THIRD WAY, OLD WAY

Irwin Stelzer offers an American

free-marketeer's view of the route taken by President and Prime Minister

Washington NEXT WEEK the Third Way will find its way to New York. Political leaders who profess to have found the road that runs between capitalism and socialism directly to a fairer, more agreeable society will gather at New York University to trade ideas and plans. These, they are convinced, will produce a better world and, not inci- dentally, ensure their continuation in power.

Barring resignation, President Clinton will be there. So will Tony Blair, perhaps the most serious and coherent proponent of the Third Way, and with prestige enhanced by the progress he has made towards bringing the troubles in Ireland to an end, or at least fashioning a consensus that makes it more difficult for the bombers to receive the protection of the populace. Germany's Gerhard Schroder will be absent. He will be busy on the more practical problem of unseating Chancellor Kohl. He has hired the Clinton adviser Hank Sheinkopf to help him do it.

Politically, the participants have reason for satisfaction. As Mr Blair has pointed out, 'The centre-left is in office, not only in Britain, but throughout Europe, in a dozen EU countries.' And, he might have added, it controls the executive branch of the United States government, Bill Clinton having made it clear in his last State of the Union message that his way is, indeed, the Third Way. More important, contends Mr Blair, 'It is the centre-left [in which the Prime Minister includes socialist and social democratic parties] which holds the intel- lectual advantage; it is our agenda which will reshape people's lives.'

It is easier to consign both Left and Right to the dustbin of history than to devise a Third Way. Advancing from slo- gan to concept is particularly difficult in America, where its chief exponent, Bill Clinton, is known for using precise lan- guage only when in the tightest of legal corners. Third Wayer Mr Clinton found this new route broad enough to encompass his 1996 announcement that the era of big government had ended and his 1998 call for an expansion of the role of government to include subsidisation of child care, extension of government-funded health care from the elderly to the merely mid- dle-aged, and the use of federal funds for the until now local functions of hiring teachers and building schools. The Presi- dent told the nation when reporting on the state of the union earlier this year, 'My fel- low Americans, we have found a Third Way.'

So right-inclined Americans and British Conservatives can be forgiven for their suspicion that the Third Way is merely a new name for the Old Left road. Third Way emphasis on what Mr Blair calls 'the challenge of social exclusion' is to free- market conservatives nothing more than an excuse to dust off old, failed pro- grammes of job-training, tax-and-spend and increased government involvement in health care, housing, education and other spheres of life, not to mention weakening the family by supporting `life-style alterna- tives'.

The Left is equally suspicious. Many on that end of the political spectrum see the Third Way as warmed-over Reaganism- Thatcherism, involving acceptance of free markets and a reining in of the welfare state in response to global competition, softened by a kinder, gentler rhetoric and, should the opportunity arise, a bit of income redistribution to salve leftist con- sciences. Mr Clinton's acquiescence in Republican efforts to reform the welfare system, and Mr Blair's insistence that his government's obligation to provide oppor- tunity extends only to those who are willing to work, are seen by the Left as a surrender to the doctrines of the Right rather than as a new Third Way.

Third Way adherents' claim to novelty reflects either ignorance that their search for a path different from both capitalism and state socialism is merely the latest in many such attempts, or is a cynical attempt to put a new label on an unsuccessful product.

It was fashionable after the second world war for leftish academics to hail Sweden's `Middle Way' as the answer. Opposed to American capitalism because of its failure to accord them the rewards they felt were their due, and dimly aware that Stalin's communism contained some features that many considered unattractive, they fas- tened on Sweden's expansive and expand- ing welfare state as the middle way between what they saw as two equally unacceptable brutalities, American free markets and Soviet totalitarian commu- nism. Alas, Sweden is bankrupt, or close to it, having found it impossible to maintain incentives to work in the face of govern- ment provision of the necessities and many of the luxuries of life.

Then there was France — cultured, sophisticated, producer of the movies that American intellectuals stormed the art houses in their hundreds to see — with still another third way: indicative planning. The French Modernisation and Investment Plan and Planning Council, with the pre- mier in the chair presiding over business executives, trade union leaders and govern- ment bureaucrats, presented an appealing alternative to raucous, unplanned market capitalism, especially in the years immedi- ately following the second world war. Here the French elite could impose on the coun- try its view of what should be produced, and in what quantities, and direct invest- ment so as 'to put France in the vanguard of the advanced technological nations', to quote an approving Peter Hennessy (Never Again: Britain 1945-1951).

Alas, France's Third Way has brought it neither to the vanguard of advanced tech- nological nations nor to a state of competi- tiveness good enough to persuade it that it can safely abandon its protectionism for the hurly-burly of international competi- tion. Its unemployment rate hovers at three times the US level and almost twice the UK level, and enormous transfers of income from those in work to the unem- ployed have proved not enough to prevent the latter from rioting for a year-end bonus. The trade unions periodically shut the country down, and disaffected, anti- immigrant, anti-Semite, anti-everything voices are heard in the land. Worse still, at least for those who believe in la gloire francaise, France has had to cede control of its monetary policy first to the Bundes- bank and now to the European Central Bank.

