1. The Third Way: Legacies of the Clinton Administration and Prospects for the Future Tokyo December 12, 2000

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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 3 rd 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