to cover the added risk.

This leaves only one alternative: the better-off members of society have to pay up. Their taxes must be raised. The better-off should have no problem with this. After all, they are the ones who will gain the most from an unfettered market, because they have the education, skills and social connections to guarantee themselves (and their progeny) the best jobs.

Political reality is messier. Before they part with any of their burgeoning income, the wealthy will resist. And they have an ever-expanding arsenal at their disposal – campaign contributions, lobbyists, single-issue advertisements and a plethora of conservative magazines and think-tanks.

This puts Third Way governments in a quandary. It means that the overarching agenda – to liberate market forces while easing the transition of those who’d otherwise fall behind – has no natural core of support among the electorate.

The Clinton administration’s record offers a case in point. Some of the president’s proposals have been enacted, but few on the scale necessary to make significant progress toward overcoming inequality. Most education and training initiatives have been meagre; tax incentives for industry to create jobs in poor inner cities have hardly been up to the task; and proposals to expand health care and child care have resulted only in marginal gains.

The real lesson for the new centre-left governments around the world is that there is a legitimate way to deal with the stresses of a rapidly globalising economy. But the political reality is that people are becoming ever more split between two old ways – either preserve and protect jobs, or let the free market rip. For the Third Way to succeed, it will need to be turned into a political movement all its own.

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, government leaders will have to broker a new social contract between those who have been winning and those who have been losing. In return for being given what they need in order to do even better, the winners must agree to apply a portion of their added booty to equipping the losers. The deal must be explicit, and framed as a choice. Thus could this Third Way become something of a crusade, and at its base a moral one.

Left-of-centre governments must promote the nation as 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 in order that all their members have a fair chance of succeeding. Only out of such an ideal can a new political movement emerge.

Bill Clinton failed to turn his agenda into a moral crusade. It is now up to Blair, Schroder, Jospin and a future American president to try.

The author is professor of economic and social policy at Brandeis University

Topics in this article :