The next Third Way to make its appear- ance was Germany's. This variant on the theme of finding a path between capital- ism and socialism appealed to both corpor- crats and trade union bosses. Workers are included on corporate boards and partici- pate in decisions concerning plant loca- tions, work rules and the other stuff of industrial life. Corporate executives are shielded from the need to deliver wealth to shareholders by understanding and very conservative banks controlling their boards, and hostile takeovers being unthinkable. This latter feature became particularly attractive to underperforming executives in American and British corpo- rations.

Add to all this a welfare state that rewards absence from work at the same rate as work, provides state-paid vacations to spas, limits shop hours and makes firing so difficult as to deter hiring. You thus have a Third Way that gives something to everyone — the poor consumer excepted. This German Third Way has produced the highest worker absentee rate in Europe, labour costs some 50 per cent higher than those in the United States and the United Kingdom, a sclerotic engineering industry whose largest export now seems to be investment and jobs, and a welfare system that an aging population simply can no longer fund. Then, of course, there is Japan's Third Way, a combination of state direction of corporate activity, mercantilism and crony capitalism. This alternative to Thatcher- Reagan free markets seemed for a while likely to propel Japan to the first rank of industrial nations. No one noticed that Japanese protectionism was impoverishing its consumers, that silly planning had driv- en the price of land up to the point where a rice paddy near Tokyo was as expensive as a great swathe of mid-town Manhattan, and that a combination of government pressure and cronyism had forced the banks to make loans that have since proved wildly imprudent. Japan's Third Way has led to prolonged recession.

The hunt for a Third Way has long been the goal of those who simply cannot accept that free-market capitalism is the only sys- tem that has brought material benefits to all — unequally, but to all who chose to participate in its labour markets. Nor is there much that is new in the present-day Blair-led Third way's emphasis on its inter- national reach. Old-line leftists always argued that class trumped nationality 'workers of the world, unite' was only one of many appeals across national borders. More modern Third Wayers, of course, no longer rely on such crass slogans. Anthony Giddens, director of the London School of Economics, has described Blair's 'ambition to create an international consensus of the centre-left for the 21st century'. But this is a very special sort of internationalism, one that takes the form of transferring to some international body or other responsibility for functions until now reserved to the nation state. Thus, Mr Clinton and Mr Blair say they can't move against Saddam Hussein because the Russians and the Chi- nese won't let them, never mind that they have the military power to prevent Iraq from restocking its arsenal without calling on a single Chinese or Russian soldier to help. Third way internationalism is not the muscular sort that enabled the team of Thatcher-Reagan-Bush to win the Cold War, or Bush to assemble an international coalition to drive Saddam out of Kuwait, a feat Mr Bush achieved by leading from the front. It is the sort that seeks to avoid the use of force and casualties at all costs.

As they gather at New York University, these leaders have more than the political in common, they have the personal as well. In addition to believing that, one way or another, government can find some Third Way to what Blair calls 'more cohesive, happier and richer communities', they exhibit certain common personal charac- teristics. Blair, Clinton and Schroder all tout their youthfulness and vigour. Blair ran against the image of a tired Tory gov- ernment that had been in power too long and was run by men who had stayed too late at the ball. Clinton ran as a sort of New Age opposite of old stuck-in-the-mud and out-of-touch George Bush (and then proceeded to make being stuck in the mud of old-fashioned, some would say Victori- an, values a virtue not to be lightly dis- missed). Schroder acknowledges Kohl's contributions to the unification of his country and to the shaping of post-war Europe, but argues that new problems require new leaders in the mould of Blair and Clinton.

All three have mastered the use of tele- vision; all three have forgone the outward trappings of office — Blair tells everyone to 'call me Tony'; Clinton uses a television appearance to discuss the type of under- wear he favours; Schroder eschews the security retinues that surround modem- day politicians — all in pursuit of having, or at least seeming to have, a common touch, unlike, say, the regal Thatcher or the remote Bush. 'Getting down and dirty' was once the quite respectable American description of this process of getting in touch with the masses, but one must assume that to be a phrase not favoured in Bill Clinton's White House. 'Connecting with the everyday concerns of voters' is now the preferred formulation.

With so much in common, these Third Way politicians should make a congenial group, assuming that Clinton sheds the funk that has so obviously overcome him since his non-confession confession in the Lewinsky affair, and that Blair can over- come the fatigue that lines his face after his aborted summer vacation. But if they want to have more than a self-congratula- tory good time they will have to give seri- ous thought to some of the new learning about the efficacy, or lack of it, of state action, and confront the charge that there is a contradiction at the heart of their enterprise.

But, first, it is necessary to understand just what the enterprise aims to do. Its advocates tend to describe it as a reaction to bad things that preceded the accession to power of Third Way politicians. The Home Secretary, Jack Straw, has equal scorn for the 'me-first' society of the Eight- ies and the policies of the 'Old Left' in the Sixties. The former 'reinforced the natural tendency in each of us towards selfishness' and encouraged individuals `to get what they could regardless of its effect on oth- ers', while the latter confused liberty and licence, and held 'that the State [Straw still capitalises the word] existed as some sort of universal great provider which made no moral judgments regardless of the merits of those who were dependent upon it'.

Clinton, too, rails against the greedy Eighties, during which Ronald Reagan and George Bush allegedly let the rich get rich- er while the poor got poorer, and speaks the language of compassion and communi- ty, even agreeing with his wife (a more prudent than ever course of action these days) that it takes a village to raise a child.

The Third Way often defines itself by what it opposes, making it difficult to dis- cover what it favours. As best as one can tell, it seeks to preserve the benefits of market capitalism — Blair speaks highly of many of the reforms introduced by Lady Thatcher — while at the same time replac- ing or at least supplementing Adam Smith's invisible hand, the force that auto- matically leads self-seeking individuals to serve the needs of the community, with the long arm of government.

Now, there is some merit to some of this. Even America's neo-conservatives concede that there are certain goods that only government can provide, and that it needs the resources to do that. But Third Way advocates have yet to come to grips with increasingly powerful arguments that many of the functions once thought reserved to government — from education to rubbish collection to road-building can better be provided by the private sec- tor, or with new studies that suggest that churches and other private-sector, volun- tary institutions are more efficient and suc- cessful providers of various social services than are governments, and that the latter can do the most good for the truly needy and deserving by devolving many of its welfare functions to these voluntary insti- tutions.

Surely, this is a topic worthy of their consideration when they convene at NYU. As is the even more important question of whether their Third Way, rather than the capitalist system that they can't quite get themselves to accept, suffers from a debili- tating inherent contradiction.

John Gray, professor of European Thought at the London School of Eco- nomics and a critic who comes at the Third Way from its left flank, says that in order to redistribute income on a scale sufficient to raise a 'despairing underclass' and wipe out 'an overclass that opts out almost entirely from public services', the Third Way requires perpetual economic growth. Come the inevitable recession — and in Britain that may well be sooner rather than later — the government will have to abandon its reliance on 'the economic veri- ties that it inherited', raise taxes to fund its programmes for social cohesion and inclu- sion, and recognise that the two strands of the Third Way — economic liberalism and social liberalism — are incompatible.

So far, neither Mr Blair nor Mr Clinton nor any of the politicians who will join them at NYU has faced up to this criti- cism, and with reason. For, as a practical matter, their political opponents have not forced them to do so. In America, Repub- licans have either gone along with Clin- ton's expansion of the welfare state, and refused to attempt to cut taxes so as to force its shrinkage, or felt that his political weakness permitted them to ignore his proposals without actually responding to them. In Great Britain, David Willetts's valiant efforts to develop a coherent response to the Third Way, to transplant one of his two brains into the cranium of the stupid party, have so far failed; about all the Tories seem capable of mounting is an attack on New Labour's spending with- out specifying which of the programmes being financed they would eliminate.

Not being pressed for coherence, Third Way politicians can be expected to rely on platitudes and on a parading of their good intentions and compassion. Fortunately, a combination of circumstances makes the Third Way they espouse less dangerous to the future well-being of their citizens than might otherwise be the case. Lady Thatch- er has said, 'The Third Way leads only to the Third World,' and she may well prove right in the case of some European coun- tries. But the good news is that Tony Blair stands between Britain and such a fate: he is, in the end, a pragmatist whose quite laudable goal is to achieve re-election. To do that, he must retain the support of mid- dle England, which limits his ability to lurch leftwards. The bad news is that noth- ing stands between Britain and Old Labour except Blair. Should he depart the scene, either as the result of an internal party coup or some act of a malign provi- dence, there is little question that his likely successor will move New Labour leftwards, as his supporters in that wing of the party confidently expect.

When all is said and done, there is a possibility that the Third Wayers may be on to something, but it is not necessarily the something they think they are on to. Britain remains a class-ridden society, one in which equal opportunity is not even an ideal for many of those who oppose Blair and his Third Way. It is a society in which rewards are not distributed in even rough proportion to effort and achievement, although Margaret Thatcher did much to improve the prospects of poor boys from the East End, and to enable many of hum- ble origins to end up in comfortable homes in Essex — to the consternation of the `high Tories' whose sense of the proper order of things the grocer's daughter from Grantham so offended.

Neither is America exactly a meritocra- cy. True, the Left has distorted income dis- tribution with quotas and special privileges for any group of complainants that can muster enough votes to be heard. But the Right is hardly in a position to dismiss the Third Way as an interference with a per- fectly functioning allocation of rewards in 4 proportion to merit. Republicans propose to lower inheritance taxes, to give the sons and the daughters of the wealthy an even bigger head start in life; they are unoffend- ed by universities that grant preferential admission to the offspring of alumni, and they systematically refuse to recognise that when markets fail to function — as is the case in the presence of monopoly power or environmental degradation — government has a corrective role to play.

That this New York talking-shop will produce some Third-Way solution to these problems, some programmes that will increase the efficiency with which capital- ism distributes the material rewards it is so good at creating, is unlikely, if history be any guide. But then, we thought it unlikely that Blair could rout the left wing of his party, or move Ireland towards peace.